[Senate Hearing 107-283]
[From the U.S. Government Publishing Office]
S. Hrg. 107-283
ONLINE ENTERTAINMENT AND COPYRIGHT LAW: COMING SOON TO A DIGITAL DEVICE
NEAR YOU
=======================================================================
HEARING
before the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
APRIL 3, 2001
__________
Serial No. J-107-9
__________
Printed for the use of the Committee on the Judiciary
_______
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77-094 WASHINGTON : 2002
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COMMITTEE ON THE JUDICIARY
ORRIN G. HATCH, Utah, Chairman
STROM THURMOND, South Carolina PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa EDWARD M. KENNEDY, Massachusetts
ARLEN SPECTER, Pennsylvania JOSEPH R. BIDEN, Jr., Delaware
JON KYL, Arizona HERBERT KOHL, Wisconsin
MIKE DeWINE, Ohio DIANNE FEINSTEIN, California
JEFF SESSIONS, Alabama RUSSELL D. FEINGOLD, Wisconsin
SAM BROWNBACK, Kansas CHARLES E. SCHUMER, New York
MITCH McCONNELL, Kentucky RICHARD J. DURBIN, Illinois
MARIA CANTWELL, Washington
Sharon Prost, Chief Counsel
Makan Delrahim, Staff Director
Bruce Cohen, Minority Chief Counsel and Staff Director
C O N T E N T S
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STATEMENTS OF COMMITTEE MEMBERS
Page
Cantwell, Hon. Maria, a U.S. Senator from the State of Washington 170
Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah...... 1
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont. 3
WITNESSES
Barry, Hank, Interim Chief Executive Officer, Napster............ 22
Berry, Ken, President and Chief Executive Officer, EMI Recorded
Music.......................................................... 51
Cannon, Hon. Chris, a Representative in Congress from the State
of Utah........................................................ 88
Farrace, Mike, Senior Vice President, Digital Business, Tower
Records/Books/Videos, MTS, Inc................................. 106
Fish, Edmund, President, MetaTrust Utility Division, InterTrust
Technologies................................................... 116
Gottlieb, Steve, President and Founder, TVT Records.............. 46
Greenberg, Sally, Senior Product Safety Counsel, Consumers Union. 110
Henley, Don, President, Recording Artists Coalition.............. 13
Kearby, Gerald W., President and Chief Executive Officer, Liquid
Audio, Inc..................................................... 53
Morissette, Alanis, Recording Artist............................. 17
Murphy, Edward P., President and Chief Executive Officer,
National Music Publishers' Association......................... 103
Parsons, Richard D., Co-Chief Operating Officer, AOL Time Warner. 7
Richards, Robin, President, MP3.com, Inc......................... 90
Rosen, Hilary, President and Chief Executive Officer, Recording
Industry of America............................................ 57
Valenti, Jack, Chairman and Chief Operating Officer, Motion
Picture Association of America................................. 10
QUESTIONS AND ANSWERS
Responses of the Recording Artists Coalition to questions
submitted by the Senate Judiciary Committee.................... 125
Responses of Mike Farrace to questions submitted by Senators
Hatch, Leahy and Kohl.......................................... 129
Responses of Mark Traphagen, on behalf of InterTrust Technologies
Corporation, to questions submitted by Senators Hatch, Leahy
and Kohl....................................................... 143
Responses of Gerald W. Kearby to questions submitted by Senators
Hatch and Leahy................................................ 145
Responses of Billy Pitts, Executive Vice President, MP3.com Inc.,
on behalf of Robin Richards, to questions submitted by Senators
Hatch and Leahy................................................ 146
Responses of Richard D. Parsons to questions submitted by Senator
Hatch.......................................................... 150
Responses of Richard D. Parsons to questions submitted by Senator
Leahy.......................................................... 155
Responses of Hilary Rosen to questions submitted by Senator Hatch 159
SUBMISSIONS FOR THE RECORD
American Federation of Musicians of the United States and Canada,
Steve Young, President, statement.............................. 164
American Federation of Television and Radio Artists, Ann
Chaitovitz, Director of Sound Recordings, statement............ 165
Boldrin, Michele, Professor of Economics, and David K. Levine,
Armen Alchian Professor of Economics, University of Minnesota,
letter......................................................... 168
Broadcast Music, Inc., statement................................. 169
CenterSpan Communications Corporation, Frank G. Hausmann,
Chairman and CEO, statement.................................... 172
Feldman, Lawrence E., Esquire, Jenkintown, PA, statement......... 175
Future of Music Coalition, Jenny Toomey, Executive Director,
statement...................................................... 177
Griffin, Jim, Founder and CEO, Cherry Lane Digital & OneHouse
LLC, article................................................... 182
National Association of Recording Merchandisers, statement....... 192
NWEZ.NET, Gloria Hylton, President, statement.................... 197
Video Software Dealers Association, statement.................... 203
ONLINE ENTERTAINMENT AND COPYRIGHT LAW: COMING SOON TO A DIGITAL DEVICE
NEAR YOU
----------
TUESDAY, APRIL 3, 2001
U.S. Senate,
Committee on the Judiciary,
Washington, DC.
The Committee met, pursuant to notice, at 10:06 a.m., in
room SD-226, Dirksen Senate Office Building, Hon. Orrin G.
Hatch, Chairman of the Committee, presiding.
Present: Senators Hatch, DeWine, Brownback, Leahy,
Feinstein, Schumer, Durbin, and Cantwell.
OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM
THE STATE OF UTAH
Chairman Hatch. Good morning, and welcome to today's
hearing entitled ``Online Entertainment: Coming Soon to a
Digital Device Near You.'' That is kind of a long title. There
have been a number of significant developments since the
Committee's hearings last year on online entertainment and
copyright law. Among many, let me mention three:
First, the Ninth Circuit has ruled that at least as a
preliminary matter, Napster as we have known it cannot
continue. For them, as Mr. Henley might say, it has been ``The
End of the Innocence.'' Even Napster acknowledges that this is
so. And in its alliance with the forward-thinking Bertelsmann,
Napster has pledged to reinvent itself so that the technology
and music fan community it has unleashed can work together in a
way that respects copyright law and the rights of creators. It
has been suggested that this new Napster can be online in June,
or at the latest, July.
Second, MP3.com has settled its litigation with the large
record labels and publishers and yet, having paid damages and
been granted licenses to go forward, still cannot bring its
service to the public. As Ms. Morissette might question, isn't
it ``Ironic''?
And, third, but by no means least, several significant
market developments have been announced that seem to put us a
step closer to the ``celestial jukebox.'' One was reported in
last Friday's Wall Street Journal that two of the five major
labels, Vivendi-Universal and Sony, were moving toward
launching a consumer online service called ``Duet'' which will
bring their joint catalogs to consumers. And the second, and
even more significant, announcement was yesterday's deal
between three of the big labels--AOL Time Warner, Bertelsmann,
and EMI--and the independent music service provider, Real
networks, to bring a subscription music service to consumers
over the Internet.
Pro-competition marketplace solutions that provide for a
significant online offering of popular music delivered to
consumers through an entity not controlled by the labels has
been the type of positive synergy that I have long hoped to
see. And I hope to learn more about the details of these
developments and to hear more heartening information on this
front. This Committee is here today, and will continue in the
future, to monitor these and related developments in our
ongoing efforts to ensure that our intellectual property laws
keep pace with technology.
Technology has made our lives more convenient, but it has
also made us more impatient. When a consumer drives up to a gas
pump, she can insert her credit car, confirm that she has
adequate funds in her account, her account is debited, and the
oil company's account is credited, the transaction is
completed, the consumer is thanked, and the tank is filled. All
of this occurs within a matter of seconds, and the transfer of
sensitive financial data is done so securely and with utter
precision.
Now, while there are significant additional challenges in
the context of a product that is delivered wholly online, most
consumers think similar technological advances should allow
them access to the music and the movies they love whenever and
wherever they want it. I believe it can, and that it can do so
in a way that respects the rights of those who create the works
we all want to enjoy in this new way. Instant access to an
infinite offering of perfectly performed creativity on a
portable device the size of a pen, or a phone, or in the car,
or wherever I want it, without dragging cases of CDs, is more
than a new way of delivering the same product. It is a
transformation of our experience of entertainment and poses a
revolution in the businesses that have delivered it. And I do
appreciate the disconcerting panic that the uncertainty of new
technology might cause established businesses such as the
record labels.
But as a music lover, and as one who enjoys the best that
human creativity offers, I--and fans across this country--
eagerly anticipate these technological transformations the
future holds. That is why we are here today. As inventor
Charles Kettering admonished, ``We should all be concerned
about the future, because we will have to spend the rest of our
lives there.'' Artists, record labels, and music fans.
The developments I mentioned have involved primarily
entertainment companies and technology companies. But as Mr.
Henley has pointed out, ``there's three sides to every story.''
Today, we may find there are even more sides than that. We have
tried to broaden the discussion beyond just the business
entities that mediate the primary relationship. We need to keep
in mind in this process that between the artist and the
audience. We need to look to see what the future of these
various industries holds and how technology has and will
continue to change it.
When it comes to technology, I must admit, I try to avoid
making any predictions. Whenever I am tempted, I think back to
the year 1927, when H.M. Warner of Warner Brothers said, ``who
the hell wants to hear actors talk?'' Or more recently in 1977,
when Ken Olsen, the founder of Digital Equipment Corporation,
said, ``there is no reason anyone would want a computer in
their home.''
But what I can safely predict is that we will have no
choice but to embrace technology, and in order to do this
properly, especially as policymakers, we need to understand it.
And that is precisely why I am pleased to have such a large and
distinguished group here today sharing their thinking with us
about these matters. As many as are here, many were not able to
participate because of space and time constraints. We will
include in the record many statements from a number of artists
and technology companies and others. Joining us today are
leaders in the entertainment and technology businesses, as well
as consumer advocates and some of the most distinguished
creators of popular music. I look forward to learning from each
perspective presented today.
I will conclude by saying that some may feel about the road
ahead as Woody Allen expressed it: ``We stand at a cross-roads,
one road leading to despair and hopelessness, and the other
leading to extinction, and I hope we have the wisdom to choose
correctly.'' He has a way of putting things.
Well, I am optimistic that we will be able to choose the
road that embraces technology, respects the creativity of
artists, and meets the justifiably impatient demand of
consumers. With apologies to Ted Nugent, who, unfortunately,
could not make it today, I do not believe that we are riding a
``Terminus Eldorado.'' Rather, I like to take the advice of
Alanis Morissette, with whom I met this morning, who suggested
on her last album that the appropriate response to experience,
even to experience we don't particularly want, is a resounding
``Thank U.'' I believe the road ahead is very exciting. I do
know some things about this, but I do not know precisely where
it leads, nor will I predict, but I can see some exciting
possibilities. And I look forward to exploring them with all of
you today.
This is an important hearing. It can help to determine
where we are going in the future. And we have some of the most
important people on earth here today with regard to the issues
involved, the complex issues and the contradictory issues that
are involved, and we look forward to hearing from all of you.
Senator Leahy?
STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM THE
STATE OF VERMONT
Senator Leahy. Thank you, Mr. Chairman. When I see a crowd
this size, I wonder whether you must be giving away something
free.
[Laughter.]
Senator Leahy. I will just let that one float out there
with no editorial comment.
I am glad to see my friend Don Henley here. The last time
we were together it was a little bit quieter venue, but I am
not going to be photographing you here. We have the best
photographers in the country lined up here. I will let them do
that.
Technology changes have become almost exponential in the
last few years. When I arrived in the Senate 26 years ago, Mr.
Valenti remembers I not only had hair but it was dark at that
time. But when I arrived here 26 years ago, I installed what
was the latest technology--and I was the first Senator in the
country ever to do this--to make it easier for my constituents
to contact me. That technology was an 800 telephone line, the
first Senator ever to have done that. It was the latest and
best technology.
Now, look at the difference. I still have the 800 number,
but I get a lot more e-mails from my constituents than I do
telephone calls. I get them day and night and so on. In fact, I
get sometimes more e-mail messages than the antiquated Senate
computer system is able to handle. And when the computer
systems here in the Senate are temporarily shut down because of
too much of a good thing, we realize quickly how dependent we
are on them.
Now, this Committee examined the challenges to the music
industry posed by new online technologies at a hearing almost a
year ago. I am glad to see back before the Committee some of
the same witnesses who testified at last year's hearing and to
welcome the other witnesses Senator Hatch has invited.
Music has been at the forefront of the online copyright
battles, but the issue raised by the deployment of new software
applications and new online services have even broader
implications for other forms of copyrighted works.
For the copyright industry, to paraphrase a classic phrase
from a book I first read back in the third grade, one of my
favorites, ``It is the best of times, it is the worst of times.
It is the age of wisdom, it is the age of foolishness.''
These are certainly good economic times for our copyright
industries. Computer software, motion pictures, television
programs, music, publishing, other copyright-based industries
have proven to be a critical engine for our economy. According
to one recent study, American copyright industries accounted
for almost 5 percent of our gross domestic product. To put that
in actual numbers, that is over $450 billion. And employment in
this sector grew more than three times as fast as the remainder
of the fast-growing U.S. economy.
In the same year, 1999, the U.S. copyright industry led all
other major industry sectors with over $79 billion in foreign
sales and exports. That is more than the automobile, the car
parts, the aircraft, or the agricultural sector. That is a big
change from when I came to the Senate.
The growth of these industries has been good for American
workers. It has been good for our economy. And their continued
success depends on strong copyright laws and effective
enforcement of these laws.
Every year, the copyright industries lose billions of
dollars in lost revenue to hard goods piracy around the world.
According to Forester Research, one pirated product is made for
every three legitimate ones. Think of that. A quarter of the
products are pirated.
Now, understandably, especially in a digital age, software
manufacturers, the record companies, the movie producers, the
retailers, whose business is selling licensed copies of these
copyrighted works, are concerned that the losses are going to
accelerate as digital works are downloaded freely and without
consideration to the owners of these products.
Over the past years, Senator Hatch and I and others on the
Judiciary Committee have worked constructively and productively
together. We have tried to provide a legal framework to protect
our country's intellectual property. We have worked hard to
craft intellectual property legislation that fulfills the
promise of our Constitution, not simply to secure rights for
authors and inventors, but do it in a way that promotes the
progress of science and the useful arts.
Now, we also strive to ensure that copyright law protects
fair use and free speech and promotes consumer choice and
technological innovation.
Our past history has shown that oftentimes new technologies
may initially appear to trump intellectual property protection,
but in the end, they usually open new opportunities for artists
and new sources of revenue for the copyright owner and new
choices for consumers. I can understand how artists and writers
can be worried. I went on to a site--not Napster, I should
point out--but I downloaded Don Henley, I downloaded
``Annabel,'' ``Damn It, Rose,'' ``Everything Is Different
Now,'' ``For My Wedding,'' ``Goodbye to a River,'' ``Inside
Job,'' ``Miss Ghost,'' ``My Thanksgiving,'' ``Nobody Else in
the World But You,'' and others. I picked those because they
are among my favorites. For Ms. Morissette, I saw, again, ones
I enjoy very much, ``All I Really Want,'' ``Forgiven,'' ``Head
Over Feet,'' ``Ironic,'' ``Mary Jane,'' ``Perfect,'' ``Wake
Up,'' ``You Learn.'' I am just looking at the computer here.
Now, most of those I have at home, the CDs that I bought at
a store and have enjoyed. I can imagine, though, probably some
of the calculations that are going on in your mind as I read
down these. But I am also reminded of the battles in the early
1980's of the videocassette recorder. As recently documented in
the new book, Digital Copyright, the motion picture industry
initially predicted that the invention and marketing of the VCR
would lead to the destruction of the American television and
motion picture industries. Indeed, a representative of the
American Federation of Television and Radio Artists told a
Congressional Committee back in 1982, that, ``Unless we do
something to ensure that the creators of the material are not
exploited by the electronics revolution, that same revolution
which will make it possible for almost every household to have
an audio and video recorder will surely undermine, cripple, and
eventually wash away the very industries on which it feeds and
which provide employment for thousands of our citizens.''
As one commentator recently observed, ``Both the motion
picture and television industries discovered that the
videocassette recorder generated new markets for prerecorded
versions of their material.'' In fact, I don't think there is a
movie--and Mr. Valenti would know this better than all of us--
if there is a movie made today where they don't think what the
after-sale aspects of video or DVD recording might be.
I think the VCR's history of success will repeat itself in
this new era. The copyright industries appear to have learned
from this history. They are making efforts to develop new
business models that will flourish in the digital environment.
We want to hear from entertainment companies and online service
providers and retailers about what they are doing to provide
legitimate sources of copyrighted works online and what
obstacles remain.
Now, the courts have ruled on the application of copyright
law to Napster's operation. There are additional court hearings
in that case next week. And whether I agree or disagree with
what the court is doing, this is not the place to relitigate
that case or the MP3.com case.
At our last hearing, each witness was asked about Congress'
role here. Each witness then--and some of you are here today--
stated clearly that no Congressional action was wanted or
needed and that the marketplace was the right place to resolve
these matters.
So I am going to be interested in hearing how the
marketplace is evolving, how we make the best of these times,
but also how we ensure those people who are such superb artists
and writers and performers are able to be compensated for their
work, because as much as I love new technology--I don't think
anybody else uses new technology any more than I do up here, I
don't want Don Henley or Alanis Morissette or anybody else to
not be able to continue to produce because they are not being
compensated for their work.
So let's figure out how we do such things. I mean, how do
we protect the genius of those who do this, but also the genius
of those who have designed everything from Napster to MP3.com.
In other words, how do we use the technology and balance the
rights of all creators of copyrighted works.
Thank you, Mr. Chairman.
Chairman Hatch. Thank you, Senator.
We have a long and distinguished list of witnesses today,
and in the interest of time, I will give the barest of
introductions to each witness before they begin each of their
presentations.
On the first panel, we will hear first from Richard
Parsons, who is the co-chief operating officer of AOL Time
Warner, one of the world's premier entertainment companies.
Jack Valenti is no stranger to this Committee as Chairman
and CEO of the Motion Picture Association of America. We
certainly welcome both of you here and look forward to hearing
your testimony.
Don Henley is a leading advocate for artists and is a
world-renowned writer and artist in his own right. I have a
great deal of respect for Don Henley, and we are very pleased
to have you with us.
Alanis Morissette is similarly one of the most popular
artists in the music industry and music business today, and it
was really a pleasure to get acquainted with you, Ms.
Morissette. We are very appreciative that you would take time
to be with us.
Hank Barry, as you all know, is the interim CEO of Napster,
the music file exchange service, which has been some of the
cause of this excitement we have had around this over the last
number of years.
Steve Gottlieb is president of TVT Records, a large
independent record label. We are grateful to have both of you
with us and look forward to your testimony.
Ken Berry is president and CEO of EMI Recorded Music and
which, of course, is one of the premier companies in the
business. We appreciate you taking time to be with us, Mr.
Berry.
Gerald Kearby is president and CEO of Liquid Audio, an
online music delivery and technology company. Mr. Kearby, we
are very happy to have you here.
And, finally, no stranger to this Committee and someone who
has helped us through the years to understand some of these
issues, Hilary Rosen, who is president and CEO of the Recording
Industry Association of America. Ms. Rosen, as always, we look
forward to hearing your testimony.
We look forward to all of your presentations here today,
and in the interest of time, we would ask each of you to
summarize your presentations if you can and do it in as fast a
summary as you can.
So we will start with you, Mr. Parsons, and go right across
the table.
STATEMENT OF RICHARD D. PARSONS, CO-CHIEF OPERATING OFFICER,
AOL TIME WARNER
Mr. Parsons. Mr. Chairman and members of the Committee,
thank you very much and good morning. In view of the long list
of speakers, I will try to set an example, if not of eloquence
then at least of brevity. But even in the interest of brevity,
let me not forget good manners. Let me thank you, Mr. Chairman,
for inviting us here to speak today. And thank you also for the
leadership that you and Senator Leahy and the other members of
this Committee have provided in this area of not only
superintending the rights of copyright owners, but looking out
for the interests of consumers as we enter this digital age. We
appreciate your thoughtful efforts in trying to help shape
public policy to protect both important interests.
Also, I would be remiss if I didn't call out--this is a
distinguished panel, but just join you in expressing
appreciation for two of the members of the panel in particular:
Don Henley and Alanis Morissette. In our business it is complex
and it is growing more so, but we understand that at the core
of the creative side of our business is the creative genius of
artists who make it go. It all starts with them, and while on
occasion--and you may hear some of it today--we have internal
fusses and feuds and family fights, these are two artists who
are associated with our labels, and we couldn't be prouder of
them, and we want to acknowledge that we acknowledge that at
the end of the day it starts with their creative genius, and
the rest of us just kind of build on that.
So, with that, let me say that as co-chief operating
officer of AOL, I am in charge of what we refer to as our
``content businesses.'' Behind that somewhat sterile label are
four of the world's most creatively dynamic enterprises: the
Warner Music Group, Warner Brothers Studio, New Line Cinema,
and Time Warner Trade Publishing.
Together, these businesses produce an extraordinary array
of movies, music, television programming, and books. Today they
are also grappling with the effects of digital media in general
and the Internet in particular, the very stuff which this
hearing is intended to address.
Now, I won't try and explore all of the implications of the
digital revolution for our company or for our industry, both
because I would be here all day if I tried and, more
fundamentally, it is a universe still evolving on a minute-to-
minute basis.
Instead, let me offer three basic observations that I
believe past and present experience suggests might guide our
way as we enter the new digital age.
First, we know that the digital distribution of
entertainment content is a real business and that it will grow
exponentially going forward. As my friend and partner in crime
at AOL Time Warner Bob Pittman puts it, ``How often do you
launch a business where you know millions of consumers are
already lined up and waiting for your product?''
Because we recognize this, we also recognize that the
digital age presents a tremendous opportunity to our company to
bring new levels of convenience and choice to consumers, to
develop new artists, and to expand the market for creative
content. Those companies that can meet these criteria and meet
this challenge will succeed in the new digital marketplace.
Those who can't, won't.
Second, we know that where there is no effective copyright
protection, there are no creative enterprises, save those
directed by wealthy patrons or government. This is as true in
the digital world as it was in the analog one.
Quite simply, a vibrant, vital democratic culture can't
exist without the legal right of individual artists and the
enterprises that nurture, develop, and distribute their work to
direct how and where it is to be used and to reap the rewards
therefrom.
In the end, I think anyone who wants to be a part of a
business involving copyrighted material must respect the
copyrights of others, not merely out of respect for the law,
but out of the simple requirement of survival.
If the history of America's economic success has taught the
world anything, it is the indispensable role of a system of law
in creating a marketplace where buyers, sellers, and producers
can be certain of their rights and responsibilities.
Like free governments, free markets are impossible to
sustain without the collective willingness to observe and
enforce the legal safeguards that ensure that the pursuit of
happiness doesn't descend into mass piracy and anarchy.
As inconvenient as it may be for some, the legal right and
moral necessity of intellectual property protection can't be
conjured out of existence by the wave of a digital wand. Either
we abide by the rule of law or we end up with chaos.
Third, when it comes to the shape, substance, and operation
of the digital marketplace, none of us knows what future format
it will take.
Put aside the logical absurdity of trying to write
regulations for an industry that doesn't even exist yet, and
consider what is the best way to ensure that consumers get to
decide in what form and at what price they receive information
and entertainment on digital networks.
The answer, I submit, is fairly simple: strong, market-
drive competition. Along with guaranteeing copyright
protection, our shared focus should be on fostering an
environment that secures a marketplace in which consumers have
an optimum array of different and convenient choices for
quality and value.
Now, yesterday, as you mentioned, Senator, our companies
took a big step in that direction with the announcement of an
agreement to form something called MusicNet, which is a
collaboration between AOL Time Warner, RealNetworks, EMI, and
Bertelsmann. It is a breakthrough platform for online music
subscription services in both a safe, convenient, and lawful
manner. This agreement ushers in, we believe, the era of
secure, convenient, interactive mass music distribution that
consumers demand that we want to provide. By licensing our
music catalogues to MusicNet, we create new outlets for our
artists and for their work. By distributing a MusicNet-powered
subscription service on AOL, we can offer the best interactive
music experience for our online members, allowing them to
choose from a broad selection of different labels and artists.
In conclusion, I would say that amid all the views you will
hear today, it is my hope we can reach consensus on these three
facts: digital distribution is here to stay; copyright is key
to making it fair for consumers and creators alike; and
competition and consumer choice are the way to ensure a
continuing supply of high-quality content at affordable prices.
Thank you very much.
[The prepared statement of Mr. Parsons follows:]
Statement of Richard D. Parsons, AOL Time Warner
Chairman Hatch and the Members of this Committee, I'm Richard
Parsons, Co-Chief Operating Officer of AOL Time Warner, and I'm
Grateful for the Chance to appear here today.
In view of the long list of speakers, I'll try to set an example,
if not of eloquence, then of brevity.
As Co-Coo, I'm in charge of what we refer to as our ``Content
Businesses.'' Behind that somewhat sterile label are four of the
world's most creatively dynamic enterprises: Warner Music Group, Warner
Bros. Studio, New line cinema and Time Warner Trade Publishing.
Together, they produce an extraordinary array of movies, music,
television programming and books. Today they are also grappling with
the effects of digital media in general and the internet in particular,
the very issues this hearing is intended to address.
The merger of AOL and Time Warner has put the timetable for change
on hyper-speed. I won't try to explore all the implications for our
company or industry, both because I'd be here all day and, more
fundamentally, It's a universe still evolving minute to minute.
Instead, let me offer three basic observations that, I believe,
past and present experience tells us to be true.
First, we know that the digital distribution of entertainment
content is a real business and will grow exponentially. As my friend
and partner Bob Pittman puts it, ``How often do you launch a business
where you know millions of consumers are lined up and waiting for your
product?''
This is a tremendous opportunity to bring new levels of convenience
and choice to consumers, develop new artists and expand the market for
creative content. Those companies that can meet these criteria will
succeed in the new digital marketplace; those who can't, won't.
Second, we know that where there's no effective copyright
protection, there are no creative enterprises, except those directed by
wealthy patrons or government. This is as true in the digital world as
it is in the analog one.
Quite simply, a vibrant, vital democratic culture can't exist
without the legal right of individual artists and the enterprises that
nurture, develop and distribute their work to direct how and where it
is used, and to reap the rewards.
In the end, I think, anyone who wants to be part of a business
involving copyrighted material must respect the copyrights of others,
not merely out of respect for the law, but out of the simple
requirement of survival.
If the history of America's economic success has taught the world
anything, it's the indispensable role of a system of law in creating a
marketplace where buyers, sellers and producers can be certain of their
rights and responsibilities.
Like free governments, free markets are impossible to sustain
without this collective willingness to observe and enforce the legal
safeguards that ensure ``the pursuit of happiness'' doesn't descend
into mass piracy and anarchy.
As inconvenient as it may be to some, the legal right and moral
necessity of intellectual property can't be conjured out of existence
by the wave of a digital wand. Either we abide by the rule of law or we
end up with chaos.
Third, when it comes to the shape, substance and operation of the
digital marketplace, none of us knows what future forms it will take.
Put aside the logical absurdity of trying to write regulations for
an industry that doesn't even exist yet, and consider what's the best
way of ensuring that consumers get to decide in what format and at what
price they receive information and entertainment on digital networks.
The answer is simple: strong market-driven competition.
Along with guaranteeing copyright protection, our shared focus
should be fostering an environment that secures a marketplace in which
consumers have an optimum array of different and convenient choices for
quality and value.
Yesterday, we took a big step in that direction with the agreement
by realnetworks, EMI, Bertelsmann and AOL Time Warner to create
musicnet, a breakthrough platform for online music subscription
services.
This agreement ushers in the era of secure, Convenient, interactive
mass music distribution that consumers demand and that we want to
provide. By licensing our music catalogues to musicnet, we create new
outlets for our artists and their work. By distributing a musicnet-
powered subscription service on AOL, we can offer the best interactive
music experience for our online members, allowing them to choose from a
broad selection of different labels and artists.
Amid all the views you'll hear today, it's my hope we can reach
consensus on these three facts: digital distribution is 5 here to stay;
copyright is key to making it fair for consumers and creators alike;
competition and consumer choice are the way to ensure a continuing
supply of high-quality content at affordable prices.
Thank you.
Chairman Hatch. Thank you.
Mr. Valenti, we will turn to you.
STATEMENT OF JACK VALENTI, CHAIRMAN AND CHIEF OPERATING
OFFICER, MOTION PICTURE ASSOCIATION OF AMERICA
Mr. Valenti. Thank you, Mr. Chairman. I brought with me my
timer so that I can be sure that I am not going to filibuster,
which is an attitude devoutly to be admired by all.
Chairman Hatch. We forgot to put ours up, but I have asked
them to get it. But we are going to give you time.
Mr. Valenti. Let me start by saying that the copyrights
industries, which are composed of movies, television, home
video, music, publishing, and computer software, represent
America's greatest economic asset, and, I might add, its
premier export trade prize. We are creating new jobs at three
times the rate of the remainder of the economy. We bring in
more international revenues than agriculture, than aircraft,
than automobiles and auto parts. We have a surplus balance of
trade with every single countries in the world. No other
American enterprise can make that statement. That is a
revelatory statement because last year this country suffered
over $400 billion in deficit balance of trade. We are an
economic engine of growth that is the envy of the known world.
More extraordinary is the reach, the global reach of the
copyright industries. That creative material is joyously
received by every country, creed, and culture, and the American
movie, as anybody who travels abroad would testify, is
omnipresent. We are hospitably patronized on every continent.
Now, I want you to know that we believe the Internet
represents a glorious new potential of a new delivery system so
that we can bring movies to American homes. I am pleased to
report to you that within 4 to 6 months, several of the major
film studios will be online with movies, and the other major
studios will follow close on their heels. We are using new
technology to try to protect these movies on their journey from
cyberspace to American homes, to prevent wholesale reproduction
as well as retransmission on the Internet. But if that
protection is not enough and we need more technological
protection, some of which will require Congressional
legislation, we will be back to you to ask for your help in
protecting America's most precious creative prize.
I think that Congress has to stand guard to preserve,
protect, and defend copyright, without any question, against
those who want to erode it or shrivel it or exile it.
Now, I might add that new technology makes possible through
the Internet people to illegally download movies today without
permission of the owner and without any payment.
Now, creative property is private property. To take it
without permission and without payment collides with the core
values of this society, and otherwise rational people, who
wouldn't dream of stealing a videocassette off the shelf of a
Blockbuster store, blithely download movies casually, which
seems to be for many accepted normality of Internet behavior.
Now, I will tell you again, to repeat, that creative
property is private property. Right now consultants tell us
that at least 350,000 movies are being illegally downloaded
every day right now, with estimates up to 1 million downloads
illegally within the year. So, again, creative property is
private property. To take it without permission or payment just
because technology say it is easy to do so is wrong.
Now, with all the passion that I can summon--and I am about
to deplete it right quick--I am asking this Committee and the
Congress to make sure that copyright is not allowed to decay,
for if that happens, this Nation will see the slow undoing of
an enormous creative and economic asset, and we will be
squandering part of that economic future.
So I will utter three words that will thrill this
Committee: In conclusion--that is Goldwyn, ``in conclusion.''
Well, forget it, I won't go into that.
[Laughter.]
Mr. Valenti. But I want to leave you with this question:
Who will invest huge sums of private risk capital in the
production of films if they cannot protect that creative
material from being stolen on the Internet, or anywhere in
cyberspace? That is the question I leave with you, and I share
Mr. Parsons, and I hope some of the other people on this panel,
of the eternal enduring value of copyright as a great, great
asset of this country.
Thank you.
Chairman Hatch. Well, thank you. I think--
Mr. Valenti. Mr. Chairman, let me ask you a question. I am
under 5 minutes. I would like to take 32 seconds--and I mean 32
seconds--to show you on this screen an actual take-down, an
illegal take-down that we did in our office of the picture that
won the Academy Award for Best Picture while it was still
playing in the theaters. I want you to see this actual take-
down, if one of my experts will come over here. This is where--
Senator Leahy. I will do it for you, Jack, if you want.
Mr. Valenti. But I want you to see this. This is the actual
take-down, Mr. Chairman, of and I am going to spin it for 32
seconds to show you the watchable quality of ``Gladiator.''
[Video shown.]
Mr. Valenti. That is what is happening today. The award-
winning ``Gladiator'' is one of those 350,000 films that are
being downloaded.
Senator Leahy. We also thank Allison for getting it
downloaded.
Mr. Valenti. Thank you very much.
[The prepared statement of Mr. Valenti follows:]
Jack Valenti, Chairman and CEO, Motion Picture Association,
Washington, D.C.
When Abraham Lincoln first ran for Congress, he began his first
campaign speech by saying: ``My politics are short and sweet, like the
old woman's dance.'' Taking my cue from Abe Lincoln, I say: ``My
message is short and sweet--and urgent.''
The Copyright Industries (movies, TV, home video, music, publishing
and computer software) are America's greatest trade prize. We are
creating jobs at three times the rate of the rest of the economy. We
bring in more international revenues than aircraft, more than
agriculture, more than automobiles and auto parts. What is more
astonishing and more valuable is that we have a Surplus Balance of
Trade with every single country in the world, while in 2000 this nation
suffered an unholy rise to almost $400 Billion in Deficits. No other
American business enterprise can make that statement, which is why we
represent an economic engine of growth that is the envy of the known
world.
Even more extraordinary is the global reach of the Copyright
Industries. American creative material is joyously received by every
country, creed and culture on this planet. The American movie, as
anyone who travels abroad can testify, is omnipresent all over the
world, hospitably patronized on every continent.
We believe the Internet has great potential as a new delivery
system for movies. Several movie studios will be OnLine with their
films within four to six months. They will be content encrypted, to
protect these films on their way to American homes. If it becomes clear
that more protection is needed, some of which might require
congressional legislation, we will return to you for help.
Keep in mind it that the preeminence of the Copyright Industries as
an American economic and creative prize is the prime reason why the
Congress must stand guard, to preserve and defend Copyright against
those who would loosen its protective bindings, or try to shrink it, or
erode it. New technology makes possible, through the Internet, the
illegal use of creative material without the permission of the owner
nor any payment for its use. Creative property is private property. To
take it without permission, without payment to its owners, collides
with the core values of this society. Yet that is precisely what is
happening. Otherwise rational people who would not dream of stealing a
videocassette off the shelf of a Blockbuster store are using movies
without permission or payment, which is, for many, the assumed
normality of current Internet behavior. It is estimated that today some
370,000 movies are being downloaded, illegitimately, every day. By the
end of the year it is estimated that one million illegal downloads will
take place every day.
To repeat, creative property is private property. It cannot be
casually pilfered simply because it is easy to do so. Moreover, with
all the passion I can summon I tell this Committee that if Copyright is
allowed to decay, then this nation will begin the slow undoing of an
immense economic asset, which can squander our creative future. The
question that the Congress must answer is: Who will invest huge amounts
of private risk capital in the production of films if this creative
property cannot be protected from theft?
Chairman Hatch. Well, thank you, Jack. That is a powerful
statement, and I agree with you on copyright issues, there is
no question about it, and you as well, Mr. Parsons.
Mr. Henley, we look forward to your very important comments
about your industry.
STATEMENT OF DON HENLEY, ON BEHALF OF THE RECORDING ARTISTS
COALITION
Mr. Henley. Thank you, Mr. Chairman. I am certainly honored
to be here today, and I appreciate the opportunity to speak
today on behalf of recording artists and, more particularly,
the Recording Artists Coalition, of which I am a co-founder.
Recording artists have for far too long been insufficiently
represented here in Washington. I think you would agree with
that.
Chairman Hatch. I do.
Mr. Henley. The RIAA, Recording Industry Association of
America, does not speak on behalf of recording artists, even
though they have given the impression at times that they do.
The RIAA speaks only on behalf of its membership, which is
solely composed of major and independent record companies.
Now, over the next several years, Congress and the
Copyright Office and the record companies and the Internet
companies will lay the groundwork for intellectual property
rules and royalty rates for the exploitation of music on the
Internet. At this point there has been little input from the
recording artist community. Most, if not all, of the
discussions have been between the labels and the Internet
companies.
I would like to point out that there would be no need for
these discussions if it were not for artists and their creative
works, and we must be actively involved in the development of
this framework or our interests will not be protected. And so
artists today are simply asking for a place at the table.
As you know, Mr. Chairman, the Recording Artists Coalition
was at the forefront of the initiative to repeal the work-for-
hire legislation that was enacted in November 1999. I would
like to thank you and the other Senators on the Committee for
repealing that legislation. In the past, copyright law
amendments have been enacted only after serious and, at times,
lengthy deliberations. Generally, all of the interested parties
were afforded an opportunity to present their views to
Congress. No copyright law amendment has ever passed without
this type of fair and democratic deliberation, except this most
recent amendment.
Before the passage of the amendment adding sound recordings
to the list of works eligible for work-for-hire status,
Congress heard only one viewpoint, which was that of the RIAA.
You were told that the amendment was a technical change when,
in fact, it was a substantive change, one that would have
deprived recording artists of the right to pass to their
families and heirs the lifeblood of their careers: their sound
recording copyrights. Once you recognize this surreptitious
manipulation, you set out to right the wrong, and recording
artists and their families will never forget your courageous
and principled stand.
But we are here today to discuss the digital music
marketplace and what action, if any, Congress must take to meet
the needs of the creators and consumers. The Recording Artists
Coalition's position is very simple. We believe that recording
artists should always be paid for the exploitation of their
sound recordings on the Internet, unless the recording artist
makes the decision to provide his or her recordings free of
charge to listeners.
Napster has stated in public that it intends to build a
fee-based service that compensates creators. We look forward to
the implementation of that service, and services like it. We
recognize that, whether we like it or not, Napster has changed
everything. We are listening to our fans. Millions of people
have begun to experience interactive music services, and they
have so far been getting these services free of charge. But I
agree with Napster that, with some improvements, many of its
users will be willing to pay for this sort of service. In fact,
according to Mr. Barry, 70 percent of people surveyed said that
they are willing to pay for this type of service.
Napster and other locker-type systems have flourished
because the record industry has failed to be forward-thinking
and has made it extremely difficult for legitimate companies to
license rights on an arm's-length basis. The record industry
has fiddled on the sidelines while the digital revolution went
on without them. The major labels should have spent their time
negotiating and implementing a fair and comprehensive licensing
system, one that addresses the interests of all parties,
including recording artists. And while we support the copyright
infringement lawsuits filed by the record industry, the
lawsuits should not be used to destroy a viable and useful
independent Internet distribution system. It is in the best
interests of recording artists, as well as consumers, that
Congress promotes an atmosphere of independent digital
distribution of music. The solution resides in the marketplace
and not in the courtroom. If, however, a resolution cannot be
reached quickly, compulsory licenses should be considered, but
only as a last resort.
Under the Digital Millennium Copyright Act, performers--
that is, recording artists--are now, for the first time ever,
entitled to a public performance right. Writers of music share
a public performance right with publishers. The publishers do
not recoup advances under the writer's share. The writer's
share is protected by an independent collection society.
Payment for digital performances should follow this logic. It
is vitally important that the recording artists receive digital
performance royalties directly from the source without the
record company recouping royalties against outstanding
accounts, or by engaging in unnecessary bureaucratic disputes.
So long as the major record companies represented by the
RIAA and the recording artists engage in public battles over
these issues, as well as others, the RIAA cannot act as an
objective, independent body.
This single, digital, public performance royalty that I
speak of is currently in force, and it applies to very
specific, non-interactive digital broadcasts only. Recording
Artists Coalition believes that Congress should examine the
possibility of expanding artist performance rights to include
interactive services. Music fans should be able to hear music
anywhere, anytime, on demand. Many businesses have recognized
that, in the wake of Napster, the competition is for
interactivity. The record labels themselves have begun to
develop interactive music services as well as license their
catalogues to other companies. My colleagues and I are
concerned that artists do not have rights to direct
remuneration for interactive services. Furthermore, Congress
should ensure that radio stations are not exempt from payment
of digital royalties for Internet radio broadcasts. It is
fundamentally unfair that broadcasters have always been exempt
from paying performers a performance right for analog
broadcasting, and we don't want to see this inequity extended
to the Internet.
In addition to Internet issues, recording artists have
other serious contractual problems with major labels. A new
artist agreement is one-sided in favor of the labels. In most
cases, a new artist has little leverage for negotiate favorable
terms. Many artists and music attorneys believe that the
standard industry contract is unconscionable.
The record company in many instances advances all or part
of the costs of recording, promotion, and marketing, and then
recoups the costs from the artist royalty. As a result, a
typical artist could sell half a million records and not see
one dollar in royalties. Even if an artist is lucky enough to
recoup, the label maintains ownership of the masters and the
copyrights. Just as you have so insightfully observed, Mr.
Chairman, it is as though you have paid off your mortgage and
the bank still owns your house. One way to even this playing
field would be for Congress to consider a Federal 7-year term,
much like the law that helped movie actors gain free agency in
California. While the California law is not perfect, it
provides a good model for Congress to consider.
I would like to address just one more important issue, if I
might. While there are many ways that Congress can help the
recording artist while encouraging a prosperous digital
marketplace, expanding fair use is not one of them. Fair use is
a delicate balance that adequately addresses the needs of the
record companies, the recording artists, and the public.
No recording artist wants to limit the use of his or her
music within the traditional parameters of fair use. However,
by expanding the exception, Congress will effectively
institutionalize free commercial distribution of music on the
Internet. This is not why fair use was created. The answer for
all parties involved and the public's demand for high-quality
digital services likes in the fair licensing of music.
I thank you again for this opportunity to discuss these
important issues with the Committee. Congress must continue to
hear from the independent voice of recording artists, and the
Recording Artists Coalition is dedicated to bringing these and
other issues directly affecting us to your attention and to the
attention of the public, as well as working with you to resolve
these problems. Recording artists must always have an
independent voice as our interests are unique and vital and, at
times, contrary to the interests of the RIAA and the major
record companies. The bottom line is that artists create the
music that fuels these industries and, hence, it would appear
obvious that our interests and concerns should be seriously
considered.
Thank you, sir.
[The prepared statement of Mr. Henley follows:]
Statement of Don Henley, on Behalf of the Recording Artists Coalition
Mr. Chairman and Members of the Committee,
I am honored to be here and I thank you for the opportunity to
speak today on behalf of recording artists and the Recording Artists
Coalition (RAC). Recording artists have for far too long been
insufficiently represented in Washington DC. The RIAA does not speak on
behalf of recording artists, even though it gives the impression at
times that it does. The RIAA speaks only on behalf of its membership,
which is solely composed of major and independent record companies.
Over the next several years, the Congress, the Copyright Office, the
record companies and the Internet companies will lay the groundwork for
intellectual property rules and royalty rates for the exploitation of
music on the Internet. At this point, there has been little input from
the recording artist community. Most, if not all, of the discussions
have been between the labels and the Internet companies. Yet, the
artists are the ones who create the content for distribution. There
would be no need for these discussions if it were not for artists and
we must be actively involved in the development of the framework, or
our interests will not be protected. Artists are simply asking for a
seat at the table.
As you know Mr. Chairman, RAC was at the forefront of the
initiative to repeal the ``work for hire'' legislation that was enacted
in November 1999. I would like to thank you and all the other Senators
on the Committee for repealing that legislation. In the past, Copyright
Law amendments have been enacted only after serious, and at times,
lengthy deliberations. Generally, all interested parties were afforded
an opportunity to present their views to Congress. No Copyright Law
amendment has ever passed without this type of fair and democratic
deliberation, except this most recent amendment.
Before passage of the amendment adding ``sound recordings'' to the
list of works eligible for ``work for hire'' status, Congress heard
only one viewpoint, that of the RIAA. You were told that the amendment
was a technical change, when in fact it was a substantive change; one
that would have deprived recording artists of the right to pass to
their families and heirs the lifeblood of their careers, their sound
recording copyrights. Once you recognized this surreptitious
manipulation, you set out to right the wrong, and recording artists and
their families will never forget your courageous and principled stand.
We are here today to discuss the digital music marketplace and what
action, if any, Congress must take to meet the needs of the creators
and the consumers. RAC's position is very simple. We believe that
recording artists should always be paid for the exploitation of their
sound recordings on the Internet, unless the recording artist makes the
decision to provide his or her sound recordings free of charge to
listeners.
Napster has stated in public that it intends to build a fee-based
service that compensates creators. We look forward to the
implementation of that service, and services like it. We recognize
that, whether we like it or not, Napster has changed everything. We are
listening to our fans. Millions of people have begun to experience
interactive music services. They have so far been getting these
services free of charge, but I agree with Napster that, with some
improvements, many of its users will be willing to pay for this sort of
service.
Napster and other ``locker'' systems have flourished because the
record industry has failed to be forward thinking and has made it
extremely difficult for legitimate companies to license the rights on
an arm's length basis. The record industry fiddled on the sidelines
while the digital revolution went on without them. The major labels
should have spent their time negotiating and implementing a fair and
comprehensive licensing system; one that addresses the interests of all
the parties, including recording artists. While we support the
copyright infringement lawsuits filed by the record industry, the
lawsuits should not be used to destroy a viable and useful independent
Internet distribution system. It is in the best interests of recording
artists, as well as consumers, that Congress promotes an atmosphere of
independent digital distribution of music. The solution resides in the
marketplace and not in the courtroom. If, however, a resolution can not
be reached quickly, compulsory licenses should be considered--but only
as a last resort.
Under the Digital Millenium Copyright Act (DMCA), performers--that
is, recording artists, are now, for the first time ever, entitled to a
public performance right. Writers of music share a public performance
right with publishers. The publishers do not recoup advances against
the writer's share, as it (the writer's share) is protected by an
independent collection society. Payment for digital performances should
follow this logic. It is vitally important that the recording artists
receive digital performance royalties directly from the source without
the record company recouping royalties against outstanding accounts, or
by engaging in unnecessary bureaucratic disputes.
So long as the major record companies, represented by the RIAA, and
the recording artists engage in public battles over these issues, as
well as others, the RIAA can not act as an objective, independent body.
This single, digital, public performance royalty that is currently
in force applies to very specific, non-interactive digital broadcasts
only. RAC believes that Congress should examine the possibility of
expanding artist performance rights to include interactive services.
Music fans should be able to hear music anywhere, anytime, on demand.
Many businesses have recognized that, in the wake of Napster, the
competition is for interactivity. The record labels themselves have
begun to develop interactive music services as well as license their
catalogs to other companies. My colleagues and I are concerned that
artists do not have rights to direct remuneration for interactive
services. Furthermore, Congress should ensure that radio stations are
not exempt from payment of digital royalties for Internet radio
broadcasts. It is fundamentally unfair that broadcasters have always
been exempt from paying performers a performance right for analog
broadcasting; we don't want to see this inequity extended to the
Internet.
In addition to Internet issues, recording artists have other
serious contractual problems with the major labels. A new artist
agreement is one- sided in favor of the labels. In most cases, a new
artist has little leverage to negotiate favorable terms. Many artists
and music attorneys believe that the ``standard industry contract'' is
unconscionable.
The record company, in many instances, advances all or part of the
costs of recording, promotion and marketing, and then recoups the costs
from the artist royalty. As a result, a typical artist could sell a
half million records and not see one dollar in royalties. Even if an
artist is lucky enough to recoup, the label maintains ownership of the
masters and the copyrights. Just as you have so insightfully observed,
Mr. Chairman, it is as though you have paid off your mortgage and the
bank still owns your house. One way to even this playing field would be
for Congress to consider a federal seven-year term, much like the law
that helped movie actors gain free agency in California. While the
California law is not perfect, it provides a good model for Congress to
consider.
I would like to address one more important issue. While there are
many ways Congress can help the recording artist while encouraging a
prosperous digital marketplace, expanding fair use in not one of them.
Fair use is a delicate balance the adequately addresses the needs of
the record companies, the recording artists, and the public.
No recording artist wants to limit the use of his or her music
within the traditional parameters of fair use. However, by expanding
the exception, Congress will effectively institutionalize free
commercial distribution of music on the Internet. This is not why fair
use was created. The answer for all parties involved and the public's
demand for high-quality digital services, lies in the fair licensing of
the music.
I thank you again for this opportunity to discuss these important
issues with the Committee. Congress must continue to hear from the
independent voice of recording artists. RAC is dedicated to bringing
these and other issues directly affecting recording artists to your
attention and to the attention of the public, as well as working with
Congress to resolve these lingering problems. Recording artists must
always have an independent voice as our interests are unique, vital,
and at times contrary to the interests of the RIAA and the major record
companies. The bottom line is that artists create the music that fuels
these industries and hence it would appear obvious that our interests
and concerns should be seriously considered.
thank you for your time.
Chairman Hatch. Thank you, Mr. Henley. You have given us a
lot to think about.
Ms. Morissette?
STATEMENT OF ALANIS MORISSETTE, RECORDING ARTIST
Ms. Morissette. Good morning, and thank you, Chairman
Hatch, for inviting me to testify at today's hearings. I would
like to start by letting you know how deeply grateful and
fortunate I feel for all of the success and opportunities that
I have in my life. I feel blessed to be able to share my
expressions the way I do and feel privileged to be able to
speak on behalf of fellow artists who have encouraged me to do
so.
The reality is that for every artist fortunate enough to be
in my position, there are thousands of other incredibly gifted
artists whose work may never be heard. It is with this in mind
that I speak today on behalf of all musical artists who have a
passionate desire for a direct voice when it comes time to
discuss the issues that control their future, their
livelihoods, and their ability to work and create. I believe it
is vital for us to be an integral part of the solution-creating
process. I invite other artists to join me, and I honor those
artists who have already spoken. I now join them in sharing the
same vision and goal.
I have come to realize that what we are trying to do is
develop a solution that satisfies the concerns of three
separate groups. First, and most importantly, there are the
people who listen to the music and are in the audience. Second,
there are the artists and all the members of the creative
community. And, third, there are the record companies and
people who have built and who will continue to build businesses
that connect the first two. An effective solution, as I see it,
can only culminate if each of these groups have their own voice
in the solution-creating process.
Music fans have a voice through elected officials, such as
you, the Members of Congress. The record companies have always
had their voices heard through their lobbying organizations,
such as the RIAA. The reason I am here today is to let you know
that although these intermediaries claim to represent the
creators, and while there certainly have been some alignment of
goals at times, our interests are not always the same.
There are an ever increasing number of ways in which those
interests conflict, particularly in the digital age. No matter
what you may hear from any of these parties, it is artists, and
artists alone, who I believe to be truly able to accurately
communicate and represent our unique and fundamental point of
view. You need look no further for evidence of this than the
recent bankruptcy and work-for-hire issues which would have
worked against artists and gone by unnoticed if the artistic
community had not spoken up.
As an artist, I have one goal: to continue to create and
share my creative expressions with as many people and as
directly as possible. If the intermediaries can help facilitate
that connection, I welcome their involvement. Where they impede
that connection, I question it, and I assume I am not alone in
that concern.
My only explanation as to the reasons why artists have not
spoken up in the past, individually or collectively, as often
as they are beginning to now is this: We are an incredibly
diverse group of individuals whose energies go into writing,
recording, and producing our music, and months, if not years,
of touring on the road. As a result of this diversity and the
amount of time and energy spent creating and sharing those
creations, it has been difficult for us to speak with a unified
voice and to decide who the person or persons would be to speak
on our behalf. It has, therefore, been easy for others to speak
up under the guise of doing so on our behalf.
I also believe that some artists are afraid of tapping into
or being portrayed as having tapped into the business-minded
part of themselves, believing that it may somehow compromise
their artistic integrity, and I understand this, although I
ultimately believe it is an act of self-care and that they are
honoring their expressions by allowing themselves to be aware
of and concerned about their livelihood.
I also know there has been fear generated in the artistic
community of speaking in a way that would throw any negative
light on the relationship between artists and their record
companies. I choose not to speak specifically about those
issues here today, as one quote taken out of context could be
subject to misinterpretation and be deeply misrepresentative of
my greater view on this issue. History has not been kind to
artists who have candidly expressed points of views that differ
from those of their record company. To say the least, to have
spoken up could potentially have exacerbated an already
strained relationship. Artists want to continue to share their
music with as many people as they possibly can. Up until
recently, their only way of doing this was through traditional
means. Without any other true option that would allow them to
pursue their goals, they would understandably, if not
reticently, accept the status quo.
We have now clearly evolved into a new and exciting digital
era in which we are discovering new ways to share our music
directly and interactively. Though I cannot speak for every
artist, my initial resistance to the new services created
online was based on the debate having been framed in terms of
piracy. Being labeled as such by the record companies, it
understandably sent a ripple effect of panic throughout the
artistic community. But what I have since come to realize is
that for the majority of artists, this so-called piracy may
have actually been working in their favor. Most recording
artists never receive royalties past their initial advance due
to the financial structure of most record company contracts.
From these artists' viewpoint, their music is free since they
do not, in the end, receive money from any of the sales. That
free Internet distribution allows the artist to aggregate an
audience and create a direct relationship with that audience as
well as develop a community among the people who love their
music. This in turn allows that artist to generate compensation
through other outlets, such as touring and merchandise. For the
majority of artists, this amounts to making enough money to be
in survival mode.
I believe that most artists write and create motivated by
the goal of expressing themselves and of sharing their
expressions with as many people as possible and view the
financial reward as a natural and welcome outcome as opposed to
it being their singular motivation.
At this critical juncture in the digital era, there are an
infinite number of decisions to be made regarding how music use
will be monitored, where the money generated from such use will
go, how it will go there, whom it will go through, and how it
will ultimately be divided up.
I believe it would be in everyone's best interest to make
sure that the creators of music and art are duly compensated
for their work and, most importantly, that they will have a
direct voice in the process of making these decisions. I also
believe that the people and companies who invest a lot of time
and money, working very hard to distribute our music with
people around the world, are deserving of being compensated for
their work as well. By embracing the concept of interactive
music online and by finding the best way we possibly can to
make sure that we come up with a system that allows artists to
be compensated for such use online, we are fostering a direct,
immediate, mutually gratifying, and I think incredibly exciting
relationship between artists and the people with whom they are
communicating.
In the big picture, it will benefit the exact companies who
have resisted it the most. History has proven time and again
that a greater variety of formats and distribution
opportunities lead to more choices for consumers, increased
awareness of the artists and their music, and ultimately a
continued and greater reward financially, creatively, and
personally for everybody involved.
As with any paradigm shift, there are understandable fears
and apprehensions to be addressed, and I believe we can arrive
at a place where all three groups can continue to thrive.
However, I believe the only way this can happen is if all three
groups communicate their own distinct points of view to each
other and if we are all open and honest about our true agendas
and concerns. I have always believed in the concept of everyone
winning or there not being a deal to be made. That remains true
to this day, and yet it would be remiss of me not to notice
that the longer we wait in the ``no deal'' holding pattern
while trying to figure this out, we run the risk of missing the
opportunity to connect directly with people and of driving
these forward-thinking distribution outlets created by the Web
underground.
We are faced with many difficult and complex questions
during this exciting time in music history. I am here to
emphasize how important I believe it to be that, as you are
considering constructing legislation that will govern the
future of digital music distribution, that I, along with all
artists, be actively involved in helping to develop what I know
can be gratifying solutions for all involved.
Thank you very much for your time.
[The prepared statement of Ms. Morissette follows:]
Statement of Alanis Morissette
Good morning. Thank you Chairman Hatch for inviting me to testify
at today's hearings. I would like to let you know how deeply grateful
and fortunate I feel for all of the success and opportunities that I
have in my life. I feel blessed to be able to share my expressions the
way I do and feel privileged to be able to speak on behalf of fellow
artists who have encouraged me to do so. The reality is that for every
artist fortunate enough to be in my position, there are thousands of
other incredibly gifted artists whose work may never be heard. It is
with this in mind, that I speak today on behalf of all musical artists
who have a passionate desire for a direct voice when it comes time to
discuss the issues that control their future, their livelihoods and
their ability to work and create. I believe it is vital for us to be an
integral part of the solution creating process. I invite other artists
to join me and I honor those artists who have already spoken. I now
join them in sharing the same vision and goal.
I have come to realize that what we are trying to do is develop a
solution that satisfies the concerns of three separate groups: First
and most importantly there are the people who listen to the music and
are in the audience, secondly, there are the artists and all the
members of the creative community and thirdly, there are the record
companies and people who have built and who will continue to build
businesses that connect the first two. An effective solution, as I see
it, can only culminate if each of these groups have their own voice in
the solution creating process.
Music fans have a voice through elected officials such as
yourselves, members of the congress. The record companies have always
had their voices heard through their lobbying organizations such as the
RIAA. The reason I am here today is to let you know that although these
intermediaries claim to represent the creators, and while there
certainly have been some alignment of goals at times, our interests are
not always the same. There are an ever-increasing number of ways in
which those interests conflict, particularly in the digital age. No
matter what you may hear from any of these parties, it is artists and
artists alone who I believe to be truly able to accurately communicate
and represent our unique and fundamental point of view. You need look
no further for evidence of this than the recent bankruptcy and work-
for-hire issues, which would have worked against artists and gone by
unnoticed if the artistic community had not spoken up.
As an artist, I have one goal: to continue to create and share my
creative expressions with as many people and as directly as possible.
If the intermediaries can help facilitate that connection, I welcome
their involvement. Where they impede that connection, I question it and
I assume that I am not alone in this concern.
My only explanation as to the reasons why artists have not spoken
up in the past, individually or collectively, as often as they are
beginning to now is this: We are an incredibly diverse group of
individuals whose energies go into writing, recording and producing our
music, and months if not years of touring on the road. As a result of
this diversity and the amount of time and energy spent creating and
sharing those creations, it has been difficult for us to speak with a
unified voice and to decide who the person or persons would be to speak
on our behalf. It has therefore been easy for others to speak up under
the guise of doing so on our behalf. I also know that there has been
fear generated in the artistic community of speaking in a way that
would throw any negative light on the relationship between the artists
and record companies. I choose not to speak specifically about those
issues here today as one quote taken out of context could be subject to
misinterpretation and be deeply misrepresentative of my greater view on
this issue. History has not been kind to artists who have candidly
expressed points of view that differ with those of their record
company. To say the least, to have spoken up could potentially have
exacerbated an already strained relationship. Artists want to continue
to share their music with as many people as they possibly can. Up until
recently, their only way of doing this was through traditional means.
Without any other true option that would allow them to pursue their
goals, they would understandably, if not reticently accept the status
quo.
We have now clearly evolved into a new and exciting digital era in
which we are discovering new ways to share our music directly and
interactively. Though I cannot speak for every artist, my initial
resistance to the new services created online was based on the debate
having been framed in terms of ``piracy''. Being labeled as such by the
record companies, it understandably sent a ripple effect of panic
throughout the artistic community. But what I have since come to
realize is that for the majority of artists, this so-called ``piracy''
may have actually been working in their favor. Most recording artists
never receive royalties past their initial advance due to the financial
structure of most record company contracts. From these artists'
viewpoint, their music is free since they do not, in the end, receive
money from any of the sales. That ``free'' internet distribution allows
the artist to aggregate an audience and create a direct relationship
with that audience as well as develop a community among the people who
love their music. This in turn allows that artist to generate
compensation through other outlets such as touring and merchandise. For
the majority of artists, this amounts to making enough money to be in
survival mode.
I believe that most artists write and create motivated by the goal
of sharing their music with as many people as possible and view the
financial reward as a natural and welcome outcome as opposed to it
being their singular motivation.
At this critical juncture in the digital era, there are an infinite
number of decisions to be made regarding how music use will be
monitored, where the money generated from such use will go, how it will
go there, whom it will go through, and how it will ultimately be
divided up.
I believe it would be in everyone's best interest to make sure that
the creators of music and art are duly compensated for their work and
most importantly, that they will have a direct voice in the process of
making these decisions. I also believe that the people and companies
who invest a lot of time and money, working very hard to distribute our
music with people around the world are deserving of being compensated
for their work as well. By embracing the concept of interactive music
online, and by finding the best way we possibly can to make sure that
we come up with a system that allows artists to be compensated for such
use online, we are fostering a direct, immediate, mutually gratifying
and I think incredibly exciting relationship between artists and the
people with they are communicating.
In the big picture, it will benefit the exact companies who have
resisted it the most. History has proven time and again that a greater
variety of formats and distribution opportunities lead to more choices
for consumers, increased awareness of the artists and their music and
ultimately a continued and greater reward financially, creatively and
personally for everybody involved.
As with any paradigm shift there are understandable fears and
apprehensions to be addressed and I believe we can arrive at a place
where all three groups can continue to thrive. However, I believe the
only way this can happen is if all three groups communicate their own
distinct points of view to each other and if we are all open and honest
about our true agendas and concerns. I have always believed in the
concept of everyone winning or there not being a deal to be made. That
remains true to this day and yet it would be remiss of me not to notice
that the longer we stay in the ``no deal'' holding pattern while trying
to figure this out, we run the risk of missing the opportunity to
connect directly with people and of driving these forward thinking
distribution outlets created by the web underground.
We are faced with many difficult and complex questions during this
exciting time in music history. I am here to emphasize how important I
believe it to be that as you are considering constructing legislation
that will govern the future of digital music distribution, that I,
along with all artists be actively involved in helping to develop what
I know can be gratifying solutions for all involved.
Thank you very much for your time.
Chairman Hatch. Thank you very much. We appreciate having
you here.
Mr. Barry, we will turn to you.
STATEMENT OF HANK BARRY, INTERIM CHIEF EXECUTIVE OFFICER,
NAPSTER
Mr. Barry. Thank you, Senator. Thank you for inviting me to
appear before you today. I am glad to be here representing the
more 60 million people who are part of the Napster community.
As I did the last time I was here, I would like to take a
moment to acknowledge Shawn Fanning, who is behind me today. He
was 19 the last time we met. He is 20 now, so he is over the
hill.
The question before us today is: What does it take to make
music on the Internet a fair and profitable business? I think
it is going to take an act of Congress, a change to the laws to
provide an industry-wide license for the transmission of music
over the Internet. The Internet needs a simple and
comprehensive solution, similar to the one that allowed radio
to succeed. The Internet does not need another decade of
litigation.
I have tried for the last 9 months to make a market-based
solution. We were able to reach agreement with Bertelsmann on a
business model and license terms for the sound recordings and
the musical compositions that they control. Yet I can't today
report that any other such agreement has been reached with a
major label or publisher. We were fortunate to make an
agreement with Mr. Gottlieb here.
One obstacle may have been a lack of will, but all the
record and publishing companies represented on the panel today
now say they want to move forward in this area, and I take them
at their word. What, then, is the problem? Licensed music
should now be available over the Internet as it is over the
radio. I think a large part of the problem is complexity.
If you take this CD by the Holmes Brothers, it is no simple
object. There are two separate and distinct copyrighted works
embodied in each track on this gospel CD. For each track, there
is the owner of the sound recording, the tape that you make in
the studio. There is also a separate work, the musical
composition, the song, the sheet music, the song the artist
sings. By law, each track of the CD is also considered a
reproduction of the musical composition, so you are buying two
works.
On this single CD, for example, there are 13 sound
recordings and eight separate music publishers. And that is
pretty typical. Now, if you multiply that times 3,000 record
companies in the United States and 25,000 music publishers
times 27,000 new CDs made ever year, I think you can see that
separate, individual negotiations for license agreements are
just not viable. They are not a viable option.
This situation has led to endless private negotiations and
litigation. Let me show you sort of a John Madden-style diagram
of the state of litigation just among those of us who are on
the panel here today. That is just the people who are here
today.
So how can this mess be cleaned up? Well, I think this is
the center of this issue, and here I find myself in surprising
agreement with the perceptive, reasoned analysis by the RIAA.
You may know that Vivendi-Universal recently made musical
compositions available online without getting the publisher's
permission. The RIAA has gone to the Copyright Office after the
fact, arguing for a compulsory license for situations like
this.
Let me quote to you from the petition that the RIAA made to
the Copyright Office. ``The music industry is unique among
owners and users of copyrighted works in that reproduction and
distribution of musical works has been subject to a compulsory
license since 1909. The availability of a compulsory license
has ensured that necessary rights can be obtained when needed,
at a known price, and pursuant to established procedures.''
The RIAA then argues that extending the compulsory license
to their new digital offers would--and I am now quoting again--
``avoid the need for individual negotiations on a scale that is
unprecedented in the industry and, thus, facilitate the
launch'' of these new services.
This is the official position of the RIAA, and I endorse
this principle. But I endorse it not just for musical
compositions but for sound recordings as well.
Congress has repeatedly used such licenses to advance
public policy goals in the context of new and frequently
inefficient marketplaces. These industry-wide licenses for
defined services, with clear payment structures, have
encouraged beneficial new technologies and responded
effectively to particular market failures.
Music on the radio works because of what is functionally an
industry-wide license. Cable television, satellite television,
Web casting--you in the Congress have effectively encouraged
new technologies through these types of licensing arrangements
in a way that fostered competition and benefited consumers and
creators alike.
Copyright, Senator, is a tool of public policy. It does not
vindicate a private right. Copyright requires a constant
balance between the public's interest in promoting creative
expression and the public's interest in having access to these
works. This is a balance that has often proven impossible to
find without the help of Congress.
Finally, the Napster community says loudly and clearly that
we want artists and songwriters to be paid. I think that the
license you create should also include a direct Internet rights
payment to artists. There is certainly precedent for this, Mr.
Henley said, in the so-called writer's share of public
performance--that is, radio and television payments that are
collected by ASCAP and BMI. You may know that a portion of
these payments goes directly to the songwriter.
Senator, this is a moment of tremendous opportunity. For
many years, our Nation and this Committee heard wonderful
promises of an emerging Internet music era where people could
have convenient access to the entire catalogue of recorded
music over the Internet at the touch of a button. Well, as
often happens, history arrived ahead of time, and it is a
uniquely American story. A young man with no standing, no
credentials, no connections, and no plan for placating the
powerful, sat down outside Boston and created an entirely new
system. I think it is meaningful that within 18 months we are
no longer debating whether there should be music on the
Internet but, rather, debating the best way to make sure that
it continues. More than 60 million people have starred on a new
stage in our National love affair with music. All of us are
finding new music and music we had forgotten how much we loved.
The question before this Committee is a matter of policy:
how to make this new world of Internet music work. The next
step should not be shutting it down. The Congress has
effectively promoted new technologies in the past while
ensuring that creators benefit and are paid. And I believe it
is essential that we do so again today.
Thank you.
[The prepared statement of Mr. Barry follows:]
Statement of Hank Barry, Interim CEO, Napster
Mr. Chairman and members of the Committee, thank you for inviting
me to appear before you today. I am happy to be here on behalf of
Napster and all the members of the Napster community. As I did last
time I was here, I would like to take a moment to acknowledge Shawn
Fanning, the founder of Napster, who is sitting behind me today. He was
19 then. He is 20 now--and despite his advanced years, he is not yet
over the hill.
I think no one in this room--even those with whom we have disagreed
vigorously would contest that accessing music over the Internet is
something that tens of millions of people, young and old, love to do.
Over half of Napster's users are over 25, and they come from all walks
of life. The question before us today--from all of our very different
perspectives and responsibilities--is what does it take to make music
on the Internet a fair and profitable. business.
To realize this goal, I believe it will take an Act of Congress--a
change to the laws to provide a compulsory license for the transmission
of music over the Internet. And today I will tell you why I strongly
believe such a change is necessary, an important step for the Internet,
and why it will be good for artists, listeners and businesses.
Negotiation History
When I last testified before this Committee last July, I did not
believe this issue required a legislative solution. I believed that
Napster should find a private contractual solution that the rights
holders and the people who use Napster could all support. We said ``let
the marketplace work.''
Since that time the Napster community has continued to grow. We
then had 20 million members; we have grown to more than 60 million
members today, even as we aggressively comply with the District Court's
injunction.
Since people who use Napster buy more music than others and are
very willing to pay for music over the Internet, I believed there was a
basis for making an agreement with the record and music publishing
companies. We built our business model around this idea: that the
people using Napster want artists and songwriters to be paid, and that
peer-to-peer Internet technology is the most efficient and convenient
way ever devised to make music accessible.
I have tried for the last 9 months to make an agreement under which
Napster can get a license from the record companies and the music
publishers. I believed that any such agreement would serve as a
precedent for other agreements and could serve as the basis for
payments by the people using Napster to recording artists and
songwriters. We were able to reach agreement with Bertelsmann on a
business model for a new service and license terms for the sound
recordings and the musical compositions they control. Yet I cannot
today report that any other such agreement has been reached with a
major label.
Perhaps I should not have been surprised at this result. Although
the World Wide Web portion of the Internet has been around for 7 years,
and billions of investor dollars have been spent founding and
attempting to grow technology companies and consumer companies that
would help all of us access music over the Internet, to this date no
service has been able to provide a comprehensive offering of music on
the Internet that is licensed by the major recording and publishing
companies.
For the record companies, the promise of music over the Internet
has always been ``coming real soon now''. Every time this Committee
holds a hearing on these issues, new promises of imminent progress are
made. Just last July, Fred Ehrlich from Sony told this Committee ``we
are in active conversations'' with both eMusic and mp3.com. But, once
again, these have turned out to be empty statements.
The DMCA was supposed to solve many of these problems. As Chairman
Hatch said in the last hearing of this Committee on this issue:
``In short, it was believed that a stable, predictable legal
environment would encourage the deployment of business models which
would make properly licensed content more widely available. Sadly, this
has not yet occurred to any great extent in the music industry, and the
DMCA is nearly two years old.''
Look at the facts. Where are the Internet businesses with clear and
complete recording and music publishing licenses? There are none. Where
are the emerging digital media companies with negotiated agreements
with all rightsholders? There are none.
And of course these companies argue that this is Napster's fault.
That argument might be granted some validity if there were even one
fully-licensed business with anything approaching a comprehensive
consumer offer. But there are none.
We might all well ask--why is this so complicated? Why can't the
record companies and music publishing companies just issue licenses to
eMusic, Liquid Audio, Listen.com, Yahoo, MSN and Napster, and everyone
else, so consumers can pay money and have access to music over the
Internet, while ensuring that artists and songwriters are paid? Why
have the record and publishing companies continually said they are
going to license, and then not followed through?
Well, one obstacle may have been a lack of will--the record
companies have stated repeatedly that they believe that licenses of
sales over the Internet will cut into physical goods sales and
generally damage, not increase, their business. This fear, of course,
has not been founded in reality to date. CD sales are stronger than
other retail, even in the face of uncertain economic times. Internet
music has increased interest in music as a whole. Like the VCR, the
cassette, and every other major innovation, Internet music has been
greeted by a chorus of doom from existing distributors. But let's
assume that the will is there to license music over the Internet--
certainly all of the record and publishing companies represented on
this panel now say they want to move forward in this area.
Even if we assume that everyone agrees that licensing music for the
Internet would be a good thing, my experience is that it is an almost
impossibly complicated thing. And unfortunately I have to explain how
complicated it is by going over the rights structure in this industry.
So if you will let me do that. . .
Industry Overview
This background description here is for those of you who are not
copyright lawyers. Bob Kohn of eMusic wrote a great book on this if you
want further information.
As the members of this Committee know, when you buy a CD or tape,
you are really getting copies of two separate works. The first is the
sound recording that the artist and producers and musicians made in the
studio. The second is the musical composition, the song that is being
played. By law, each copy of the CD is also considered a reproduction
of that musical composition. The complex part about this is that the
sound recording and the musical composition that is sung on the sound
recording (the ``song''--the music) are almost always owned by
different companies, even where, as in many cases, the recording artist
is the same person who wrote the song.
Now if you are trying to make music available to the public on the
Internet, whether for download or streaming or even for broadcast, and
if you need a private contractual agreement to do that, then you have
to negotiate with both sets of rightsholders--the record companies and
the music publishers. First you have to go to the record companies (and
if you want the good stuff, like polkas and Lithuanian folk songs, you
have to go to many record companies--there are over 3,000 record
companies in the US alone).
And when you have negotiated each of those 3,000 separate
agreements, you are only half way there--because then you have to go
and negotiate with all of the music publishers--and there are over
25,000 independent music publishers in the US alone. Mr. Murphy's
organization represents many of them, but I believe Mr. Roberts from
MP3.com would tell you that anything less than an overall comprehensive
license to all compositions doesn't do you much good, because the
likelihood is that rights you have and the rights you need will not
match at all. And even one failure to match can bring down the whole
structure.
This is further complicated by the fact that several of the largest
music publishers, controlling millions of songs, are owned by the
record labels, but the music publishing catalogs they control bear no
relation to the sound recordings they control--they are not the same
songs. For a final complication--the music publishers have two separate
rights, the right to make a mechanical copy of the song and the public
performance right, that may both be implicated in this type of
licensing. And each of those rights is administered for them by a
different rights organization.
Now, as you know Senator, that is a simplified statement of the
rights structures in this industry.
Compulsory Licenses
So, what can Congress do to simplify this in a way that will work?
Well, here--at the center of the matter--I find myself in
surprising agreement with a perceptive recent analysis by the RIAA.
Vivendi Universal and the National Association of Music Publishers
are in a dispute based on the fact that Universal made musical
compositions available online without getting the publishers'
permission. The RIAA has gone to the Copyright Office seeking guidance
as to whether Section 115 of the Copyright Act applies in such
circumstances. The RIAA articulates a compelling case for the need for
compulsory licenses. The RIAA says that two fundamental problems limit
access to music on the Internet: first, that independent sequential
negotiations with all rights holders (like those I described a minute
ago) are practically impossible in any reasonable time frame. Second,
they say that the laws regarding rights are unclear.
It's an argument I would like to examine with you in some detail.
So let me quote now from the RIAA's Petition. I have attached the
entire Petition to my testimony.
The RIAA said: ``To the extent that On-Demand streams and Limited
Downloads make use of musical works, it is right and proper that
songwriters and music publishers receive a reasonable royalty, as
appropriate and as provided under existing law. RIAA's member companies
are ready and willing to pay reasonable applicable royalties for the
services they operate or authorize.''
[so far so good]
A few paragraphs down, they continue.
``To be compelling to consumers, it is believed that a service must
offer tens or hundreds of thousands of songs, in which rights may be
owned by hundreds or thousands of publishers. No service provider is
eager to embark on individual negotiations with all those publishers
unless it is necessary.''
[well--that's my experience too. Continuing. . .]
``The music industry is unique among owners and users of
copyrighted works in that reproduction and distribution of musical
works has been subject to a compulsory license since 1909. In the
nearly a century that the mechanical compulsory license has existed, it
has become the foundation of business practices that are deeply
ingrained in the industry and have been embraced by the copyright
owners whose works are subject to it.''
``. . . the availability of a compulsory license has ensured that
necessary rights can be obtained, when needed, at a known price, and
pursuant to established procedures. Recognizing that the business
practices founded upon the compulsory license extend to On-Demand
streams would avoid the need for individual negotiations on a scale
that is unprecedented in the industry and thus facilitate the launch of
On-Demand Streaming services. . .''
``The lack of clarity as to the issues described above has become
the primary obstacle to the launch of digital services designed to meet
ever-increasing consumer demand . . . . Representatives of the RIAA and
its members have negotiated with representatives of music publishers
concerning the licensing of services that would offer On Demand Streams
and Limited Downloads. However, in large part because of the
uncertainty as to the fundamental questions of law addressed above,
these negotiations have not yet successfully resolved the matter.''
In short, the RIAA's position is that Internet music is a mess
because everyone involved asserts complex and varying rights, that
there are too many potential licensors for ``independent sequential
negotiations'', and that the best way for the market to move forward
quickly and fairly may be a compulsory license for musical
compositions.
That is the official position of the RIAA--and I endorse this
principle. But I endorse it not just for musical compositions -but for
sound recordings as well. Not just for music publishers, but also for
record companies.
Do they Work? Examples of Compulsory Licenses
As the RIAA says, compulsory licenses have a long history of
success, allowing for the widespread implementation of a new technology
while ensuring that rights holders are compensated. Congress has
repeatedly used such licenses as a way of advancing public policy goals
in the context of new and frequently inefficient marketplaces.
