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79–464CC 2002

ENSURING CONTENT PROTECTION IN

THE DIGITAL AGE

HEARING

BEFORE THE

SUBCOMMITTEE ON TELECOMMUNICATIONS AND 

THE INTERNET

OF THE

COMMITTEE ON ENERGY AND 

COMMERCE 

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

APRIL 25, 2002

Serial No. 107–95

Printed for the use of the Committee on Energy and Commerce

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/house

(II)

COMMITTEE ON ENERGY AND COMMERCE 

W.J. ‘‘BILLY’’ TAUZIN, Louisiana, Chairman 

MICHAEL BILIRAKIS, Florida 

JOE BARTON, Texas 

FRED UPTON, Michigan 

CLIFF STEARNS, Florida 

PAUL E. GILLMOR, Ohio 

JAMES C. GREENWOOD, Pennsylvania 

CHRISTOPHER COX, California 

NATHAN DEAL, Georgia 

RICHARD BURR, North Carolina 

ED WHITFIELD, Kentucky 

GREG GANSKE, Iowa 

CHARLIE NORWOOD, Georgia 

BARBARA CUBIN, Wyoming 

JOHN SHIMKUS, Illinois 

HEATHER WILSON, New Mexico 

JOHN B. SHADEGG, Arizona 

CHARLES ‘‘CHIP’’ PICKERING, Mississippi 

VITO FOSSELLA, New York 

ROY BLUNT, Missouri 

TOM DAVIS, Virginia 

ED BRYANT, Tennessee 

ROBERT L. EHRLICH, Jr., Maryland 

STEVE BUYER, Indiana 

GEORGE RADANOVICH, California 

CHARLES F. BASS, New Hampshire 

JOSEPH R. PITTS, Pennsylvania 

MARY BONO, California 

GREG WALDEN, Oregon 

LEE TERRY, Nebraska 

ERNIE FLETCHER, Kentucky 

JOHN D. DINGELL, Michigan 

HENRY A. WAXMAN, California 

EDWARD J. MARKEY, Massachusetts 

RALPH M. HALL, Texas 

RICK BOUCHER, Virginia 

EDOLPHUS TOWNS, New York 

FRANK PALLONE, Jr., New Jersey 

SHERROD BROWN, Ohio 

BART GORDON, Tennessee 

PETER DEUTSCH, Florida 

BOBBY L. RUSH, Illinois 

ANNA G. ESHOO, California 

BART STUPAK, Michigan 

ELIOT L. ENGEL, New York 

TOM SAWYER, Ohio 

ALBERT R. WYNN, Maryland 

GENE GREEN, Texas 

KAREN MCCARTHY, Missouri 

TED STRICKLAND, Ohio 

DIANA DEGETTE, Colorado 

THOMAS M. BARRETT, Wisconsin 

BILL LUTHER, Minnesota 

LOIS CAPPS, California 

MICHAEL F. DOYLE, Pennsylvania 

CHRISTOPHER JOHN, Louisiana 

JANE HARMAN, California 

DAVID V. MARVENTANO, Staff Director 

JAMES D. BARNETTE, General Counsel 

REID P.F. STUNTZ, Minority Staff Director and Chief Counsel 

Page

III

SUBCOMMITTEE ON TELECOMMUNICATIONS AND THE INTERNET

FRED UPTON, Michigan, Chairman 

MICHAEL BILIRAKIS, Florida 

JOE BARTON, Texas 

CLIFF STEARNS, Florida 

Vice Chairman 

PAUL E. GILLMOR, Ohio 

CHRISTOPHER COX, California 

NATHAN DEAL, Georgia 

BARBARA CUBIN, Wyoming 

JOHN SHIMKUS, Illinois 

HEATHER WILSON, New Mexico 

CHARLES ‘‘CHIP’’ PICKERING, Mississippi 

VITO FOSSELLA, New York 

ROY BLUNT, Missouri 

TOM DAVIS, Virginia 

ROBERT L. EHRLICH, Jr., Maryland 

CHARLES F. BASS, New Hampshire 

LEE TERRY, Nebraska 

W.J. ‘‘BILLY’’ TAUZIN, Louisiana 

(Ex Officio) 

EDWARD J. MARKEY, Massachusetts 

BART GORDON, Tennessee 

BOBBY L. RUSH, Illinois 

ANNA G. ESHOO, California 

ELIOT L. ENGEL, New York 

GENE GREEN, Texas 

KAREN MCCARTHY, Missouri 

BILL LUTHER, Minnesota 

BART STUPAK, Michigan 

DIANA DEGETTE, Colorado 

JANE HARMAN, California 

RICK BOUCHER, Virginia 

SHERROD BROWN, Ohio 

TOM SAWYER, Ohio 

JOHN D. DINGELL, Michigan, 

(Ex Officio) 

(II) 

4

C O N T E N T S 

Page

Testimony of: 

Blanford, Lawrence J., CEO, Philips Consumer Electronics ........................ 38

Chernin, Peter, President and Chief Operating Officer, News Corporation ................................................................................................................. 19

Jacobson, Larry, President and Chief Operating Officer, RealNetworks .... 43

Kraus, Joe, Co-Founder, DigitalConsumer.org .............................................. 54

Liao, Paul F., Chief Technology Officer, Panasonic/Matsushita Electric 

Corporation of America ................................................................................ 31

Litai, Assaf, Founder and Acting CEO, Vidius .............................................. 50

Parsons, Richard D., Co-Chief Operating Officer, AOL Time Warner Inc .. 27

Material submitted for the record by: 

Association for Competitive Technology, prepared statement of .................. 86

Griffin, Steve, CEO and Chairman, StreamCast Networks, Inc., prepared 

statement of ................................................................................................... 90

Rosen, Hillary,, President and CEO, Recording Industry Association of 

America, prepared statement of .................................................................. 99

Shapiro, Gary J., Chairman, The Home Recording Rights Coalition, prepared statement of ........................................................................................ 102

Valenti, Jack, President and CEO, Motion Picture Association of America, 

prepared statement of ................................................................................... 92

Video Software Dealers Association, prepared statement of ........................ 94

(III) 

(1)

ENSURING CONTENT PROTECTION IN THE 

DIGITAL AGE 

THURSDAY, APRIL 25, 2002

HOUSE OF REPRESENTATIVES,

COMMITTEE ON ENERGY AND COMMERCE,

SUBCOMMITTEE ON TELECOMMUNICATIONS

AND THE INTERNET, 

Washington, DC. 

The subcommittee met, pursuant to notice, at 12:30 p.m., in room 

2123, Rayburn House Office Building, Hon. Fred Upton (chairman) 

presiding. 

Members present: Representatives Upton, Barton, Stearns, 

Gillmor, Deal, Shimkus, Fossella, Davis, Bass, Terry, Tauzin (ex 

officio), Markey, Eshoo, Engel, Green, McCarthy, Luther, Harman, 

Boucher, and Sawyer. 

Also present: Representative Walden. 

Staff present: Jessica Wallace, majority counsel; Linda BlossBaum, majority counsel; Will Nordwind, majority counsel; Hollyn 

Kidd, legislative clerk; Andy Levin, minority counsel; and Brendan 

Kelsay, minority professional staff. 

Mr. UPTON. Today’s hearing is on ensuring content protection in 

the digital age, and while our inquiry starts with the important 

question of how this impacts the transition to digital television, our 

subcommittee’s interest is, of course, much broader. 

The DTV transition deadline of 2006 is fast approaching. So time 

is of the essence. This hearing follows on the heels of several 

lengthy DTV roundtables which Chairman Tauzin held with myself, Mr. Dingell, and Mr. Markey, at which representatives of the 

major, relevant industries discussed, sometimes fiercely debated, 

the obstacles which stand in the way of a successful and timely 

transition to digital television and how we can overcome those obstacles. 

Many issues, such as cable compatibility and must carry, have 

been touched upon in our roundtables, but perhaps the one issue 

that has dominated the agenda has been content protection. Clearly, this issue needs to be addressed if we are to succeed with the 

transition. 

I truly believe that the best solution is a private sector solution. 

Yet inter-industry agreements have been elusive to date. I know, 

through over 8 hours of roundtables, that these issues are complex 

both legally and technologically. But if we can put a man on the 

moon, then I am optimistic that, with the right amount of pressure 

from Congress, the industries, and consumers, which have the best 

2

engineers and minds in the world, we can do anything that we set 

our minds to. 

So the questions I have are these. How long can, or should, we 

wait for those deals to be struck in light of the impending deadlines 

on the transition to digital? 

Do the industries have the right processes in place to come up 

with a fair plan to all, including consumers, and one that will not 

stifle technological innovation in the future? And what, if any, is 

the proper role of government? 

We have heard that three content protection issues have been 

identified in apparent order of degree of technical difficulty. From 

easiest to hardest, they are: (1) the broadcast flag; (2) the analog 

hole; and (3) peer-to-peer. 

Earlier I mentioned putting a man on the moon, and I am reminded of how our Nation achieved that objective. President Kennedy laid out the first challenge. Then the engineers came about 

solving the problem. First, we put chimps into orbit and, once that 

was done, we put men into orbit, and after that we finally put a 

man on the moon. The point is that it was not all done in one step. 

It was done step by step. 

In today’s context, the question becomes: If we can get the broadcast flag done and maybe the analog hole, will that be enough, for 

the sake of the DTV transition, to unleash the content as we continue moving forward on the other content protection issues? And 

will, or should, Congress or the FCC be needed to ratify any such 

deals to ensure consistent compliance amongst all manufacturers? 

In all of this, we cannot lose sight of the fact that this is about 

the consumer. The consumer wants to continue enjoying great 

American movies, whether it be ‘‘Saving Private Ryan,’’ ‘‘Lion 

King,’’ ‘‘Band of Brothers,’’ but if that content is continuously 

ripped off and illegally transmitted with one click to the rest of the 

world on the Internet, then we will see a decline in the studios’

ability to make them. 

Consumers also enjoy great home entertainment equipment and 

certain expectations regarding ‘‘fair use’’ rights, and we, as Members of Congress, must vigilantly guard those rights as we make 

our way through this important debate. 

It is a delicate balancing act, but one which is as old as Article 

I, Section 8 of the Constitution itself. I am confident that even Ben 

Franklin, as he was exploring science with his kite and his key in 

the thunderstorm, never could have dreamed of the digital technology, let alone motion pictures, DVDs, the Internet, Morpheus, 

and the like. Hence, fast forwarding to today, it is this Congress’

burden to help sort out how to rationally protect content in the digital age, and that is what I hope can be accomplished someday, if 

not today. 

I look forward to hearing from today’s panel of witnesses to help 

us through these issues, and I am excited that our subcommittee 

will be the first to use our committee’s latest technology to hear 

from one such witness remotely, Mr. Chernin of News Corp all the 

way from Los Angeles. I tip my hat to Chairman Tauzin and Ranking Member Dingell for their foresight in bringing our committee 

room into the 21st century. 

3

I yield to my friend and colleague, the ranking member of the 

subcommittee, the gentleman from Massachusetts. I am sorry we 

are not going to put up the Orioles-Boston game up here, but you 

can watch the Cubs at some point later on. The gentleman is recognized. 

Mr. MARKEY. I thank the gentleman very much, and that digital 

technology is so sensitive that we actually have to put black screen 

up there so that people know that it is not broadcasting some other 

more sensitive piece of information. 

I want to commend you, Mr. Chairman, for calling this hearing 

today on a variety of issues related to digital rights management. 

Today’s hearing will enable the subcommittee to explore policy 

questions related to the digital television transition, and will also 

raise other issues regarding consumer rights related to the recording data, transferring data from device to device, and whether consumers will have the ability to upload information and transmit it 

on the Internet. 

Both of the general topics to be raised at the hearing today are 

important, and both probably warrant a series of hearings on their 

separate sets of questions, implications and possible solutions. 

Hopefully, by throwing them together today, we can get a quick 

check on the status of various industry segments as well as what 

other broader consumer implications exist. 

First, I want to talk about the digital television transition. It is 

readily apparent to even the casual observer that the DTV transition remains largely stalled, and even where progress is being 

made, it represents marginal progress at best. We are already a 

number of years into the transition with, frankly, little to show for 

it. 

It is clear that, if we keep up the current pace of transition, we 

are also years and years away from the digital denouement of this 

industrial policy for television, and I think that it is a key element 

of the transition simply acknowledging that it is, in fact, industrial 

policy, whether we want to say those words or not. 

We gave the broadcasters’ spectrum worth billions of dollars for 

free. We linked the industry an additional six megahertz for a transition period, and we set benchmarks for when they had to get 

their stations up and running. After the transition, we expect to receive back spectrum from the broadcasters. 

Having embarked upon this policy, policymakers have not put in 

place the relevant and necessary rules to ensure that the transition 

is both timely and successful. As important as it is to exhort the 

industry to do more, and as welcome as it is to call upon industry 

leaders for voluntary efforts, such hortatory rhetoric is no substitute for real action, because voluntary efforts alone will not 

achieve our important policy objectives. 

That is because, at its core, the DTV transition represents a government driven policy, not a purely market driven phenomenon. 

Therefore, it is imperative that government do more to create the 

conditions and environment for policy success. Failure to do so is 

unfair to consumers, taxpayers, and to the various high tech industries with a stake in the future of television. 

With respect to the other half of today’s hearing related to digital 

rights management generally, I welcome today’s glimpse at some of 

4

the issues raised by the increased digitalization of content and the 

repercussions raised by the success and growth of the Internet. 

Content creators have not only an understandable interest but also 

a right to the protection of their creative works from theft and infringement. Our society has long recognized and respected this 

right. 

In the post-NAFTA, post-GATT economy, we have made an economic decision as a country that, as the many low wage, low tech 

manufacturing jobs migrate abroad, we should compete for high 

end, high tech, knowledge based jobs and markets in a global economy. Because such products are often ephemeral, we must protect 

such content from piracy, because our economic future depends in 

part upon such protection. 

When content creators and owners are fearful of putting content 

into digital form and distributing it for fear of infringement and 

theft, the marketplace is unnecessarily depressed, and consumers 

either pay far too much for such content or can’t receive it at all. 

Reassuring content creators and owners that the risk of such illegal conduct is minimal will help make such digital content more 

available. 

We must recognize, however, that not all consumers are potential 

pirates, and not all subsequent use of digital content by consumers 

represents infringements. I think it is important to underscore the 

principle of fair use, and note at the outset that it is called fair use, 

not home use. 

If I have a right to record information consistent with the fair 

use doctrine, I would hope that, for purposes of education especially, we ensure that information for the classroom and for academic research is not so encoded and locked up that libraries or 

schools cannot utilize such material efficiently to educate and enlighten. 

I also hope that, while technologists work on broadcast flags or 

other content protective measures, we anticipate and construct a 

policy that is Internet friendly. If the digital era of the future will 

permit me to record certain content in digital form on a digital 

disk, it will seem quaintly analog to tell consumers that they then 

cannot use the broadband Internet to transmit that information instantly to a brother-in-law out in Seattle. Instead, they will have 

to put that disk in a FedEx envelope and spend $15 to get it out 

overnight. 

The broadband Internet of the future should not be envisioned 

solely for commercial downloads. It must be interactive, and it 

must permit law abiding consumers the right to speak and communicate digitally as well. 

I understand that current technology may not yet permit such a 

policy, but current discussions should not close the door on such 

Internet friendly, copyright respecting conduct and conduit. We 

must put faith in technology to solve some of the problems that 

technology itself poses. 

I thank the chairman very much for allowing me the opportunity 

at a little extra length to make my opening statement. 

Mr. UPTON. Recognize the chairman of the full committee, Chairman Tauzin. 

5

Chairman TAUZIN. Thank you, Chairman Upton. Let me deeply 

express my appreciation to the witnesses today who will again help 

us to understand the gaps that still need to be closed in resolution 

of the very serious and complex issues of protecting digital content 

in this new age. 

I want to particularly thank Chairman Upton, Mr. Dingell, Mr. 

Markey, and Mr. Boucher who has been participating with us, for 

their assistance in the roundtables. I think it is important that I 

go on the record and explain what we have been doing in these 

roundtables. 

These roundtables have not been an opportunity for people to 

come and tell us what they think we ought to pass into law, quite 

the opposite. The roundtables have been our effort to help facilitate 

a discussion over the many disciplines involved in this transition 

to a digital television age to see if, in fact, we can encourage and 

help frame some of the debate going on in the marketplace where 

the agreements have to be reached and the technologies have to be 

developed and the standards have to be agreed upon and the actual 

industry-to-industry conversations need to occur if, in fact, many of 

these thorny issues are going to be settled outside of Congress having to mandate technologies and standards. 

The roundtables have been extraordinarily successful, and I 

thought it was time, as did Chairman Upton, that we go on the 

public record to talk about just how much progress has been made, 

how close we are to finding resolutions on some of these thorny 

issues in the marketplace rather than through legislation, with the 

notion that, if agreements can be reached, if understandings on 

content protection and simultaneously protecting the right of consumers, who happen to be our constituents, in the exercise of their 

fair use of digital products in the same, although the vague way, 

they appreciate their capacity to copy products in the analog world 

and to use them in their home systems, etcetera, and that we can 

reach agreements on interoperability standards and agreements on 

transmission of the new digital signals in a way that when consumers buy these products, they are not going to wake up to find 

out that everything has been down-res’ed, which is an interesting 

term meaning intentional degrading of the resolution of the signal. 

If consumers can be assured that, when they purchase equipment, they can plug it in and play it anywhere in America and that 

it is interoperable, whether it is a satellite system or a cable system or a telephone system or wireless broadband system that is delivering the signal, and the signal will reach them in the same 

quality form it was being produced—If all those agreements can be 

reached and we are left with the simple task of codifying some 

agreements, where necessary, and/or providing enforcement for 

those agreements so that all the players agree to live by the terms 

of those agreements, that will be the ideal best world. 

The worst world will be if progress at these roundtables stops 

and the interdisciplinary, inter-industry discussions end without 

agreement, and we are asked instead to legislate on standards and 

technologies and content protection agreements. 

The roundtables have been successful to date. They have been 

successful, because they have allowed members of industry to challenge one another and to do it in front of their own peers. They 

6

have had to explain why they have yet to reach agreement and 

why they can’t come to agreement, and why perhaps their agreement is holding up others from making their agreements and for 

this process to work. 

I can tell you two things that are absolutely certain. We are determined to stick with our schedule. Congress mandated the broadcasters to be in the digital world by the year 2006. We are going 

to do everything in our power to meet that schedule. Second, we 

are going to do everything in our power from this committee level, 

and I know in the Congress, to make sure that consumers are the 

big beneficiaries of this transition. 