Compulsory licenses have encouraged beneficial new technologies, and
responded effectively to particular market failures--including
excessive contracting costs and anticompetitive market structures.
Let's look at some examples:
In 1909, Congress created a right against the reproduction of
musical compositions in mechanical forms (i.e., piano rolls), but
limited this right through the creation of a mechanical compulsory
license for musical works. The legislative history behind the
mechanical compulsory license reveals that Congress enacted this
provision, not only to compensate composers, but to prevent the Aeolian
Company, which had acquired mechanical reproduction rights from all of
the nation's leading music publishers, from limiting the dissemination
of the music to the public through the creation of a monopolistic
environment. Thanks to this, once a song has been recorded by anybody,
it may be recorded by anyone else, without a further license from the
music publisher, if the person making the new recording notifies the
publisher and pays a statutorily mandated royalty based on the number
of copes made. That's where ``cover'' songs come from--and only those
of us who have heard different versions of ``Louie Louie'' can
appreciate what that compulsory license has meant for American music.
Years later, Congress again enacted several additional compulsory
license, this time related to consumers' ability to access broadcast
transmissions via cable and satellite systems. In 1976, Congress passed
a compulsory license for cable television systems that retransmit
copyrighted works. Pursuant to the compulsory license provision,
copyright owners are entitled to be paid prescribed royalty fees for a
cable television company's secondary transmission of the copyrighted
work embodied in television and radio broadcasts.
Then, in 1988, Congress passed the Satellite Home Viewer Act of
1988 (SHVA), which created a compulsory license system for satellite
carriers that retransmit television broadcasts that operates similar to
the cable compulsory license. Congress acted again in 1999 when it
expanded the SHVA's scope to include local-into-local retransmission.
Congress recognized the ability of these then cutting edge
technologies to further disseminate to the public television and radio
content, and the need to ensure that rights holders remained adequately
compensated. Congress understood, however, the inefficiencies inherent
in forcing cable or satellite providers to negotiate individual
licensing agreements, thereby resulting in the use of a compulsory
license system.
Interestingly enough, considering the current controversy,
Congress' next foray into compulsory licenses applied specifically to
music. The Digital Performance Rights in Sound Recordings Act of 1995
created a limited performance right for sound recordings, subject to a
compulsory license for certain digital audio deliveries of sound
recordings. The compulsory license originally applied, in general, to
non-interactive satellite and cable audio digital deliveries. The
Digital Millennium Copyright Act amended the original law to explicitly
include non-interactive webcasting of sound recordings within the
compulsory license's scope.
At the time, Congress reasoned that these new technologies promised
to encourage the widespread dissemination of this music to the public.
Once again, Congress enacted the compulsory license mechanism as a
means to ensure that artists and other rights holders were compensated,
while not hindering the continued development and deployment of these
digital delivery systems.
Finally, I think we can all agree that AM and FM radio have been
good for recorded music. The benefits of radio have flowed from the
effective compulsory license created by performing rights societies,
such as ASCAP and BMI. They enforce songwriters' and music publishers'
performance rights through a court created process that removes the
need to negotiate with individual rights holders. While Congress did
not create this procedure, it has implicitly endorsed it by recognizing
these performing rights societies in recent legislation. Further,
Congress repeatedly has refused requests to outlaw the use of these
blanket licenses.
In all of these cases of compulsory licensing, creators benefit
from, but do not completely control, the distribution of their product.
A balance is struck--a balance that is at the heart of all intellectual
property law. Remember, intellectual property is not the same as real
property or personal property--copyright is a limited right. Copyright
is not based on a private right of the individual, it is a creation of
and a tool of public policy. It requires a constant balance between the
public's interest in promoting creative expression and the public's
interest having access to those works. This is a balance that has often
proven impossible to find without the help of the Congress.
Important Elements of Any Licensing Regime for Internet Music
Let me offer a few specific elements that I think are important for
a fair and equitable compulsory license law.
Any such solution has to apply to the entire catalog of the
applicable rightsowner, whether record company or music publisher. Too
often companies have entered into licensing arrangements that contain a
clause saying that the subject matter of the license will be decided
``later, when the rightsholders can determine what rights the
rightsholder owns and can license.'' This process, which is generally
know a ``rights clearances'' is often used to transform what looks like
a real license into an empty shell.
Any such solution should also offer licensees both the sound
recording rights and the musical composition rights. As we have seen
above, it makes no sense for a licensee to have a sound recording
license, and then have to begin negotiating with all the publishers.
Any technology requirements for copyright management and security
have to be general enough so that they are capable of being fulfilled
by many vendors. Private licensing regimes have been recently reported
which would violate this basic principle of neutrality, by linking
access to rights to the use of particular software--even as there are
interlocking financial arrangements between the rightsholders and the
software companies. ASCAP cannot tell a radio station what brand of
transmitter to use; and no such new technological extensions of market
power should be a part of any new licensing.
The licensing terms under any compulsory licensing system must be
the same for all. I am particularly concerned here about a point
Senator Hatch made at our hearing last July, that he was concerned that
the major record companies would make cross-licensing arrangements
among each other that would have economic terms that would ensure that
the Internet services the record companies operate would have greater
profits than any other licensed services.
Benefits to All Artists
We must be careful to construct a structure that will allow all
recording artists, songwriters, record companies and publishers, not
just the few large entities, to participate and profit from music on
the Internet. I believe that the great strength of American music is as
much in choral, gospel and inspirational music bands, as it is in the
latest Top 40 hits. Certainly a 10 minute walk through the shared files
of Napster users suggests the same. We all listen to everything. And so
all independent labels and publishers should participate as well.
Finally, I think we should adopt a direct Internet rights payment
to artists. There is certainly precedent for this in the so-called
``writer's share'' of public performance (radio and television)
payments that are made by ASCAP and BMI. As you know, a portion of
those payments goes directly to the songwriter. We can do the same and
give artists a direct benefit from these new technologies.
Conclusion
Senator, this is a moment of tremendous opportunity. For many
years, our nation and this Committee heard wonderful promises of an
emerging digital music era, where people could have convenient access
to the entire catalog of recorded music over the Internet at the touch
of a button.
Well, as often happens, history arrived ahead of time.
And it is a uniquely American story.
A young man with no standing, no credentials, no connections, and
no plan for placating the powerful, sat down outside Boston and created
an entirely new system.
Within 18 months, we were no longer debating whether there would be
music on the Internet, but debating the best way to make sure that it
continues. More than 60 million users have started a new stage in our
national love affair with music. Napster users are nearly 50% more
likely to say they are listening to more music now than six months ago,
compared to others on line. All of us are finding new music--and music
we'd forgotten how much we loved.
The question before this Committee is a matter of policy. How to
make this new world of Internet music work. The next step should not be
shutting it down, but making it work for everyone. The Congress has
effectively promoted new technologies in the past, while ensuring that
creators benefit; it is essential that we do so again today.
Thank you.
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Chairman Hatch. Thank you, Mr. Barry.
Mr. Gottlieb, we look forward to your testimony.
STATEMENT OF STEVE GOTTLIEB, PRESIDENT AND FOUNDER, TVT RECORDS
Mr. Gottlieb. Mr. Chairman and distinguished members of the
Committee, good morning, and thank you for inviting me to
participate. I am both honored and humbled to be here among
such highly celebrated business colleagues and legendary
recording artists. My purpose in appearing before you today is
to share our concern that copyright remain a tool to
incentivize creators and not a means to enlarge or enhance
market power.
By way of introduction, I am president and founder of TVT
Records, one of the largest, free-standing, independent record
companies in America. By free standing, I mean we are neither
owned or funded or distributed by or otherwise aligned with any
of the five multinational music companies.
Like many independents, ours is a story of most unlikely
success. Armed with almost no capital and less experience, my
company sprang from an odd collection of old TV themes. Back
then, independents were considered a low-rent farm club. The
major companies owned the charts, and the notion of an
independent having a hit without the help of a major label was
most unlikely. Happily, times have changed and today
independent records grace the top of the charts every day.
As an independent, TVT is part of a community of thousands
of entrepreneurs and artists responsible for one of the most
vital segments of the U.S. music industry. Collectively, our
market share is some 17 percent of domestic retail sales, a
market share greater than four of the multinational music
companies and second only to that of Universal.
Beyond our collective market power, the independent
community plays a unique role as the principal spawning ground
for new artists and new music movements. It is by virtue of the
independent community's constant prodding and rejuvenation of
the music scene that we as Americans enjoy such a diverse
choice of music and such a productive and profitable music
industry.
Independent entrepreneurs, artists, and society are
beneficiaries today of what is essentially a level playing
field with regard to music marketing and distribution. This
allows consumers to hear a broad array of music on the radio,
to find it at their record stores, and to embrace it as they so
choose. And they do so with unpredictable results that no
record company, no matter how well capitalized, can sit idly
by, comforted with the notion that their past success is a
predictor of future outcomes.
This level playing field also allows copyright creators,
the artists upon whose gifts and talents we so depend, to
create with the knowledge that, beyond themselves, the ultimate
arbiter of taste will be the public. The hallmark of the music
business is the public listens to songs and artists, not record
companies. Ideally, those songs and artists compete with one
another in a marketplace of musical ideas.
With the advent of the digital age, the greatest threat to
the composition of the music industry, its vibrancy and
independent spirit, is the emergence of new barriers between
music providers and the market discipline exerted by public
demand. Some years ago, decidedly without the authority of
rights to do so, Shawn Fanning introduced the world to a
profound new notion. What this notion depended on, aside from
the misappropriation of music copyrights, to which I will
return, is unfettered access on an even-handed basis to the
idealized infinite jukebox. It is, I would argue, this freedom
to choose from everything in existence that has so ignited the
passion of Napster users. It is the freedom to choose which has
so inspired and renewed people's love of music online and the
freedom to choose that underlies the digital music revolution.
It is freedom, and not free-ness or the absence of cost. For,
surely, while copyright owners may not have been recompensed
through Napster's infancy, clearly many others have been able
to monetize the consumer's passion for digital music.
As the advertisements for a wide array of hardware makers
currently attests to, enjoyment of online music has been a
major driver of computer sales and has helped fuel
extraordinary growth for ISPs and infrastructure providers
alike. Music file sharing has earned itself recognition as the
killer Nap.
Once security issues are addressed--and security must be
addressed--the question becomes: What will this new digital
world look like? The genius of Napster is that all music is
available on an equal footing and that the consumer's choice
prevails. Our concern is that, without Congressional scrutiny,
any service such as Napster that requires consent of all
copyright owners may be unfairly dominated by the few owners of
the most content. The result would be a two-class system of
copyrights where the copyrights that are owned and aggregated
by multinational corporations are treated one way and the
copyrights of everyone else another.
We have already begun to experience that firsthand, and
right now our lawyers are in New York in front of a Federal
judge and jury defending our copyrights against a company that
has taken the viewpoint that, while the major labels were
entitled to substantial damages and licensees with regard to
their copyrights, independent labels were not.
Such a two-class system of copyright, one that places
copyright value based on who owns it and what market they can
exert, would be a tremendous setback to our fertile
entertainment economy.
The various announcements of entities being fostered by the
major record labels, all are consistent in their failure to
acknowledge the necessity of a scheme whereby all content
creators are treated equally. None of these vehicles to date,
as far as I can tell, have made it clear that the creation of a
level playing field is one of their organizing principles.
Indeed, the very opposite seems to have been expressed, that
is, by all these vehicles, with the exception of Napster.
I should point out that TVT, while in a lawsuit with some
online companies, has been not slow to offer its content on the
Internet. Since 1999, our entire catalogue has been made
available free to the consumer on a timed-out and secure basis.
And we remain No. 1 in the number of secure downloads provided
to consumers.
More recently, we were the first label to recognize that
once Napster had expressed its willingness to acknowledge
copyright and to establish a scheme to compensate all rights
holders, that we had indeed reached the goal of our litigation
with them. Thus, we became the first label to withdraw all of
our claims against Napster and entered into a license agreement
with them for their anticipated new secure music subscription
service.
Amongst all entities vying to provide music online in a
responsible and secure manner, Napster alone has promised to
create a platform on which all rights holders may compete on
the basis of quality and appeal of their content. This
commitment to equal access and opportunity may never come to
fruition if Napster is not successful in persuading the major
content owners to grant it rights.
Under such a circumstances the question arises: Can a
marketplace in which a few entities control so much content
produce a universal delivery system in which equal access and
equal opportunity, financial and otherwise, is provided to all?
The question is one that I believe the Committee must consider
to be an issue of importance. If the largest aggregators of
content are able to leverage their market power to gain undue
advantage, then they will be allowed to transform a mechanism
intended to incent creation into a mechanism that perpetuates
the current marketplace status quo. Such a distortion of
copyright policy would institutionalize current content owners'
positions of dominance in the marketplace and shift the benefit
of copyright law from creators to the largest of aggregators.
The unique nature of the phenomenon introduced to us all by
Shawn Fanning has the potential to open up a whole new horizon
to all content owners and consumers alike. I welcome the
Committee's scrutiny of the marketplace as it works through
these many new and interesting challenges and hope the
Committee's continued interest in the matter will assist
motivating our industry's leaders to indeed lead us toward a
fair and equitable market solution, one that will neither limit
consumer choice or create inequities among content owners.
Chairman Hatch. Thank you, Mr. Gottlieb.
[The prepared statement of Mr. Gottlieb follows:]
Statement of Steve Gottlieb, President and Founder, TVT Records
Mr. Chairman and distinguished members of the Committee, good
morning and thank you for inviting me to participate in this hearing. I
am both honored and humbled to be here among such highly celebrated
business colleagues and legendary recording artists. My purpose in
appearing before you today is to address how in this digital age,
copyright remains a tool to incent creators and not a mechanism to
enlarge market power.
By way of introduction I am Steve Gottlieb president and founder of
TVT Records, the largest freestanding independent record company in
America. By freestanding I mean we are neither owned by; funded by;
distributed by; nor otherwise aligned with any of the five major
multinational music companies. Like many independent labels ours is the
story of the most unlikely success. Fresh from school with degrees from
Yale and Harvard under my belt, I foolishly undertook to license
Americas best-loved and appreciated music, namely our TV themes, and
assemble them in a compilation called Televisions Greatest Hits. The
resulting vinyl LP, for alas that was the poor state of our music
technology at that time, became a worldwide success. From those humble
beginnings, armed with almost no capital and even less experience, I
began my assault on what was then a music establishment of 6 major
record companies. Back in those days independents were considered to be
a low rent farm club at best. The major record companies owned the
charts and the notion of an independent having a hit record without the
``help'' of a major most unlikely. Happily times have changed and
albums from independents regularly grace the top of the bestseller
charts. So to has TVT changed.
From a one-man shop in 1985, TVT now employs well over 100 people
and enjoyed sales in excess of 50 million dollars last year. Our roster
now extends well beyond TV themes running the musical gamut from hard
rock to pop to hip-hop to R&B to alternative. Through TVT SoundTrax,
our label is also a force in motion picture soundtrack albums including
releases from such top films as Steven Soderburgh's Oscar nominated
``Traffic''--a film I am proud to be associated with as, I hope, Sen.
Hatch is as well
As an independent, TVT is a member of a community of thousands of
entrepreneurs and artists responsible for one of the most vital
segments of the US music industry. Collectively our market share is
some 17% of domestic retail sales, a market share greater than four of
the multinational music companies, and second only to that of
Universal. This figure perhaps understates the size of the
independents' share of music that most engages the public's interest.
To wit, in the major labels' own filings against Napster they have
acknowledged that a full 27% of the music files shared were non-major
titles. Beyond our collective market power, the independent community
plays a unique role as the principle spawning ground for new artists
and new music movements. It is by virtue of the independent community's
constant prodding and rejuvenation of the music scene that we as
Americans enjoy such a diverse choice of music and such a productive
and profitable music industry.
Fellow entrepreneurs, artists, and society are all beneficiaries
what today is an essentially level playing field with regard to music
marketing and distribution. This level playing field allows consumers
to hear a broad array of music on radio, to find it at record stores
and to embrace it as they choose. And embrace it they do--with such
unpredictable results that no record company, no matter how well
capitalized, can sit idly by comforted by the notion that their most
recent success will have any bearing on their ability to identify,
attract, and support tomorrow's most popular artist. As the marketplace
continually reminds us, picking tomorrow's stars is, at best, a low
percentage game.
The hallmark of the music business is that the public listens to
songs and artists--not record companies. Ideally, those songs and
artists compete against one another in a marketplace of musical ideas.
This competitive framework has evolved from and depends upon a
combination of laws, regulations, judicial rulings and market forces.
For example, laws against both Payola and concentrated radio station
ownership, combined with the discipline of market forces, insure that
radio stations are always searching for what excites the listener.
Failure to do so would only create opportunity for competitors to gain
an advantage in the marketplace. Similarly retailers, who can ill
afford to drive a customer across the street, are forced by the
marketplace to stock whatever consumers demand. This proximity to
public yields an essentially open marketplace.
Where there is a lack of marketplace competition--wherein parties
are isolated from the discipline of public demand--as in the area of
music video television, the results are informative. There, the majors
have demonstrated both the desire and ability to exploit their market
dominance so as to deprive independents from gaining an amount of
airtime devoted to their artist that is anywhere near commensurate with
their marketshare.
Moving beyond these examples to our current dilemma, the advent of
the digital age brings the greatest threat yet to the vibrant
composition and independent competitive spirit of the music industry.
This threat is the emergence of new barriers between music providers
and the market discipline exerted by public demand.
Some years ago, decidedly without the authority or rights to do so,
Shawn Fanning introduced the world to a profound new notion and tapped
directly into this market demand. His notion of having immediate access
to the entire world of music without limitation has allowed a wholly
new and unique way of interacting with music as transformative,
different, and disruptive an innovation as the radio. This powerful
concept was instantly understood and embraced by the public in an
unprecedented manner as something with no real world equivalent. What
this innovation depended on (aside from the misappropriation of music
copyrights to which I will return) is unfettered access on a democratic
and evenhanded basis to the idealized infinite jukebox. It is, I would
argue, this freedom to choose from everything in existence that has so
ignited the passion of Napster users; it is this freedom to choose
which has so inspired and renewed people's love of music online; and it
is this freedom to choose that fuels the digital music revolution. It
is freedom--not freeness or absence of cost. For surely while copyright
owners may not have been recompensed through Napster's unauthorized
infancy, clearly many others have been able to monetize the consumer's
passion for digital music. As the advertisements for a wide array of
hardware and software makers currently attests to, enjoyment of online
music has been major driver of computer sales and has helped fuel
extraordinary growth for ISP's and infrastructure providers. Music file
sharing has earned itself recognition as the killer ``Napp''. And peer
to peer sharing will certainly be an application that will grow to
accommodate and encompass other forms of intellectual property.
Once security issues are addressed, as they must be, the question
becomes what will this new digital world look like? The genius of
Napster is that all music is available on an equal footing and that the
consumer's choice ultimately prevails. If this is something we all
value, if this free choice is as important to us as the underlying free
expression itself, how can we preserve it? In my opinion, Napster and
the overwhelming public support it has received, attest to the fact
that a service such as they have envisioned by opening up universal
desktop access to all music on some limited, controlled, and licensed
basis deserves careful consideration as something quite possibly in the
public interest.
Our concern is that without Congressional scrutiny, any service,
such as Napster, that requires consent of all copyright owners may be
unfairly dominated by the few owners of the most content. The result
would be a 2-class system of copyrights wherein the copyrights owned
and aggregated by multinational corporations and represented by
professional trade associations are treated one way--and the copyrights
of everyone else another. In this potential future what becomes
significant about the economic reward accorded to copyright is not so
much the nature of the copyrighted content but rather the nature, or
more specifically the market share of its owner. We have already begun
to experience that firsthand. Right now, TVT's lawyers are in New York
in front of a Federal Judge and jury, defending the copyrights of our
artists against a company, MP3.com, that has taken the peculiar
viewpoint that while major labels were entitled to substantial damages
and license fees with regard to their copyrights, independent labels
are not.
Such a 2-class system of copyrights that places copyright value
based on who the owner is and what market power they can exert would be
a tremendous setback to our fertile entertainment economy. Similarly,
the various announcements of entities being fostered by the major
record labels have all been consistent in their failure to acknowledge
the necessity of a scheme where by all content creators are treated in
an even-handed fashion. A lack of equal treatment serves to, in effect,
shift the benefits and protections conferred by copyright away from
creators whom copyright law is meant to reward and to the largest
aggregators of such copyrighted content. This shifting landscape
undermines the level playing field on which creators have historically
enjoyed a fair expectation that they will be able to compete. None of
these vehicles to date, as far as I can tell, have made it clear that
the creation of a level playing field is one of their organizing
principles. Indeed, the very opposite seems to have been expressed--
that is by all these vehicles with the exception of Napster.
I should point out that TVT, while in a lawsuit with MP3.com, has
not been slow to offer its content on the Internet. We are particularly
proud as a label to have a history of ``firsts'' on the Internet. We
were the first label to invest in Reciprocal, a major digital rights
management security firm. We were the first label to adopt Microsoft's
Secure Windows Media format with regards to our label's musical output
and believe we remain to this day the label to have delivered the
largest number of secure music files via download to the consumer. In
November of 1999 we put our entire catalog online free to the consumer
on a timed-out and secure basis. More recently, we were the first label
to recognize that once Napster had expressed its willingness to
acknowledge copyrights and to establish a scheme to compensate all
rights holders, that we had indeed reached the goal of our litigation
with them. Thus, in January of this year, we became the first label to
withdraw all of our claims against Napster and entered into a license
agreement with them for their anticipated new secure music service.
Amongst all entities vying to provide music online in a responsible
and secure manner, Napster alone has promised to establish a system
that acknowledges rights of all content owners and recognized the
central importance of creating a platform on which all rights holders
may compete--compete on the basis of the quality and appeal on their
content. This commitment to equal access and opportunity may never come
to fruition if Napster is not successful in persuading the major
content owners to grant it rights. Under such a circumstance the
question arises: Can a marketplace in which so few entities control so
much product, produce a universal delivery system in which equal access
and equal opportunity, financial or otherwise, is provided to all
content owners?
The question is one that I believe this Committee must consider to
be an issue of importance. It is my opinion that rewarding copyright
aggregators at the expense of copyright creators is antithetical to the
spirit of the law. If the largest aggregators of content are able to
leverage their market power to gain undue advantage over smaller
copyright owners in the exploitation of copyright, then they will be
allowed to transform a mechanism intended to invent creation into a
mechanism that perpetuates the current marketplace status quo. Such a
distortion of copyright policy would institutionalize current content
owners positions of dominance in the marketplace and shift the benefit
of copyright law from individual creators to the largest of
aggregators.
The unique nature of phenomena introduced to us all by Sean Fanning
has the potential to open up a whole new horizon to all content owners
and consumers alike. While, in my opinion, intervention may currently
be premature, I do welcome the Committee's continued scrutiny of the
marketplace as it works through these many new and interesting
challenges and sincerely hope the Committee's ongoing interest in the
matter will assist in motivating our industry's leaders to indeed lead
us toward a fair and equitable market solution--one that will neither
limit consumer choice or create inequities amongst content owners.
Thank you.
Chairman Hatch. Mr. Berry, we are honored to have you with
us. We look forward to hearing from you.
STATEMENT OF KEN BERRY, PRESIDENT AND CHIEF EXECUTIVE OFFICER,
EMI RECORDED MUSIC
Mr. Berry. Mr. Chairman, Senator Leahy, and members of the
Committee, my name is Ken Berry. I am president and CEO of EMI
Recorded Music, and I have been in the music business for
nearly 30 years. EMI is the world's third largest recorded
music company and the world's largest music publisher. Over the
years, we have been home to artists such as Frank Sinatra, the
Beach Boys, the Beatles, Garth Brooks, and Janet Jackson.
EMI Recorded Music develops, promotes, markets, and
distributes music to fans, and we embrace any technology that
makes music more accessible and enjoyable for the consumer. The
Internet is the most exciting and revolutionary technology to
impact our industry ever. It is also much more than a new
medium for promotion and distribution. It is a transforming
one, for fans, artists, and record companies alike.
My message to this Committee is simple: EMI is embracing
this medium. We are working to create a legitimate digital
marketplace, to make our music easier to access for consumers.
In order to achieve this, we are making significant investments
in our company to adapt to the digital marketplace. EMI alone
has signed three dozen deals in the past 2 years to make music
available online from North America to Europe to Australia and
the Pacific Rim.
Name a new business model, from direct-to-consumer to
business-to-business, and chances are we have embraced it. Name
a mode of digital delivery, and recordings in the EMI library
are probably online in it already, or will be very soon. We are
opening kiosks, portals, digital downloads, customized CDs, and
music videos on demand.
Just yesterday, as you heard from Dick Parsons, we
announced EMI's participation in MusicNet with two other record
companies and real networks to create a technology platform and
music clearinghouse to license on a non-exclusive basis
companies seeking to sell subscription services. All of our
deals have a common goal: to expand the availability of our
music in a manner that protects our and our artists' rights.
We are proud of the progress we have made at EMI, and we
are excited still about the possibilities that lie ahead. A
critical obstacle stands in the way of these possibilities.
Some of the companies to whom we have licensed our rights are
finding it difficult to build viable businesses in an
environment dominated by the unlawful downloading of our entire
catalogue for free.
Mr. Chairman, it is impossible for legitimate innovators to
compete with those who say the rules should not apply to them.
At EMI we are excited at the prospect of this great digital
transformation. The opportunities that the Internet brings to
the music community are limitless, and the biggest winners are
the fans, who will have faster, more convenient access to our
global music catalogues.
Like all of my employees, I am in this business because I
love music, and I have had the good fortune to work with many
outstanding artists. I want to thank the members of this
Committee for your long-standing support for intellectual
property rights, and I would be happy to answer some questions
later on.
[The prepared statement of Mr. Berry follows:]
Statement of Ken Berry, President and CEO, EMI Recorded Music
Mr. Chairman, Senator Leahy, Members of the Committee, my name is
Ken Berry and I am President and CEO of EMI Recorded Music. I have been
in the music business for nearly 30 years.
EMI is the world's third largest recorded music company and the
world's largest music publisher. Over the years we have been home to
artists such as Frank Sinatra, The Beach Boys, The Beatles, Garth
Brooks and Janet Jackson.
EMI Recorded Music develops, promotes, markets, and distributes
music to fans and we embrace any technology that makes music more
accessible and enjoyable for the consumer.
The Internet is the most exciting and revolutionary technology to
impact our industry ever--but it is also much more than a new medium
for promotion and distribution. It is a transforming one--for fans,
artists and record companies alike.
My message to this committee is simple: EMI is embracing this
medium. We are working to create a legitimate digital marketplace--to
make our music easier to access for consumers.
In order to achieve this, we are making significant investments in
our company to adapt to the digital marketplace.
EMI alone has signed three dozen deals in the past two years to
make music available online from North America to Europe to Australia
to the Pacific Rim. Name a business model--from direct-to-consumer to
business-to-business--and chances are we've embraced it. Name a mode of
digital delivery, and recordings in the EMI library are probably online
in it right now or on their way soon. Kiosks. Portals. Digital
downloads. Customized CD's. Music videos on demand.
Just yesterday we announced EMI's participation in MusicNet, a
partnership with two other major record companies and RealNetworks to
create a technology platform and music clearing house to license, on a
nonexclusive basis, companies seeking to sell subscription services.
All of these deals have a common goal--to expand the availability of
our music in a manner that protects our and our artists rights.
While we are proud of the progress we have made at EMI, we are more
excited about the possibilities that still lie ahead.
A critical obstacle stands in the way of those possibilities. Some
of the companies to whom we have licensed our rights are finding it
difficult to build viable businesses in an environment dominated by the
unlawful free downloading of our entire catalogue. Mr. Chairman, it is
impossible for legitimate innovators to compete with those who say the
rules shouldn't apply to them.
At EMI, we are excited at the prospect of this great digital
transformation. The opportunities that the Internet beings to the music
community are limitless. And the biggest winners are the fans who will
have faster, more convenient access to our global music catalogues.
Like all of my employees, I am in this business because I love
music and have had the good fortune to work with many brilliant
artists. I want to thank the Members of this Committee for your
longstanding support of intellectual property rights and would be happy
to answer any questions.
Thank you.
Chairman Hatch. Thank you, Mr. Berry.
Mr. Kearby, we will take your testimony now.
STATEMENT OF GERALD KEARBY, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, LIQUID AUDIO, INC.
Mr. Kearby. Good morning, Mr. Chairman and distinguished
members of the Committee. I would like to thank Senator Hatch
and Senator Leahy and the other members of the Committee for
the opportunity to be here today.
My name is Gerry Kearby. I am the co-founder of Liquid
Audio. I began my career 30 years ago here in Washington, D.C.,
where I played music for the Marines down at Marine Barracks
and 8th and I. In the early 1980's, I developed technology for
rock and roll bands in the Bay Area like the Grateful Dead and
the Jefferson Starship. In the mid-1980's, I developed
technology for LucasFilm that became the first digital audio
editing tool for film and audio production. My partners and I
formed Liquid Audio to provide a secure environment for digital
delivery of music. My job here today is to tell you that the
ability to secure and distribute music is not a roadblock. The
technology exists right now.
We founded the company in 1996, and we founded it as an
end-to-end security system to distribute copyrighted material
on the Internet. There was a lot of technology involved:
encoding and hosting and digital rights management, which is
known as the DRM business now, retail integration,
distribution, consumer fulfillment, reporting services, and
payment of copyright royalties.
Our DRM is one of the most widely used systems to protect
music copyrights today. We have over 13,000 artists from more
than 1,200 record labels that use our technology to sell their
music today. In addition to the liquid format, we also
distribute in Windows media format for Microsoft, and Microsoft
named Liquid Audio as the key distribution channel for Windows
media content.
So beyond the encoding of music, distribution of music is
very important. We have built a channel of over 1,000
retailers, everybody from Amazon and Best Buy, Billboard,
CDNOW, Tower Records, and Yahoo!, to 200 radio stations. We
connect major record labels and independent record labels to
1,100 music program directors around the country in order for
these record companies to get their music quickly to radio as
it breaks.
Our consumer software enables millions of consumers to
enjoy music, to download it, where the rules apply, to burn it
to CDs or put it out to a portable device.
We have developed an open platform that is compatible with
many formats, including MP3, RealNetworks, AOL's WinAmp,
Microsoft Windows Media, and Sony's Open Magic Gate.
We have been providing security since 1997 when we
partnered with Capitol Records actually to sell a download from
a major artists. The challenge here is the balance of security
with the consumer's need for the ease of use. Consumers will be
driven to illegitimate channels as long as the technology
provides overly strict kind of controls and as long as they
can't find all the music they want.
Since 1997, we have worked closely with artists and record
labels, retailers and consumers to improve the secure download
experience. We have been successful at doing it, and this
technology exists today.
I would like to quote Mr. Barry here. The system has been
accepted and approved by major record labels, Mr. Barry said.
We have elected to include Liquid Audio's digital download
format because it allows us to offer our music securely and at
a very high quality, using an easy online purchase process.
So security is not a barrier to providing the music that
the consumers want on the Net. Liquid Audio provides a proven
security system that is used by major labels and independent
labels, by many thousands of music retailers and consumer
product companies.
So why, then, are there tens of millions of consumers
turning to unauthorized sites to obtain digital music? The
answer is simple. The music most people want is not available
for purchase through legitimate channels. The good news is that
millions and millions of consumers are excited about digital
music, but those consumers must be attracted to legitimate
sites.
We are optimistic that the current marketplace can be
changed, and now it is incumbent upon all of us to demonstrate
that copyrights can be respected and that music can be
accessible in every format, every car, and every portable
device.
We don't believe that all or even the vast majority of
users of the illegitimate music-sharing systems are cyber
shoplifters at heart. We believe that consumers will embrace
and pay for systems that are legitimate, easy to use, and
reasonably priced.
But that can't happen unless all the music consumers want
is made available, including access to all the rich and varied
catalogues owned by the majors and the independent record
labels.
With the assistance of this Committee, encouraging record
labels and content owners to work with all participants who add
value to the music industry, fans will remain loyal and the
music economy will grow for all legitimate participants.
The problem before us does not involve a failure of the
copyright system or of technology, but a failure in the
marketplace. It is time to address this failure before the
damage is irreversible. We look forward to further
encouragement from this Committee and other Members of Congress
to make the dream of widespread music delivery a reality. This
effort will help the entire industry and satisfy the millions
of fans who are excited about digital delivery of music.
Thank you very much for the opportunity to testify.
[The prepared statement of Mr. Kearby follows:]
Statement of Gerald W. Kearby, President and Chief Executive Officer,
Liquid Audio, Inc.
I. Introduction
Good morning Mr. Chairman and distinguished members of the
Committee. My name is Gerry Kearby and I am the Chief Executive Officer
of Liquid Audio. I would like to thank Chairman Hatch, Senator Leahy
and the other members of the Judiciary Committee for the opportunity to
appear before you today to speak about an important topic: Online
Entertainment and Copyright Law. I am a co-founder of Liquid Audio and
have spent my working life in the music business. I began my 25-year
music industry career playing in the United States Marine Corps band.
After that I was a sound engineer for bands such as the Grateful Dead,
Diana Ross and the Jefferson Starship. I was one of the first pioneers
in the digital music industry when I built components for the first
digital audio editing tools for LucasFilm Limited. My partners and I
formed Liquid Audio to provide a secure environment for the delivery of
digital music over the Internet.
II. Liquid Audio
Founded in 1996, Liquid Audio created and deployed the first, and
most widely adopted solution for the secure delivery of digital music
over the Internet. Liquid Audio provides a complete end-to-end
infrastructure to use the Internet as a low-cost environment to
distribute copyrighted music. This includes encoding, hosting, digital
rights management (known as DRM), distribution, retail integration,
consumer fulfillment, reporting services and payment of copyright
royalties.
Liquid Audio has been first in every key area of digital music
delivery. Some major record labels use Liquid Audio for a limited
amount of music released thus far--a few hundred titles. The majority
of EMI online retailers have chosen Liquid Audio as their digital
service provider. The Liquid Audio DRM is one of the most widely used
systems to protect music copyrights. The Liquid Catalog of 150,000
independent record label tracks is the largest collection of secure
independent music. Finally, Microsoft named Liquid Audio ``the key
distribution channel for Windows Media content.''
Liquid Audio has a proven its secure distribution system for the
Internet marketplace that enables musicians, record labels and
retailers to publish, and securely distribute digital music to online
consumers. Highlights of the Liquid Audio system include:
1,200 Record Labels--Liquid Audio's secure distribution
solution enables more than 13,000 artists from 1,200
independent record labels to securely distribute their digital
music.
Network of 1,000 Music Retailers--Liquid Audio's retail
integration solution enables more than 1,000 retailer's Web
sites, including Amazon, Best Buy, Billboard, CDNOW, Tower
Records and Yahoo!, to promote and sell digital music to
consumers.
Over 200 Radio Stations--Liquid Audio's radio promotion
network coordinates the promotion and distribution of new
record releases, and through our joint effort with R&R Music
Meeting, extends this reach to thousands of radio stations
across the United States.
Millions of Consumers--Liquid Audio's consumer software
enables the millions of consumers visiting the 1,000 sites in
our network to download and enjoy digital music.
Liquid's solution enables content owners to promote and sell their
music in a variety of formats. Our Retail Integration and Fulfillment
Systems (RIFFS) enables retail Web sites to sell music downloads from
the 150,000 track Liquid Catalog. Liquid also provides a state-of-the-
art consumer software application enabling users to preview, purchase,
download, organize and export digital music in a secure environment.
Finally, Liquid Audio's distribution platform is open and compatible
with many formats and technologies including MP3, RealNetworks, AOL
WinAmp, Microsoft Windows Media, Liquid Audio, Sony ATRAC3, AAC and
Dolby Digital AC-3.
Thus, Liquid Audio's digital music distribution system is a
comprehensive, secure platform that is delivering music in a
legitimate, user-friendly environment to millions of customers today.
Because it is open and scalable, Liquid's system is capable of serving
all of the needs of its existing users as well as millions of more
users to access the music they demand while satisfying the needs of
artists and labels to provide for security and compensation.
Knowing we could not build an industry alone, in 1998 Liquid Audio
became a founding Board member of the Digital Media Association (DIMA),
a trade organization of more than seventy member companies that provide
legitimate, copyright-compliant music and audio-visual services for
consumers, creators and business partners.
III. Digital Music Security
The primary challenge is balancing security with ease of use.
Consumers will be driven to illegitimate channels by overly strict
controls and complicated procedures. Since our founding, we have
listened to and worked closely with artists, writers, publishers,
record labels, retailers and consumers. Liquid Audio has been
successful in developing a user-friendly system. Our four-part digital
music security solution protects music on the Internet today. Those
four parts are:
Copy Control.--Liquid Audio's system enforces usage rules set
by content owners that mandate how consumers can use their
content, including rules on the number of secure copies,
exports to devices and time-outs.
Distribution Management.--Secure protocols protect all parts
of the Liquid Audio distribution system to prevent unauthorized
acquisition of content as it moves from publishing through
Internet distribution, downloading and reporting. Liquid Audio
has developed a territory management system that ensures
compliance with international licensing obligations.
Usage Tracking.--Liquid Audio is able to uniquely identify
each piece of music. Liquid Audio can embed indelible and
inaudible DRM information into the audio waveform as a
watermark or in digital files as an encrypted header. The
embedded information identifies and tracks audio usage and
cannot be removed without destroying the recorded music.
Royalty Payments.--Liquid Audio's reporting system allows for
timely and accurate accounting for music use and distribution
of the corresponding royalties to creators and content owners.
Liquid Audio's digital music security system is flexible. It allows
artists and labels a variety of security options when delivering music,
and it allows users a variety of options when consuming the music.
Liquid's digital music security system has been tested and
approved--as demonstrated by use today by thousands of companies. EMI
Recorded Music's CEO, Ken Berry said: ``We have elected to include
Liquid Audio's digital download format and software in our trial
because it allows us to offer our music securely and at a very high
quality, using an easy online purchasing process.
In addition to our retail network, some 1,200 record labels from
majors to independents including Atlantic, Artemis, Capital, MCA, Zomba
and edel AG labels, and artists such as Lenny Kravitz, Dave Matthews
Band, Don Henley and Aimee Mann use the Liquid digital music security
system. Finally, Liquid's security systems are embedded in consumer
products.
Security is not a barrier to supplying all the music consumers want
on the Internet. Today, Liquid Audio provides a proven digital music
security system in use by major labels, many independent labels, music
retailers and consumer product companies.
IV. The Internet Music ``Problem''
Over the last several months I have been dismayed and frustrated by
the extraordinary traction in the marketplace and public attention
awarded to companies that do not respect the law, or do not respect the
copyrights of creators and producers. I am dismayed because it is
difficult to compete with companies that have seemingly unlimited
resources combined with disrespect for the law. But I am as frustrated
with the response of the copyright owners to litigate rather than
compete. That response has been detrimental to themselves, to the
recording artists and to otherwise trusted partners such as Liquid
Audio.
As a result of Napster, tens of millions of consumers who otherwise
would have been willing to pay a fair price for quality online music
have been conditioned to obtaining music for free. Creators and
producers of music and other entertainment products have been forced to
expend enormous resources to defend their copyrights. This has diverted
their attention and resources away from legitimate partners like Liquid
Audio that can help develop the ultimate marketplace weapon--
competitive alternatives.
It is hard to blame millions of consumers for obtaining compelling
music that is easily accessible and free. Some may find their actions
unlawful, but the judicial system would be overwhelmed and artists'
fans would become their enemies if creators used the law as their only
weapon. As noted below, Liquid Audio proposes a competitive marketplace
solution. Napster has proven there is a market. Now the rest of us must
work collaboratively to compete. In addition to litigating where
appropriate, creators and record labels must turn to their trusted
partners for assistance--not just Liquid Audio but several trusted
partners, including our technology company competitors.
V. The Internet Music Solution--The Content
Liquid Audio's digital music distribution system not only respects
the copyright rules and protects the content, it provides an attractive
environment for Internet users to legitimately experience and acquire
music. As I noted earlier, although Liquid was the first, there are a
number of other companies not present here today that are fully
prepared to provide these secure services and have devoted themselves
to the same effort. The stage is set for a competitive marketplace that
will serve the needs of music fans, artists and their record companies.
Why then are tens of millions of users turning to unauthorized
sites on the Internet to obtain digital music? The answer is simple.
The music most people want is not available for purchase through
legitimate Web sites. The good news is that millions and millions of
consumers are excited about digital music. But those consumers must be
attracted to legitimate Web sites.
Liquid Audio is optimistic that the current marketplace can be
changed. Now, it is incumbent upon all of us to demonstrate that
copyright can be respected and music can be accessible in every format,
in every home, in every car and on every portable device. We do not
believe that all or even the vast majority of the users of illegitimate
music download systems are ``cybershoplifters'' at heart. We believe
consumers will embrace and pay for services that are legitimate,
reasonably priced and easy to use. Online resellers using a secure
online system, such as Liquid Audio's, will be able to add value to
attract consumers to their sites and will provide a legitimate Internet
digital music experience.
This cannot happen unless all the music that the consumers want is
made available, including access to all the rich and varied catalogs
owned by the major and independent record labels. Defining price points
and business models in an open and competitive marketplace is never
easy, and there will always be Napster progeny that promote taking
rather than purchasing. But with the assistance of this Committee, by
encouraging record labels and content owners to work with all
participants who add value to the music industry, fans will remain
loyal and the music economy will grow for all legitimate participants.
VI. Conclusion
Liquid Audio is optimistic that the current unfortunate state of
affairs can be reversed. The Ninth Circuit has ruled. Now we must show
our fellow citizens they can respect copyright yet still acquire the
music they want, when they want it, where they want it, and how they
want it. Liquid Audio stands ready to provide those services. But we
can only provide the music consumers want if all music, and not just a
token sample, is made available by the copyright owners on reasonable
licensing terms.
We appreciate the efforts of the members of this Committee, and
their encouraging remarks that record labels and content owners should
work with all of the legitimate participants in the online music
community to create a secure and competitive marketplace.
The problem before us does not involve a failure of the copyright
system, but a failure in the marketplace. It is time to address this
failure before the damage is irreversible. We look forward to further
encouragement from this Committee and other members of Congress to make
the dream of widespread legitimate online delivery of digital music a
reality. This effort will help the entire music industry. It will also
satisfy the innumerable music fans who are excited about the digital
delivery of music but have not been able to find a broad and deep
online music experience that offers them legitimacy and value.
Thank you for this opportunity to testify today.
Chairman Hatch. Thank you, Mr. Kearby.
Ms. Rosen, we look forward to your testimony.
STATEMENT OF HILARY ROSEN, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, RECORDING INDUSTRY ASSOCIATION OF AMERICA
Ms. Rosen. Thank you, Mr. Chairman.
I listened eagerly at the outset to the opening statements,
Mr. Chairman, of you and Senator Leahy, and I heard the words
that people were concerned about piracy. For me, this hearing
is not about piracy. It is about opportunity.
While it is tempting to respond to a lot of what I have
already heard this morning, I think you have an idea, at least,
of what it has been like for record companies trying to get
into this space with a lot of thoughtful additional opinions
about how we get there.
Napster was exciting, but giving away someone else's music,
frankly, without their permission is yesterday's news. On the
screen before you are samples of dozens of Web sites with whom
record companies have signed licensing agreements and on which
fans can find digital music right now.
I am going to keep talking as this is playing, but the
story is about plans to bring new services that will offer even
more variety, better audio quality, and new features to the
marketplace as soon as possible.
Mr. Parsons and Mr. Berry have already talked about the
announcements from their companies, about their partnerships
with RealNetworks. Other companies, like Sony and Universal,
have formed ventures to offer subscription services which they
are going to launch later this year. Many independent record
companies have also signed such deals.
On the other side of these efforts lies a new frontier for
music fans. Today's hearing and the many participants on this
panel are evidence that there are several moving parts to this
issue. There is a host of technology-related issues from
identifying partners and finding technologies, like Gerry
Kearby's company. We are actually one of his many competitors.
The systems and business models that have a chance of
succeeding with consumers have to be thought through. This
whole grand experiment is about the consumer and the music fan
and how to create even more passion for music and its delivery.
Of course, the music starts with the artist, musicians and
songwriters. Without their talent, without their passion, there
would be no consumer demand and no music industry to fulfill
that demand. Record companies have already started to consult
with their artists in individual discussions to assure that
these new business models offer fair returns for everybody.
More needs to be done.
Negotiations are underway with music publishers and
songwriters, for they also must be fairly compensated, and I am
confident that those negotiations will succeed.
Has our start been too slow? Perhaps. But measured against
the scope of the challenges, we have moved at an extraordinary
pace, and I have no doubt that the current efforts underway are
immense and determined. The marketplace is moving correctly and
it is moving quickly, and we can provide and protect the
incentive to create along the way.
We all know that what is done in this space for music has
great import for all entertainment products and for all
domestic policy--the legal precedents, the public policy
responses, and the marketplace acceptance by consumers. We are
grateful to this Committee for the opportunity to discuss these
issues and, indeed, America's record labels are proud to be in
the forefront of this amazing period of change, and we are
confident that the outcomes will be wonderful for creators and
music fans alike.
Thank you.
[The prepared statement of Ms. Rosen follows:]
Statement of Hilary Rosen, President and CEO, Recording Industry
Association of America
Mr. Chairman, Senator Leahy and members of the Committee, thank you
for the opportunity to appear before you today.
The title of this hearing is ``Online Entertainment and Copyright
Law: Coming Soon to a Digital Device Near You.''
It's an apt title, Mr. Chairman. But if you'll excuse me for
borrowing the senatorial parlance, I have an amendment to offer.
Because online entertainment isn't coming soon. It's here . . . and
it's getting better everyday.
Napster was exciting. But giving away someone else's music without
their permission is yesterday's news.
The story now is the music industry's efforts to alert fans and
consumers to the huge amounts of legitimately licensed music that is
currently available on-line. And the story is about our plans to bring
new services that will offer even more variety, better audio quality
and new features to the marketplace as soon as possible.
The goal is to have several different kinds of systems and business
models for music fans to choose from, available in as many locations
on-line as possible, on a nonexclusive basis to encourage competition--
and to make these services and products compatible with new hand held
devices and other technologies that are emerging around the corner. To
achieve this goal, America's record labels are licensing innovatively,
constantly and aggressively and they are in some cases putting
finishing touches on systems that they have built themselves.
Flashing on the screen before you are samples of the dozens of web
sites with whom RIAA member companies have signed licensing agreements
and on which fans can find digital music right now. And these are in
addition to the hundreds of statutory licenses already in place for
webcasting.
Just yesterday, three companies with major record companies, AOL
Time Warner, EMI and Bertelsmann announced a partnership with Real
Networks' to create MusicNet, a technology provider and a music
clearinghouse to license its platform to companies seeking to sell
subscription services under their own brands. It has been widely
reported that two others, Sony Music and Universal Music have formed a
venture to offer subscription services which will launch this year.
Many independent record companies have signed similar licenses and are
using their catalog in innovative ways to bring music to the consumer.
Portals and web sites will combine these services to offer aggregated
music services to consumers.
Building entirely new businesses is a complex endeavor. But we're
approaching this challenge the same way we know any member of this
committee would handle a piece of legislation--sorting through the
issues as quickly but as thoroughly as you can, and doing all you can
to bring the diverse interests involved together.
Is it easy? Of course not. Is it worth it? Absolutely.
Because on the other side of our effort lies a new frontier for
music--one in which garage bands have a global audience, songwriters
can compose with their brethren an ocean away and fans have unlimited
choices and record labels have unparalleled opportunities.
Like any new frontier, when it comes to exploring this one, taking
short cuts would short-change the people and possibilities we are
trying to reach.
Today's Hearing Validates the Complex Issues Record Companies Have
Faced
The make up of today's hearing panel symbolizes the complex issues
record companies are facing as they work to coordinate the diverse
interests involved in bringing music online.
TECHNOLOGY ISSUES
Finding the right technologies and the right technology partners to
help build systems is a key first step. Gerry Kearby and his company
Liquid Audio have been in this space from the start tweaking their
technology several times as the marketplace evolved. I can only imagine
the frustration he has felt when at each stop along the way another
technology company has joined the fray as a competitor; and sometimes
as soon as a decision is made, a new advance is made technologically.
There are systems issues like determining compatibility for the
multiple devices that are currently on the market and those that might
be developed in the future. What interfaces are required for consumer
use? Should the system be adaptable to multiple kinds of business
models or will separate systems be built for each service? Is the music
database digitized in the proper formats to give flexibility to develop
new services?
And there are many others: Which technology do you use to compress
and decompress content? What combinations of encryption and
watermarking should be used to protect the content? What levels of
protections should be associated with each different business model?
The consumer is always in the forefront of this discussion. How do you
devise a system that's as easy to use as placing a CD in a CD player?
Then there is the so called ``back room'' operation. You need customer
service for when the downloads or streams fail to materialize and you
need to fashion transaction systems that work with multiple outlets.
You need clearinghouses to assure that royalties are paid to the right
people for the right activity.
All of these questions are important and they are being answered
every day. And not just for the United States, for these are global
issues. For if there is one thing this Committee well knows, the
Internet is a global distribution system and it must be treated as
such. You simply can't have a long-term successful business if you are
not thinking about multiple territories.
ARTISTS AND SONGWRITERS
Don Henley and Alanis Morrisette personify what we all know--that
artists and songwriters and musicians are the soul of the music
business--that the Internet represents an extraordinary opportunity for
them--and for record companies to succeed, they must succeed. A
relationship between artists and labels must be defined that works for
the Digital Age.
Artists have historically had a one-to-one contractual relationship
with the record company that relies on the sale of individual albums.
Yet some of the new distribution systems rely on consumer access to
multiple artist's works for fixed prices in a subscription based model.
It is important that individual artists are compensated fairly and
these discussions take time. In any business, contract discussions can
be messy and sometimes lengthy. But this is a very important issue to
the record companies and there is a strong commitment on their part to
comprehensively addressing it in the work on new distribution systems.
Progress has been made on this front but more needs to be done.
And artists need access to information to do their own distribution
if they aren't signed to a record label. These artist's ability to
protect their own copyrights and enforce their rights against pirates
are as important to them as it is to the record companies.
We also need licenses from songwriters and music publishers, Le.:
NMPA's constituency as well as ASCAP, BMI and SESAC--to do our
business. We have arrangements in place for simple downloading of full
songs, but new models such as subscriptions are being discussed right
now. Coming up with a standardized royalty rate for all manners of
business models--most of which haven't even been invented yet--is a
daunting task, but we're committed to getting it done.
RETAILERS
As Mike Farrace here from Tower Records On-line will tell you, 97
percent of music sales are still brick-and-mortar transactions--and we
have to ensure that online distribution enhances rather than undermines
the commercial viability of our retail partners. In addition, retailers
have valuable customer relationships with both the sales of physical
goods as well as downloads. Those relationships are important and is
certainly the subject of many discussions between retailers and record
companies.
These are all exceptional challenges. Measured against their scope,
we have moved at an extraordinary pace. Clocked in Internet speed, I
think it has been too slow. We all do. But I have no doubt of the
intensity of the effort currently being made and the determination to
be successful. The marketplace is working and we do not need additional
legislation to assure progress.
I am amused by those who suggest that record companies don't want
to be on-line with legitimate music--that we don't want to serve our
customers. It is a ridiculous notion that should be given no credence
by this Committee or this Congress. We are a huge industry trapped
inside a small physical package. Our freedom from selling only physical
CDs or cassettes means a huge expansion worldwide in the artists we can
support, the diversity of music we can offer and the commercial
potential we can unleash. We understand that better than anyone else
and we are taking the most active steps to embrace the opportunity.
The Consequences of On-line Piracy
There is one way to overcome every one of the challenges mentioned
above--to accelerate online music to real-time speed--to cause every
legal or technical complication magically to disappear.
And that's to break the law.
Because once you conclude that piracy is permissible and
intellectual property is worthless, licensing is a snap. Technical
protection becomes a breeze. And royalties are no great shakes either.
I don't believe that anyone on this Committee or in this Congress
supports piracy--in physical form or in the on-line arena. And over the
last few years, the courts have gone a long way to define exactly what
constitutes on-line piracy. We are pleased with these court decisions.
The courts have confirmed that piracy exists both when there is obvious
mal-intent but it also occurs when seemingly well-intentioned people
launch business services using copyrighted work without first securing
licenses. The notion that the latter type of piracy is morally or
economically permissible in the guise of technical innovation has been
resoundingly rejected by the courts and should be by this Committee.
We look forward to Napster complying fully with the requirements
the court has imposed. To date they certainly have not--but I remain
optimistic and am committed to working productively with them in this
regard. Indeed, several of our member companies who are plaintiffs in
this case have committed to licensing Napster once they have a legal
service to bring music online in a manner that takes advantage of peer-
to-peer technology while respecting intellectual property. One of our
member companies, Bertelsmann, is even funding their entry into this
legitimate marketplace.
I believe that disputes are best avoided when ground rules are most
clear. Innovation is produced most quickly when intellectual property
is protected most rigorously.
We stand ready to defend those principles--not just for ourselves
but for all of the partners in the chain of a legitimate digital music
business. All of those companies you have just seen me flash though
deserve the benefit of a lawful marketplace. They can't compete
otherwise.
The Future is Bright and the Map will be Drawn for Others
The frontier of online music isn't in courtrooms. It's on
computers. It isn't in disputes. It's in digital devices. And above
all, it isn't in litigation. It's in innovation.
The challenges involved in building a legitimate market for online
music are daunting. Were the opportunity any less immense, they might
not be worth the cost.
But the opportunity is that immense. The frontier of digital
music--is that thrilling. To be sure, the legitimate road may be a bit
longer--but taking a short cut would shortchange the music fans on whom
our industry depends.
We are doing this right--and we are moving quickly--and we can
protect the incentive for innovation along the way. Indeed, America's
record labels are proud to be in the forefront of this amazing period
of change and we are confident that the outcomes will be wonderful for
music fans and creators alike.
Thank you.
Chairman Hatch. Thank you, Ms. Rosen.
This has been a really interesting panel, and we are sorry
that we have to have so many witnesses, but you are all
critical to our understanding. We have had a wide variety of
interesting comments here today that were very thoughtful,
reflective, and very much consternation to us on what to do and
what needs to be done.
Mr. Parsons and Mr. Berry, Ken Berry, let me ask you this
question to begin. I have been encouraged by the reports of the
record labels' taking significant steps into the online
distribution space, as Ms. Rosen has helped us to understand,
especially the announcement of the alliance of Warner Music,
EMI, and Bertelsmann with RealNetworks to form MusicNet.
Nevertheless, some concerns remain.
What assurances can you give us that this alliance will
foster open competition among online music distributors and
retailers, allowing diverse companies like Tower Records On-
line, for instance, or Liquid Audio or the new Napster and so
on to use their own music players and digital rights management
systems to keep their own customer information to compete with
America OnLine, for example, as a music service provider? Let's
start with you, Mr. Parsons.
Mr. Parsons. Thank you, Mr. Chairman. First of all, a word
about MusicNet in terms of what it is and why we think it
expands opportunity for everybody. MusicNet is going to be, in
essence, a B-to-B platform that aggregates the music initially
of the three companies you just identified, namely, Warner,
EMI, and Bertelsmann, and hopefully, going forward, all of the
music available. In other words, we will be seeking to get
licenses from the other majors and the independents, aggregate
all that music, and make a service available to other
distributor platforms that are looking to create relationships
with consumers, so that MusicNet will not have a direct
relationship with the end-user consumer but will have
relationships with affiliated or syndicated platforms, like
AOL, like RealNetworks, or like any of the platforms you just
mentioned. All of those we will try and deploy this service as
widely across as many different distribution platforms as
possible.
So the key to this thing is that MusicNet, using the real
technology, will have a secure, convenient, easy-to-access, in
essence, turnkey product to distribute to other platforms that
have relationships with consumers. It is non-exclusive so, in
other words, it doesn't detract in any way from the existing
competitive landscape. What it does is it adds a powerful new
alternative for distributors to go to for, in essence, the
turnkey solution to get access to deep and rich music content.
Chairman Hatch. Mr. Berry, do you care to comment?
Mr. Berry. Mr. Chairman, as Mr. Parsons has already said,
the arrangements we are entering are non-exclusive, and it is
intended to accelerate the process of getting music into the
Internet space and make it easier for consumers to find a broad
aggregation of music. But it is not our sole access to the
consumer, nor is it the exclusive way in which we intend to
exploit our music in the Internet space.
We have entered into, as I said earlier, many licenses and
will continue to enter into new licenses in the future in order
to accelerate this process of getting music out there in the
Internet arena. We have even said, as you probably know, in the
press comment yesterday that when Napster has their viable new
business model which respects the rights of artists and record
companies, we will be prepared to talk about entering into a
license there with that new model.
Chairman Hatch. Thank you.
Mr. Parsons. In fact, if I just might add?
Chairman Hatch. Mr. Parsons?
Mr. Parsons. Ken makes a good point that neither side of
this relationship that the music companies have created with
MusicNet is exclusive. MusicNet will be offering this service
to a range of distribution platforms, and all of the music
companies are not exclusive to MusicNet. They will also be
entering into, in the fullness of time, their own relationships
with other aggregators of their content. So this is just one
new way to go.
And we did, in fact, not only agree to consider licensing
Napster, but in the agreement itself, it provides that MusicNet
service will offer an affiliation and a relationship to Napster
provided that Napster simply meet certain conditions of
security and legal operation that were set forth in the
agreement. So that is done.
Chairman Hatch. Thank you.
Mr. Valenti, I think you summed up the importance of the
totality of these industries as well as anybody has ever done
so before this Committee. And I think you have done a great
deal of service in helping us all to understand how important
not just movies but music and everything else is.
Having made that statement, I would like to ask Mr. Henley
and Ms. Morissette a question. Digital distribution systems
like the Internet allow the artist and the music fans to
connect in a new way. It offers a more transparent mechanism
for accounting to artists for the use of their works. And it
might even create some cost savings for music fans.
What could intermediaries like the record labels and
technology companies do, and what reforms might Congress make
to most significantly harness the opportunities offered to
artists, especially niche artists, and their fans? And I would
welcome responses from anybody on the panel, but let's start
with you, Mr. Henley, and then go to Ms. Morissette.
Mr. Henley. Well, Congress can help by fostering an
atmosphere of openness and communications between the record
companies and the artists. We are very concerned about fair
compensation, not only just getting paid for music on the
Internet but how much we get paid and what kind of licensing
system there will be. We are concerned about who is going to
collect these digital royalties and how they will be disbursed
to recording artists.
Chairman Hatch. Do you have any doubt that what Mr. Ken
Berry and Mr. Parsons have described will also include the
artists and the writers, the creative people in the royalty
distribution?
Mr. Henley. Well, I would certainly hope so. As I said in
my testimony, up until now the dialog has only been between the
record companies and the Internet companies, and we have been
excluded basically from that dialog. And we would like to be a
part of it in the future certainly.
Chairman Hatch. Mr. Parsons, did you want to answer that
question?
Mr. Parsons. To be sure, Senator, the artists, as I said in
my opening statement, it all starts with the artists. We have
no intention of excluding them, frankly, either from the
discussion, the ongoing discussion of how the business should
roll out in the online world and most particularly from their
fair share of the proceeds from this. In essence, each of the
record companies that are signed up to this have obligations to
their artists and to the publishers, which we fully intend to
honor on a go-forward basis.
Chairman Hatch. And to the writers as well? In other words,
you are including them with the artists as well?
Mr. Parsons. Absolutely. And I think the first bridge that
we had to build, however, had to be to kind of create a model
in the marketplace that, if you will, was different than the
Napster model; in other words, a model that enabled someone to
have a digital rights management system that you could capture
revenues around the use of this copyrighted material, and then
the allocation of it will be determined either in accordance
with pre-existing contractual relationships or, frankly, in
many instances, we will have to go back to artists, writers,
and publishers and negotiate new terms.
Chairman Hatch. Ms. Morissette, would you care to comment?
Ms. Morissette. I am in support of dialoguing and focusing
on the present and going forward with this new digital era.
There have been dynamics in the past that have not been in
favor of artists, to say the least. And I think that artists
are more open to dialog, I think, now more than ever. So I am
open to dialoguing about it, and I am open to creating new
forms of, you know, transparency, really, of where the money is
coming from and who it is going through, and ultimately how it
is divided up, as I said earlier.
So I think at this point in time, artists more than ever
are open to being included in those dialogs and being part of
that creation of the solution.
Chairman Hatch. Thank you.
Mr. Henley?
Mr. Henley. It is important to remember what I said in my
testimony earlier, that recording artists do not at this time
have protection in terms of a public performance right for
interactive services. That has to be created.
Another concern is the issue of recoupment. As I also
pointed out earlier, the publishers do not recoup advances
against the writer's share of royalties. And if some sort of
collection agency is created by the record companies, such as
Sound Exchange, we would like to hear the record companies say
that they will not use that collection agency as simply another
pool from which they can recoup advances for tour support, for
promotion, things of that nature.
So there are a lot of excruciating details that need to be
worked out in this new world.
Ms. Rosen. Mr. Chairman, can I just make a comment on that?
Chairman Hatch. Yes.
Ms. Rosen. I don't want the Committee to be under the
impression that there is not a copyright for certain uses. I
think the issue that Mr. Henley is referring to is that in
certain limited instances there is a statutory license that is
administered collectively for radio-like Web-casting.
Interactive services are more akin to the direct distribution
rights of record companies, of book publishers, of film
companies. Those are administered on a contract-by-contract
basis. So there is no collective licensing of those rights and,
therefore, no fear for artists about a collective body
diverting those rights. Those rights are administered
individually by copyright owners by contract, the same way that
physical record sales are administered.
So I think that there are a host of issues for individual
record companies and their individual artists to talk about in
terms of whether or not their contracts provide for those
services, but the right clearly exists and it is important.
Chairman Hatch. My time is up, but I would like to ask just
one other question to you, Mr. Barry, and Mr. Kearby as well.
Do the recent announcements like the ones made about MusicNet
give you more hope that your companies will be licensed by the
record labels?
Mr. Barry. Well, Senator, when I heard the announcement
yesterday, my first thought was that we ought to have a hearing
like this every week because I think it does move things
forward a bit. But I think there are--
Chairman Hatch. I am game, but--
[Laughter.]
Mr. Barry. Permanent oversight might be a good idea.
Senator Leahy. We will do a compulsory licensing hearing
next week.
Chairman Hatch. Compulsory hearings.
Mr. Barry. I think yes, and the questions really that are
still out there are the ones I raised in my testimony. In order
to enable this Internet music, we are going to have to have
rights to the entire catalogues. We are going to have to have
rights to musical compositions as well as sound recordings. And
I would ask Mr. Parsons and Mr. Berry whether rights to musical
compositions are included within the licenses they are giving
to MusicNet, for example.
I also say that--there was a discussion about technical
requirements, security requirements. I think those are
absolutely appropriate. They need to be established and
administered in a very open and even-handed basis and not to
require technology from any particular vendor but rather be
open standards.
I think that, as Mr. Gottlieb said, we should have the same
terms for all. There shouldn't be cross-licensing, as you,
Senator, were concerned about last year, that it be an even
playing field, as Steve said, so that, for example, the deals
that are made between AOL and EMI are no different than the
deals that are made generally for MusicNet.
Then, finally, I think it is really important that we allow
people other than the major labels to participate in these
industry-wide structures.
Chairman Hatch. Thank you.
Do you care to comment, Mr. Kearby?
Mr. Kearby. Yes, sir. I think we are encouraged by the
announcement of MusicNet. We are concerned that unless all of
the content is available from all of the record labels, we
won't have a wide enough audience for this, and people will be
stuck in a Beta and VHS land where one technology supports one
set of record labels and another technology supports another.
I can and should state that we are dismayed, really, to
consider that the record labels would go and directly discuss
with Napster licensing. We think that rewards years of illegal
behavior, and we think that companies like Liquid Audio and
many of our competitors who have lived by the rules for the
last 5 years shouldn't be disadvantaged by a company that
aggregated so many millions of consumers by providing
intellectual property for free.
Chairman Hatch. Thank you.
Mr. Valenti, I am going to come back to you. I just have to
ask this question. You know, I can see the many conflicts and
problems here. There is no question about it. Without the
artists, without the writers, you wouldn't have the product.
Without the consumers, you wouldn't have any buying of it.
Without AOL, EMI, et cetera, et cetera, you wouldn't be able
to--artists wouldn't have a chance to get their stuff out there
and have the funding to make things work.
Mr. Valenti, I can't tell you how much your remarks
impressed me here today because of what the totality of the
entertainment industry means to our balance of trade and the
enjoyment that people have all over the world and how America
is the No. 1 leader throughout the world. You make that case
very well.
But I have been sitting here thinking that maybe there are
some other solutions as well. If you go to compulsory
licensing, you are talking about violations of the GATT Treaty.
So it is not a simple thing to do. It is a very complex thing
to do, and it is the last thing anybody really should want to
do, in my opinion, unless, like Mr. Henley says, it is the last
resort to resolve this.
But I remember a number of years ago I came up with the
idea to do an orphan drug bill. Now, you might think, what has
that got to do with music, movies, entertainment, et cetera?
But at the time they were developing three or four orphan drugs
a year in the pharmaceutical industry. But we put a very small
incentive, a tax incentive, into orphan drugs, and today there
are well over 200 orphan drugs. And these are orphan drugs to
help populations of 200,000 or less.
I am wondering if there isn't some way that we could maybe
even put some incentive into this system so that you don't have
some of these conflicts, so that there may be a way of
resolving all of these problems. I can see Mr. Hank Barry's
position that if you are going to do a deal with RealNetworks
and it is non-exclusive, why can't you do the same deal with
him or with Mr. Gottlieb or anybody else, for that matter? If
you do that deal, why can't the artists and the writers be
paid, and why can't their royalties be secure? Why is there
this conflict and this feeling?
I think RIAA is very, very important in this whole thing.
No question about it. You do a great service. Without you the
industry wouldn't be as solvent or as strong as it is. So every
one of you plays a very important role.
I would like you all to think about this. Maybe something
like the orphan drug incentives that created a mass of orphan
drugs that have benefited people who would never have had those
pharmaceuticals had it not been for us having some minor, but
yet important, incentive.
Now, think about it, because that may be an answer that
might help all of you. It may be just another lame-brain Hatch
idea. You never know. But I will do my best to try and help the
industry.
I don't have any axe to grind here. I want to see it work.
I want to see it really--Senator Leahy particularly liked the
``lame-brain Hatch idea'' phrase.
Senator Leahy. When did this ever happen?
[Laughter.]
Chairman Hatch. But just think about it, would you? Then
help this Committee, because we don't know what to do. We know
we are going into a new age. We know that music is going to be
disseminated in far different manners than it has ever been
disseminated before. We know that the idea of gold records and
platinum records is going to be a thing of the past. We know
that online is where people are going to get most of their
music. We know that the whole business plan or various business
plans have got to be revised and revamped. We know that artists
are very upset and concerned. We know that writers are very
upset and concerned. We have seen a lot of writers who have
discontinued their contracts because the industry is concerned.
There are a lot of really talented people who have no chance
whatsoever, because we can't come up with the solutions to
these problems and provide the incentives to really help far
more people, not just artists and writers and consumers but the
businesses themselves.
This is an area that I really love to consider, an area I
really love to work on. I would really love to help all of you.
You can see the conflicts and the disparities. Your comments on
that, and then I will quit.
Mr. Parsons. May I, Mr. Chairman?
Chairman Hatch. Yes.
Mr. Parsons. It does seem to me you have pointed out the
tip of the iceberg of complexity around these issues. They are
enormously complex.
Chairman Hatch. They really are.
Mr. Parsons. And the interests are competing at various
levels. But I do think, back to what I was saying in my
comments, you know, you have to have some faith in the
marketplace in terms of working through these issues. And if
your Committee fails to see progress, it seems to me that is
when the yellow flags go up.
But I submit to you that progress is being made. Progress
is being made because--
Chairman Hatch. It seems to be, but it also seems to be
very slow in the making. And, you know, one of the things that
bothers me is that music can be on the radio and royalties are
paid and people are taken care of. It is kind of just accepted.
Why is that not possible on the Internet?
Mr. Parsons. I think--
Chairman Hatch. I understand every company wants to have
its own Web page, its own distribution system, its own right to
control some product. But, still, it's not that way on radio.
Mr. Parsons. I just think it takes time for those
conflicting and competing and complex interests to work their
way out. But the great incentive here is--frankly, we are all
in business to make money now, I grant you. The artists are in
business, as Don Henley and Alanis say--
Chairman Hatch. And you are all critical to--
Mr. Parsons.--first and foremost to create, you know, an
artistic vision or expression. But there is a little bit of
money underlying that as well. And we will figure it out, and I
think we are figuring it out. And I think the MusicNet
transaction is--
Chairman Hatch. But do I have to hold a hearing every week
to get this figured out?
Senator Leahy. Well, it actually worked. You got AOL Time
Warner and EMI to announce the Bertelsmann RealNetworks, the
MusicNet Sounds. I mean, Lord knows what we get next week.
Mr. Parsons. I assure you, we didn't just go to work on
that last week.
[Laughter.]
Senator Leahy. I understand that the timing is great. I am
going to have a question on--
Chairman Hatch. Senator Leahy, I have taken way too much
time. I apologize. But I have to say that this Committee is
very concerned about all these issues. I don't want any of you
to feel like this Committee is not considering your thoughts.
But as you can see, there are a lot of different ideas here, a
lot of different conflicts, a lot of different problems. There
is no simple way of solving it. But I have thrown out this idea
of perhaps some sort of an incentive that might bring you all
together. I don't know. But I know we couldn't do anything in
orphan drugs until we wrote this simple bill, and today there
are millions of people being helped, small groups of people who
never would have been helped before, and from those orphan
drugs we have had major blockbuster drugs developed as
extensions of them.
So there may be some way we could do this. I hope you will
help us.
Mr. Barry, you look like you want to comment on this.
Mr. Barry. Senator, I would just echo your comments. I
think that we have a marketplace here that is extraordinarily
slow to mature, and we have seen in the past with respect to
the Satellite Home Viewer Act, the Digital Performance Rights
Sound Recording Act, the Copyright Act modifications with
respect to cable television that every once in a while Congress
has to step in and enable these new marketplaces.
I will just give you a quote from September 1997: ``The
Internet presents the recording industry with tremendous
opportunities, and already some companies are experimenting
with the online delivery of music directly to consumers on
demand.'' I mean, this has been--this is Carrie Sherman from
the RIAA.
This is a long-standing issue, and I really believe--I
think that there is good faith on both sides here--in fact, on
all sides. And there are many sides. But I think that this
question of all these varying rights, the complexity of the
rights situation is really the issue. And I know the music
publishers are here today. I think that they are absolutely key
to this discussion as well.
Chairman Hatch. Mr. Henley, you have indicated you wanted
to say something.
Mr. Henley. Yes. Thank you, sir.
Most of this discussion here today has been about
distribution of music on the Internet and the digital
revolution. I would just like to point out--and I know we don't
have time to go into it here today, but perhaps we could come
back another time and discuss some of these other issues. There
are historic issues concerning problems between the artists and
the recording industry, including copyright ownership, as
manifested in the work-for-hire issue that has still not been
worked out, despite a directive from the Congressional
Committee where we had the hearing last May. So there are still
serious issues regarding work for hire that need to be
addressed. There are issues regarding the nature of the
standard recording contract. There are issues such as the 7-
year statute in California, which is the crux of the Courtney
Love lawsuit.
All these issues need to be scrutinized by Congress so that
the playing field can be leveled. It will be nice to work out
the digital revolution, but we have some things going back 50
years that we would like to come and talk about at some point.
Chairman Hatch. We would be glad to listen.
Senator Leahy, sorry.
Senator Leahy. Thank you. No, I find it interesting because
you speak of the orphan drugs and the others, but there are
also some in the Senate--and the House, for that matter--who
feel that we don't want to build the technology, nor could we,
or the business model, nor could we, that we may jump-start
everything through compulsory licensing. I am not suggesting
that is what this Committee would do by any means, but I would
not want anybody to leave not realizing that there are some in
the House and Senate who feel that way. Probably one of the
important things about having a hearing like this is to get all
sides heard.
Mr. Parsons, you mentioned earlier and were making the
comment that, of course, MusicNet did not get put together
overnight in time for this hearing, and as one of the witnesses
said, ``Isn't it ironic?'' the announcement was made just
before the hearing.
My question is: When will this become real? I realize we
had the announcement before the hearing, but when will we
actually have MusicNet?
Mr. Parsons. Well, good question, Senator. I think that,
just to take a step back for a moment, these companies have
been working toward this objective for quite some time. If
there was a seminal event or catalytic event, I will call it, I
would refer more to the decision of the Ninth Circuit in the
Napster case that sort of said, look, these are the rules of
the road going forward, now stop living in a dreamland of hope
that somehow you can avoid the copyright laws and their
application to the online world, and get about the business of
creating legal models. And that is what I think put a little
bit more fire on the efforts, because I would remind the
Senator that we at Warner Music Group have been associated with
RealNetworks on MusicNet for over a year, we brought the other
guys in.
But when will it be real? It is real now. The licenses that
were granted to MusicNet as a result of this agreement exist.
The terms exist. The licenses for distribution between MusicNet
and AOL and Real exist and were signed. What still is in beta
testing is the actual technology, the digital rights management
technology that is going to make all of this work. Real and
MusicNet are in their beta testing. I think they will actually
be out in the market probably the middle of this month with
that test, and we at AOL are looking to be marketing the
service late summer, early fall.
Senator Leahy. The reason I ask, somebody mentioned the
1996 Communications Act. I remember us being told just go ahead
and leave us as much flexibility as possible, cable rates, for
example, will come down. They didn't. They went up. We will
offer a lot more services. Service didn't get a heck of a lot
better in most of the cable systems, certainly not Fairfax
County where it is somewhere in the 50's or 60's in its quality
and ability. I only mention that because I am familiar with
that one as a user. I can usually get a better picture off my
rabbit ears. But that is for some of us older people who
remember that expression. Younger folks here won't. But I also
think of the optimism we had about the satellite home viewer
Act, but we are still waiting for many of the access in some of
the rural areas, and I worry about this.
But let me ask both you and Mr. Ken Berry, I understand you
are going to license your music to MusicNet on a non-exclusive
basis. Am I correct in that?
Mr. Berry. That is correct.
Senator Leahy. I think that is going to be good news to the
music retailers. They have sold your music for years in brick-
and-mortar shops as well as online. They obviously don't want
to be cutoff from your music catalogue.
How do you respond to Mr. Farrace's concern that you may
use your power to ``steal our customers'' and ``all retailers
just want a level playing field and let them decide how to
market and sell music''?
Mr. Berry. Well, EMI Music's policy has been for many years
to try and make our music ubiquitous. We would like the
consumer to encounter our music in as many environments as we
can possibly get it to. We don't assume that the consumer will
come to us. We need to go and find them.
To that end, we have worked closely with a lot of
retailers, and we were amongst the first to do it, to build
relationships so that if we were in the world of digital
downloads, for example, we did it through retail sites.
Now, clearly, new media does bring for the first time the
ability for record companies to deal directly with individual
consumers, but my expectation is that there will be many
services offering music to the consumer, and we will need to
service a number of different intermediaries between us and
that consumer, some of which may indeed be retail
organizations.
Senator Leahy. Let me follow a little bit up on that. Ms.
Rosen has testified that the RIAA member companies have
licensed dozens of Web sites--we saw some here earlier--to
provide music for downloads and for streaming, in addition, I
think, to hundreds of statutory licenses for Web-casting. And I
think that is a great step forward. I have said for some time
that litigation against unlicensed sites is only a partial
answer. You can't just say, well, we are going to close down
sites and not provide legitimate alternatives to obtain digital
music. People want to be able to obtain digital music, the
beauty of having every copy exactly the same and exactly the
same quality.