As we enter this digital world where incredible new products are 

going to be made available, not just through the PC modems but 

through the empowering and enabling the television set in our 

homes to become conduits for this massive amount of new information, entertainment, education, commerce, even health care and 

who knows what else, that consumers will be the big winners and 

we take them through this transition in a way that doesn’t burn 

them, doesn’t unnecessarily cost them. We must ensure that they 

don’t have to constantly purchase new equipment and new technology because we have suddenly made last year’s model obsolete 

by some decisions we made here. That is going to be pretty critical. 

The thing I most want to avoid and I suspect all of us on this 

panel most want to avoid, is a situation where those of you who 

have already committed yourselves so well to this process, who are 

beginning to make the big investments, the cable companies who 

are making the investments and upgrading their systems, the 

broadcasters who are putting out the digital transmission equipment and beginning to do high definition content, the studios that 

are beginning to do more and more high definition, digital content—I want to applaud CBS in particular because of the great efforts they have made, and urge the others to follow suit in creating 

and airing quality through high definition content. 

I would hate to see those of you who are beginning to do that 

suddenly say that I had better stop, because progress has not been 

made on the other important issues about distributing these programs and making sure that technologies and electronic equipment 

are all designed around the agreements made to both protect content in a digital age and protect consumers’ legitimate rights of fair 

use. 

Those are tricky, thorny questions, but I am delighted you have 

all come to share the progress you have made. I have asked Chairman Upton and the members of our committee to make sure that 

this hearing does not drive you further apart but brings you closer 

together, and that everything we do accommodates the constant dialog that must occur if all the various elements of this tricky transition will come together in a way that consumers benefit and we 

stick to this timetable. 

That is a healthy agenda, but I thank you for coming to help us 

work it out. Thank you, Mr. Chairman. 

Mr. UPTON. Thank you, Mr. Tauzin. I would note for the record 

that any member that is not here, their statement, if they prefer, 

be entered into the record under unanimous consent. I know Mr. 

Dingell is one of those. 

7

Recognize for an opening statement Mr. Boucher. 

Mr. BOUCHER. Thank you very much, Mr. Chairman. I appreciate 

your focusing the attention of the subcommittee today on the coequal need to protect copyrighted material against piracy and to respect and to reaffirm the time honored fair use rights of the consumers of that same material. 

With the arrival of content in digital form and with a deep penetration of Internet usage, the striking of a reasonable balance between the rights of copyright owners and the rights of the users of 

copyrighted material has become both more urgently needed and 

more difficult to achieve. 

This hearing evolves from our earlier discussions on facilitating 

the digital television transition. An element of those discussions 

was the need to protect from unauthorized copying and from 

uploading to the Internet the digital TV transmission of high value 

programming. It is essential that this protection be provided so 

that program originators will release their high value material for 

digital television broadcast. 

The transition to digital television will never be truly effective if 

the most desired programs are not available. So copyrighted programs must be protected, but there is a co-equal need. The time 

honored fair use right of the consumers of digital material to make 

recordings for noncommercial personal use and for personal convenience must be respected and must be specifically affirmed. 

The fair use right of consumers to convey digital material they 

have lawfully acquired among a wide range of digital devices in the 

home setting and beyond the home setting to other personal spaces, 

including the car and the personal office and anyplace to which 

that consumer of digital information may travel, must also be respected and observed. 

This committee, Mr. Chairman, is an excellent forum for addressing these challenges and striking the essential balance between 

copyright owner rights and user rights that are so essential in this 

digital era. There is a right way and a wrong way to protect content in digital TV transmissions. 

The right way is to look to the affected private sector entities for 

a technical solution, and on that front truly impressive progress is 

being made. The Broadcast Protection Discussion Group of the 

broader Copy Protection Technical Working Group is comprised of 

digital equipment manufacturers and the major motion picture studios. 

The Group has already developed a standard for the protection 

of digital television signals that arrive in the home by means of 

cable TV or by means of satellite. These signals pass through a set 

top box that can both protect the content from unauthorized copying and allow home recording for personal use in appropriate, 

clearly defined circumstances. 

That same Working Group is now very close to agreeing upon a 

standard broadcast flag for the protection of programming that is 

delivered by digital television broadcast over the air to be received 

by antenna or by rabbit ears. 

That standard would also honor the fair use right of television 

viewers to make copies for personal use, and work is continuing by 

another group to address the problem of the so called analog hole 

8

through which a highly technical and cumbersome process can provide an avenue for uploading of material to the Internet by means 

of the digitization of analog content. A watermark standard to close 

the analog hole is in development by another working group. 

I want to take the opportunity of this hearing today to congratulate the Working Group companies on the impressive successes 

that they are achieving. I also commend them for respecting the 

fair use rights of television viewers as the various technical standards have been developed and approved by the Group. 

The Working Group approach is the right way to proceed, and it 

is achieving solid results. I will be interested to learn from witnesses today and in other future forums the extent to which the 

protection of content delivered over cable and satellite, which has 

been achieved, and the protection of over-the-air delivered content, 

which the Group is on the verge of achieving, is sufficient to persuade the studios to release their highest value content for digital 

television transmission. 

The wrong way to proceed is for Congress to act prematurely, 

and I am concerned by all of the conversation that has been directed in the last month to an approach recommended in the Senate, which would clearly have the Congress act in a premature 

fashion. 

Legislation has been introduced in the Senate that would have 

the government develop technical content protection standards. 

The fair use rights of consumers would not be guaranteed through 

that measure. 

There is every probability that a government standard would impede the functionality of digital receivers, players and recorders. 

This is clearly the wrong approach, and the progress being made 

by the private sector Working Group renders that approach not 

only inappropriate but also clearly unnecessary. 

After private sector standards are developed, there may be a role 

for the government to assure that devices employ the standard. At 

that time, we can be assured that the functionality of players, receivers, and recorders will not be impeded. 

We can be assured that consumer fair use rights will be protected, and that copyrighted material will be safeguarded. Mr. 

Chairman, I suggest that we not act until we have received those 

assurances.Thank you again for conducting this hearing, Mr. 

Chairman, and a warm welcome to all of our witnesses. 

[The prepared statement of Hon. Rick Boucher follows:]

PREPARED STATEMENT OF HON. RICK BOUCHER, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF VIRGINIA

Thank you, Mr. Chairman for focusing the attention of the Subcommittee on the 

co-equal need to protect copyrighted material against piracy and to respect and reaffirm the time honored Fair Use Rights of the consumers of the same material. 

With the arrival of content in digital form and with a deep penetration of Internet 

usage, the striking of a reasonable balance between copyright owner rights and the 

rights of the users of copyrighted material has become both more urgently needed 

and a great challenge to achieve. 

This hearing evolves from our earlier discussions on facilitating the digital television transition. An element of those discussions was the need to protect from unauthorized copying and uploading to the Internet the digital TV transmissions of 

high value programming. 

It is essential that this protection be provided so that program originators will release their high value material for digital TV broadcast. The transition to digital 

9

TV will never be effective if the most desired programs are not available. And so, 

copyrighted programming must be protected. 

But there is a co-equal need. The time honored Fair Use Right of the consumers 

of digital material to make recordings for non-commercial personal use and convenience must be respected and specifically affirmed. The Fair Use Right of consumers 

to convey digital material they have lawfully acquired among a wide range of digital 

devices in the home and the extended personal setting including the car, the personal office and places to which the person may travel must be respected and observed. 

This Committee is an excellent forum for addressing those challenges and striking 

the essential balance between copyright owner rights and user rights in the digital 

era. 

There is a right way and a wrong way to protect content in digital TV transmissions. 

The right way is to look to the affected private sector entities for a technical solution. And on that front impressive progress is being made. The Broadcast Protection 

Discussion Group of the broader Copy Protection Working Group is comprised of 

digital equipment manufacturers and the major motion picture studios. 

The Group has already developed a standard for the protection of digital TV signals that arrive in the home by means of cable TV or by satellite. These signals 

pass through a set top box that can both protect the content from unauthorized 

copying and allow home recording for personal use in appropriate defined circumstances. 

The same Working Group is now very close to agreeing upon a standard broadcast 

flag for the protection of programming delivered over the air to the home for receipt 

by an antenna or by rabbit ears. That standard would also honor the Fair Use Right 

of TV viewers to make copies for personal use. 

And work is continuing by the group to address the problem of the so called analog hole which through a highly technical and cumbersome process can be an avenue for the uploading of material to the Internet by means of the digitization of analog content. A watermark standard to close the analog hole is in development by 

the Working Group. 

I congratulate the Working Group companies on the impressive successes they are 

achieving. I also commend them for respecting the Fair Use Rights of TV viewers 

as the various technical standards are approved by the Group. 

The Working Group approach is the right way to proceed and it is achieving solid 

results. I will be interested to learn from our witnesses today the extent to which 

the protection of content delivered over cable and satellite which has been achieved 

and the protection of over the air delivered content which the Group is on the verge 

of achieving is sufficient to persuade the studios to release their highest value content for digital TV delivery. 

The wrong way to proceed is for Congress to act prematurely. A measure has been 

introduced in the Senate which is premature. It would have the government develop 

technical content protection standards. The Fair Use Rights of consumers would not 

be guaranteed. 

There is every possibility that a government standard would impede the 

functionality of digital receivers, players and recorders. 

This is clearly the wrong approach and the progress being made by the private 

sector Working Group renders it not only inappropriate but also unnecessary. 

After private sector standards are developed, there may be a role for government 

to assure that devices employ the standard. At that time we can be assured that 

the functionality of devices will not be impaired, that consumer Fair Use Rights will 

be protected and that copyrighted material will be safeguarded. We should not act 

until we have those assurances.

Mr. UPTON. Thank you. Recognize for an opening statement Mr. 

Stearns, the vice chairman. 

Mr. STEARNS. Thank you, Mr. Chairman, and I want to congratulate you for holding this hearing to examine content protection in 

the digital era. 

Of course, I want to commend Chairman Tauzin for his tireless 

leadership in conducting several TV roundtable groups. As he has 

pointed out, they have been very helpful. 

As we discuss content protection in the digital era, the groups 

with the most to gain and lose from the digital transition are copyVerDate Sep 04 2002 09:35 Sep 20, 2002 Jkt 010199 PO 00000 Frm 00013 Fmt 6633 Sfmt 6602 W:\DISC\79464 79464
10

right holders of digital content and manufacturers and information 

technology companies that facilitate such content. 

For instance, the average cost of making and marketing films is now about $80 million a film. Collectively, however, the copyright 

industry generates almost $80 billion abroad, and such investments 

certainly need protecting. As such, intellectual property laws give 

creators the incentive and protection they need to make their 

works available to consumers. 

Mr. Chairman, in passing the Digital Millennium Copyright Act, 

Congress updated U.S. copyright law for the digital age by affording copyright owners protections, while establishing fair use for 

technology in a digital environment. Digital media also creates a 

new opportunity for new forms of copyright infringement, and new 

concerns about fair use of copyrighted works and other long established copyright principles. 

A recent article in a Wired magazine, May 2002, highlights a 

man named, ‘‘Lord of the Borrowers.’’ He used the Internet and 

peer to peer applications to accumulate nearly 2,500 movies, video, 

and software titles, and in turn contributing to the illegal transfer 

of copyrighted works, including 3,000 songs and movies such as 

‘‘Harry Potter’’ and ‘‘A Beautiful Mind.’’ Such actors are no different than those who walk into Blockbuster’s movie rental and 

steal merchandise. 

In this article it talks about this man in his home. He has music 

piped into his bathroom, his living room, his kitchen. Every corner 

of his home has music, with a 28-speaker stereo system that cycles 

3,000 songs ranging from 200 from Elvis Presley tunes and all the 

early Beatles to classical, hip-hop, blues and concert, all that he 

bootlegged, even Axl Rose doing ‘‘White Christmas.’’ He says, ‘‘I had enough music to run a radio station,’’ he brags. ‘‘I could let it play for weeks and weeks, and it would never run 

out.’’ He hasn’t spent a dime, and his only real connection comes 

in the form of a cable modem—‘‘Lord of the Borrowers.’’ Mr. Chairman, I would like unanimous consent to put this article 

in the record. 

Mr. UPTON. Without objection. 

Mr. STEARNS. As a result, the prevention of unauthorized copying 

of digital work has grown in importance in such technologies being 

continually developed and improved upon by media and electronic 

industries. However, there remains several outstanding issues regarding technology, technical industrywide solutions. 

The parties appear close to reaching agreement pertaining to 

broadcast flags in order to prevent broadcast programs exhibited on 

over-the-air TV stations from being redistributed without authorization. Additionally, protecting digital content in the analog format, or plugging the analog hole, serves as a means of protecting 

intellectual property. 

While these two issues appear to be imminently resolved—immediately resolved, the parties seem far from reaching consensus on 

how to treat peer to peer applications which allow for distribution 

of files across the Internet without the need of a centralized server. 

Nevertheless, as pointed out by the chairman, we have the opportunity to solve these problems, and I think the private industry is 

the best way to solve these at this point, and not have mandates 

11

from the Federal Government. As so often happens, the Federal 

Government sometimes strangles innovation. 

Finally, Mr. Chairman, while we are quick to protect the investment of content owners, we must balance it out to be doubly sure 

we protect the rights of consumers. It is imperative that all parties 

continue to recognize consumers’ rights to personal, noncommercial 

use of the legally purchased copyrighted materials. 

Additionally, neither Hollywood nor manufacturers would be 

profitable without consumers. As such, we need to respect consumers’ investment in such technology and ensure that their investments are not made obsolete with efforts to protect content. 

Mr. Chairman, I again commend you for your hearing. 

Mr. UPTON. Ms. Harman. 

Ms. HARMAN. Thank you, Mr. Chairman. I have a statement for 

the record, but just want to summarize with a few points. 

First of all, the issues we assess today have a huge impact on 

the digital world, and I am trying very hard to wrap my aging analog brain around them. Second, this is an excellent panel and a 

stellar group in the first row right behind it, and their spectrum 

of views is most welcome. 

Third, what we do and, just as important, what we do not do 

really matters in this case. We have had a few hearings lately that 

I thought mattered a bit less than this one. This one will really 

make a difference. 

So I would just set out a few principles we ought to think about. 

The first is that government should do no harm. That has been 

said often, but here we are in a position to do a great deal of harm 

if we do the wrong thing. 

The second is that the transition to digital is not just a question 

of supply. It is a question of demand, and the demand will not be 

there if high value content is not there, and high value content will 

not be there if we don’t protect intellectual property. So we had 

better get that part right. 

The third point is that the private sector has a great deal to offer 

here. There are market mechanisms and, as we have heard, crossindustry mechanisms that can do a lot of the hard work, and perhaps do it better than we can do it. 

Fourth, government has a tendency to operate with a sledge 

hammer. In this case, operating with a scalpel is absolutely required. 

So I look forward to the testimony today. I have got some questions for some of the witnesses. This is going to take hard work. 

We are going to earn our pay getting this thing right, and I look 

forward to being a part of the bipartisan solution on this committee. Thank you, Mr. Chairman. 

Mr. UPTON. Thank you. 

Mr. Shimkus. 

Mr. SHIMKUS. Thank you, Mr. Chairman. I know this is a tough 

issue. I am going to listen to the panel. I just remind people who 

have been before this committee before, my first experience is with 

my wife, who is a church organist, when she went through the 

reams of music and took out all the Xeroxed copies of music and 

threw them in the trash can because she wanted to respect the intellectual rights of the folks who wrote the music. 

12

It was not a positive thing for the members of the church to see, 

but it was the right thing to do, because those people who write 

the music, who prepare that, need to be compensated if we continue to want artists to flourish. But this is a hard issue. You all 

are the experts. We are going to ask a lot of questions. We look forward to your testimony. 

I yield back my time. Thank you. 

Mr. UPTON. Mr. Green. 

Mr. GREEN. Thank you, Mr. Chairman. I want to commend you 

for holding this hearing today, but I want to start out by commending Chairman Powell and the FCC for their recent action on 

the HDTV transition. His letter outlining voluntary steps to broadcasters, cable companies, and consumer electronics folks each need 

to take—and the steps each need to take was crucial to speeding 

the digital transition. 

The subcommittee, I think, can and will impose a mandatory solution to move the digital transition forward, but I hope we do not 

have to go down that path. For all parties interested in the DTV 

transition, I fully support the goals outlined in Chairman Powell’s 

letter. Then I want to see the goals implemented in a timely manner through good faith and cooperation, hopefully, of all the parties. However, if these goals cannot be reached on a voluntary basis 

and there is continuing dispute, then I would share in any action 

initiated by Chairman Powell. 

Mr. Chairman, now I want to talk about the public policy purposely excluded from the Powell letter. The missing component was 

anything to do with digital rights management or DRM. DRM is 

the protection of digital content that flows to computers, high definition TVs, and various home entertainment systems. 

Why is DRM important? Because without it, we have no protection for copyrighted works. Creative minds should be able to profit 

from their creations through the copyright system. Many American 

consumers, though, feel that digital is free and can be obtained 

through the many peer to peer sites operating around the world. 

The idea that this digital content is free or should be free will 

be a difficult mindset to break. However, it now goes directly to the 

heart of the DRM problem. My constituents have now placed a 

value on this type of content, and that value is free. Rightly or 

wrongly, declining music CD sales seem to indicate that consumers 

are no longer willing to pay $12 for a CD. So how do we work this 

consumer preference into the context of DRM? 

One approach is the Hollings bill, and I oppose that approach. It 

is overly broad and penalizes consumers who have never or will 

never obtain illegally copied digital content. Piracy is a serious 

issue, and it should be addressed, but I am very hesitant for Congress to get too involved. 

My hope is the broadcasters, content providers, and consumer 

electronics folks will move to develop a solution among themselves. 

It must be targeted, and it must only be in response to the new 

content distribution methods from the movie and the music industries. The software industry is already marketing their products 

over the Internet with full DRM protection, and they should be the 

model. 

13

Mr. Chairman, at the end of the day, it is the consumer who has 

to benefit from any changes or agreements on this issue, and I 

hope to support legislation that has broad industry support and a 

tightly defined focus. 

Again, I thank the chairman for this hearing today. 

Mr. UPTON. Thank you. 

Mr. Bass. 

Mr. BASS. I thank the chairman for holding this hearing, and I 

also want to make note of the fact, this is actually my first hearing 

on this subcommittee, and it is a real honor to be here, especially 

with my friend from Massachusetts. Now we have a chance of really bringing a well deserved recognition to the Red Sox and the 

Celtics and the Bruins and, of course, our Super Bowl Patriot 

champions. 

Indeed, Mr. Chairman—— Mr. UPTON. With a Michigan quarterback, I want you to know. 