Liquid Audio and Tower have licenses to deliver some music
online. But Mr. Kearby from Liquid Audio and Mr. Farrace from
Tower have expressed concern that the music most people want is
not available through legitimate sites. Mr. Farrace says only a
small percentage of the millions of songs available in CD are
authorized for digital sale. And right now actually Napster may
have the biggest offering, which I suspect is one of the
explanations of its popularity.
Mr. Hank Barry said, ``To this date, no service has been
able to provide a comprehensive offering of music on the
Internet that is licensed by the major recording and publishing
companies.''
So, Mr. Parsons and Mr. Ken Berry and Ms. Rosen, why isn't
there something like the equivalent, the digital equivalent of
Tower Records up and running, first off? And--well, let's take
that first off.
Ms. Rosen. Senator Leahy, I think it is important to sort
of put this issue in perspective about the nature of the
offerings and the timetables under which they have occurred.
At the outset, the expectation was that people wanted a
singles-driven online business, because that is what they
couldn't get currently from albums. So everybody wanted to be
able to buy singles. Gerry Kearby invented a great system--he
has some competitors in this system--to sort of sell downloaded
singles. All of the record companies provided those
downloadable songs, some through aggregated partners and also
through individual sites.
What happened then was that Napster created a scenario
where it was essentially everything you wanted all at once, in
essence, kind of an ``all you can eat'' approach. The consumer
liked that idea, you know, as other people today have said.
They liked the idea of being able to think up any song, going
up to Napster, and pulling it down. So the business model
thinking has completely evolved since that time.
But Napster a year ago said that they wanted a legitimate
service. They still haven't been able to build one. They have
$50 million from one of my companies. They still haven't been
able to build a legitimate legal service. This is not easy to
do.
What the record companies did when the Napster phenomenon
came on was said: This is an interesting thing and we are going
to learn from this, because we understand how our consumers
have started to think and started to consume music. So we have
got to prepare our back rooms, our technology service
providers, we have got to find legitimate partners in the space
to help us build subscription-based services, the so-called
``all you can eat'' services.
That essentially started last year. That takes a lot of
time. Hank Barry hasn't been able to get it done either. So the
only reason he has got all the music is because he doesn't
license any of it.
So it has got to be very clear to this Committee and to the
public that the evolution of the music offerings on the
Internet have been quite thoughtful, quite deliberate, and
really have changed with the consumer mind-set.
The other thing that I think is worth pointing out is that
there is not a single industry making any money on the
Internet, except the sex business. You know, they are the only
ones who have figured out how to actually sell products through
the Internet. And so the fact--
Senator Leahy. Are they on the Internet?
Ms. Rosen. I have heard. I have heard.
[Laughter.]
Ms. Rosen. Although I am sure no one around here would
actually have been a customer.
The fact is that there is a lot of legitimate companies
like Mr. Kearby's, like all of those ones I have showed, that
are actually trying to compete in the marketplace, attract more
investment capital, get more funding, and get more attention to
their sites. It is very hard to do that in an environment where
Napster continues to operate, No. 1. And, No. 2, as you are
following the consumers' wants and needs, the technology and
the assets required to back that up are enormous. I think you
have heard these companies are committed to providing that, but
this has not been sort of a slow process. This has been an
evolution of consumer demand.
Senator Leahy. You don't have any question that you
envision a future where there will be a profitable sale or can
be a profitable--
Ms. Rosen. I don't have any question about it.
Senator Leahy.--sale of music on the Internet.
Ms. Rosen. And, to be honest, I resent Mr. Barry's
suggesting that it is too slow when he himself hasn't been able
to do it legitimately.
Mr. Parsons. Before we--
Senator Leahy. Let me get Mr. Parsons and Mr. Ken Berry,
and then I have a question for Mr. Hank Barry who might follow
up on this.
Mr. Parsons. Let me just say the vision you just outlined
is exactly what the MusicNet model is all about. Essentially,
we, EMI, BMG--and I would point out that EMI and Warner Music
Group are the largest publishing entities; we own the greatest
number of copyrights out here in terms of a deep catalogue--
have essentially licensed that catalogue so that for the first
time you now have companies with deep, rich catalogues,
licensed catalogues, to the MusicNet service to be made
available.
Now, one of the reasons I said we are going to actually not
be in the marketplace with the product is not just technology,
but we have to clear the rights. I mean, we have gone through a
sample, I think, of about 70,000 songs that we would put on day
one to see with respect to that sampling--and as I have said,
we have got over a million copyrights. So we took a sample of
70,000. We went through to see where we have the full
complement of rights, not just from the music companies but
from the artists, from the writers, from all of those
constituencies Senator Hatch mentioned a moment ago.
We have got to clear those rights and make sure that
whatever we turn over to be available for downloading we have
got the rights to do that, and then the money will follow back
to the rights owners.
It is a much simpler task if you basically disregard or
ignore everybody's rights. But I wanted to leave this on a
hopeful note. The MusicNet service that we announced is exactly
what the Senator has in mind in terms of a place you can go and
get everything.
Senator Leahy. Well, and keep in mind what I have said
probably a dozen times in hearings like this and a hundred
times elsewhere, I want the artists, the performers, those who
have invested in them, to get a return on their investment. I
don't want Mr. Henley or Ms. Morissette to go out and see their
songs that they have worked hard on, that are popular because
of their unique contribution to it, to be available free--
Mr. Parsons. That is what takes some of the time.
Senator Leahy. Mr. Ken Berry, you wanted to say something,
did you, before I go to Mr. Hank Barry?
Mr. Berry. Just to repeat a little bit what Dick Parsons
said a moment ago, we have had to build systems in our
respective music companies that can, first of all, digitize the
content wherein so it can be manipulated and, furthermore,
build systems that will track the revenue bank so the artists
actually do get paid, which are not issues with these free
services where our content is being given away. It is a very
significant investment, and it clearly has taken some time.
Of course, we do invest an awful lot in our artists'
careers. It is not just a question of signing them. We are
making big investments all the time, particularly in this new
digital era, to make sure that we are set up to actually
provide the full service through to the consumer. And clearing
rights, as has been mentioned before by people here, is
complicated, but we are in the process of doing it and we are
getting the answers to this particular obstacle right now.
Senator Leahy. Mr. Hank Barry, I believe you want to run a
legitimate business. I don't mean that in a condescending way
at all. I mean it very sincerely, and I have talked to you
before. You have a brand name that can be very valuable,
something as well-known as Coca-Cola, at least among those who
are going to be using it, or we think of brands like Ben and
Jerry's, coming from Vermont.
But I also believe the record companies want to share the
benefits of the marketplace that you happen to build, which is
a tremendous one, provided you make your system secure, No. 1,
and, second, compensate the artists and the copyright owners. I
am not going into the court cases. Those are pretty clear.
But I went back this weekend, and I went on your Web site,
and I just wanted to check some of the things that are
available. You can find the Lenny Kravitz song ``Again'' by
typing Lenny Kravitz in the artist line and ``Again'' in the
title line. You are not using any misspelled words or anything
else. And there is a song that I believe is on Billboard's Top
10 right now. You can find a song I like, ``Hotel California''
by the Eagles. You simply type these words in the appropriate
lines. Marvin Gaye's song ``I Heard It Through the Grapevine''
is there. Now, that is a song that has been licensed for
various commercial uses as well.
Now, all those songs are copyrighted. I suspect there is
not permission to have them there. What do you say about this?
I mean, what do you do? Because, on the one hand, I see what
you are trying to do. You are trying to put together an easily
downloadable business. You agree, as I understand, with me that
artists should be compensated. But what do we do in a situation
like this?
Mr. Barry. I appreciate the chance to respond to that
because it is something that people have made a lot of
contentions about.
This is the matter that is before the district court right
now. As you know, the Ninth Circuit entered an order and the
district court fashioned an injunction to implement that order.
We are complying with that district court order, I think in an
objectively measurable way. We have detailed the actions that
we have taken in three separate compliance reports to the
district court, one of which we are submitting today.
Since March the 5th, the total number of files available
through the service--remember, it goes from the hard drive of
one user to the hard drive of another--has dropped from 375
million to under 100 million. We have blocked over 300,000
separate songs with 1.6 million individual file names. We have
pulled together 100,000 additional title variants, and we have
licensed Grace Notes data base. We have also changed Napster's
terms of use so that we are going to bar participation of
people who attempt to bypass this filtering system.
Now, is that enough? No. As we have seen, some songs get
through. Is it harder to find a song? Yes. The Ninth Circuit
said--and I think it is true--this is not an exact science, and
we are working to make it better.
Those are the facts. But we are not asking this Committee
and we are not asking the court of the plaintiffs to take our
word for it. We asked the judge to appoint an independent
technical evaluator--and she did so last Friday--to make sure
that we are doing everything that is possible to comply with
the injunction. She has appointed that independent technical
advisor, and that person is going to help to find whether we
are acting correctly and whether the plaintiffs are acting
correctly under the injunction. So we look forward to working
with that independent advisor and working harder to address the
issues that you raised.
Senator Leahy. I have other questions for the record, but
one last question for Mr. Valenti, because every time I mention
compulsory licenses, I see Mr. Valenti's hair stand up on end,
and I can't do that anymore. Because some have called upon
Congress to step in to control the licensing for music and
other forms of entertainment in the online space, which in the
digital world involves your industry, Mr. Valenti, how do you
feel about that?
Mr. Valenti. How do I feel about--
Senator Leahy. Compulsory licensing.
Mr. Valenti. Well, I think we have to understand, I am not
talking about music now because that is--
Senator Leahy. No, I am talking about for the movies.
Mr. Valenti. Movies alone. I think we have to understand
that the difference between the analog world, in which we
mostly exist today, and the binary number world, the digital
world, in which we will exist tomorrow, is the difference
between lightning and the lightning bug. Totally different. And
the reason why a compulsory license won't work, will be totally
unworkable with movies, four quick points:
One, a compulsory license today for cable and satellite is
defined by limited viewing areas. The cable system in
Washington, D.C., doesn't go to Philadelphia. And if you have a
satellite, it has to be within the footprint of the satellite.
On the other hand, the Internet is global. It is instant at
186,000 miles per second and it is global. And I know there is
supposed to be technology out there to contain it, but guess
what? It doesn't work and it is mainly, I think, what I call
the dot-com hype.
Second, I think that the independent producer would be
devastated. When the independents go out to make a movie, they
have to finance it themselves. They go outside the studio
system. And they pre-sell their movie to various territories,
to France, to Germany, to Japan, to Argentina. And if you had a
compulsory license, they would be out of business. They
couldn't pre-sell because there is no limitation on that reach.
Third, government price-fixing never works. I was present
in the 1976 Copyright Act, and I personally negotiated with
your predecessor, Mr. Chairman, John McClellan. And in those
days, I don't know how it works today, but he didn't fool
around with Subcommittees and Committee members. He had all the
power and, by jingo, he used it. I am sure that is the same
way--
Senator Leahy. Orrin does it exactly the same way.
[Laughter.]
Senator Leahy. Never mind, you know, being bipartisan and
everything. He still does it the same way. I come in and I have
to go to his office and schmooze each morning.
[Laughter.]
Chairman Hatch. I wish. I just wish.
Mr. Valenti. And as a result, we started out with about 7
percent of a cable system's revenues, and then it got down to 6
and then 5 and 4. And every morning when you got to John
McClellan's office, he had a new lower rate. And, finally, when
it got to about 1 percent, I ran up the white flag because I
thought that the Senator was going to go down to zero before we
were done.
As a result, today a cable system with $9 to $10 million in
revenues pays 1.89 percent of its revenues for its compulsory
license. On a satellite, a satellite pays 19 cents per
subscriber for all the programming of a single broadcasting
station for 1 month. Now, if ever I saw a thing that was
totally out of balance, that is it.
And the fourth thing is I think that--keep in mind that if
you set a rate on a compulsory license for movies, you would
have to set that rate as the potential to cover the entire
world because that is what the Internet does, which means that
American consumers would be subsidizing the viewing of European
and Latin American and Asian citizens. They would be paying the
rate so that somebody else abroad could get it free. It just
won't work and doesn't need to work, because the movie industry
around the world has been operating for about 70 years, 80
years, back to 1913 when ``The Squaw Man'' came out, and it
works in a negotiated basis around the world.
I might add, finally, that if you look at a cable system
today, the marketplace works. For example, MTV--
Senator Leahy. Be careful on that. They are monopolies,
they give lousy service, and they don't--but go ahead.
[Laughter.]
Mr. Valenti. I must say--
Senator Leahy. You pay to have at least 20 preachers
wearing bad hairpieces who sit on there and tell you if you
will send money just to their company, you have salvation.
Ms. Rosen. You are going to get letters, Senator Leahy.
Mr. Valenti. Senator, I have learned one thing in my long
and some would say checkered career. I never debate with a
Senator.
Senator Leahy. Of course you do, but that is OK.
Mr. Valenti. Having said that--
[Laughter.]
Chairman Hatch. What do you mean?
Mr. Valenti. Shall we move along? All of the programs,
mostly on cable, like HBO, Showtime, USA, Lifetime, Discovery,
TNT Movie Classics, these are all negotiated in the
marketplace. There is no compulsory license there. All
negotiated. So I can't speak about music or anything else, but
in the movie business, the idea of a compulsory license is an
idea whose time has not and should not come.
Senator Leahy. Thank you.
Chairman Hatch. Thank you.
Senator Feinstein?
Ms. Rosen. Senator Leahy, could I just add one thing on
that with respect to music?
Senator Leahy. Yes.
Ms. Rosen. Sorry. A quick question. Everything that Jack
said about the Internet being global and once it is licensed
applies for music as well. But people should remember that
there has actually never been a compulsory license that goes to
the core distribution right. Any compulsory licenses that have
ever been considered have always been in very limited areas of
public performance, which for most--for copyrighted works are
secondary or tertiary markets. When you talk about the
compulsory license in this instance or the one that Mr. Barry
or some others have suggested, you are talking about the core
distribution right of a reproduction, and that would be a
disaster.
Senator Leahy. Thank you.
Chairman Hatch. We are going to keep the record open for
questions by members of the Committee through Friday. But we
are running out of time.
Senator Feinstein?
Senator Feinstein. Well, thanks very much, Mr. Chairman.
I think Mr. Valenti's opening remarks really in a sense
were a tribute to copyright and intellectual property laws,
which have really allowed this industry, all of it--its many
complex parts--to grow and prosper and really in a sense to
become the envy of the world.
For my State, California, Napster was in my backyard--well,
I guess San Mateo County--the movie industry is premier, and
much of the foundation of intellectual property industries
emerge in California. So obviously their protection is very
important to me.
It is also important that consumers are able to utilize new
technology and do it in a way that protects these copyright
laws.
Now, since our last hearing, Mr. Barry, you went through a
court case. The world is different today than it was at our
last hearing. And I want to ask this question: I think you
still do advocate for compulsory licenses. Is that correct?
Mr. Barry. I think that whenever there is a feeling in the
marketplace--and that is my contention, that there is a feeling
in the marketplace here--then Congress has to look at it. And
that is one of the options, I believe, yes.
Senator Feinstein. Well, have you formulated a pricing
structure that would adequately compensate artists, record
labels, et cetera?
Mr. Barry. What we are trying to do here today, Senator, is
identify through all the varying views that are here on the
panel and some that are in the room but not here on the panel,
such as the publishers--
Senator Feinstein. Could you move your mike closer?
Mr. Barry. Oh, sorry.
Senator Feinstein. I want to hear the fine points.
Mr. Barry. What we are trying to do here, Senator--and
obviously we are at the very early stages of trying to figure
out whether this marketplace is working--is to define some of
the rights that are involved when one goes to have a full
catalogue of music available.
I will give you an example. MP3.com, which is also a
company that is located in California, in San Diego, has paid
over $160 million in settlement fees with respect to sound
recordings with the major labels, and yet the service
associated with that is not available now. And that is because
they don't have publishing rights. They don't have publishing
rights to the catalogue that is associated with the sound
recordings.
And I think that if I had to name one place where there is
really an issue in the marketplace, it is with respect to this
complexity of licensing. I asked earlier--and I don't believe I
have had an answer yet--whether music publishing rights are
included within the rights that MusicNet is going to provide.
And I would suggest to you, Senator, that getting a license
from MusicNet without publishing rights is not going to enable
anyone to actually have the kind of service that we are all
saying the consumer should have. And so Mr. Parsons might have
an answer to that right now.
Senator Feinstein. Mr. Parsons, do you want to respond to
that?
Mr. Parsons. Well, yes. As I indicated earlier, on the
MusicNet, the full complement of rights to enable the streaming
or downloading of our catalogues--EMI's, Warner Music, BMG's--
is included in the license that we gave to MusicNet. But,
Senator, I just think--you know, my colleague Mr. Valenti
started this hearing off by saying, you know, intellectual
property rights are private property rights. And when one
thinks about a compulsory license, the hurdle that one should
have to clear to say that I am going to abrogate the rights of
an owner of property to determine how that property is used
because there is some broader, overriding public interest
applied to this space, yes, it is complicated--not that it
can't be done because we just did it. It is complicated to sort
through the maze of rights and to make sure the property owners
are appropriately contacted and consented and paid.
But it certainly doesn't rise to the level of, you know,
U.S. Congress intervention to say that it is so important that
people have access to the music in this fashion that we are
going to override the rights of the copyright owners, whoever
they may be, and provide it on some compulsory basis.
That is why I was saying to Senator Hatch earlier, let the
marketplace work. It is working and we are getting there, but
the theory of Napster--and I heard the answer to Senator Leahy.
It sounded to me like, you know, a thief who gets caught and
then tells the judge, well, look, I am prepared to go straight
and I will go to a trade school or whatever, but in the
meantime, I need to continue to steal because it is all I know.
I don't think that is a legitimate approach to this. I think
the approach has to be to respect the rights of the people who
own the property and to work through the complexities. I mean,
that is what we are trying to do, and that is what we said, if
Napster can do it that way, they, too, will be entitled to a
license from MusicNet, which, as I say, is the full complement
of rights that you need to stream and download the music that
our companies offer.
Senator Feinstein. Thank you. I would like to ask--
Mr. Barry. Senator, I--
Senator Feinstein. Would you like to respond to that, Mr.
Barry?
Mr. Barry. Well, you had asked me the question about
whether we had a pricing mechanism in place.
Senator Feinstein. Correct.
Mr. Barry. And the answer is that I think that we are just
raising the issue. This is clearly something that nobody here
favors in the sense of we all would like the marketplace to
work. We are all committed to that.
But as Mr. Henley said, as a last resort we have to look at
this. And you can look around the Internet today, and there
isn't any service that has a comprehensive license to both
sound recording and publishing to make that available to
consumers. There is no Internet equivalent of ASCAP. There is
no Internet equivalent of any clearance organization. And so
that is the point I am raising.
Senator Feinstein. Yes. I guess what Mr. Parsons is saying
is, if you believe that this is private property, then it is up
to you to work out the individual agreements to be able to put
up that private property.
I would like to ask Ken Berry a question, if I could.
Napster has said many times that no one will talk to them about
licensing, and they publicly stated that they would offer $1
billion over 5 years to the record labels if they could get
licenses.
I would like to ask you: Are you willing to give Napster a
license?
Mr. Berry. First of all, we have had conversations, as Hank
knows, about the prospect of having a license in the future
when the legitimate business model is established. And, of
course, it has not been at this time and is not expected in the
immediate future. So we await the outcome of the new commercial
model, and we will definitely enter into serious conversations
about a license at that time.
But in the offer of the $1 billion, which was a very large
number in most people's terms understand, we believe our
business is migrating to the Internet, and that is where our
music will be sold. And our investments in music come to many
billions of dollars, just as EMI, let alone my competitors,
whether they are independents or other majors in this industry,
and to try and take a license to basically take over the music
space on the Internet, the amount of money involved is very,
very significant to compensate the music companies, which is
why there is such a negative response to it.
But we are interested in talking about a license, as I
heard already my colleague on the left, but a lot of companies
have, as you say, gone straight and actually offered legitimate
services and not tried to offer our content for free. And there
is an issue about the fact that Napster is clearly offering our
content for free even now, as was identified, Lenny Kravitz
being one of our recordings. And this is a very serious problem
for us, and we think it is very unfair on the people running
legitimate models right now, trying to make a business. How can
they do so in this climate where music is being given away for
free?
Senator Feinstein. Would Napster like to respond to that,
Mr. Barry?
Mr. Barry. Just one footnote, Senator. In the press
briefing where we described our economic offer and the various
economic offers we have been making over the last 9 months to
the labels, we made it very clear that in the new Napster
service there will not be the ability to export a file from a
person's PC. So there will be limitations on burning. There
will be limitations on exporting to a Rio device. And we told
all of the record labels that there would be fidelity
limitations. So you would have a media limitation and a
fidelity limitation. So I just want to make clear for the
record that was the context in which that offer was made.
And I would say further that, with respect to a possible
industry-wide licensing arrangement, we would continue to make
those sorts of limitations, because we actually believe that
Napster is a promotional service. Most people use it to listen
to, sample music before they go out and buy it. And so,
therefore, these limitations on burning and limitations on
export were things that we clearly stated publicly at the same
time--the same day, actually, that we made that offer.
Chairman Hatch. Senator, could we turn to Senator Schumer
at this time?
Senator Feinstein. Thank you, Mr. Chairman.
Chairman Hatch. We are running out of time, and I don't
want to completely shortchange the second panel.
Senator Schumer. Well, thank you, Mr. Chairman. I want to
thank you and all of our diverse witnesses. Every time we have
a hearing, we realize how complicated all of this is. I just
want to say I start out from two places that a year ago I
thought might be contradictory. I don't think they are now. One
is that copyright must be protected. You just can't take
people's stuff and give it away for free, no matter what your
rationale is. Everyone would like to have for free. That is not
how we work. And it is not fair, it is not right. And if we
started doing that here, we could start--you know, it is music,
it is an intangible good, but you might want to do the same
thing in so many other places. But, second--and, again, I don't
think these are contradictory--that digital music has to be
made widely available on the Internet, because the Internet has
brought so many new possibilities that it is exciting. And the
question is how you protect the intellectual property, the
copyright, and still use technology to give all these new
advantages that people have.
For me, it comes down sort of personally. Being from New
York, we have lots of people who are artists, who are would-be
artists--I guess no one thinks they are a would-be artist--
undiscovered artists, and lots of companies that do a great job
distributing music. I am proud that New York is the music
capital.
On the other hand, you know, my 16-year-old daughter banged
on my door one morning and said, ``Dad, you got to pass a
constitutional amendment to protect Napster.'' The first
political statement out of her mouth after all these years.
[Laughter.]
Senator Schumer. And basically what she did for me, she
gave me the best birthday gift I ever received, which was she
asked me my 16 favorite songs, she put them on one CD--this is
a year ago so it was OK then, I guess--including songs that I
had been in search of. When I was a kid, I had a crush on Rene
Strasberg and the song ``Don't Walk Away Renee'' came out by
the Left Banke, and I have been trying for 20 years to get that
song on my--
Senator Leahy. Well, there is a well-known song if there
ever was one.
Senator Schumer. It is a great song.
[Laughter.]
Senator Schumer. I won't sing it for you, Mr. Chairman.
Chairman Hatch. Let's not knock our artists.
Senator Schumer. I then went and asked my daughter to ask
her friends--Mr. Henley is saying that was a junkie song, I
think, to Ms. Morissette there.
Mr. Henley. No. With all due respect, Senator, the word
``Don't'' is not in the title of that song.
Senator Schumer. Oh, ``Walk Away Renee.''
Mr. Henley. Thank you.
[Laughter.]
Senator Schumer. Well, let me say this to you, sir--
Senator Leahy. That ruins the whole story.
Senator Schumer. I didn't want Renee to walk away, but she
did.
[Laughter.]
Senator Schumer. She was only going out with college guys,
you know.
In any case--enough of this. In any case, I went and asked
my daughter, I asked her, ``Would you''--I tried to ask her
about the issue of intellectual property, which I believe in.
And I said, ``Would you be willing to pay for this?'' I would
be willing to pay $50 for that album, which is more than
probably anyone would envision me being charged for it. And she
said yes.
And then she on her own went and asked 15 of her friends in
high school would they be willing to pay for all of this, and
they said yes.
So intellectually we are no longer at a conundrum here. I
think everybody sort of agrees that intellectual property must
be kept and protected, and at the same time the new
technologies must be expanded. And I think after hearing from
Mr. Kearby and others, Mr. Parsons, Mr. Barry and Mr. Berry,
that technology is there.
And so the question is: How do we get there? And I am not
sure, being a novice at this, that what we are not hearing here
is everyone agrees to the place we ought to get, but everyone
is sort of standing in line, elbowing, they want to be the one
to get there first. And that is probably true of every person
at this table.
And, I don't know, it is hard for us who are not the
technological experts to figure out who is right and who is
wrong in all of that. And so I have a few specific questions,
but I would ask the witnesses to think about this general
question. Am I wrong in that assumption? Am I wrong in the
assumption that we all want to get to the same place and each
of us has a different way?
And then you have two conflicting things here. The record
companies, whether the big ones like Mr. Parsons and Mr. Berry
come from, or the littler ones like Mr. Gottlieb comes from,
have something that all the rest of you folks need. They have
the right to do with the music what they want.
You have the other folks, the technological people have
copyrights and patents on their technology, but my guess is
that there are other people who will come up with other patents
on that, whereas nobody else will have the copyright on ``Don't
Walk Away Renee'' and other--I mean, ``Walk Away Renee'' and
other greater songs. So that is a conundrum as well.
So I guess my general question to everybody here--and then
I have three specific ones that I am going to ask, too, so I
can get answers to those. But my general question I would ask
to anyone to respond to, do we all think we will end up in the
same place? And is this just a discussion as to who is doing
it? Or is it beyond that?
And then my specifics are as follows: one to Mr. Barry of
Napster, and that is, you know, you want people to make deals
with you, and yet it seems to, I guess, somebody who is trying
to be as objective about this that you are still allowing
people to download copyright-protected materials from Napster
despite court orders, despite everything else. And that would
say to me, if I were lining up to make a deal with you, I don't
think I should. And so I would like you to answer that
specifically. I would like to know how many people have been
knocked off the system compared to how many people who are
still on the system. Because if you do believe in intellectual
property, that is a sine qua non, and I don't think you would
have the right--I would like to see the technology that you
have started prevail. But if you are doing that, maybe you
shouldn't be the one sitting at the table making the deal.
Mr. Barry. I understand, Senator.
Senator Schumer. And the second question, a specific--and
then I will let everybody answer all of these in the interest
of time--is to Mr. Parsons and Mr. Berry. I think the model
that you guys have put together is very interesting and could
work. Two of your friendly competitors have a different model.
How do those come together? And then, second, what do you do in
terms of contracts with smaller companies like Mr. Gottlieb's?
Do they get the same terms if they have produced and put the
sweat and equity into getting a song out as the larger
companies, or are they going to get a different type of deal
that is not as advisable? Because I think that is important as
well.
In other words, let's assume the Big Five, it is, come
together. What happens to the 17 percent of the music that is--
was it 17? Or some nice, significant percentage--that is not
one of the big companies in terms of how they relate to this
new technology that is going to do the music.
So with that I would ask Mr. Hank Barry to answer my first
question, Mr. Parsons and Mr. Berry to answer my second
question, and then all of you to answer the general question
that I asked, or anyone who wants to. Mr. Barry?
Thank you for your indulgence, Mr. Chairman.
Mr. Barry. I will start with the general question, which is
I do think that we all see the tremendous benefit of this and
we are all going to the same place. For me, the fundamental
question is whether the marketplace is going to function
efficiently to get us there. And in my remarks earlier, I gave
some reasons why I thought it was not. Obviously other people
have a different view. But that is my answer to the first
question.
With respect to the second question--and I detailed our
compliance efforts earlier, Senator; you might not have been
here. But let me say generally that you have to think about how
the Napster architecture works. We don't host any files. You
can't download a file from Napster. You download a file from
another person who is using the system at the same time.
Napster is a directory, an index, with community around it with
respect to the other uses who are on the system at the same
time you are logged on. So it is essentially a real-time search
engine. And the challenge there--which is recognized by the
Ninth Circuit Court. They said this is not an exact science.
The challenge that we have in complying with the district
court's injunction is to identify all the files as people are
logging them in, block the ones that should be blocked, and in
general, as I said earlier, when people are not acting
appropriately with respect to the rules of the system, removing
those people from the system.
Under our previous notices, we blocked over 750,000 people
from participating on the system under our DMCA notice regime.
And as I said earlier, we have blocked 1.6 million files, which
represent about 300,000 individual songs. And I did say
earlier, Senator, that I don't think it is good enough. It is
an iterative process, and we are working on it every day to
make it better.
Senator Schumer. Has it interfered with the functioning of
Napster on the street?
Mr. Barry. It has slowed down performance--
Senator Schumer. I don't hear that it has.
Mr. Barry. Well, our testing says that it has.
Senator Schumer. Does anyone disagree with that?
Mr. Barry. Well, people can disagree. The fundamental point
that you make, though, is that things are still available
through the service that shouldn't be there, and I agree with
that. And certainly the court anticipated that when it
appointed last week this independent technical advisor who is
going to advise the court about whether we are doing all the
things that are possible in order to comply with the
injunction.
So I think we are in agreement on the goal. The question is
what is the way to get there.
Senator Schumer. Does any single person want to just answer
what Mr. Barry said? Ms. Rosen?
Ms. Rosen. I don't think I have to get into it much, except
that my best analogy that came immediately to mind when he said
that was when my son is hitting my daughter and she is crying,
and then I tell him to stop, he says, ``But, Mom, I'm not
hitting her as hard anymore, so I don't want to stop.''
It is sort of irrelevant, the degrees of compliance. You
are either compliant or you are not.
Mr. Barry. Yes, I think that is true, and if I could just
point to a chart for a moment here with respect to our activity
and blocking files on the system over the last 4 weeks, people
can see that we have gone from a regime where people had access
to about 375 million files to a regime where they have access
to approximately 100 million. Now, that may not seem a lot, and
if you can find the file that you want, it doesn't matter to
you. And we understand that. And so we are going to do a better
job, and I take Ms. Rosen's point.
Senator Schumer. The second question to Mr. Parsons and Mr.
Berry.
Mr. Parsons. Very quickly, because I am aware of time,
also. All of us in the business believe that in order for a
legitimate service to find real success in the consumer
marketplace, you have to have access to all the music, so that
eventually I am sure there will be two, four--I don't know how
many--six services up that everyone licenses, but that have
different personalities and different other features but have
access to all the music. But because this is America and
because willing buyers and willing sellers in the normal course
of commerce find each other and negotiate the terms under which
they will do business, it just takes some time to assemble all
that music in one place.
So we started MusicNet with three of the majors. There are
obviously two majors who are not in yet, and a bunch of
independents, but our objective is to get them all into the
boat on this platform. There will be others. Universal and Sony
are working now on something called Duet. They haven't quite
launched it yet, but that will be a different technological
platform. And their objective will be to get everybody in that
boat so that we can have competition around presenting music
online to consumers in an easy, affordable, value-added way;
i.e., you come to one place, you can get anything you want.
With respect to your second question, clearly I indicated
earlier that MusicNet will be out seeking to license not only
the two majors but the independents. The terms of those
licenses, however, will be negotiated in traditional, free-
market, American commerce fashion; i.e., you have got something
I want, I have got something you want, let's sit down and talk
about how we come together around that.
Chairman Hatch. OK. With that, I am going to have to cut it
off, because we have one more questioner, and then we are going
to have to go to last panel. We are really out of time.
Senator Cantwell. Thank you, Chairman Hatch and Senator
Leahy, for calling this important hearing. Obviously the
delivery of online music is testing how the marketplace and law
can work together to bring new entertainment services to the
many people who are here listening today.
Obviously this whole industry is quite young, and there is
not a lot of history guiding us in this process. We can learn
from the past when new mediums were developed, like radio or
television, that oftentimes those industries were rocked and
ultimately revolutionized. And I think that is what we are
seeing today.
Legitimate, secure online music services are good from the
consumer, and they are good for the economy. And the testimony
that you have had today has tried to explain each of your
vision on how we get there. Obviously artists, as Mr. Henley
talked about, want more flexibility in the current business
models. The music industry execs who have put time and energy
into the marketing of those products want to make sure that
investment is ultimately protected. The security solution
providers, as Mr. Kearby is one of, have put time and energy
into new technology and think that the technology is there and
ready and want to see that technology is used to delivery those
new services. And consumers rightly should benefit from not
only the new technology, but new business models.
So my question is, as you all now have been thrown into
this online music sandbox and are being required to play
together, if you will, our choices seem to be: one, as the
somewhat supervising adults, to go back and say work it out;
the Chairman articulated a second alternative, which would be
to have, you know, this Committee continue to be an oversight
and pressure point on this discussion; I don't know if I quite
heard him right, but I think he mentioned weekly or every
couple weeks a hearing, which seems quite extraordinary; or the
possibility of legislation.
Now, by comparison, I would have to say to my colleagues,
when I think about the other new economy challenges of
protecting personal privacy, e-commerce taxation, I would
actually say that by comparison to those, there has been a lot
of progress here. Now, maybe the demand for music is more
incentive than the unknowing consumer whose personal privacy
has been eroded. But the issues seem to me to be those three
choices.
So I would like to ask at least a couple of the panelists,
others if they want to join in: How should we measure this
progress in a real timeline? Is it possible in the next 6
months to see full catalogues online in a business model that
consumers would accept? And I guess what I would like to do is
ask Mr. Henley and Mr. Hank Barry and Mr. Kearby and Ms. Rosen
specifically to respond to this. Is that the bottom line that
we are negotiating? Mr. Henley, you may say not--even if we get
full catalogues online, the existing model isn't flexible
enough for us. I mean, artists would like to have the
opportunity to have their music in certain--or, Ms. Morissette,
you have obviously done this already, so you have seen the
benefit of having some music out there even in a timed-out
version or what have you. That is good for your overall
promotion.
So are we going to see something in the next 6 months that
will satisfy the consumers and the business? Are we talking
about a model that is in the very, very near term going to
provide that kind of benefit to consumers and the industry? Or
are we talking about one of the other two choices of continued
hearings or possible legislation?
Mr. Kearby. Well, I would like to start. From Liquid
Audio's perspective, when Chairman Hatch asked earlier, Does
MusicNet help or hurt?, I guess the real answer to that
question--and I hadn't thought of it at the time--was, well, I
guess it depends on the licensing terms. And is the playing
field level for distributor vis-a-vis MusicNet? Are we going to
get the same pricing, therefore, be able to offer that pricing
to our channels that MusicNet gets and offers to its channels?
Presuming that the answer is yes and presuming that the
publishing issues are taken care of, then my answer is yes, we
can have a system up and running in 6 months. We always say we
are the tool makers, not the rulemakers. We will find out what
the rules are relative to output to portable devices and CDs.
But, yes, a system can be put into play in 6 months that
protects property and has a subscription service. The real
issue is: What are the pricing concerns and what, if any, will
the consumers, you know, require of the marketplace relative to
those pricing terms?
Ms. Rosen. You know, I am an optimist but I am also a free-
marketeer, and I think that the question that you ask is a good
one. But it is also what test will this be measured by. I don't
think that this Congress or this Committee wants to be in a
position where people are essentially forced to go into
businesses that are not going to be profitable, that are going
to be money-losing, that are going to be cannibalizing. I think
people are trying to be thoughtful about that.
As we have said before, people are having a lot of trouble
making successful business models on the Internet and other
industries. So these are somewhat time-consuming.
I think the test has already actually been passed. There
have been a lot of market trials and a lot of experimentation,
and the intent is serious. I am optimistic that we have long
passed the time in the music business where people thought that
this was a ``what if'' proposition as opposed to a ``when''
proposition. This is happening, if only because a more
ubiquitous environment of legitimate music available, not
succeeding, cedes the territory to the pirates, and we are not
willing to do that because there is no upside to anybody to do
that. We want to sell music. That is why we take risks on
artists. That is our business. And so this is a place where we
are going to do that.
Senator Cantwell. Mr. Henley or Mr. Barry?
Mr. Henley. Well, I hate to keep going back to this, but
the last 15 or 20 speakers have crystallized my point about the
artist being left out of this equation. As Alanis and I sit
here, there is a ping-pong game going back and forth across our
heads about business models on the Internet, when, in fact, we
don't know how our intellectual property is going to be
protected. We are already in disputes with record companies
about abuses of our copyrights and our intellectual property,
and the Internet gives a whole new array of ways in which our
copyrights and our intellectual property can be exploited. So
we need some statutory protection. We need some explanations.
We need some answers about how we are going to get fairly
compensated in this new Internet world from all the other
people who are sitting here.
Senator Cantwell. But I also heard you say flexibility. In
some instances, you said you would be willing to forego those
royalties at your own discretion. You are after flexibility--
Mr. Henley. I didn't say I would be willing to do that. I
said if--
[Laughter.]
Mr. Henley. If an artist so chooses. There are many people
on Napster right now who want them to distribute their music
free of charge, and that is their prerogative. Having been in
this business about 38 years, I don't see it that way. I don't
need the promotion. I am not a new artist. If other people want
to do that, that is fine with me. But I don't necessarily want
to do that. But, you know, people are free to do what--if they
want to give their music away, that is their prerogative, but I
don't--I didn't mean to imply that I was willing to do that.
Senator Cantwell. So if the security solution and the
labels are saying in 6 months we think we will have catalogues
available, we think there will be business models that
consumers can access--because there is a lot, obviously, online
now. You are still saying you have concerns about the artist
compensation that you wish this Committee would address.
Mr. Henley. Six months sounds like a very short time to me,
and we still don't know how this money is going to be collected
and how it is going to be distributed to artists. And, again,
we are unprotected.
Mary Beth Peters, who is the head of the U.S. Copyright
Office, has said that in the world of copyright, American
artists are the most unprotected on the planet. And so we have
grave concerns about how we are going to be compensated fairly
in this brave new world of Internet. And we are not getting
answers to those questions.
Ms. Morissette. And I believe in the building of the new
models is where we want to have our voices heard, because there
is no question that not only are the new models going to be
needed to be established, which I am hoping is going to be done
with the three groups that I talked about earlier, but also it
would be remiss of us not to reference, if nothing else, what
the past models have looked like. And, you know, the dawn of
this new digital era has shone light on all of it, which is
part of what is exciting.
Chairman Hatch. Well, let me interrupt here. I have to say
that I am challenging all of you that we are going to have a
lot more hearings if your interests aren't served, because
without you, without the creators and the artists, we wouldn't
have anything. Without the consumers, we wouldn't have
anything. Without the distribution channels, we wouldn't have
anything. And without the publishers, we wouldn't have
anything.
Every one of you is critical, so I am just suggesting to
those of you who make and build these business plans that you
make sure that everybody here is considered. And between you
and me, I would like it to be done without the almighty hand of
the Federal Government. I think it can be done. I agree with
you, Mr. Parsons, that it ought to be done on a business basis.
It does take time, but I hope that you can get it done more
quickly.
Let me just say before we let you all go--and I apologize
to you for being so long--we will keep the record open for
questions. We hope you will answer these questions because this
is an important hearing, and the questions that we ask are
going to be very, very important with regard to what happens in
the future.
I want to add that over the years I have heard from record
companies, research companies, artists, and technology
companies, and I want to see if there is anything we can do in
Congress to help all of these parties in solving some of these
problems, especially a number of important policy issues that,
of course, have been raised by all of you. I think they are
worthy, and they are ripe for consideration for this Committee.
Many of these center on enhanced protections for copyright
while improving the respect we have for artists. Now, the
issues that I think both Senator Leahy and I would like to
throw out to you as a consideration for you to help us with are
as follows--or at least these are some of them:
Number one, the public policy of limiting artists' personal
service contracts. This is the issue raised in the Courtney
Love litigation under California law.
Number two, how we can ensure that the current fair-use
rights we enjoy, such as making personal copies of a CD on your
own hard drive or in your home, could co-exist with digital
rights protection technologies.
Number three, how we can provide for enhanced technological
protections such as the recognition of watermark technology
used by copyright owners when they provide their works over the
Internet.
Number four, how we can resolve these work-for-hire
problems and issues that have been raised here today before we
get to acrimonious litigation between the artists and the
record labels.
Number five, the collection and accounting of digital
royalty rights, which appears to be a big problem here. We have
to resolve that.
Number six, one issue of fairness that I have heard lots
about, which involves the ownership of Internet domain names
that correspond to the personal names of artists. Why should
people steal artists' names and then want to charge you to use
your own name? That is ridiculous, as far as I am concerned,
but I would like your advice on that. I would like to hear from
all the interested parties how we can help resolve some of
these issues and further the creativity of our society.
Well, let me just say this has been a marvelous panel, and
I know a lot of you have really sacrificed to be here. It means
a lot to us, and I personally apologize for going so long, and
I apologize to the next panel for it going so long. But it has
been important, and we will continue to hold hearings that may
elucidate what needs to be talked about in these areas.
With that, we will recess--
Senator Leahy. May I just--
Chairman Hatch. Senator Leahy?
Senator Leahy. I just want to say, Mr. Chairman, there are
a number of these important issues. I think what Mr. Kearby
said struck me. He wants to make the tools, not the rules, to
paraphrase what he said. And I am not sure any of us on this
panel would be prepared to, even if we could pass all the laws
we wanted today in a fast-changing world like this, who knows
just what to do. I don't have any doubt that when you speak
about the tools, these can be done. Whatever kind of business
model you want, any way of distribution you can do. And I
suspect that we are going to find more and more consumer uses
of that, whether it is down to something like this monitor and
this mouse carrying all your records and everything else.
But Mr. Henley points out, I think very well, that it is
one thing if you have a starting artist who wants to give away
as a promotion music, that is fine. They do it in a lot of
things. They do it with ice cream. Ben and Jerry's did it when
they first started out. But then they became a multi-million-
dollar business once people got used to it. Even well-
established artists, Mr. Henley and Ms. Morissette, if they
have a new album out, maybe they want to direct market it,
assuming they don't have contractual obligations; otherwise,
they may want to give it away. Well, that should be their
choice. But otherwise they should always be compensated. I
mean, that is the thing we have to find out.
I think there is great genius in Napster and MP3 and all
the other technical applications for the Internet that have
been done.
As one who feels very strongly about our copyright laws, as
one who looks even back to the beginning of this country and
the Constitution when we talk about such issues, I want to make
sure artists are protected. Otherwise, we are not going to have
anything in the future. My friend from Utah has raised some
points that are going to open up in some ways a Pandora's box,
but I think it is not all that bad that we open it.
Chairman Hatch. Thank you, Senator.
With that, we want to thank you. We are going to take a
five minute-recess. We would like to come out and shake hands
with you while we set up the other panel.
[The Committee stood in recess from 12:55 p.m. to 1:06
p.m.]
Chairman Hatch. We are privileged on this next panel to
have Congressman Chris Cannon, my dear colleague from Utah who
is very familiar with Internet matters.
Then we will hear from Robin Richards, who is President of
MP3.com, a leading Internet music distributor.
Ed Murphy is President and CEO of the National Music
Publishers' Association.
Mike Farrace is Senior Vice President at Tower Records, a
leading online and brick-and-mortar music retailer.
Sally Greenberg is Senior Product Counsel of Consumers
Union.
Finally, Edmund Fish is President of the MetaTrust Utility
Division of InterTrust Technologies, a provider of
technological protections for copyright content online.
We look forward to your presentations today. We are really
out of time, and I don't want to short-change you, but I would
like you to summarize as best you can. If you can do it in less
than 5 minutes, we would appreciate it.
We are going to reserve questions on the part of the
Committee so that we can submit those in writing to you because
this panel, in particular, should give us the best you can in
writing as to what should be done about some of these issues.
So with that, we will turn to you, Mr. Cannon, and we
appreciate your patience in waiting. We appreciate all of you
for being patient in waiting this long.
STATEMENTS OF HON. CHRIS CANNON, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF UTAH
Representative Cannon. Mr. Chairman and Senator Leahy. I
thank you for the opportunity to offer some thoughts on the
issue of digital music and copyright.
Let me start off by saying that, as a conservative, I
believe in and respect property rights, whether the property in
question is physical, personal, or intellectual. Around the
globe, people read books written by American authors, watch
movies created by American directors, and listen to songs
performed by American artists, all because we as a Nation
respect creativity and provide a legal framework that
encourages it.
As such, I cannot and will not support anyone who profits
off other people's creativity or innovation and fails to
compensate the creator. However, facilitating public access to
creative works is also a key goal, one that in no way is
inconsistent with Congress providing incentives for creativity.
With that thought in mind, I would like to specifically address
the the marketplace for digital music distribution.
As you know, I have experience as a venture capitalist,
starting more than a decade ago with Utah-based Geneva Steel.
As e-commerce has taken hold, I have moved the focus of my
efforts to technology. Like most venture capitalists, I have
watched companies such as musicmaker.com and others that had
hoped to distribute music via the Internet go out of business.
To be sure, the failure of online music distribution to
take hold is in part rooted in the immaturity of the
marketplace and the lack of residential broadband access. But
there are also troubling signs that the recording industry may
have intentionally chosen not to license music to new entrants
to the marketplace.
It has been suggested by a number of observers that the
industry may be manipulating copyright law to deprive the
digital music market of competitive forces. If that charge is
proven, the copyright model that the recording labels have come
to rely upon will almost certainly require adjustment.
Any system of distribution that increases cost to
consumers, decreases choices, or distorts the market should be
thoroughly examined, particularly when that system exists only
as an outgrowth of rights to intellectual property conferred by
Congress.
We all know that Congress' historical approach to copyright
law has not been static. Copyright protection is not a black-
and-white issue. From player pianos to satellite television, we
have been willing to modify copyright to meet blockages in the
marketplace.
Whether the problem of digital music requires modification
has yet to be determined. But I would hope Congress would not
shy away from an examination of the issues merely because the
same copyright stakeholders who sought from us the sweeping
changes of the Digital Millennium Copyright Act 2 years ago now
demand the absolute rigidity of the status quo.
Clearly, everyone here would prefer a market-driven
solution to the issue. Yesterday's announcement regarding the
industry's new deal with RealNetworks is a step in the right
direction. However, the fact that the new distribution service
will be 60-percent owned by recording labels highlights the
potential dangers of vertical integration in the marketplace.
If anti-competitive practices are taking place, we must be
prepared to shift our paradigm regarding copyright licensing to
ensure a vibrant and competitive market for online music.
The Internet continues to bring us wonderful, new
developments, from entertainment to telemedicine. My hope is
that as a result of vigorous competition among digital media
companies, we will see a decline in the cost of digital music
and other information, and with it more options for artists and
consumers.
Mr. Chairman, thank you for holding this hearing. I look
forward to working with you and other members of this chamber
and my colleagues in the House to ensure an appropriate balance
between protection of intellectual property rights and the need
for efficient distribution of information in the digital world.
Thank you.
Chairman Hatch. Well, thank you, Mr. Cannon. We will excuse
you because we know you have other duties, but we appreciate
having the benefit of your experience.
Representative Cannon. Thank you.
Chairman Hatch. Mr. Richards, we will turn to you.
STATEMENT OF ROBIN RICHARDS, PRESIDENT, MP3.COM, INC.
Mr. Richards. Good afternoon, Mr. Chairman and Mr. Leahy.
Thank you for having me here today to testify.
I heard a lot of compelling issues, I heard a lot of
confusing issues. Some folks needed licenses and some folks
wanted better security. Artists wanted to be paid for their
works, as they rightfully should when they go on the Net, and
consumers want their music in digital formats.
I hear the new service that is coming; keyword: it is
coming. I look at MP3.com and I look at where we have been. I
am here to request your help because we have licenses. We have
security that the publishing companies and record companies
have approved. We have collection and accounting systems where
we can account for all of the listens. We have 28 million
users, according to Media Metric's newest survey. We pay
artists and writers every time somebody listens to their songs.
But the law is holding us back, and I am here to request
your help in clarifying existing copyright law to ensure that
the millions of Americans who have purchased CDs--and we need
to make sure we talk about purchased CDs versus free music on
the Internet or not purchased CDs--Americans who have purchased
CDs be allowed to access them online whenever and wherever they
want.
Last September, our company's CEO appeared before this
Committee and described our innovative online music service and
the disputes we found ourselves in with the music industry over
the virtual music lockers we had created for consumers so that
they could use the Internet to play back the CDs that they buy
from the brick-and-mortar and online retail establishments.
Since that time, MP3.com has paid tens of millions of
dollars to the five major record labels in the Harry Fox
Agency, which claims to represent over 25,000 music publishers.
Yet, after trying for nearly 6 months, we still aren't able to
provide our listeners with access to the nearly two-thirds of
the songs on CDs that they have purchased in the locker system.
So what is causing this problem and what can be done about
it? The problem we are facing in giving consumers access to
music online--and it is a problem that will be faced by every
Internet music provider, AOL Time Warner and Real, as well; we
are just a little bit ahead of them--is that there is no
practical way for us to get licenses from all the music
publishers with copyright ownership claims on the more than
900,000 songs in our digital library.
Dealing with this problem will require Congressional
action. But while Congress considers that action, we need a
more immediate fix--the establishment of a safe harbor under
the auspices of the Copyright Office that will allow businesses
like ours to begin bringing music consumers the benefits that
online technology offers, while protecting the interests of
copyright owners. There is no contractual dispute between Ed
and me; we are doing fine.
Obtaining licenses for every song would be a monumental
task even if the publishing information were readily available,
but it is not. Even for brand new CDs, it can take up to 2
months to track down who the publishers are. Mr. Murphy doesn't
have that information.
More importantly, because the Harry Fox Agency doesn't
represent every music publisher--the last estimate was 70
percent--and because many songs have several different
publishers--some of our new music, hip-hop and rap, can have 10
publishers on one song claiming a share of the rights there--it
appears that there is no practical way for us to get the
clearances we need through the marketplace.
Nobody wants to buy a CD with 15 songs and find out that
they can only listen to 4 or 5 of them, but that is the
situation we find ourselves in. The good news is that the
reproduction and distribution rights we need to get from the
publishers already are subject to statutory compulsory license
under Section 115 of the Copyright Act. It is here already.
The bad news is that its statutory licensing mechanism
which dates back nearly 100 years is badly out of date. Even
though Section 115 was amended in 1995 to extend it to certain
online activities, the Copyright Office has never established
royalty rates for a service like ours.
Moreover, the procedures that the Office traditionally has
used in granting statutory licenses are cumbersome, time-
consuming, and expensive. We actually would have to manually
search the Copyright Office's records for the names and
addresses of the copyright owners of each of the hundreds of
thousands of song titles on the CDs that our consumers have
purchased and stored online. And we would have to submit a
separate application to the Copyright Office for each song
whose current owners could not be located. That is thousands of
folks we can't find. Using this antiquated system for obtaining
licenses in a digital era would completely overwhelm the
Copyright Office, which typically handles only a few hundred
statutory license applications in a single year under 115.
In short, our problem in getting licenses isn't contractual
nature, and the free market can't help. Our problem is that the
marketplace and statutory licensing mechanisms that were
developed in the pre-digital era simply cannot handle the
demands of the Internet-fueled digital music economy.
People don't want to use the Internet to store and listen
to some of their music purchases. They want all of the music
they own to be available online to them, and this makes sense
and seems right. We have built a system that can allow people
to get the added value from their music purchases that the
Internet promises. We and other innovators who will follow
surely in our footsteps can make it possible for your children
to leave their CD collections safely at home when they go off
to college, or for you to listen to any of your CDs in your car
or on a hand-held device without toting around suitcases full
of silver discs.
To do these things, we need your help. Consumers need to
know exactly what they can do with their music purchases, not
just what they can't do. And we need Congress to reform and
modernize the Section 115 compulsory license. We urge you to
look to the model of the satellite and cable compulsory
licenses which permit copyright users to submit periodic
royalty payments into a pool that is then distributed among
copyright owner claimants. This model gives the users of
copyrighted works assurance that they have the protection of a
compulsory license even if they cannot identify in advance
every person who might claim an ownership interest in the works
being used.
But most importantly, we need for Congress to encourage the
Copyright Office to create an immediate safe harbor that will
allow companies like ours to have the protection of a
compulsory license while waiting for Congress and the Office to
establish rates and update the procedures for getting those
licenses.
We have shown that we are willing to pay copyright owners
for licenses. We ask your assistance in overcoming the
inadequacies of the current law and the system and marketplace
and the statutory mechanisms for obtaining those licenses so
that true competition can exist and music online can finally
emerge.
I thank you for your time.
[The prepared statement of Mr. Richards follows:]
Statement of Robin Richards, President, MP3.COM, INC.
Thank you for this opportunity to appear before you this morning.
My goal today is to describe to you some of the hurdles faced by the
developers of on-line music technologies in obtaining all of the
licenses that the record labels and music publishers insist are
necessary before consumers can take advantage of those technologies--
even technologies that simply allow consumers to listen to the CDs that
they purchase from brick and mortar and on-line retail establishments.
In particular, I want to focus on the problems that Internet-music
services such as ours face in meeting the music publishers' insistence
that we obtain licenses covering the incidental reproductions that are
inherent in enabling consumers to listen to their CDs in MP3 format.
And, finally, I will describe an easily implemented ``safe harbor''
proposal that would allow the purchasers of recorded music to begin
taking immediate advantage of some of the benefits that on-line music
technology offers them while government and industry attempt to resolve
larger questions regarding the application of the copyright law in the
digital environment.
I appear before you as part of a new industry--an industry that
represents a new economy in the throws of tumultuous transition. I
don't think it is an exaggeration to say its future--the jobs it
generates, the consumers it serves and the value it brings to artists
and creators--is greatly dependent upon your actions.
The Internet music industry is at a critical juncture. The Wall
Street Journal just three weeks ago put the problem in perspective. The
Journal said, and I quote: ``The music labels are asking lawmakers to
stay out of the digital-music fight while they roll out their own
competing online services, and, so far, it is working.'' The article
went on to say that Congress is not ready to intervene. ``Instead,''
the article said, ``lawmakers plan to keep a spotlight on the issue by
holding hearings and publicly urging the labels to move ahead quickly
on their own services.''
If this, indeed, is the position of Congress, then Congress is
doing what it has seldom done, taking the side of one segment of an
industry against another. This is not merely a matter of Congress
allowing the marketplace to work out its problems. The stark reality is
that Congress is taking the side of Goliaths against David.
Congressional inaction will, in fact, give the music industry
conglomerates that control both the sound recording copyright and the
copyright in the individual songs on those recordings time to snuff out
the competing small businesses attempting to emerge in the on-line
music service sector. There will be no competition, except among these
conglomerates themselves, who eventually will effectively control the
music industry from one end of the spectrum to the other.
If that sounds alarmist, it should. Let me explain why.
We are a premier, worldwide, Internet music service provider. We
give up-andcoming musicians access to a market and marketing that would
otherwise be closed to them. We assist new entrepreneurs to use the
management tools we've developed and refined to create their own
services and businesses. We team with radio stations to bring the music
of their local artists to on-line listeners. We provide unique music
and management services to retailers. We sell CDs, recommend and assist
with hardware and software, and provide free musical greeting cards. We
have a children's channel, too.
I want to focus on just one of our services. In January 2000, we
launched a service called My.MP3.com. My.MP3.com is a digital music
storage ``locker'' service that uses MP3 compression technology to
enable people to use Internet connected devices to listen to the CDs
that they purchase at their local record store or from on-line
retailers such as junglejeff.com and, in the near future,
towerrecords.com. Today, the primary playback device for My.MP3.com
users is their personal computer. But in the not too distant future,
consumers will be able to use My.MP3.com to access their purchased CD
collections using hand-held Internet-enabled devices and Internet-
connected devices installed in their cars.
The way the My.MP3.com service works is as follows: with respect to
a CD that a consumer already has purchased, the consumer takes the CD
and places it in the CDROM tray of his or her computer; our ``Beam-It''
software then ``reads'' the CD and, having established that it is a
real, legitimate CD release, adds the CD to a secure, personalized
``locker'' which can be accessed by that consumer--and only by that
consumer. With respect to CDs purchased on-line from one of our retail
partners, the consumer can use our ``Instant Listening'' software to
add a CD in MP3 format to his or her personal locker at the same time
the consumer pays one of our on-line retail partners for the CD,
thereby allowing access to the songs on the CD even before the disc is
physically delivered.
I want to emphasize that My.MP3.com differs from music file-sharing
or ``swapping'' services that allow users to download, save, and trade
music that they have not purchased. CDs can be accessed on My.MP3.com
only for a real-time listening experience, not for downloading and
copying. And before any CD can be accessed on our service that CD will
have been purchased twice: once by the listener and, as discussed
below, once by us.
As you know, not long after launching the My.MP3.com service, we
were sued for copyright infringement both by the major record labels
and by certain music publishers. The problem that we faced in trying to
defend ourselves against these lawsuits is that the Copyright Act never
anticipated the development of a technology such as My.MP3.com. While
Congress has made certain changes to the Copyright Act in effort to
address the use of digital transmission technology to deliver music to
consumers, these changes rightfully focused on concerns that ``on-
demand'' services that allowed consumers to choose what music they
received over the Internet could lead to the widespread production and
distribution of perfect ``pirate'' copies of sound recordings. Congress
never foresaw--or addressed--the development of an ``on-demand''
service such as My.MP3.com--a service that poses no piracy threat since
users can only ``demand'' music that they already have purchased and
only for the purpose of receiving what essentially is a ``private''
performance via real-time, streaming audio, without the ability to
duplicate, save, or share the transmissions.
Because Congress never foresaw the development of a personal
purchased music ``locker'' service like My.MP3.com, the door was left
open for record labels and music publishers to argue that My.MP3.com
was infringing their copyrights by allowing consumers to access their
purchased CDs in MP3 format. In particular, the copyright owners cited
the fact that instead of developing a system that requires consumers to
convert their own CDs into the MP3 format, My.MP3.com went out into the
marketplace and bought those same CDs and converted them for the
consumer. According to the record labels and music publishers, the act
of converting these CDs to MP3 format, so that consumers who had
separately purchased those same CDs could listen them to in that
format, constituted an act of infringement. In addition, the music
publishers took note of the fact that when a consumer listens to a song
from his or her My.MP3.com locker, that song is delivered to the
consumer by means of a ``streaming'' audio technology that
automatically makes a temporary or ``buffer'' copy of a portion of the
song as a necessary and integral part of the transmission process.
Although this buffer copy lasts only a few seconds and is eliminated
once the playback of the song begins, the music publishers asserted
that, in order to use this technology to playback a CD to a consumer
who has purchased that CD, My.MP3.com needed a separate license to make
and distribute copies of the song.
In response to these lawsuits, we voluntarily ``shut down'' the
My.MP3.com service and entered into settlement negotiations with
various copyright owners and their representatives. Shutting down our
service deprived consumers of the ability to access the music that they
had purchased and stored in their on-line lockers. There is a certain
irony in the fact that by forcing us to shut down our site, the record
labels and music publishers undoubtedly drove many of our customers to
services such as Napster, where they not only could find and play the
CDs that they already had bought, but also could (and probably did)
obtain access to a vast array of music selections without ever having
to purchase them.
In any event, although we disagreed with the interpretation of the
copyright law put forward by the record labels and publishers, our
desire to get our service back up and running led us to enter into very
costly agreements covering all of their claims. We have agreed to pay
for converting the CDs that we purchase into MP3 format. We have agreed
to pay for performing both the sound recordings and the songs contained
on those CDs.
And we even have agreed to pay the publishers for the temporary,
momentary ``buffer'' copy that automatically is made (and deleted) each
time someone listens to their own music out of their My.MP3.com locker.
Yet, today, nearly six months after signing the last of these
agreements, we haven't been able to obtain all of the licenses that the
copyright owners insist we must have before we can fully relaunch the
My.MP3.com service.
Despite what you may hear from some of the copyright owners, our
inability to obtain the necessary licenses is not merely a contractual
problem that can and will be solved by the marketplace. Rather, it is a
reflection of the fact that the existing marketplace and statutory
music licensing mechanisms--mechanisms that developed nearly 100 years
ago--simply do not work in the digital environment. As a matter of
public policy, it is incumbent on government to address the failure of
these marketplace and statutory mechanisms, both through immediate
remedial action and through a comprehensive reassessment of the
application of the copyright law to digital music technologies.
The particular marketplace and statutory failure that is currently
frustrating our ability to provide the My.MP3.com service to consumers
involves the licensing of the right to reproduce and distribute musical
compositions, by means of streaming MP3 transmissions, to consumers who
have bought the CDs on which those compositions appear. As I have
indicated, we do not agree that the essentially ``private''
performances facilitated by our technology should trigger any
additional copyright payments (over and above the compensation received
by copyright owners as a result of the purchase of their works by us
and by users of our service). Nonetheless, faced with a threatened
onslaught of litigation, we agreed to pay the music publishers for
making an ``incidental digital phonorecord delivery'' each time someone
uses the My.MP3.com service to listen to one of their own CDs.
Incidental digital phonorecord deliveries--IDPDs for short--are a
type of ``mechanical'' reproduction and distribution requiring licenses
from the owners of the publishing rights in the songs contained on a
CD. Our licensing agreement was made with the Harry Fox Agency (``HFA
''), an arm of the National Music Publishers Association that, for
nearly 75 years, has served as the music publishing industry's
principal clearinghouse for the administration of mechanical rights
licenses. According to its website, HFA issues licenses, collects and
distributes royalty payments, and audits the books and records of
licensees on behalf of more than 25,000 music publishers who, in turn,
represent the interests of over 150,000 songwriters.
When MP3.com and HFA announced their licensing agreement last
October, the joint press release proclaimed that the deal was intended
to give us licenses for over a million songs. And, in fact, we
immediately provided HFA with a list of over 900,000 song titles, along
with information identifying the CD on which each song appeared and the
name of the artist performing the song, exactly as was requested by
HFA. Six months later, however, HFA still has not been able to issue
licenses to us for nearly two-thirds of these songs.
We are not suggesting that HFA hasn't tried to clear the rights to
more songs. Rather, the problem appears to be that HFA's system for
issuing mechanical rights licenses for its publisher members simply
cannot handle the demands of the digital marketplace. In order for us
to obtain a license for a particular song from HFA, we not only have to
provide them with the song title, CD and artist, but we also have to
know who owns the publishing rights for the song. This information is
not readily available to the public and, to date, HFA has been unable
or unwilling to match our list of song titles with their database of
the songs published by their publisher-clients or to otherwise make
available to us the information that they insist be provided on each
license request.
Nor is this problem limited to the songs on ``older'' CDs. Making
newly released CDs available to consumers through the ``Instant
Listening'' option is one of the key attractions of the My.MP3.com
service--and is something that helps promote the sale of music. (For
example, before we shut down the My.MP3.com service, participating
retailers who offered their customers our Instant Listening option saw
their sales of new releases as much as double.) But even after settling
with the labels and publishers, we have been stymied in obtaining
licenses for the songs on newly issued CDs.
A good illustration (reflected in the attached Exhibit 1) is our
experience with the new Jennifer Lopez CD, ``J-Lo.'' Shortly after
Epic/Sony records released this CD, we attempted to make it available
on My.MP3.com. We had obtained the necessary rights from the record
labels with respect to the sound recording copyright and we had
agreements with ASCAP and BMI giving us the right to ``publicly
perform'' the songs on the CD. However, we couldn't get HFA to give us
the required (by them) license for any of the songs. When we asked HFA
why the songs on this new CD were not in their database and, thus,
licensable, we were told that HFA would be able to issue licenses
covering some--but not necessarily all--of the songs, but that it would
take 6-8 weeks after receipt of a license request for HFA to locate the
publishers associated with each song and get clearance. That's 6 to 8
weeks for just one CD. Consequently, we have been unable to offer
consumers who buy the J-Lo CD from one of our on-line retail partners
the opportunity to use ``Instant Listening'' to begin listening to
their purchase while waiting for the physical disc to be shipped to
their homes. Similarly, even after the customer has the actual CD in
hand, he or she cannot use the Beam It software to add the songs on the
CD to his or her My.MP3.com locker.
Apart from the problem of obtaining information matching up the
songs we want to play with the songs owned by publishers represented by
HFA, the difficulties we face in getting the My.MP3.com service back up
and running are exacerbated by the fact that HFA does not represent
every publisher and by the fact that the publishing rights in many, if
not most song titles are held by multiple owners in varying
percentages. For example, if you look at the liner notes of a ``rap''
CD--one of the most popular genres of music on-line, you will see as
many as ten publishers on any given song. Many of these publishers may
be impossible to locate or are otherwise unreachable.
Thus, even if HFA granted us licenses to the song catalogs of all
of the publishers that they represent, there will be songs in
My.MP3.com lockers for which we do not have clearance, or for which we
have only a partial clearance. Indeed, we have already encountered the
situation where, after activating a song in reliance on an HFA-issued
license, we received notice from a non-HFA affiliated publisher
claiming a partial ownership interest in the song and objecting to its
being made available on our service.
In short, there is no marketplace mechanism that will allow us to
fully relaunch My.MP3.com--thereby giving consumers access to all of
the songs on all of the CDs that they have purchased and stored on
their My.MP3.com lockers--without running a significant risk that we
will be sued by unknown publishers claiming ownership rights in some of
those songs.
Given the potential unavailability of marketplace licenses for any
number of songs, the obvious solution is the establishment of a
statutory licensing mechanism. And, in fact, nearly a hundred years
ago, Congress addressed concerns that the withholding of music licenses
could lead to the emergence of ``a great music monopoly'' by
establishing a statutory compulsory copyright license for anyone who
wants to reproduce and distribute copies of a previously license--which
originally applied to the reproduction and distributionof songs in
mechanical formats such as piano rolls--to cover the digital delivery
of reporductions of songs (including IDPDs), neither the statutory
procedures for invoking the compulsory license, nor the Copyright
Office's implementing regulations, have been adopted to meet the
demands of the on-line music environment.
A more detailed synopsis of the workings of the statutory
mechanical copyright license (currently codified in Section 115 of the
Copyright Act) is attached as Exhibit 2 to this testimony. Suffice it
to say here that before MP3.com could claim protection under the
statutory license, we would have to manually search the Copyright
Office's records for the names and addresses of the copyright owners of
every one of the nearly one million songs on the My.MP3.com service--a
task that in and of itself is economically and practically infeasible.
Moreover, for any song that does not have current ownership information
on file, MP3.com (or any other on-linemusic provider seeking a
comulsory license to a wide spectrum of musical works) would have to
file a separate compulsory license application. This means that if
current information is not available for merely a third of the million
songs searched--a not improbable result given the songwriters and
publishers are not required to notify the Copyright Office about
changes in the ownership of a son's publishing rights, or even to
register the copyright in the song in the first place--over 300,000
separate filings would have to be made at the Copyright Office. To put
the burden that this would create in some perspective, last year the
Copyright Office processed roughly 350 Section 115 license
applications.
Congree cannot stand idly by and simply hope that the gridlock
currently frustrating the relaunch of MY.MP3.com (which will frustrate
the introduction of other services as well) will resolve itself. Many
of you probably have seen the ad on television in which a weary
traveler stops at a remote establishment and is offered a choice of
every song ever recorded in every format. We are supposed to be shocked
at this unimaginable concept. But, given the advances in digital
technology, the idea that every piece of recorded music could be
available at the click of a mouse is not unimaginable at all. What does
remain unimaginable, however, is that anyone could ever track down all
of the copyright owners in every single song and get them to agree to
license terms. If the ``science fiction'' depicted in that ad is to
become ``science fact,'' government must deal decisively--and quickly--
with some fundamental questions regarding the on-line use of music.
For example, the rights implicated by the use of streaming audio
technology must be clarified. If streaming audio is being used simply
to perform a musical work, should the owners of the copyright in that
work have additional rights because the transmitting entity, in order
to render this performance, must first convert the work to MP3 format
and because the creation of temporary ``buffer'' copies are an inherent
part of the streaming process? We note that the Copyright Office has
initiated an inquiry to address this issue in response to petitions
filed by our company and by the RIAA. We hope the Office is able to
offer some much needed guidance. But if the Office is unable or
unwilling to do so, we urge Congress to step in and address these
matters in a prompt and timely fashion.
Once the scope of the rights implicated by the use of streaming
audio technology are clarified, Congress must ensure that there is a
practicable means of licensing those rights. In particular, if it is
determined that the right to convert DCs to MP3 format and/or to make
``buffer'' copies requires a license from the music publishers,
Congress must reform the Section 115 compulsory license so that it can
be utilized in the digital environment. We urge Congress to look to the
model of the satellite and cable compulsory licenses, which permit
copyright users to submit periodic royalty payments into a pool that is
then distributed amongst copyright owning claimants. This model gives
the users of copyrighted works assurance that they have the protection
of a compulsory license even if they cannot identify and locate every
person who might claim a copyright interest in the works begin used.
Finally, Congress needs to address the rights of music purchasers.
The public, quite frankly, is confused. At every turn the courts,
applying statutory provisions that never contemplated the services to
which they are being addressed, are telling consumers what they cannot
do. It is time for government to step in and clarify what someone who
purchases a CD can do. Specifically, Congress needs to address the
following questions:
(1) Can and should consumers be able to listen to their own
purchased CDs on any digital device? In 1992, Congress enacted the
Audio Home Recording Act, which gave consumers the right to copy CDs to
tapes. Now questions abound about consumers' use of the next generation
of technology, such as personal computers and MP3 players. Each new
device or format raises a new the issue of what the law allows
consumers to do with the music that they purchase.
It shouldn't take a separate act of Congress to permit consumers to
use a new gadget to listen to their music. Let's clarify copyright law
once and for all and give consumers the explicit right to convert their
music CDs into other digital formats for the purpose of enjoying their
purchases on any Internet-enabled device.
(2) Can and should music buyers be allowed to store their music in
places where they can most easily access it? One of the benefits
offered by digital technology is that it can make music fully portable.
No more lugging around CDs in order to have your music collection at
your fingertips. Imagine being able to access all of your music
purchases from your PDA, phone, car or wherever you happen to be. This
is becoming more of a reality every day as the world around us goes on-
line.
Unfortunately, the drafters of the Copyright Act never contemplated
this situation so it's subject to extensive legal debate. Music buyers
should be rewarded with the maximum use of the music that they purchase
with their hard-earned dollars. Let's ensure that they have the rights
to house their music purchases in places where they can best access it.
And let's encourage companies that build technologies to help them to
do this faster or better.
(3) Should CD buyers be subject to additional fees when they store
and playback their purchased music collections? If you buy a Ford, do
you expect you can drive it anywhere without having to pay Ford more
money? If you buy a paperback best seller, would you be surprised to be
billed more money based on where you read it? Can you think of any
product you purchase outright, only to be surprised with additional
charges in the future? In some instances, there could be fraud charges
for selling something and then hitting the unsuspecting purchaser with
more charges.
Yet this seems to be where we are headed with music CDs. Consumers
believe they are buying CDs, but copyright owners argue that, under
current law, payments can be imposed on a consumer's use of on-line
technologies that allow them to store and playback the music that they
have already bought. Is a consumer truly buying a CD or is it just a
lease they'll have to continue paying on forever? Music buyers have the
right to demand clarity in this area. Either CDs should be properly
labeled as a lease and future payments defined in advance, or consumers
should be only charged once no matter how or where they listen to their
music. This is essential for them to make informed buying choices.
Last year we supported a bill, the Music Owners' Listening Rights
Act, which addressed many of the questions posed above. We believe that
the approach taken in that legislation offered an appropriate
resolution of the rights of consumer with respect to the on-line
storage and playback of their purchased CDs. However, we are not wedded
to a single approach and look forward to working with Congress, the
Copyright Office, and the music industry to clarify and confirm the
rights of music consumers in the digital environment.
While we believe that there is a pressing need for quick action to
clarify and reform the process by which on-line uses of music are
licensed (to the extent licensing is necessary), we are not naive. We
recognize that the questions that we have posed will not be answered
overnight. Fortunately, there is a short-term solution available that
will give My.MP3.com and other similar on-line digital music providers
a ``safe harbor'' from infringement claims while protecting the music
publishers' interests. Although Congress extended the Section 115
compulsory license to ``IDPDs'' in 1995, the Copyright Office has never
adopted rules setting the rates or terms for invoking that license. In
fact, the Office has expressly adopted a rule ``the adoption of such
rates and terms.
It is simply not right for the benefits of a statutory compulsory
license enacted by Congress to be denied to on-line music providers
because no rates or terms have been established for its use. We urge
that you support our efforts to get the Copyright Office to establish a
safe harbor mechanism whereby on-line music users can, by filing
informational statements at the Copyright Office, obtain the protection
from liability that compulsory licensing is intended to give. These
statements would include the names of the songs for which protection is
sought, together with information regarding the name of the CD on which
the song appears, the artist performing the song, and the number of
times that the song has been ``delivered'' to consumers. Once rates and
terms have been established, royalty payments covering the activities
described can be made.
This safe harbor approach, if implemented, will immediately solve
the problem faced by MY.MP3.com and other on-line music providers: the
risk of being sued for using songs owned by publishers who cannot be
identified through the existing marketplace and statutory licensing
mechanisms. More importantly, it will allow consumers to take advantage
of innovative technologies that increase the value of their purchased
CDs through on-line storage and playback. Put simply, as soon as this
safe harbor approach is implemented, we will provide the required
information and by the next day we will be in a position to ``unlock''
all of the purchased music that users of the MY.MP3.com service have
stored on-line.
In conclusion, I would like to return to my opening comments. I
hope that the implication in the Wall Street Journal article was not
correct. I hope that it is no Congress' intention to allow the major
record labels and mu8sic publishing companies to buy time until they
drive others and us from this market, a market we created, a market we
nurtured, a market we served. Such inaction would have catastrophic
consequences, create an unholy alliance between government and the
conglomerates, and set a very bad precedent.
The confusion and uncertainty surrounding the application of
current copyright law to new digital music services helps only the
established music industry, which is seeking through vertical
integration to control not only the publishing and sound recording
rights, but also the avenues of music distribution. Innovative new
companies such as ours languish in regulatory limbo, while the
international music conglomerates have free reign and the time they
need to duplicate services that we invented, we innovated, we financed,
we marketed and we brought on line, with some of the technology we
revolutionized.
The real losers will be consumers, who will be denied competitive
choices they have every right to expect. Also lost to them will be the
spirit of innovation, invention and entrepreneurship that brought them
this new technology and new services in the first place. It is that
spirit that has served as the backbone of the American economy since
the days of our founding. Small business drives our economy, not any
looming international conglomerates that seek to control it.
I am grateful to the Committee for scheduling this hearing and
offering me the opportunity to describe the difficulties that we face
in bringing the benefits and value of on-line digital music storage and
playback to the purchasers of recorded music. I hope this hearing is
not a placeholder. I hope it does not end with Congress believing this
is enough while the others take advantage of our situation. I hope you
will use this hearing as a springboard to action and find the necessary
balance between the rights of copyright owners and the rights of
consumers.
Thank you.
INTERNET MUSIC AND THE SECTION 115 ``MECHANICAL'' LICENSE
I. THE SECTION 115 ``MECHANICAL'' LICENSE:
What is the ``mechanical'' license? The ``mechanical'' license,
which was first enacted in 1909 to address concerns about the possible
emergence of a ``great music monopoly,'' and which now can be found in
Section 115 of the Copyright Act, is a ``compulsory'' copyright license
that allows anyone to record and distribute their own ``cover'' version
of a previously published copyrighted ``nondramatic musical work''
(i.e., a song) without having to negotiate with the copyright owner for
the right to do so. The Section 115 license also applies when copies
are made and distributed of a pre-existing recording of a song;
however, in order to reproduce and distribute copies of a pre-existing
recording, an additional license (referred to as a ``master recording
license '') must be obtained from the record label that owns the
copyright in the pre-existing recording. The rate for the mechanical
license was initially set by Congress and is subject to periodic
revision by a Copyright Arbitration Royalty Panel.