Mr. BASS. I am also pleased to be participating in this hearing 

because of its significance. Digital content protection, as many have 

said before, is not a simple issue. It is not going to be resolved 

through a formula or a Federal law or regulation that will resolve 

this issue. 

I think, although it is best that it be left to those who have created and those who will employ the digital infrastructure, content 

protection and so forth, and understand the complexities best, I 

also feel that Congress needs to ensure that excess consumer costs 

and unreasonable inhibition on personal use are kept to a minimum, as has been said by other members of this subcommittee. 

These are very complex, and I am looking forward as the newest 

member of this subcommittee to gaining a better understanding 

and being an active participant in the resolution of these issues, 

and I yield back. 

Mr. UPTON. Mr. Luther. 

Mr. LUTHER. Thank you, Mr. Chairman, and I also want to 

thank you for holding this important hearing. As has been mentioned, the crux of the issue before us is really twofold. First, do 

market forces provide adequate incentives for the private sector to 

form constructive partnerships between content providers, the information technology industry, and electronics manufacturers to 

develop commercially viable encryption technology where the property rights of content providers are adequately protected, or do 

market forces make it difficult for all of the relevant industry players to come to some sort of meaningful consensus? 

Of course, were market forces sufficient, then Congressional action would be largely unwarranted. I am interested in reviewing 

the perspectives of our panelists on this issue. 

Second, if in fact market forces are insufficient in creating incentives for such technological innovations, the next question becomes 

exactly how forceful of a nudge does the private sector require from 

Congress? In this regard, I think we need to better understand to 

what degree a Congressionally mandated technological standard 

would inhibit the high tech community from adapting to a rapidly 

and ever changing digital environment. 

Do the various parties require only strict government enforcement of existing copyright law or should the government step in 

14

and involve itself in determining the actual baseline standard by 

which digital technology must abide? 

It goes without saying that our deliberations today should ultimately serve the American consumer. After all, we are trying to aid 

the development and promise of digital television and facilitate the 

application of high speed data services, both of which should ultimately benefit the average citizen. 

As long as keep the public in mind and avoid focusing on potentially factional disputes, I believe that our committee can be helpful 

in ushering in the promise of the digital age. 

Thank you, Mr. Chairman, and I yield back the balance of my 

time. 

Mr. UPTON. Mr. Davis. 

Mr. DAVIS. I am eager to hear the panel. I ask unanimous consent my statement go in the record. 

Mr. UPTON. All members have that right. Thank you. 

Ms. McCarthy. 

Ms. MCCARTHY. Thank you very much for holding this hearing, 

Mr. Chairman, and I would ask unanimous consent that my statement be placed in the record, so we can get on to the substance 

at hand and the panels that have come before us today. 

Mr. UPTON. Extra credit. Thank you. 

Mr. Terry. 

Mr. TERRY. I will submit my statement, since I have an eight 

o’clock flight. 

Mr. UPTON. Tomorrow or today? 

Mr. Sawyer. 

Mr. SAWYER. I will submit mine as well, Mr. chairman. 

Mr. UPTON. Ms. Eshoo. 

Ms. ESHOO. I am not leaving until 7:30 tomorrow morning. 

Thank you, Mr. Chairman, and first of all, welcome to our very 

impressive panel that is here today, and most especially to Joe 

Kraus, who is the founder of Excite.com. He is from Palo Alto, 

which is the heart of the most distinguished Congressional district 

in the country, and he has made significant contributions to the 

Internet age through his companies and now through the organization that he founded, DigitalConsumer.org. Thank you for being 

here, and we are proud that you are a witness. 

This hearing gives our committee the opportunity to discuss the 

status of protection and distribution of digital content. Various 

technology associations have called for a national broadband policy 

with goals of having broadband in 100 million homes in 10 years. 

If we are going to achieve these lofty goals, we need to examine 

what the barriers are that prevent consumers from getting the content they prefer. 

At times, the promise of broadband and digital television seem 

really farther off than we would have hoped. I wish myself I had 

at least a quarter for every time we have had a hearing here on 

digital TV and have all the reports from the industry, but we can 

attribute at least part of the lagging pace, in my view, to the complexities that are associated with protecting content. 

So finding a solution to this problem, in my view, is not going 

to happen quickly, and I think that it really necessitates the concentrated efforts of all the affected industries. If there was ever a 

15

market that would force companies to come together and find a solution, I think this is it. 

Content creators lose hundreds of thousands of movies to illegal downloads over the Internet, and the software industry loses $11 

billion annually to piracy. So there is one heck of an economic incentive in this for people to come together. This is a huge problem, 

and the industries, obviously, have a vested interest in solving it. 

The economic impact has resulted in the formation, as several of 

my colleagues have pointed to, of working groups that have used 

the combined expertise of many engineers to find methods of protecting digital content. I think the government should be monitoring that progress very closely from the sidelines, rather than inserting itself into the process. 

Legislation that could result in a single technological mandate 

brings with it numerous problems. First, it will stifle, in my view, 

the progress made by the inter-industry working groups by imposing unnecessary bureaucratic procedures and injecting the Federal 

Government into engineering decisions. We are not good at that. 

We don’t know how to do that. 

Second, once a particular technology is selected through this 

process, it could create a single point of vulnerability, making it 

susceptible to hackers and cumbersome to correct. 

Finally, rather than finding a workable market solution, an imprudent mandate could require millions of dollars in engineering 

changes that, in the end, would obviously be passed on to consumers. 

So let me say last that I think that Mickey Mouse and Silicon 

Valley have to create a yellow brick road to hold hands and walk 

down together, and I look forward to the testimony that we are 

going to hear today. I think it is going to be very, very important 

for us to, obviously, take into consideration as we look to see what 

policies, if any, the Congress should be making in this area. Thank 

you. 

Mr. UPTON. Thank you. That concludes the opening statements. 

You can tell, because of the interest—appearance of the members 

as well as the length of the statements, the keen interest on this 

topic, and we are delighted to now let the witnesses speak. 

[Additional statements submitted for the record follow:]

PREPARED STATEMENT OF HON. TOM DAVIS, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF VIRGINIA

There were two salesmen driving around in the country when their car broke 

down. It was late in the evening, so they decided to walk over to a nearby farmhouse and ask if they could spend the night. A recently widowed woman answered 

the door. When they told her of their plight, she told them it would be inappropriate 

to let them sleep in the house since she had just recently lost her husband. However, she did offer to let them sleep in the barn. 

About a year later, the two salesmen were driving in the same vicinity when one 

turned to the other and asked, ‘‘Do you remember the time that widow let us sleep 

in the barn?’’ His partner replied that he did. 

‘‘Did you sneak up to the house that night?’’

His partner, now blushing, replied that he had. 

‘‘And did you give her my name?’’

Once again, the other partner confessed his guilt. ‘‘Why do you ask?’’ he replied. 

‘‘Well,’’ said the first salesman, ‘‘she died last week and left me $1 million.’’

The moral of this story: take credit for your work. That is the central issue we 

are discussing today. The creators of music and video products are struggling to 

16

maintain a system where they receive just compensation for their products in a 

technological environment where that task is increasingly difficult. Digital technology has made it extremely easy to ‘‘share’’ these files via the Internet. I have 

been shown a plethora of peer-to-peer sights on the net where one can go and 

download content for free. Obviously, this poses a severe threat to the recording, 

movie, and broadcasting industries. 

At the same time, digital technology holds great promise for consumers. In our 

efforts to protect content, we must be careful not to throw the baby out with the 

bath water. I will admit my first reaction to proposed legislation that would have 

the government step in with a solution was not favorable. However, this is a complex issue, and I want to ensure that we maintain an environment as conducive as 

possible to innovation. I do not have the technological answer to the question of how 

to best protect digital content. However, I do not want to take steps that prevent 

those with the ability to create such a solution from doing so. 

I am looking forward to the testimony today, and I am thankful to Chairman 

Upton for calling this hearing to give the industry stakeholders an opportunity to 

present their case. This afternoon will be an educational experience for us all, and 

will hopefully guide us in the right direction for any necessary legislative action. 

PREPARED STATEMENT OF HON. LEE TERRY, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF NEBRASKA

Thank you Mr. Chairman and thank you for holding this hearing today. 

It is well understood that as we move forward into the digital age, consumers will 

want the latest and greatest forms of technology and the content to go with it. Digital content has become the content demanded by consumers. DVD[’s are one of the 

most popular segments of the entertainment industry and are considered to be the 

fastest growing consumer electronics product ever. Digital TV and HDTV programming are starting to role out and become available to consumers in many markets. 

As consumer demand for Digital TV and HDTV increases, it is imperative that their 

content be protected from piracy. I think this can best be done with a type of technology that is not selected by the Government. 

There will always be men and women who feel that all content should be free and 

who will spend their time doing their best to hack the most sophisticated encryption 

programs. I believe that the people who hold this belief will never change this view. 

That is why all the industries affected by the need for DRM solutions must come 

together to sort out their problems and find ways to solve them. The revenue lost 

from content piracy is staggering, and losses increase annually. I have heard loss 

figures ranging from $10 Billion to $15 Billion. This is money that deserves to be 

in the hands of those who produce the content, not of those who steal it. 

I am a firm believer in free markets and as such I also feel that industry experts 

can make better decisions on how to protect their goods from piracy than the Federal Government can. The Government should not pick winners and losers. We 

should not mandate a technology that could be obsolete within a year of our mandate. 