How do you obtain a ``mechanical'' license? Section 115 provides
that, if the name and address of the copyright owner of a particular
song can be identified from the Copyright Office's records, anyone
wishing to exercise the statutory ``mechanical'' license to make and
distribute copies of that song must serve a ``notice of intent'' on the
copyright owner prior to distributing any copies; failure to serve this
notice before distributing copies bars reliance on the mechanical
license. The statute also requires the compulsory licensee to make
monthly royalty payments to the copyright owner (based on the number of
copies distributed) and to provide the copyright owner with CPA-
certified annual statements of account. The statute directs the
Copyright Office to prescribe, by regulation, the form, content, and
other requirements regarding service and certification of the initial
notice of intent and the monthly and annual statements.
If the name and/or address of the copyright owner cannot be
ascertained from the registration or other public records of the
Copyright Office, the notice of intent must be filed directly with the
Office; in such cases, however, no royalties will be due until such
time as the copyright owner has identified itself in the Office's
public records.
The Copyright Office has declined to promulgate ``official'' forms
for either the notice of intent or the royalty statements. Instead, the
Office has prescribed a set of rather detailed and burdensome filing
requirements. The most burdensome requirement is that a separate notice
of intent must be filed for each song for which the license is claimed.
In addition to information about the song itself, each notice must be
signed by an officer of the licensee, must contain detailed information
about the licensee (e.g., the names of all of the officers and
directors of any entity with a greater than 25% beneficial ownership
interest in the licensee), and must be served on the copyright owner by
registered or certified mail. For each notice that is filed with the
Copyright Office (because the name/address of the copyright owner is
not available), a $12 filing fee must be paid; another $8 fee must be
paid if the licensee wants to receive an acknowledgement of the filing
from the Office.
The role of the Harry Fox Agency. In practice, the statutory
mechanical license process is rarely, if ever, utilized. Instead,
mechanical rights licenses are granted (at the statutory royalty rate)
by the Harry Fox Agency (``HFA ''). According to its website (http://
www.nmpa.org/hfa.html), HFA represents more than 22,000 U.S. music
publishers. Songwriters (who are the original copyright owners of the
songs they compose) typically assign their copyright interests to
publishing companies. The process of applying to HFA for a mechanical
license requires a separate application for each song; the information
required by the application form includes the name(s) of the publishers
who hold an interest in the song for which the license is being sought
and the percentage ownership interest held by each publisher. The HFA
website indicates that it takes 4-8 weeks for a license to be granted
if the application is submitted manually. When a song is released for
the first time on CD, the labels and/or publishers don't always tell
HFA; consequently, when an application for a mechanical license is
filed for a new song, HFA may have to go back to the publisher for
authorization to grant the statutory license:
II. THE PROBLEM OF LICENSING THE ON-LINE DISTRIBUTION OF MUSIC
In 1995, Congress sought to clarify the application of the
``mechanical'' compulsory license to the on-line distribution of music
by amending Section 115 to specify that it covered digital transmission
services that make ``digital phonorecord deliveries.'' Notwithstanding
this amendment, the ability of consumers to utilize Internet-based
tools to enjoy recorded music continues to be frustrated by legal
uncertainty over the scope of the Section 115 compulsory license and by
the practical unmanageability of the current Section 115 process in an
Internet environment. Furthermore, when it comes to the distribution of
music on-line, neither the Harry Fox Agency nor the record labels can
be relied upon as a surrogate for the statutory licensing process.
Legal uncertainty. The 1995 amendments to Section 115 provided for
the establishment of royalty rates not only for ``digital phonorecord
deliveries,'' but also for ``incidental digital phonorecord
deliveries'' (``IDPDs ''). Unfortunately, the neither the Copyright Act
nor the Copyright Office's rules define what constitutes an ``IDPD.''
The music publishers argue that the temporary ``buffer'' or ``RAM''
copies typically made on a web-user's computer in order to receive a
``streamed'' real-time Internet performance of a song constitute IDPDs
for which the transmitting entity must obtain mechanical licenses--
separate from the licenses are needed to perform the song. Not
surprisingly, streaming audio services, including digital locker
services such as My.MP3.com disagree.
In addition to legal uncertainty as to what constitutes an IDPD,
there is legal uncertainty as how the Section 115 license is to be
applied with respect to IDPDs. The 1995 amendments directed the
Copyright Office to conduct a rulemaking to establish such rates and
terms; however, upon request of the songwriters and record companies,
the Office ``deferred'' the adoption of IDPDs rates and terms--a
decision that remains in effect today. The Office has never explained
the meaning of its ``deferral'' decision. For example, if during the
deferral period a transmission service does not file a ``notice of
intent'' before making IDPDs of a particular song, does the service
lose any right to rely on the mechanical compulsory license after the
deferral is lifted? Are transmission services immune from liability for
IDPDs made during the deferral period or will the rates adopted when
the deferral is lifted apply retroactively?
Practical unmanageability. Even if there was no uncertainty as to
what constitutes an IDPD or as to the significance of the Copyright
Office's deferral of IDPD rates, the Copyright Act and the Copyright
Office's rules erect insurmountable practical obstacles to the use of
the license by Internet-based music providers who are deemed to be
making IDPDs. The problem is that an on-line digital locker service
such as My.MP3.com, which allows consumers to access streamed
performances of their personal music collections on any Internet-
enabled device, needs clearance for literally hundreds of thousands of
song titles.
As a prerequisite to obtaining a compulsory mechanical license
under Section 115, MP3.com would have to manually search the
Copyright Office's records for the name and address of the
copyright owner for hundreds of thousands of song titles (or
pay someone to conduct such a search).
The Copyright Office currently charges $65.00/hour to search
its records (with an estimated time to conduct a search of
between 8 and 12 weeks)
It is likely that, for a substantial number of song titles
(totally in the tens, if not hundreds, of thousands), the
Copyright Office records will not reveal the name and/or
address of the copyright owner. For each of these titles,
MP3.com would have to submit to the Office a separately
prepared and signed ``notice of intent'' along with a $12
filing fee per notice.
Even where the Office's records identify the name and address
of the copyright owner, it is a virtual certainty that the
records for thousands of songs will be out-of-date and that
notices sent to the listed address will be returned as
undeliverable; in such cases, MP3.com will have to file with
the Copyright Office each returned notice, along with evidence
of the attempted service.
And, finally, as for the songs for which accurate addresses
can be obtained, MP3.com will have to prepare and serve, via
registered or certified mail, separate notices for each title,
and will have to submit monthly payments and CPA-certified
annual accounting statements for each title.
In short, compliance with the current Section 115 procedures
is not feasible, either practically or economically. And if
MP3.com did try to follow the existing procedures, the
Copyright Office would end up being buried in an avalanche of
paper that it could never process.
On-line music distributors cannot rely on The Harry Fox Agency and/
or the record labels as an alternative to the Section 115 compulsory
license process. As noted above, distributors of recorded music
traditionally have obtained mechanical licenses through the Harry Fox
Agency rather than through the statutory processes established by
Section 115 and the Copyright Office's rules. However, when it comes to
on-line distribution of recorded music, neither the Harry Fox Agency,
nor the record labels can be relied upon to provide a workable
alternative to statutory licensing.
In October 2000, MP3.com, which had been accused of making unlawful
digital phonorecord deliveries by certain music publishers, entered
into a widely publicized settlement with those publishers and with the
Harry Fox Agency. In the joint press release announcing the settlement,
the publishers characterized the agreement as a ``landmark proposal''
that the Harry Fox Agency could ``refer to the music publishing and
songwriting community with confidence and enthusiasm.''
More than five months later, the Harry Fox Agency has been able to
give MP3.com mechanical licenses for only a fraction of the nearly one
million song titles owned by its publisher-principals. Nor has MP3.com
been able to obtain publishing information or clearances from the
publishing subsidiaries of the major record labels, despite having
entered into separate settlements with each of those labels.
CONCLUSION
Given the unwillingness and/or inability of the publishers and the
record labels to provide Internet music distributors with the
mechanical rights that allegedly are necessary to operate their
businesses--rights that are supposed to be subject to ``compulsory''
licensing--and given the practical impossibility of complying with the
prerequisites for that ``compulsory'' license, it is clear that
Congress must seriously consider major reform to Section 115 in order
to ensure that the public is able to enjoy the benefits of innovative,
on-line music technologies such as My.MP3.com.
[GRAPHIC] [TIFF OMITTED] T7094.018
[GRAPHIC] [TIFF OMITTED] T7094.017
Chairman Hatch. Thank you, Mr. Richards.
Mr. Murphy, we are glad to have you here.
STATEMENT OF EDWARD P. MURPHY, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, NATIONAL MUSIC PUBLISHERS' ASSOCIATION, INC.
Mr. Murphy. Thank you, Mr. Chairman, and thank you for your
ongoing participation in efforts to help the creative community
and the songwriters and publishers.
Mr. Chairman, you have asked whether online entertainment
will be coming soon to a digital device near you. For music,
the question is not whether it is coming; the music is here.
Our members have licensed more than 30 enterprises, most of
them fledgling businesses less than 5 years old, to distribute
recordings of music over the Internet. Among them are eMusic,
MP3.com, and MusicBank. These companies have chosen to respect
the rules laid down by Congress by obtaining licenses and
paying compensation to the copyright owners.
These licenses demonstrate that the music publishers are
committed to licensing their music on the Internet, and confirm
that Congress has provided us with sufficient flexibility to
license new and innovative music services. In this connection,
I understand that MP3.com has said here today that music
publishers have not issued licenses under their settlement
agreement. This is not totally correct. HFA has deemed MP3.com
to hold interim licenses for virtually every song in our
publishers' repertoire. This amounts to more than 600,000 songs
that are available right now to be used by My.MP3.
NMPA and HFA have also agreed to extend these interim
licensing agreements, and promised not to support any lawsuits
against MP3.com while the parties hammer out the final details
of processing individual license requests for each song that
MP3.com wishes to make available on its service.
We are committed to devoting whatever resources are
necessary to help MP3.com support proper licensing requests.
The challenge is to put Humpty Dumpty back together again after
the fact because, as you know, MP3.com did not follow the usual
process of requesting licenses before making our songs
available. MP3.com submitted more than 600,000 license requests
at one time, and HFA typically processes about 250,000 licenses
per year on behalf of the entire recording community. But this
can be done and we are doing it.
Music publishers believe that users of music must compete
in the marketplace on a level playing field by following the
rules of the road. Congress clarified the rules of the road on
the Internet by confirming in the Digital Performance Right in
Sound Recordings Act of 1995 that songwriters and music
publishers had exclusive rights to make digital phono
deliveries. In doing so, Congress gave us the flexibility to
license business models that no one could have anticipated 6
years ago.
Unfortunately, many Internet music services, most notably
Napster and its imitators, are flaunting the rules established
by Congress. By refusing to obtain licenses to pay copyright
owners required by Congress, Napster and its imitators are
placing our licensees at a potential fatal competitive
disadvantage. Many of our licensees are feeling the squeeze and
are under intense financial pressure from Napster.
Mr. Chairman, the situation is frankly really outrageous.
Businesses that respect the rules of the road should not be
penalized because a few irresponsible parties ignore the speed
limit. The music publishers' lawsuit against Napster is all
about restoring a level playing field. We do not object to
peer-to-peer technology, as such. However, our members do
object to Napster's business practices.
Napster built services on the premise that music creators
should provide content for free. It is teaching an entire
generation that music has no value on the Internet. Two Federal
courts have now concluded that Napster is facilitating
copyright infringement on a scale that is without precedent.
While Napster has acted disreputably, those who seek to
imitate Napster truly have no excuse. Now, Napster wants music
creators and copyright owners to bear the expense of monitoring
the Napster service. While many are quick to jump on the
Napster bandwagon, if copyright owners are no longer to be
compensated for their creative efforts, they must not bear such
a burden. In the long run, far fewer songs will be written, and
obviously we will all be the lesser for that.
Finally, in the wake of the Ninth Circuit decision, Napster
here today suddenly sees compulsory licensing, whether
established by Congress or the courts, as a solution.
Compulsory licenses, however, were available to Napster for our
members' songs before it launched its service. Napster simply
did not avail itself of them. With due respect, Napster is
being, I think, very disingenuous.
We remain cautiously optimistic that Napster will comply
with the district court order. We look forward to working with
Napster in this regard, and with MP3.com. It is conceivable
that Napster will choose to comply with its obligations and
obtain licenses, but we are not there yet.
In sum, Mr. Chairman, laws passed by Congress continue to
serve the intellectual property community, including music
creators and music users alike. There is no need to fix, as we
say, what ain't broke.
I thank the Committee for this opportunity to testify. I am
happy to answer any questions in writing later. Thank you, Mr.
Chairman.
[The prepared statement of Mr. Murphy follows:]
Statement of Edward P. Murphy, President and Chief Executive Officer,
National Music Publishers' Association, Inc.
Good morning, Mr. Chairman, Senator Leahy and members of the
Committee. I am Edward P. Murphy, President and Chief Executive Officer
of the National Music Publishers' Association (``NMPA ''). On behalf of
the more than 700 members of NMPA that own or control the majority of
the musical compositions licensed for manufacture and distribution as
phonorecords in the United States, I want to thank you for inviting me
to testify today about music publishers' successful efforts to license
their music on the Internet and to guarantee a level playing field for
all of our licensees. Songwriters and music publishers have long been
enthusiastic about the Internet's potential, and are working hard to
get their music to the millions who log on to the Internet every day.
Nearly a century ago, a new technology emerged that changed the
music industry forever. The new technology was the piano roll--
essentially long perforated sheets that operated a player piano's keys.
One piano roll company attempted to acquire exclusive rights to
virtually every musical composition. To make sure that musical
compositions were widely available for reproduction as piano rolls and
in other media and technologies, Congress enacted a compulsory license.
A compulsory license means that once a sound recording of a copyrighted
musical work is made and distributed with permission, anyone else can
obtain a statutory license from the copyright owner.
The Harry Fox Agency, Inc. (``HFA '') was founded in 1927 and today
operates as an industry service subsidiary of NMPA. HFA acts as agent
for more than 27,000 music publishers in licensing their musical
compositions for reproduction as CDs, cassette tapes, LPs and digital
phonorecord deliveries, as well for use in motion pictures and other
audiovisual productions. Over the years, Congress has repeatedly
recognized and affirmed HFA's role in negotiating on behalf of its
music publisher-principals. HFA is the place everyone knows they can go
to get a license to make phonorecords. With HFA, songwriters and music
publishers are poised to license music for use on the Internet.
Thanks to Congress, the rules of the road for the use of music on
the Internet also have never been clearer. With passage of the Digital
Performance Right in Sound Recordings Act of 1995, Congress confirmed
the exclusive right of song owners to transmit (or authorize others to
transmit) phonorecords of their works over the Internet known as
digital phonorecord deliveries, or ``DPDs.'' Congress expressly made
DPDs subject to compulsory licensing in the same manner as CDs,
cassettes and LPs. If a record label or Internet music company follows
the rules of the road, the toll that must be paid is a fair and
reasonable one: now just seven-and-a-half cents per download.
In that connection, Mr. Chairman, you have asked whether online
entertainment will be ``coming soon to a digital device near you.'' For
music, the question is not whether it is coming--the music is here.
Indeed, our members have licensed more than thirty enterprises, most of
them fledgling businesses less than five years old, to distribute
recordings of music over the Internet. Among them are Emusic and
MP3.com and Musicbank. These companies have chosen to respect the rules
laid down by Congress by obtaining licenses and paying compensation to
the copyright owners. These licenses demonstrate that music publishers
are fully prepared and poised to license any Internet music service if
it observes the rules Congress has set.
Unfortunately, many Internet music services, most notably Napster
and its imitators, have flouted the law that Congress enacted and are
making a mockery of these rules. Two federal courts have now concluded
that Napster is facilitating copyright infringement on a scale that is
without precedent. And while Napster has acted disreputably, those who
seek to imitate Napster in the wake of those decisions truly have no
excuse. By refusing to obtain licenses and pay copyright owners as
required by Congress, Napster and its imitators are placing music
publishers' law-abiding licensees at a substantial competitive
disadvantage. Many of our licensees are feeling the squeeze and are
under intense financial pressure from Napster. Mr. Chairman, the
situation is, frankly, outrageous. Why will anyone want to get a
license, if that will only put the licensee at a potentially fatal
competitive disadvantage? Businesses that respect the rules should not
be penalized because a few irresponsible parties willfully ignore the
speed limit.
The music publishers' lawsuit against Napster is about restoring a
level playing field. We do not object to peer-to-peer technology as
such; however, our members do object to Napster's parasitic business
practices. Napster does not pay for content, bandwidth or storage for
its music service. Napster claims that it has the right to make its
shareholders Internet billionaires, but its service was built on the
premise that music creators should provide the content that draws
consumers to Napster's service for free. Now Napster wants music
creators and copyright owners to bear the expense of monitoring the
Napster service. While many are quick to jump on the Napster bandwagon,
if copyright owners are no longer to be compensated for their creative
efforts and must bear such burdens, in the long-run, far fewer songs
will be written. Consumers will be the ultimate losers.
Remarkably, in the wake of the Ninth Circuit's affirmance of the
District Court's issuance of a preliminary injunction, Napster now sees
compulsory licenses whether established by Congress or the courts--as
the solution. Songwriters and music publishers find this to be
disingenuous because Napster chose to flout the rules prescribed by
Congress for obtaining a compulsory license in the first place.
There are precedents, of course, where companies have ceased their
infringement and moved to respect the rules established by Congress.
The most notable, recent example is MP3.com. MP3.com copied tens of
thousands of CDs and placed copies of the sound recording tracks on its
computer servers to offer the MyMP3 interactive music service in
January 2000 without first obtaining licenses. After litigation, the
music publishers and MP3.com entered into a landmark settlement
pursuant to the compulsory license provisions of the Copyright Act. The
settlement provides for payment of compensation for past acts of
copyright infringement and a forward-looking license for the MyMP3
service.
In this regard. MP3.com raises two issues relating to licensing
musical compositions in connection with its MyMP3 service:
First, MP3.com has expressed its concern regarding the availability
of a compulsory license for subscription music services because there
is no current rate in effect. The compulsory license provisions
specifically contemplate that owners of musical works will negotiate
and reach private agreements as new business models arise. Pursuant to
those provisions, MP3.com has obtained a license with specified rates.
Representatives of the recording industry, the digital media companies
and NMPA are currently exploring a range of options for licensing these
types of services. If a resolution cannot be reached as to appropriate
rates, Congress provided that such matters will be addressed by
arbitration before a Copyright Arbitration Royalty Panel. If lower
rates are agreed upon in a broader consensus or are determined by a
Copyright Royalty Arbitration Panel and are adopted by regulation, MP3
will receive the benefit of those terms under the ``most favored
nation'' provision in its settlement agreement with the music
publishers, thus preserving a level playing field.
Second, MP3.com has expressed its concern over the difficulty it
has encountered in preparing proper license requests. Accurate
licensing information is necessary to make sure the proper copyright
owner is paid for the use of its musical work and the legislative
proposals suggested by MP3.com would not eliminate the need for
accurate information. To help MP3.com identify the music MP3.com had
already put on its service, HFA has provided MP3.com with an electronic
copy of its licensing database, something HFA had never before provided
to any record company or any other licensee. And NMPA and HFA have
provided MP3 written assurance they will not support any litigation
against the company while both work in good faith to address these
problems.
Finally, we agree with MP3.com that HFA could better serve MP3.com
and other music service providers if the lag time between the release
of a new recording and the submission by the record company of its own
license requests were substantially shortened. We will continue to work
with MP3.com and with the record companies to make improvements in this
area.
In sum, we believe that the compulsory license provisions already
in existence for musical compositions are sufficiently flexible to
address the new business models that crop up every day on the Internet.
A level playing field, however, is essential so that Internet music
services have every incentive to obtain licenses and compensate
songwriters, and so companies that do so are not penalized for
following the rules of the road.
I thank the Committee for this opportunity to testify.
Chairman Hatch. Thank you, Mr. Murphy.
Mr. Farrace?
STATEMENT OF MIKE FARRACE, SENIOR VICE PRESIDENT, DIGITAL
BUSINESS, TOWER RECORDS/BOOKS/VIDEO, MTS. INC.
Mr. Farrace. Thank you, Mr. Chairman.
Along with its competitors, Tower Records plays an
important role in assuring that the consumer benefits from
vigorous competition in the marketing and sale of recording
audio and video products. Right now, we think the law provides
a good balance between copyrights and competition, but it may
not in the future.
The law gives copyright owners incentive to create, but
gives balance to the process by granting owners of copyrights
broad rights to distribute those creations after the first
sale. It is these checks and balances that keep competition
keen. And as I will mention in a moment, if intellectual
property owners had the right to control copyrights years ago
the way they propose to do so now, there would be no used
books, no lending your records to a friend, no video rentals,
and no donations of recorded products, software, or even books
to libraries or schools.
About 5 years ago, a friend sent me one digital song file
which took me about 3 hours to download, but it was still one
of the most exciting things I had ever done. A couple of years
later, our company got T1 access and the resulting increase of
download speed convinced me that we were on the threshold of
the most incredible period in our history. The promise of
instant access, portability like never before imagined, rich
multi-media add-ons and all the rest was irresistible. This was
the chance of a lifetime to provide our customers with the best
possible experience.
We did download experiments with our record company
partners, mostly free promotions. At the same time, we started
working with new digital companies like Liquid Audio to build
digital retailing tools and to integrate digital sound files
into our business.
As a result, we can now add secure, watermarked digital
files to an Internet shopping basket that contains physical
goods like CDs or DVDs. We can accept virtually any form of
payment. We can reconcile the charge, provide refunds, issue
credits, replace defective merchandise--all the stuff retailers
do. So we have a system that works.
We have been selling downloads for almost 4 years now, and
though the technology continues to evolve and improve, the
rocket science part is over. The members of the retail
community know how to send a secure digital sound file safely
and securely without running the customer through a gauntlet or
invading their privacy.
We have made it clear to record companies that we are ready
and willing to go into business with them. We have demonstrated
that we are willing to work on solving any digital dilemmas,
and they know we want to play by the rules. But quite honestly,
we are puzzled by some of the rules which are unfriendly to
customers and retailers.
Particularly worrisome is that some companies require
individual personal data from the consumer in order to access
the content. Virtually all the companies interrupt the
transaction process in some way to gather customer information.
Only one company does not, and none of the others will promise
not to use this information to solicit our customers directly
in the future.
So what is wrong with this picture? We market to and
acquire the customer, then are forced to violate their privacy
and damage our relationships, which are requirements just to
get the merchandise we want to sell. So you may see why we are
concerned.
We are a one hundred-percent permission-based company. We
never send e-mails to our customers without their permission.
So, naturally, we think requiring customers to submit their
individual personal data to access a recording they are paying
for or enticing them while we are trying to conduct business
with them is unfair.
We have the same concerns about the rules our customers are
being asked to agree to. These end user license agreements
which aren't even seen by the customer until after they have
paid for the music can be downright oppressive. Some have had
outrageous restrictions written by lawyers who saw people as
thieves instead of customers. And although we deal with our
fair share of theft, this is not the way we choose to perceive
our customers, nor is it the way we want them to perceive us.
These click-through agreements are awkward, confusing, and
they create serious customer service issues for companies like
Tower. It is like someone else is standing behind our cash
register, free to create customer service policy on our behalf
and even sell to our customers directly. We must control this
relationship that we have spent so much time and energy and
money cultivating and which is at the core of our commitment.
So these barriers to broad access lead us to question
sometimes the motives of our suppliers. We worry that all this
talk and activity about protecting the music is really about
controlling lawful use and cutting retailers out of the
marketplace.
The deals record companies are pursuing are with each other
or with new or small companies that they may end up owning.
They say they want us in this business, but they don't honor
our privacy policies or make systems simple enough for users.
Instead, Bertelsmann buys CDNow, which has a strategic
relationship with Time Warner, which is trying to cross-license
with Sony, which is building a subscription service with
Universal, which has a joint venture with BMG. That is four out
of the five major suppliers, and the fifth one, EMI, has been
for sale all year. And similar announcements are coming from
the movie studios.
Our suppliers have the right to get into retailing, and we
recognize that and we are not afraid to compete with them. But
it is not fair to let these companies use their power over us
to steal the customers and ultimately steal our business.
Retailers need rules that protect competition.
I am speaking just for Tower today, Mr. Chairman, but if
you ask Pam Horvitz at NARM, which is the association that
represents music retailers, or Bo Anderson at VSDA, which
represents video retailers, they will tell you that all
retailers just want a level playing field that lets them do the
marketing and the selling, and I think that is what our
Government wants also.
The bottom line, in conclusion, is that we are frustrated
by the progress that has been made so far. We are sympathetic
to the record companies' worries about piracy in cyberspace. We
understand their fear of losing control of assets. We
understand that this could endanger their profitable durable
physical goods distribution system. Believe me, we understand
that, too, but it is time to get out of each other's way a
little and go to work.
I thank you for inviting me to testify today and I am happy
to take any questions later. I have summarized this testimony
here, but I have submitted the written testimony to be put in
the record.
Chairman Hatch. Without objection, we will put all full
statements in the record. That is for sure.
[The prepared statement of Mr. Farrace follows:]
Statement of Mike Farrace, Senior Vice President, Digital Business,
Tower Records/Books/Video, MTS., Inc.
Good morning. My name is Mike Farrace, and, among other things, I'm
responsible for digital business at Tower Records. Tower started out as
a single store selling records in Sacramento, California in 1960.
Today, we own and operate 189 stores in 17 countries not counting
franchises, and we sell books and movies as well as music.
We're famous for a couple of things: great selection and knowing
what we're talking about. Every record in stock and every kid roaming
the sales floor represent investments in customer satisfaction. We
stock an amazing variety of recordings, and the people we employ are
there because they love records. We open early, stay up late, make our
stores beautiful and work our tails off to make music lovers happy.
We find out what people want, and we sell it to them the way they
want it. Our stores have been in the thick of every musical revolution
since 1960. We've managed at least 13 physical configurations of audio
playback media and at least four video formats during that period.
We've sold vinyl albums and 45s, Eight Tracks, Four Tracks, Reel to
Reel, Cassettes, Compact Disks, Digital Compact Cassettes, MiniDiscs,
CDR, Enhanced CD, CD ROMs Mini CDs and probably a few formats I've
forgotten. We were the first U.S. music retailer in Japan, the first to
publish our own magazine, and the first traditional reseller with an
online record store. We were among the very first to embrace LaserDisk
and later DVD. Sometimes these investments turn out to be great.
Sometimes they don't. But we keep trying because that's what we do.
We've never been shy.
We're where the record labels turn when they're trying to break new
music, which is the hardest job of all. We've done many thousands of
promotions in support of bands in almost every conceivable genre of
recorded sound, including ones for Don Henley and Alanis Morrisette.
All the in-store performances, display contests we run, and crazy
things we've asked our stores to do have helped sell a lot of records,
and helped establish careers for these artists.
While, without a doubt, we are completely dependent on the artist
and the customer for our livelihood, because of the way the record
business works, we are also dependent on labels and distributors. We've
had many battles over all kinds of things with our suppliers. We've
gone toe to toe about terms and support. We've wrestled over more
complex issues, like whether ``12 CDs for a penny'' record clubs are
really fair play, or whether embedding a hyperlink on a CD, which is a
couple of clicks from a reseller that isn't us, and is sometimes the
supplier, isn't just a bit devious, and unfair.
Of course, the record companies could probably add a few pet peeves
about us. But together, we manage. In the best of times, it's a
privilege to be a partner in the chain to creative works that please so
many people, and a pleasure to work with the people that create and
distribute it.
We've been a good partner so far in the music industry, and we want
to continue to be a good partner in the digital age.
Five years ago, someone I knew sent me a digital song file. I was
convinced we were on the threshold of one of the most invigorating and
fulfilling periods in retailing history. The promise of instant access,
portability like we never imagined, rich multimedia addons and all the
rest was irresistible. If our core values included giving the customer
the best possible experience, this was the chance of a lifetime.
We started working with new digital companies, (one of which--
Liquid Audio--is present here today), to integrate digital sound files
into our physical goods systems. In the last five years, we've used
over a dozen audio codecs and four digital rights management systems.
We have seen at least a half-dozen secure bonafide digital delivery
mechanisms and have implemented two.
As a result, we can add secure, watermarked digital files to a
shopping basket containing physical goods and can accept a wide range
of payment forms. We can provide samples on virtually every song in our
database. We provide reports ranging from basic sales and traffic to
incredibly detailed user behavior statistics where we have our
customer's permission. We use digital special ordering and sampling in
some stores and will continue to roll out even more services in the
coming months. We have a system that works. We've been selling
downloads for almost four years and while the technology continues to
improve, the rocket science part is over. We've shown record companies
that we're willing to work with them on digital distribution. The only
thing missing is a big press conference to announce we have all the
content.
So far we've had something around 100,000 downloads available for
both sale or promotion from a handful of companies including Liquid
Audio, EMI, Warner and Sony. But as a retailer, I don't think my
digital offering is very attractive. First of all, there isn't much of
a selection. There are tens of millions of songs available on compact
disk around the world, and only a small percentage have been authorized
for digital sale. Our Internet experience has taught us that selection
equals sales. Our first online store in 1995 started with just 20,000
titles. All things being equal, sales increased consistently with
selection. Today, towerrecords.com offers well over 500,000 titles--
something like 5 million songs. We want the digital equivalent of that.
Second, the suppliers use disparate delivery systems, each one
unique, requiring the download of special software and the use of a
specific digital rights management provider. It's like requiring the
retailer to have a different cash register for each distributor not to
mention a plethora of separate steps and confirmation emails to the
unfortunate customer who actually wants multiple songs from more than
one company.
We've always played by the rules, but today we're puzzled by the
rules. Particularly worrisome is that some companies require personal
data from our customers. They insist on actually possessing the names,
and only a few will promise not to solicit these customers immediately
or in the future. We're trying it, but we're worried about violating
our own privacy policy, damaging our relationship with our customers,
and maybe even result in Tower violating the law. Tower Records is a
100% permission-based company. We never send emails to our customers
without their permission, and feel that either requiring customers to
submit their personal data to access the recording or enticing them
while we are conducting a transaction is unfair.
We have the same concerns about the rules our customers are being
asked to agree to. First off, these End User License Agreements aren't
even available to our customers until after they've bought the music.
Some of the first ones we saw were pretty horrible, and had some
outrageous restrictions that made customers feel like untrustworthy
thieves. These ``click through'' agreements are very awkward and
confusing to consumers and create service issues for resellers. This
control over usage is enforced by technological locks that are the
digital equivalent of preventing anyone from reading a book unless they
make a payment to the copyright owner every time they open it. It's
like having someone else standing behind our cash register, taking
control of the customer relationship that we have cultivated, and which
is core to our commitment.
The bottom line is that we're pretty frustrated by the progress
that's been made so far. We're sympathetic to the record company
worries about piracy in cyberspace. We understand their fear of losing
control of assets. We think part is fear that it will endanger their
profitable and durable physical goods distribution system. And believe
me, we understand that too.
But many of the barriers that prevent access to an exhaustive
inventory of sound are perplexing, and frankly, lead us to question the
motives of our suppliers. We're starting to worry that maybe all the
talk and activity about protecting the music is not just about
controlling copyright infringement, but is really about controlling
lawful use and hiding plans for cutting retailers out of the
marketplace. A lot of the deals the record companies seem most
interested in pursuing are with each other, or with companies that they
all buy a piece of--like MusicNet. They tell us they want us in this
business, but they don't follow up with products that we would want to
sell or that our customers would want to buy. Instead, Bertelsman buys
CDNow which has a strategic relationship with Time Warner which wants
to cross license movies with Sony which has a subscription service
project with Universal (called Duet) which has a joint venture called
``GetMusic'' with BMG. That's four out of five of my major music
suppliers, and the fifth one, no offense to Ken Berry at EMI, has been
for sale all year.
OK. My suppliers have the right to get into retailing. Tower isn't
afraid to compete with retailers. We think we're pretty good. But we
don't think it's fair to let these companies use their power over us to
steal our customers and ultimately steal our business. Retailers need
rules that protect competition. I'm speaking just for Tower today, but
if you ask
Pam Horovitz at NARM, which is the association that represents
music retailers, she'll tell you that all retailers just want a level
playing field that let's them decide how to market and sell music.
That's what I think our government wants also.
I would have liked to have been accompanied here today by
representatives of two trade associations Tower belongs to: National
Association of Recording Merchandisers and Video Software Dealers
Association. NARM and VSDA have been active before the Copyright Office
and Department of Commerce in presenting the legal issues involved in
this intersection of copyright law, antitrust law, and consumer rights.
Each has prepared a written statement on the topic of today's hearing,
and I respectfully request that their statements be included in the
record of this hearing.
I thank you for inviting me to testify here today.
Chairman Hatch. Ms. Greenberg, we will turn to you. Thank
you for being here.
STATEMENT OF SALLY GREENBERG, SENIOR PRODUCT SAFETY COUNSEL,
CONSUMERS UNION
Ms. Greenberg. Thank you, Mr. Chairman. Consumers Union
appreciates the opportunity to represent the interests of
consumers here today, consumers who haven't always had a place
at the table in these ongoing discussions about consumers'
access to music online.
Consumers Union, as you know, no doubt, is the publisher of
both Consumer Reports, which is a print magazine with 4.5
million subscribers, and also the publisher of a Web site with
one of the Internet's largest paid subscriber bases. We
understand the importance and value of copyright protection.
In our role as advocates for consumer and public interest,
we also understand that copyright law is a delicate balance
between the rights of those create, compile and distribute
information, and the ability of the public to get access to
that information. We are, in short, pro-consumer and pro-
copyright.
We are here today because of our belief that while we must
protect the rights of authors of creative works, we should not
in the name of copyright unduly burden consumers. Irrespective
of the merits or legality of Napster's online music service,
Napster has popularized the power of peer-to-peer networking.
We believe peer-to-peer, which allows individuals users to
share files with other users without going to a central
location, has the potential to revolutionize the way we
communicate and learn, but it is a model that is in its
infancy. Actions that we take today can have the effect of
facilitating the development of peer-to-peer networking or
chilling its development.
When the VCR was introduced in the 1980's, Jack Valenti,
who was with us this morning, lobbying for the motion picture
industry made the famous statement, or in retrospect perhaps
the famous overstatement that the VCR is to the motion picture
industry and the American public what the Boston strangler is
to a woman alone.
Of course, we now know the real end of the VCR story.
Videocassettes and rentals are one of the most valuable and
profitable components of the entertainment industry. Had it not
been for judicious policymakers and judges, the story of VCRs
may have had a very different ending. Consumers could just as
easily been denied the benefits of the VCR if the industry's
``Chicken Little'' approach had prevailed.
We are concerned that the recording industry's opposition
to Napster and other peer-to-peer online systems may be more of
the same. Consumers Union understands the concern of the
recording industry that Napster users enjoy creative works
without having to pay the artist or recording company. This is
a valid issue and we firmly believe that creators of artistic
works, be they musicians, artists, authors, or others, must
have financial incentives to continue their creative endeavors
and should be fairly compensated for their work. Those who add
value to their work, like recording studios, have a right to
fair compensation as well.
Unfortunately, we believe the Napster debate has been
reduced to the question of whether music should be free, and
that is the wrong question. Of course, music should not be
free, but there is an important point we shouldn't lose sight
of. In a very short period of time, there have been over 72
million installations of Napster's online service and the
public has manifested a previously unimaginable demand for
music distribution online. At the same time, that public has
demonstrated a previously unparalleled appetite for peer-to-
peer information delivery.
So where do we go from here? Despite the recording
industry's arguments that it has made and is making efforts to
provide music online, it appears to us at this moment that the
recording companies that control the music business aren't
giving consumers what they want. If ever there was a crystal-
clear indicator that consumer is there, Napster is there.
To reduce this to even simpler terms, what we have is a new
technology, we have a great consumer demand for that
technology, but we have an inefficient marketplace that
prevents the new technology from operating in a way that
appropriately balances the competing needs of copyright owners
and the public's right to receive information.
Congress has before it an opportunity to redress this
problem and arrive at a fair and equitable balance between
copyright owners, creative artists, and the public. Last July
when this panel held hearings, Senator Leahy and you, Senator
Hatch, expressed hope that the parties might work together
toward a mutual agreement. Otherwise, there would be pressure
on Congress to create statutory compulsory licenses.
Since that time, there has been a preliminary injunction
against Napster and an offer from Napster to pay the recording
industry $1 billion to license Napster to offer its users paid
subscriptions. To our knowledge, the industry, with the
exception of Bertelsmann, has flatly rejected that offer and
has made no counter-offer. Meanwhile, consumers continue to be
deprived of access for a reasonable fee to the kind of online
service that Napster was providing.
In that vein, Consumers Union believes the best approach
would be one that has been tested and proved successful for
users of other technologies. We would propose the establishment
of a compulsory licensing mechanism through which Napster and
other online music providers would have a legal avenue for the
72 million people who have installed Napster to share music
online. We urge this Committee to use the models that exist to
authorize a Copyright Arbitration Royalty Panel, or CARP, to
resolve the disputes over the issue of music royalties between
Napster and other peer-to-peer online services and the
recording industry.
Compulsory licensing systems we know are not popular with
the labels; they are not perhaps popular with others involved
in the distribution and the production of CDs in this case. But
they do serve both owners and users by reducing the transaction
costs involved in licensing through the private market system.
Consumers Union is on record supporting compulsory
licensing for both satellite and cable transmission. Compulsory
licensing provides a fair profit to the owners of copyright,
while ensuring that the public has access to creative works. It
has also provided consumers with greater choice.
Let me close by saying that Consumers Union fears that
unless Congress provides for compulsory licensing, which is a
tried and true system that has worked in the past to provide
consumers with access to emerging technologies, we will see a
quashing of innovation and competition, and consumers will be
the losers for it.
Thank you.
[The prepared statement of Ms. Greenberg follows:]
Statement of Sally Greenberg, Senior Product Safety Counsel
Consumers Union, a publisher of both Consumer Reports-a print
magazine with 4.5 million paid subscribers-and a Web site with one of
the Internet's largest paid subscriber bases, understands the
importance and value of copyright protections. In our role as advocates
for consumer and public interests, we also understand that copyright
law is a delicate balance between the rights of those who create,
compile, and distribute information and the ability of the public to
get access to that information. We are, in a word, pro-consumer and
pro-copyright. As Senator Hatch said last July at hearings on this same
subject, we must protect the rights of the creator but we cannot in the
name of copyright unduly burden consumers.
New technologies historically have challenged our system of
protecting creative works through copyright, and required a balancing
between the public's right to know and the limited monopoly rights of
authors. Whether it was the printing press, the jukebox, the
photocopier, cable television, or the Internet, these technologies have
forced us to continually revisit the balance between the rights of
authors and rights of users to have access to information and creative
works. Promoting and fostering innovation is clearly the goal of
intellectual property law, but with changing technology we will
continue to debate what will best accomplish that goal.
When the VCR was introduced in the early 1980s, Jack Valenti,
lobbying for the Motion Picture Industry Association of America, made
the famous statement, or in retrospect, perhaps, overstatement that
``the VCR is to the motion picture industry and the American public
what the Boston strangler is to the woman alone.'' Of course, we now
know the real end to the VCR story--videocassette sales and rentals are
now one of the most lucrative slices of the industry's copyright pie.
Had it not been for judicious policymakers and judges, the story of
VCRs might have had a very different ending-consumers could just as
easily have been denied the benefits of the VCR if the industry's
``Chicken Little'' approach had prevailed. We are concerned that the
recording industry's opposition to Napster and other peer-to-peer
online systems may be more of the same.
While it is almost a cliche to speak of the Internet and
information technologies as revolutionary, it is nonetheless accurate
to say that the Internet has completely changed the way we gather and
distribute information. I don't think anyone here would disagree that
Internet and information technologies have been responsible for
tremendous gains in productivity and an unrivaled period of economic
expansion.
As the Internet has developed, several milestones were responsible
for huge increases in users on the network: the creation of HTML, the
programming language of the World Wide Web, enabling users of the
network to exchange information in a common format, and the creation of
Mosaic, the world's first generally accessible Web browser. And we
believe that peer to peer networking is a milestone on par with these
other developments.
Irrespective of the merits or legality of Napster's service,
Napster has popularized the power of peer to peer networking. The first
Web browser introduced to users the idea that they could instantly get
access to information anywhere on the planet-what Napster has done is
introduce millions of users to the idea that they can find information
by connecting directly with other users.
We believe peer to peer networking, which allows individual users
to share files with other users without going through a central
location, has the potential to revolutionize the way we communicate and
learn, but it is a model in its infancy. Actions that we take today can
have the effect of facilitating the development of peer to peer
networking, or chilling its development.
CU understands the concern of the recording industry that Napster
users enjoy creative works without having to pay the artist or the
recording company. This is a valid issue. We firmly believe that
creators of artistic works, be they musicians, artists, authors, or
others, must have financial incentives to continue their creative
endeavors and should be fairly compensated for their work. Those who
add value to their work, like recording studios, have a right to fair
compensation, as well. Unfortunately, we believe the Napster debate has
been reduced to the question of whether music should be free, and we
believe that is the wrong question. Of course music should not be free.
But there is an important point we should not lose sight of: in a
very short period of time, over 72 million people have installed
Napster's online service and manifested a previously unimaginable
demand for music distribution online. At the same time, that public
demonstrated a previously unparalled appetite for peer to peer
information delivery.
We are concerned that shutting down Napster, and thereby sending a
chilling message to other peer-to-peer online systems, will stifle the
kind of innovation that brought us the Internet in the first place. The
direction taken in response to Napster-like online music services will
be instructive to every fledgling peer to peer service, and their
network architecture will be directly influenced by legislative actions
taken--or not taken--by this panel.
In the aftermath of the Federal court's preliminary injunction
ordering Napster to cease providing free downloads of copyrighted
music, where do we go? Despite the recording industry protestations
that it has made and is making efforts to provide music online, it
appears to us that at this moment, the recording companies that control
the music business aren't giving consumers what they want. If ever
there were a crystal clear indicator that the consumer demand is there,
Napster is it. So why have the major labels not stepped up and given
consumers what they are asking for?
To boil it down in even simpler terms, we have new technology and
we have great consumer demand for that technology. But we have an
inefficient marketplace and that prevents the new technology from
operating in a way that appropriately balances the competing needs of
copyright owners and the public's right to receive information.
We suspect that the recording industry is resistant to changing the
status quo and adapting to consumer demand for getting music online to
protect current profit margins. According to columnist Thomas Weber
writing in the Wall Street Journal last week, $1.50 or less of a CD
priced at $15, goes to the artist.\1\ Add in composer's royalties,
manufacturing, packaging, and distribution costs and you're only
talking about $5 of the total price. $5 goes to the retailer, and the
record company gets $5 for marketing costs and profit. But the record
company also gets a portion of the manufacturing, packaging and
distribution costs through its subsidiaries, so each ``cost item'' in
that chain also may generate profit for them.
---------------------------------------------------------------------------
\1\ Weber Thomas. ``Why Gutting Napster Won't Cure the Blues of the
Music Industry.'' Wall Street Journal, March 26, 2001.
---------------------------------------------------------------------------
Therein lies the problem for consumers. The public demand for
online music cries out for a transformation of the way music is
delivered, but the recording industry has strong disincentives from
transforming their current distribution and marketing system. With the
courts ordering Napster to stop providing free downloads of copyrighted
music, the recording industry failing to respond to Napster's offers to
set up a subscriber service, for which they have offered to pay the
recording industry a lump sum of one billion dollars over five years,
and the industry's failure to offer the same Napster-style service to
consumers themselves, we appear to be at an impasse. And so consumers
turn to Congress to properly balance the interests at stake.
We believe the recording industry also fears that online
distribution of music could result in total disintermediation. In other
words, what if consumers have the means to bypass the label entirely,
connecting directly to an artist's Web site and cutting the recording
company out of the transaction entirely?
Indeed, the recording industry has demonstrated through its actions
that it is entirely aware of this possibility by waging a war on the
technologies of online music distribution, rather than going after uses
of those technologies. Over the last few years, Congress has already
passed the No Electronic Theft Act of 1997 and the Digital Millennium
Copyright Act in 1998, both of which would allow the Recording Industry
Association of America (RIAA) to go after individuals who are illegally
copying. But the recording industry seems not to be going after
individual violators; their real interest seems to be in going after
the technology. They realize that with 72 million people installing
Napster, they cannot all be made criminals. Regrettably, the recording
industry appears to be attacking innovation more than it is attacking
piracy.
Consumers are paying the price doubly: they are faced with fewer
choices and are paying higher prices for those choices. It also appears
that the recording industry may be using litigation as a strong-arm
business tactic to freeze the status quo and protect its profits. For
instance, the Recording Industry Association of America (RIAA) sued
MP3.com, a service that merely allowed users to take a CD that they
legitimately bought and access it from any location through the
Internet. As Michael Robinson of MP3.com testified here last summer,
when MP3.com attempted to abide by a court order and get its system
licensed, the company ran into a hornet's nest of different licensing
agreements and spent large sums of money in the process. This for a
service that simply gave users the ability to get online access to
music they legitimately purchased and owned. MP3.com's experience is
hardly incentive for other Internet innovations.
We have another concern that may contribute to the diminishment of
rights consumers now have. In the offline world, once an individual
purchases a copy of music, that individual is allowed to give or sell
that copy to anyone he or she pleases, otherwise known as the first
sale doctrine.\2\ Yet in the online world, first sale is rapidly
disappearing. CU acknowledges that when the first sale doctrine was
first contemplated, peer-to-peer online capability didn't exist. That
is why we think Congress should take a look at this issue as well.
---------------------------------------------------------------------------
\2\ The first sale doctrine was incorporated into the 1909 Act in
17 U.S.C. Section 27 (1909 Act).
---------------------------------------------------------------------------
Congress has a model for addressing and balancing interests to
arrive at a fair and equitable balance between copyright owners,
creative artists, and the public. Last July, when this panel last held
hearings on this issue, Senator Leahy expressed hope that the parties
might work together toward some mutual agreement, otherwise there will
be pressure on Congress to create statutory compulsory licenses. That
hearing happened before the preliminary injunction against Napster was
in place, and before Napster had offered to pay the recording industry
$1 billion to license Napster to offer its users paid subscriptions. To
our knowledge, the industry, with the exception of Bertelsmann, has
flatly rejected that offer and has made no counteroffer. We have
neither heard of nor seen any signs of progress. Meanwhile, consumers
continue to be deprived of access, for a reasonable fee, to the kind of
online service that Napster was providing. We believe the need for
Congressional action is even more urgent today than it was last July.
In that vein, Consumers Union believes the best approach would be
one that has been tested and proved successful for other new
technologies. We propose the establishment of a compulsory licensing
mechanism through which Napster and other online music providers would
have a legal avenue for the 72 million people who have installed
Napster. The compulsory licensing system supercedes the normal
marketing mechanism for distributing copyrighted works and allows the
prospective user the right to obtain a compulsory license under which
he or she can use the work without the copyright owner's permission. In
this way, we believe that Congress would help peer to peer networking
to realize its full potential.
Congress has set up compulsory licensing systems in several
instances (one repealed pertaining to jukebox licensing), each outlined
below.
The Mechanical License, Congress in 1909 created a right
against the reproduction of musical compositions in mechanical
forms (piano rolls). Congress limited this right however,
through the creation of a mechanical compulsory license for
musical works.
The Cable License of Section 111 establishes a compulsory
license for secondary transmissions by cable television
systems.
The Satellite Retransmission License establishes a compulsory
license for satellite retransmissions to the public for private
viewing.
The Audio Home Recording Act, establishes compulsory
licensing-like system by proving immunity from liability for
copyright infringement by manufacturers and importers of
digital recording devices, but imposes a levy on these devices,
the proceeds from which are to be distributed to copyright
owners.
We urge this Committee use these models to authorize a Copyright
Arbitration Royalty Panel, or CARP, to resolve the disputes over the
issue of music royalties between Napster and other peer-to-peer online
service, and the recording industry. We also urge the panel to set a
time limit in the law to finalize royalties, so that the parties are
not debating the issue 3 years down the road, with consumers still left
out in the cold.
While we realize fully that rights holders tend to dislike
compulsory licensing systems, these systems are products of political
compromise; they serve both owners and users by reducing the
transaction costs involved in licensing works through the private
market system. Compulsory licensing has worked well in other contexts
where we have supported it. For instance, CU is on record supporting
compulsory licensing for both cable and satellite transmission
entities. CU's Gene Kimmelman told the Senate Commerce Committee in
1998 and 1999 that by ``eliminating the transaction costs associated
with thousands of copyright clearing negotiations, the compulsory
license ensures fair compensation to copyright holders while also
providing consumers greater opportunity to receive multichannel video
programming from a variety of vendors.'' Those principles apply to
music, as they do to cable and satellite. Indeed, without compulsory
licensing mechanisms for satellite or cable systems, consumers would
not have had access to a broad range of programming and we don't
believe these technologies could have flourished. Compulsory licensing
provides a fair profit to owners of the copyright while ensuring that
the public has access to creative works.
Compulsory licensing has not only provided consumers with greater
choice, it also spurred competition. Imagine if Congress had not acted
to provide a compulsory license in the case of satellite retransmission
of broadcast signals. The only truly viable potential competitor to
cable monopolies direct broadcast satellite-would not be in a position
to offer consumers an alternative to cable.
We support compulsory licensing because we believe that ``killer
applications'' like Napster will encourage the rollout of broadband
Internet services, just as email and instant messaging were responsible
for huge growth in the narrowband Internet. Congressional action will
be instrumental in greasing the wheels to facilitate this process,
thereby bringing users of Napster and other peer-to-peer technologies
into the sanctioned marketplace.
Consumers Union is concerned that unless Congress provides for
compulsory licensing, a tried-and-true system that has worked in the
past to provide the consumers with access to emerging technologies, we
will see a chilling of innovation and competition, and consumers will
be the losers.
Chairman Hatch. Thank you, Ms. Greenberg. That was very
interesting.
Mr. Fish?
STATEMENT OF EDMUND FISH, PRESIDENT, METATRUST UTILITY
DIVISION, INTERTRUST TECHNOLOGIES CORPORATION
Mr. Fish. Mr. Chairman, Senators Leahy, Feinstein, and the
other members of the Committee, I have the distinct honor today
of being the last, but hopefully not the least person to
address this Committee on the very important issues that are
before it.
In sitting and listening to all of the other testimony, I
had an observation. It strikes me each time I hear this debate
how many diverse interests there are. You could think of it as
a symphony. Symphonies take practice or you have got a lot of
discordant efforts. At the same time, symphonies need a
framework, and I am here to talk about that framework today.
I am here on behalf of our founder, Chairman and CEO, Mr.
Victor Shear, and our organization that has grown from a
handful a few years back to more than 350 worldwide today.
InterTrust has been focusing on the issues before this
Committee since its founding in 1990. We coined the expression
``digital rights management'' to describe the requisite
mechanisms.
It took 9 years and more than $100 million in capital to
bring this technology to market, and we have made many
significant inventions along the way. We now provide technology
to a number of copyright owners, artists, device manufacturers,
software providers, and online services bringing digital
information to the Internet. These include Adobe, AOL,
Bertelsmann, Blockbuster, Compaq, Diamond Rio, Nokia, Philips--
many, many different participants in this process.
Mr. Chairman, let me suggest that at the heart of the issue
is how do we bring civility to the post-Napster world without
compromising our traditional cultural values or our leadership
in technology, as was so poignantly pointed out this morning.
We suggest that the answer lies in the following two ideas:
first, a balanced partnership between technology and law, and,
second, an understanding of what digital rights technology can
do and how it should do it.
One might say that technology created this problem, but
technology can also help to solve it. To do that, however, it
needs a partnership between law and technology. Until now, we
have had technology pitted against law. This technology is
called digital rights management, or DRM.
Sophisticated DRM technologies such as InterTrust can
provide the mechanism to help effect this partnership of law
and technology. It facilitates a workable framework for the
efforts of artists, as well as the industries that bring their
works to the public. This framework must also satisfy law and
the legitimate expectations of consumers. The digital world
should live up to the principles most of us believe are the
minimum standards we would demand in the traditional analog
world.
To be clear, when I am speaking about DRM technology, I am
not referring to mechanisms that simply deliver protected music
online in return for a payment and then lock it to a PC.
Rather, to create the partnership framework I have mentioned,
it is critical to create a zone, independent of time, place, or
device, where music is protected by technology and where
rights-holders and consumers are free to express and protect
their rights through the freedom to establish differing rules
reflecting their own individual interests.
Robust business models such as download, streaming,
subscription, pay-per-listen, or super-distribution are
possible. DRM technology, however, can also allow special
consumption rules to be created for particular consumers or
classes of users, for schools and universities, for libraries,
and for consumers with special needs such as the blind.
InterTrust Technologies does this today.
Our experience tells us that there are three fundamental
requirements in order to establish this framework. First,
technology must provide creators of digital information the
secure ability to manage and protect their rights throughout
the life cycle of the content and however that content may be
exploited, and it must operate wherever music is played--
personnel computer, to PDA, to cell phone, and back again. We
live in a connected world.
Second, it must provide copyright owners and value chain
participants such as retailers the ability to offer consumers a
wide range of usage options.
Third, it must be unimpeachably neutral and a trusted
environment in which technology assures these agreed-upon
arrangements. It may not in any way advantage any interests,
including those of the technology provider. The trusted
environment should be open enough to permit multiple formats,
multiple services, multiple applications, a true competitive
ecosystem. That is why InterTrust restricts itself to building
a platform that solely supports third-party businesses. We run
no other such services.
In closing, we should remember that the issue is about
constructing a civil digital society in the Internet Age, where
rules created by citizens and for citizens can be implemented
and respected wherever and whenever legitimate interests are in
play. InterTrust is helping to make this a reality with a whole
variety of partners, many of whom you have heard from today.
Thank you very much.
[The prepared statement of Mr. Shear, as presented by Mr.
Fish, follows:]
Statement by Victor Shear, Founder and CEO, Intertrust Technologies
Corporation
InterTrust Technologies Corporation is the leading provider of
Digital Rights Management (DRM) technologies, which in the field of
copyright protection will secure four objectives: (i) give consumers
new freedom to enjoy music and entertainment online; (ii) give
copyright owners the means to manage and protect their rights in the
works they create and publish; (iii) give effect to elements of law,
such as copyright exceptions; and (iv) provide users with the means to
manage legitimate personal rights and interests.
Until now, the ability of the creative community to enforce rights
in their copyrighted works has never really caught up with the
technologies enabling anybody to make and distribute unlawful digital
copies. What has been urgently needed is a partnership between
technology and law to provide a workable economic framework for the
vital efforts of our musicians, writers, actors and artists, and to
accommodate and satisfy the legitimate expectations of consumers--
including limitations on exclusive rights to the extent they are
sufficiently formulated. Sophisticated DRM technology now provides the
mechanism to effect this partnership.
InterTrust's DRM technology is now capable of securely managing
rights in copyrighted works in the context of peer-to-peer
distribution, and can enable consumers to listen, record, and
distribute music online without compromising the rights of artists,
record labels, and other copyright owners. It also makes it possible
for the creative community to offer consumers a limitless range of ways
to enjoy music and entertainment: sale of downloads; subscriptions;
payper-listen; superdistribution (consumer A delivering material to
consumer B and so on); file sharing. It can do so because it associates
the technical protection with the content regardless of the channel
through or platform upon which it is exploited.
But effective DRM solutions require more than sophisticated
technology. They also require credibility and trust. That is why
InterTrust restricts itself to building a platform that supports third
party businesses. It is not itself a distributor of copyrighted works;
a builder of consumer applications such as electronic music players; or
a credit card transaction processor. InterTrust's business role and
model is that of a utility: it facilitates but strictly refrains from
intruding into the business models and distribution channels for
copyrighted works. InterTrust's function is not to dictate the
arrangements for digital rights management, but to establish and
maintain a platform to ensure the neutrality, security, commercial
reliability, and trusted interoperability of services and software
applications used for the protection and management of rights in
digital information of all kinds, including online entertainment. It is
fundamental to our vision that this trusted, neutral infrastructure is
essential to the long-term effectiveness of DRM solutions, and to their
acceptance by copyright owners, distributors, and consumers alike.
Ultimately, the reality of sophisticated DRM technology is about
far more than Napster, online entertainment and copyright law. It is
about constructing a civil digital society in the Internet Age, where
rules created for or by its citizens can be implemented and respected
wherever and whenever their legitimate interests are in play. It is
this simple proposition that InterTrust is making a reality.
On behalf of InterTrust, I wish to thank Senators Hatch, Leahy,
Feinstein, Thurmond, and all the members of the Committee for the
opportunity to testify this morning on the important issue of on-line
entertainment and copyright law. I would like to tell the Committee
about how InterTrust Technologies Corporation has developed Digital
Rights Management technologies that in the field of copyright
protection will secure four objectives:
give consumers new freedom to enjoy music and other forms of
content,;
give copyright owners and other value chain participants the
means to manage and protect their rights in published works;
give effect to elements of law, such as copyright exceptions,
for ensuring that rights are managed in accordance with public
interest;
provide users with the means to manage their legitimate
personal rights and interests.
InterTrust is the leading provider of peer-to-peer Digital Rights
Management (DRM) technology. This technology ensures the neutrality,
security, commercial reliability, and trusted interoperability of
applications and services used to protect and manage rights in all
forms of information, including the creative works under consideration
here. Our enterprise is focused on the rapidly evolving area of digital
commerce in information; our aim is to provide a framework of
commercial trust comparable in scope, and at least as reliable, as the
systems of trust that underpin commerce in the physical world.
The focus of this Committee extends beyond a simple re-examination
of the particulars of the Napster case to the broader questions it
raises. I respectfully submit that, from that perspective, InterTrust
has a particularly valuable contribution to make. Given our unique
position in the DRM arena, we believe we can assist the Committee in
considering the complex issues before it.
Background on InterTrust Technologies Corporation
I founded InterTrust in January 1990. The goal was to provide
solutions to many of the complexities involved in realizing the full
potential of electronic commerce. It seemed clear that digital commerce
would require mechanisms enabling the dynamics of traditional commerce
to be seamlessly translated into the electronic world. My associates
and I coined the expression Digital Rights Management to describe the
requisite mechanisms. In effect, we were looking towards a world in
which, where and as appropriate, commerce could be digitally ``virtual]
zed''. Over the last 10 years, InterTrust has developed the concept of
Digital Rights Management (``DRM '') and has grown from myself and a
handful of researchers to a fully-fledged commercial enterprise
employing more than 350 people worldwide. Approximately $340 million of
working capital has been provided to InterTrust by its investors, and
all of this capital is dedicated to the creation of a digital rights
management framework for digital commerce and participant conduct.
The impact of the Internet has meant that the initial and most
visible applications of InterTrust's technology have been for digital
music, video, and publishing. Literally any digital information that is
shared or stored will ultimately be implicated, however. This includes,
for example, medical records, enterprise workflow, financial
interactions, and the policy management of any stored or communicated
information--policies ranging from privacy rights to enforcing
government regulations to reliably automating commercial interests.
As concerns electronic distribution of entertainment products and
services, InterTrust has been a very active member of the Secure
Digital Music Initiative (SDMI) since its inception, and its employees
have chaired SDMI's Portable Device Working Group and its Screening
Group. We played the role of primary developer of the Intellectual
Property Management Protocol (IPMP), which became an MPEG-4 standard
for electronic devices. We have strategic alliances and partnerships
with a number of major enterprises including Adobe, AOL, Bertelsmann,
Blockbuster, Compaq, Diamond Rio, Enron, Mitsubishi, Nokia, Philips,
Samsung, Texas Instruments, Universal Music and numerous others. They
are all actively working with InterTrust DRM technology to further the
enjoyment of music, video, published text and other information
products on PCs, portable music players, cable systems and mobile
phones. InterTrust works with these and other companies to help
establish standards, and, through InterTrust's MetaTrust Utility, to
help ensure that consumers and commercial organizations can enjoy a
consistent degree of reliability, integrity, and interoperability when
they expose their interests through digital interaction. We pride
ourselves on working with individuals and companies, large and small,
that have interests in, or rights related to, digital information that
need rights management.
Online Entertainment and Digital Rights Management
Great creators are normally great communicators, their individual
voices collectively embodying and expressing the values and passions of
their culture. Using digital technology expedites the accurate
dissemination and reception of creators' works and, when employed in
the proper context, digital technology can also support the universe of
rights associated with most creative works--the rights of creators,
value chain members, users, and societal organizations. Although
digital technology can greatly enhance the communication of creators'
works, unless it is properly employed, its use creates severe problems.
Digital technology, when improperly used, can deny content creators and
their successors the commercially essential return for labor and right
to manage and exploit property. The improper use of digital
technology--when employed as a vehicle for the unfettered purloining of
copyrighted content--directly undermines the basic building blocks of
modern society, the respect for the rights of others, as well as proper
return for one's creative output and labor. Moreover, such improper use
directly suborns the stable economic basis necessary for further
development of art.
Ultimately society loses out as the basic ``glue'' of commerce and
democracy, the civil interaction between multi-party rights and
interests and the maintenance of a market for goods and services, is
undermined in the service of convenience and self-interest. At times it
appears there's a call to revolt, ``free the content,'' when such a
call--if extended beyond fair use -obscures the real issues and would
seek to legitimize people taking for free whatever they want. Others'
rights be damned!
Although the impetus for this hearing may be ``file-sharing'' and
the recent Court of Appeals decision affecting it, it is not just about
Napster. It is about the changes that digital technology is bringing to
the worlds of art, entertainment and information. It is also about the
kind of society that electronic communities and digital technology,
used in concert with copyright law, can create. Many people are just
now beginning to realize how profound those changes and possibilities
are. In under two years and with very little in the way of direct
investment, an electronic community of some 60 Napster million file
sharers was created. Ordinary consumers used the Napster system to
obtain unauthorized copies of copyrighted music without payment when
most of them, at least previously, would never have considered buying
pirated CDs in the physical world. Other communities are springing up
worldwide where individuals communicate electronically and eschew any
reference to traditional principles of commerce and property rights.
The Digital Millennium Copyright Act, which this Committee was
instrumental in enacting, was the first in the world to tackle the
challenges of digital technology. Yet for all its thoroughness, we are
probably even now past the point where we could claim that copyright
law alone is sufficient to establish adequate mechanisms for the
protection and management of rights in creative works (though it is
essential that legislators continue to develop the body of digital
copyright laws and regulation). Despite shorter revision cycles for
law, the ability of the creative community to enforce the rights in
their works has never really caught up with the technologies enabling
anybody to make and distribute unlawful digital copies. The situation
is now being considered by some leading academics as one in which
copyright law may in practice become virtually irrelevant.
Society simply cannot afford to accept copyright law becoming
irrelevant. And we cannot afford to set the extraordinary example of
dispensing with the rights of content providers because we are
unwilling to develop a framework for proper commercial and civil
behavior. There is therefore an urgent need for a partnership between
technology and law that effectively maintains the underlying commercial
and social principles of modern free society. With respect to online
entertainment the partnership must provide a workable framework for the
efforts of our musicians, writers, actors and artists. We need a
partnership between government and content commerce participants that
accommodates and satisfies the legitimate expectations of American
citizens--including any limitations on exclusive rights appropriate for
an intelligent public policy.
Sophisticated DRM technology such as InterTrust's can provide the
mechanism to help effect this partnership. While technical complexities
and challenges abound, the mission is achievable: to provide a
combination of technical mechanisms and social compacts that allow the
transfer of the basic features of traditional commerce into the digital
market place. The means to achieve this goal are now at hand, and the
means to continue developing a flexible, free, and safe commercial
digital environment, are readily accessible. There are, of course, new
and complex commercial, economic and social issues to be addressed. But
this cannot deflect us from the simple, basic responsibility that we
all have, to not settle for over-simplifications that result in
distorting, unfair, and socially and commercially flawed solutions.
Rather, we must strive to allow the digital world to live up to the
principles most all of us believe are the minimum standards we would
demand in the traditional, non-digital world.
The basic principles of granting rights to creators to control the
use of their work and of maintaining trusted systems for commerce
remain as valid as ever. We should not ignore the opportunities as they
arise of reviewing current copyright limitations and other
accommodations that were made before the advent of effective digital
rights management to ensure they continue to serve these principles. We
should also be ready to reshape these limitations, where necessary, to
fit the emerging digital marketplace. Above all we should be driven by
a simple principle: to maintain a free and effective commercial society
that, in a balanced fashion, supports the rights of all participants.
Digital Rights Management Technology
It is important to understand from the outset that when talking
about DRM technology we are not referring to simple mechanisms that,
say, carry protected material from a server to a client in return for a
payment, locking the material to a single device. Such a proposition
offers nowhere near the degree of flexibility and coverage necessary to
support either traditional or new business offerings. Post delivery,
persistent protection of commercial interests, flexibility in use of
content across devices and locations, and flexible interaction with
content, are all priorities for content value chain participants. In
the context of music as it relates to Napster, users want to play music
on-line or off-line, and they want the right and ability to combine
music into playlists that are used to create a specific personal or
group music experience, for use wherever and whenever they wish.
The technology system that InterTrust has developed protects
content, in the instance of this discussion music, on a persistent
basis throughout its commercial lifecycle. It does this by binding
rules governing content use with governed content. This tamper
resistant association persists regardless of the channel through or
platform upon which the music is played, and the number of handlers of
the content, the duration of time, or the physical location of the
content. InterTrust technology creates a zone--independent of time,
place, or device--where music is governed by technology and where
rights-holders, including consumers, are free to express and protect
their rights through the freedom to establish differing rules
reflecting their individual interests.
Within this technical protection zone, digital information such as
music can be offered to consumers via a virtually limitless range of
models: sale of downloads; subscriptions; pay-perlisten;
superdistribution (consumer A delivering material to consumer B and so
on); and file sharing. This freedom is also available for the
implementation of a richly diverse range of policies that govern usage,
and any consequences of usage, in relation to groups of any nature,
such as special interest groups. To accommodate statutory limitations
on copyright, special consumption rules can be created, either through
law or through accepted practice of rightsholders, for particular
consumers or classes of users: for schools and universities; for
libraries and archival institutions; and for consumers with special
needs such as the blind. Whatever the needs, whatever the relationship
between different participants the digital information remains
persistently protected while freely available according to agreed rules
of use.
If this protection is to remain effective throughout the lifecycle
of the content then it follows that it must be possible to change the
rules relating to use. Material can have a succession of different
owners. It can change in value; it can be traded for different
purposes; it can be used on multiple, different devices; and it can be
loaned to other parties. Our system anticipates and accommodates all
these possibilities. In our system, digital information and the rules
governing its use by a particular user can exist and move independently
of each other, coming together to give effect to the agreement between
supplier, distributor, and consumer, and respecting whatever rules may
be applied by government, or, for example, by financial institutions.
An efficient system of protection must not only accommodate a wide
variety of business offerings. It must also support the complex value
chains through which many of the offerings are delivered. The
architecture InterTrust has developed supports value chain
relationships based on traditional commercial principles--we call this
digital enabling of value chains ``chain of handling and control''.
This means that each actor in the value chain is able to create the
rules it wishes to apply to the material in question within the scope
of authority granted to the participant by the previous or governing
actors in the value chain. A publisher could establish the commercial
terms for a work within the authority granted by the author; the
distributor could then set rules within the scope of authority granted
by the publisher and so on through the value chain, all in accordance
with law and accepted practice.
Requirements of Digital Rights Management
We believe there are a number of precedent requirements for
effective digital rights management of content. First, it must provide
creators of digital information the ability to manage and protect their
rights throughout content lifecycles and however content may be
exploited. This means that a DRM system must be secure and resilient to
tampering, and certain elements of the protection system must accompany
the copy of the work as it is passed from party to party, format to
format, platform to platform.
Second, it must support commercial flexibility so that it can
accommodate the arrangements struck between copyright owners, their
customers, distributors, retailers and other value-adding participants.
This means that a rights management system must provide content
creators and/or publishers the means to allow consumers choices
appropriate to the commercial circumstance.
Consumers must be able to enjoy copyrighted works, and the system
must permit consumer arrangements to vary based on the terms agreed to
by the content commerce participants.
Third, it must provide a neutral and trusted environment in which
technology assures these agreed upon arrangements. The rights
management technology must be unimpeachably neutral, that is it may not
in any way subtly or secretly advantage any hidden interests, and
further, it is essential that the rights management technology not
advantage any out-of-context interests of the rights management
technology provider. Consequently, for example, neither a rights
holder, nor a consumer, nor the rights technology provider should be
able to alter or tamper with any agreed upon commercial arrangements
once agreed or impede the expression of a parties' rights or interest.
Unless a rights management system meets these requirements--that
is, unless the trust system is itself unimpeachably trustable--it will
fail to satisfy the legitimate interests of businesses, consumers, and
government. Further, unless a rights management system is able to
maintain its trust attributes regardless of the underlying digital
commerce platform, device, or application, it will fail one of two
tests. Either the system will (A) lack reliability in protecting
participant rights, since a loosely coupled array of rights systems,
without a unifying maintained rights environment, will readily succumb
to hackers; or the system will (B) lack interoperability, and consumers
and commercial participants alike will lose the convenience and
efficiency essential to content commerce, and risk having their
interests suborned to the interests of a party controlling a narrow,
proprietary environment.
In the domain of music, InterTrust DRM technology is now capable of
permitting consumers to listen, record, and distribute music online in
ways that do not compromise the rights of artists, record labels, and
other copyright owners. It is capable of managing the rights in
copyrighted works in a secure manner in the context of peer-to-peer
distribution. Its technology supports the ongoing effort of Digital
World Services (DWS), a Bertelsmann subsidiary, and the Universal Music
Group, as well as many other interests both large and small, enabling
them to implement new business models for the distribution of music on-
line. A leading international music group, Daft Punk, for example,
recently accompanied the release of its latest album with a novel
application of InterTrust technology. The band is encouraging
traditional retail relationships and creating digital economy value for
its fans by enabling those fans who have purchased the CD to access the
group's web site and to download additional music--at no further cost,
but protected with InterTrust DRM.
Effective DRM solutions require more than sophisticated technology.
They also require credibility and trust. That is why InterTrust
restricts itself to building a platform that supports third party
businesses. It is not itself a distributor of copyrighted works; a
builder of commercial consumer applications, such as electronic music
players; or a credit card transaction processor. InterTrust's MetaTrust
Utility, the core of InterTrust's business interests, functions as a
utility. It facilitates--but refrains from intruding into--the business
models and distribution channels for copyrighted works. Its function is
not to dictate the arrangements for digital rights management, but to
establish and maintain a platform that ensures the neutrality,
security, commercial reliability, and trusted interoperability of
services, software applications, and devices used for the protection
and management of rights in digital information of all kinds. A
trusted, neutral infrastructure is essential to the long-term
effectiveness of DRM solutions, and to their acceptance by copyright
owners, distributors, and consumers alike.
Conclusion
DRM technologies should give consumers new options for legitimately
acquiring and enjoying music and other forms of online entertainment,
while ensuring that copyright owners and other commercial participants
have the means to manage and protect their rights. Enabling peer-topeer
distribution of music and other copyrighted works without compromising
copyright is an obvious example. In our view, sophisticated DRM
solutions must support the fundamental principle of any effective
copyright system: that of striking the correct balance between
protecting the rights and interests of copyright owners while promoting
the interests of the wider community and facilitating the efficient and
flexible dissemination of, and greater access to, music and other
copyrighted works.
Ultimately, the reality of sophisticated DRM technology is about
far more than Napster, online entertainment and copyright law. Policy
makers, consumers, and busines globally will come to realize that the
``Napster issue'' isn't just about music and the Internet. It is about
constructing a civil digital society in the Internet Age, where rules
created for and by its citizens can be implemented and respected
whereever and when ever legitimate interests are in play. It is this
simple proposition that InterTrust is helping to make a reality.
In closing, InterTrust once again thanks the Committee for the
opportunity to present testimony on this important issue, and looks
forward to working with members of the Committee as they onsider the
important issues related to online entertainment and copyright.
Statement of Todd Slosek, InterTrust Technologies Corporation, Santa
Clara, CA
Washington, D.C., April 3, 2001--Victor Shear, the founder and CEO
of InterTrust Technologies Corporation, testified today before the
United States Senate on the critical role that Digital Rights
Management (DRM) solutions will play in the future of peer-to-peer file
sharing technologies like Napster and other online entertainment.
At a hearing of the Senate Judiciary Committee on online
entertainment and copyright, Shear testified that the InterTrust DRM
technology is now capable of securely managing rights in copyrighted
works in the context of peer-to-peer distribution, and can enable
consumers to listen, record, and distribute music online without
compromising the rights of artists, record labels, and other copyright
owners.
``The ability of the creative community to enforce the rights in
their works has never really caught up with the technologies enabling
anybody to make and distribute unlawful digital copies,'' said Shear.
``We urgently need a partnership between technology and law to provide
a workable economic framework for the vital efforts of our musicians,
writers, actors and artists, and to accommodate and satisfy the
legitimate expectations of consumers. InterTrust's sophisticated DRM
technology now provides the mechanism to effect this partnership.''
InterTrust DRM technology makes it possible for the creative
community to offer consumers a limitless range of ways to enjoy music
and entertainment: sale of downloads; subscriptions; pay-per-listen;
superdistribution (consumer A delivering material to consumer B and so
on); file sharing. It can do so because it associates the technical
protection with the content regardless of the channel through or
platform upon which it is exploited. For example, the leading
international group, Daft Punk, uses InterTrust DRM technology to
enable fans who have purchased the group's latest CD to download
additional music from its web site.
``Ultimately, the reality of sophisticated DRM technology is about
far more than Napster, online entertainment and copyright law,'' Shear
told the Senate panel. ``It is about constructing a civil digital
society in the Internet Age, where rules created for or by its citizens
can be implemented and respected wherever and whenever their legitimate
interests are in play. It is this simple proposition that InterTrust is
making a reality.''
InterTrust [Ticker ITRU] is the leading provider of peer-to-peer
Digital Rights Management (DRM) technology to ensures the neutrality,
security, commercial reliability, and trusted interoperability of
online applications and services. InterTrust has strategic alliances
and partnerships with a number of major enterprises, including Adobe,
AOL, Bertelsmann, Blockbuster, Compaq, Diamond Rio, Enron, Mitsubishi,
Nokia, Philips, Samsung, Texas Instruments, and Universal Music, using
InterTrust technology to enable consumers to enjoy music, video,
published text and other information products on PCs, portable music
players, cable systems and mobile phones. For more information, please
visit the InterTrust website at www.intertrLISt.COM.
Chairman Hatch. Well, thank you so much. This has been a
particularly interesting panel to me. I am sorry I had to step
out for a minute or two, but I got most of the message here and
it was very good.
In closing, I appreciate the time and effort all of you
have put in for your testimony today, and the artistic efforts
of those whom you represent. We now have increased appreciation
of the continual evolution of Internet music and the legal and
ethical complexities that has generated. It seems to me this
hearing has brought that out.
As with any new technology, the scientific advancements
often outpace the necessary legal adjustments. We have recently
seen similar discussions in the current situation with
molecular biology and genetic research. The research has
outpaced the law.
My goal has always been to respect the efforts of
individual artists and associated intellectual property rights,
but at the same time to allow a legal framework that does not
stifle the technological innovation which is the foundation of
our entertainment industry, which is, of course, the envy of
the whole world.
Let me just say this: We will leave the record open until
Friday, and we will allow any member of this Committee to
submit questions, which I hope you will answer within 2 weeks.
It is important that you get your answers back to us, because
we are building a record here that literally may determine the
future for all of you with regard to music, and I would like to
do it the right way.
I don't have any axes to grind here. I think I have
expressed how important every aspect of this business is, but I
do have an axe to grind in that I love the business and I love
what it does. I love the softening it brings to America. I love
the good things about the business that really mean so much to
all of us.
I think Mr. Valenti's comments today of how important this
business is vis-a-vis the rest of the world and vis-a-vis our
balance of trade--this is the one industry, and I am talking
about the whole entertainment industry--movies, music, books,
et cetera--it is the one industry where we really have a great
balance of trade surplus.
To me, it is an industry that brings a great deal of joy
and satisfaction to millions and millions and millions of
people out there, and we want to keep it going. But it is also
an industry which is very tough to break into. I know a lot of
really fine writers and artists who will never have a chance,
in my eyes, because of the way the industry is currently
structured, and it is a sad thing.
I remember when I received my first royalty check from
ASCAP that they had collected. I was at an ASCAP annual meeting
and there were about 1,000 people there, all writers, and I
raised my check and said I just got my first royalty check. The
whole place went out of control; everybody stood and applauded
and stomped their feet.
When I sat down, Marilyn Bergman, who heads ASCAP, reached
over to me and said, ``Senator, the reason they are so excited
is because none of them will ever receive a royalty check. And
yet there is some real talent out there that ought to be
compensated.''
I think Napster understands that the court is right in
determining that Napster needs to operate within the legal
framework of the law, and they are trying to do so. I said to
the industry that they ought to capture Napster, because it is
a great peer-to-peer system that literally people love,
especially our young people, and I think our young people are
willing to pay something to be able to use Napster.
I would hope that we could do this without having the
compulsory licensing situation. I don't know that we can, but I
hope that we can. That is my goal. We have come a long way
since last summer, but in my opinion we haven't gone anywhere
near as far as we should go, and we haven't accomplished
anywhere near what we should accomplish. There is all too much
litigation and in-fighting in this industry that ought to be
resolved, it seems to me, by good business plans and good,
honest approaches inter-industries. I hope that we can do that.
This has been a great hearing for me because I have learned
a lot from it, and I am not going to forget what I have learned
here today. I just want to thank all of you for being here.
With that, we will adjourn until further notice.
[Whereupon, at 1:47 p.m., the Committee was adjourned.]
[Questions and answers and submissions for the record
follow:]
QUESTIONS AND ANSWERS
Responses of the Recording Artists Coalition to questions submitted by
Senator Leahy
1. Compulsory licenses and licensing disputes--RAC believes that
the content owners and content users must be afforded a reasonable time
period to develop a licensing system without government intervention. A
fair system might be created if the parties engage in ``good faith''
negotiations. However, if an agreement cannot be reached within a six
month to one-year time period, then Congress should step in and
implement a compulsory license system that fairly compensates the
recording artist and the record label. Without a compulsory system or a
functioning voluntary licensing framework, there will be a disincentive
to use music on the Internet and that would harm all parties. The goal
of Congress should be to provide incentives to use music on the
Internet, but only in the absence of a voluntary framework should a
compulsory license system be implemented to accomplish that objective.
RAC does not consider contract provisions requiring the artist's
approval to grant rights for Internet delivery of music as a serious
roadblock to increased Internet distribution of music. Most artists
will agree to such a request from their record label, so long as the
record label acknowledges the label's obligation to negotiate with the
recording artist as to the appropriate division of receipts, including
advances on the entire licensing deal, equity participation, etc. There
are few provisions in artist contracts providing much negotiating
leverage. Provisions such as ``anti-coupling'' provide artists with a
modicum of control and rare negotiating power. It is a cause of
concern, however, that the ``anti-coupling'' clauses in some new artist
contracts have been eroded for some uses in the digital space.
2. Historical instances in which compulsories were created as
raised by Mr. Barry--Mr. Barry is right to point out that compulsory
licenses have been used in the past to license music. However, just
because there have been compulsory license systems created in the past
does not mean that Congress should or must step in immediately. In both
instances cited by Mr. Barry, the impasse between the content owners
and content users was clear and intractable. A compulsory license
system was only implemented after extensive negotiations failed, and
essentially all other options were exhausted.
At this point in time, RAC does not believe that all options have
been exhausted. The key condition, however, must be open and fair
``arms length'' negotiations between the parties. If the record labels
refuse to negotiate in ``good faith'' or simply perpetuate the status
quo, then Congress should strongly prod the record companies and music
publishers to enter into ``good faith'' negotiations with the
independent Internet companies. In the case of Napster, Congress should
implore the record labels and music publishers to offer Napster license
rates on essentially the same terms as provided by them to other
Internet content users so long as Napster follows through on its
assurances of security. No one could have anticipated the public's
tremendous demand for interactive music or out-ofprint recordings.
Therefore, Napster's effort to create a pay system to legitimately meet
this consumer demand should be supported. As stated before, however, if
the parties are unable to independently develop a new system within six
months to one year, then Congress should intervene as a ``last
resort.'' Congress can then rely on the precedents set by the previous
compulsory music license systems to craft a new Internet music
compulsory license system.
3. Digital Rights Management--RAC has no evidence either supporting
or disputing the existence of adequate technology.
4. How soon is soon--Before Napster became so popular, the major
record labels' forays on the Internet market were apprehensive. The
labels released a very limited selection of cumbersome, encrypted
downloads at exorbitant prices. The record labels simply did not listen
to the fan's demand or recording artist's excitement for music on the
Internet. In particular, many recording artists have been pushing
record labels for years to take a more serious and comprehensive
approach to the Internet. The label's inaction created a vacuum
directly leading to the creation of Napster. Napster simply responded
to consumer demand while the labels did not. As such, it is still in
large part up to the record labels to determine in what fashion and
when digital content will be fully exploited. RAC hopes sooner rather
than later and with consideration for the artists' concerns. With that
stated, however, the most important element of an Internet music
business model is the continued existence and expansion of a viable
independent distribution system on the Internet. Systems like a fee-
based Napster will not only provide an outlet for independent recording
artists and those recording artists signed to major labels who are not
given the major star promotional push, but these independent Internet
music sites will challenge the major labels to continue on an
aggressive course and timetable.
5. All other issues will be dealt with below.
Work for Hire
RAC believes strongly that Congress should reexamine the work for
hire provisions in the 1976 Copyright Act with an eye toward clarifying
authorship issues of sound recordings. However, before any real
progress can be made on the work for hire issue, the record labels,
represented by the RIAA, must fundamentally change their relationship
with recording artists and more importantly, with the organizations and
groups representing recording artists. While paying great lip service
to the importance of the recording artist to their companies in
testimony before Congress, the record labels and the RIAA, have adopted
a policy of indifference and confrontation regarding work for hire. The
RIAA has made it very clear that they are not interested in meeting or
negotiating with the recording artists. Nor have they shown a
willingness to fulfill the strong desire of Congress (specifically this
Committee) for the parties to negotiate an acceptable work for hire
amendment that would be supported by all factions in the music industry
and Congress. Apparently, the RIAA has taken the position that they
will fight this issue in court, thereby taking full advantage of the
immense difference in financial resources between the record labels,
owned and supported by multinational corporations, on the one hand, and
the recording artists on the other. This record company posture is
unacceptable to the recording artists, and should be unacceptable to
Congress.
As the record labels have no intention of starting any kind of
substantive dialogue with the recording artists, it is imperative that
Congress intercedes and calls for hearings on this issue. All sides in
this debate--there are many--must be heard in a ``blue-sky'' forum.
Academics must offer their counsel, and even producers, backing
performers, and the unions must be given the opportunity to present
their views. Only when a full public airing of all viewpoints is made,
can the parties and Congress fashion a fair and sensible amendment or,
in the alternative, decide to refrain from offering an amendment. This
is how the Copyright Law has been amended in the past. There is no
reason to veer from this democratic and mutually respectful tradition.
Seemingly, the record labels learned very little from the work for
hire episode. At the core of this conflict is the disconnect between
the public perception of recording artist/record company relations, and
the reality. Record companies publicly portray the recording artist as
a partner in their enterprise. The record companies use this image of a
working ``partnership'' between recording artists and record companies
as a way to entice recording artists to sign with their companies.
However, once the record contract is signed, generally the record
labels true goal, that of creating an employer/employee relationship,
quickly replaces the illusion of a partnership. Recording artists are
not employees. We are not entitled to the benefits of employees such as
pensions and health care, and as such we do not create works for hire.
In fact, the working relationship between a recording artist and a
record company is that of a joint venture/partnership. Other than the
standard boilerplate work for hire language that is mandatory and non-
negotiable in almost every record agreement with a major label, there
are no contractual indicia of an employer/employee relationship. So
while the recording artist works with the record company as a
functional partner, the record company treats the recording artist as
an employee. The record companies must treat recording artists more
like partners, which in fact they are. If the record labels would
listen to and respect the recording artists' collective political and
economic voice, tremendous progress could be made to resolve the
lingering political and contractual differences between the recording
artists and the labels, including work for hire.
Compulsory Licenses as a Last Resort
This issue is addressed above.
Interactive Digital Performance Right
The Digital Performance Right in a Sound Recording Act of 1995
created the first performance right for the performers of music.
Congress mandated a royalty payment of 50% to the copyright holder
(most often the record label), 45% to the featured artist, and 5% to
the non-featured musicians and vocalists. This royalty applies only to
noninteractive webcasting as defined by the compulsory structure of the
Digital Millennium Copyright Act. The problem is that for an
interactive service such as Bertelsmann/Napster, My.Mp3.com, MusicNet,
or Duet, the compulsory license does not apply: Artists lose their 45%
and have to settle for whatever they are promised in their label deal.
This might range anywhere from 7% to 50%, but more importantly would be
recoupable against the artist's outstanding balance. As such, for most
artists, there will be little revenue from interactive music services
under the licensing structure that exists today.
Writers of music share a performance right with publishers. The
writer's 50% share is paid directly to the writer, and is not subject
to recoupment. RAC believes that digital performance rights for sound
recordings should mirror the writer's system.
The Digital Performance Right in a Sound Recording Act contains
provisions for labels to strike exclusive licenses with webcasters.
Under an exclusive license, artists once again potentially lose the 45%
afforded to them by the compulsory. The difference between a direct
payment to an artist and a recoupable payment is dramatic for both the
artist and the label. For the artist, it may be the difference between
some payment and none. Since the incentive is greater for the label to
negotiate directly with webcasters, the labels could retain more money
possibly at a lower rate.
There is also the matter of equity stakes the labels have
negotiated with digital media companies. It is now common for the
labels to take equity in digital media companies as a precondition to
licensing their content. For instance, AOL Time Warner, Bertelsmann,
and EMI hold equity in MusicNet, and Sony and Universal in Duet--equity
shares that will not be offered to recording artists. Perhaps one way
to level this inequity is to ensure direct, substantial, and non-
recoupable payment to artists from interactive music services.
Independent Artists
The answer to this question must be in two parts. First, the issue
of new artists signing major label agreements will be addressed, and
second, the issue of independent artists will be addressed:
A. New Major Label Artists--A young recording artist signed to a
major label has many obstacles to overcome. The rate of success of new
artists is incredibly low. Most do not get past their first album
release, and for those who do, the success rate after that is still
quite low. This is a very tough business. The Internet provides a new
artist with a valuable promotional tool that had never existed before.
A new artist can use the Internet to release promotional tracks and
drive traffic their way. New artists can create web sites that provide
promotional information and develop a degree of interactivity with
their fans. In many instances bands communicate with their fans by
amassing an e-mail database. They can inform their fans when and where
they will be performing live, or when their new album is being
released. They can interact with their fans through chat rooms, and in
some instances they receive feedback from their fans about their music.
In fact, the band Journey recently revised an unreleased album,
including creating new tracks, based on feedback from fans who heard
the album after it was prematurely put on the Internet without the
band's approval. The Internet undoubtedly provides the newly signed
artist with an unprecedented marketing and promotional tool.
Furthermore, the Internet is, as of yet, unproven as a primary
distribution mechanism. New artists still rely on CD sales and it
remains difficult to obtain shelf space in the terrestrial retail
outlets. The promise of independent Internet distribution is unlimited
``shelf space''.
Unfortunately, many major labels are beginning to acquire more and
more Internet rights from bands when they are signed. Some major labels
now try to own and/or control an artist's web site, even if the site
was created before the recording agreement was signed. They are
especially concerned about controlling data which is stored on the web
site, and in some instances, they have attempted to exclusively control
the artist's trademarked name on a web site address even after the
termination of the recording agreement. The newly signed artist must
try to retain these rights so the artist can take a substantive role in
promotion during and after the deal. Major labels are very shortsighted
in this regard. By seeking to control an inordinate amount of Internet
and digital rights of the newly signed recording artists; they are
unwittingly ensuring that the failure rate of new artists remains at
the same level or conceivably gets worse. Major labels have cut
promotional budgets and staffs across the board; especially those
recently acquired by multinational corporations. The labels must
apportion their shrinking promotional money and manpower to a greater
number of deserving bands. A new band might well find itself in the
middle of this type of number crunching that ultimately may result in
record label neglect. At times the only player actually promoting a new
band is the band itself. A new act must retain as many Internet rights
as possible so as to give itself a fighting chance in the ever more
constricted major label market.
B. Independent Artists--A viable independent Internet distribution
system must be allowed to survive. Otherwise, independent artists will
not be able to take advantage of the wonderful promotional, marketing,
and creative benefits of the Internet. The Internet provides many
independent recording artists with an outlet that was simply not in
existence before. The major record companies should not be allowed to
destroy or inhibit independent online distribution in the name of
copyright infifringement enforcement, when in fact, its destruction
will only secure Internet market dominance for the major labels. Will
the major labels willingly allow for competition with independent
artists through an Internet system the majors control such as MusicNet?
There is reason to be concerned that the major labels will only want
their respective artists to be promoted via the Internet. This is the
most compelling reason why the major labels should license their music
to Napster and services like it, so that independent distribution will
survive. Otherwise the independent artist will be as isolated as ever.
Contractual Issues
For years, recording artists and their representatives have
recognized and vilified the antiquated, but universally used, standard
recording agreement. Some surmise that the standard recording
agreement, with all of its anti-artist provisions, arguably constitutes
a restraint of trade under the laws of the United States. There is some
degree of support for this point of view. Courts in the United Kingdom
have at times ruled that certain standard music industry contracts
constitute a restraint of trade under the laws of the United Kingdom,
and perhaps even under the laws and regulations of the European
Community, if the court determines that the contract in question is
oppressive and against the public interest. In those instances UK
courts have rescinded or terminated contracts and at times awarded
recording artists with significant damages. Based on this precedent in
the UK, this Committee should examine the standard recording agreement
as is used in the record industry today in the United States to
determine whether there is any basis to conclude that this type of
standard agreement also violates US law. The following are examples of
certain controversial provisions Congress may find troublesome:
1. A key issue in many of the United Kingdom restraint of trade
cases is the inordinately long term of the standard contract. Most
major label agreements require a commitment for six to eight albums,
with a term that could conceivably last well over ten years. The United
Kingdom and the State of California have tried to address this problem
either through court intervention or through the legislature. (No
action has been taken elsewhere in the United States.) Courts in the
United Kingdom have ruled at times, that as a matter of UK law an
excessively long term recording agreement, as well as other types of
similar agreements in the music industry, constitutes a restraint of
trade. The State of California responded by enacting Labor Code 2855
which prohibits, under certain circumstances, a term for entertainment
industry personal service contracts longer than seven years. RAC
believes a legislative solution is desirable, and therefore Congress
should seriously consider enacting a seven-year federal law similar to
the law in California. While the California law is not perfect,
Congress should consider it as a guide. Free agency in the music
industry will help the established artists, the new artists, and the
independent artists. Free agency in the movie industry has been a
fantastic success, increasing the economic viability of both the
studios and the actors. In the music business, both the record labels
and the recording artists will benefit from a free agency system that
places a premium on success and gives artists a new degree of control
over their careers. This is why a federal seven-year rule would be good
public policy. It guarantees competition and innovation in the music
industry.
2. The majority of recording artists will never achieve financial
success or independence while the very onerous recoupment policy
remains a staple of the standard record agreement. As Chairman Hatch
has stated in the past, this is the only industry in which, after you
pay off the mortgage, the bank still owns the house. This standard
recoupment policy is also a very compelling reason why Congress and the
Courts should recognize that a recording artist is not an employee or
independent contractor of the record company. Congress should undertake
a very close examination of this policy.
3. When a band signs a record contract with a major label there is
almost always a ``leaving member'' clause. This type of clause mandates
that a recording label has the right to retain the services of a
leaving member of a band as a solo artist.
4. The work for hire provision of the standard record agreement
offers another compelling example of a provision which raises anti-
competitive concerns as it denies the creator of the work the right,
otherwise granted to all other copyright creators in similar
circumstances, to exercise termination rights. Essentially, the work
for hire provision tries to contractually deny the recording artist
their termination right, even though the Copyright Law clearly does not
include sound recordings as a qualifying category for work for hire
status.
5. Recording artists who also write their own music often must
waive the full, statutory mechanical royalty rate as a precondition to
signing a record contract (the ``controlled compositions'' clause).
In almost all record contracts, the standard royalty is drastically
reduced for all sorts of inappropriate and arbitrary reasons. For
example, a recording artist will receive a reduced royalty if a record
is sold in a foreign territory, if the record is sold in a PX or a
military base, if the record is released in a ``new format or
technology,'' and if the record is sold through a record club. The
major labels cross-license their catalogs to record clubs, such as
Columbia House and BMG Direct. The labels take enormous advances that
they do not share with recording artists and pay artists based upon a
50% royalty rate. RAC is also concerned that this long-contended
practice is extending to the online marketplace. With Mp3.com, for
example, each of the major labels took $20 million advances on blanket
licenses--advances they have not offered to share with artists. A
certain amount of records will be distributed as ``free goods'' when in
many instances the recording agreement provides that the record company
may include these records in special merchandising programs. In these
instances, the record company would still get paid for these records
while the artist would not. Some contracts actually charge a packaging
deduction against the recording artist for sales of records via the
Internet. In other words, the record company does not create any
packaging, but nevertheless charges the recording artist for the non-
existent packaging. Sometimes these packaging charges amount to 25% of
the standard list price of a record. RAC member, Tom Waits sums up the
situation very nicely with this prophetic line in his song ``Step Right
Up'': when it comes to recording contracts, ``the big print giveth, and
the small print taketh away.'' All in all, the practices of the record
industry relating to calculation of royalties warrant serious
attention.
All of the above are compelling reasons why Congress should
investigate, understand, and hopefully act to change the very basic way
that business is conducted in the music industry. Even though the
record companies will protest, this type of intervention will help all
concerned, including the record companies, as it will revitalize
creativity and guarantee that the record industry will be a vital and
important American treasure for many years to come.
Responses of Mike Farrace to questions submitted by Senators Hatch,
Leahy and Kohl
I am pleased to provide these responses to the written questions
asked subsequent to the April 3, 2001 hearing. I thank the Judiciary
Committee for the attention it is giving to the need to encourage ample
dissemination of creative works and the importance of maintaining
vigorous competition in the distribution of sound recordings.
Responses to written questions from Senator Hatch
Question: One argument we have heard in favor of a compulsory
license is that music has so many pieces to license and there have been
substantial disputes between the record labels, the publishers and
technology companies like MP3.com about how to get the publishing
rights cleared in the volume demanded by online offerings. Some have
suggested that a stumbling block to getting the labels to license sound
recordings is that they may not have the rights from their artists to
grant these rights. I understand there may even be problems with the
MusicNet offering to some degree because of these impediments. Would
any of you be interested in commenting on this particular problem and
suggest ways to remedy it?
Answer: It is Tower's understanding that while many artist
contracts of the past may not have included language providing for
distribution via new configurations, the language of most artist
contracts today acknowledges that record companies will face an ever-
changing landscape of technological opportunities for distribution, and
therefore, contract language provides for the record companies' ability
to exploit copyright via new configurations and channels of
distribution which may not specifically be identified by name. More
importantly, however, if such a stumbling block exists for a label, we
believe it should preclude content availability for MusicNet or Duet
just as it would for a delivery system using an independent company
such as Tower. Conversely, if MusicNet and Duet can be licensed, so can
Tower.
It may also be useful to note that disputes over ownership of
copyrighted material have existed in the past, and can logically be
expected to exist in the future. A compulsory license would not address
issues of ownership. We believe Congress is correct in hesitating to
impose an extreme measure such as a compulsory license without giving
the marketplace time to offer its own solutions. At the same time, we
urge the Committee of the Judiciary to view with caution claims of
stumbling blocks that appear to exist only for companies not owned or
controlled by copyright owners.
Question: Mr. Hank Barry argues that we have created compulsory
licenses in the past, for publishing rights in music and in rebroadcast
of television programming because it was difficult to clear the rights
to the myriad creative interests involved in making up a broadcast day.
Would anyone like to explain why that analogy does or does not obtain
in the online music and entertainment world?
Answer: The analogy appears to apply. A song can have more than one
writer and owner; an album can have multiple writers; a compilation
album or soundtrack can involve multiple labels and distributors. Ed
Murphy, in his testimony on behalf of NMPA, acknowledged that the size
of the licensing demand placed on Harry Fox by just MP3.com was far in
excess of their current licensing capability. However, Mr. Murphy also
insisted that they were working hard to meet not only the needs of
MP3.com, but to anticipate the licensing needs of the industry as a
whole. We readily acknowledge that many in the industry have been
working feverishly to address the myriad rights involved in creating a
digital marketplace. We believe that while current progress has been
slower than we would like, a careful review of the industry's ability
to solve the licensing issues identified at the hearing is necessary
before concluding that a compulsory license is required.
Tower supports the concept of Section 115, which allows anyone to
obtain a compulsory license to make and distribute phonorecords of a
copyrighted work once that work has been distributed to the public,
thereby encouraging more creative uses of the work while insuring that
the copyright owner receives a reasonable royalty payment. The public
may benefit from similar tools applied online to eliminate the
potential logjam created when an entity that controls a copyright
frustrates the widespread distribution intended by the Constitution.
Some conditions upon the licensee may be warranted to insure that the
right to a compulsory license to make a reproduction via a digital
phonorecord delivery (DPD) be available only to those who can
demonstrate the ability to (a) be accountable for the number of DPDs
actually distributed and (b) can deliver them in a reasonably secure
format. (See, for example, House Report No. 76-1476, noting the
authority of the Register of Copyrights to prescribe regulations
pursuant to Section 115 containing ``detailed provisions ensuring that
the ultimate disposition of every phonorecord made under a compulsory
license is accounted for.'') These details are beyond the scope of this
response. However, Congress should reasonably expect that a statutory
framework for this could be developed with the help of knowledgeable
experts if compulsory licensing becomes warranted.
Question: I have heard a number of entertainment companies say that
acceptable protection for online content simply does not exist yet,
that existing Digital Rights Management and watermarks, wrappers, or
encryption, is simply not good enough to protect valuable content. Yet
we have a number of technology companies here today who believe that
they have such a solution, and now we have announcements of online
initiatives from all five major labels, which suggests the
technological protections have developed recently. Would any of you
care to comment on the state of technological protection for content?
Answer: Our belief is that the copyright management through
watermarking and encryption available through existing systems are
suitable and more than adequate for use in launching the sale of
digital files online. Making an extensive selection of audio content
available for consumer use now would provide a convenient, genuine and
legal alternative to piracy. Secure digital delivery systems will
continue to improve over time, just as loss control systems at retail
have improved over the years. Tower has long been a faithful partner in
helping record companies combat piracy of physical goods all over the
world. We believe we have earned the right to be trusted in the new
digital distribution channel.
Tower can today offer downloads that are infinitely more secure
than the music published on CDs. Every time a record company refuses
legal content to Tower and other retailers, the result is that Tower
and other retailers are prevented from competing with services like
Napster. It seems illogical to us, and leads us to question the motives
of our suppliers. We worry that their long-teen plans may be to confine
existing retailers to the ``bricks and mortar'' world while the record
companies try to establish stronger technological controls not only
over electronic distribution, but also over lawful use subsequent to
the initial distribution.
Question: The premise of this hearing is that digital content is
coming soon to digital devices to be enjoyed by consumers soon. Based
on our discussion today, how soon is soon, and when will the promise
become reality?
Answer: There is no technological barrier preventing that from
happening right now. As I said in my testimony, robust technology
exists to facilitate the portability of song files to a variety of
media and playback mechanisms. We do acknowledge that there is the
challenging issue of developing viable economic models for digital
distribution. However, we believe that the best way to test the
viability of these economic models is to work with trusted partners
like Tower who will provide real feedback from real consumers about
real products available in the marketplace.
Question: Is there any point you feel should be raised or that you
would like to further respond to for the completeness of our record?
Answer: We are concerned that what is happening today has less to
do with controlling piracy, and more to do with copyright owners
controlling the distribution and use of copies and phonorecords beyond
the limits imposed by Congress. The piracy rationale is not limited to
music, but is being extended to motion pictures as well. See, e.g.,
Alen Koebel, ``Digital Video Interfaces And Consumer Displays,''
Widescreen Review, April 2001, p. 102, at 106 (``Digital technologies,
for the first time, make it possible to control where, when and in what
manner content is viewed. Digital content protection could be used
simply to prevent copies, but is capable of much more . . . [and] the
evidence suggests that Hollywood is actually more concerned with
controlling honest consumers--with the ultimate aim of extracting more
money from their wallets--than stopping pirates'').
Previously, when new technologies that ``steal'' copyrighted
material have been introduced (like cable TV or video), Congress has
sought solely to ensure compensation Congress has never sought to
guarantee control. Copyright owners have never been permitted to decide
who gets to sell copies and phonorecords, or to whom or at what price.
Nor have copyright owners been permitted to decide who gets to read a
book, listen to a song, rent or watch a movie, or whether the owner of
a lawfully purchased copy can give it away. Today record companies and
studios are attempting to claim the unlimited right to control these
decisions. See ``Report to Congress: Study Examining 17 U.S.C. Sections
109 and 117 Pursuant to Section 104 of the Digital Millennium Copyright
Act,'' U.S. Dept. of Commerce, National Telecommunications and
Information Administration, March 2001, n.101.
Question: What are your concerns regarding the recently announced
MusicNet and Duet deals, and what issues in connection with these deals
should the Judiciary Committee, in your opinion, continue to watch?
Answer: Tower's concerns are based in part on the fact that the
details of these deals have yet to be made clear. It appears that
MusicNet intends to offer streams and downloads. Their first customers
will be AOL and Real Networks, both major stakeholders in the MusicNet
Company. Record companies tell us MusicNet is an independent company
that will be non-discriminatory. Tower expects that the terms and
conditions through which content is made available to us will allow us
to compete just as aggressively against AOL and Real as we do against
other retailers.
Our concerns also echo those of the Register of Copyrights, which
offers that ``any one work will ordinarily be competing in the market
with many others . . . [t]he real danger of monopoly might arise when
many works of the same kind are pooled and controlled together.''
Register's Report on the General Revision of the U.S. Copyright Law
(1961), at 5. In the off-line world, the five major record companies
have already formed crosslicensing relationships with each other that
disfavor competing retailers, in a manner very similar to what appear
to be the MusicNet/Duet deals. Record clubs like Columbia House and BMG
Direct cross license audio content to companies owned by the record
companies themselves, resulting in the ubiquitous ``10 CDs for a
penny'' offers which not only dramatically reduce the perceived value
of music generally, but which foster a belief among consumers that
recordings retailers like Tower sell are overpriced. Online, MusicNet
and Duet reflect the recognition of the record companies, voiced by
Richard Parsons at the April 3, 2001 hearing and recently echoed in
Time. ``None of these services can survive without content from all
five major labels.'' Dannielle Romano, music analyst at Jupiter Media
Metrix, as quoted in by Chris Taylor in ``More Pain for Napster: The
big music labels spin plans go to the Net,'' Time, April 16, 2001, p.
43. Retailers, likewise, must have content from at least each of the
major companies to be competitive.
Thus, the danger mentioned by the Register of Copyrights forty
years ago has increased exponentially. Currently, five companies
control 85% of all sound recordings. So, MusicNet and Duet will
together control 85% of the market. Moreover, since neither MusicNet
nor Duet can succeed on the strength of their own collections, it
stands to reason that soon these two behemoths will follow the model
they established with BMG Direct and Columbia House, cross license to
each other, and each be in a position to dispense with having to deal
competitively with any other competing distribution entity. See
Learmonth, ``Universal and Sony in Napsterless Harmony,'' The Industry
Standard, visited at http://www.idg.net/crd--music--450642--103.htm1
(``. . . sources say, Duet development has been launched; the staff is
based in New York and its corporate structure will be much like the
Columbia House record club, which is half-owned by Sony and half by
Warner Music Group. '') Independent record companies will be forced to
accede to their terms if they want an outlet, and no retailer would
have any hope of offering competitive terms to consumers because their
wholesale costs will, as we have seen with the record clubs, be several
times higher than the wholesale prices the record companies give each
other.
As I mentioned in my testimony, many entities are ready to offer
lawful digital downloads. Thus, the creation of MusicNet and Duet was
not really necessary to achieve that objective. To the contrary, the
evidence suggests that the reason these record companies have denied
others the opportunity to lawfully compete with Napster by delaying
secure digital downloads is that they hope to devise a network by which
they alone can control substantially all digital distribution.
There are, then, two issues that Tower would ask this Committee to
continue to watch. First, the degree to which companies that have
amassed substantial collections of copyrighted works leverage the power
of these monopoly collections into control over their competition.
These companies have shown a historical predilection to monopolize
online entertainment in ways both subtle and overt, and therefore,
examining the reciprocal relationship licensing used to favor their own
companies and joint ventures over those of their competitors, would be
appropriate. See, for example, Six West Retail Acquisition, Inc. v.
Sony Management Corp., No. 97 Civ. 5499 (DNE), 2000 U.S. Dist. LEXIS
2604, *60-*64 (S.D.N.Y. March 8, 2000).
Second, the Judiciary Committee should continue to watch the same
issue that was of concern to Congress nearly 100 years ago--striking
the proper balance between content owners' legitimate demands for
compensation, and yielding to their illegitimate demands for control.
Today, there is every reason to stay the course explained by your
colleagues in the House in 1909 when the House Judiciary Committee
said: ``Your committee feel that it would be most unwise to permit the
copyright proprietor to exercise any control whatever over the article
which is the subject of copyright after said proprietor has made the
first sale.'' In the online world, this means that a copyright cartel
must be prevented from controlling the retail-level authorization of
downloads because the result of a digital download is the same as the
purchase of a DVD or CD: The consumer will become the ``owner of a
lawfully made copy or phonorecord.'' See Section 109. Just as Congress
prevents copyright owners from controlling distribution once having
sold copies for distribution, so, too, should they be prevented from
controlling retail-level DPDs once they have licensed a merchant to
offer the DPD to the public.
Just as in the sale pre-packaged copies and phonorecords, the
public interest demands that retailers remain free to charge competing
prices, offer competing levels of customer support, and otherwise offer
the public the benefit of vigorous competition. In the same manner,
consumers must be free to give, sell or lend lawfully acquired songs.
Congress should act swiftly in response to any use of new technology to
prevent the lawful use of lawfully made copies, and should take the
additional step of making sure that digital distribution of
phonorecords made at home or in a retail store remains just as free
from copyright owner control as is the physical distribution of pre-
recorded phonorecords made in a factory.
Question: There have been calls for compulsory licensing of sound
recordings, of publishing rights, and of ``most favored nation''
protections for online distributors not affiliated with record
companies. Others argue that no one has rights to use property other
than the property owner and those property owner agrees with (with fair
use exceptions in the copyright context, of course). Could you each
explain what justification you see, if any, for such extreme
legislative action, other than that your business plans rely on using
the major labels' content to be successful? Please be specific if you
suggest such theories as misuse of copyright, etc.
Answer: While Tower does not favor compulsory licensing at this
time, we believe a careful review of industry practices up to this
point is helpful in evaluating two separate but related issues. One is
whether the copyright owner should be obligated to license the online
reproduction of its works, and the other is whether such licensing,
once authorized, should be given on a non-discriminatory basis. The
effect of the copyright owner's decision upon freedom of competition is
fundamentally different in an online or ``postrecorded'' distribution
than it is for physical or ``pre-recorded'' distribution.
For the consuming public, the most important feature of physical
distribution is not whether or to whom the reproduction right or
distribution right is licensed, because at some point the goods will
reach a retailer of the customer's choosing, should that retailer
choose to carry the product. Moreover, thanks to the Robinson-Patman
Act, all retailers will have roughly the same acquisition cost, and
thanks to the first sale doctrine, all retailers will have a chance to
buy the product and compete on a relatively level playing field.
In the online world, the strictures of the Robinson-Patman Act can
be avoided because the courts have interpreted it to apply to the sale
of tangible goods, but not to licenses. Free of the restrictions in the
Robinson-Patman Act, copyright owners have the power to license the
reproduction right to only those companies of their choosing and can
also decide who will survive through the use of terms which favor one
competitor (such as a company which they own) over another.
In short, in the physical goods world, the copyright owner may
strategically restrict who can manufacture (reproduce) copies and
phonorecords of its works, and who can make the initial distribution of
its works, but the distributors must not discriminate in price and
retailers to whom they refuse to sell will always have a way of
obtaining the product for resale. In the online distribution world, in
contrast, the copyright owner can both shut a retailer completely out
of the market and/or license the reproduction right on grossly
discriminatory terms, to the same effect.
A case brought by NARM against Sony Corporation, on behalf of its
music retail members, challenges Sony's cross-licensing wherein the
record clubs can obtain sound recordings identical to the ones
retailers sell, but at a small fraction of the price. Sony claims that
it can do this because licenses are not subject to the Robinson-Patman
Act. In this case, which is currently before Judge Sullivan in the U.S.
District Court for the District of Columbia, we allege that these
licenses are in reality just sham licenses intended to cover up what
are, in substance, sales of goods of like kind and quality to similarly
situated buyers but at grossly dissimilar prices. The CDs are
manufactured in the same manufacturing facilities and result in
virtually identical copies. A CD Sony sells to Tower for $12.50 costs
Columbia House (the record club jointly owned by Sony and AOL/TW) only
about $2.50. The result is that Columbia House can make a $10 profit
before retailers can break even. If that same model is carried over to
digital distribution (and every indication is that the record companies
intend precisely that), then the retailers favored by the copyright
owners could offer downloads at a small fraction of the ``wholesale''
cost offered to other retailers.
Do consumers benefit when two retailers are charged one wholesale
price, and all others are charged 500% more? Clearly, they would be
better off if thousands of retailers like Tower were charged the lower
wholesale price.
Congress should adopt the same policy restrictions for copyright
owners in the world of digital distribution as it did for physical
distribution. ``[W]here the copyright owner first consents to the sale
or other distribution of copies or phonorecords . . . continued control
over distribution of copies is not so much a supplement to the
intangible copyright, but is rather primarily a device for controlling
the disposition of the tangible personal property that embodies the
copyrighted work. Therefore, at this point, the policy favoring a
copyright monopoly for authors gives way to the policy opposing
restraints of trade and restraints on alienation.'' 2 M. Nimmer & D.
Nimmer, NIMMER ON COPYRIGHT, Sec. 8.12[A] (2000).
Your question notes that some ``argue that no one has rights to use
property other than the property owner and those the property owner
agrees with . . .'' but such argument fails following a quick reference
to the Copyright Act. There is absolutely nothing in the Copyright Act
that creates any exclusive right of ``use.'' Anyone can use a
copyrighted work in any way they desire, so long as it does not
infringe any of the enumerated exclusive rights. If I were to sneak
into a theater to watch a movie without paying, I may be in trouble
with the theater owner if I get caught, but I'm not infringing
copyright. Similarly, a record company has no power under the Copyright
Act to control who gets to listen to a recording.
There have been many business plans that have relied on using
copyrighted content in ways that copyright owners may not have
supported, but which have ultimately benefited them. Cable TV has
provided thousands of additional outlets for content. MTV created a
market for selling music video in addition to promoting the sale of
millions of CDs. Independent video stores created both the video rental
and video sell-through markets. The notion that an independent business
plan that uses copyrighted material is somehow ``tainted'' should be
treated with suspicion.
Question: I assume you agree that ultimately online distribution of
music, be it downloads or streaming services, can be less costly than
distribution in the physical world where trucks, warehousing, damaged
goods, and overstocks can run up costs. Some have suggested that the
labels cannot pass these cost savings on to consumers because doing so
would upset the record store retailers they rely on like Tower Records
by undercutting the record store sales price. Would you agree that
brick and mortar retailers are the reason online cost-savings cannot be
passed on to consumers? Similarly, would you object to retailers using
deep discounts on recorded music as loss leaders to induce customers to
visit the store, perhaps to buy stereo equipment, etc., and if so, why?
Answer: We agree that online distribution of music may be less
costly than distribution in the physical world. We do not agree that
brick and mortar retailers are the reason that online cost-savings
would not be passed on to consumers. First, let us clarify the use of
the term ``distribution,'' which refers to the wholesaling of music,
and which is distinct from ``retailing'', which involves selling to the
end user. Today, if Tower buys 1,000 CDs, they would have to be
manufactured, labeled, packaged and shipped to our stores. Tomorrow,
Tower could obtain one digital file and a license to sell 1000 Tower
customers the rights to download a copy. For the record company, the
latter form of distribution is certainly cheaper because the costs of
manufacturing the components of a recording are being shifted
downstream.
If lower wholesale prices result from economies realized in online
distribution, and if they are commensurate with the actual savings, we
see no reason to be upset. The cost of producing the recorded media,
printing the booklet, inserting the CD and booklet in a package,
boxing, shipping and maintaining the necessary warehousing, sales and
inventory systems and personnel as well as any other physical-world-
only materials and activities could be reasonably deducted from the
existing wholesale cost. However, there are other activities which must
reasonably replace them such as storing and serving the content in a
secure server, utilizing a copyright management system, verifying the
completion of the download, and providing customer service for
incomplete or faulty downloads. Once these are added back in, along
with activities which do not change, such as advertising and promotion,
we will be able to determine the true savings that might be passed on.
As long as the cost-basis of merchandise is consistent and
supported by reasonable volume requirements and other accepted
marketing programs such as dating, advertising support, and
merchandising support, we would embrace lower costs online. What record
companies are really describing when they say brick-and-mortar
retailers will object to passing on savings are the ``savings'' they
intend to reap by eliminating retailers from the distribution chain
altogether.
We are concerned that record companies will create direct marketing
strategies that mirror those in the record clubs, where cross-licensing
and sweetheart licenses are granted only to affiliated companies. These
arrangements in the past have eroded the perceived value of music and
lead consumers to believe retailers are making dramatically greater
profits than they really are.
We define a ``loss leader'' as a product that is sold for less than
its actual cost. We do not object to low margin ``deep discounting,''
per se, as a means to induce customers to visit a store to buy other,
more profitable products, and while we think pricing below cost is bad
public policy and we don't engage in it ourselves, we recognize that
some of our competitors do. However, consumers as well as government
need to understand the true impact of loss leader programs on the
ecosystem of bringing, and keeping, music widely available to the
public. Tower has always been devoted to finding and stocking every
piece of music offered to us, and to having personnel who are
knowledgeable about such a vast selection of music. The cost of such an
approach is substantial, and therefore we place less emphasis on having
the best price in our marketing. However, our concerns about the impact
of widespread loss leader programs extend well past the impact on
Tower's marketplace niche.
Particularly in this age of dot-coms, when the cost of new customer
acquisition may exceed the wholesale price of two or three CDs, it
concerns us when CDs are sold below wholesale because the company in
question is not really in the business of selling music at all, but in
the business of selling advertising or in selling consumer data, in
which case the lure of cheap music may be used as the bait to engage in
lucrative consumer data mining, or to solicit for sales of unrelated
consumer goods. Such activities undermine the value of music, both real
and perceived, and tend to undermine what should be one of the primary
sources of income for creative artists.
Sometimes our issues dovetail with those of others in the value
chain, like artists. Why should an artist forgo regular royalty levels
to enable a record club to use these strategies to erode the value of
their work? Why should a record company be permitted to reduce the
artist's compensation for an identical consumer product, just to
undercut the competing retailer? And, how does the consumer benefit
when a purported cost savings is made possible by shifting the cost
from one retailer (the one in which the record company has a financial
interest) to another (that competes independently)?
The short answer to your question, then, is that retailers fear the
lack of true competition more than we fear true competitors. The
Copyright Act makes a careful distinction between the copyright in the
intellectual property, which grants a limited monopoly, and rights in
the copies and phonorecords themselves, where the free market and
antitrust laws come into play. See Section 202 (``Ownership of a
copyright, or of any of the exclusive rights under a copyright, is
distinct from ownership of any material object in which the work is
embodied''). When the copyright monopoly in the intellectual property
is used to restrict competition in the physical property (whether made
in a factory, store or home), Congress should provide the tools with
which the courts can draw the line. In this, we echo the concern raised
by Senator Hatch when he stated: ``We will also need to review the
increasing legal tension in the high technology industry between
intellectual property rights and antitrust laws. There has always been
a tension here, but in the Internet world, we need to be careful that
intellectual property or content power is not leveraged into
distribution power, or otherwise used in anticompetitive ways.'' 107
Cong. Rec. S 1376 et seq., February 14, 2001).
Responses to written questions from Senator Leahy
Question 1: Mike Farrace, Senior Vice President, at Tower Records
testified that some record companies are requiring personal data from
and about Towers' customers, prompting concerns by Tower Records about
violating its own privacy policy, damaging the relationship with the
customer, and ``maybe even result[ing] in Tower violating the law.''
Question 1(A): What sort of personal data are record companies
requesting from retail distributors, such as Tower Records, and other
online distribution services to provide from or about customers?
Answer: The customer's e-mail address is the primary bit of data
labels want, although some proposed systems require much more. Record
companies have used several strategies to acquire the email address and
other information, which we outline in Question 1(B).
Question 1(B): Are record companies asking retail distributors to
provide any personal data about customers who purchase CDs in brick-
and-mortar stores, or have the requests for collection of customer data
been limited to online music purchases?
Answer: Record companies have solicited personal retail customer
data in both selling environments. They have long sought customer data
through the use of ``blow in'' cards which invite a CD purchaser to
complete a form in order to join a fan club or get additional
information about a company's catalog of releases. Some record
companies embed links on CDs sold at brick and mortar stores which link
to record company-owned artist web sites, which in turn link to record
company-owned commerce sites, or to third party commerce sites.
Manufacturers have not yet specifically requested or required that
Tower provide personal data about brick and mortar customers who
purchase CDs to them directly. However, they do routinely print the
URL's of artist and label sites on the product, so we are forced to
market their data collection web site and, ultimately, their own or
third-party commerce sites. It is as though instead of requiring that
we give them our best customer list, they simply forced us to send
everyone on that list free advertising for their competing retail site.
Online, record companies have variously proposed several systems
that have inherent data collection, and/or systems which have ``opt
in'' screens intermingled with the transaction process, but email data
can be gathered under a variety of circumstances.
In the first, the record company's digital delivery system
processes the transaction. In these systems, the label captures the
consumer's e-mail address, specifics about the product purchased, the
customer's credit card number, dates, times, etc. This information can
then be combined with prior purchases to determine trends and create
user profiles. This is the most objectionable situation for retailers.
The second strategy is to insert an ``opt-in'' screen during the
transaction process. In some cases, this has been a simple screen that
asks for the customer's email address without explanation. In others,
text below the entry field asks the user if they would like more
information about this artist. In some cases, the name is simply
gathered by the content owner and no particular use of the name is
specified. In others, the user is sent to a web site where they are
presented with a large list of artist names with checkboxes, and told
they will receive email about the artists they checked.
The third strategy is one in which the record company partners with
a technology company to offer their own customer support function, and
in which the technology company will collect consumer data at the
customer support level and share it with the record company.
The fourth is one in which the record company limits the retailer
to the role of sales agent, wherein the online retailer's only function
is to promote links to the record company itself and perhaps handle the
customer support function if the transaction fails. The consumer
transaction is made directly with the record company (though the
consumer may not be aware of it) in exchange for a commission to the
retailer/sales agent, and thus the record company can solicit whatever
information it wishes without regard to the retailer's wishes or
privacy policies.
We do not object to opt-in opportunities generally. We do object to
the use of these names by record companies for marketing directly to
Tower consumers. Only one label that does not already require personal
data as part of a proprietary transaction mechanism, EMI, has agreed to
refrain from activities of this kind. Some companies have offered to
share the names under certain conditions, or agree to mail only in
conjunction with the primary retailer, or to allow the retailer to
email, provided the retailer does the mailings whenever the record
company wants and/or agrees to limit the content of the emails.
The problem with these scenarios is twofold: (1) Because there are
multiple retailers and multiple content owners, customers could
potentially be barraged by numerous indiscriminate mailings, which will
create customer service burdens to retailers and, as a result,
undermine each retailer's customer relationship. (2) Of equal concern
is that we know that information about Tower customers will be used to
eventually divert future purchases from our customers to retailers
owned or operated by the record companies. Other than EMI via the
agreement with Liquid Audio, no record company will promise never to
use the data independently unless we agree to conditions like the ones
above.
Most labels also want recaps of sales, including artist, title and
sales price. We don't object to sales recaps when they are used in
aggregate to discern trends, identify ``hot'' records or for other
purposes consistent with building marketing plans that intelligently
allocate resources to resellers. We do object when our own customer
information is used to market to our customers, or is used by the
recipients to compete with us. It frustrates free market economics by
using monopoly power to raise the costs to a competitor.
(The use of embedded hyperlinks as described above is part of a
lawsuit filed by the National Association of Recording Merchandisers,
the music retailer trade organization to which we belong, against Sony
Corporation.)
Question 1(C): Are retail distributors and online distribution
services formulating or revising their privacy policies to accommodate
requests from record companies to provide personal data from or about
customers?
Answer: Tower's privacy policy requires explicit permission from
our customer to send email beyond order acknowledgements, confirmations
and receipts. Opt-in opportunities exist on our site, and are included
at the bottom of these transactional mailings. We are concerned that we
do not know exactly what information our suppliers or their agents may
be collecting or what they may be doing with the data. We have not
revised our privacy policies to accommodate labels, preferring instead
to fight for our customers' privacy as well as for the exclusive
ownership of the existing retail relationship, including customer
contact information. We are willing to cooperate with record companies,
as we always have, in marketing recordings. For example, in return for
dropping record company requirements to possess and use our customer
information, we have offered to feature their products in a guaranteed
number of periodic emails executed by mutual agreement on behalf of
their artists.
On the video side of our business, we are fortunate that Congress
enacted the Video Privacy Protection Act, 18 U.S.C. Sec. 2710, which
prohibits such data mining without the contemporaneous consent of the
consumer. The courts have held that third parties who obtain such
information may also be liable for the disclosure. This was the
determination reached in Video Software Dealers Association, Inc. v.
City of Oklahoma City, No. CIV97-1150-T, 1998 U.S. Dist. LEXIS 22095
(W.D. Okla. Dec. 18, 1998), a case brought on behalf of retailers such
as Tower by our trade association. Because of this law, our customers'
private video sales and rental records cannot be surreptitiously taken
from us.
Question 1(D): Are record companies requiring as part of their
licensing agreements for digital music that they be provided access to
customers' personal data?
Answer: Yes. As described above, some licensing agreements include
the use of delivery systems that automatically deliver customer data to
record companies preempting the need to have ``access.'' They get the
customer personal data as part of the transaction, and do not pay for
the information or even negotiate with us for access. As in the case of
hyperlinks on CDs, retailers simply do not have an alternative if they
want the content.
Question 2: Jack Valenti testified that within four to six months,
several movie studios plan to use the Internet to transmit movies to
American homes in encrypted form, but that more protection may be
needed, ``some of which might require congressional legislation.'' In
the Digital Millennium Copyright Act (DMCA), the Congress has provided
protection for technological measures that effectively control access
to copyrighted works and barred the manufacture, import or sale of
products or services primarily designed to circumvent such
technological measures. 17 U.S.C. Sec. 1201(a)(1) & (2). Please
describe the circumstances where additional protection may be warranted
and the areas not already covered by the DMCA where additional
legislation may be requested.
Answer: Mr. Valenti's statement is open-ended. While we support all
ongoing efforts to restrict the illegal copying and distribution of
copyrighted works, we do as long as they do not create onerous limits
on fair use, or require that retail customer data be turned over to
copyright holders. That said, Tower does not foresee a future need for
additional legislative protection. Indeed, it appears that
technological developments alone are now replacing the Copyright Act as
the greatest source of power for copyright owners, such that Congress
may need to address restoring the appropriate public/private balance in
copyright law rather than creating greater protections for copyright
owners. As noted by Alen Koebel, supra, this may be more about
controlling lawful use than controlling piracy. The new prohibition on
circumventing effective access control technologies ``must be weighed
against the potential for misuse that content protection brings.''
Koebel at 106.
Question 3: Concerns have been expressed that ``copyright
management'' measures being developed by copyright owners to control
the distribution of their digital works may erode the first sale
doctrine. If a customer pays for the personal use of a copyrighted
work, the rights holder may use technological means to ensure that the
work is not posted on a web site for use by others. Do you believe that
the marketplace will sort out the scope of copyright management
measures since customers who believe they are not getting what they pay
for will simply stop buying?
Answer: We support copyright management measures which limit
illegal distribution of digital works while still providing an
acceptable end-user experience and respecting the rights copyright law
gives to owners. We object to the use of so-called ``digital rights
management'' (or ``DRM '') systems and other access control
technologies which have little to do with copyright management, but
are, instead, being implemented in ways that prevent consumers from
exercising Section 109 rights.
We believe that access control technologies are already proving to
be unacceptable to consumers because of the severe restrictions to
legal use imposed after the sale. Since resellers are being forced to
pass on such restrictions (as we have no control over them and it is
unlawful to circumvent them), the record company restrictions become
unreasonable barriers for resellers in their efforts to market digital
content. The marketplace cannot sort out the use of restrictive
measures because the copyright monopoly is being used in conjunction
with the prohibitions in Section 1201 to prevent the normal market
effects to sort this out. For example, copies of motion pictures are
being offered through digital download using DRM technology that
prevents the owner of the lawfully made copy from renting, lending or
selling it. That is, the technology prevents owners of the download
from exercising their rights under Section 109. The download of the
Miramax film Guinevere is one example. The consumer who downloads the
film becomes the owner of a lawfully made copy, but can only enjoy the
copy for a 24-hour period, after which access is denied unless an
additional payment is made. If consumers object to the terms contained
at the single retail site from which it is available
(www.sightsound.com), there is no other place to which the consumer can
turn for better terms. Thus, the consumer only has the choice of giving
up their rights guaranteed by Section 109 or never owning the download.
If we consider, however, how a competitive market might sort this
out, the result is completely different. Section 109 limits the right
of copyright owners, not retailers. If a retailer were to offer the
downloaded copy with similar restrictions, consumers who object to such
terms could simply shop elsewhere, just as today, a consumer who
objects to having to return a rented video the next day can shop with a
retailer who offers longer rental periods, or the consumer can purchase
it outright.
We believe customers will pay for reasonably secured content that
is reasonably priced. The question is, ``Is what they want to buy being
offered, and if not, why not?'' A competitive retail market would
normally charge a lower price for a product with added restrictions on
use. What we are seeing in the digital music industry, even in the
prerecorded media, is added cost (that is, added restrictions) with no
countervailing price reduction. When Sony added a restrictive EULA to
one of its CDs, there was not a penny of price reduction. According to
Sony, the consumer who failed to return the CD to Sony within seven
days of purchase agreed never to sell it, lend it or give it away, and
agreed never to play it on a different computer, yet there was neither
a price reduction in exchange nor an option to purchase the CD
elsewhere without the restrictions. (See Attachment A to my written
testimony.) Retailers could not compete to offer the CD with or without
the restrictions, and therefor the marketplace will never have the
tools with which to sort out the most competitive scope of access
control technologies. Only illegal distribution sites are in a position
to offer a competitive choice.
The only way for the market to sort out the appropriate scope of
copyright management measures is for the use of such measures to be
strictly limited to the management of the copyrights set forth in
Section 106, as further limited by the Copyright Act and, in
particular, Section 109. When copyright owners leverage their
monopolies to ``manage'' rights they do not have (such as to control
how the lawful owner disposes of a lawfully made copy), the free market
is subverted, competition is suppressed, consumers lose out, and
artists gain less exposure.
Question 4: Retailers of music, movies, video games and other
copyrighted works have expressed concern about whether copyright
management measures and end user licensing agreements will erode the
ability of retailers and distributors to distinguish themselves from
one another in meaningful ways with the potential of stifling
competition among retailers, since those measures may set uniform
prices, policies and terms for the online distribution of digital
works.
Question 4(A): Please explain whether you believe that uniform
copyright management measures and user licensing agreements carry the
potential risks for competition identified by retailers?
Answer: It is not just the uniformity, but also the oppressiveness
of these measures that give rise to our concerns. We believe copyright
management measures and user licensing agreements, to the degree that
they preserve first sale rights and provide resellers with
opportunities to sell their customers digital works in the form
customers want, do not carry undue risks inherently. It is the degree
to which copyright owners restrict access and use outside of the bounds
of their copyrights, to fix retail prices, suppress retail competition,
or use such access controls to gather and use our customer information,
that present the risks. The uniformity itself is a symptom of the lack
of retail competition, and an element detrimental to consumers (as it
is any time all stores look alike), and to retailers, who have fewer
significant ways in which to compete. The need for us here at Tower to
distinguish ourselves from our competitors is not just a desire to
maintain our unique personality, character and reputation, but is the
essence of the way we compete. We can't claim to be better than the
store down the street if we are prevented from being better.
Question 4(B): Would variation in the terms for pricing, use
policies and terms for the distribution of digital works provide
flexibility for different distribution models and give the consumer the
maximum number of choices?
Answer: Absolutely, provided that these variations are the result
of retail competition and not the result of the copyright owners
discriminating among competing retailers. Some of the most innovative
business models giving consumers the most choice are those that are
beyond the control of the copyright owner. For example, without (and
indeed against) the consent of the copyright owner, consumers can
obtain pre-recorded copies and phonorecords new from a store, free on
loan from the library or a friend, second-hand at a used goods store, a
yard sale or flea market, at a low-cost rental in the case of movies
and video games, or as a gift. We at Tower consider competing with
these avenues part of doing business. The fact that our customers can
re-sell, loan or give away what they buy from us adds value to that
initial purchase transaction, even though neither we nor the copyright
owner derive any additional value from the myriad possible subsequent
distributions.
The best business model we have today is where they sell us the
copies at a price of their choosing, and we in turn market them and
develop all sorts of competing ways of getting them into the hands of
consumers, who are free, in turn, to legally transfer title or
possession to others. That's how it should work for digital downloads.
Once someone else owns the downloaded copy, the copyright owner's
control over that copy should cease. Let others compete over the
pricing and distribution terms, so consumers will have some real
choices.
Question 5: The Copyright Office issued a Notice of Inquiry on
March 9, in response to a petition by the RIAA, stating that: ``there
is considerable uncertainty as to interpretation and application of the
copyright laws to certain kinds of digital transmissions of prerecorded
musical works. It is also apparent that the impasse presented by these
legal questions may impede the ability of copyright owners and users to
agree upon royalty rates under section 115. . .'' 66 Fed. Reg. 14099,
141101 (2001).
Question 5(A): Do you agree with this statement and, if so, please
explain how the uncertainty over the legal questions presented in the
petition are affecting voluntary licensing agreements for new online
music services?
Answer: It appears to us that much of what passes for uncertainty
is, in reality, the result of an effort by various interest groups to
advance a position which stretches copyright law in a direction more
favorable to them. Perhaps it is not so much the uncertainty that is
affecting voluntary licensing agreements, but the positions that are
being staked out as part of a negotiating posture.
Question 5(B): In 1995, the Digital Performance Right in Sound
Recordings Act expanded the scope of the mechanical license, under 17
U.S.C. Sec. 115, to include the right to distribute, or authorize the
distribution of, by digital transmission both hard copy phonorecords
and ``digital phonorecord deliveries'' or ``DPDs.'' DPDs are defined in
the Act but a subset of DPDs, called ``incidental DPDs,'' which are
also subject to the mechanical licensing process, are not defined. One
of the issues before the Copyright Office is to determine what is and
what is not an ``incidental DPD.'' Is this a question that the
Copyright Office or the Congress should determine in the first
instance?
Answer: To a large extent, this issue may have been addressed more
effectively than Congress realized back in 1976, when it revised the
basis for calculating the royalty rate to provide that ``the royalty
under a compulsory license shall be payable for every phonorecord made
and distributed in accordance with the license.'' Section 115(c)(2)
(emphasis added). House Report No. 94-1476 explained: ``It is
unjustified to require a compulsory licensee to pay license fees on
records which merely go into inventory, which may later be destroyed,
and from which the record producer gains no economic benefit.'' (Let's
call them ``incidental phonorecords,'' by analogy.) It was Congress'
intent ``that the Register of Copyrights will prescribe regulations
insuring that copyright owners will receive full and prompt payment for
all phonorecords made and distributed.'' Id. (emphasis added).
Moreover, as noted in said Report, Section 115(c)(2) further provides
that ``a phonorecord is considered `distributed' if the person
exercising the compulsory license has voluntarily and permanently
parted with possession.'' Finally, the Report stresses that the term
``made'' was used instead of ``manufactured'' so as to include ``every
possible manufacturing or other process capable of reproducing a sound
recording in phonorecords.''
It appears to us, then, that Congress already determined this issue
in the first instance. Certainly DPDs are one possible ``manufacturing
or other process capable of reproducing a sound recording in
phonorecords.'' (Even a computer hard drive can be a ``phonorecord,''
as that term is defined in Section 101.) Further, Congress has already
empowered to Copyright Office to insure that prompt payment is made for
DPDs that are ``made and distributed.'' Just as no royalty obligation
would be triggered by ``incidental phonorecords'' from which the
producer gains no benefit, logic would dictate that ``incidental DPDs''
which serve only to facilitate efficient distribution of the actual DPD
would trigger no compulsory license royalty obligation. Congress has
delegated to the Copyright Office responsibility for determining when
the royalty payable for actually distributed DPDs becomes due.
Question 5(C): The Copyright Office is currently considering the
applicability of the section 115 mechanical license to two new services
for delivery of digital music: ``On-Demand streaming'' (which permits
users to listen to real-time streamed music they want when they want
it) and ``Limited Downloads'' (which permits users to download music
for listening for only a limited time). According to the Notice of
Inquiry, these types of services were not ``anticipated'' when the
Congress expanded the scope of section 115 to cover digital
transmissions. Is legal uncertainty over the applicability of section
115 to these new services having any effect on the deployment of such
services and, if so, please explain what that effect is?
Answer: As for ``On-Demand streaming,'' we agree with the comments
of the Consumer Electronics Association and Clear Channel
Communications, Inc., filed on April 23, 2001, in response to the
Copyright Office' Notice of Inquiry, 66 Fed. Reg. 14,099. We do not see
how a public performance could possibly generate a mechanical royalty.
A DPD could be made concurrent with a public performance, but in that
case, the mechanical license is triggered by the DPD, not the public
performance.
``Limited Downloads'' are not recognized under copyright law. What
is being sought by the RIAA from the Copyright Office is power to
authorize the reproduction and distribution of a copy of a work, only
to have the resulting copy time out or otherwise be rendered useless to
its owner. We can se no room for such an approach, particularly given
the rights of owners of lawfully made copies to dispose of them without
the copyright owner's consent. The proposal would allow the use of
access control technologies to effectively lock out the owner of a
lawfully made copy from continuing to enjoy the fruits of ownership.
The RIAA proposal may be consistent with the position of the
Copyright Industry Organizations, which maintain that Section 109
rights may be exercised only ``in the absence of licensing or
technological restrictions to the contrary.'' But surely Congress never
intended the rights in Section 109, which specifically limit the
copyright monopoly, to be taken away by the copyright owner's own use
of technological access controls. A logical extension of such concept
would prevent the public from re-reading books, borrowing books,
purchasing them used, or receiving previously read books by gift,
because they would be unreadable.
So the question is not whether legal uncertainty over the ``Limited
Download'' is having an effect on the deployment of such a ``service.''
The question is whether Congress should make it even clearer that a
Limited Download as a tool used at the sole discretion of the copyright
owner is not a ``service'' to consumers, but an unauthorized extension
of the copyright owner's control over lawfully made copies which are
the property of others.
On the other hand, we are more than willing to explore how
technology can be used to extend the number of options available for
disseminating works. Rep. Boucher introduced legislation during the
last Congress to allow owners of lawfully made copies to forward them
to others if the original is deleted, but without infringing the right
of reproduction. The use of ``check-in/check-out'' technology to allow
consumers to redistribute a digital file while ensuring that only one
authorized copy is accessible at a given time sounds very attractive,
and we are pleased to be working with copyright owners and technology
companies to support industry standards for such actions. In the very
near future, Congress should carefully consider how copyright law
should evolve to facilitate such business models, but now is not the
time to be fitting a square peg into a round hole.
In the motion picture industry, limited use is a service provided
by your local video store--not the copyright owner. (Videos can already
be rented online, even though the delivery is still through the mails.)
In the event that Congress visits this issue, we would suggest that the
analogy be drawn from the physical distribution world, where copyright
owners are prevented from using their monopoly to control distribution.
For example, a library might have the right to ``lend'' an electronic
copy by letting a patron download the file to their computer while the
original is rendered inaccessible. Or the library might ``own'' the
virtual right to three copies, but only have one actual copy, which
could be downloaded by up to three patrons at a time. The ``check-in''
technology would allow the patron to ``return'' the copy, in which case
the original is made accessible again and access is denied to the
patron's copy. Such a model could be used for video rental as well.
Under current law, each copy made implicates the reproduction right,
regardless whether it is accessible. If copyright law were to be
amended to support such functions without infringing the reproduction
right, we feel it would be imperative for the physical distribution
model to be followed. That is, just as selling, giving, library lending
and video store rentals do not require the copyright owner's consent,
so, too, should the virtual equivalent remain outside of the control of
the copyright owner.
If, indeed, an ``online rental'' model is to ever be recognized in
copyright law, it should be developed along the lines of the physical
goods model by an Act of Congress, the principles of the first sale
doctrine should be maintained, and the rental terms should be
determined by competing retailers rather than the copyright owner.
The Limited Download proposal also concerns us because one of the
justifications for it is a promotional use of consumer sampling--a use
for which the Copyright Act already makes ample provision. First, there
is the in-store play exception contained in Section 110(7). This allows
consumers to listen to an entire album in the record store. Second, the
fair use doctrine allows what has been the industry practice since the
inception of electronic commerce, and that is to permit the merchant to
promote the sale of prerecorded works and downloads by offering song
samples, normally lasting only about thirty seconds, or representative
excerpts of a motion picture, commonly referred to as movie trailers,
at the point of sale and without the need to first obtain permission.
Just as booksellers may display copies of books open for perusal
without fear of violating the copyright owners exclusive right of
public display, and just as the grocer may reproduce copyrighted labels
of soup cans in the Sunday newspaper to advertise the next week's sale
without violating the copyright owner's exclusive right of
reproduction, so, too, can music and video retailers copy and make
available cover artwork, a thirty-second sound clip sample, or a movie
trailer, to assist and encourage the consumer in making a purchasing
decision
This is, in fact, very simple, and it concerns us that this effort
to take what has been a standard no-cost industry practice and convert
it into a new exclusive copyright called a Limited Download is coming
at the very same time that several copyright owners have, almost in
unison, begun asking retailers to get a license from them to promote
the sale and rental of their works by use of such simple consumer-
friendly devices. We can't tell whether this is sheer coincidence or
part of a carefully orchestrated plan to further encroach into the
domain beyond the reach of their copyrights but, either way, it is
making retailers very nervous. The legality of this promotional
activity in digital distribution should be affirmed in the law.
Question 5(D): Various music publishers filed suit in December,
2000, against UMG for copyright infringement alleging that UMG was
copying sound recordings on servers for its new online music
subscription service, Farmclub.com, and stating that: ``UMG recently
obtained a judgment from this court that the operator of another
Internet music service, MP3.com, Inc., had willfully infringed UMG's
sound recording copyrights by placing copies of those sound recordings
on its public servers--precisely what UMG has done here without
plaintiffs permission.'' Would clarifying the scope of the mechanical
license under section 115 of the Copyright Act in the context of such
new online music services help avoid the undue delay and undue
distraction from litigation?
Answer: Yes. We believe that some clarification might be in order.
It would appear that reproducing a sound recording onto the hard drive
of a file server for the purpose of offering digital performances to
the public would be an act of infringement unless some exception
applies (such as in Section 107 or 114, for example). It should be
equally clear that reproductions incidental to the delivery of an audio
stream or digital downloads, but that have no independent value and
cannot be perceived by the consumer, should not trigger the mechanical
royalty. (See Section 115.)
Somewhere between these two rather clear issues (though we concede
that some might debate them), are practices which may make perfect
business and common sense from the standpoint of creating greater
efficiencies for the benefit of consumers and copyright owners, but
where the law did not anticipate the many recent improvements in
digital distribution technology which depend upon the creation of
multiple copies incidental to the actual public performance or DPD.
The best example I know of is the very practical need for making
multiple copies of a work just to have available the most popular
formats and CODECs. A merchant who is preparing a database of licensed
song files for the purpose of offering lawful downloads or licensed
audio streams should not have to pay more just for the ability to offer
the consumer a choice of format, CODEC or transfer speed. That is like
requiring a printer to pay extra for typesetting a large font version
of a book for the vision impaired.
Question 6: Hillary Rosen has testified that RIAA member companies
have committed to licensing Napster once the service operates in a
fashion that respects copyrights and Napster has an agreement with
Bertelsmann to help develop this system. What is the current status of
Napster's efforts to develop a technological upgrade to digital rights
management system that is secure and addresses the needs of artists and
copyright owners addresses the rights of artists and copyright owners?
Has Napster been able to share a new technological approach with (a)
the court; (b) with artists or (c) with copyright owners? When does
Napster expect to be able to introduce the new technological model?
Answer: I have no comment in response to this question.
Question 7: The record companies have announced new online music
services, including MUSICNET and Duet, which will provide competing
business-to-business platforms for music subscription services that
will cross-license music and offer the services on a non-exclusive
basis. As Hilary Rosen stated in her testimony, the record companies
recognize the need to ``ensure that online distribution enhances rather
than undermines the commercial viability of our retail partners.''
Thus, the non-exclusive nature of these new platforms is important. Do
you believe that it is also important for the record companies to make
digital music available to those competing retailers capable of
offering secure and accountable downloads, on a non-discriminatory
basis that does not price them out of any competitive opportunity or
give them substantially less attractive nonprice terms?
Answer: Yes, we do. We believe it is critically important for the
record companies to make digital music available to competing retailers
capable of offering secure and accountable downloads, on a non-
discriminatory basis that does not price them out of any competitive
opportunity or give them substantially less attractive non-price terms.
The same is true in the case of audiovisual works, and requires that we
pay special attention to similar ventures in the motion picture
industry such as MovieFly.
We also feel compelled to point out that we think non-
discriminatory means offering these digital products equally on all
levels, including at the same time, for the same price, with equivalent
terms and conditions (such as warranties and replacement policies), and
with the same bonus features (such as free promotional tracks or
special added content).
To date, there have been announcements about the services, but no
contact with retailers that we know of by Duet, MusicNet or any record
companies about the planned new services. Nor have MovieFly or the
motion picture studios been open to retail competition. Instead,
announcements concerning their non-retail partners were made, with no
mention of retail, which seems curious in light of Ms. Rosen's remarks
about the importance of retailers to her member companies. The
importance of retailers seems rather like that of a parasite to its
live host, and reminds me of the analogy NARM drew to witchweed in its
case against Sony, where it explained that ``Witchweed (STRIGA
ASIATICA) is a parasitic plant that attacks some of the most important
crops in the U.S. . . . Unlike most weeds, which merely compete with
crops, parasites like WW do their damage more directly. They rob
nutrients and moisture by tapping directly into the host's root system.
Consequently, the host spends energy supporting WW growth at is own
expense.'' Fact Sheet for Witchweed (WW), FACT Sheet 07 PPQ, made
available through the Cooperative Agriculture Pest Survey program, May
25, 1993, http://ceris.purdue.edu/napis/pests/ww/facts.txt accessed
April 21, 2000. According to ``Parasite,'' Microsoft Encarta
Encyclopedia 2000, it eventually kills the host. And that is exactly
how retailers are beginning to feel. We are an integral part of the
industry which has resulted in the success of record companies, movie
studios and computer game manufacturers, yet our root system--which is
our customer base--is being tapped in an effort to feed off of it until
we are no longer needed. They can't live without us, just yet.
The last contact we had with MusicNet was a meeting where nothing
remotely similar to their press release the day before the Senate
hearing was even mentioned. There has been no contact with Tower
regarding details of the offers from either MusicNet or Duet, much less
any offer from the record companies to invite us to compete with either
of the two entities they jointly control.
Response to written question from Senator Kohl
Question: While all of the panelists are primarily concerned with
access to online entertainment marketplace, they must also understand
that they have a responsibility to parents. The Internet makes it even
more difficult for parents to police the songs that their children
hear, the images that they see and the games that they play. I'd like
the panelists to discuss what their company or industry plans to do to
help parents as online entertainment becomes more readily accessible to
all consumers, especially children.
Answer: We are proud of what Tower is doing in this area. We met
with the RIAA in February at the NARM convention, agreed with their
recommendations, and have initiated a project with our online
merchandising team which will improve the current notification which we
implement online in the following ways:
1. Clearer language indicating parental advisory titles. We intend
to use the terms, ``Unedited, Explicit Lyrics'' to describe such titles
in place of ``PA,'' or ``explicit'' to describe unedited recordings,
and ``Edited Lyrics'' to describe edited versions.
2. Links to descriptions of what the language means. We intend to
implement a web page describing what the terminology above means.
3. Persistent notification throughout the transaction process.
While we haven't decided exactly how, we are working on methods to keep
the Parental Advisory message ``live'' right through to the shopping
basket.
You also asked about what our industry is doing. Tower is a member
of two trade associations that have taken leading roles in this area.
The National Association of Recording Merchandisers (``NARM '') is the
principal trade association for retailers and distributors of sound
recordings, and the Video Software Dealers Association (``VSDA '') is
the principal trade association for retailers and distributors of home
video movies and video games. As an active member of each, Tower has
had the privilege of having a representative on the Board of each of
these trade associations, and has participated in the development of
our industry's programs in this area.
I must note, however, that despite challenging all members to be
responsive to public concerns, both trade associations have been
careful to preserve the freedom of each member to remain competitive
with other members when it comes to dealing with their customers. Each
retailer sees customer relationships as one of the key areas in which
we all compete with each other, and attempt to distinguish ourselves as
the retailer most responsive to consumers, including children and their
parents. How we do that is, ultimately, something we, at Tower, work
very hard on independent of what any competing retailer may do. So,
although industry-wide programs such as those NARM and VSDA have
initiated have a very important function, we recognize that there are
some areas in which freedom of competition is the best solution. When
push comes to shove, as it often does in the competitive retail level
of distribution, we want customers to choose our store over any
competitor's, and if a younger customer needs their parent's permission
to shop with us, we certainly want every parent to feel confident that
their permission should be granted. That is one reason why we have so
vigorously opposed proposals that would give our suppliers permission
to enter into agreements in unreasonable restraint of trade against us.
After all, as my responses to the previous questions make clear, they
are becoming our fiercest retail competitors, and we cannot afford to
let them have any additional control over retail distribution.
Concluding Statement
I respectfully ask the members of this Committee to consider
whether you ever became fans of a particular artist because someone
shared their copy of the music with you. I suspect that each of you can
recall an occasion in which an artist's work touched you, even though
someone else paid for the copy of the sound recording you heard. All of
you have probably enjoyed the freedom to rent a movie instead of buying
it. Yet, these opportunities are currently being threatened by
technology. This debate should be more than about whether a record
company may restrict distribution and redistribution to increase its
profit from an artist's work, or whether a movie studio may use
technology to prevent retailers from renting copies if their profit
margins will increase. Rather, this debate should be about how ``the
Progress of Science and the Useful Arts'' (U.S. Constitution, art. 8)
can be promoted for the public good. The profits of the Copyright
Industry Organization members, retailers and authors should be
subservient to that end, and we think that end is best served by
preserving our freedom to aggressively and lawfully compete in
disseminating these treasures to the public.
Thank you for the opportunity to participate in this important
debate.
Responses of Mark Traphagen, on behalf of InterTrust Technologies
Corporation, to questions submitted by Senators Hatch, Leahy and Kohl
I have heard a number of entertainment companies say that
acceptable protection for online content simply does not exist yet,
that existing Digital Rights Management and watermarks, wrappers, or
encryption, is simply not good enough to protect valuable content. Yet
we have a number of technology companies here today who believe that
they have such a solution, and now we have announcements of online
initiatives from all five major labels, which suggests the
technological protection have developed recently. Would any of you care
to comment on the state of technological protection for content?
Response by InterTrust:
The DRM technology developed by InterTrust is now capable of
securely managing rights in copyrighted works--music, video, text, and
graphics--in the online environment without compromising the rights of
artists, record labels, and other copyright owners. Indeed, a number of
entertainment companies (including AOL Time Warner, Bertelsman, and
Universal Music Group), entertainment distributors (including
Blockbuster), and entertainment device manufacturers (including Diamond
Rio, Samsung, Nokia, and Philips) are actively working with InterTrust
DRM technology to make music video, published text and other
information products available for consumers to use on PCs, portable
music players, cable systems and mobile phones.
Unlike simple technological measures that carry copyrighted works
from a server to a client and lock the copy to a single device, the
InterTrust DRM technology protects copyrighted works regardless of the
channel through or platform upon which the music is played, the number
of intermediaries, the duration of time, or the physical location of
the content. This post-delivery, persistent protection of copyrighted
works permits alternatives in making copyrighted works available,
including sale of downloads, subscriptions, pay-per-use and peer-to-
peer distribution. It also provides flexibility for each actor in the
distribution channel, meaning that a publisher can establish the
commercial terms for a work within the authority granted by the author;
a distributor can set rules within the scope of authority granted by
the publisher, and so on. Because the copyrighted works are
persistently protected by the InterTrust DRM technology, it also
permits flexible use of these works by consumers using different
devices in different locations.
Question from Senator Leahy:
Concerns have heen expressed that ``copyright management'' measures
heing developed by copyright owners to control the distrihution of
their digital works may erode the first sale doctrine. If a customer
pays for the personal use of a copyrighted work, the rights holder may
use technological means to ensure that the work is not posted on a weh
site for use by others. Do you helieve that the marketplace will sort
out the scope of copyright management measures since customers who
helieve they are not getting what they pay for will simply stop huying?
Response by InterTrust:
InterTrust believes that the advent of effective DRM technologies
should launch a period of lively marketplace experimentation in online
delivery by the owners and distributors of copyrighted works and that,
as illustrated by the popularity of the Napster service, consumers will
make their preferences clearly known. To avoid stifling this lively
experimentation, InterTrust believes that, until it is shown to be
ineffective in reflecting the balance struck in the Copyright Act, the
marketplace should be where consumers, copyright owners, and
distributors sort out the ways in which DRM technologies are used to
protect and manage rights in copyrighted works.
Why does InterTrust believe this? Because DRM technologies give
copyright owners new confidence that their works will be protected in
the online environment, DRM technologies also enable them to permit
consumers to use copyrighted works in new and more convenient ways,
some of which may surpass the scope of copyright exceptions such as the
first sale doctrine. For example, while the first sale doctrine
exhausts the exclusive right to distribute a copy or a phonorecord of
most copyrighted works to the public, it does not limit the other
exclusive rights of the copyright owner--reproduction, adaptation,
public display, and public performance. With the protection of
effective DRM technology, however, some copyright owners and
distributors could choose to attract consumers by permitting them to
make and display copies.
Moreover, InterTrust's DRM technology also enables copyright owners
and distributors to accommodate a richly diverse range of policies
arising through law or through accepted practice (provided they are
sufficiently detailed) for use of works by particular groups of
consumers, such as schools and universities, libraries and archival
institutions, and those with special needs, such as the blind.
Consumers are likely to respond favorably to copyright owners and
distributors who use these capabilities of DRM technologies to permit
flexible use in the course of managing their rights.
Question from Senator Kohl:
While all of the panelists are primarily concerned with access to
the online entertainment marketplace, they must also understand that
they have a responsibility to parents. The Internet makes it even more
difificultfor parents to police the songs that their children hear, the
images that they see and the games that they play. I'd like the
panelists to discuss what their company or industry plans to do to help
parents as online entertainment becomes more readily accessible to all
consumers, especially children.