Chairman Tauzin, you should be commended for bringing industry together for 

round-table discussions. These discussions are very important to finding the solutions to the transmission of free, over-the-air broadcasting, the analog hole, and 

peer-to-peer file sharing. Through these discussions, the solution to these problems 

can be found. If the Government were to mandate a solution, there could be no fruitful discussion that might lead to better ways and different forms of technology that 

would be best to protect the content providers from piracy. 

I cannot believe that IT companies or the IT industry would support piracy. They 

have as much to lose as anyone else. Furthermore, I have seen these IT companies 

in action, and have witnessed their desire to be at the table to discuss the problems 

facing each industry and the various solutions that can be given to solve their problems. 

There are also a host of companies that are spending their time and capital trying 

to solve the Digital Rights Management problem. Each one should be commended 

for their efforts. Companies like SealedMedia, who work to provide Digital Rights 

Management technology for organizations requiring persistent control for digital 

Internet content. SealedMedia’s solution is unique, as its DRM technology is being 

developed to support multiple media formats. However, if the Government mandates 

a technology, we might be hindering SealedMedia’s ability to innovate and come up 

with solutions that the Government and affected industries have not considered. 

The type of thinking that is needed to find a solution to the DRM problem is one 

that provides a series of different solutions in the short term with the capabilities 

17

to provide additional protections in the future. Any thinking that moves towards 

mandating standards today, while well intentioned, is shortsighted. 

DRM solutions and innovations should not be frozen by Governmental mandates. 

DRM solutions should protect content and the distribution of digital media in all 

forms. In addition, DRM solutions should be allowed to flourish in as many forms 

as necessary to accomplish the end goal of ending piracy. The Digital Rights Management issue cannot be solved with a one-size-fits-all approach. What works well 

for protecting content on a DVD might not work well for protecting broadcast content. These affected industries should be left to solve the DRM problem with minimal Governmental intervention. Rather the Government should focus on giving the 

DRM solutions all the enforcement protections they might need. 

I thank you Mr. Chairman and I look forward to the testimony from our witnesses 

today. 

PREPARED STATEMENT OF HON. ELIOT L. ENGEL, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF NEW YORK

Mr. Chairman—I want to thank you and the panelists for holding this hearing. 

It is vital for the Congress to do a better job of understanding the nuances involved 

in technology and the law. Before us today is literally what the future of copyright 

protection should be. 

There has been a great deal of discussion regarding legislation introduced by Senator Hollings. Some have said that it specifies a standard, but this is not true. I 

have reviewed the legislation and does no such thing. It does authorize a federal 

agency, the FCC, to do so. I’d like that point to be clear, because agencies can 

change regulations far easier than Congress can change laws. 

The need for standards is so important, so evident, and so prevalent, that we 

often do not see it before our very eyes. In 1901 Congress created the National Bureau of Standards, which today is the National Institute of Standards and Technology. One of the very first challenges the Bureau of Standards faced dealt directly 

with health and safety of every citizen within the United States. The need for standards was dramatized in 1904, when more than 1,500 buildings burned down in Baltimore, because of a lack of standard fire-hose couplings. When firefighters from 

Washington and as far away as New York arrived to help douse the fire, few of their 

hoses fit the hydrants. The Bureau of Standards had already collected more than 

600 sizes and variations in fire-hose couplings in a previous investigation and, after 

the Baltimore fire, was a key figure in setting a national standard. 

Today we are concerned about the standards to protect the intellectual property 

of movies and music. This doesn’t rise to level of importance of universal fire-house 

couplings, but it is nevertheless important. Though a person’s life is not endangered 

by piracy, harm nevertheless occurs. What your job—and I speak to the panelists now—what your job is today is to try and convince us whether or not the Congress 

or Administration needs to intervene. 

I have heard good arguments on both sides and I have heard some bad arguments 

on both sides. So this is your opportunity to educate me and influence my opinion. 

PREPARED STATEMENT OF HON. JOHN D. DINGELL, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF MICHIGAN

The transition to digital television is, without question, one of the thorniest issues 

this Subcommittee has had to deal with. Its success hinges on the actions of a disparate group of industry players, many of whom historically make their living competing against one another. Now these companies must find a way to work together 

for the good of the whole. It is a very tall order, as we’ve learned from the DTV 

roundtable discussions led by Chairmen Tauzin and Upton, but I remain hopeful it 

can be done. 

Some believe the transition will not succeed unless more high value, high definition television programming is produced by the broadcast and cable networks. Others say that the key to success lies in making sure broadcasters meet the digital 

TV buildout deadlines. Still others say cable and satellite systems must be made 

to pass through high definition content when it is available, and that these distribution systems must be compatible with any television display. And, of course, there 

remains a statutory conversion date by which this great experiment must be completed. 

In my view, all of these claims have merit. But, in the end, success will be measured in terms of whether consumers ultimately enjoy a higher value television product than they do today. And I am convinced that day will come. It may not happen 

18

magically on December 31, 2006. In fact, consumers may be watching digital television signals reconverted to display on their old analog sets for many more years 

beyond that. But eventually, consumers will migrate to digital sets, so long as they 

perceive value in doing so. 

So where does the value come from? I believe you need to look no further than 

the many hearings we’ve held on this subject over the past twenty years. High Definition Television, or HDTV, was part and parcel to this digital experiment. That 

idea didn’t originate with me or the other Members serving at the time. It was the 

simple commitment made by the broadcast industry when it pitched the idea of receiving a second channel. In fact, as recently as 1996, the National Association of 

Broadcasters (NAB) maintained that TV stations ‘‘will use this spectrum for HDTV, 

pure and simple.’’ It is true that the 1996 Telecommunication Act permits flexibility to offer ancillary video, data, and other non-high-definition services on this digital channel. But 

my sense is the tide may be turning on these plans for a number of reasons. First 

and foremost, there is a glut of digital channels out there, both on satellite TV and 

digital cable. Simply adding more to the mix may not make good sense if few people 

are watching. 

Instead, broadcasters may need to distinguish their programming. One way is by 

telling better stories. But another way is to make their content look, sound, and feel 

superior to other programming available to viewers. They certainly have the tools 

to do the latter, and I hope they’re beginning to see the wisdom of that. Several 

networks are already putting more and more HDTV on the air, and competition 

from cable networks like HBO, Showtime, HD-Net, and Discovery will only increase 

the competitive pressure to do so. 

Now it is true that more HD programming does not necessarily mean the viewer 

will automatically see it. Cable and satellite companies must carry the programming, and do so in a way that is compatible with any and all digital television displays. 

But, on this point, broadcasters may hold the keys to the kingdom. If they put 

on more HDTV, differentiating their programming, the signs point to tremendous 

consumer demand, and cable systems will be forced to respond. Some have started 

to negotiate carriage agreements in earnest, and the pressure from satellite will be 

very important as well. We’re already seeing DirecTV putting more HD programming on its system. In fact, I understand they’re adding Showtime HD this month 

at no additional cost to subscribers, and that trend will likely continue. 

The hurdle, of course, to putting on more high value, high definition digital programming is the very real concern of content owners over piracy of their works. 

We’ve been down this road many times before as technology evolves. And it’s pretty 

clear that the best result occurs when competing interests in industry work together 

to find the right solutions. I am not convinced that government has the tools or the 

expertise to make the right judgments on these matters. 

Certainly there are some in the industry who would prefer a legislative approach. 

And I note that Senator Hollings has introduced legislation that brings this debate 

into sharper focus. But the bill as drafted is unbalanced, stunting the growth of one 

industry in order to protect the growth of another. 

Imagine if the motion picture industry had won its fight against the VCR in the 

early 1980s. At that time the industry believed VCRs would provide the death knell 

to first run motion pictures. Now, of course, sales of VHS tapes actually exceed box 

office receipts each year. But if that notion had prevailed in the Supreme Court, the 

VCR would have been outlawed and the benefits to both the film industry and the 

consumer would never have been realized. As the industry learned then, the answer 

is not to limit technological advances. Rather, it is to embrace them and adapt business strategies to exploit their inherent value. 

While I believe the industry is best poised to negotiate the technical details of digital rights management, the government certainly does have an ongoing and important role in protecting consumers. That means making sure reasonable consumer expectations are met. That goes for recordability and playback on a variety of devices 

throughout the home. But, just as important are reasonable consumer expectations 

about the functionality of the new equipment they already have bought. Over $5 billion of high definition equipment has been sold to date, and that number is projected to soar to $9 billion by the end of this year. 

This equipment was bought with the promise of delivering high definition pictures. In my view, the proposals made by some industry players to downgrade the 

resolution of programs delivered to this new equipment are unfair, counterproductive to the transition, and possibly unlawful. Consumers should not be left 

holding the bag. Content owners and equipment manufacturers should find technological solutions to close the analog hole and address ‘‘in the clear’’ transmissions—

19

and the sooner the better—so the industry’s exposure to piracy is limited going forward. But to do so in a way that makes obsolete, or even degrades the functionality 

of, existing products should be a nonstarter. 

Mr. Chairman, again I commend you for tackling these difficult issues today, and 

I look forward to continuing our work together to meet the challenges they present.

Mr. UPTON. This is a first that we are actually going to have a 

video conference in this hearing room, and our first witness will be 

Mr. Peter Chernin, President and CEO of News Corporation, who 

is actually in Los Angeles, to be followed by Mr. Richard Parsons, 

Co-Chief Operating Officer of AOL Time Warner, Dr. Paul Liao, 

Chief Technology Officer of Panasonic/Matsushita, Mr. Larry 

Blanford, CEO of Philips Consumer Electronics, Mr. Larry 

Jacobson, President and Chief Operating Officer of RealNetworks, 

Mr. Assaf Litai, Founder and Acting CEO of Vidius, and Mr. Joe 

Kraus, Co-founder of DigitalConsumer.org. 

We will start long distance with Mr. Peter Chernin. Peter, welcome. Thank you for appearing. All of your statements are all made 

part of the record. If you could also try to abide by the 5-minute 

rule, that would be truly appreciated. Thank you. 

Mr. Chernin. 

STATEMENTS OF PETER CHERNIN, PRESIDENT AND CHIEF 

OPERATING OFFICER, NEWS CORPORATION; RICHARD D. 

PARSONS, CO-CHIEF OPERATING OFFICER, AOL TIME WARNER INC.; PAUL F. LIAO, CHIEF TECHNOLOGY OFFICER, 

PANASONIC/MATSUSHITA ELECTRIC CORPORATION OF 

AMERICA; LAWRENCE J. BLANFORD, CEO, PHILIPS CONSUMER ELECTRONICS; LARRY JACOBSON, PRESIDENT AND 

CHIEF OPERATING OFFICER, REALNETWORKS; ASSAF LITAI, 

FOUNDER AND ACTING CEO, VIDIUS; AND JOE KRAUS, COFOUNDER, DIGITALCONSUMER.ORG 

Mr. CHERNIN. Thank you, sir. Good afternoon, Mr. Chairman, 

Ranking Member Markey and members of the subcommittee. My 

name is Peter Chernin, and I am the President of the News Corporation. Thank you, Mr. Chairman and Ranking Member Markey, 

for inviting me to participate in today’s hearing by video conference. 

I would like to take this opportunity to applaud all of you for 

your leadership in seeking to ensure copyright protection for content providers in the digital age. 

First, I would like to point out that, although some content providers have been accused of being backward thinking and antitechnology, I am proud to be aggressively pioneering this committee’s brand new video conference technology. 

As an industry, we are in a very exciting but challenging time. 

The rise of the broadband Internet and other digital technologies 

is providing us with tools of unprecedented flexibility that we are 

only beginning to fathom. News Corporation is already harnessing 

these technologies and distribution methods on an unprecedented 

scale. 

For example, over 50 percent of United States television households are able to receive Fox programming in digital form, including the first ever all digital, wide screen Super Bowl earlier this 

year. We have released hundreds of Fox movies on DVD, and will 

soon be releasing Fox movies in the high definition digital DVHS 

20

prerecorded format. However, we strongly believe that the great 

promise of broadband Internet and other digital technologies can be 

fully achieved only if protections are in place to safeguard our investment in the development and distribution of content. 

Recently, we have seen more and more Napster-like programs, 

such as Gnutella and Morpheus, which facilitate the downloading 

of motion pictures and television programming without authorization or compensation to the copyright holder. 

With the advent of broadband, it is only a matter of time before 

these file sharing technologies and other emerging mechanisms 

have a serious impact on the economic viability of the motion picture and television broadcast industries. However, I cannot emphasize enough that it will not be just the media companies that will 

be hurt economically if this piracy continues. 

Rampant piracy will hurt all businesses and consumers and individuals that make their livelihood from the making, redistribution, 

and licensing of content. 

We are working to solve the piracy problems ourselves by distributing our content through media that are reasonably secure. For 

example, pay cable, direct broadcast satellite, and DVHS are digital distribution channels to the home that provide a basic level of 

security for digital content. 

In each of these areas we are able to protect our content either 

through contractual arrangements with cable and satellite providers or through a licensing process using commercially available 

digital rights management, DRM, technology for the Internet. However, I want to focus for a moment on the one major digital distribution method that does not currently offer adequate protection, 

digital over the air broadcast television or so called DTV. 

Presently, cable and satellite have a competitive advantage over 

DTV due to the closed nature of cable and satellite systems that 

allow for encryption and, thus, for the protection of content. DTV, 

on the other hand, is not encrypted for public policy reasons and, 

therefore, does not enjoy these same protections. However, we have 

identified a technological solution that works without encrypting 

DTV. 

It involves the insertion of a broadcast flag in DTV signals that 

can be detected upon receipt by DTV processing equipment. Once 

detected, the receiving device would protect the content from being 

redistributed on the Internet. However, this technology would have 

no impact on the ability of individuals to make personal copies of 

their favorite television shows. 

Mr. Chairman, as you are undoubtedly aware, there has been an 

ongoing effort for the last several years to negotiate the protection 

of all digital audio-visual content delivered to the home network, 

including but not limited to DTV. These negotiations, often referred 

to as the 5C negotiations, have made substantial progress with regard to the protection of pre-recorded and conditional access delivered content such as pay per view, video on demand, and pay and 

basic cable, and we at Fox applaud that progress. 

I am also pleased to note, Mr. Chairman, that over the past few 

weeks significant progress has been made between our industry 

and the IT and consumer electronics industries on solving the probVerDate Sep 04 2002 09:35 Sep 20, 2002 Jkt 010199 PO 00000 Frm 00024 Fmt 6633 Sfmt 6602 W:\DISC\79464 79464
21

lem of protecting free, over-the-air digital TV broadcasts through 

the use of a broadcast flag. 

I have described in my written testimony the details of the status 

of these negotiations. This positive movement could not have occurred without the substantial involvement of this subcommittee 

and other Members of Congress who have put pressure on all of us 

to solve this problem. 

I would also like to praise Mr. Parsons of AOL Time Warner and 

Mr. Barrett of Intel for their joint statement on principles on copyright protection that specifically mentioned the need to fix the DTV 

copyright problem. 

Private sector efforts such as these are important toward reaching our stated goals, and should be commended. However, even if 

we do reach a private sector agreement, which I am confident we 

will, targeted legislation will still be necessary in order to ensure 

a level playing field for all the parties. 

Just as we are striving to protect our content when distributed 

by DTV, we are confronting two other mechanisms that still threaten the security of content. Into the foreseeable future, we will still 

need to deliver content to consumers in an analog form. After all, 

hundreds of millions of television sets can only accept content in 

that form. 

Unfortunately, analog content can be easily converted into an unprotected digital form that can in turn be copied or redistributed 

without authorization. This is the so called analog hole. We are developing a plan to plug the analog hole. It includes harnessing watermark technology that will prevent such conversions from being 

used to avoid content protection obligations. 

We hope to secure, again, inter-industry consensus on such a proposal, and we welcome your assistance in encouraging all relevant 

parties to make this happen. Once that consensus is reached, we 

would hope to have that solution quickly ratified by Congress. 

Finally, we are diligently working on plans to stop the unauthorized viewing of content delivered via the Internet. It is a very difficult and complex problem to address, because there are so many 

ways unauthorized content can be distributed on the Internet. We 

are mindful of not overcorrecting the problem and burdening Internet appliances anymore than necessary, but we are confident that 

the problem can be solved. We know it must be. 

It is reported that every day hundreds of thousands of copies of 

movies are being downloaded without compensation to their copyright holders, and this number is growing rapidly. The competition 

from pirated and, therefore, free copies of our movies and TV shows 

is the single biggest obstacle to developing a viable business model 

for offering consumers authorized versions of movies and TV shows 

on the web. 

Again, we are optimistic that we can develop the technological 

solution to address this threat in a cost effective way, just as we 

have with DTV and will soon be doing with the analog hole. However, it is critical that Congress plays an active role in ensuring 

that the parties reach a consensus on how to solve this problem as 

quickly as it is technologically possible. 

This is an Internet problem that needs to be solved at Internet 

speed. We need Congress and your efforts to continue to help make 

22

that happen. As with the broadcast flag and the analog hole solutions, we will need Congress to codify this solution to the illegal 

download problem. 

At the end of the day, Mr. Chairman and members of the subcommittee, if we do not find creative solutions to this real and 

growing problem, consumers will be the ultimate losers. While 

some may see a short term gain in obtaining free, unauthorized 

material from the Internet, the long term result will be less consumer choice and stunted American technological growth and development. 

I thank you for the opportunity to present the views of News 

Corporation from a distance on this important topic, and I will be 

happy, whenever you would like, to answer any questions. Thank 

you. 

[The prepared statement of Peter Chernin follows:]

PREPARED STATEMENT OF PETER CHERNIN, PRESIDENT AND CHIEF OPERATING

OFFICER, NEWS CORPORATION

Good morning, Mr. Chairman and Members of the Subcommittee. My name is 

Peter Chernin and I am President and Chief Operating Officer of News Corporation. 

Mr. Chairman, I want to take this opportunity to thank the Subcommittee for inviting me to participate in today’s hearing, and to applaud the Subcommittee’s efforts 

to ensure copyright protection for content producers in the digital broadband age. 

First, I would like to point out that, although some content providers have been 

accused of being backward-thinking and anti-technology, I am proud to be aggressively pioneering this Committee’s brand-new video conference technology. It is not 

the first time the entertainment industry has pushed technological innovation to 

new levels. I hope that this will not go unnoticed by our detractors. 