Response from InterTrust:
The InterTrust DRM technology includes features that enable
entertainment producers and distributors to associate content
advisories, such as ratings and labels, with the digital material and
to display such advisories when the digital material is opened by
consumers. The DRM technology also includes other features that enable
parents to control or prohibit access to digital material incorporating
such content advisories. Provided that these features are used by
producers, distributors, and parents, the content advisories would be
persistently associated with the digital material after delivery to the
consumer.
Responses of Gerald W. Kearby to questions submitted by Senators Hatch
and Leahy
I. Introduction
Thank you for the opportunity to respond to the written questions
from the Chairman and the Ranking Minority Member of the Committee. I
have only endeavored to answer the questions that directly pertain to
my testimony as supplemented on April 5, 2001 (the Supplement).
Question. Acceptable Protection for Online Content:
Answer. Detailed answers to this question are contained both in my
testimony and in the Supplement. To reiterate, the basic points of that
testimony, the technology necessary to secure distribute online music
has been available for several years. Liquid Audio commercially
deployed such a system in 1997, and we are currently developing our
6th generation of products. Liquid Audio requests the
opportunity to demonstrate its copy protection system to the Committee.
One demonstration is worth several thousand words and, we hope, would
set this issue to rest.
Question. When Will Digital Music Come to A Device Near You?
Answer. Unfortunately, it appears as though billions of digital
songs are now on a large variety of devices today. I say unfortunately
because the vast, vast majority of those digital songs were downloaded
from Napster without authorization from the copyright holder. The
question should be: when will there be a legitimate market supplying
digital music to those devices near you? That is entirely in the hands
of the major record labels. As discussed below, it appears that they
have taken some first steps towards entering the marketplace. Those
steps, however, appear unclear and do not seem to represent an adequate
response to the demand in the market.
Question. Record Companies and Online Resellers. Senator Leahy
asks: ``Do you believe that it is also important for the record
companies to make digital music available to those competing retailers
capable of offering secure and accountable downloads on a non-
discriminatory basis that does not price them out of any competitive
opportunity or give them substantially less attractive non-price terms?
''
Answer. The answer is simple--yes! To attract the tens of millions
of people away from unauthorized distribution of digital music will
require adding value to attract them to the legitimate online music
sites. Competing resellers of digital music are far better positioned
to respond to the market than would be a monolithic captive reseller.
Obviously price will be an important factor. But beyond that ease of
user, i.e., user interface and additional services such as playlist
creation and distribution, music news, personalized music search and
delivery, custom CD creation, etc. will need to be created to draw
users from illegal services such as Napster.
There are lessons to be learned from the Napster experience beyond
the fact that many people will trade music for free. One significant
factor is that consumers want all of the music available in one place.
A music buyer in the analog world won't tolerate a record store that
only carried three of the five major labels' CDs. Unlike buying an
automobile, the consumer doesn't go into a record store to buy a brand.
They go to buy music by artist, or by song or by genre--few clerks are
asked for a Sony Music CD, rather the user would ask, for example, for
music by the artist Billy Joel or the song Piano Man. So it is in the
digital world. At the moment there are two nascent services: Duet with
two labels and Music.Net with three labels. Online resellers must be
able to offer one-stop shopping for all the music. Consumers demand it.
Consumers also want an easy to use digital system. They don't want
to click through fourteen steps before they can download their music.
Competition among resellers will result in the best interfaces
succeeding in the market. In addition, to attract customers resellers
will have to add value beyond just having all the music. The more
legitimate resellers that have access to the music at reasonable
nondiscriminatory prices, the more services will be developed. That in
turn will lure music fans away from unauthorized services.
Responses of Billy Pitts, Executive Vice President, MP3.com Inc., on
behalf of Robin Richards, to questions submitted by Senators Hatch and
Leahy
Question. For all panelists (especially Mr. Parsons, Mr. Ken Berry,
Mr. Murphy, and Mr. Richards, and Mr. Henley and Ms. Morissette): One
argument we have heard in favor of a compulsory license is that music
has so many pieces to license and there have been substantial disputes
between the record labels, the publishers and technology companies like
MP3.com about how to get the publishing rights cleared in the volume
demanded by online offerings. Some have suggested that a stumbling
block to getting the labels to license sound recordings is that they
may not have the rights from their artists to grant these rights. I
understand there may even be problems with the MusicNet offering to
some degree because of these impediments. Would any of you be
interested in commenting on this particular problem and suggest ways to
remedy it?
Answer: As we discussed in our written testimony, the existing
marketplace and statutory mechanisms for licensing the use or music
simply do not work m the digital environment. The My.MP3.com service
allows consumers to ``store'' CDs that they purchase in a digital
``locker'' and to use any Internet-enabled device to playback the songs
on those CDs. There is no practicable way for MP3.com (or similar
service providers) to identify and obtain licenses from the copyright
owners for each and every song on the wide array of CDs that consumers
might choose to store (assuming that it even is necessary to obtain
licenses to offer consumers this tool). These practical problems could
be overcome by establishing a more streamlined compulsory license,
modeled on the satellite and cable licenses (Sections 119 and Section
111). Under such a compulsory license, it would be sufficient for the
user of the work to submit to the Copyright Office information
identifying the user and the works being used along with semi-annual
royalty payments (with rates set by arbitration). The copyright owners
whose works were used could then submit claims for their respective
shares of the royalty pool.
Question. For all panelists: Mr. Hank Barry argues that we have
created compulsory licenses in the past, for publishing rights in music
and in rebroadcast of television programming because it was difficult
to clear the rights to the myriad creative interests involved in making
up a broadcast day. Would anyone like to explain why that analogy does
or does not obtain in the online music and entertainment world?
Answer: In the context of cable and satellite retransmissions of
broadcast television programming, Congress has recognized that
compulsory licensing is necessary to overcome the logistical burdens
that would otherwise arise. It is not possible for cable operators and
satellite carriers to identify and contact, either in advance or after
the fact, each of the copyright owners claiming an interest in each of
the dozens of television programs broadcast daily on the broadcast
channels that the cable operator and satellite carrier retransmit. The
situation presented by the on-line delivery of music, particularly by
services that offer access to a vast library of CDs containing hundreds
of thousands of song titles, is directly analogous.
Question. For all panelists: I have heard a number of entertainment
companies say that acceptable protection for online content simply does
not exist yet, that existing Digital Rights Management and watermarks,
wrappers, or encryption, is simply not good enough to protect valuable
content. Yet we have a number of technology companies here today who
believe that they have such a solution, and now we have announcements
of online initiatives from all five major labels, which suggests the
technological protections have developed recently. Would any of you
care to comment on the state of technological protection for content?
Answer: MP3.com's server-side security system is designed to
fulfill the needs of the consumer, the rights-holder, and the emerging
technology providers. Our first goal is to provide the consumer with a
satisfying experience where he or she may access content already
purchased and play that content back to themselves in a secure and
transparent environment. Through the development of our Beam-It and
Instant Listening programs, we are able to help consumers verify
ownership of their CDs and store those CDs in a matter of seconds as
opposed to having to wait hours to rip and encode the song themselves
and then having to worry about the amount of space the song is taking
up on their hard drive. Our security mechanisms have been independently
evaluated by Adam Stubblefield and Dan Wallach at the Department of
Computer Science at Rice University.
Our second goal is to ensure rights-holders that our system will
replicate the protection of their content as well or better than the
protection in place in the physical world. Through our server-side DRM
system we provide a number of levels of security that are not available
in the physical world. For instance, CDs produced today are created
without copy protection and CD players are unable to keep users from
copying songs at will. Because music can be distributed quickly through
the digital space, we have put measures in place to monitor the
behavior of an account to make sure that the activity of that account
is consistent with the guidelines set by the content provider. If
account sharing or song trading is detected then the account can be
disabled.
Finally, we strive to have a system that works independent of any
current piece of technology so that it can adapt to new Internet
enabled devices (like cell phones and set top boxes) or digital rights
management protections without the consumer having to take further
action. All security systems are required to evolve over time. Our
server-side solution adapts itself to new requirements without
incurring hardship on the user by forcing them to go through complex
and cumbersome software updates. Further, by managing protection at the
server level, rather than the client level, we are able to ensure that
the system is ubiquitous.
Question. For all panelists: The premise of this hearing is that
digital content is coming soon to digital devices to be enjoyed by
consumers soon. Based on our discussion today, how soon is soon, and
when will the promise become reality?
Answer: With respect to music, the ``promise'' that digital content
will be available to consumers over a variety of digital devices
already is a reality. The technical hurdles to streaming music to a
variety of wired and wireless digital devices have largely been
overcome. For example, MP3.com has sponsored demonstrations of the use
of streaming technology to deliver music to Internet-enabled devices in
cars and to phones. The principal obstacle to the full deployment of
these and other technological developments is the uncertainty
surrounding the status of digital music under the copyright laws and
the insistence by copyright owners that streaming of audio over the
Internet requires a multitude of separate performance and reproduction/
distribution licenses for both the sound recording and the musical
compositions embodied in the sound recording.
Question. Mr. Barry, Mr. Richards, Mr. Kearby, and Mr. Farrace:
There have been calls for compulsory licensing of sound recordings, of
publishing rights, and of ``most favored nation ``protections for
online distributors not affiliated with record companies. Others argue
that no one has rights to use property other than the property owner
and those the property owner agrees with (with fair use exceptions in
the copyright context, of course). Could you each explain what
justification you see, if any, for such extreme legislative action,
other than that your business plans rely on using the major labels'
content to be successful? Please be specific if you suggest such
theories as misuse of copyright, etc.
Answer: MP3.com respectfully disagrees with the suggestion that
compulsory licensing and ``most favored nation'' protections are
``extreme'' legislative measures. The Section 115 compulsory license
for the reproduction and distribution of phonorecords dates back nearly
100 years and was recodified in 1976; in 1995, Congress sought to
expressly extend Section 115 to the digital environment (albeit in an
imperfect manner that needs to be addressed administratively and/or
legislatively as soon as possible). In addition, Congress has enacted
compulsory licensing mechanisms for the delivery of broadcast
television signals by cable systems and satellite carriers, for the
public performance of sound recordings by digital audio transmission,
and for certain ephemeral copies. And Congress has recognized a right
of non-discriminatory access to vertically-integrated content, both in
the Copyright Act (Section 114(h)) and in the Communications Act
(Section 628). The underlying bases for these various legislative
enactments include overcoming logistical problems in marketplace
licensing, ensuring the public's access to content, and protecting
against anti-competitive behavior. Each of these same concerns is
applicable to the on-line music environment and justify the
establishment of a functional compulsory licensing regime that gives
copyright users--and consumers--access to a complete library of sound
recordings and musical compositions, while ensuring that copyright
owners are fairly compensated. Finally, we note that there is a
pressing need for Congress to address and clarify the rights of music
consumers with respect to their ability to their use of new
technologies. Whether through the application of the concept of ``fair
use'' or through the establishment of clarifying exemptions and/or
definitions, the law should distinguish those services that permit
music consumers to store and playback the CDs that they purchase and
that protect against activities that would allow third parties to
access the music without purchasing it (such as file copying and
sharing).
Question. Mr. Richards: Could you explain how MP3.com tracks each
listen for each song and accounts to the writers and artists whose
music is accessed from your service? And do you think you have a model
that would be useful for the publishers and recording artist
representatives to adopt? Do you think this would afford artists the
sort of transparency Mr. Henley and Ms. Morissette seek?
Answer: MP3.com has made significant investments in the development
and maintenance of a comprehensive infrastructure system that allows us
to report activity on a song-by-song basis. In order to track each
``playback'' of a particular song, we create a unique song ID which is
affiliated with information relating to that song, including song
title, artist name, the associated CD title and the CD's UPC, the
identity of the label claiming the master recording right in the
recording, the publisher claiming and/or administering the mechanical
rights, and all of the payment terms associated with the song. MP3.com
aggregates the activity log files at the song ID level on a quarterly
basis and reports certain information (such as how many times the song
was added to our servers, added to users' accounts, and/or streamed
from users' accounts).
MP3.com supports ``transparency'' in the form of disclosure of
information to artists and writers and our tracking system permits us,
with the rights-holders' permission, to share key statistics with the
public and/or with artists and writers. For example, we currently post
songplay and earnings information for those MP3.com artists who
participate in our ``Payback-for-Playback'' program (a program that
compensates artists who make songs available on the MP3.com website).
We encourage you to visit our site and see the type of information made
available. (Example: http://artiststats.mp3.com/artist--stats/44/
ernesto--cortazar.html).
Question. Mike Farrace, Senior Vice President, at Tower Records
testified that some record companies are requiring personal data from
and about Towers' customers, prompting concerns by Tower Records about
violating its own privacy policy, damaging the relationship with the
customer, and ``maybe even resultjing] in Tower violating the law.''
(A) What sort of personal data are record companies requesting from
retail distributors, such as Tower Records, and other online
distribution services to provide from or about customers?
(B) Are record companies asking retail distributors to provide any
personal data about customers who purchase CDs in brick-and-mortar
stores, or have the requests for collection of customer data been
limited to online music purchases?
(C) Are retail distributors and online distribution services
formulating or revising their privacy policies to accommodate requests
from record companies to provide personal data from or about customers?
(D) Are record companies requiring as part of their licensing
agreements for digital music that they be provided access to customers'
personal data?
Answer: MP3.com is committed to protecting the privacy of its
users. A copy of our privacy policy can be found at http://
www.mp3.com.privacy.Yhtml. While MP3.com receives personal information
provided voluntarily by its users in connection with certain activities
(e.g., initial sign-up for service, on-line purchases, surveys,
contests), we do not sell, rent, or trade personal information with
others. Some of our contracts with record labels request that we supply
aggregate demographic information (to the extent that we collect such
information) to help the labels better tailor their marketing messages.
However, we have not been requested to share specific information about
users and/or their accounts and we do not share such information.
Question. Concerns have been expressed that ``copyright
management'' measures being developed by copyright owners to control
the distribution of their digital works may erode the first sale
doctrine. If a customer pays for the personal use of a copyrighted
work, the rights holder may use technological means to ensure that the
work is not posted on a web site for use by others. Do you believe that
the marketplace will sort out the scope of copyright management
measures since customers who believe they are not getting what they pay
for will simply stop buying?
Answer: MP3.com shares concerns that consumers' rights with respect
to their music purchases are being eroded. This concern goes beyond the
erosion of the ``first sale doctrine"; even the right of a consumer to
listen to his or her music purchases is being threatened. Specifically,
the ``My.MP3.com'' service permits purchasers of recorded music to
``store'' their purchases in digital ``lockers'' and then to play back
their purchases over any Internet-connected device. The owners of the
sound recording and musical composition copyrights have argued, and one
federal court has agreed, that the storage of recorded music in such
lockers and the ``personal performances'' of the recordings in those
lockers, constitutes infringement. It is critical that Congress clarify
the rights of consumers to utilize new technologies to store and play
back the music that they purchase.
Question. The Copyright Office issued a Notice of Inquiry on March
9, in response to a petition by the RIAA, stating that: ``there is
considerable uncertainty as to interpretation and application of the
copyright laws to certain kinds of digital transmissions of prerecorded
musical works. It is also apparent that the impasse presented by these
legal questions may impede the ability of copyright owners and users to
agree upon royalty rates under section 115. . .'' 66 Fed. Reg. 14099,
141101 (2001).
(A) Do you agree with this statement and, if so, please explain how
the uncertainty over the legal questions presented in the petition are
affecting voluntary licensing agreements for new online music services?
Answer: We strongly agree that the uncertainty surrounding the
interpretation and application of the copyright law to streaming audio
services in general, and to ``personal'' digital ``locker'' services
such as My.MP3.com in particular, impedes the ability of copyright
owners and users to agree upon royalty rates under Section 115. The
music publishers cite the licensing agreement reached between MP3.com
and the Harry Fox Agency as evidence that the marketplace is working.
In fact, however, that agreement was entered into only after MP3.com
was sued by the publishers. This litigation alleged that the ``server''
and ``buffer'' copies that are a necessary incident of the operation of
the My.MP3.com streaming audio personal digital music locker service
infringed the publishers' reproduction and distribution rights.
Although it is unlikely that the publishers could have established that
such ``copying'' had caused them any actual economic harm, the risk of
crushing ``statutory'' damages forced My.MP3.com to enter into
licensing agreements despite its disagreement with the publishers'
interpretation of Section 115. The risk of statutory damages,
particularly where the underlying legal issues themselves are in
dispute, skews the ``negotiation'' of royalty payments in favor of the
copyright owners.
Question. (B) In 1995, the Digital Performance Right in Sound
Recordings Act expanded the scope of the mechanical license, under 17
U.S.C. Sec. 115, to include the right to distribute,, or authorize the
distribution of, by digital transmission both hard copy phonorecords
and ``digital phonorecord deliveries'' or ``DPDs.'' DPDs are defined in
the Act but a subset of DPDs, called ``incidental DPDs,'' which are
also subject to the mechanical licensing process, are not defined. One
of the issues before the Copyright Office is to determine what is and
what is not an ``incidental DPD.'' Is this a question that the
Copyright Office or the Congress should determine in the first
instance?
Answer: MP3.com believes that it may be appropriate for the
Copyright Office, in the first instance, to consider what is and what
is not an ``incidental DPD'' and has filed comments to that effect with
the Copyright Office. (Copies of MP3.com's filings with the Copyright
Office are attached hereto for your convenience). The outcome of the
Copyright Office's consideration of this issue likely will help define
whether, and to what extent, further Congressional action is necessary.
However, whatever the outcome of the Office's consideration of the
``incidental DPW'' issue, MP3.com believes that Congressional action
will be necessary to clarify the rights of consumers to use
``personal'' digital music locker services to enjoy their purchased
music over Internet-enabled listening devices.
Question. (C) The Copyright Office is currently considering the
applicability of the section 115 mechanical license to two new services
for delivery of digital music: ``On-Demand streaming'' (which permits
users to listen to real-time streamed music they want when they want
it) and ``Limited Downloads'' (which permits users to download music
for listening for only a limited time). According to the Notice of
Inquiry, these types of services were not ``anticipated'' when the
Congress expanded the scope of section 115 to cover digital
transmissions. Is legal uncertainty over the applicability of section
115 to these new services having any effect on the deployment of such
services and, if so, please explain what that effect is?
Answer: As noted above, MP3.com, which offers music purchasers
``on-demand'' streaming by means of a digital music ``locker'' service,
was sued for copyright infringement by the music publishers. As a
result of that litigation (and litigation brought by sound recording
copyright owners), MP3.com was forced to shut down its service. As
detailed in our written testimony submitted to the Committee, MP3.com
has not been able to fully relaunch its My.MP3.com service, despite
having agreed to pay tens of millions of dollars to various record
labels and to the music publishers represented by the Harry Fox Agency.
In particular, our ability to provide consumers with access to all of
the music in their purchased music lockers is being frustrated both by
the uncertainty surrounding the application of Section 115 and the
absence of a practicable mechanism for invoking the Section 115
compulsory license.
Question. (D) various music publishers filed suit in December,
2000, against UMG for copyright infringement alleging that UMG was
copying sound recordings on servers for its new online music
subscription service, Farmclub.com, and stating that: ``UMG recently
obtained a judgment from this court that the operator of another
Internet music service, MP3.com, Inc., had willfully infringed UMG's
sound recording copyrights by placing copies of those sound recordings
on its public servers--precisely what UMG has done here without
plaintiff's permission.'' Would clarifying the scope of the mechanical
license under section ll S of the Copyright Act in the context of such
new online music services help avoid the undue delay and undue
distraction from litigation?
Answer: The most important action that can be taken to avoid the
undue delay an undue distraction that results from litigation over the
use of new on-line tools, such as streaming audio digital music locker
services, is for the Copyright Office to clarify its rule (37 CFR
Section 255.6) ``deferring'' the establishment of rates and terms for
``incidental DPDs.'' Such clarification can and should provide a ``safe
harbor'' mechanism whereby copyright users could obtain the protection
of the statutory license while the scope of Section 115 is being
clarified. Again, however, MP3.com wishes to note that, in the long
run, Congress will have to clarify not only Section 115, but also other
provisions of the Copyright Act that allegedly are implicated by audio
streaming services in general, and by ``purchased'' digital music
locker services in particular.
Question. The record companies have announced new online music
services, including MUSICNET and Duet, which will provide competing
business-to-business platforms for music subscription services that
will cross-license music and offer the services on a non exclusive
basis. As Hilary Rosen stated in her testimony, the record companies
recognize the need to ``ensure that online distribution enhances rather
than undermines the commercial viability of our retail partners.
``Thus, the non-exclusive nature of these new platforms is important.
Do you believe that it is also important for the record companies to
make digital music available to those competing retailers capable of
offering secure and accountable downloads, on a non-discriminatory
basis that does not price them out of any competitive opportunity or
give them substantially less attractive non price terms?
Answer: The issue of non-discriminatory licensing arises not only
with respect to ``downloads,'' but also with respect to ``on-demand''
streaming. Section 114(h) of the Copyright Act should be extended to
apply to all ``interactive'' services.
Responses of Richard D. Parsons to questions submitted by Senator Hatch
Question 1: For all panelists (especially Mr. Parsons, Mr. Ken
Berry, Mr. Murphy and Mr. Richards and Mr. Henley and Ms. Morissette):
One argument we have heard in favor of a compulsory license is that
music has so many pieces to license and there have been substantial
disputes between the record labels, the publishers and the technology
companies like MP3. com about how to get the publishing rights cleared
in the volume demanded by online offerings. Some have suggested that a
stumbling block to getting the labels to license sound recordings is
that they may not have the rights from the artists to grant these
rights. I understand there may even be problems with the MusicNet
offering to some degree because of these impediments. Would any of you
be interested in commenting on this particular problem and suggest ways
to remedy it?
Answer: As this question addresses two different copyrights, the
copyright in musical compositions and the copyright in sound
recordings, I will need to divide my answer into two parts.
With respect to the copyright in sound recordings, the clearance
issues are not complicated and we do not expect that they will present
any significant stumbling block to the availability of music for use on
subscription and other Internet-based services.
With respect to the copyright in musical compositions, the
resolution of issues to allow the administratively convenient and
economic licensing of music publishing rights is well under way and
does not require Congressional intervention at this time. In
particular, these matters should not prevent the timely launch of the
MusicNet service in the second half of this year. The clearance issues
that have arisen involve interpreting the Copyright Act. We are hopeful
that the Copyright Office pursuant to a rulemaking proceeding will
resolve them in due course. In this regard, on March 9, the Copyright
Office published a Notice of Inquiry and comments were submitted on
April 23. Reply comments are due on May 23. The Copyright Office may
very well decide that a compulsory license under Section 115 of the
Copyright Act already obtains. This would be the case if on-demand
streaming (``On-Demand Streaming'') is determined to be an incidental
digital phonorecord delivery (``iDPD'') and time- or use-limited
downloads (``Limited Downloads'') are determined to be iDPDs or
rentals. It is also possible that mechanical compulsory licenses
already secured by record companies for the manufacture and
distribution of physical records also cover On-Demand Streaming and
Limited Downloads. This matter maybe resolved in Mayor June by summary
judgment in The Rodgers and Hammerstein Organization, et. al. v. UMG
Recordings, Inc., et. al., a case pending before the United States
District Court, Southern District of New York. Thus, the issues
relating to On-Demand Streaming and Limited Downloads, which are the
services to be provided by MusicNet, are well on their way to being
resolved and any Congressional intervention would be premature.
Question 2: For all panelists: Mr. Hank Barry argues that we have
created compulsory licenses in the past, for publishing rights in music
and in rebroadcast of television programming because it was difficult
to clear the rights to the myriad creative interests involved in making
up a broadcast day. Would anyone like to explain why that analogy does
or does not obtain in the online music and entertainment world?
Answer: Once again, I must make a distinction between musical
compositions and sound recordings.
We would have no problem with a mechanical compulsory license for
use of musical compositions in On-Demand Streaming and Limited
Downloads. As I pointed out in my answer to Question 1 above, it may
already exist under Section 115 of the Copyright Act. The mechanical
compulsory license for musical compositions is a bedrock concept in the
U.S. music publishing business; indeed music publishers have favored
retaining it in the law. In fact, a mechanical compulsory license first
appears in the Copyright Act as enacted in 1909.
On the other hand, in the U.S. record business a compulsory license
for sound recordings has been the rare exception, not the norm, and is
completely inappropriate in this instance. There is no need for so
drastic a remedy. First, the marketplace is already working. In the
last 18 months, Warner Music Group (``WMG'') has entered into content
agreements with a subscription service, three digital locker services,
seven streaming video services and five Internet radio services.
Second, particularly in the Internet space, a sound recording copyright
owner must have leave to determine how and when his, her or its works
are used. A sound recording, unlike a musical composition which is not
enjoyed by itself except in printed form, is a consumer product. The
potential for cannibalization of physical sales and permanent downloads
by subscription business models is high. Security is also a significant
matter. Substitutability and copy protection issues endemic to the
Internet pose great risks for record companies. Accordingly, sound
recording copyright owners must have the ability to structure their
relationships with Internet-based music services in order to take these
essential concerns into account. Third, the worldwide nature of the
Internet makes a U.S. compulsory license impractical at best. Fourth,
commercial models are still evolving. Last year, permanent downloads
were thought to be the future of the music business. This year they
look less promising and the subscription model is in vogue. The ``one
size fits all'' approach implicit in a compulsory license regime is
manifestly unsuitable for a nascent and rapidly evolving marketplace.
Question 3: For all panelists: I have heard a number of
entertainment companies say acceptable protection for online content
simply does not exist yet, that existing Digital Rights Management and
watermarks, wrappers, or encryption, is simply not good enough to
protect valuable content. Yet we have a number of technology companies
here today who believe that they have struck a solution, and now we
have announcements of online initiatives from all five major labels,
which suggests the technological protections have developed recently.
Would any of you care to comment on that state of technological
protection for content?
Answer: Progress has been made in the development of copy-
protection technologies and we have been working with technology
providers for both online music and film content. We no longer see the
lack of reliable copy protection technologies as a gating factor to the
launch of Internet-based content businesses. That being said,
protecting content on the Internet poses several challenges. Among
these are the very structure of the Internet as a completely
decentralized network with no single ``command center'' or server and
the fact that the computer environment is designed to facilitate, not
thwart, the reproduction and dissemination of data files.
It is clear that no single technology will provide a complete
solution. Rather, it is necessary to employ a combination of encryption
and watermarking tools, coupled with enforceable rules regarding
copying and secondary transmissions. In addition, hardware and computer
companies must ultimately build support for protection technologies
into their products in order for these systems to be viable. While no
content protection technology will be ``bullet proof' and battling
hackers will be an ongoing reality, we are working with our technology
suppliers to ensure that systems will be upgradeable and renewable so
as to quickly address and frustrate such attacks.
Question 4: For all panelists: The premise of this hearing is that
digital content is coming soon to digital devices to be enjoyed by
consumers soon. Based on our discussion today, how soon is soon, and
when will the promise become reality?
Answer: As mentioned in my answer to Question 2, WMG has already
provided its content to many Internet-based music services, among them
the MusicNet service. MusicNet is still on schedule for a public launch
in the late summer/early fall of this year. In fact my company has long
been a leader in the introduction of new digital devices. Although I
may be accused of being too literal, I should point out that WMG has
been releasing digital devices (i.e., CDs) since 1983. In March of
1997, Warner Home Video was the first to release motion pictures in the
U.S. in DVD form, a digital device vastly superior to consumer
videocassette. In fall of 2000, WMG was the first to release sound
recordings in the U.S. in DVD Audio form, an exciting new digital
device that improves on the CD by providing higher fidelity and six-
channel surround sound.
Question 5: For all panelists: Is there any point you feel should
be raised or that you would like to further respond to the completeness
of our record?
Answer: No.
Question 6: Mr. Parsons, Mr. Ken Berry and Ms. Rosen: Do record
companies have problems granting blanket licenses to third parties for
digital distribution of an artist's recordings or settling lawsuits
because of agreements with artists, such as ``coupling'' restrictions
in their recording agreements (coupling is compiling an artist's
recording(s) together with master recordings by other artists) such
that the record companies would need the artist's approval to do so?
Does a record company have the rights to distribute an artist's
recording absent the accompanying artwork without an artist's approval
under most recording agreements? If they don't, how can they do so via
digital distribution?
Answer: Because we sometimes have agreements with third parties
that restrict our rights, WMG cannot grant rights for digital
distribution with respect to every single sound recording that it owns
and/or controls without exception. Nonetheless, WMG can (and does)
grant rights with respect to every single sound recording that it owns
and/or controls subject only to third-party restrictions. Typical
recording agreement provisions that restrict ``coupling'' or artwork
use would not prohibit the use of sound recordings or their associated
artwork in current digital distribution models. It would be rare for a
recording agreement to prevent a record company from settling lawsuits
with copyright infringers.
Question 7: Mr. Parsons, Mr. Ken Berry, and Ms. Rosen: Has there
been any discussion or consideration about the basis on which record
companies will share with artist monies they receive from blanket
licensing, damage awards, or equity/stock participations they receive
from third party companies?
Answer: Every recording agreement is different, so there can be no
fixed basis upon which record companies compensate artists. WMG will,
of course, abide by the terms and conditions of its recording
agreements. In particular, as we have previously announced, WMG will
share with artists the monies received by WMG in connection with its
MP3.com settlement agreement in accordance with the terms of the
applicable artist agreements.
Question 8: Mr. Parsons and Mr. Ken Berry: At the April 3, 2001,
Senate Judiciary Committee hearing on online entertainment, Napster's
CEO Hank Barry discussed the licensing complexities related to music
webcasts and limited downloads. According to Mr. Barry, the MusicNet
music licensing deal, which is a joint venture between AOL Time Warner,
EMI, BMG, and RealNetworks, may not allow companies to offer the type
of online music services consumers desire if the planned MusicNet
licenses do not include publishing rights. Mr. Barry queried whether
MusicNet license would include these publishing rights. In response to
Mr. Barry's comments, Senator Feinstein asked Mr. Parsons to respond.
Mr. Parsons responded that, ``the full complement of rights to enable
the streaming or downloading of our catalogues--EMI's, Warner Music,
BMG's--is included in the license that we gave the MusicNet. ``Can you
clarify for us whether the MusicNet licenses you have granted include
all of the required publishing rights, and the distinguish for us
whether you mean that you are granting all publishing rights your
entities-control, or all rights your entities control related to sound
recordings your companies control, and whether you have cleared
publishing licenses from outside publishers of music on sound
recordings you control or whether the new MusicNet entity will have to
clear these rights of third party publishers?
Answer: In essence, WMG's Subscription Services Agreement with
MusicNet includes all of the required publishing rights. The agreement
requires WMG to obtain mechanical licenses for musical compositions
embodied in sound recordings owned and/or controlled by WMG to the
extent that such mechanical licenses can be obtained by compulsory
means under Section 115 of the Copyright Act. Accordingly, WMG has
proceeded with the first wave of a large compulsory licensing program
pursuant to which, at the end of April, WMG sent Notices of Intention
to approximately 3,000 music publishers in order to obtain
approximately 17,000 licenses for musical compositions embodied on
approximately 13,000 sound recordings owned and/or controlled by WMG.
Our current plan is for this licensing effort to continue. The
Subscription Services Agreement does not grant MusicNet mechanical
licenses for musical compositions controlled by Warner/Chappell Music,
Inc. These licenses will also be obtained pursuant to WMG's compulsory
licensing program. The Subscription Services Agreement requires
MusicNet to obtain performance licenses for musical compositions
embodied in sound recordings owned and/or controlled by WMG. These
rights are easily secured on a blanket basis in the U.S. from ASCAP,
BMI and SESAC.
Question 9: Mr. Parsons and Mr. Ken Berry: This week has seen a
handful of announcements in the digital media space. While 1 have seen
this a step forward, I have heard some skepticism concerning these
deals given the timing of the announcements in the relation to the
committee's hearing and the relative lack of specificity. Accordingly,
please answer the following questions with respect to the recently
announced MusicNet deal.
Question a: Does the deal allow for the immediate licensing for
subscription download of EMI, Warner Music, and BMG's entire music
catalogs?
Answer: Yes, but not entire (see Question 6 above). WMG will be
able to make available a substantial portion of its repertoire to
MusicNet.
Question b: At what specific date will the full MusicNet download
service be made available to the entire public, rather than on a beta,
regional, or ISP membership basis?
Answer: See Question 4 above. The beta version will be ready as
early as May.
Question c: Will the MusicNet license include all necessary
publishing rights and, if not, on what date will all publishing rights
be available?
Answer: See Question 8 above.
Question d: Will MusicNet be technology neutral, or will it require
licensees to implement a particular proprietary technology?
Answer: There is nothing in the MusicNet transactional documents
that ties MusicNet to a particular DRM or CODEC. Technology decisions
will be made by MusicNet's management in the best interests of MusicNet
and will be overseen by MusicNet's board. MusicNet at present has a 7-
member board (2 independent directors, 2 appointed by RealNetworks and
1 appointed by each of EMI, BMG and WMG). Where there are interested
directors, board decisions will be determined by a majority of the
disinterested directors. In addition, WMG's Subscription Services
Agreement with MusicNet permits MusicNet to make WMG's content
available using any of along list of DRMs or CODECs.
Question e: Will other ISPs enjoy the same licensing terms
(including prices, catalog available, etc) as AOL and other ISPs with
equity stakes in MusicNet enjoy, yes or no?
Answer: Nothing in the MusicNet transaction would limit another
ISP's ability to enjoy the same licensing terms as AOL. As described
below, MusicNet will negotiate all content and distribution
relationships on an arm's-length basis.
MusicNet's deals with content companies (including EMI, BMG and
WMG) will be negotiated by the CEO of MusicNet or another officer of
MusicNet designated by the CEO (the ``Licensing Negotiator''). The
Licensing Negotiator in the performance of his/her duties will report
only to MusicNet's independent directors and the directors appointed to
MusicNet's board by RealNetworks. The terms of content licenses are to
be maintained in strict confidence by the Licensing Negotiator,
MusicNet and its officers and employees, the independent directors and
the RealNetworks directors. They may not be divulged to any third party
(including EMI, BMG and WMG).
MusicNet's deals with distribution companies (including AOL and
RealNetworks) will be negotiated by the CEO of MusicNet or another
officer of MusicNet designated by the CEO (the ``Distribution
Negotiator''). The Distribution Negotiator in the performance of his/
her duties will report only to MusicNet's independent directors and the
directors appointed to MusicNet's board by any stockholder that is not
a party to and does not have an affiliate that is party to a
distribution agreement. The terms of distribution agreements are to be
maintained in strict confidence by the Distribution Negotiator,
MusicNet and its officers and employees, the independent directors and
the directors appointed to MusicNet's board by any stockholder that is
not a party to and does not have an affiliate that is party to a
distribution agreement. They may not be divulged to any third party
(including AOL and RealNetworks).
Question 10: Your testimony made clear that you do not believe
compulsory music licensing for interactive services to be necessary or
desirable, citing MusicNet and other recent licensing initiatives by
major record labels as evidence that product is beginning to flow to
the market. What is your reaction to the suggestion of a sort of ``Most
Favored Nation ``statute, similar to the program access rules for
subscription television licensing, that required large copyright holder
entities that engage in cross-licensing of their catalogs to make the
licensed materials available on essentially the same terms and
conditions to, for example, similar internet-based music distribution
or ``locker'' services?
Answer: We do not believe that a regulatory mandate similar to the
program access rules for subscription television licensing is either
necessary or advisable for licensing music to interactive services.
Television delivery services are much more uniform in their function of
delivering programming to a consumer. The consumer experience of
receiving a particular program from a cable operator versus a satellite
operator, for example, is basically the same. In contrast, interactive
digital music delivery services vary greatly. Some services just stream
music for consumer listening. Others involve a storage or locker
service for music that a consumer already owns. Still others offer
consumers the ability to download music and keep a permanent copy.
Furthermore, these services vary in the level of security that they
offer to content suppliers. Given the variety of business models and
the speed at which such models are changing and evolving, it would be
impracticable and unwieldy to apply a ``Most Favored Nation''--type
approach. Moreover, applying a ``Most Favored Nation'' concept to this
arena would likely have the perverse consequence of discouraging music
owners from licensing to start-up services, promotional services, or
niche-market-oriented services, with the result of a smaller array of
choices for consumers.
Question 11: Mr. Parsons and Mr. Ken Berry (and perhaps Ms. Rosen):
can any of you explain what relevance traditional artist royalty
reductions like those for packaging, returns or free goods have in
cyberspace, and why those are not savings available in cyberspace that
can be shared by consumers and artists as well as labels? What
assurance can you give Mr. Henley and Ms. Morissette that the royalties
earned on interactive services granted in the Digital Performance
Rights Act will be passed on to them in a fair and equitable way rather
than recouped against recording costs or otherwise kept by the labels?
If you believe they should be recouped, please explain why?
Answer: Some traditional royalty reductions found in recording
agreements will be relevant to the Internet space, although it is hard
to predict at this time which ones they will be. I don't believe that
returns will be a relevant concept in the Internet space. Free goods
may be relevant, if, for example, we are actually giving away permanent
downloads to incentivize online retailers or to obtain positioning.
Packaging deductions may be relevant to the extent that, as in the
physical world, they are employed to arrive at a royalty-per-unit that
will be acceptable to both the artist and the record company.
There appears to be a widespread public belief that a record
company's profit margins in the Internet world will be higher than in
the physical world. It is far too early to know this with any
certainty. While we certainly hope the public is right, there are a
number of facts at our disposal which challenge that assumption. First,
a download is a less-fullyrealized consumer product than a CD as the CD
includes artwork and the physical medium that makes the product
portable. Therefore, it is highly likely that the price a consumer is
prepared to pay for a download will be less than the price he or she is
prepared to pay for its physical analog. Second, while there are no
printing, manufacturing or physical distribution costs associated with
a download, the distribution of downloads will implicate a whole new
series of expenses including hosting costs, bandwidth delivery costs,
content preparation costs and license fees attributable to security and
digital rights management technologies. These expenses are roughly
equivalent to any savings achieved by not having to print, manufacture
and distribute a physical record. Perhaps, over time, the volume of
digital transactions may drive efficiencies that lower costs and
increase record company margins.
In general, our recording agreements, as negotiated, provide that
royalties otherwise payable to artists are applied in recoupment of
certain payments made to or on behalf of artists such as recording
costs, some video production costs, tour support and some independent
promotion costs. This course of dealing, developed over many years,
reflects the marketplace realities and the large investments that a
record company makes in an artist's career. In this regard, our
recording agreements don't make a distinction between royalties
accruing from physical and non-physical distribution models.
Responses of Richard D. Parsons to questions submitted by Senator Leahy
Question 1: Mike Farrace, Senior Vice President, at Tower Records
testified that some record companies are requiring personal data from
and about Tower's customers, prompting concerns by Tower Records about
violation its own privacy policy, damaging the relationship with the
customer, and ``maybe even resulting] in Tower violating the law.''
Question a: What sort of personal data are record companies
requesting from retail distributors, such as Tower Record, and other
online distribution services to provide from or about customers?
Answer: In general, WMG does not request personal data from retail
distributors and online distribution services with respectto their
customers. In fact, as a practice, we do not request and have not
received such data from any retail distributor or online distribution
service. (For the purposes of this question, I am assuming that you
mean ``online distribution services'' to be the Internet analog to
``brick-and-mortar.'')
Question b: Are record companies asking retail distributors to
provide any personal data about customers who purchase CDs in brick-
and-mortar stores, or have the requests for collection of customer data
been limited to online music purchases?
Answer: There is only one situation where WMG asks ``brick-and-
mortar'' stores to provide personal data about customers who purchase
CDs. Certain chains such as Newbury Comics and CD World have ``frequent
shopper card'' programs that provide discounts to high-volume
customers. In applying for such cards, the customers provide certain
personal data to the stores and agree to let the stores share some of
that data with record companies. WMG gets limited demographic data from
these stores with respect to such customers' purchases (e.g., age and
gender), but not the names of the customers.
Question c: Are retail distributors and online distribution
services formulating or revising their privacy policies to accommodate
requests from record companies to provide
personal data from or about customers?
Answer: I don't know. This question would best be addressed to Mr.
Farrace.
Question d: Are record companies requiring as part of their
licensing agreements for digital music that they be provided access to
customers' personal data?
Answer: In some of WMG's agreements with digital music services,
WMG may be provided with limited access to customers' personal data
provided that such data is legally obtained by the relevant service and
is in accord with such service's ``privacy policy.'' For example, in
WMG's digital download fulfillment agreements with companies such as
Liquid Audio and RioPort, WMG may be provided with the names, e-mail
addresses and zip codes of purchasers of WMG content, provided, that
the customer has explicitly consented to have such information made
available to WMG via an ``opt-in'' process that informs such customer
of how such information will be used. In WMG's typical music locker
service agreements such as with MP3.com and Echo, WMG may be granted
the ability to solicit customers to purchase WMG products and may also
be granted access by such services to general information pertaining to
individual customers. In most, if not all, of WMG's agreements with
digital music services, WMG is provided with aggregated customer
demographic data on a no-name basis and only so long as providing such
information does not run awry of the applicable service's ``privacy
policy.'' Finally, when WMG runs contests, e-mail blasts and other
promotions through Internet music services such as ARTISTdirect or
MP3.com, consumers may be given the option to learn more about a
particular WMG artist or another WMG artist by providing certain
personal data (e.g., an e-mail address) and clicking ``ok.''
Question 2: Jack Valenti testified that within four to six months,
several movie studios plan to use the Internet to transmit movies to
American homes in encrypted form, but that more protection may be
needed, ``some of which might require congressional legislation. ``In
the Digital Millennium Copyright Act (DMCA), the Congress has provided
protection for technological measures that effectively control access
to copyrighted works and barred the manufacture, import or sale of
products or services primarily designed to circumvent such
technological measures. 17 U.S.C. Sec. 1201 (a)(I) & (2). Please
describe the circumstances where additional protection may be warranted
and the areas not already covered by the DMCA where additional
legislation may be requested.
Answer: The DMCA, along with the balance of U.S. copyright law,
currently functions well in the Internet environment. The recent court
decisions in the DeCSS and the Napster cases recognize the importance
of granting legal protections to copyrighted works and technical
protection measures on the Internet. We do not believe additional
legislation is needed at this time. Nevertheless, as the technical and
business digital landscape evolves, the law may need to change with it.
In particular, as we move to delivering more of our content online,
including films, legislation may be needed at some point in the future
to supplement the cross-industry efforts among the content, consumer
electronics, computer and online service provider industries to ensure
adequate security to support these new business models and delivery
channels.
Question 3: Concerns have been expressed that ``copyright
management'' measures being developed by copyright owners to control
the distribution of their digital works may erode the first sale
doctrine. If a customer pays for the personal use of a copyrighted work
the rights holder may use technological means to ensure that the work
is not posted on a web site for use by others. Do you believe that the
marketplace will sort out the scope of copyright management measure
since customers who believe they are not getting what they pay for will
simply stop buying?
Answer: Much confusion has surrounded the issue of the first sale
doctrine and its application to the online world. The first sale
doctrine distinguishes possessory personal property rights from
copyrights. Under the first sale doctrine, the owner of a tangible copy
of a work may transfer possession of (e.g., sell, lend or give away)
that particular copy to another person. Two persons cannot have
simultaneous possession of the particular copy and the first sale
doctrine does not permit additional copies of the work to be made.
Thus, if someone buys a CD and then gives it to a friend, the first
sale doctrine applies to that activity. However, if the purchaser buys
the CD and then rips it into an MP3 file and e-mails that file to a
friend, the first sale doctrine has been exceeded. This is because the
purchaser has made a copy of the work, rather than simply transferring
possession of an existing copy.
The question poses an example of a consumer who pays for the
personal use of a copyrighted work and the possibility that the owner
of the copyright in the work might apply technical measures to prevent
the consumer from posting the copy of the work to a website for use by
others. In this example, the posting of the copy by the consumer would,
even in the absence of technical measures, not be permitted under the
first sale doctrine. Such a posting would involve unauthorized
reproduction of the work and unauthorized distribution of the
additional copies, enabling the consumer to retain his or her copy
while simultaneously giving copies away to many others. Hence the
application of copyright management measures to prevent or discourage
this type of activity in no way erodes or undercuts the first sale
doctrine.
We believe that the application of ``copyright management''
measures will actually facilitate a wide array of content offerings to
consumers at varying price points. And we agree that the marketplace
will sort out the scope of such measures based on what consumers find
acceptable. If consumers find that they are getting value for what they
pay for, then, they will accept technical measures. Indeed, the
experience of DVD--with its technical protections for motion picture
content--bears out this principle; consumers have embraced DVD faster
and more enthusiastically than any other format, including CD and VHS,
both of which were unprotected.
Question 4: Retailers of music, movies, video games and other
copyrighted works have expressed concern about whether copyright
management measures and end user licensing agreements will erode the
ability of retailers and distributors to distinguish themselves from
one another in meaningful ways with the potential of stifling
competition among retailers, since those measures may set uniform
prices, policies and terms for online distribution of digital works.
Question a: Please explain whether you believe that uniform
copyright management measures and user licensing agreements carry the
potential risks for competition identified by retailers?
Answer: Copyright management measures, in terms of technical
protection measures, should have no detrimental impact on legitimate
retailers and distributors and their ability to compete. Measures
employed to prevent unauthorized access or unauthorized reproduction or
distribution operate so as to be transparent to all legitimate uses by
a consumer. Thus, for example, the high-quality viewing experience that
the consumer gets with DVD is in no way impaired by the fact that the
motion picture content on DVD is encrypted. The application of this
technical protection to DVD has had no negative impact on retailers'
and distributors' abilities to compete and distinguish themselves in
pricing and promotion.
It is not entirely clear what that term ``end user licensing
agreements'' is intended to mean--whether (i) licensing agreements
directly between record companies and consumers or (ii) the terms that
record companies may require retailers to abide by in selling product
to end consumers. In either case, such agreements would pose no threat
to competition.
As for the first scenario, consumers will naturally continue to buy
records where it is convenient to do so. That means they will continue
to go to retailers that provide a full range of music (and can offer
service and an attractive price), rather than record companies that
only have a limited selection. Moreover, record companies have an
interest- in the promoting and selling their product broadly, so they
have an on-going interest in maintaining a healthy network of
retailers. Thus, retailers should continue play a central role in
making digital music available to consumers (just as they have in sales
of CDs whether in traditional stores or through websites), and direct
purchases from record companies are likely to remain a relatively small
portion of transactions.
As for the second scenario, retailers may need to abide by certain
restrictions to protect copyrights (for example, if the record company
and music publishers have been able to grant rights to a retailer only
for a particular country--such as the United States--then the retailer
would need to take steps to assure that it does not make the recording
available outside of that territory). But just as such competition has
flourished among ``brick-and-mortar'' retailers while respecting such
copyright restrictions, it should do so among online retailers as well.
Question b: Would variation in the terms for pricing, use policies
and terms for the distribution of digital works provide flexibility for
different distribution models and give the consumer the maximum number
of choices?
Answer: Certainly. Record companies have an interest in exploring a
number of different models for making digital music available to
consumers--in terms of price, format (stream versus download), and
packaging. Ultimately, the range of choice will be determined by
consumer preferences, the extent of retailer ingenuity, and
practicality.
Question 5: The Copyright Office issued a Notice of Inquiry on
March 9, in response to a petition by the RIAA, stating that: ``there
is considerable uncertainty as to interpretation and application of the
copyright laws to certain kinds of digital transmissions of prerecorded
musical works. It is also apparent that the impasse presented by these
legal questions may impede the ability of copyright owners and users to
agree upon royalty rates under section 115. . . ``66Fed Reg. 14099,
141101 (2001).
Question a: Do you agree with this statement and, if so please
explain how the uncertainty over the legal questions presented in the
petition are affecting voluntary licensing agreements for new online
music services?
Answer: Yes, I do agree with the statement. In order to give you
some idea as to the significance of the problem, I will focus on On-
Demand Streaming alone and set aside Limited Downloads, which may be
even more complicated.
At present, a service that provides On-Demand Streaming to
consumers doesn't know whether it needs to obtain mechanical licenses
in musical compositions embodied on sound recordings. If the service
fails to obtain mechanical licenses (even though there is uncertainty
as to whether it is required to do so), it risks being pursued as a
copyright infringer. If the service wishes to cover itself by obtaining
mechanical licenses (even though such licenses may be unnecessary), it
is unclear whether those mechanical licenses must be negotiated
directly with a myriad of publishers or whether the licenses can be
secured under Section 115 of the Copyright Act. Either process--direct
negotiation or invoking Section 115--is extremely burdensome from an
administrative point of view. In the case of direct negotiation, the
service may end up inadvertently committing to an uncommercially high
rate. By invoking Section 115, the service may obtain mechanical
licenses but runs the risk that the rate, as later determined, will be
uneconomic.
Question b: In 1995, the Digital Performance Right in Sound
Recordings Act expanded the scope of the mechanical license, under 17
U.SC Section 115, to include the right to distribute, or authorize the
distribution of, by digital transmission both hard copy phonorecords
and ``digital phonorecords deliveries'' or ``DPDs. ``DPDs are defined
in the Act but a subset of DPDs, called incidental DPDs, ``which are
also subject to the mechanical licensing process, are not defined. One
of the issues before the Copyright Office is to determine what is and
what is not an ``incidental DPD. ``Is this a question that the
Copyright Office or the Congress should determine in the first
instance?
Answer: This is clearly a question for the Copyright Office. First,
the question falls squarely within the Copyright Office's authority and
proficiency. As long recognized by Congress and the courts, it is the
job of the Copyright Office to interpret the Copyright Act and function
as an expert advisor on issues of copyright law. Second, time is
pressing and the Copyright Office rulemaking process that is already
underway will resolve this question more far more quickly than Congress
or the courts.
Question c: The Copyright Office is currently considering the
applicability of the section 115 mechanical license to two new services
for delivery of digital music: ``On-Demand Streaming'' (which permits
users to listen to real-time streamed music they want when they want
it) and ``Limited Downloads'' (which permits users to download music
for listening for only a limited time.) According to the Notice of
Inquiry, these types of services were not ``anticipated'' when the
Congress expanded the scope of section 115 to cover digital
transmissions. Is legal uncertainty over the applicability of section
115 to these new services having any effect on the deployment of such
services and, if so please explain what that effect is?
Answer: Given the ambiguities surrounding the mechanical licensing
of musical compositions, the administrative burdens and economic risks
in launching an Internetbased music service are extremely high., These
ambiguities will dissuade all but the mosthighly-motivated companies
from attempting to develop or invest in the development of such a
service.: Even those that choose to proceed will be hampered
considerably by the enormity of the rights clearance process. This
marketplace cannot thrive unless the Copyright Office resolves the
uncertainties.
Question d: Various music publishers filed suit in December, 2000,
against UMG for copyright infringement alleging that UMG was copying
sound recordings on servers for its new online music subscription
service, Farmclub.com, and stating that ``UMG recently obtained a
judgment from this court that the operator of another Internet music
service, MP3.com, Inc., had willfully infringed UMG's sound recording
copyrights by placing copies of those sound recordings on its public
servers--precisely what UMG has done here without plaintiffs
permission.'' Would clarifying the scope of the mechanical license
under section 115 of the Copyright Act in the context of such new
online music services help avoid the undue delay and undue distraction
from litigation?
Answer: The effect of the Copyright Office's commencing a
rulemaking proceeding regarding the application of the mechanical
compulsory license of Section 115 to certain digital music services
will be to reduce the potential for future litigation, streamline the
rights clearance process and accelerate the proliferation of digital
music services.
Question 6: Hillary Rosen has testified that RIAA member companies
have committed to licensing Napster once the service operates in a
fashion that respects copyrights and Napster has an agreement with
Bertelsmann to help develop this system. What is the current status of
Napster's efforts to develop a technological upgrade to digital rights
management system that is secure and addresses the needs of artists and
copyright owners addresses the rights of artists and copyright owners?
Has Napster been able to share a new technological approach with (a)
the court; (b) with artists or (c) with copyright owners? When does
Napster expect to be able to introduce the new technological model?
Answer: We don't know the current status regarding Napster's
efforts to develop a secure system, we are not aware whether Napster
has shared any new technology approach with the courts or artists and
we don't know when or if Napster will be introducing a new
technological model. Napster would best answer those questions. In
February and March of this year, Napster executives communicated on
several occasions with WMG executives concerning Napster's intention to
implement an acoustic fingerprinting technology intended to ``screen
out'' unauthorized sound recordings.
Question 7: The recording companies have announced new online music
services, including MusicNet and Duet, which will provide competing
business-to-business platforms for music subscription services that
will cross-license music and offer the services on a nonexclusive
basis. As Hilary Rosen stated in her testimony, the record companies
recognize the need to ``ensure that online distribution enhances rather
than undermines the commercial viability of our retail partners.
``Thus, the non-exclusive nature of these new platforms is important.
Do you believe that it is also important for the record companies to
make digital music available to those competing retailers capable of
offering secure and accountable downloads, on a non-discriminatory
basis that does not price them out of any competitive opportunity or
give them substantially less attractive non price terms?
Answer: As stated above, the MusicNet service will be offered on a
non-exclusive basis to various distributors including portals and music
portals and certainly to online retail sites. WMG's Subscription
Services Agreement with MusicNet is non-exclusive and WMG would be able
to provide its content directly to any such distributor that itself
wishes to build a subscription infrastructure. It is certainly
important for WMG to make its content widely available to those
companies that are in a position to provide opportunities for the
promotion or sale of such content. The price or non-price terms
relating thereto will be negotiated on an arm's-length basis in
accordance with all applicable laws.
Responses of Hilary Rosen to questions submitted by Senator Hatch
Question 1: One argument we have heard in favor of a compulsory
license is that music has so many pieces to license and there have been
substantial disputes between the record labels, the publishers and
technology companies like MP3.com about how to get the publishing
rights cleared in the volume demanded by online offerings. Some have
suggested that a stumbling block to getting the labels to license sound
recordings is that they may not have the rights from their artists to
grant these rights. I understand there may even be problems with the
MusicNet offering to some degree because of these impediments. Would
any of you be interested in commenting on this particular problem and
suggest ways to remedy it?
Answer: It is true that licensing in the music business is
complicated. This is especially true with respect to musical
compositions, because music publishers and songwriters have chosen to
bifurcate the licensing of their rights, with performing rights
organizations like ASCAP, BMI and SESAC licensing performance rights
and The Harry Fox Agency licensing reproduction and distribution. There
is of course, already a compulsory license for the reproduction and
distribution of musical works. However, the Copyright Office
regulations implementing that license prescribe procedures that are not
well suited to Internet licensing. We have asked the Copyright Office
to simplify these procedures to facilitate the launch of subscription
digital music services, and we believe the Office has the ability to
make significant improvements in these procedures within the existing
statutory framework.
With respect to sound recordings, the recording industry is moving
rapidly to adapt to licensing at Internet speed. If any artist
contracts limit the ability of labels to make some recordings available
electronically those issues will be worked out between the individual
label and artists. To date, such limits have not prevented record
companies from making the vast majority of the songs in their catalogs
available for licensing. If artists choose not to work with labels to
make their songs available for electronic distribution, I respect their
decision, however it is clear that if consumers arc not offered
legitimate versions, they will find pirate versions of the music they
want.
It is easy to launch an infringing service that makes no effort to
see that creators and copyright owners are compensated, and may even be
consciously ignorant of the recordings being distributed. Launching a
legitimate service requires more effort and infrastructure. Right now,
record labels are moving as quickly as they can to open new outlets for
recordings by launching new services, partnering with distributors and
licensing their catalogs for various kinds of Internet use. As part of
this effort, they are creating the infrastructure necessary to support
legitimate Internet music services, including libraries of encoded
recordings, databases of rights information, and royalty distribution
systems, as well as determining whether there are limits on the
electronic distribution of certain of their recordings. This effort
cannot be completed overnight, but once it has been done for one
Internet licensing deal, every subsequent deal, and the launch of every
subsequent service, will be easier and faster.
Question 2: Mr. Hank Barry argues that we have created compulsory
licenses in the past for publishing rights in music and in rebroadcast
of television programming because it was difficult to clear the rights
to the myriad creative interests involved in making up a broadcast day.
Would anyone like to explain why that analogy does or does not pertain
in the online music and entertainment world?
Answer: The compulsory licenses identified in the question arose
from situations nothing like we have today in the case of Internet
music services. The other compulsory licenses--for cable and satellite
retransmission and mechanical reproduction--arose not because it was
difficult to obtain copyright ``clearance,'' but because copyright
owners were granted new rights covering existing but peripheral uses of
their works, and there was a real concern that copyright owners would
not make their copyrighted works available to existing users.
The mechanical compulsory license came about at a time when the
core business of music publishers was selling sheet music, after the
Supreme Court held that copyright owners had no right to exclude piano
roll makers from manufacturing copies of their works in the form of
piano rolls. Congress reversed that decision, but having heard that
music publishers might grant exclusive rights to one piano roll
manufacturer, Congress decided to limit the right to mechanical
reproduction with a compulsory license so that musical works would
continue to be available to all potential users. Thus, music publishers
never had an exclusive right to mechanically reproduce their works and
instead have developed their business around the compulsory license.
Indeed, publishers have so embraced the compulsory license that they
insisted that the compulsory license be retained and extended to
electronic music delivery in 1995.
Similarly, the cable compulsory license came about at a time when
cable . television was not nearly so commercially significant as
broadcast television, after the Supreme Court held that copyright
owners had no right to stop cable retransmission of broadcast signals.
In granting copyright owners rights with respect to cable
retransmissions, Congress limited those rights with a compulsory
license, so that cable systems would not need permission to continue to
make broadcast signals available to their subscribers. Once a cable
compulsory license was in place, and satellite systems were denied the
right to be considered ``cable systems,'' the satellite compulsory
license naturally followed.
By contrast, reproduction and distribution of sound recordings are
the core rights and core business of record companies. Unlike these
other compulsory licenses, a compulsory license to reproduce and
distribute sound recordings would take away the most important existing
rights record companies have in their sound recordings and threaten the
core business of record companies--distributing copies of their
recordings in whatever media consumers then demand. There is no problem
with the availability of sound recordings that would warrant this
unprecedented action. Record companies are licensing their sound
recordings for use on the Internet regularly and have signed dozens of
deals already. Recently, record companies have formed two competing
joint ventures, MusicNet and Duet, that intend to amass catalogs of
recordings as large as they can and make them available on a
nonexclusive basis for Internet distribution. In short, there is no
question that sound recordings are being made available.
Furthermore, a compulsory license might not be economically
significant so long as electronic distribution accounts for a miniscule
percentage of record sales. However, if electronic music delivery
becomes as commercially significant as we all hope it will, a
compulsory license could dramatically affect the economics of the
industry and the bargains between artists and record labels. Record
companies make business decisions, and strike agreements with artists,
based on the income record labels can expect to receive from selling
recordings under exclusive rights of reproduction and distribution. If
there were a compulsory license for electronic distribution, as
electronic distribution became more important, the royalty provisions
of the compulsory license increasingly would determine the economics of
the record business. The government should not force any industry to
have its profitability determined every five years by three
arbitrators. Doing so would be unfair, a dramatic departure from the
precedents cited by Mr. Barry, and quite possibly a violation of the
Constitution or U. S. treaty obligations.
Finally, the American recording industry is the most vibrant
national recording industry in the world. A compulsory license on sound
recordings would give away our cultural heritage and one of America's
best trade assets.
Question 3: I have heard a number of entertainment companies say
that acceptable protection for online content simply does not exist
yet, that existing Digital Rights Management and watermarks, wrappers,
or encryption, is simply not good enough to protect valuable content.
Yet we have a number of technology companies here today who believe
that they have such a solution, and now we have announcements of online
initiatives from all five major labels, which suggests the
technological protections have developed recently. Would any of you
care to comment on the state of technological protection for content?
Answer: The technology for protecting copyrighted works is
developing nicely. One interesting development in the last year or two
has been that the software and technology companies--responding to the
demands of the marketplace--have started to focus on developing methods
of promoting legitimate commerce by protecting rights, rather than
methods of recklessly disseminating other people's content without
their consent. RIAA is encouraged by this newfound enthusiasm for
rights management and protection technologies.
Record labels, among other copyright owners, have formed
partnerships with technology companies to create and implement creative
and flexible methods for enabling the electronic distribution of
copyrighted works in ways that are easy for consumers to use, while
providing appropriate protection to copyright owners. Content owners
have a variety of technologies to choose from to meet their needs and
offer services that meet consumers' needs, and we expect more and more
progress in this area.
Question 4: The premise of this hearing is that digital content is
coming soon to digital devices to be enjoyed by consumers soon. Based
on our discussion today, how soon is soon, and when will the promise
become reality?
Answer: The answer to the question of ``How soon?'' is that digital
music content is here now. All of the major record companies have made
digital downloads available to consumers, and record companies have
licensed streaming by interactive and noninteractive webcasters. Record
labels have made deals allowing Internet services to construct
compilation compact discs, and for ``kiosks'' that further the
distribution of digital music. Although not yet ``here,'' MusicNet and
Duet subscription services will be launched later this year, and more
new and exciting services will follow as record labels continue to seek
new outlets for electronic distribution of their recordings.
Criticism of the industry for not making enough recordings
available online through enough different outlets faster is unfair. The
recent economic downturn and shakeout in the technology sector
illustrate that very few companies have figured out how to run
profitable businesses distributing content online. Production and
promotion of material that consumers want is expensive, and large scale
online distribution is expensive too. Over the last few years, some
companies were able to finance content production and distribution for
a time through equity investment in a superheated stock market, but for
the production and distribution of content to be sustainable, there has
to be a profitable business model. Record companies should not be
blamed for not finding enough profitable ways to distribute recordings
online five years ago, when even today very few businesses have found
sustainable business models for online distribution.
Question 5: Is there any point you feel should be raised or that
you would lie to further respond to for the completeness of our record?
Answer: The marketplace is working to bring digital music to
consumers now. And the market forces that are bringing artists, record
labels, technology companies and online services together to satisfy
consumer demand really are the ideal solution for everyone involved.
Only the marketplace provides the flexibility to experiment with
service offerings, business models and contractual arrangements to
adapt to consumer demand. By contrast, regulation would make it more
difficult to take advantage of opportunities offered by new
technologies and to meet the evolving demands of consumers. This is
because any regulatory framework would create barriers to offering
services other than those envisioned by the regulations and hamstring
record labels and online services in developing and offering innovative
services in response to consumer demand. It is for similar reasons that
Congress has been reluctant to regulate the Internet in general.
Digital music services should not be the exception to this wise rule.
Because the market for digital music is nascent, it is critical that
digital music services develop and adapt while the market matures
without the heavy hand of government regulation.
Question 6: Do record companies have problems granting blanket
licenses to third parties for digital distribution of an artist's
recordings or settling lawsuits because of agreements with artists,
such as ``coupling'' restrictions in their recording agreements
(coupling is compiling an artist's recording(s) together with master
recordings by other artists) such that the record companies would need
the artist's approval to do so? Does a record company have the right to
distribute an artist's recording absent the accompanying artwork
without an artist's approval under most recording agreements? If they
don't, how can they do so via digital distribution?
Answer: Artist contracts vary from label to label and artist to
artist. My general understanding is that the vast majority of artist
contracts do not contain limitations that would prevent record
companies from licensing their recordings for digital distribution,
with or without the associated cover art. And where such limitations
exist, we can all be certain that discussions are or will be taking
place between those labels and individual artists. Such limits have not
prevented record companies from making the vast majority of the songs
in their catalogs available for licensing, nor from settling the major
labels' case against MP3.com.
Question 7: Has there been any discussion or consideration about
the basis on which record companies will share with artists monies they
receive from blanket licensing, damage awards, or equity stock
participations they receive from third party companies?
Answer: Section 114 of the Copyright Act provides the answer to
this question. A record company's receipts from the statutory license
are to be allocated in accordance with the statute, and in other
respects, artists are to be paid in accordance with their contracts.
Moreover, record labels recognize that their relationships with artists
are critical to their success, and so sometimes renegotiate contracts
or make other payments to artists even when not required. For example,
all ofthe major labels we represented in the MP3.com case have stated
their intention to pay artists their fair share of those damages.
Universal has publicly announced that it will pay its artists half of
the damages it received from MP3.com.
Question 8: Hank Barry of Napster referred in his testimony to the
RIAA's pending petition before the Copyright Office that a compulsory
license is precisely what's needed in order to permit RIAA's members
secure necessary rights from music publishers. Could you elaborate on
the meaning of your petition and explain why, in your view, such relief
should not be afforded to other parties seeking to obtain other
copyright rights from your member companies or clearing publishing
rights in the manner you suggest in your petition? Could you also
further elaborate your point about distinguishing the ``core
distribution right'' from the other compulsory licenses cited as
precedent, including the mechanical license you seek to take advantage
of?
Answer: The characterization of our Copyright Office petition in
this question is incorrect. A compulsory license is not needed; one has
existed for almost a century and been fully embraced by the copyright
owners whose works are subject to it. Indeed, it is the music
publishers, not the record companies, who insisted that the compulsory
license be extended to electronic delivery in 1995, because music
publishers have structured their business practices around the
compulsory license and have consistently opposed efforts to eliminate
the compulsory license in international treaty negotiations. The only
question is how that license applies to certain types of digital music
services. RIAA's petition asks that the Copyright Office initiate a
rulemaking to clarify how the mechanical compulsory license applies to
two types of music delivery methods, ``OnDemand Streams'' and ``Limited
Downloads.'' Uncertainty concerning that question has been a
significant impediment to the launch of subscription music services by
record companies and their licensees. The petition also asks the Office
to promulgate interim rules with streamlined procedures for obtaining
mechanical licenses, because the Office's existing regulations require
a procedure that is poorly suited to Internet licensing, and more
cumbersome than it needs to be given the authority Congress has given
the Office to make rules to implement the compulsory license. Whatever
relief record companies might receive from this Copyright Office
proceeding would apply to anyone seeking to clear publishing rights by
relying on the existing mechanical compulsory license. A more complete
statement of our views on these issues is set forth in RIAA's attached
comments on the Copyright Office's Notice of Inquiry.
By contrast, we believe that a compulsory license for the
reproduction and distribution of sound recordings is unnecessary and
unwise. The marketplace is working to bring digital music to consumers
now. Record companies are licensing their sound recordings for use on
the Internet regularly and have signed dozens of deals already. A
fundamental underpinning of the market for sound recordings is the
record companies' exclusive reproduction and distribution rights. These
are ``core'' rights because they are existing rights covering the core
business of record companies--distributing copies of their recordings
in whatever media consumers then demand. The industry has developed in
reliance on the fact that record labels have the exclusive right to
reproduce and distribute their records. These rights have encouraged
record labels to discover and promote new artists and take risks,
knowing that if they do discover an artist that the public likes, they
can make creative and business decisions about how to commercialize
that artist's recordings to make a fair profit on their investment.
Without exclusive rights, recordings would become a commodity, and
record companies would be far less willing to take chances and record
new material, and to make a promotional investment, if others could
skim the cream of their catalogs and sell the most popular recordings
for the same compensation to the copyright owner as less popular
recordings. Thus, taking away the most important rights record
companies have in their sound recordings would cause great disruption
to the recording industry, which could only limit the variety of new
music availabie to the public and reduce the opportunities available to
artists.
Creation of a compulsory license for sound recordings now would be
very different from creation of the mechanical compulsory license in
1909. Music publishers never had the exclusive right to reproduce and
distribute recordings of their songs; the grant of that right in 1909
was limited by the compulsory license. Before that time, the core
business of music publishers was publishing sheet music. Thus, in 1909,
creation of the mechanical compulsory license only provided incremental
revenue to publishers, and caused no disruption of the music publishing
industry. As the sale of records eclipsed the sale of sheet music, and
the compulsory license has become the dominant source of revenue for
music publishers, the modern publishing industry has grown up around
the compulsory license and fully embraced it. That is obviously not
true of the recording industry, which always has enjoyed exclusive
rights with respect to its recordings. Congress should not risk the
vitality of the most vibrant national recording industry in the world
by creating a compulsory license now that goes to the heart of the
industry's existing rights and business.
Question 9: During your testimony you displayed for the Committee
the home pages of a number of current web-based music services, which
your member companies, you testifed, have already licensed. The
implication of your statement appeared to be that such licensing
activity has already gone on a long way to satisfy consumer demand.
Would you please, for the record, provide the Committee with details as
to which services your members have licensed, whether they had
officially launched by the date of your testimony and, if so,
approximately how many ``customers'' they each had at that point. Could
you also detail, please, whether the licenses generally provided these
services required the service provider to furnish customer data to the
licensor and, if so, what kind of data?
Answer: Attached is the list of websites and services licensed by
RIAA members, as presented in Hilary Rosen's testimony. All of these
sites had launched before the date of the hearing presentation. Please
note that this is a list of just some of the services and sites that
our companies have licensed. The RIAA is not involved in its members'
licensing deals because each company negotiates its agreements
individually. We therefore do not have a comprehensive list of all
licensed services and do not possess specific information about what
kind of data, if any, is provided under such agreements.
Licensed Music Sites
www.2ksounds.com
www.akoo.com
www.aolmusic.com
www.artistdirect.com
www.clickradio.com
www.ecastinc.com
www.echo.com
www.e-qreetings.com
www.farmclub.com
www.hob.com
www.ichoosetv.com
www.intertainer.com
www.launch.com
www.liquidaudio.com
www.listen.com
www.loudeve.com
www.moontaxi.com
www.mp3.com
www.mtvi.com
www.musicbank.com
www.musicbrigade.com
www.musicchoice.com
www.net4music.com
www.oen.com
www.ondemanddistribution.com
www.radiowave.com
www.real.com
www.rioport.com
www.soundbuzz.com
www.starmedia.com
www.streamsaves.com
www.supertracks.com
www.touchtunes.com
www.vidnet.com
www.vahoomusic.com
Question 10: Your testimony made clear that you do not believe
compulsory music licensing for interactive services to be necessary or
desirable, citing MusicNet and other recent licensing initiatives by
major record labels as evidence that product is beginning to flow to
the market. What is your reaction to the suggestion of a sort of ``Most
Favored Nation'' statute, similar to the program access rules for
subscription television licensing, that required large copyright holder
entities that engage in cross-licensing of their catalogs to make the
licensed materials available on essentially the same terms and
conditions to, for example, similar internet-based music distribution
or ``locker'' services?
Answer: A government-mandated ``most favored nation'' (``MFN '')
requirement would be a straightjacket on the marketplace for digital
music. We also believe it will stifle technology rather than encourage
innovation. The Internet provides nearly limitless opportunities for
digital music distribution, and with these opportunities come a
similarly limitless number of ways bargains may be struck among
artists, record labels, and digital music services. Deals might combine
online licensing with bricks and mortar retail opportunities. A
transaction might take advantage of a particular consumer niche,
involve a less popular musical genre, or launch an innovative strategy.
And labels often strike special promotional deals. It would be very
difficult to attempt to structure a government-mandated MFN requirement
that recognized any of this complexity, and it would be a bad idea to
try.
If an MFN requirement were imposed, record companies could never
take chances, experiment with new ideas, support new services,
structure special deals, or reach out to niche markets. Knowing that a
concession in any one deal would become the least common denominator
for all other deals, record companies would be forced to establish
standard terms from which they could not deviate in individual
instances without consequences across all their deals. Thus, the result
of an unprecedented MFN requirement would be to stifle competition and
business creativity; limit the flexibility of artists, record labels
and service providers to offer consumers innovative digital music
services; and ultimately, limit consumer choice.
Question 11: We all worked together on a return to the status quo
on the status of sound recordings as works-made-for-hire. Do any of you
have any thoughts on how we might further revise the law to avoid
litigation on that issue in the future?
Answer: As hard as we worked to return the works-made-for-hire
issue to the status quo, litigation over the issue may be unavoidable.
Work for hire provisions have been included in recording agreements,
and in agreements between artists and their producers and musicians,
for decades. At the moment that recordings were created pursuant to
those agreements, authorship was determined, and certain rights vested,
based on the law that existed at the time. Congress may not have the
legal authority to change those rights, such as by determining that
someone who had been an author for decades no longer is, and indeed
never was. Participants in the recording industry reached their
agreements based on their understanding of the law as it was when they
made their deals. It would not be fair to upset their expectations
retroactively. (Notably, the 1999 amendment clarifying that sound
recordings are eligible for work made for hire treatment did not
purport to be retroactive.)
Each contract, and the circumstances surrounding the creation of
each recording, are unique. This means that, at least until there are
some precedents in this area, courts will likely have to make case-by-
case determinations of who is the author of a particular recording--
whether it be the record label alone because of a work made for hire
agreement, the featured recording artist alone (either because of a
work made for hire agreement or an interpretation that the featured
artist is the sole author), or some combination of the label, featured
artist, producer, background musicians and vocalists, engineers and
technicians. The desire to create a new provision parsing out creative
contributions among participants and determining a new definition of
who the creator might be simply proves the point we made all along
during the dispute last year. Avoiding disputes among all these
contributors to the creation of a recording is exactly the reason we
believed, and still believe that sound recordings are eligible for work
made for hire treatment; any other result inevitably will lead to
litigation among claimants to rights in successful recordings. Since it
would be impossible in our view to develop a statutory definition of
the rightful creator (in some cases, it might be the producer, in some
cases the musicians, in others the featured artists and in others the
royalty artist or artists, etc.) these issues are best left to
contract. The only thing the statute should articulate is whether or
not sound recordings are eligible to be considered works for hire. The
decision to create a work for hire has always been left to and should
continue to be left to individual creative participants. Creative
participants may freely decide whether or not to agree that their
contribution is a work for hire or not. They have been making this
decision for decades already in their recording agreements.
SUBMISSIONS FOR THE RECORD
Statement of American Federation of Musicians of the United States and
Canada, Steve Young, President
As the President of the nation's largest organization representing
musicians--the American Federation of Musicians with over 100,000
members--I have one important message for the members of this
distinguished Committee, the representatives of the business community
who will be speaking today, and all the fans of music, on-line music
services, and music file sharing who are gathering in Washington to
listen and to express their views:
Please remember the artists!
All the varied forms of music loved by ardent music fans, all the
highly-successful businesses created by the recording industry, and all
the online music services that are trying to emerge in this new digital
era have one thing in common: they depend, utterly, on the creative
energy of the artists who make the music.
If those artists--including royalty artists, session musicians, and
background vocalists--cannot make a decent living by making and
recording music, this nation's staggeringly rich output of artistically
varied, high-quality recorded music will not be able to continue. There
will be less music for fans and music lovers.
Before we as a nation decide what the new models for music
distribution should be, it would be wise to examine the old models and
consider how they can be improved to enhance the ability of artists to
survive and create.
Most musicians who record music toil for many years but do not
become rich celebrities known throughout the nation. Artistic talent,
hard work, and loyal fans do not guarantee great financial success.
Many incredibly talented musicians may make only a modest living.
Musicians who record under the industry-wide collective bargaining
agreement negotiated by the union receive scale wages for their time in
the studio (including pension contributions), and Special Payments
Funds payments based on record company contributions and a formula tied
to industry-wide sales. These Special Payments Fund payments are a
critical part of the musicians' compensation structure, especially for
those who do not have royalty contracts with a record label. If record
sales decline, they will decline also. Most musicians cannot afford
such a loss.
Musicians who obtain royalty contracts from the record companies
also derive important income from the sales of their records--if their
records sell enough to recoup the costs of making the record in
accordance with the terms of their royalty contracts. Royalty artists
should be able to choose whether or not they want to offer their music
via online services that may reduce the sales of their recordings.
One thing historically missing from the income of all musicians
whether royalty artists or session musicians--is compensation for the
commercial broadcast of their recorded works. Because historically
there was no performance right in sound recordings, musicians received
no income from that form of exploitation of their work. The American
Federation of Musicians always believed that to be a great injustice,
and lobbied for years for amendments to the law. At the dawn of the
digital era, the American Federation of Musicians fought for the
creation of the Digital Performance Right in Sound Recordings Act,
which became law in 1995. The union fought for, and that Act
established, the principal that musicians and vocalists should share in
any income streams that derived from the new digital performance right.
Artists must share in the revenue--that is the principal that the
old and new business forms must recognize. That is also the principal
that music lovers and fans must embrace--artists must have an income,
if there is to be art.
Whatever old business models remain and whatever new business
models emerge, the future of our artists depends on their ability to
earn a decent income, one that shares in all the income streams their
creative works generate. I hope and believe that music fans will
willingly pay for music in order to support the artists whose work they
love.
Please remember the artists!
Statement of American Federation of Television and Radio Artists, Ann
Chaitovitz, Director of Sound Recordings
Introduction
My name is Ann Chaitovitz, and I am the Director of Sound
Recordings for the American Federation of Television and Radio Artists
(AFTRA). On behalf of the over 80,000 performers and newspersons in
AFTRA, I appreciate the opportunity to submit this testimony on behalf
of performers because new technology presents many challenges, as well
as many opportunities, for performers. As a result of this Committee's
leadership and our country's intellectual property laws, America
creates the pre-eminent entertainment in the world and entertainment
product is our leading export. In order to continue producing the
finest and most sought after artistic creations in the world, the U.S.
must ensure that artist incentives to create are nurtured, artists are
fairly compensated for the exploitation of their work and that present
and future streams of income are shared with the creators.
Music, motion pictures and other entertainment products are
marketed to the world by major American industries with many
contributors and participants. But individual artists--singers,
musicians, writers, actors and other creators--are at the heart of the
success of these major industries. It is the talent, training,
dedication and creative verve of these individuals that make the
original works of art upon which our successful industries are based.
The artistic community now faces one of its most serious challenges.
New technological services enable people to obtain these artistic
creations without payment of any sort to the creators and owners of
those products. Should this trend continue, inevitably sales will
decrease and the direct income earned by artists will be reduced
significantly. That reduction in earnings will also decrease or even
eliminate performers' health and pension benefits.
AFTRA supports the development of new technologies. Technology will
allow our members' creative talents to be disseminated to an ever-
increasing audience and that, we believe, benefits everyone. AFTRA,
however, also strongly believes that the new technologies should not
result in detriment to our members and that these new methods of
dissemination should provide compensation to copyright owners and
creators of sound recordings.
American Federation of Television and Radio Artists
AFTRA is a national labor union representing over 80,000 performers
and newspersons that are employed in the news, entertainment,
advertising and sound recording industries. Our membership includes
television and radio performers and approximately 15,000 singers, rap
artists, narrators and other vocalists on sound recordings (``Singers
''), including roughly 4,000 Singers who receive payments for the sale/
distribution of each recording pursuant to a royalty contract
(``Royalty Artists '') and 11,000 singers who are not signed to a
royalty contract (``Background Singers ''). On behalf of the 15,000
Singers that it represents, AFTRA negotiates the AFTRA National Code of
Fair Practice for Sound Recordings (the ``Sound Recordings Code '').
The Sound Recordings Code has been signed by an approximately 1200
record labels, including all of the major labels. Under the Sound
Recordings Code, signatory record companies are required to contribute
amounts to the AFTRA Health and Retirement Funds on behalf of the
Singers who perform on a recording. Those contributions are based upon
a percentage of each individual Singer's earnings. The AFTRA Health
Fund provides health benefits to Singers who reach certain threshold
levels of earnings upon which contributions are made by the record
labels. The AFTRA Retirement Fund provides pension benefits to Singers
based upon the amount of the individual Singer's earnings throughout
his/her career. In short, the health and pension benefits that each
Singer receives are dependent upon the amount of earnings on which
employer contributions are made.
In addition to bargaining and administering the Sound Recordings
Code, AFTRA also actively participates in all facets of public policy
development effecting our membership, frequently pursuing national and
international legislation and treaties that protect Singers' rights, as
well as joining issues in litigation that are critical to our
memberships' interests.
Singer Compensation
Many people harbor misconceptions about the music industry and
performers and how performers are paid. Basically, as the name implies,
in addition to the small session fee required by the Sound Recordings
Code, Royalty Artists receive a royalty for the sale or distribution of
each recording and do not receive a fee for making an album. In fact,
the Royalty Artist must pay for all of the production costs of the
album, 50% of the independent promotion costs, 50% of the costs of
videos and 50-100% of the tour costs. Artists often pay these costs
with the help of an advance from the record company. However, artists
must pay back their advances before they receive any royalty shares
earned by their albums. This is called ``recoupment.'' Taking into
account all the deductions, royalty artists generally receive between
$0.80 and $2.40 for each recording sold, depending on the level of
success of the artist when the royalty contract is signed. What often
is not understood is that the artist does not receive any of this
royalty money until the recording company has recouped these costs. It
usually takes two or three years before even a successful artist
receives his or her first royalty payment. As Sheryl Crow stated in a
response to a question from Congresswoman Bono at a May 2000 House
Judiciary Committee hearing, she did not receive any money until after
her record had sold ``three or four million copies.'' And, very few
records ever sell this many units. As an example, in 1999, nearly
39,000 recordings were released, but only 3 singles and 135 albums--
0.35%--were certified as selling three million units, and notably, many
of these records had been selling over a number of years before finally
reaching the three million unit sales mark in 1999. And, 77% of the
39,000 recordings sold less than 1000 units.
Under the Sound Recordings Code, background singers receive a
session fee for their work in the recording studios and also additional
payments if the records on which they perform reach certain sales
plateaus. However, most records never meet any of these plateaus. Thus,
all Singers are compensated based on the sales of their recordings, and
any decrease in record sales volume would directly and adversely impact
both Royalty Artists and Background Singers. The decrease in earnings
that would result from any decrease in recording sales volume will
result in a corresponding decrease in the pension that a Singer would
receive upon retirement and, further, may jeopardize a Singer's
eligibility for individual and family health coverage altogether.
The Future
In a society that treasures creative work, the artists' incentives
to create should not be thwarted by the advent of new technologies.
Many professional singers struggle to earn a living from their recorded
performances. Even for those relatively few singers who have successful
careers, almost all spent years struggling economically while they were
honing their craft, building their careers and trying to obtain a
recording contract. These singers deserve to have their work protected
and be compensated whenever anyone exploits it by whatever means,
analog or digital, new technology or old. However, digital product and
new technology presents a more serious threat to creators' livelihood
because millions of people may have free access to a work. If Congress
permits this piracy, American artists will suffer, and we risk not only
our ability to continue creating worldrenowned masterpieces but also
our balance of trade.
Again, we appreciate the opportunity to submit this testimony and
look forward to working with the Committee and its staff as it
addresses these copyright issues that are fundamental to our
membership.
american federation of television and radio artists
AFTRA urges Congress to protect recording artists from piracy of
their works
Washington, D.C., April 3, 2001--The artistic community now faces
its most serious challenges as new technological services enable people
to obtain their artistic creations without payment to the creators and
owners of these products. If this trend continues, sales will decrease
and the income earned by artists will be reduced significantly, also
decreasing or even eliminating performers' health and retirement
benefits, according to testimony by the American Federation of
Television and Radio Artists at today's hearings before the Senate
Judiciary Committee in Washington.
In its testimony before the Committee, which is considering Online
Entertainment and Copyright Law, AFTRA, which represents 80,000
performers and broadcasters, including 15,000 singers, addressed the
many misconceptions about the music industry and performers, and how
they are paid. In addition to the small session fee required by the
AFTRA Contract, Royalty Artists receive a royalty for the sale of each
recording, but they ``do not receive a fee for making an album,'' said
Ann Chaitovitz, AFTRA's Director of Sound Recordings.
``In fact,'' said Ms. Chaitovitz, ``the Royalty Artist must pay for
all of the production costs of the album, 50% of the independent
promotion costs, 50% of the costs of videos and from 50% to 100% of the
tour costs. Artists often pay these costs with the help of an advance
from the record company. However,'' Ms. Chaitovitz said, ``artists must
pay back their advances before they receive any royalty shares earned
by their albums.'' Sheryl Crow has stated that she did not receive any
money until after a recording had sold ``three or four million
copies.''
``Few records ever sell this many units,'' Ms. Chaitovitz told the
Committee. ``In fact 77% of the 39,000 recordings released in 1999, for
example, sold less than 1,000 units.''
``While AFTRA supports the development of new technologies,'' Ms.
Chaitovitz said, ``digital product and new technology presents a
serious threat to creators' livelihood because millions of people have
free access to a work. If Congress permits this piracy, American
artists will suffer, and we risk not only our ability to continue
creating world-renowned masterpieces but also our balance of trade.''
AFTRA has contracts with 1,200 recording companies, including all
of the major labels.
April 2, 2001
Jim Griffin
CEO, Cherry Lane Digital
Museum Square
5757 Wilshire Blvd., Suite 401
Los Angeles, CA 90036
Dear Jim:
We have reviewed your White Paper ``IMPASSE: TECHNOLOGY, POPULAR
DEMAND, and TODAY'S COPYRIGHT REGIME.'' We are two professional
economists expert in markets, organization, strategic behavior and
growth. Central to our research is the role of innovation in fostering
growth and prosperity. Our current endeavor focuses on the
determination of the system of property rights most favorable to
production and diffusion of intellectual innovations. This has lead us
to support a strong protection of the right of creators to sell their
work, because this is crucial to provide the financial incentives
needed to assure a continued flow of artistic creations and
innovations. However, we are highly skeptical about the need for
restrictive copyright protection after the first sale. The points you
make in your paper are similar to those we have made in our own
research: we endorse the recommendations you make. If implemented, they
would open the way to a more efficient and socially useful system for
copyrights protection and distribution of artistic products. Allow us
to elaborate briefly on the most relevant issues.
Curtailment of the digital delivery of music
You argue persuasively that the current copyright law, as applied
by the courts, will lead to the curtailment of digital delivery of
music. You also argue, and we find this crucial, that the current
situation of impasse is not sustainable, that it is damaging both to
American consumers and the overall economy, and that, due to continuous
technological advances in this area, a substantial reconsideration of
copyright legislation is urgently needed. We also agree with you in
calling attention to the anti-trust problems generated by the ongoing
attempt of the ``majors'' to coordinate in establishing a music-
delivery business and to collude in preventing the entry of independent
competitors. Vigorous competition, especially following major
technological breakthroughs such as the Internet is crucial in
stimulating innovation and in providing better products at lower
prices. In the long run the new delivery technology should lower
barriers to entry and lead to cheaper and more varied music (and arts)
accessible to a wider audience. Current efforts by the majors, if
successful, may severely tilt the playing field in their own favor.
This would prevent new companies from providing such services and stop
superior delivery technologies from being adopted. Encouraging
innovation by new companies such as Napster instead strengthens the
technological leadership upon which the increasing wealth of American
households is built.
Transactions costs
Quite correctly, you compare the reduction of transaction costs
achievable through peer-to-peer networking to the increase in such
costs caused by ongoing byzantine attempts to control, monitor and
neutralize the economic impact of the Internet technology upon
established monopolies. Economists widely recognize the effort by
incumbents to suppress new technology as one of the most significant
social costs of market concentration. In the long run, such efforts are
seldom successful. Still, they delay the social benefits of new
technology in the meanwhile, and lead to the development of wasteful
and undesirable black markets. Incumbents' efforts not only increase
current transaction costs but also paralyze future progress: newer
products and techniques are always fed by the ongoing adoption and
experimentation of previous ones.
Fair use
You observe that efforts to prevent piracy also prevent fair use.
This is one of the most insidious consequences of overprotecting
intellectual property. Fair use constitutes the core of consumer
sovereignty. Producers of any kind, and those of intellectual property
in particular, always profit from greater market power, and for this
reason have always argued against fair use. Congress and the Supreme
Court have wisely resisted this pressure, recognizing that eliminating
fair use serves no broad economic purpose and thwarts the copyright
laws' goal of maximizing the use and enjoyment of protected work. Given
that Napster and related technologies have had little impact on the
profits of the majors, it is hard for us to avoid the conclusion that
much of what is being sold as an effort to prevent piracy is in fact an
effort to prevent fair use and so increase future monopoly power. We
are especially concerned about the economic consequences of adding copy
protection to multi-use devices such as computers. Complex software and
hardware invariably have bugs. While buggy VCRs and DATs pose little
threat to economic growth, the loss of data and time from buggy
hardware and software in computers can lead to significant economic
harm.
Statutory licensing
Your paper supports consideration of statutory licensing, correctly
pointing out that these schemes are already widespread under
circumstances similar to those involving Napster. Indeed, the music
industry itself is arguing for statutory licensing for music broadcast
over internet radio. Statutory licensing seems to us a sensible middle
ground between the extreme copyright protection demanded by the
currently dominant firms and a competitive system based only on the
right of first sale. While, in our view, it will not be the final
answer to the momentous problems generated by ongoing technological
innovation, it does constitute an important step in the correct
direction. We want to emphasize that mandatory licensing will reduce
incentives to piracy and the black market generated by the current,
unsustainable, status quo.
Overall then, we support your effort and that of Napster to improve
existing copyright law to better ``promote the progress of science and
the useful arts.''
Best Regards,
Michele Boldrin
Professor of Economics
David K. Levine
Armen Alchian Professor of Economics
Statement of Broadcast Music, Inc.
Broadcast Music, Inc. (``BMI'') is a music performing rights
licensing organization (``PRO'') that represents approximately 350,000
affiliated songwriters, composers and publishers, in licensing the
public performing right in approximately 4.5 million musical works,
including many thousands of foreign works through BMI's affiliations
with over 60 foreign PROs. BMI has been a proponent of strong copyright
protection for the rights of authors and creators for decades. BMI
believes that copyright must be protected on the Internet in order to
foster the creation of music. To this end, BMI participated in the
negotiations that led to the U.S. signing of the WIPO Copyright Treaty
and the subsequent enactment of the Digital Millennium Copyright Act of
1998. These laws adopted new technological protections for copyrighted
works online and clarified the copyright responsibilities of Internet
service providers in order to make a more stable environment for the
commercial delivery of music and other copyright content in the online
world.
BMI has been a pioneer in licensing copyrights on the Internet and
in digital transmission technologies. In April 1995 BMI announced the
first commercial copyright license for music on the Internet, a blanket
public performing right license with On Ramp, Inc. Since that time, BMI
has entered into license agreements with over 1,000 web sites,
including such well known sites as Yahoo!broadcast.com, NetRadio,
Spinner.com, MP3.com, Emusic.com, GetMusic.com and FarmClub.com. Since
the beginning BMI's Internet license has covered the public performing
right involved in both the downloading of music files as well as the
streaming of music either on demand or as part of archived or regularly
scheduled programming. BMI's licensing experience has proven that
licensing is an effective solution to the problem of protecting
creators' and copyright owners' rights and ensuring copyright owners
obtain commercial reward for the widespread exploitation of their works
by online music users.
BMI has embraced new digital technologies that facilitate the
licensing of online transmissions of musical works. Last year BMI
announced a new ``Digital Licensing Center'' that allows users to
obtain BMI licenses through a simple click-through system available on
BMI's award-winning web site, BMI.com. These efforts will make
licensing particularly accessible and easy for small webcasters. BMI is
also utilizing digital technologies to enable its licensees to submit
reports and statements online, permitting faster processing of
information that will permit a dramatic increase in the speed of
payment of royalties to writers and publishers.
One of the most compelling aspects of the Internet is its
international scope. BMI has responded to the challenges posed by the
dimensionless nature of cyberspace by negotiating pioneering global
rights agreements with over 20 foreign PROs, including the major
European societies. As a result of these agreements, BMI now can offer
users seamless licenses that cover transmissions of BMI's repertoire of
works that cross national boundaries.
Peer-to-peer file sharing services like Napster are only the latest
in a long line of challenges presented to the music industry and the
copyright community by the Internet. BMI is pleased that the courts
have recognized that unauthorized peer-to-peer file sharing constitutes
copyright infringement. Unregulated by law, the Internet has the
potential to become the largest ``swap meet'' for piracy of copyrighted
works in history. Napster has announced its intention to reformulate
its service as a licensed subscription music transmission service. BMI
has been engaged in good faith negotiations with Napster over the terms
of a BMI blanket license for peer-to-peer file sharing.
BMI has a long history of licensing both free over the air
broadcast and subscription cable music transmission services. For
example, BMI has successfully concluded industry-wide negotiations with
the television industry for promotional use web site licenses for
hundreds of television broadcast stations, and with the radio industry
for interim licenses for radio signal streaming online. In BMI's view
Napster's service shares numerous characteristics of broadcasting and
cable transmissions, and if peer-to-peer music transmissions online are
allowed to be ``free'' on the basis of a misguided notion of ``fair
use,'' in the long run established markets for public performance of
music will be jeopardized. BMI is hopeful that its negotiations with
Napster will bear fruit, and does not believe that a compulsory license
for the public performance of copyright musical works is necessary or
appropriate.
Peer-to-peer transmissions of music involve a number of different
copyright rights for which Napster must seek licensing. For example, in
addition to the public performing right in the musical work, such
transmissions also involve the public performance right in pre-recorded
sound recordings that contain those musical works. The reproduction and
distribution rights in Section 106(1) and (3) in copyrighted musical
works and sound recordings (so-called ``mechanical rights'') are also
implicated by transmissions that result in copies, as the Ninth Circuit
found. The recording industry has taken steps to license necessary
rights to webcasters, generally, and the music publishers have as well
with respect to mechanical rights.
It takes time for licensing practices to be developed. This is
especially so in an environment where the business models are changing
as often as the technology improves. The Berne Convention requires that
copyright owners be given adequate time to develop mechanisms for
licensing before exemptions or compulsory licenses are legislated,
particularly where substantial vested commercial interests are at
stake. BMI supports the Committee's interest in the oversight of the e-
commerce in copyrighted works, and believes that the proper approach is
to allow the market place to work under the auspices of the DMCA to
foster a wealth of entertainment product for consumers in the 21st
century.
Statement of Hon. Maria Cantwell, a U.S. Senator from the State of
Washington
I want to thank Chairman Hatch and Senator Leahy for calling this
hearing. The delivery of online music has become the testing ground for
how the marketplace and the law can work to bring new entertainment
services to the consumer.
The business of distributing music online is quite young. There is
little history guiding its development.
What we can learn from history is that as every new medium
developed--the printing press, radio, television--industries touched by
new media were rocked--and ultimately revolutionized.
Legitimate secure online music services will be fantastic for
consumers and good for the economy. Unfortunately, the public discourse
has been diverted from where I believe the discussion should occur:
rather than identifying ways to bring the music industry, online
distributors and others with technological solutions together to
resolve legal and practical questions of rights, licensing and
distribution, many are focused on only one approach: Napster.
Clearly, Napster is evidence that there is extremely high consumer
demand for online music delivery. But in focusing on Napster, we see
the battle lines--without any sense of the productive lines of
communication.
Indeed, there are significant concerns on both sides of the debate.
But this doesn't mean that there have to be winners and losers. It
means simply that there are issues that we need to work through in a
thoughtful way. We will all benefit from the growth in the market that
will result.
From the perspective of the entertainment industry, in the earlier
days of online music it looked as though a few new companies were
coming into the economy, taking the entertainment industry's ``goods,''
and building businesses at their expense. Indeed, many of these claims
are legitimate. I respect the importance of intellectual property
rights and recognize the risk digital delivery poses. Issues of
copyright and security are of utmost importance in this discussion. The
threat to the music industry will become a threat to the viability of
the Internet, if copyright is not respected.
From the point of view of some in the online community, the
entertainment industry is simply entrenched and afraid of new
technologies. This is a vigorous young industry developing
extraordinarily exciting new ways to bring entertainment and
information to consumers. And although the public discourse may reflect
otherwise, most of those in this space are legitimate businesses trying
to develop new markets in this new medium. And we must encourage an
environment in which these businesses will flourish.
I would observe, that when compared with other policy arising as a
result of the creation of the Internet, substantial progress has been
made in the past few years. There are substantial inroads being made in
bringing legitimate music distribution online.
But all of these businesses need to be building relationships. We
need to be getting people to work together. Right now, it simply looks
like everybody is in the ``online music sandbox,'' a lot of sand is
flying, but there is not much of an effort to play together.
There are legitimate business and technological issues that we
collectively need to consider. Without question, some of the issues are
arcane or technical. But we need to continue to work our way through
them.
There are three ways we can approach this: (1) everybody makes the
effort to work it out; (2) keep holding hearings such as this one in
the hope that hearings will pressure the parties to compromise and work
together; or (3) legislate the framework.
From my perspective, we need to keep moving forward to find the
solutions that will bring music to consumers in a manner that will
allow them to listen to music where they want, when they want. The
environment should be secure, so the artists and other copyright
holders are paid for their work, and the costs to the consumer should
be reasonable.
Our job is to preserve the profitability that the entertainment
industry has built--and take advantage of new business models and new
media. We need to create a competitive environment that will give the
consumers the flexibility they want in obtaining their entertainment.
We need to work together to build on the successes of each of these
industries. I hope we can focus on how we can encourage solutions that
bring to consumers the services that they want, and continue the
enormous contribution to our economy that entertainment brings.
The differences I hear here seem to be marginal when I think of the
alternatives to working together--there are such sites as BearShare, a
Gnutella service, ready to compete with Napster. I know that when
creative minds decide to accomplish something, they can. I hope that
you will all sit down, set a realistic time-line, and work to achieving
ubiquitous music delivery through legitimate channels.
I look forward to your testimony.
Statement of CenterSpan Communications Corporation, Frank G. Hausmann,
Chairman and CEO, Portland, OR
Chairman Hatch and Members of the Committee, CenterSpan
Communications is pleased to be able to provide its views regarding the
important focus of today's hearing. Today's technology, as well as new
technologies that will undoubtedly be created over the next few years,
will indeed enable all individuals to have access to high-quality
digital culture, media, and entertainment on-demand 24/7 from nearly
any location through a variety of wired and wireless digital devices.
The challenge that confronts the Committee is to determine whether the
current state of copyright law empowers or detracts from our ability to
fulfill that potential. The question that faces you is whether
statutory change is required - and, if change is to be made, how to
balance the maintenance of incentives that ``promote the Progress of
Science and the useful Arts'', the goal set forth in Article I of the
Constitution, against the technological developments that can undermine
the ``exclusive Right to their respective Writings and Discoveries''
envisioned by that founding document.
Executive Summary
CenterSpan's Scour Exchange is the first secure and legal
service for peer-to-peer (P2P) distribution of interactive
audio and video entertainment.
P2P is both the origin and the future of the Internet.
Contrary to the impressions generated by the Napster
controversy, P2P systems are not inherently infringing or non-
secure. P2P offers ``viral marketing'' benefits far beyond
those available in central server systems. In addition, a P2P
distributed environment offers substantial cost savings with
respect to storage and bandwidth requirements necessary to
support games, music and video.
Existing digital rights management (DRM) technologies provide
sufficient security to address the legitimate concerns of
copyright owners.
A legislated fair use ``safe harbor'' may be desirable in the
future, but in the near-term the marketplace should be
permitted to let DRM technologies provide the optimal balance
between affected parties.
New or expanded compulsory licenses for interactive media may
be appropriate for ``streaming'' distribution that is analogous
to commercial
broadcasting, but not for ``downloading'' which enables the
provisioning of permanent copies and represents the entire
future of how digital content will be sold and distributed.
The first sale doctrine is not meaningful or applicable in the
digital environment.
Consumers may require enhanced legal protections to assure
that when they participate in beneficial P2P systems their
legitimate privacy expectations are respected. They should not
be subjected to unsolicited marketing and spamming from third
party commercial entities.
We look forward to working with the Committee as it addresses
critical copyright and related public policy issues for digital
media in the twenty-first century.
Company Background
My name is Frank G. Hausmann. I serve as President, CEO, and
Chairman of the Board of CenterSpan Communications Corporation,
headquartered in Portland, Oregon. CenterSpan is a NASDAQ-listed (stock
symbol: CSCC) company as well as an Intel Capital Portfolio Company.
CenterSpan is a developer and marketer of secure peer-to-peer Internet
software solutions for communication and collaborative information
sharing. My professional background consists of extensive computer
industry experience.
Our major focus is the delivery of interactive digital
entertainment. In May 2000 we launched Socket, a P2P Internet gaming
application. In December 2000 we purchased the 4.5 million-customer
list and other assets of Scour Exchange (SX) at bankruptcy auction for
$9 million in cash and stock. SX was a pioneering P2P system for the
delivery of audio and video, but its failure to comply with copyright
law resulted in a barrage of litigation and subsequent bankruptcy.
Just last week, we launched the Beta test version of the new Scour
Exchange service. SX is now the first secure and legal P2P ``digital
distribution channel'' supporting the delivery of audio and video
entertainment. To date, more than 370,000 people have pre-registered to
participate in the free Beta test. We intend to use the Beta test to
finetune SX's offerings and technology, and anticipate the rollout of a
tiered-price subscription service during the second half of this year.
We plan to offer different service options depending on the type,
quantity, and ``use rules'' of content that subscribers wish to access.
Eventually, SX will also support e-books, photos and graphics. Our
proprietary market research, as well as extensive conversations with
all segments of the digital entertainment world, convinces us that
there will be substantial consumer demand for such a service--provided
that it offers the right combination of ease of use and content.
In February 2001, CenterSpan established a Digital Media and
Entertainment Group. The joint executive team of Michael Kassan and
Howard Weitzman runs this Los Angeles-based unit. Mr. Kassan formerly
served as President and Chief Operating Officer of Western Initiative
Media Worldwide, a division of the Interpublic Group; in 1997 he was
named by Advertising Age as one of the top media executives in the
United States. Mr. Weitzman was formerly a senior executive with
Universal Studios and a wellrespected entertainment attorney for over
30 years. Both of these accomplished executives came to CenterSpan from
Massive Media Group, a developer of digital rights management (DRM)
based applications and services for the entertainment and advertising
markets. Together, they bring to CenterSpan an understanding of DRM
technologies, and of the entertainment, media, and advertising sectors
that is invaluable to our future growth. SX has already acquired
licensed audio and video content from a variety of sources for use in
the Beta test, and is currently in discussions and negotiations with
record labels, movie studios, and other content owners to obtain top
content for the launch of the fee-based service later this year. We are
very optimistic that we will be able to secure a depth and variety of
entertainment offerings sufficient to provide a compelling and
rewarding experience for SX subscribers.
P2P: Origin and Future of the Internet
CenterSpan embraced the P2P marketplace out of our belief that
peer-to-peer networks and applications are both the origin and the
future of the Internet. The Internet's fundamental support of a widely
dispersed and virtually limitless number of participants, coupled with
the transmission of digital information through packet switching that
breaks up messages and content and sends it between users via multiple
routes, was chosen to assure the maintenance of communication
regardless of attacks on any single component of the system. The result
is the most robust, resilient, and useful communications system in
history.
CenterSpan believes that Internet media business models that rely
solely on content distribution from central servers, and do not support
or further dispersal by individual users, will not be as successful in
the marketplace. Most such systems are unable to take advantage of the
``viral marketing'' that occurs when fans enthusiastically promote and
share their secure digital entertainment files with others. Where video
and gaming content is concerned, the significant storage and bandwidth
requirements are best and most efficiently met through the dispersal of
content to end-users within a P2P environment. In effect, P2P systems
enable consumers to choose to make a portion of their hard drive
storage and bandwidth available for other users to share.
It is unfortunate that Napster has created the public impression
that P2P networks only support illegal distribution of inherently non-
secure content. Nothing could be further from the truth. The courts
have determined that Napster's original design is in substantial
violation of our copyright laws, and it is under mandate to comply with
the Ninth Circuit's injunction and cease its infringing activities.
Napster has publicly stated its intent to develop a legal,
subscription-based P2P system. On February 13, 2001, when the Ninth
Circuit Court of Appeals issued its decision, I applauded that ruling
and stated, ``The rights of copyright holders must be protected in the
new digital distribution paradigm. . .. The new Scour Exchange respects
and protects copyrights and provides content owners with mechanisms to
control the distribution and use of their material while profiting from
it.'' The Committee can rest assured that SX will demonstrate that
respect for copyrights through required licensing and the utilization
of advanced DRM technologies are completely compatible with the
distributional and cost advantages of P2P systems.
Public Policy Views
The Committee is now engaged in a dual enterprise. Your first
objective is to determine the current state of digital entertainment
technology and applicable law. Your task is to determine whether near-
term legislative intervention is required to protect the goals of
copyright law and the rights of copyright holders while promoting the
further development of digital distribution of music, movies, and other
genre of entertainment and culture. As so often before, you must
balance traditional legal values with new technology that, depending on
its use or misuse, may promote or undermine the progress of science and
the useful arts.
CenterSpan welcomes the opportunity to contribute to that process
going forward. We believe that what we have already learned in
developing the first legal and secure P2P system, as well as what we
expect to learn from SX's Beta test and transformation into a fee-based
subscription service, can be of substantial value to your
deliberations.
We find ourselves in substantial agreement with the sentiments
expressed in the February 14 Senate floor remarks of Chairman Hatch and
Senator Leahy in response to the Ninth Circuit's Napster decision. We
concur with Chairman Hatch's call for ``an open and competitive
environment in the production and distribution of content on the
Internet'', as well as for ``a marketplace resolution to. . .digital
music controversies''. And we are in concert with Senator Leahy's
observations that ``the availability of new music and other creative
works. . .depends on clearly understood and adequately enforced
copyright protection. . .. copyrights may not be ignored when new
online services are deployed. The Internet can and must serve the needs
not only of Internet users and innovators of new technologies, but also
of artists, songwriters, performers and copyright holders''. Each day,
CenterSpan/Scour Exchange is fully engaged in the digital marketplace
as we seek to legally obtain, and technologically secure, diverse
content to offer to the public. We are confident that we can
effectively compete and provide new benefits for consumers, creators,
and copyright owners, so long as we have a supportive legal framework
that sets forth nondiscriminatory and clearly understood principles for
all market participants.
we are therefore pleased to share our views on some of the key public
policy and technical questions that confront you:
Security: We believe that current DRM technologies do provide
sufficient protection to satisfy the legitimate concerns of
copyright holders. CenterSpan has designed its system to
eventually support a variety of DRM solutions.
Fair Use: CenterSpan would support the consideration of
legislation to carve out a fair use ``safe harbor'', should it
become apparent that the marketplace is not sufficiently
sensitive to this key protection of informed discussion,
criticism, and debate. For the time being, the marketplace is
the best place to determine the reuse limitations supported by
DRM technologies and is most likely to set the optimal balance
between the desires of consumers, the needs of scholars and
commentators, and the legitimate concerns of content owners.
Compulsory licenses: CenterSpan believes it is worthwhile for
Congress to consider the establishment of new or expanded
compulsory licenses to facilitate the digital distribution of
interactive media content over the Internet. If you take this
path, it may be useful to distinguish between those forms of
``digital distribution'' that are analogous to broadcasting,
versus those that are more akin to ownership of a CD or DVD.
Digital content may be distributed via ``streaming'' or
``downloading''. CenterSpan's view is that streaming is
analogous to radio and broadcast television, while downloading
represents the next generation distribution channel of digital
copies. This distribution channel facilitates the sale or use
of permanent or quasi-permanent content, subject to the
consumer's fair use transfer to other devices, be they in the
home or auto, or a portable device that may be carried on their
person. In our view, compulsory licensing may be more
appropriate for streaming media that allows for listening or
viewing but does not provide for the retention of a permanent
copy.
First sale doctrine: It is our view that the first sale
doctrine is not meaningful or applicable in the digital
environment. The doctrine makes sense for analog media, such as
used books or records. But there is simply no way to adequately
assure that an individual selling a ``used'' digital file has
not retained a perfect digital copy for continued use. Whatever
loss may occur from the absence of a first sale right in the
digital environment should be more than offset by the lowered
costs and vastly broader selection of content made possible by
Internet distribution.
Privacy: We applaud the continuing efforts of Chairman Hatch,
Senator Leahy, and other members of the Committee to assure
that citizens' concerns about online privacy are adequately
addressed. If consumers believe that the use of online
technologies and services is at odds with their expectations of
personal privacy, then the growth of Internet commerce will
suffer. While one's listening and viewing habits may not raise
the same level of concern as medical and financial data, we
note nonetheless that Congress saw fit to make it illegal for
video rental stores to reveal the records of individual
consumers.
P2P systems inherently raise unique privacy questions and
challenges. A consumer who subscribes to any P2P entertainment service
agrees to make a portion of their computer's hard drive viewable by and
accessible to other subscribers. Thus, they have a clear expectation
that their collection of digital media will be revealed to third
parties, even if their identity is safeguarded. However, they may not
contemplate that unauthorized commercial third parties can gain similar
access and can use the information they obtain for a variety of
marketing, promotional and other purposes. Even where such activities
violate the P2P provider's terms of service, as they would
CenterSpan's, they are difficult for the P2P service to detect and
deter.
CenterSpan's own privacy policy prohibits the sharing of personally
identifiable customer information with third parties, except for that
information required to facilitate payment transactions. We will not
allow our customers to be subjected to unwanted solicitation and
spamming from unauthorized commercial third parties. Therefore, we
encourage the Committee to consider whether new legal protections
should be put in place to assure that the privacy expectations of P2P
system users are fully respected.
Conclusion
CenterSpan appreciates this opportunity to share its views, market
experience, and plans for the P2P future with the Committee. We look
forward to working with you in the months ahead as you strive to assure
that the legal and policy structure for digital media in the twenty-
first century is fully relevant and strikes the proper balance between
the rights and interests of all participants in this exciting and
rapidly evolving sector.
Statement of Lawrence E. Feldman, Esquire, Jenkintown, PA
I. Vantage Point:
I am a lawyer from Pennsylvania with over twenty years experience
in general civil litigation. I also represent ``catalog artists'' (that
is, artists no longer under contract to the record companies) in two
class actions against the record industry Chambers v. MP3.com, UMG el.
al., SDNY 2000 (involving current internet use of old recordings of the
1950's through 1995 by music industry without payment; on appeal after
dismissal by Judge Rakoff;) and Moore a AFTRA, Time Warner, et. al.
(ND.ALA 1993); (on-going RICO and ERISA suit against the record
industry for illegal pension reporting practices in connection with the
AFTRA health plan ). I am also one of many firms involved in In Re
COMPACT DISC MINIMUM ADVERTISED PRICE ANTITRUST LITIGATION MDL Docket
No. 1361, and other litigation, including copyright and trademark
litigation. I also assist musicians in running and maintaining internet
websites, and I own several internet webservers. I am a former
professional performing and recording musician (electric violin,
guitar, banjo, mandolin, keyboards). My on-line resume is at http.//
leflaw.com/leflawnet/firmresume.htmll; there is an on-line article on
digital music and record companies at http://mp3.com/news/227.html; on-
line article on AFTRA class action at http://www.addicted.com.au/MNOTW/
lofi/970821/970821--971.shtml.
I am not an entertainment lawyer or music industry lawyer per se. I
consider myself a self-funded public interest lawyer and litigator. I
represent no music or record companies, although I do represent
webcasters.
Among the artists I represent, several have specifically endorsed
the positions taken herein. They are:
Carl Gardner of the Coasters (``Yakety Yak'', ``Charlie
Brown'', ``Love Potion Number 9'')
Bill Pinkney of the Original Drifters (co-founder of the
Drifters in 1953; voice of ``White Christmas'' in Home Alone
(1991); Bill is a veteran of the Normandy invasion, and a
Bronze star recipient.
Damon Harris (Temptations 1971-75) (``Papa was a Rolling
Stone'')
Lester Chambers of the Chambers Brothers (``Time Has Come
Today'', ``People Get Ready'')
Tony Silvester of the Main Ingredient (``Everybody plays the
fool'').
Others have expressed support for the general notion of copyright
reform and mistrust of the record industry, as outlined below. I will
supplement this list prior to the April 3, 2001 hearing.
II. Reason for Speaking to Committee:
A. Lack of a voice in copyright legislation for the recording
artist who must depend on sale of recorded music to survive;
specifically records, tapes and compact discs, since their contracts
obviously provide no compensation for digital performances.
B. Continual misrepresentation by the RIAA to this committee and
elsewhere that 1) they represent the interest of recording artists 2)
they represent the interest of the ``American'' recording industry,
since they represent mostly foreign corporations who do business in
this country, and should have no voice in matters involving U.S.
legislation or the U.S. Constitution.
C. Alarm that the Congress has given the RIAA an official role in
fiscal and fiduciary matters involving webcasting royalties, because of
their historical indifference to the plights of artists and consumers,
their demonstrated inability to accurately account for their copyright
registrations as well as their royalties due thereon, their recently
exposed conduct in the Work for Hire lobbying effort, and their
historical abuse and lack of concern for older artists, and their
historical connection to organized crime.
D. Alarm that the Copyright Act is now, because of the two major
RJAA - driven revisions of 1995 and 1998, one of the single biggest
threats to privacy and freedom from searches and seizures, as evidenced
by recent ``Napster raids'' in U.S. and Belgium, and prosecution of
Jeff Levy in 1999 for running a music server. The RIAA says that the
artists support this conduct. The artists at large do not.
III. Message:
Most authors and artists who you have heard of don't own the
copyright registration certificate to their works. Usually the
copyrights are held by a record label or publisher instead, since the
artists' contract have historically contained a clause requiring them
to assign all rights to the company. So when you hear a song by your
favorite band being used to sell beer and cars on television, chances
are that they didn't have anything to do with the endorsement: they
don't own or control their own songs, or even get compensated at all,
because the record company does.
Juxtaposed against this reality is the constitutional provision
``Congress shall have power. . . .to promote the progress of science
and useful arts, by securing for limited times to authors and inventors
the exclusive right to their respective writings and discoveries.''
Article I, section I Clause 8 is not merely a grant of power to
congress. It is also a limitation of that power. The Framers, who had
just fought a war with England, were mistrustful of government
sponsored monopolies like the Statute of Anne, which they saw as a
limitation of the common law perpetual rights of authors, so they made
it a constitutional drafting priority to make sure that Congress'
intrusion to secure such perpetual rights of authors and inventors be
limited in time, and be for the benefit of authors and inventors. It
was not, as the RIAA says at their website, because copyright is more
important than the First Amendment. It was that the limitation of
copyright was more important than the First Amendment. Wheaton a Peters
8 Pet. 591 1834,
In 1995 Congress enacted a statute, the Digital Performing Rights
in Sound Recording Act, that gives exclusive rights in digital
performances to the legal copyright owner, without providing any
concomitant i ight of payment to the equitable owner (the artist is the
equitable owner of the copyright under 17 USC 501(b), ) who has no
royalty provision in his contract to cover such uses, especially if his
contract predates 1996, which most do.
Copyright is a bundle of rights. Congress created a new right and
gave it to the copyright holder in 1995'without even stopping to think
that the artist will no longer benefit because of prior assignments.
The record industry's institutionalized greed and callousness is
illustrated by the recent payment of ``statutory copyright infringement
damages'' in excess of 200 million dollars, plus stock and warrants and
future license fees from Mp3.com, a well known website, to the record
companies, in litigation spearheaded by the RIAA for on-line use of my
clients names, music, and likenesses with no payment to the artists
thus far. When the artists try to sue for a declaration of rights and
royalties involving the same conduct, we were unceremoniously shown the
door in Chambers v. Mp3.com, et. al., currently on appeal.
I believe that, as a start, the following amendments are needed:
1. The Copyright Act, 17 USC 5O1b should be amended to (a) give the
artist rights to sue copyright holders in federal court for an
accounting of profits or to determine title to copyright; (b) with the
rebuttal presumption that a 45% split, the rate already in the statute
for webcasting, was per se reasonable for uses not set out specifically
in the artist contract. Present law of New York is that there is no
federal jurisdiction for such an action (Keith v Scruggs, SDNY 1981),
and many courts seem willing to let the prior assignment of copyright
stand, without any compensation for new uses; (c) that any action for
statutory infingement damages use the same 45% split to the artists,
whether the suit be on the compilation copyright or the underlying
copyrights; (d) provide that fiduciary standards control the
relationship of copyright holder and artists, and that breach of
fiduciary duty is a ground for recission of the assignment.
2. Artist Fair Use--An artist may use a copyrighted work on which
he performed or contributed copyrightable material, in any manner
listed in section 106, so long as its primary purpose is to promote the
career or reputation of the artist. Automatic fee shift against any
copyright holder who sues an artist for infringing a work in which he
performed or contributed and does not prevail. Record companies have
threated action against artists who use their own material on the
internet.
3. That digital internet performance rights do not apply to any
pre-1996 recordings. The industry should go back and renegotiate with
the catalogue artists. Otherwise, it is tantamount to a taking without
just compensation.
4. Provide for automatic termination of transfer of sound recording
copyrights, without formalities. The Work for Hire controversy is not
yet settled. Artists should have the masters back. .Artists need this
protection. Its like a trust for their old age, since the pension
system is so flawed up because of collective bargaining agreement
provisions regardinw, health and welfare by the AFTRA Llnion which
couples health coverage with royalty payments.
5. The RIAA (or Soundexchange or AARC or other incarnations) should
not he collecting money for artists under the DCMA or the Audio Home
Recording Act. Appoint a reputable accounting firm, without specific
music industry ties, or someone the musicians trust.
6. Enact a FEDERAL RECISSION OF COPYRIGHT ASSIGNMENT ACT as
amendment to 17 USC 501. The United States District Courts should have
original jurisdiction over actions to rescind an assignment or license
of copyright, or any of the bundle of rights within the purview of 17
U.S.C. 106, in which a plaintiff is a creator of the copyright whose
assignment or license is sought to be rescinded, and it is claimed that
any conduct of the assignee towards the creator renders the assignee
unfit to be a registrant of a federal copyright, within the standards
of Article I section 1 Clause 8 of the United States Constitution. It
should also be part of the Copyright Act that failure to publish or
distribute copyrighted material for at least two years shall be a prima
facie case of abandonment of copyright, resulting in a reversion to the
artists/grantors.
I would be honored to submit drafts of this and other related
proposed legislation, if the committee requests.
Statement of the Future of Music Coalition, Jenny Toomey, Executive
Director
Summary
The Future of Music Coalition is a not-for-profit think tank that
advocates for new business models, technologies or policies that will
advance the cause of artists. We firmly believe that the music industry
as it exists today is, at a very basic level, anti-artist, and that any
serious examination of a digital future must take into account the
structures in place in our analog present. While the final solutions to
the challenges in this space will be driven in many ways by technology
and the market, there are a number of critical policy decisions in
front of Congress that could make a significant difference in the lives
of artists. These include:
1. Competition for collection and distribution of the digital royalty
2. Direct payment of the digital royalty to the artist
3. Fostering of non-commercial space on the radio and on the Internet
4. Ensuring artists have the right to keep their recordings in print
The Future of Music Coalition remains eager to work with any
organization that shares our concern for improving the conditions for
artists in these exciting times.
Introduction
More often than not, the debate over digital music distribution has
left artists and their representatives sitting on the sidelines. Even
today's hearing has omitted many of the organizations that have been
driving the debate and have stood alone in proposing concrete and
coherent solutions to the questions that the Senate is posing. The
Future of Music Coalition (FMC), for example, took the unique step of
bringing together more than 600 hundred music industry leaders,
technologists, consumers, musicians, academics and composers (including
Senator Hatch) to discuss these very issues this past January at
Georgetown University. Unless the Senate and other governmental
organizations include artist organizations, like the FMC, in public
discussions about the future of digital music, the public cynicism that
has made peer to peer a phenomenon will continue to grow.
Increasingly, the public believes that artists are not compensated
fairly. This perspective is then used as a justification for file
sharing of copyrighted materials. If the average teenager believes that
their favorite artists will not receive compensation for their
creations, it gives them the excuse to use peer to peer file-sharing
services that have no mechanism in place to compensate the artist. This
is the crux of an enormous problem.
The Recording Industry Association of America (RIAA) has a
confusing track record. It has publicly stated that the organization
does not represent the interests of artists, but rather the interests
of the major record companies. It has also stated that it is trying to
protect recording artists and their creations through litigation
against Napster and MP3.com. Still there has been no public explanation
as to how the recording artists will participate in the large sums that
have been generated by the settlements and/or judgements from these
cases.
The Senate must ask the difficult questions: how are the artists
being paid now and how will they be paid in the future? In other words,
each time that a settlement is reached or a new lawsuit is filed, the
Senate must ask: how will the artists be compensated when there is a
final adjudication? Prospectively, the Senate should look at each of
the digital music distribution issues and conflicts through this prism
of artistic compensation.
The System is Broken
Any serious examination of the digital future of downloadable music
needs to take into account the fact that the music industry in America
is fundamentally broken. In 1999, less than 1 percent of the total
number of albums released sold more than 10,000 copies.\1\ Commercial
radio airplay is often sold to the highest bidder through a shadowy
network of ``independent radio promoters,'' \2\ while attempts to
create new non-commercial Low Power FM stations have been gutted by
Congress.\3\ The dreams of stardom chased by many are met head on with
the sad reality that an estimated 75 percent of releases from major
labels are not even currently in print, leaving artists with a huge
debt to the record companies that they have no means to pay back.
Meanwhile, technology companies seem content to roll out new business
models and technologies without giving serious thought to how these
technologies will impact artists' traditional revenue streams.
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\1\ 11David Segal, ``They Sell Songs the Whole World Sings: Mass
Merchants Offer Convenience, Less Choice,'' Washington Post, February
21, 2001, Page Al.
\2\ Eric Boehlert ``Pay for Play,'' Salon, March 14, 2001.
\3\ Stephen Labaton, ``Congress Curtails a Plan for Low-Power Radio
Stations,'' New York Times, December 19, 2000, A1.
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Elevating the Artists
The Future of Music Coalition is a not-for-profit think tank whose
sole mission is to elevate artists into the middle of this debate. The
FMC aims to increase knowledge about the current industry and advocate
in favor of specific solutions--including policy solutions and business
models--that will improve artists' ability to succeed in a notoriously
(if not artificially) constrained industry. We strongly believe that an
artists' agenda and a consumers' agenda are one and the same.
Ultimately, the new music industry will be defined in relation to
innovations in technology and the marketplace. It is important to
recognize that neither of these forces are neutral ones. There are a
number of critical policy decisions that will determine how the market
evolves and artists need to participate in those decisions. The FMC
proposes four simple steps that will not only increase artist
compensation but will also grow the size of the music market thereby
creating new jobs and new sources of capital for investment. Each of
these proposals will not only effectively create new opportunities in
our industry but they will also enhance the shareholder value of each
of the publicly traded major record labels. This is truly an
opportunity to nurture and to grow the recording industry and the
performing artists that make it all possible.
1. competition in collection of digital royalty
SoundExchange is the name of an organization created by the
Recording Industry Association of America (RIAA) that is poised to
become the sole mechanism by which all webcasting royalties will be
collected and dispersed to all musicians. The Future of Music Coalition
believes that artists must have the right to choose between competing
collection agencies, similar to the robust competition between ASCAP,
BMI and SESAC for analog performance royalties.
The Future of Music Coalition has stated a number of reasons why
SoundExchange should not be the sole collector:
A. It is partisan.
It is clearly inappropriate to force independent musicians who have
consciously worked outside of the major label system, and who compete
with that system daily, to now go to an organization that was created
by the major labels in order to collect their independently generated
royalties.
B. The data is too valuable.
It is also our opinion that the transfer data (i.e. who is playing
what songs, how many times, etc.) is valuable and should not be owned
or controlled by the RIAA.
C. The RIAA cannot be trusted to represent artists' interests.
We believe that if the major labels are allowed any discretion in
the manner by which webcasting royalties are collected, divided and
paid out they will certainly exert influence in a way that benefits
themselves and their constituents. Here it might be wise to remember
the recent ``work for hire'' controversy which implicated the RIAA for
requesting (and getting passed) a ``technical amendment'' which changed
the substance of the Copyright Act to the detriment of recording
artists. This change allowed record companies to claim ownership of
sound recording copyrights FOREVER when previously these copyrights
reverted to the creators after 35 years.
Thankfully the ``work for hire'' clause was identified, fought and
ultimately repealed due to the efforts of a coalition of recording
artists and musicians' rights groups. Still we think it would be unwise
to allow such recently identified ``foxes'' as the RIAA or their agents
at SoundExchange to be the sole guardian of the newly established ``hen
house'' of digital royalties.
2. direct payment of artists' 45 percent of webcasting royalties
through the dmca
The language of the Digital Millennium Copyright Act needs
clarification to ensure artists are paid their royalties directly.
The Problem:
As it stands now, some parties believe the DMCA language states
that the entire 100 percent of any webcasting royalty should be paid
first to the copyright owner (usually the label) who is then required
to pay 45 percent to the performer and 5 percent to the unions.
Other parties suggest that ambiguity in the language of the DMCA
implies that artists should be paid their 45 percent directly.
The Solution:
To eliminate further confusion and to guard the artists' right to
their 45 percent share of the webcasting royalty, the FMC proposes an
amendment to the Digital Millennium Copyright Act (DMCA). Modeled after
the so-called writers' share paid by ASCAP, BMI and SESAC, the FMC
amendment would establish that recording artists be paid directly their
45 percent share of all Digital Performance Royalties for Sound
Recordings (DPRSR). The FMC believes that this is the first step in
acknowledging recording artists as stakeholders in the use of music on
the Internet.
Why should this be done?
As it stands the digital webcasting royalties are set to be
administered exclusively by SoundExchange, a partisan collective
created by the labels. Recently SoundExchange offered to pay the
artists their 45 percent share directly--but only for the first year.
The FMC believes this is a smoke screen of false generosity. It is
hardly a foregone conclusion that the money is currently controllable
by the labels. If the law was meant to state that the artists get paid
their 45 percent directly in perpetuity, who are SoundExchange to offer
the same deal for a diminished period of only one year?
What is at stake?
A. Fear of Cross Collatoralization.
If these royalties go first to the copyright owner, the labels may
then attempt to cross collatoralize this new money against any of the
artists' accumulated label debt. If royalties are diverted in this
manner, the overwhelming majority of major label artists would not see
any webcasting royalties whatsoever.
B. Fear of Obfuscation.
As it stands very few artists who work through the major label
system pay off their ``expenses'' and earn royalties. Oftentimes those
artists that do recoup only learn of that fact after auditing the
label. It would be dangerous to subject webcasting royalties to the
same non-transparent formula that already underserves musicians in the
terrestrial world.
C. The Future is Interactive--we should plan for that now.
FMC believes that it is critical that the stakeholders work
together to attempt to make these statutory licenses apply to both
interactive and non-interactive web uses. Impending technological
advances (Tivo, etc.) already allow for interactive uses of non-
interactive streams on the back end. Thus it is fair to suggest that
the future of music and all ``innovative'' business models will be
interactive.
If we do not address the issue of a fair statutory rate for
interactivity now, we run the risk of a future where only non-
interactive and dated business models pay the fair 45 percent statutory
rate to creators. While all other interactive and forward-thinking
business models pay artists in a manner that is subject to the same
nebulous contractual rate that pays artists far less.
Here it is important to remember that artists' contract royalty
rate is not statutory, transparent nor is it public. Traditional
contract royalties begin at a much smaller ``11-13 percent'' and allow
for that royalty amount to be further diminished through a process of
unfair deductions that are standardized within the industry.
To understand this royalty reduction, multiply an I 1 percent
royalty rate by 85 percent for a ``free goods'' deduction. Then
multiply it by 75 percent for a ``packaging'' deduction. Then multiply
it again by 75 percent for a ``new media'' deduction. After this
process of deduction, an 11 percent royalty is effectively reduced to
less than 6 percent.
Non-interactive webcasting royalties pay artists 45 percent.
Interactive webcasting royalties are subject to contracts. They pay
artists 6 percent. At a difference of 39 percentage points, clearly,
artists stand to fare far better under a statutory rate than one that
is contractual. Therefore FMC suggests that it would greatly benefit
the majority of artists if the statutory rate were applied to both
interactive and non-interactive webcasting licenses.
3. support for non-commercial speech in broadcasting and on the
internet
In general, music is programmed for one of two reasons: to
aggregate the largest possible audience in hopes of charging larger
rates to advertisers (the commercial model) or because a piece of music
is important enough that a broadcaster thinks it should be shared with
its audience (the non-commercial model). Obviously, artists and
consumers benefit from the widest number of possible outlets for their
music.
Therefore, beyond taking a look at potentially illegal ``pay for
play'' practices in commercial radio, or creating new community-based
platforms like Low Power FM, there needs to be a means by which less
expensive (or graduated) licenses can be granted to community based
webcasters in the same manner that the performing rights
organizations--BMI, ASCAP, SESAC--license community based terrestrial
stations at a less expensive rate.
While it is critical that webcasters compensate creators for the
value of their music, we should recognize the important contribution
that community based stations make in exposing music fans to a broader
variety of music.
Why is this important?
In order to webcast legally, a majority of independent Internet
radio programmers have signed the Statutory Licensing Agreement and
agreed to back pay royalties at the ``statutory rate'' from the date of
that signature, once the rate is established.
It has been over two years since some of these webcasters have
signed the agreement yet the rate is still undecided! There are obvious
and grave concerns among independent and community based webcasters
that they will be forced out of business on the day that they are
presented with a back-dated bill that is beyond their means.
If this happens the FMC fears we will soon find the infinite space
of the World Wide Web dominated by the same hit-driven, bottom-line
mentality that currently dominates the finite terrestrial bankwidth and
underserves the majority of musicians and consumers.
Consolidation of the Terrestrial Bandwidth
The commercial radio bandwidth is no fiend to the majority of
musicians, nor, for that matter, the majority of consumers. In 2001,
the overwhelming consolidation of the commercial radio ownership has
concentrated control of terrestrial radio into very few dominant
hands.\4\ The predominance of supper-duopolies (more than 7 radio
stations in a market owned by one company) and the resulting drive to
create additional super-duopolies, has resulted in reductive,
consolidated, market-driven programming and far less bankwidth space
for niche or independent broadcasting on the radio dial. Both of these
factors have had a grave impact on the ability for musicians to get
their music in front of a listening audience.
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\4\ Lydia Polgreen, ``The Death of Local Radio'', Washington
Monthly, April 1999.
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Concentration of radio playlists
Commercial radio playlists seem dominated by a ``once-removed''
process of independent radio promotion that requires overwhelming
investment to place songs on commercial radio. If this is true, then
over 80 percent of musicians who do not choose to release records
through the major label system are effectively locked out of the
publicly owned but commercially licensed airwaves. It would be a
disservice to artists and consumers to see this same unfair structure
replicated on the web through a process of prohibitively expensive
webcasting and licensing fees.
4. ``automatic'' license for out-of-print recordings
Major labels commonly acknowledge that a majority of their back
catalog is currently out of print. This phenomenon harms both
musicians, who lose potential record sales, and consumers who find
their variety of musical choices artificially diminished.
In order to address this problem, record contracts in some
countries contain ``reversion clauses'' which allow for the return the
copyright to the creator (musician) if a title has remained out of
print for an established period of time. Reversion clauses frame the
relationship between artist and label as an equal one where both sides
have responsibilities and accountability.
In the United States there is no such reversion clause and,
therefore, very little recourse for musicians who have signed away
their copyrights to a label that is unwilling to keep those records in
print.
In order to address this problem FMC is advocating for the creation
of a compulsory or ``automatic'' license to enable musician signatories
(or their heirs) the unquestionable legal right to license their back
catalog sound recordings (at a fair statutory rate) from labels that
have allowed these recordings to go out of print.
Copyright as Ante
It is standard industry practice to require musicians to sign away
the rights to their copyrights in order to participate in the major
label system. This means that ultimately musicians will have little to
no control over the availability of their records for sale. Since
mechanical royalties paid to artists from record sales make up a large
portion of musicians' income, it seems wholly unfair that they would
have no recourse when their records are purposefully allowed to remain
out of print.
Artists and Recoupment
Danny Goldberg of Artemis Records recently indicated that most
major label artists need to sell more than 200,000 copies in order to
pay back their debt to the label.\5\ However, according to Soundscan
data, only 1 percent of records released in 1999 sold more than 10,000
copies,\6\ a number far short of Mr. Goldberg's projection. Using these
statistics we can assume that the overwhelming majority of major label
musicians are in debt to their labels. Understanding that major labels
routinely let artists' material fall out of print, as noted above,
there are even fewer opportunities for artists to recoup.
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\5\ Danny Goldberg, ``The Ballad of the Mid-Level Artist,'' Inside,
2000, http://www.tonos.com/appl/connect/commentary/jsp)/danny--
goldbery--1.jsp
\6\ Segal, ``They Sell Songs.''
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Napster's Newest Fans
In the physical world, record store and warehouse shelf-space is
finite and valuable but the virtual marketplace does not have the same
physical limitations.
The fastest growing demographic segment using Napster are adults
over the age of 24. Research reports have confirmed that one of the
major reasons that they are doing so is to access commercial recordings
that are no longer commercially available. The FMC believes that
allowing recording artists to make all of their recordings available to
the public will lessen the public dpendence on Napster, stimulate new
record sales, and help achieve our goal of putting more money into the
pockets of both recording artists and record labels.
Conclusion
Clearly, the music technology space is a difficult area for policy
makers to negotiate, with evolving technologies and market forces
shifting constantly. That being said, the future of Music Coalition has
identified four specific areas of concern that Congress should address:
1. Competition for collection and distribution of the digital royalty
2. Direct payment of the digital royalty to the artist
3. Fostering of non-commercial space on the radio and on the Internet
4. Ensuring artists to have the right to keep their recordings in print
We firmly believe these four major items will make a tremendous
difference to the lives of artists nationwide, and we look forward to
collaborating with other interested parties to help build the structure
that will sustain a middle class of musicians in America.
Statement of Jim Griffin, Founder and CEO, Cherry Lane Digital &
OneHouse LLC, Los Angeles, California
AT IMPASSE: Technology, Popular Demand, and Today's Copyright Regime
The Internet has fostered the creation of new music delivery
services that provide Americans with unprecedented access to a broad
catalogue of music. Consumers have responded enthusiastically.
Continuing to meet this popular demand is clearly in the public
interest, yet the future availability of these services is now in
jeopardy. It would be unfortunate both for the American public as well
as for copyright holders if peer-to-peer delivery of music were to be
suppressed. If encouraged by appropriate legislation, these services
can be configured in a manner that fully protects the interests of
rights holders by ensuring them a steady stream of royalties. Moreover,
consistent with the goals of the Copyright Act, these popular delivery
services offer the potential for unprecedented growth in the creation
and enjoyment of music.
In effect, the Internet is shifting the music marketplace from one
for products to one for delivery services. Technological advances have
fostered similar transitions in other markets in the past, and each
time, the nation has opted to adjust its copyright laws as needed in
order to enable competitive delivery services to face off against one
another in the marketplace. Each time, consumers and copyright holders
alike have benefited from the resulting expansion in the production and
enjoyment of original works.
In passing the Digital Millennium Copyright Act in 1998, Congress
recognized the need for legislation to foster the Internet's potential
for broad dissemination, at the time and place chosen by the user, of
all forms of original work. But the existing scheme for protecting and
encouraging the dissemination of copyrighted material is inadequate for
the changed market environment wrought by the new online world.
Legislation enabling the continued development of online music delivery
services, while fully protecting the interests of copyholders, is now
needed.
The earlier statutes intended to encourage the use of prior
generations of new delivery services should guide the way. Some of
these statutes were designed to address problems created by high
transactions costs when new technology offered the potential to deliver
original works to multitudes of users. Some were intended to promote a
nascent technology that might not, without statutory encouragement,
have taken hold. Some were designed to help identify a reasonable price
when the marketplace was inefficient at doing so. All were intended to
promote the underlying goals of our copyright regime--to encourage the
creation and broad dissemination of original works. These statutes
provide a variety of examples of solutions that serve the interests of
both rights holders and the public.
1. public demand for digital music delivery services is strong and
growing.
``Music has been at the forefront of the Internet explosion, and
for good reason: The Internet offers tremendous opportunities for the
music business as well as for everyone who loves music.'' \1\ Because
music is easily transmitted in digital form, the Internet has promoted
the development of new music delivery services, bringing the American
public convenient access to much more, and more varied, music than has
ever been possible before. The public response has been overwhelming.
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\1\ A&MRecords, Inc. v. Napster, Inc., Complaints Sec. 35 (N.D.
Cal. 1999).
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Napster has grown with unprecedented speed. First available in
1999, its software has now been downloaded over 71 million times. Its
appeal is broad--though designed by a college student and popular with
teenagers, half of its users are over 30 years old, and they are evenly
divided between men and women.\2\ Its peak of 1.8 million simultaneous
users is within striking range of AOL's reported peak of 2.2 million
simultaneous users. And its more than 10 million hits from unique
addresses per day is significantly greater than the fewer than 7
million unique address visits that eBay and the Walt Disney Internet
Group attract per week.\3\
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\2\ July 11, 2000, Testimony of Hank Barry, CEO of Napster, Inc.,
before the Senate Judiciary Committee.
\3\ See Niels en/NetRating service report for week ending 3/18/01.
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Another software program for distribution of music and other
digital files was originally posted on a website affiliated with AOL in
the spring of 2000. It was removed after a single afternoon, but in
just those few hours, 10,000 copies were downloaded, and today the
decentralized file-sharing Gnutella software is enjoying ever-widening
usage. It is also rapidly becoming more user-friendly. And there are
many other means of obtaining access to music through the Internet,
including Aimster, Bearshare, iMesh, and Spinfrenzy.
The advent of online music delivery services has and will fuel
sales of music both as a new delivery service and in ``hard copy''
form. Many Napster users are willing to pay a monthly fee for continued
access to the service.\4\ And many online music listeners report
sampling new music using Napster or another such service, and then
purchasing a CD of the music they liked.
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\4\ Pay to play, PC MAGAZINE at 67, April 24, 2001.
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Napster and similar services are racing to fill an entirely new
market for services offering the customized delivery of music, a market
just recently enabled by technological innovation. As with the
invention decades ago of radio service for delivering plays and music,
and then of television service by means of broadcast and later cable
and satellite delivery, for delivering video performances and events,
digital music service has transformed the nature of the market for the
underlying copyrighted content. This transformation can be suppressed
only at enormous cost to consumers and to copyright holders, who should
benefit from the greatly expanded delivery of their works that the
services promise. The American public's demand for music delivery
services will continue to grow. It is in the public interest, and in
the interests of rights holders, to satisfy that demand. But the demand
cannot effectively be met under the current statutory scheme.
2. digital music delivery services may be sharply curtailed despite
widespread popular demand.
Adverse court decisions now threaten the continued availability of
digital music delivery services.\5\ Moreover, market forces, which
might be expected to engender a new means of meeting the popular
demand, are being thwarted by a variety of obstacles. Legislation is
needed to resolve the impasse.
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\5\ See, e.g., A&M Records, Inc. v. Napster, 239 F.3d 1004
(9th Cir. 2001) (finding a prima facie case of direct
copyright infringement); UMG Recordings, Inc. v. MP3.Com, Inc., 56
U.S.P.Q.2d 1376 (S.D.N.Y. 2000) (holding MP3 infringed copyright
owners' rights).
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For two reasons, the marketplace cannot and will not provide a
solution. First, the music industry, long known for close coordination
among its major players,\6\ has with one notable exception chosen to
work to retain control of music distribution, refusing to deal with
entities that threaten that control even if in the process substantial
popular demand for music is left unsatisfied.\7\ Five companies--AOL-
Time Warner, EMI, Sony, BMG, and Universal--control about 85% of the
market for pre-recorded music.\8\ These companies are collectively
known as the ``majors.'' The remainder of the music industry is made up
of much smaller companies referred to as ``independents'' or
``Indies.'' As reflected by their collective market share, the majors
dominate the distribution of prerecorded music and have done so for
decades.\9\
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\6\ See, e.g., Federal Trade Commission, Press Release, Record
Companies Settle FTC Charges of Restraining Competition in CD Music
Market, (May 10, 2000) available at http://www.fte.gov/opa/2000/05/
dcpres.htm (``The Federal Trade Commission announced today that it has
reached separate settlement agreements with . . . the five largest
distributors of recorded music who sell approximately 85 percent of all
compact discs (CDs) purchased in the United States to end their
allegedly illegal advertising policies that affected prices for CDs.
The proposed agreements would settle FTC charges that all five
companies illegally modified their existing cooperative advertising
programs to induce retailers into charging consumers higher prices for
CDs, allowing the distributors to raise their own prices. ''); Federal
Trade Comnussion, Analysis to Aid Public Comment on the Proposed
Consent Order; In the Matter of Sony Music Entertainment, Inc., In the
Matter of Time Warner, Inc.,--In the Matter of BMG Music, d. b. a.
``BMG Entertainment''; In the Matter of Universal Music &c Video
Distribution Corp. and UMG Recordings, Inc.,--and In the Matter of
Capitol Records, Inc., d.b.a. ``EMI Music Distribution'' et al., (Sept.
2000) available at http://www.ftc.gov/os/2000/09/musicstatement.htm
(``The market structure in which the distributors' MAP provisions have
operated also gives us reason to believe that these programs violate
Section 5 of the FTC Act as practices which materially facilitate
interdependent conduct. The MAP programs were implemented with an
anticompetitive intent and they had significant anticompetitive
effects. In addition, there was no plausible business justification for
these programs. '') (hereinafter ``Analysis To Aid Public Comment '').
The individual FTC complaints and agreements containing consent orders,
as well as additional materials, are available at http://www.ftc.gov/
os/2000/05/index.htm. See also United States v. Time Warner Inc., et
al., 1997 WL 118413 (D.D.C. 1997) (Justice Department investigation
into a series of joint ventures and other coordinated conduct among
producers of prerecorded music both domestically and abroad; no
antitrust challenge brought).
\7\ With the exception of Bertelsmann AG, the majors have refused
to license their copyrighted music to Napster. Bertelsmann has
conditioned its willingness to license on Napster's developing a
technology that would ensure payment of royalties every time a song is
shared. Until Napster introduces that technology, as it plans to do
this summer, Bertelsmann remains a plaintiff in the infringement suit.
See Record label settles out of court with Napster, San Jose Mercury
News, January 26, 2001, at http://www.mercurycenter.com/svtech/news/
indepth/docs/napster012601.htm/; Kevin Featherly, Major Indie Label TVT
Records Buries Napster Hatchet, BizReport, January 26, 2001, at http://
www.bizreport.com/daily/2001/01/20010126-7.htm. Universal's CEO has
said that his company would license a royalty-paying peer-to-peer
service, but Universal has not negotiated any such arrangement with
Napster to date.
\8\ See Analysis To Aid Public Comment, supra n.6 (``The five
distributors together account for over 85 percent of the market . . .
'').
\9\ See Analysis To Aid Public Comment, supra n.6 (the five major
music companies ``collectively dominate this market ''); R.
SCHULENBERG, LEGAL ASPECTS OF THE MUSIC INDUSTRY 3 (1999) (``[T]he
music industry is dominated by a small number of entertainment/
communications conglomerates. At the end of 1998, these were
Bertelsmann, EMI-Capitol, Universal Music Group, Sony, and Time Warner,
and only one, Time Warner, was U.S. owned. '').
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The majors' dominance extends beyond the distribution of pre-
recorded music into both music publishing and the signing and promotion
of new artists. While music publishing is less concentrated than sales
of pre-recorded music, the music publishing businesses owned by the
five majors control a high percentage of the most valuable song
copyrights. Indeed, the two largest music publishing companies, those
owned by AOL-Time Warner and EMI, alone control the rights to millions
of songs.\10\ Although literally thousands of musical copyright owners
are not affiliated with any of the major music publishing companies--
including a number of independent music publishing companies--the
catalogues of song copyrights owned by these entities pale in
comparison to those of the major music publishing companies.
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\10\ Warner/Chappell Music, Inc.: A Company Profile, http://
www.warnerchappell.com/cgi-bin/WebObjects/wcmusic/awc/About.woa/wa/
ArticlePage.wo?articleId=443. (``From perennial favories such as `Happy
Birthday,' `Rhapsody In Blue,' `Winter Wonderland' and the ballads of
Cole Porter to the hottest hits of recent years by such megastars as:
R.E.M., Michael Jackson, Elton John, Sheryl Crow, Jewel and Madonna,
Los Angeles-headquartered Warner/Chappell Music, Inc. now ranks as the
premiere music publishing company in the world.'' and ``The company's
exhaustive catalog of songs spans the classical, standard, pop,
country, Broadway, foreign, movie and television score and current hit
categories . . .. ''); Warner/Chappell--Song Search, http://
www.wamerchappell.com/WebObjects/wcmusic/ss/index.html. ``Warner/
Chappell is home to more than a million songs . . . .''; Seagram Muisc
Unit, Universal, Makes Pact to Acquire Rondor, 2000 WL-WSJ 3038939
(Aug.3, 2000).
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Similarly, the labels owned by the major music companies are
capable of offering the most lucrative recording deals and, therefore,
typically sign the most promising new artists to recording contracts.
Few artists succeed in a big way without the backing of a major label,
since the majors' expansive resources and high market shares give them
considerable influence over the primary promotional vehicles in the
music industry, including radio and cable television channels like MTV
and VH1.\11\ For artists, the majors collectively control the gateway
to the top.
---------------------------------------------------------------------------
\11\ John Sutton-Smith, Easy Bider, Hits Magazine (July 18, 1997),
at http://www.warnerchappell.com/cgi-bin/WebObjects/wcmusic/awc/
About.woa/wa/ArticlePage.wo?articleId=281. ``Certainly we can always
afford not to go for an act, because when you're the size of the major
music publishers, no one act has a material impact on the bottom
line.'' Les Bider is the Chairman and CEO of Warner/Chappel Music
Publishing.
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Where a small number of large firms comprise an industry their
interests will frequently align and, very often, so will their business
decisions and strategy. And parallel, and even interdependent, decision
making has long been a hallmark of the music industry. Such behavior
can be a natural outgrowth of market concentration and may occur even
without what might be deemed collusive activity in violation of the
antitrust laws. Even if it is not illegal, however, such ``non-
competitive'' behavior still harms consumers, because it enables each
of the majors to safely ignore consumer demand, confident that its
competitors will do the same.
The ongoing litigation against Napster allows the music companies
to watch one another's business plans even more closely than usual.
Their joint participation in the litigation, although likely shielded
from antitrust challenge by the Noerr-Pennington defense,\12\ provides
each company with a picture window on the others' strategies for
dealing with the online world. Each time they consider and discuss the
relief they are seeking in the litigation, and as they evaluate
Napster's billion-dollar settlement offer, each firm necessarily
reveals its own plans and goals for the digital marketplace.
---------------------------------------------------------------------------
\12\ See Eastern Railroad Presidents Conference v. Noerr Motor
Freight, Inc., 365 U.S. 127 (1961); United Mine Workers v. Pennington,
381 U.S. 657 (1965).
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The majors know that the public wants the ability to access the
full range of music, not just the music of one or two companies, from a
single source. As they are reported to have written in another context,
``[t]o be compelling to consumers . . . a service must offers tens or
hundreds of thousands of songs . . .'' \13\ They cannot themselves
offer a single joint site for antitrust reasons. But as long as most of
them remain united, they can prevent the success of any unaffiliated
service by refusing to license their songs. They are insulated from
market pressures by virtue of their coordinated behavior. Only if
several were to defect would the others have to follow in order to
remain competitive.
---------------------------------------------------------------------------
\13\ Jeffrey Benner, Record Industry Plays Both Sides, WIRED NEWS,
March 16, 2001, at www.wired.com/business/ 0,1367,42426,OO.htm1(March
16, 2001) at 13.
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Why would the majors choose to prevent the development of popular
digital delivery services, despite the demonstrated ability of such
sources to increase public demand for music? Napster, as the innovator
of peer-to-peer music file sharing technology, has earned a ``first-
mover'' advantage over other companies in the digital delivery of
music. As a threshold matter, the majors do not want to enable Napster
to earn a financial reward for this innovation, but would rather try to
recapture the advantage for themselves. More importantly, they fear
increasing competition from independent labels. Napster does not have
an interest in what, or whose, music is shared on its service--with
Napster's service, independent music is as readily available as the
majors' music. And Napster is not only a vehicle for the delivery of
music, but also an open venue for the exchange of opinions and
recommendations about music, entirely free of the majors' control. For
the major music companies, which dominate older music promotional
channels, this would be a dramatic change. They do not want to lose
their historical influence and concomitant ability to direct consumers'
attention, and purchases, to their own artists and labels.
Thus, it is in the majors' collective interest to regain control of
music distribution from upstart entities such as Napster, even after it
transitions to a royalty-generating service. The concentrated structure
of the music industry and the increased coordination facilitated by
their joint participation in litigation enable them to assure
themselves that most are pursuing a strategy that protects them all.
Absent intervention by Congress, adverse court decisions and the
coordinated resistance of four of the leading record companies will
deprive consumers of digital distribution technology in the future. A
unique opportunity for consumers to enjoy a fantastic range of original
work, in a context that ensures full compensation to rights holders,
will be lost.
Another reason that the unassisted marketplace will not meet the
public demand for digital music delivery services is uncertainty over
pricing. Customized music delivery is a wholly new service-based
approach to content delivery, and it does not fit neatly into the
current copyright regime. If the various legal issues are not soon
addressed by legislation, considerable additional litigation is likely
to ensue, regarding fair use, first amendment rights, and more; as a
result, absent legislation, the pricing picture is not likely be
clarified anytime soon. In this environment, it will be difficult if
not impossible for new services to succeed, and their failure would
leave public demand for these services unmet.
3. When faced with similar problems in the past, Congress has
enacted legislation to foster development of new delivery services
while ensuring that the interests of copyright holders are protected.
With some frequency over the past century, new technology has
enabled the creation of new delivery services for copyrighted works,
while at the same time creating new inconsistencies and inefficiencies
in the existing copyright regime. Each time,
Congress has responded by enacting legislation that encourages the
maximum development of the new delivery services, but also protects the
interests of rights holders.
Each of these examples can be best understood as a Congressional
response to the transformation, through new technology, of a market for
protected works sold in the form of products into a market for the sale
of services delivering those works to consumers. Each time, Congress
has acted to protect the rights of copyholders in the works themselves,
while ensuring competition among services that deliver those works.
The Supreme Court has written, ``[f]rom its beginning, the law of
copyright has developed in response to significant changes in
technology. . . . Repeatedly, as new developments have occurred in this
country, it has been the Congress that has fashioned the new rules that
new technology made necessary.'' \14\ Not every technological change,
of course, necessitates a corresponding change in the copyright laws.
Indeed, were this the case, Congress would get very little accomplished
other than amending the copyright laws. When, however, in light of new
technology, the boundaries of existing copyright law are inadequate to
promote the widespread distribution of works that the copyright regime
encourages, Congress fashions an appropriate legislative solution.\15\
``Sound policy, as well as history, supports . . . [the courts']
deference to Congress when major technological innovations alter the
market for copyrighted materials. Congress has the constitutional
authority and the institutional ability to accommodate fully the varied
permutations of competing interests that are inevitably implicated by
such new technology.'' \16\
---------------------------------------------------------------------------
\14\ Sony Corp. of America v. Universal City Studios, Inc., 464
U.S. 417, 430-31 (1984). In a footnote, the Court gave examples of
technological changes that resulted in Congress passing new copyright
rules, including a number of statutory licenses:
Thus, for example, the development and marketing of player pianos
and perforated rolls of music, see White-Smith Music Publishing Co. v.
Apollo Co., 209 U.S. 1, 28 S.Ct. 319, 52 L.Ed. 655 (1908), preceded the
enactment of the Copyright Act in 1909 . . . the development of the
technology that made it possible to retransmit television programs by
cable or by microwave systems, see Fortnightly Corp. v. United Artists,
392 U.S. 390, 88 S.Ct. 2084, 20 L.Ed. 2d 1176 (1968), and Teleprompter
Corp. v. CBS, 415 U.S. 394, 94 S.Ct. 1129, 39 L.Ed.2d 415 (1974),
prompted the enactment of the complex provisions set forth in 17 U.S.C.
Sec. 111 (d)(2)(B) and Sec. 111(d)(5). . ..''
Id at n.11. Notably, in both of these instances Congress' response
was the creation of statutory licensing systems rather than merely the
creation of new rights.
\15\ In Sony Corp. the Supreme Court explained that:
The judiciary's reluctance to expand the protections afforded by
the copyright without explicit legislative guidance is a recurring
theme. Sound policy, as well as history, supports our consistent
deference to Congress when major technological innovations alter the
market for copyrighted materials. Congress has the constitutional
authority and the institutional ability to accommodate fully the varied
permutations of competing interests that are inevitably implicated by
such new technology. In a case like this, in which Congress has not
plainly marked our course, we must be circumspect in construing the
scope of rights created by a legislative enactment which never
contemplated such a calculus of interests. In doing so, we are guided
by Justice Stewart's exposition of the correct approach to ambiguities
in the law of copyright: `The limited scope of the copyright holder's
statutory monopoly, like the limited copyright duration required by the
Constitution, reflects a balance of competing claims upon the public
interest: Creative work is to be encouraged and rewarded, but private
motivation must ultimately serve the cause of promoting broad public
availability of literature, music, and the other arts. The immediate
effect of our copyright law is to secure a fair return for an
`author's' creative labor. But the ultimate aim is, by the incentive,
to stimulate artistic creativity for the general public good. ``The
sole interest of the United States and the primary object in conferring
the monopoly,'' this Court has said, ``lie in the general benefits
derived by the public from the labors of authors.'' When technological
change has rendered its literal terms ambiguous, the Copyright Act must
be construed in light of this basic purpose.''
Id. at 431 (citations omitted, emphasis added).
\16\T3Id.
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One example of an earlier Congressional compromise designed to
encourage maximum use of a new technology for delivery of copyrighted
work is the Audio Home Recording Act of 1992.\17\ Under the AHRA,
manufacturers of ``digital audio recording devices'' are required to
include technology that prevents serial copying.\18\ Manufacturers of
these devices and of ``digital audio recording media'' must pay
predetermined royalties into a general fund that is, in turn,
distributed to holders of certain copyright interests in music.\19\ The
quid pro quo under the AHRA is that manufacturers and consumers are
granted statutory immunity from suits for copyright infringement.\20\
The AHRA provides for full use of consumer audio tape recording
technology, while ensuring a royalty stream for rights holders.
---------------------------------------------------------------------------
\17\ U.S.C. Sec. 1001 et seg.; H.R. Rep. No. 873 (1),
102nd Cong., 2d Sess. 13 (1992).
\18\ 17 U.S.C. Sec. 1001(11), 1102.
\19\ Id. at Sec. Sec. 1003-07.
\20\ See 17 U.S.C. Sec. 1008.
---------------------------------------------------------------------------
The legislation grew out of litigation filed by music publishers
and songwriters in 1990 against Sony Corporation, which had begun
marketing DAT recorders. Negotiations aimed at achieving a non-judicial
solution soon followed, and ultimately a proposal was presented to
Congress as the basis for legislation. The AHRA is the embodiment of
the compromise reached among the interested parties.\21\
\21\ See generally H.R. Rep. No. 873(1), 102nd Cong., 2d
Sess. 11-13 (1992) (``House Report''), reprinted in, 1992 U.S. Code
Cong. & Admin. News (U.S.C.C.A.N.) 3581-3583; S. Rep. No. 294, 102d
Cong., 2d Sess. 30-45 (1992) (``Senate Report'').
---------------------------------------------------------------------------
As explained by the U.S. Copyright Office in its amicus brief in the
Napster case:
Beginning in the 1980s, consumer electronics firms began to develop
tape recorders and other consumer recording devices that employ
digital audio recording technology. Unlike traditional analog
recording technology, which results in perceptible differences
between the source material and the copy, digital recording
technology permits consumers to make copies of recorded music
that are identical to the original recording. Moreover, a
digital copy can itself be copied without any degradation of
sound quality, opening the door to so-called `serial copying'--
making multiple generations of copies, each identical to the
original source. The capability of digital audio recording
technology to produce perfect copies of recorded music made the
technology attractive to the consumer electronics industry,
which anticipated substantial consumer demand for tape
recorders and other recording devices equipped with digital
recording technology. However, the same capability was a source
of concern to the music industry, which feared that the
introduction of digital audio recording technology would lead
to a vast expansion of `home taping' of copyrighted sound
recordings and a corresponding loss of sales.\22\
\22\ Brief for the United States as Amicus Curiae, at 5, A&M
Records, Inc. v. Napster (9th Cir. Mar. 21, 2001), available
at http://www.loc.gov/corpright/docs/napsteramicus.html (Nos. 00-16401
& 00-16403).
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Two main benefits flow to the music industry from the AHRA. First,
manufacturers of ``digital audio recording devices'' are required to
incorporate into their products technology that prevents serial
copying.\23\ Second, manufacturers of ``digital audio recording
devices'' and ``digital audio recording media'' must pay predetermined
royalties into a general fund to be distributed to copyright
holders.\24\ The quid pro quo under the Act is that manufacturers and
consumers are granted statutory immunity from suits for copyright
infringement, and consumers are granted immunity for the
``noncommercial use'' of digital audio recording technology.\25\
---------------------------------------------------------------------------
\23\ 17 U.S.C. Sec. 1001(11), 1102.
\24\ 17 U.S.C. at Sec. Sec. 1003-07.
\25\ 17 U.S.C. Sec. 1008.
---------------------------------------------------------------------------
The AHRA does not create a statutory license, but it achieves a
parallel outcome. The interests of copyright holders are served through
a system of royalty payments, and the public interest is served by
giving consumers the greater access to delivery of protected work that
the new technology has enabled. Under the statutory scheme, there is
competition in the production of players and tapes by means of which
consumers can customize their music listening. Each copyholder is
assured of royalties from distribution of the music delivery service--
the sales of tape players and blank tapes. Copyholders cannot, however,
thwart the delivery process.
In addressing different new delivery services, Congress has adopted
varying solutions. In these cases, the marketplace did not provide a
complete answer, and Congress acted to establish a government sponsored
or facilitated licensing or royalty scheme, or to foster development of
the new delivery service in some other way.
In 1909, in recognizing for the first time the right of a copyright
owner to authorize mechanical productions of music, such as piano
rolls, Congress also acted to prevent creation of a threatened monopoly
by a piano roll firm that had entered into exclusive agreements with a
number of leading music companies.\26\ The 1909 statute provides that
if the copyright holder has allowed mechnical reporductions. Payment of
royalties is required. The statutory procedures required by thelicense
provision are fairly time-consuming and burdensome, so most mechanical
licenses are now negotiated privately and directly between the rights
holder and the licensees. While these agreements often do not
conformexactly to the statutory provisions, the statute generally
provides an outline for the negotiated license and the statutory rate
imposes an upper limit on fees that copyright holders are able to
charge.\27\
---------------------------------------------------------------------------
\26\ 17 U.S.C. Sec. 1 et seg., and as amended.
\27\ See A. KOHN AND B. KOHN, ON MUSIC LICENSING 656-68
(2nd ed. 1996).
---------------------------------------------------------------------------
There are many other examples of legislation designed to solve
licensing issues arising from a new form of delivery. For over a
decade, jukebox operators had a statutory license for the songs their
machines played. Earlier, jukebox operators had enjoyed immunity from
infringement claims, in part as a result of an early court ruling. The
1976 Copyright Act removed this immunity and replaced it with a
statutory license and minimum royalty per performance, both of which
were administered by the Copyright Office. Congress later amended the
statute to replace the statutory license/royalty scheme with a
requirement that the copyright holders and jukebox operators negotiate
a private license in good faith, under the oversight of the Copyright
Office.\28\
---------------------------------------------------------------------------
\28\ Shubha Ghosh, MP3 v. the Law: How the Internet Could (But
Won't) Become Your Personal Jukebox, Gigalaw.com (July 2000), at http:/
/www.gigalaw.con/articles/ghosh-2000-07-p3.htm1.
---------------------------------------------------------------------------
Also in 1976, Congress enacted a statutory license for cable
services that retransmit broadcast television signals. This legislation
was an effort to forge a compromise between copyright owners of
television programming and operators of cable companies. Beginning in
the 1950s, cable companies picked up transmission signals from
broadcasters and retransmitted them, initially to local homes and
later, with improved technology, to distant locations. This practice
undermined the exclusive agreements between broadcasters and copyright
holders, arguably to the detriment of the latter. In two cases,
nonetheless, the Supreme Court refused to find that the cable companies
were infringing upon the copyright holders' rights.\29\ Congress
responded with a compromise embodied in the 1976 Copyright Act's cable
license provision. Congress acknowledged the copyright owners'
interests in their broadcasts and determined that the cable companies
should pay royalties for their use.\30\ In addition, Congress
determined that transactions costs would be onerous if the cable
companies were required to negotiate separately with each rights
holder. Congress resolved both issues by means of a statutory license,
found in section 111 of the 1976 Copyright Act.\31\ As leading
authorities on copyright law have explained, one of Congress' initial
reasons for implementing the cable compulsory license was to foster the
growth of the thennascent cable industry,\32\ a purpose that has been
very effectively accomplished.
---------------------------------------------------------------------------
\29\ Fortnightly Corp. v. United Artists Television, Inc., 392 U.S.
390 (1968); Telepromtper Corp. v. CBS, 415 U.S. 394, 409 (1974).
\30\ H.R. Rep. No. 1476, 94th Cong., 2d Sess. 89,
reprinted in 1976 U.S.C.C.A.N. 5659, 5704.
\31\ 18 U.S.C. Sec. 2318 (1996).
\32\ See 2 M. B. NIMMER AND D. NIMMER, NIMMER ON COPYRIGHT
Sec. 8.18[A1, 8-197 (1994).
---------------------------------------------------------------------------
In 1988, Congress enacted the Satellite Home Viewer Act (``SVHA '')
to enable secondary transmissions by satellite carriers of primary
transmissions for private home viewing by owners of satellite dishes.
The SVHA created a statutory temporary license for this purpose.
Satellite carriers had began to market dishes to home users as the
cost of dish technology came down. Home users were able to receive
unauthorized signals directly from satellites, avoiding copyright fees.
Although the courts did not find that satellite carriers were
infringing copyright owners' rights--they were, instead, ``passive
carriers''--Congress responded by creating a system of statutory
licensing. This legislation follows the same rationale as the cable
compulsory license: it allows a new delivery technology to grow and
supports a new industry.\33\ The statutory license extended only to
home users who would not have access to programming if they could not
use the satellite dish to pick up a signal; serving the interests of
these otherwise unserved consumers was a major purpose of the
legislation.\34\
---------------------------------------------------------------------------
\33\ H.R. Rep. No. 887(1), 100th Cong., 2nd
Sess. 1988, 1988 U.S.C.C.A.N.5577).
\34\ See H.R. Rep. No. 887(1), 100th Cong.,
2nd Sess. 1988, 1988 U.S.C.C.A.N.5577.
---------------------------------------------------------------------------
The advent of webcasting services created a series of new copyright
issues. Prior to the passage of the Digital Performance Rights in
Sounds Recordings Act of 1995 (``DPRSRA '') there had been no
recognition in the U.S. copyright laws of an exclusive right of public
performance for owners of sound recording copyrights. ``While composers
of music are given the right to publicly perform their work, owners of
sound recording copyrights generally are not. Therefore, when a song is
played by a radio station--and, until now, when it was played on
Internet radio or via webcast--the composer of the song receives a
royalty payment from the radio station, while the owners of the actual
recording receive nothing.'' \35\ The DPRSRA created the first limited
public performance right in sound recordings.\36\ It also amended the
1976 Copyright Act to provide a statutory right to perform a sound
recording publicly by means of a digital audio transmission.\37\
---------------------------------------------------------------------------
\35\ David Wittenstein and M. Lorraine Ford, ``The Webcasting
Wars'' JOURNAL of INTERNET LAW (Feb. 1999), available at http://
www.gcwf.com/articles/journal/jil--feb99--2.html.
\36\ 17 U.S.C. Sec. 115 (1996).
\37\ Id. There are limitations on this right. The DPRSRA granted
the new license for subscription transmissions only, and exempted
regular radio broadcasts and other nonsubscription transmissions.
Wittenstein and Ford, supra n.35. It also excluded any `interactive
service,' that is, any service that enables a member of the public to
receive, on request, any particular sound recording of his or her
choice. Such a service must negotiate a voluntary license directly with
the rights holder, which is free to refuse a license.
---------------------------------------------------------------------------
All of these statutory schemes fostered the development of new
delivery services, all of which have since proved successful in the
marketplace. In the early days of many of them, however, there were
sharp disputes about whether the new services should be permitted, and
claims were made that copyright holders should be empowered to suppress
them. It should be remembered that in Sony, supra n.14, the Supreme
Court came within one vote of effectively outlawing video cassette
recorders, which in the end have increased the viewing of movies
substantially and have generated billions of dollars for the holders of
movie copyrights.
4. Congress then enacted the Digital Millennium Copyright Act of
1998, which, among other things, protects the American public's ability
to customize delivery of original work, while again protecting the
interests of rights holders
Three years ago, Congress recognized that the copyright laws needed
amendment if the full potential of the Internet was to be realized.
Congress enacted the Digital Millenium Copyright Act (``DMCA '') of
1998 in part to foster the public's ability to obtain protected content
over the Internet, when and wherever it wishes. To achieve this end,
Congress granted Internet Service Providers some protection from
liability for the unauthorized transmission of protected content by
means of their services. A Senate Committee summarized the purpose of
these provisions:
Copyright laws have struggled through the years to keep pace with
emerging technology from the struggle over music played on a
player piano roll in the 1900's to the introduction of the VCR
in the 1980's. With this constant evolution in technology, the
law must adapt in order to make digital networks safe places to
disseminate and exploit copyrighted materials. The legislation
implementing the treaties, Title I of this bill, provides this
protection and creates the legal platform for launching the
global digital online marketplace for copyrighted works. It
will also make available via the Internet the movies, music,
software, and literary works that are the fruit of American
creative genius. Title II clarifies the liability faced by
service providers to transmit potentially infringing material
over their networks. In short, Title II ensures that the
efficiency of the Internet will continue to improve and that
the variety and quality of services on the Internet will
expand.\38\
\38\ S. Rep. 105-190, 105th Cong., 2nd Sess.
1998 at 2. (The Digital Millennium Copyright Act of 1998) (footnotes
omitted).
---------------------------------------------------------------------------
In order to protect the ability to customize delivery of content--
to maximize its ``option value''--the DMCA ``provide[d] certainty for
copyright owners and Internet service providers with respect to
copyright infringement on-line.'' \39\
---------------------------------------------------------------------------
\39\ Id.
---------------------------------------------------------------------------
The DMCA contains four distinct safe harbors, which under certain
conditions protect Internet Service Providers, including services such
as Napster, from liability for copyright infringement.\40\ The
centerpiece of three of the safe harbors is a notice and takedown
scheme that provides for the Internet Service Provider to block access
to or distribution of infringing content upon receiving notice from a
copyright holder that access and distribution are unauthorized. Unless
the Internet Service Provider has independent knowledge of infringing
content on its system (as defined by the statute), it is entitled to
rely upon the notice provisions.
---------------------------------------------------------------------------
\40\ Title 11, Sec. 512.
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With limited exceptions, the DMCA places the duty to police
infringement upon the copyright holder. This policy is essential to
prevent imposition of private restraints on content by Internet Service
Providers, the entities generally least equipped to decide which
content should be permitted to flow through the Internet. Placing the
responsibility on the copyright holder is also justified because the
copyright holder often may not object to the sharing of its copyrighted
content online, and indeed may benefit from the wide and inexpensive
dissemination of its content to the public over the Internet.
In the peer-to-peer environment, the Internet Service Provider,
such as Napster, does not maintain a copy of any content, but only
provides the means for sharing the content directly among its users.
Napster itself does not upload or download content, but rather any
sharing of files occurs directly, peer-to-peer, at the user level. The
peer-to-peer service provider does not even see the content being
shared among its users. The technology provides the Internet Service
Provider with only a transitory, real-time, catalogue of file names,
written by its users, that can be accessed by anyone logged on to the
service at that moment. Napster's real-time catalogue is maintained
automatically, without human intervention, and changes from minute-to-
minute depending on who is logged on and what files these users have
labeled for sharing.
The DMCA expands the public performance right in sound recordings
to include digital audio transmissions in webcast services that
resemble traditional ``terrestrial'' radio broadcasts. It also grants a
statutory license for the use of sound recordings in connection with
Internet services under certain circumstances. As with the DPRSRA, one
of the criteria for receiving a statutory license under the DMCA is
that the webcasting service be ``noninteractive.''
5. In enacting each of these statutes described, Congress addressed
pricing problems unsolved by the marketplace, including among other
problems transactions costs issues and the need to encourage nascent
technologies, while at the same time furthering the underlying goals of
the copyright laws.
One of the foremost reasons Congress has amended copyright
legislation in the ways just described has been to eliminate, or at
least diminish, the transactions costs associated with the introduction
of new services. Through Napster's technology, for example, millions of
consumers now can have access to a service providing a virtually
limitless number and variety of songs. But the rights holders number in
the thousands, if not the tens of thousands, for they include not only
the record companies, which hold the rights to most of the sound
recordings, but also the music publishers, which hold the rights to use
the underlying words and music. While the majors all have affiliated
publishing houses that own substantial catalogues of songs, ownership
of publishing rights is substantially less concentrated than ownership
of the rights to sound recordings. Individual licensing each time a
song is accessed would necessitate a preposterous number of individual
transactions. This is exactly the type of problem that statutory
licensing can help solve.
Congress has also adopted legislation where necessary to ensure
that a newly developing industry will have an opportunity to flourish.
Napster and other peer-to-peer technologies are in their infancy, and
their full potential for music delivery is not yet known. They
certainly hold substantial promise. Absent Congressional intervention,
however, the problems currently plaguing development of online music
delivery may never be fully resolved. In that event, the growth of
digital music delivery services will be stunted if not smothered
altogether, and the enormous popular demand for these services will be
frustrated. Congressional action is needed to enable this new
technology to realize its potential.
Finally, the copyright laws are ultimately intended to serve the
interests of the public in the dissemination of original work. All of
the statutes described here were intended to foster that goal. In each
case, the statutory scheme provided for more distribution rather than
less, while preserving the interests of the rights holders.
The list of services for which licenses and royalty payments are
regulated or facilitated by the government is long. The manufacturer
and the distributor of a phonograph record pay a statutory rate that is
set not by the marketplace but by the Licensing Division of the
Copyright Office. This office also issues licenses for the secondary
transmission of cable signals, for secondary transmissions by satellite
carriers of network and superstation signals for home viewing, and for
the distribution of digital audio recording devices and media.\41\ A
similar scheme could solve some of the problems presented today. It
would address transactions costs problems and pricing uncertainties. It
would encourage further development of the new services, while also
protecting the interests of copyright holders.
---------------------------------------------------------------------------
\41\ United States Copyright Office: A Brief History and Overview,
available at www.loc.gov/copyright/docs/circla.html4.
---------------------------------------------------------------------------
Technology like Napster's presents a unique opportunity for
consumers to participate in what is, essentially, a vast music library
containing an incredible variety and number of songs. Peer-to-peer
technology puts consumers in charge, since the service's musical
content is determined by the tastes of its constituents--there is no
filter blocking works that are less ``popular'' or less ``commercial.''
A service like Napster's, moreover, presents a platform from which
artists who are not affiliated with a major label may become
successful. Contrast this model with the controlled and limited digital
distribution services that the majors have proposed, and it is clear
that the public will be the loser if use of technology like Napster's
is restricted.
6. While protection against piracy is more difficult in the online
world, online technology also threatens consumers' ability to enjoy
traditional `fair use `` rights and privileges.
Much has been made of the difficulty rights holders face in
preventing piracy of protected works in the digital world, where
copying is easy and cheap, and produces copies of the same quality as
the original. Massive efforts are now underway to develop new
protections for copyrighted work, both through software and hardware
devices.
The online universe differs in important ways from the old one for
consumers as well. In the ``old media'' universe, purchasers of
copyrighted works were able to share, use, and copy for certain
personal purposes some or all of the works they had purchased. In a
recent examination of the impact of digital technology on the present
copyright regime, a distinguished panel of experts concluded:
Fair use and other exceptions to copyright law derive from the
fundamental purpose of copyright law and the concomitant
balancing of competing interests among stakeholder groups.
Although the evolving information infrastructure changes the
processes by which fair use and other exceptions to copyright
are achieved, it does not challenge the underlying public
policy motivations. Thus, fair use and other exceptions to
copyright law should continue to play a role in the digital
environment.\42\
\42\ Committee on Intellectual Property Rights and the Emerging
Information Infrastructure, THE DIGITAL DILEMMA: INTELLECTUAL PROPERTY
IN THE INFORMATION AGE 215 (2000).
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In the online universe, it may become possible for providers of
copyrighted material to track the delivery of every copy, and possibly
to block the types of personal use of copyrighted materials that
consumers have always enjoyed. Unless statutory protections are put in
place, fair use rights and privileges may not survive in the digital
environment. As leading commentators have recognized, consumers' loss
of the traditional rights and privileges of fair use would be
significant.\43\ It would constitute a sharp diminution of the benefits
consumers receive when they purchase copyrighted work today.
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\43\ Jeffrey Garten, Intellectual Property: New Answers to New
Problems, Business Week Online, April 2, 2001.
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The copyright laws, as authorized by the Copyright Clause in the
Constitution,\44\ are intended to foster the creation and distribution
of original works. Copyright holders are to be compensated for licenses
because awarding compensation encourages them to create and disseminate
their work. It is this goal of promoting the enjoyment and distribution
of original work that has led to the various statutes described above,
as well as to exceptions to the copyright law, such as fair use.
Considered pursuit of a balanced copyright regime has served the nation
well, fostering continuing creativity over the centuries. The
underlying purpose of the nation's copyright regime should guide
analysis of the action needed to adapt the nation's copyright regime to
today's technology.
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\44\ U.S. Const., art. l Sec. 8, cl. 8.
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7. The current system of copyright protection needs to be adapted
to reflect the transformation of the music marketplace, in the same way
that Congress has adapted the laws in the past to reflect marketplace
changes effected by new technology.
Americans love music. Technology like Napster's offers music in a
new form, as a service the consumer can adapt to his needs and tastes.
Yet this technology may be suppressed. This is not what the copyright
laws were intended to do. Rather, they are designed to accomplish the
opposite result--to foster the wider creation and dissemination of
original work.
Moreover, technology is rapidly evolving. The music industry's
current strategy of trying use the courts to chase down each new
service is doomed to failure, although in the process substantial
moneys will be spent and the potential for wider delivery of music will
be largely unrealized. In the end, a new legal environment will have to
be devised.\45\ If it is done sooner rather than later, millions of
dollars in litigation expenses will be saved, copyright holders will
receive more compensation, and the public will benefit from access to
new music delivery services.
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\45\ See Hal Varian, Economic Scene: The Internet Carries Profound
Implications for Providers of Information, New York Times, July 27,
2000.
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The issue for Congress is how to ensure that Internet technology is
fully harnessed in the public interest, while the interests of
copyright holders are protected. Many times in the past Congress has
successfully addressed technological change, each time adapting and
amending the copyright laws to best achieve their underlying goals in
the changed circumstances that the new technology has created. It now
faces the challenge again.
8. Conclusion: statutory licensing is fair and needed to enable new
music services to meet public demand.
Public demand for new digital music delivery services is powerful
and growing daily. These services will be difficult to suppress
entirely, but without Congressional action they will be tightly
restricted. Millions, perhaps billions, of dollars will be spent in the
struggle over their future. Market forces will not resolve the problem,
just as they have not resolved problems arising from earlier
transformational technological developments in the delivery of
copyrighted material. The large music companies, with one exception,
have chosen to stand together against the new music services, knowing
that they can thereby maintain, at least for a time, their control over
the distribution of music products and the selection of new talent.
While the new services have to negotiate with each major independently,
the majors have worked together against the new services, filing a
joint lawsuit through their trade association, jointly working on new
security technology, and jointly presenting their viewpoint to the
public. Through their joint efforts, they have been in a position to
observe one another closely and retain confidence that most of them, at
least, will remain in the traditional alliance.
In addition, market problems obstruct the continued development of
the new music services as they transition to a fee-based structure.
High transactions costs associated with individual licensing of each
service subscriber and each sharing of a song, as well as pricing
uncertainties associated with a wholly new technology, will make
survival difficult for the new services in the absence of a clear and
known legal framework. Congressional assistance, along the lines of
prior legislation, is thus essential.
I recommend a licensing regime requiring that songs released for
public distribution be licensed to the new digital music services as
well. Consumers subscribing to these services would pay fees, from
which royalty payments would be remitted to rights holders. Such a
compromise mirrors multiple prior compromises, in legislation spanning
most of the twentieth century. The interests of copyright holders would
be fully protected. The interests of consumers would be protected. And
the outcome would be consistent with the primary goal of our copyright
regime since its inception--the greater production and wider enjoyment
of original works.
Statement of National Association of Recording Merchandisers
The topic of this hearing: ``Coming Soon to a Digital Device Near
You'' should have been old news by now. Music retailers and wholesalers
have been ready, willing and able to deliver secure online
entertainment since 1999. It should have come already, and if it had,
frustrated consumers would not have given Napster and other such peer-
to-peer music copying services the popularity they enjoy today.
The members of the National Association of Recording Merchandisers
(``NARM'') are retailers and distributors of sound recordings. We have
played a central role in building the modern music business by
partnering with record companies to advertise, merchandise and sell
their products, by promoting new artists, by helping fight sound
recording piracy, and most of all, by listening to consumers. Each of
our retail members strive to be responsive to consumers in terms of
price, service, selection, and many other areas that serve to draw
customers and distinguish one retailer from another. Retailers bring
these competitive urges to the Internet where new competitive elements
are introduced, such as ease of site navigation and responsiveness to
consumer privacy.
Our members are responsible for the vast majority of all sales of
pre-recorded music, and thus are well positioned to provide lawful
access to music by downloading or streaming. Over 80% of our retail
members have websites, and they are eager to be a part of digital
distribution. The question this hearing has been called to ask is
important: why isn't it happening?
The short answer is because record companies, in their zeal to stop
Napster-type file sharing, have taken the position that they can trust
no one except other copyright owners. They have, therefore, ignored the
opportunity which sits right in front of them.
The greatest Napster-related problem retailers have is not the free
music on Napster. Retailers have a long history of competing
successfully with free goods. We compete with (but welcome) free music
over the radio, with libraries, used CDs, and personal-use copying. We
recognize that these secondary channels have their place in society, as
not everyone is willing or able to pay full price for a new CD. Our
national interest in the widest possible dissemination of creative
works is the only basis for Congress to have conferred copyright
protection in the first place.
Retailers also compete with the free music coming from the record
companies themselves: their record clubs routinely offer ``12 CDs for a
penny'' promotions. With 8 million members per club, that's over 160
million albums--over 1.6 billion song files given away just to gain
market share.
So if we are that good at competing with free music why are we
here? We are here because the careful balance copyright law struck as
part of the public bargain to encourage creation and dissemination of
these works has been upset, and it must be restored as soon as
possible.
The Copyright Monopoly
This balance been upset in several ways, all of which depend on the
unique characteristics of the copyright monopolies enjoyed by the major
record companies. Copyright law secures to authors or artists, for
limited times, certain exclusive rights. For purposes of this hearing,
the most important exclusive rights are the right of reproduction,
distribution and public performance. When exercised by individual
recording artists, each of these rights will encourage broad
reproduction, distribution and public performance of their works
because such are the avenues by which artists can be compensated, and
thereby encouraged to continue their creative endeavors. Because each
author depends heavily upon the willingness of others to reproduce and
distribute their works, each author has an incentive to offer
reasonable terms. For example, music retailers would simply refuse to
carry the works of an individual recording artist if that artist
demanded an unreasonable price, or imposed unreasonable terms and
conditions on how the sound recording could be merchandised or sold.
However, when artists assign these rights to corporations that have
amassed multi-billion dollar collections of these rights, so that just
5 corporations control 80% percent of all of the sound recordings in
the world, the ability of retailers to resist unreasonable terms is
greatly diminished. No retailer can refuse to carry Destiny's Child, Yo
Yo Ma or Ricky Martin for long--even if Sony Music embeds them with
advertising and links to its own online store.
Until recently, record companies could not control the distribution
of copies of their sound recordings once title passed to another.
Retailers and consumers were free to sell, lend or even give away
lawfully made copies. Today, copyright owners have the power to make a
sound recording ``time out'' after a certain number of plays or after a
certain amount or time, the power to prevent a sound recording from
playing on one device if it was first played on another, the power to
make inoperable a sound recording received by gift, unless the person
receiving it pays for it again. In short, thanks to digital technology,
copyright owners today enjoy such a high level of control over their
works that they hardly need copyright law at all.
NARM contends, however, that copyright law never permitted such a
high level of control because it was against the national interest to
confer it. Doctrines of ``fair use'' and ``first sale,'' which have
been codified into law should not be done away with unilaterally
through technology. Rather, they should be viewed as the embodiment of
important legal principles intended to protect the public welfare and
further the national interest.
The following are the matters we consider to be of greatest
concern:
Access
Every retailer need not stock every sound recording, but because
the five major record companies account for over 85% of all sound
recordings, every retailer must at least offer some sound recordings
from every major record company or go out of business. In the past,
record companies needed access to virtually every retailer, since 90%
of all sound recordings are sold through retailers. The digital future
will turn bleak, however, if record companies can control who will get
to compete in digital delivery, and reserve this market for themselves.
Thus far, record companies have shown the most interest in cross-
licensing digital rights to each other, or to companies they control or
in which they have invested. They have withheld rights from retailers
who are perfectly capable of offering secure, compensated digital
downloads, but who they no longer see as partners, but as competitors.
We estimate that over 99% of the repertoire owned by copyright holders
today remains off limits to legitimate retailers who are trying to
compete with peer-to-peer file sharing.
Consumer Privacy
Today anyone can walk into a record store, pay with cash, and not
have to reveal their identity to the store. If a retailer is too nosy,
a consumer can simply take their business elsewhere. Online, because a
credit card and other personal information are required, most retailers
have created privacy policies which let consumers know, in advance,
what happens to the information the store collects. Of concern to us is
that, thanks to digital technology, record companies are routinely
engineering ways to learn the identity of the consumer, even without
the knowledge or consent of the retailer who delivers the download. The
data can be sold or used by the record company to market directly to
the retailer's own customer. The retailer's own privacy policy will be
meaningless. The consumer will wonder why a particular company with
which they do no business seems to know so much about their music
tastes.
As Congress debates whether to impose minimum consumer privacy
regulations upon online merchants, one thing should be non-negotiable:
No online merchant should be forced to give up its customers to its
suppliers. There is no question that secure digital distribution can
prevent piracy without destroying privacy. There is absolutely no
reason to allow copyright owners to leverage their copyrights into data
mining.
Antitrust Concerns: Vertical Restraints
Never before have we seen the kinds of vertical restraints on music
retailers that are today being thrust upon them by copyright owners.
Retailers are being asked to sign license agreements that would
effectively extend the copyright monopoly to every aspect of the retail
channel. One popular approach, referred to as ``agent retailing,''
allows the retailer to offer the record company's music for consumer
download, but the record company--not the retailer--sets the price,
determines the warranty, dictates the replacement policy for defective
downloads, selects which sound recordings will be offered, specifies
how the download will be marketed and advertised, and even determines
what it will look like on the retailer's web page. Such models raise
serious antitrust concern because the retail level of distribution is
the only place where true competition for copyrighted materials takes
place.
Antitrust Concerns: Horizontal Restraints
After efforts to operate retail stores offering their own products
exclusively failed, the record companies learned what retailers have
known all along: Consumers do not go shopping by record label, but by
artist and genre. The music business is not like selling batteries. You
can't sell Ricky Nelson to someone who wants Ricky Martin.
Since they could not compete with retailers individually, record
companies are increasingly operating in concert, setting up joint
ventures among themselves and seeking cross-licenses with each other--
to the exclusion of competitors. The likely framework for such ventures
can be predicted by taking a look at record club licenses. The two
existing record clubs are owned and operated by the major record
companies, who crosslicense to each other the right to make each
other's records. The licenses are on extremely favorable terms, and
penalize artists by treating a large percentage of the licensed copies
as ``promotional'' copies. The $2.50 licensed copy looks and sounds
just like the $12.50 copy sold to the retailer because it is
manufactured in the same factory using the same masters. The only
significant difference is that by selling a ``license'' to reproduce,
record companies hope to avoid their obligation under the Robinson-
Patman Act to not discriminate in their ``sales'' of like products to
similarly situated retailers.
Today, in the online world, a similar web of interrelationships
among the major record companies is being spun which guarantees that no
retailer can do business online without competing with an entity
jointly owned and controlled by the major record companies. Consider
the following: Bertelsman owns CDNow, which has strategic relationships
with Sony and Time Warner. Sony and Time Warner are in negotiations to
cross license films for digital distribution. Sony has also announced a
joint venture with UMVD for a music subscription service called Duet.
AOL Time Warner, EMI, BMG all own a piece of MusicNet. Bertelsman and
UMVD have a joint venture site called ``Get Music''. All five major
music companies became major shareholders in ArtistDirect. The major
home video companies are working together on video-on-demand projects
like MovieFly.
Copyright Law: The Right to Advertise
It has long been understood that retailers of copyrighted goods
enjoy the right to reasonably copy portions of the works, display them,
and publicly perform them, where the purpose is to promote the sale of
the works in question. Notwithstanding the copyright owner's exclusive
right to publicly display a work, there is no question that booksellers
can publicly display the books and magazines offered for sale. Just as
the bookseller may allow patrons to leaf through and read books in the
store without purchasing them, so too may a music retailer allow
patrons to listen to the music in the store. Just as the bookseller may
post a sample of a book's text on the Internet, so, too, may a retailer
post a sound clip.
Today, all of that is changing. Our members are reporting efforts
by copyright owners to prohibit these forms of advertising without a
license. The only effective way for retailers to advertise even pre-
recorded sound recordings over the Internet, for physical distribution,
is to post an image of the artwork and offer a 30-second or so sound
clip as a sample. BMI has taken the novel position that a 30-second
sound clip, considered the industry norm within the bounds of fair and
sensible use, is illegal absent authorization from the copyright owner.
Some record companies are demanding that retailers get their permission
even to post the graphics of the CD itself. There cannot possibly be
any diminution in value to the copyright owner when retailers promote
the lawful sales of the copyright owner's own works. The sole purpose
for this seemingly irrational behavior appears to be to gain greater
control over distribution. Indeed, at least one record company has
offered to license these uses at virtually no cost, yet requiring a
written acknowledgment that a license is required, and reserving for
itself the right to withhold authorization to show graphics or offer
30-second samples of any songs it chooses. Absolute and total control
over distribution appears to be the sole objective.
Copyright Law: Preservation of First Sale Doctrine
Such total control over distribution is something Congress has
historically insisted must never fall into the hands of copyright
owners, because ``the policy favoring a copyright monopoly for authors
gives way to the policy opposing restraints of trade and restraints on
alienation.'' M. Nimmer, D. Nimmer, Nimmer on Copyright, Sec. 8.12[A].
Congress has provided that notwithstanding the distribution right, the
owner of a lawfully made copy or phonorecord is entitled, without the
consent of the copyright owner, to sell or otherwise transfer title or
possession of that copy. 17 U.S.C. Sec. 109(a).
Initially, copyright owners resisted the notion that Section 109(a)
applied to digital works. They eventually acknowledged that the first
sale doctrine continues to apply in the digital world,\1\ but now add
the caveat ``in the absence of licensing or technological restrictions
to the contrary.'' \2\ In other words, this federal right will exist in
the digital world only as long as they permit it. NARM believes that it
is preposterous to contend that a federal right as important as the
first sale doctrine, established first by the courts and later codified
by Congress, can disappear at the whim of the copyright owner either by
use of licensing restrictions or a line or two of computer code. Yet,
that is exactly what they intend to do: nullify a federal statutory
right. Sony has decreed that anyone who purchases The Writing's On the
Wall, a CD by Destiny's Child, installs it in their computer's CD-ROM
drive and fails to return it to Sony within seven days after buying it
from a record store, has lost their federal right to sell it or
otherwise transfer title.\3\
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\1\ Report to Congress: Study Examining 17 U. S. C. Sections 109
and 117 Pursuant to Section 104 of the Digital Millennium Copyright
Act, U.S. Department of Commerce, National Telecommunications and
Information Administration, March 2001, Part IV.
\2\ Id., n. 101.
\3\ The Sony Music Entertainment License Agreement is contained in
the readme.txt file that accompanies the music files on the same CD. An
excerpt showing the pertinent language is attached to this Statement.
Another company's license agreement used for a download is also
attached.
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Copyright Law: Selling What You Don't Own
At bottom, technology is allowing copyright owners to enforce
``licenses'' of rights they do not own, and to use rights they do own
as leverage to require members of the public to give up their statutory
rights.
We have already heard one recording industry speaker talk about a
future in which a consumer can select from a number of choices, and
``maybe just choose to buy a license to listen to the music.'' On its
face, such a statement may sound like consumers would be given more
choices, but in reality, choice is being taken away. Copyright owners
have never had the exclusive right to listen to music, and therefore
have no right to sell licenses to listen. For example:
The reproduction right: A copyright owner may license the right of
reproduction, but it is an abuse of that right to demand
payment in the form of consumer data, to license it
discriminatorily so as to insure that some retailers fail while
others succeed, or to cross-license it among the other
copyright monopoly holders to the exclusion of retail
competitors.
The distribution right: A copyright owner may license another person to
distribute copies and phonorecords of its works, but it is an
abuse of that right to require that those who obtain lawful
ownership in the chain of distribution give up their statutory
right under 17 U.S.C. ' 109(a) to sell or otherwise transfer
title or possession without the copyright owner's consent, or
to license the distribution subject to technological
restrictions that prevent the owners from exercising those
rights.
The right of public performance: For a copyright owner to sell someone
permission to listen to the copyright owner's music is like
selling a license to read a book separate from the book itself.
Even when a copyright owner licenses to someone the exclusive
right of public performance, the copyright owner has no right
to dictate who can watch the performance. There is no exclusive
right of private performance of a work, much less an exclusive
right to listen to a private performance.
Congress should stand firmly in favor of confining exploitation of
copyrights strictly to the those rights conferred by Congress, and
subject to the limitations imposed by Congress. It must not allow
copyright owners to use technology and contracts of adhesion to limit
consumer and retailer rights, nor to simply take control where Congress
has clearly denied it.
Retailers do not need the permission of record companies to sell
pre-recorded sound recordings. They have the right to set their own
prices, choose their customers, play the sound recordings in the store
and stream short samples online, all without the authorization of the
copyrights owners. Those rules should apply equally in the online
world, but instead, copyright owners are licensing what they don't own,
and enforcing those licenses by use of technological restrictions. If
they are unwilling to abide by the Copyright Act in letter and spirit,
it may be up to Congress or the courts to tell them, like the Fourth
Circuit did in Lasercomb America, Inc. v. Reynolds, 911 F.2d 970
(4th Cir. 1990), that they will lose their power to enforce
their copyrights until they stop leveraging their copyright power into
areas beyond the limits set by Congress.
Conclusion
Today, we are asking that the first sale doctrine be respected for
digital downloads just as it is for pre-recorded copies; that all
retailers be allowed equal access to retail each record company's music
library; that each retailer be allowed to compete on price, service,
and privacy; that no retailer be required to get the copyright owner's
permission to advertise the products they sell; and that no consumer be
required to become part of the copyright owner's data mine as part of
the price for listening to music. If our demands to the copyright
community for freedom to compete, for freedom to advertise what we
sell, and for freedom to protect our customers' privacy are not met,
tomorrow we may be asking Congress for something more: We may be asking
for antitrust investigations of these unfair trade practices, and for
fair but compulsory licenses to make secure downloads and digital
transmissions.
NARM's retail members are confident that, given half a chance, they
could offer the public a superior product and service to that offered
by free peer-to-peer file copying. Although some record companies are
beginning to respond to the concerns of retailers, the record
companies, as a whole, are giving them no chance at all.
NARM is the principal trade association for retailers and
distributors of sound recordings. Its approximately 1,000 members are
engaged in all aspects of music distribution to the consumer. For
further information, please contact Pamela Horovitz, NARM's President,
at (856) 596-2221.
sony music entertainment inc. license agreement
This legal agreement between you as end user and Sony Music
Entertainment Inc. concerns this product, hereafter referred to as
Software. By using and installing this disc, you agree to be bound by
the terms of this agreement. If you do not agree with this licensing
agreement, please return the CD in its original packaging with register
receipt within 7 days from time of purchase to: Sony Music
Entertainment Inc., Radio City Station, P.O. Box 844, New York, NY
10101-0844, for a full refund.
1. LICENSE; COPYRIGHT; RESTRICTIONS.
You may install and use your copy of the Software on a single
computer. You may not network the Software or otherwise use or install
it on more than one computer or terminal at the same time. The Software
(including any images, text, photographs, animations, video, audio, and
music) is owned by Sony Music Entertainment Inc. or its suppliers and
is protected by United States copyright laws and its international
treaty provisions. You may not rent, distribute, transfer or lease the
Software. You may not reverse engineer, disassemble, decompile or
translate the Software.
---------------------------------------------------------------------------
SOURCE: Destiny's Child CD, The Writing's On The Wall, readme.txt
file
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SCHEDULE A--Business Rules
In the absence of contrary Business Rules provided with a Content
offer, the following default Business Rules shall apply to all UMG
Content:
1. You may only download Content to a portable device that is (i)
compatible with the InterTrust Technologies Corp. digital rights
management system, (ii) compliant with the requirements of the Secure
Digital Music Initiative (SDMI), and (iii) compliant with UMG's content
security requirements.
2. You may not copy or ``burn'' Content onto CDs, DVDs, flash
memory, or other storage devices (other than the hard drive of the
computer upon which you installed the Software). In the future, UMG may
permit you to make these types of copies of UMG Content to certain
SDMI-compliant storage media.
3. You may not transfer your rights to use any particular copy of
Content to another. For example, you may not transfer your rights to
another at death, in divorce, or in bankruptcy. This is not an
exclusive listing; it is only a set of examples. Notwithstanding this
Business Rule, you may email a Content Reference to another consumer to
enable that consumer to purchase his or her own rights in Content.
4. You may not transfer or copy Content (with the rights you have
purchased) to another computer, even if both computers are owned by
you. You will be able to copy locked Content to another computer,
whether that computer is owned by you or not, but the rights you have
purchased to use that Content will not travel with the copy. In the
future, UMG may permit you to make these types of transfer of UMG
Content along with the rights you have purchased.
5. You may not print the photographic images, lyrics, and other
non-music elements that are distributed with Content.
6. When you purchase the right to unlimited use of Content, the use
rights associated with that Content terminate upon your death.
7. There is currently no free UMG Content. All rights must be
purchased. The only exception to this rule is that 30 second audio
clips may sometimes be made available by UMG without charge.
8. UMG may revoke your rights to use Content pursuant to the terms
of the foregoing License Agreement; in the case of a violation by you
of the License Agreement; in cases of suspected fraud by you or
another; in cases of a suspected security breach by you or another; in
order to forestall or remedy any legal exposure to UMG or its
affiliated companies; and in other situations in which UMG in its
judgment believes it advisable to do so in order to protect Content,
the Software, and/or UMG and its affiliated companies.
Statement of NWEZ.NET, Gloria Hylton, President
Thank you for the opportunity to address this committee. I
appreciate the chance to speak on behalf of the small independent
webcaster. I feel our interests have not been represented in prior
hearings on these issues of vital importance to our survival. I am not
a lawyer and apologize in advance for any lapse in protocol in the
following document and ask your indulgence and understanding as I try
to enumerate our concerns and arguments.
Here is an outline of the areas to be addressed in the body of this
statement:
I. An overall concern with the DMCA
The inherent problems of allowing the RIAA and vested interests to
frame and dominate copyright regulations on the Internet including
discussion regarding:
(1) `Individually' negotiated licenses; `Retroactive' royalty
fees; Qualifications for a compulsory license; The illusion of `non-
interactivity'; Indirectly subsidizing engrained industries;
Legislating technological discrimination; Determining appropriate sound
recording copyright performance royalties (hereinafter referred to as
sr royalties); The collection and distribution of sr royalties; DiMA
and the DMCA;
II. A brief historical overview of traditional business practices
within the music industry and how this relates to the current state of
affairs with copyright licensing on the Internet Background on NWEZ.NET
and our mission/vision
Summary
I. In 1998, with the passage of the DMCA, laws were enacted with
serious ramifications for the emergent online entertainment
marketplace. While I have no doubt Congress intended these laws ``. .
.to promote the progress of science and useful arts. . .'' and that
there are provisions within the act that do so, I argue that many
provisions within this act have accomplished the exact opposite. I
further argue that the provisions dealing with sound recording
performance rights lobbied for by the RIAA were drafted so that the
major labels could position themselves in a manner that would insure
their continued control of the music industry and thwart companies
posing any threat to that status. I believe the RIAA arguments offered
to members of Congress in the DMCA hearings were intentionally
misleading in much the same way the arguments for the now overturned
`work for hire' amendment were misleading. I believe the ensuing
actions taken by the labels in the digital arena have spoken much
louder than their 1998 rhetoric.
II. Areas in the DMCA or resultant of the DMCA that we believe
should be addressed in regards to webcasting:
(1) First and foremost, if webcasters are forced to pay sr
royalties for the first time in the history of U.S. broadcasting, all
webcasters should be assessed these rates on a fair and equitable
basis. The RIAA should not be granted an anti trust exemption to
negotiate `individual' webcasting licenses. While it is true that a
blanket license to webcast is needed, the RIAA should not be able to
grant these licenses on an `individual' basis. Standard blanket license
guidelines with provisions for varying business models should be
established and enacted. The current performance rights organizations
ASCAP, BMI and SESAC have such licenses in place for songwriter/
publisher copyrights. These organizations have guidelines that are out
in the open for anyone to examine, offering some insurance against
preferential and biased licensing. On the other hand, the RIAA has been
negotiating webcasting licenses in private, without public disclosure
of the terms being reached. This arrangement has allowed a great deal
of power to be wielded by the labels in the nascent webcasting field.
Webcasters looking to secure investment capitol are desperate for a
figure to place in their `RIAA Royalty' column. This puts them at a
distinct disadvantage when negotiating deals. Most disturbing under the
current arrangement, the labels can cut more favorable deals with
companies they have equity stakes in (essentially making preferential
deals with themselves) to the detriment of an open, fair and
competitive marketplace. They can also negotiate to obtain equity
stakes and/or promotional considerations from webcasters in exchange
for licensing. The RIAA, for obtaining such advantages can in turn
offer said webcasters lower up front royalty rates, excuse payment of
upcoming `retroactive' royalty fees, and/or offer lenient application
of the rules governing compulsory licensing. The labels can refuse to
grant individual' licenses to those companies whose business models
they dislike, creating a scenario whereby webcasters choosing not to
`play ball' with the RIAA will find themselves competing against
webcasters who have obtained unfair advantage in exchange for
concessions they've yielded to the labels--concessions which may never
be openly disclosed. You can see the inherent latitude for corruption
within this arrangement. It is true that once the CARP panel sets
general sr royalty rates (which coincidentally keeps getting pushed
back) that all webcasters not making prior `individual' deals with the
RIAA will be assessed these rates equally; however, we have no
guarantee that there will be latitude within these rates for varying
business models. I approached the copyright office with a desire to
participate in the CARP proceedings and represent the interests of
small, independent webcasters. I was informed that registering to
participate in the CARP proceedings would make me financially
responsible for paying the arbitrators a `yet to be determined and they
could give me no idea of how much it would be' fee. Not having
unlimited financial resources at my disposal I decided not to
participate. I find it disheartening that in a government founded to
represent `the people' the only people whose voices will be represented
at the upcoming CARP proceeding will be those who can afford an
undetermined entrance fee to be `in the room'. This naturally doesn't
instill confidence in the fairness of the upcoming proceeding.
Especially given such market deals' being offered for consideration by
the RIAA as the one negotiated with the now defunct Soundbreak.com.
Lisa Crane, the CEO who negotiated Soundbreak's licensing agreement was
let go following the deal. She subsequently became a paid consultant,
with the RIAA on her roster of clients. This is disconcerting to
webcasters in the same way it was disconcerting to NARAS when Mitch
Glazier, who authored the `work for hire' amendment was later hired by
the RIAA. The inference is that the `market rate deals' being presented
to the CARP panel are dubious at best. Nonetheless, once the CARP sets
the standard rates for webcasters not negotiating individual' deals,
these webcasters will be responsible for these fees retroactively back
to the passage of the DMCA in 1998. This is particularly devastating to
a nascent industry struggling to find profitability. I believe it is a
deliberate attempt by the labels to control the entire webcasting
industry. Perhaps this is what prompted Mark Cuban, founder of
Broadcast.com, to sell his company and state on kurthanson.com,
``What's the best business in the webcasting industry? Prepackaged
bankruptcies to avoid the RIAA fees!'' Since `individual' webcasting
deals are already in place, in lieu of adopting this suggestion I offer
the following redress to this grossly prejudicial and industry
crippling situation:
SR Royalties should be applied from the time they're determined,
not assessed retroactively. These royalties should begin when they are
determined and be applied equally to all webcasting companies.
Otherwise, those webcasters making `individual' deals may be excused
from the `retroactive' charges, while those not making deals are forced
to pay them. This effectively puts webcasters who do not deal with the
major labels or whose business models are unappealing to the major
labels out of business or at a distinct disadvantage. This goes against
the very premise of our `free market' economy and gives the major
labels mandated monopoly control over the entire webcasting industry.
Arbitron statistics coming out of the NAB Convention show that
households with broadband split their entertainment time equally
between television, traditional radio, and the Internet. They also show
that these households are equally likely to tune into a webcast-only
station as a traditional radio station being rebroadcast on the
Internet. They derive the conclusion that Internet radio will soon be
able to sell advertising in the same way traditional radio does. Many
players in this marketplace with oversized egos, budgets and spending
patterns have come and gone. Those of us that have survived have done
so through hard work and frugal spending. Do not punish us when the
promise of profitability is only now on the horizon. It would be
unfortunate if those building this business were forced out of business
and webcasting were only viable for the huge corporate interests
currently controlling the traditional music industry (and their
`partners').
The above commentary doesn't address the inherent problems of
qualifying for a compulsory license to begin with. The variety of hoops
a webcaster is required to jump through to be compliant for a
compulsory license is arbitrary and unreasonable. Anyone conversant
with webcasting realizes these regulations are onerous and a webcaster
will most likely be unable to abide by these regulations in some way.
This once again gives the RIAA negotiating power in the webcasting
realm, as they are unlikely to monitor those webcasters making deals
with them as closely as they will others. The threat of selective
enforcement of these regulations is real. An argument could even be
made that these regulations were intentionally drafted in a manner that
makes compliance next to impossible. The most serious of these
restrictions involves the limitation on the number of ephemeral copies'
a webcaster can make to conduct webcasting operations. These
restrictions are in stark contrast to land-based broadcasters, who are
allowed to make as many ephemeral (digital!) copies as necessary to
conduct normal broadcasting operations. I have a difficult time
understanding the reasoning behind limiting a webcasters ability to do
the same. These are copies strictly used by the webcaster themselves
and are arguably `fair use'. Webcasters compliant for compulsory
licenses are subject to many seemingly impossible regulations. For
example, compliant webcasters are prevented under the `sound recording
performance complement' from playing any four songs from a boxed set in
a three-hour period. Does this mean every webcaster is responsible for
knowing every combination of songs on every box set ever made and that
their show hosts are responsible for memorizing these song combinations
so they don't play them during any three-hour time span? Compliant
webcasters cannot announce song titles prior to playing them, although
their counterparts in traditional broadcasting regularly do so.
Compliant webcasters are required to give the song title/artist name/cd
title while the song is being played, although their counterparts in
traditional broadcasting are not. Compliant webcasters cannot even
engage in the time-honored tradition of taking `requests' from their
listeners. To do so would be considered `interactive'. Traditional
broadcasters are not expected to abide by the same rules of operations
as `compliant' webcasters. This not only favors the old technology for
streaming music over the new technology for streaming music, but also
completely ignores the true potential of the webcasting experience--
where fans can interact directly with show hosts and even artists. To
be compliant, a webcaster must essentially ignore those attributes of
interaction inherent to the Internet that would attract and hold an
audience and make his business successful. One could argue this is the
intent of compulsory regulations to begin with, especially given that
labels are gaining equity stakes in many webcasting companies which
they conveniently then write `individual' licensing agreements for.
(The fact that labels are able to obtain equity interest in webcasting
companies at all is disconcerting to a layman like myself and smacks of
conflict of interest--given the labels also license these entities and
have a vested interest in what content is disseminated through them).
The stranglehold definition of `interactive' being applied by the
RIAA to webcasting not only unfairly discriminates against new
technology but also completely disregards the reality of the digital
realm. At this point in time if you tune into a webcasting station like
NWEZ.NET you will find that your`stream' cuts out periodically due to
`buffering' due to `net congestion'. It is therefore highly unlikely
anyone would attempt to capture digital copies of current webcasts, no
matter how `interactive' or `non-interactive' they were. If they did
they would get some pretty awful copies. Copies made from your
traditional broadcasting stations would be much better quality and
easier to obtain. Having said that, however, I recognize that the
coming prevalence of broadband connections combined with the continual
advent of tivo-like consumer devices will eventually make it so any
Internet programming anywhere will face potential capture and copy.
This will be true for both interactive and non-interactive webcasts.
Non-interactive webcasts could easily be saved in their entireties and
later edited to get rid of unwanted material, essentially allowing the
consumer to make them `interactive'. Given this certainty it is my
belief that all blanket webcasting licenses should be considered to be
`interactive.' No matter what you want to believe, the reality is that
for all intents and purposes all broadcasts have the potential to be
stolen, even in the analog world. HBO has no way of knowing if they are
streaming a `performance' or a `copy' of a movie into a home. Whether
they stream a performance or a copy is totally dependent on how the
person receiving it behaves. If they hit record on their VCR then HBO
just streamed them a copy even though they intended to stream them a
performance. In much the same manner you can't legislate away drug use
or prostitution, a thief will always find a way to steal if that's what
they truly want to do.
It's interesting to note, however, that just like the videocassette
recorder brought about new revenue and actually benefited the industry
that feared and fought it, the Internet has actually increased consumer
demand and interest in music. In a related aside, Cd Baby, the largest
retailer of unsigned artist cds on the Internet, reports that 1 in 20
purchasers at Cd Baby buys a cd after hearing the band on Napster. This
information is gathered in the section of the order form asking why the
customer is buying the cd. This statistic surprised me because I would
have imagined most Napster users were only interested in known major
label acts. It seems to support the theory that many people use Napster
more as a listening' and `pre-screening' device.
If file sharing can be argued to potentially benefit recording
artists it is difficult to imagine webcasting, interactive or not,
hurting them. On the contrary, webcasting, like traditional
broadcasting, offers recording artists and copyright holders beneficial
promotional opportunities. Labels have traditionally paid to insure
their products are heard over the airwaves. Cyberwaves are the airwaves
of the future. We are all familiar with the previous payola' scandals
in the music industry. It can be argued that `payola' still exists in
the mainstream marketplace but has been officially removed by the
advent of the independent promoter' who is paid to solicit label
offerings to broadcasters and in turn pays broadcasters to secure
spins.
Why should webcasters now pay labels to offer them these same
promotional opportunities? I believe the labels recognized the Internet
as a way to continue to control what musical content is promoted, but
without paying a middleman. In fact, now the promotional channels will
have to pay them! At NWEZ.NET we frequently get grateful e-mails from
unsigned artists receiving `cyberplay'. I just received an e-mail from
a talented band based in London who sold a cd to a NWEZ.NET listener
directed to their website after hearing their song on our station. This
is the kind of activity I feel the RIAA fears. Artists currently have
the ability to record and manufacture professional sounding product.
The Internet offers them the opportunity to sell that product to a
global market. Distributors like Cd Baby can ship and warehouse
product. The missing link is promotion.
If the Internet offers promotional opportunities to all artists via
webcasting stations, without regard to their affiliation with a major
label, this threatens the long-term existence of intermediaries like
record labels. The ability of fans to directly contact recording
artists and/or buy their product without the necessity of that artist
going through the major label system is what I believe the industry is
trying to avoid. Already we're seeing artists begin to organize via the
Internet and reject traditional record label practices. The Rosenbergs
are a wonderful example of this. This unsigned power pop band received
notoriety for turning down the opportunity to go on farmclub (a major
label and Internet cooperative venture) and perform alongside the well-
known band The Counting Crows. They took exception to the 23 page, one-
sided binding `potential' record label deal given to them prior to the
appearance which gave the label many options to tie up the band if they
chose to do so (including laying claim to their website!) The
Rosenbergs shared this contract with fellow unsigned artists, warning
them about the potential consequences of appearing on the show.
Farmclub then changed their appearance stipulations as a result of the
following publicity, to the benefit of all future unsigned artists
appearing on the show. The Rosenbergs went on to sign a groundbreaking
new record deal with a small UK-based label, Discipline Global Mobile,
where they retain the rights to their sound recording copyrights and
enjoy a band/label arrangement that is a fair partnership. Another
example of an Internet success story is Emily Richards, who has made a
good name for herself via MP3.Com. Richards had a more extensive tour
last summer as an unsigned artist than No Doubt did on their first
major label tour. MP3.Com is a prime example of an Internet company
offering many advantages to artists previously excluded by the
mainstream music industry. The labels have aggressively pursued
lawsuits against MP3.Com and other innovative Internet music services.
By garnering equity stakes in webcasting companies and making it
prohibitive for companies not licensed by them to operate, the record
labels are insuring their long-term existence and continued dominance
in the music industry. Accordingly, copyright legislation that allows
the established industry giants to bully their way to dominance in the
new marketplace indirectly subsidizes those corporate interests and
perpetuates their essentially monopolistic powers to the detriment of
Internet entrepreneurs, recording artists, and the public at large.
Along similar lines, it is blatantly unfair to assess sr copyrights
to webcasters and not to traditional broadcasters. Why should the new
medium for streaming music pay these royalties when the established
medium for streaming music never has and is not slated to do so in the
future? Simply because the NAB is a more powerful lobbying organization
than the RIAA? This inequity illustrates the unfortunate influence huge
corporations and their `collective' lobbying groups possess in
affecting public policy. Sr royalties only apply to webcasters.
Webcasters are essentially penalized for enabling the `progress of the
arts through the new science of Internet technology', or, in effect,
embodying the very intent of copyright. This, to spite the fact
traditional broadcasters operate at a healthy profit and most
webcasters have yet to break even. This gives traditional broadcasters
yet another advantage over webcasters and allows them once again to
play by different rules, essentially legalizing technological
discrimination. I was happy to see the recent copyright office decision
requiring traditional broadcasters to pay sr royalties when
rebroadcasting their signals over the Internet. Naturally, if these
fees are to be assessed in the digital realm at all they should be
assessed to every webcaster, whether or not that webcaster also has a
land-based station.
Also along similar lines, sr royalty rates should be equitable to
the royalty rates for songwriting/publishing. Rumor has it the RIAA
will try to obtain 3-10 times the rate collected for songwriting/
publishing royalties for sr royalties. Why should the recording of a
song be worth more than the creation of that song in royalty fees?
Simply because the owners of the vast majority of sound recording
copyrights have a large lobbying organization? The argument that labels
invest a lot of money into recordings doesn't follow. Many new bands
are signed on the basis of cds they've already recorded. My friend
Bobby Gaylor was picked up by Atlantic after recording his own cd.
Atlantic did not rerecord the cd but went with the recording `as is'. I
guarantee you that unsigned artists aren't spending hundreds of
thousands of dollars on cd production and many are ending up with
product as radio ready as major label artists. I state this to
illustrate that recording a professional quality cd doesn't have to
cost hundreds of thousands of dollars.
Another point of contention is who will collect and distribute
these new digital royalties. I suggest the major labels should not be
allowed to be the sole organization doing so. I would go further and
suggest an independent accounting agency be put in charge of collection
and distribution of these royalties to insure fair and open
bookkeeping. Major label artists already complain of improper
accounting of their artist royalties and difficulty in attempting to
examine record label's books. It would therefore seem appropriate that
labels not even be allowed to enter this marketplace. They have
inherent conflicts of interest. I would also strongly suggest that the
legislated artist cut of the sr royalty be further defined to insure
artists receive direct payments in perpetuity. Otherwise, following a
staged public relations year by the RIAA where artists are paid
directly, artists may never see these monies due to the nature of
record label recoupable' clauses.
In another example of improper representation, DiMA, the
organization meant to represent webcasters at the congressional
committee hearing regarding the DMCA amendments, was ill prepared for
the hearing at which it spoke. The organization had hastily organized
only days prior to the event. While their intentions may have been
good, this gave them a distinct disadvantage when arguing these issues
with a wellresearched, well-established and extremely powerful lobbying
organization, the RIAA. DiMA represented only 7 Internet companies at
the time of the hearing, none of which were small independent
webcasters. DiMA represented only 2 large webcasters, one of them being
Broadcast.com, which had yet to have it's IPO. Seth Greenstein, the
lawyer speaking on behalf of DiMA at the hearing, explained that DiMA
could not afford the RIAA's threatened litigation should the DMCA
amendments not pass. Both webcasters in DiMA were looking to attract
investors and worried that potential problems with the RIAA might scare
them off. I submit that DiMA was therefore unable to adequately
represent the majority of webcasters at the time they spoke at the
hearing and ceded these amendments be added to the DMCA. I was also
told off the record (and therefore cannot confirm) by another party
involved with the proceedings that the DiMA members involved in the
hearing all secured certain allowances in exchange for not challenging
the DMCA amendments. It is interesting to note that an attorney
observing the negotiations taking place between the RIAA and DiMA (in
regards to the DMCA) commented in a CNET article: ``It's a victory for
the RIAA that the webcasters were willing to concede that the digital
performance right does apply to them. I think the law weighed a little
more heavily on the side of the webcasters, but the RIAA leveraged its
commercial position to gain the concession by the webcasters.''
III. The RIAA leveraged its commercial position to gain the
concession by the webcasters at the hearings dealing with the DMCA
amendments. It's to be expected. The RIAA continues to leverage their
position in the digital marketplace.
The major labels have always operated in a manner meant to control
and manipulate the music industry to their advantage and to the
detriment of the artists they supposedly represent and the public they
supposedly serve. Recently they were found guilty of price fixing cds
with their `minimum advertised pricing' policies with retailers,
gouging consumers out of millions of dollars. We have all seen the VH1
`Behind the Music' stories which chronicle the lives of recording
artists who have little money to spite selling millions of records. We
have read Courtney Love's rundown of major label math, which shows how
a recording artist selling over a million records ends up owing their
label money. Record label contracts are notoriously one-sided and
difficult to break. While the RIAA claims to be representing recording
artists, the majority of recording artists do not own their own sound
recording copyrights. The RIAA tried to further extend their grasp over
these particular copyrights with the `work for hire' amendment. This
amendment was deceptively described to Congress as a means of
protecting artist websites. The DMCA amendments were deceptively
described as a means to facilitate webcasting. The major label rhetoric
obviously cannot be trusted. The reasons they offer for the regulations
they request are often far removed from their true goals. Major labels
have historically dealt in unfair business practices such as `payola',
with ties to organized crime. I beseech you to treat their arguments
with the appropriate skepticism and remember that the RIAA's sole
purpose for existence is to manipulate public policy to the advantage
of the oligopoly that is the major label system.
Recently, the RIAA has broken new ground in invading the privacy of
our home computers to prosecute copyright offenders like the college
student from Oklahoma whose computer was seized for file sharing
violations. As a private citizen I request that you not lose sight of
the importance of privacy issues when the RIAA requests more copyright
controls. I also request that you consider the importance of fair use
to the public good. I further request that you not allow a grasping and
greedy industry to reign in the development of exciting technological
advances. There are many rights in the balance of these copyright
issues besides those of control.
IV. NWEZ.NET is a mom and pop webcasting station based in
California. We specialize in live shows that go out with both audio and
visual streams and include an interactive chatroom. We are proud to
offer programming outside the mainstream media box, giving
opportunities to unsigned and specialty artists excluded from most
traditional airwaves. All the show hosts at NWEZ.NET are allowed to
choose their own musical programming. If you'd like more information on
our station please visit us at http://nwez.net and click on the `About
NWEZ' link.
V. In conclusion, I call upon the sense of justice and fair play of
the honorable Senators of the Judiciary Committee and ask you to
provide a way for NWEZ.NET and stations like us to survive. Reexamine
and revise webcasting provisions lobbied for by the RIAA and provide
allowances for the reality of Internet webcasting. Do not allow current
unreasonable compulsory licensing restrictions or punitive
`retroactive' royalty payments to squash the promise of a more open,
artist-friendly, and consumer-responsive marketplace. Do not allow the
Goliath to slay the Davids. Thank you for your time and consideration.
Statement of Video Software Dealers Association
The Video Software Dealers Association (VSDA) submits this
statement for the record of the hearing on online entertainment and
copyright law. We wish to make the committee aware of our concerns
about business models for online entertainment that could undermine the
first sale doctrine of copyright law and the public policies it serves,
harm retail competition, and erode consumer privacy.
Video Software Dealers Association
Established in 1981, VSDA is a not-for-profit international trade
association for the $19 billion home entertainment industry. VSDA
represents more than 2,000 companies throughout the United States,
Canada, and 22 other countries. Membership comprises the full spectrum
of video retailers (both independents and large chains). VSDA also
includes the home video divisions of all major and independent motion
picture studios, video game and multimedia producers, and other related
businesses which constitute and support the home video entertainment
industry.
Copyright Law and Home Video
Copyright law, and particularly the first sale doctrine (codified
at 17 U.S.C. 109(a)), provides the legal foundation that has
facilitated the phenomenal growth of the home video industry over the
past two decades. Section 109(a) provides that, notwithstanding a
copyright owner's distribution right, the owner of a particular copy or
phonorecord lawfully made under U.S. copyright law ``is entitled,
without the authority of the copyright owner, to sell or otherwise
dispose of that copy or phonorecord.'' The first sale doctrine gives
retailers the right to rent and sell videos and video games without
restriction by the copyright owner, and benefits society by promoting
retail competition and maximizing distribution of copyrighted works.
When videocassette recorders (VCRs) first emerged as a consumer
electronics product in the late 1970s, few imagined how ubiquitous they
would become in America's homes and how popular watching a prerecorded
video of a motion picture would become. For an overwhelming majority of
America's 250 million plus consumers, renting and buying prerecorded
videocassettes, digital versatile discs (DVDs), and video games is an
integral component of their entertainment options. More than 90% of the
households in the U.S. own at least one VCR. And although the DVD is a
relatively new format, approximately 15 million households already own
a DVD player. It is estimated that almost 2.8 billion videotapes and
DVDs were rented in 2000. Approximately onethird of all video-equipped
households rent a videotape or DVD weekly, while 50% rent at least once
a month. More than 60% of video-equipped homes have a video library of
some sort. The average videotape library contains 75 titles, while the
average DVD collection contains 19 titles. Consumer spending on video
rentals in 2000 was a record $8.25 billion. An additional estimated
$10.8 billion was spent purchasing videotapes and DVDs, with DVDs
representing 32% of the total dollars spent.
Although the motion picture studios strenuously resisted the
emergence of the VCR and the creation of the video rental industry,
even going so far as petitioning Congress to eliminate the first sale
doctrine for prerecorded videos of movies, the home video industry
today is an enormously profitable enterprise for the motion picture
studios. Total revenue to the studios from video sales and rentals
totaled $10.7 billion in 2000. Over the past several years, revenue
from home video has accounted for more than half of the studios' gross
domestic film revenue.
Video retailing, while experiencing some of the consolidation and
slowing of growth of a maturing industry, remains a vibrant enterprise.
As of early 2000, there were 20,000 video rental specialty stores in
the U.S. These stores included the major public chains such as
Blockbuster, Hollywood Video, Movie Gallery, and a significant number
of independent retailers. It is estimated that more than 40% of video
specialty stores currently are single-store operations. Another 8,000
non-specialists, primarily supermarkets and drugstores, also rent video
as a regular part of their business, and numerous other retail outlets
sell prerecorded videos.
Thus, the freedom to rent and resell videos guaranteed by the first
sale doctrine has provided consumers with access to affordable, quality
entertainment that they can enjoy in their homes, generated a
tremendous revenue stream for the copyright owners, and created a
thriving industry of primarily small, community-based businesses.
Threats to the First Sale Doctrine
The benefits of the first sale doctrine to society, consumers,
copyright owners, and video retailers are threatened by some of the
trends in online entertainment. Unfortunately, the very same
characteristics of digital formats that enable copyright owners to
prevent the making of illegal copies and phonorecords can also
unintentionally limit or purposefully suppress retail competition and
prevent the owners of lawfully made copies from exercising rights
Congress and the courts have granted to them.
For example, access control technology can be used to prevent or
control lawful use as easily as it can be used to deter copyright
infringement. The use of such technological locks on lawful use are the
digital equivalent of preventing anyone from reading a book unless they
make a payment to the copyright owner every time they wish to do so. In
addition, some contracts of adhesion (such as ``click-through'' end
user license agreements) incant that a sale is not a ``sale'' but a
``license'' that restricts the purchaser's ability to use and transfer
ownership of the product. In a digital environment, ``click here to
agree'' is a non-negotiable step in an automated transaction, leaving
no opportunity to object.
These concerns about the erosion of copyright law in online
entertainment are not theoretical. Miramax is currently licensing the
reproduction of the movie ``Guinevere.'' Despite the fact that anyone
who downloads the movie is the owner of a lawfully made copy, and
enjoys the federal right to transfer title or possession of their legal
copy by sale, lease, or gift, the technology employed with the download
ensures that the owner must watch the movie within 24 hours of
unlocking it, after which the movie is rendered an inaccessible 500
megabytes of code. The person who downloaded it still owns that copy,
and still has the right to sell it or give it away, but no one can ever
watch it again without paying the copyright owner again for that
privilege.
VSDA is opposed to any erosion in the rights provided by the first
sale doctrine. We believe these mechanisms are not legitimate uses of
technology but rather attempts to use technology to create heretofore
unrecognized ``rights'' and to provide copyright owners' unprecedented
control over the lawful use and distribution of copyrighted works-
control Congress has expressly denied to them in the Copyright Act.
Video retailers recognize and support the rights of copyright
owners to prevent infringement of copyrighted works. VSDA actively
supported the enactment of the Digital Millennium Copyright Act (DMCA)
and specifically the anti circumvention provisions in the understanding
that these provisions were intended to deter piracy. We have supported
the positions of copyright owners in Napster, Inc. v. A&M Records, D VD
Copy Control Ass 'n, Inc. v. Bunner, and similar cases. VSDA also
actively works with the Motion Picture Association of America to
identify individuals that are infringing the copyrighted works of its
members. Thus, we do not align ourselves with those whose apparent goal
is to make meaningless the legal protections that copyright law
provides to prevent piracy of covered works.
At the same time, we cannot support those in the copyright owner
community who apparently seek to disable the protections that copyright
law provides to legal owners of lawfully made copies of copyrighted
works. Copyright owners have taken the position that they are free to
make the first sale doctrine inoperative through access control
technology and end-user license agreements. Because the first sale
doctrine furthers the important public policies of promoting
competition and maximizing dissemination of copyrighted works, the
rights it confers cannot be extinguished either by unilaterally imposed
technological controls or agreement between the parties. To conclude
otherwise would make the rights granted by the first sale doctrine
merely contingent on the technological prowess or goodwill of copyright
owners.
A digital copy authorized by the copyright owner that is delivered
by downloading onto a consumer's computer or portable storage medium
(such as a writeable compact disc or DVD) is no different from a
digital copy authorized by the copyright owner that is delivered in the
form of packaged media (such as a prerecorded videocassette or DVD).
Both are lawfully made copies and are fixed in tangible media. The
first sale doctrine applies to both.
Allowing consumers to exercise their right to rent or resell
lawfully acquired digitally delivered works will not facilitate
unlawful exhibition, reproduction, or distribution of copyrighted
works.
The technology exists today, through digital rights management, to
facilitate the lawful distribution of such works while respecting the
first sale doctrine and deterring piracy. In addition, the Ninth
Circuit's decision in Napster, Inc. v. A&M Records demonstrates that
copyright owners have adequate legal remedies at their disposal to
address online piracy.
Antitrust Concerns
Access control technology and end-user license agreements can also
be abused to suppress retail competition by concentrating greater
control over distribution in the hands of a small number of
entertainment conglomerates, to the detriment of consumers and small
businesses. It must be understood that entertainment products are not
fungible. A consumer that seeks to view ``Gladiator'' will not be fully
satisfied by substituting ``Traffic.'' Rather, for motion pictures, the
retail competition occurs not between products, but between retailers,
who compete on price, selection, terms, location, customer service, and
other factors.
The proliferation of excessive access control technology and hidden
or ``click-through'' end-user license agreements would deprive
consumers of the value and flexibility that they currently receive from
packaged entertainment. It could eliminate retail competition and
substitute uniform pricing and other uniform terms and conditions on
the sale of movies, effectively extending the carefully delineated
rights contained sections 106 and 106A of the Copyright Act into
wholesale controls over distribution to the ultimate consumer. Such
technologies are also capable of being used to obliterate the lawful
secondary market for used entertainment. Consumers could then be
prevented from loaning movies to a family member or friend, reselling
them, donating them to charitable organizations, or even, according to
some of the current business models, bequeathing them in their wills.
Competition in the distribution of copyrighted works is largely
non-existent until the product passes to distributors and retailers. If
video retailers cannot participate in the distribution of digitally
downloaded movies, either as a lawful reseller or a rental outlet, the
neighborhood video store will rapidly fade from the scene. They would
be replaced by direct distribution by copyright owners. Consumer choice
and competition would be further eroded.
More than 50 years ago, the Supreme Court in United States v.
Paramount Pictures, 334 U.S. 131 (1948), struck down pooling
arrangements and joint ownership agreements designed to give movie
studios control over the distribution of motion pictures in theaters.
It also struck down the ``block booking'' practices in which the motion
picture studios refused to license one or more copyrighted movies
unless another undesired copyrighted movie was accepted. In United
States v. Loew's, Inc., 371 U.S. 38 (1962), the Supreme Court once
again condemned block booking and related efforts to suppress
independent distributor decisions. Online distribution of entertainment
by copyright owners armed with restrictive technologies raises the
potential for the types of anticompetitive behavior that the Supreme
Court forbade in Paramount and Loew's.
Privacy Concerns
Digital download systems that require consumers to surrender
personally identifiable information or require retailers to provide
information about their customers to copyright owners also raise
concern. Such data mining mechanisms may violate the Video Privacy
Protection Act (18 U.S.C. Sec. 2710) and force retailers to share their
customer lists with potential competitors. Knowledge of which movies a
consumer chooses to rent or buy from their local retailer, whether in a
brick and mortar store or online, should remain off limits to third
parties, including the owners of the copyrights in those movies.
Conclusion
While VSDA is deeply concerned about the overreaching that appears
to be part of some emerging business models for online entertainment,
we do not call upon Congress to resolve this dispute at this time.
Copyright law is a balance between the protection of intellectual
creations and the promotion of broad public dissemination of these
creations in a manner that benefits society as a whole. We must proceed
carefully lest we upset this well-crafted, time-tested balance.
Accordingly, we do not currently support any revision of the first sale
doctrine. The doctrine has proven itself and facilitated the best
system for delivering movies and video games to the home available
anywhere in the world-and greatly favored copyright owners along the
way. Although congressional action may provide much-desired clarity, we
believe that our differences with copyright owners should be resolved
in industry-to-industry discussions, if at all possible. However,
should copyright owners seek to eliminate effective competition from
retailers and thereby deny consumers the widest access to movies and
games at the lowest possible prices, we will seek prompt and decisive
congressional action.
Thank you for the opportunity to submit our views.