You have asked me to cover several topics in my testimony: first, to describe industry efforts to ensure that digital television content—particularly high-definition 

content—is protected once the transition from analog to digital television is complete; next, to identify the goal of the Copy Protection Technology Working Group 

(or ‘‘CPTWG’’) and its subcommittee, the Broadcast Protection Discussion Group (or ‘‘BPDG’’). I will also discuss my company’s involvement in the BPDG’s efforts to address the broadcast flag technology solution; the process of evaluating alternative 

technologies capable of keeping free, over-the-air television programming from being 

redistributed on the Internet; the impact of content protection technology on consumers’ ability to enjoy the full panoply of new and exciting digital equipment; and, 

finally, inter-industry efforts to close the ‘‘analog hole’’ and to resolve the broader, 

peer-to-peer file sharing problems, as well as the proper role of government in determining those solutions. I welcome the opportunity to provide you with my company’s perspective on these important matters. 

1. PRE-BPDG EFFORTS TO PROTECT DIGITAL TELEVISION

A. The CPTWG and the Identification of the ‘‘DTV Hole’’

I will begin by giving you a few words of background on the CPTWG. 

The CPTWG was founded in the aftermath of unsuccessful discussions in the mid1990’s among representatives of the content, consumer electronics and information 

technology industries regarding a legislative approach to protecting content in the 

dawning digital era. The CPTWG was created to be a non-exclusive, non-legislative, 

non-binding forum that would meet regularly to investigate and seek consensus on 

technological solutions for various content protection challenges. I think it’s important to recognize that the CPTWG is not a standard-setting organization and has 

no authority to promulgate or even recommend particular technologies. Even where 

consensus on a particular technological approach has been reached within the 

CPTWG, implementation is always left to entities outside the forum. 

From the outset of discussions within the CPTWG, there was widespread recognition that content delivered to consumers in encrypted form was easier to protect, 

from both a technological and a legal perspective, than content that was 

unencrypted, or ‘‘in-the-clear.’’ As a result, CPTWG focused its initial efforts almost 

exclusively on the protection of content that could be delivered to the home in 

encrypted form—in other words, physical media like DVDs and cable and satellite 

programming distributed via conditional access. The idea was that once encrypted, 

23

such content would be continually protected through secure links to the recording 

and transmission technologies of consumer electronic and computing devices in people’s ‘‘home networks.’’ Solid achievements grew out of these CPTWG efforts. These 

include the DVD protection technology CSS, the so-called ‘‘5C’’ output protection 

technology (known as DTCP) and the so-called ‘‘4C’’ technology to protect recordings 

on removable media (known as CPRM). 

The problem is that free, over-the-air, digital television could not directly benefit 

from those advances. Under current FCC regulations, digital terrestrial television 

broadcasts and certain basic tier cable video programming are delivered ‘‘in-theclear,’’ or in unencrypted form. In other words, unlike encrypted digital media such 

as DVDs, or premium digital cable and satellite video transmissions delivered via 

conditional access, there is no technical or legal authorization needed to receive DTV 

signals. Thus, unprotected DTV content can be redistributed, over the Internet or 

elsewhere, without any authorization from copyright holders. The resulting ‘‘gap’’ in 

the digital content protection scheme is referred to as the ‘‘DTV hole’’. 

B. The Role of DTV Protection in the 5C Negotiations 

When the question of how to plug this DTV hole arose in 1999, Fox and other 

broadcast-oriented studios realized that the quickest way to resolve the problem 

would be to augment already-developed home networking protection technologies 

like DTCP. The initial idea was to require network entry, or ‘‘source,’’ devices to detect and respond to a ‘‘broadcast’’ watermark by directing such content to a protected output of the device. However, 5C cited a number of legal and commercial 

reasons for its belief that it could not agree to impose such an obligation upon its 

licensees and as a result the 5C/studio negotiations, which involved a number of 

issues besides DTV, were delayed for most of the year 2000. 

Progress from there was gradual. In November 2000, two studios elected to sign 

a Memorandum of Understanding with the 5C (later replaced by definitive agreements) that did not include protection for DTV. A month later all seven MPAA studios signed a letter to 5C supporting the amendment of the 5C license to impose 

broadcast watermark detection and response obligations upon 5C-licensed source devices. The DTLA and the other five studios then entered into discussions regarding 

such an amendment, which again proceeded slowly. 

In 2001, two new technology proposals from the studio side intensified these negotiations. First, in the Spring, Fox’s engineers proposed a mechanism for implementing broadcast protection in a less complex—and therefore less expensive—way 

than the original watermark proposal. The idea was to include in the technical 

standards for DTV a simple and voluntary ‘‘Redistribution Control’’ descriptor 

(colloquially, a ‘‘broadcast flag’’) indicating that the copyright holder desired to control redistribution of the broadcast signal. (This is the same proposal that was formally incorporated into the standards of the Advanced Television Standards Committee, or ATSC, earlier this month.) Fox also developed and presented to the 5C 

companies a technical proposal whereby this ‘‘broadcast flag,’’ when detected in 

ATSC transport streams, would automatically direct the streams to the established 

5C protection system—while acknowledging that the earlier ‘‘broadcast watermark’’

might continue to be useful as an alternative or replacement approach. The ‘‘broadcast flag’’ application was incorporated in a proposed MOU between the 5S studios 

and the 5C companies that was sent to 5C in July 2001 and discussed for the next 

several months. 

Finally, at a meeting in October 2001, the 5C companies again declined to impose 

the Fox solution through the DTCP license. However, the 5C companies suggested 

that Fox’s proposal form the basis for constituting a multi-industry group dedicated 

to protecting DTV against unauthorized redistribution. At that time—and later at 

an FCC staff ‘‘hoedown’’ meeting that November—the 5S studios expressed concern 

that such a multi-industry process might unnecessarily delay the actual implementation of DTV protection, but nevertheless agreed to participate. At the November 

2001 CPTWG meeting, the individual 5C companies presented a slightly refined 

version of the Fox technical proposal, and recommended that a group open to all 

interested parties be formed for the purpose of evaluating the revised technical proposal. Later that day, 70 representatives of the consumer electronics, information 

technology, motion picture, cable and broadcast industries agreed to form the Broadcast Protection Discussion Group (BPDG). They have since been joined by representatives of various government bodies, public interest groups, academics and other 

private individuals. 

24

2. THE WORK OF THE BPDG

A. BPDG Problem Statement and Schedule 

A Work Plan for the BPDG was drafted and circulated in mid-December 2001 that 

described the problem BPDG was formed to address as follows: ‘‘A solution is needed to prevent unauthorized redistribution of unencrypted digital over-the-air broadcast content on a worldwide basis (including unauthorized 

redistribution over the Internet).’’ The Work Plan also recommended a simultaneous effort to consider the policy and 

legal aspects of implementing the solution as follows: ‘‘A parallel discussion also should take place among representatives from the affected companies and industries to consider the policy and legal aspects of the 

solution, including with respect to what legally enforceable means might be 

available to mandate the use of the technologies or adherence to implementation requirements recommended by the technical working group’’. This effort 

should be organized promptly, so that work can begin once consensus begins to 

coalesce around a technical proposal.’’ The Work Plan proposed that the so-called ‘‘Parallel Group’’ (since renamed the ‘‘Policy Group’’) be organized in January 2002, and that March 31, 2002, be the proposed deadline for completing the BPDG’s evaluation of the ‘‘broadcast flag’’ proposal. 

For Fox and the other 5S studios, at least, the March 31 deadline was a key 

factor in muting concern about the delay inherent in multi-industry open processes like the BPDG. As such, Fox is greatly disappointed that the March 31 

deadline was not adhered to, even though we acknowledge the substantial efforts that were made to do so. We are equally disappointed that the Policy 

Group has barely begun its work on how to mandate adherence to the requirements developed by the BPDG. Every single day, new and perfectly lawful DTV 

receiver products are manufactured in the U.S. and around the globe without 

any built-in protection against unauthorized redistribution. As a result, every 

single day DTV’s exposure to piracy increases. Fox calls on all BPDG participants to do their utmost to ensure that the requirements document is finalized 

as soon as possible, and that the Policy Group begin work immediately on ideas 

for implementing it through legislation, regulation and/or private licenses. 

3. THE MPAA/5C/CIG AGREEMENT ON BPDG CONCLUSIONS

A. The BPDG Conclusions 

Like any other multi-industry process featuring participants with diverse interests and agendas, the discussions of the BPDG have not been without controversy. 

But that does not mean that key participants have been unable to reach agreement. 

To the contrary, I am pleased to report that, thanks to marathon negotiations during the past week, representatives of the MPAA studios, the 5C companies and the 

Computer Industry Group (CIG) have reached agreement in principle on a comprehensive set of conclusions recommended for adoption by the BPDG. (A copy of 

these conclusions is attached.) The most important of them can be summarized as 

follows:

1. An approach based on a ‘‘broadcast flag’’ is technically sufficient for the purpose 

of signaling protection of all DTV audio-visual content. 

2. The specific ‘‘broadcast flag’’ used for this purpose should be the ATSC Redistribution Control descriptor now set forth in the ATSC Standard. 

3. Protection requirements should begin at the point of demodulation of the incoming ATSC signal. 

4. Products covered by the compliance and robustness requirements must handle demodulated content in a ‘‘protected manner’’ unless—and until—the products 

screen for the ‘‘broadcast flag’’ and determine that it is not present. The parties 

have agreed on exactly how ‘‘protected manner’’ should be defined for various 

ways in which DTV is and might be transmitted and stored within and between 

covered products. 

5. Where the demodulated DTV content has been screened and the ‘‘broadcast flag’’

has been determined not to be present, no further requirements or limitations 

should be imposed upon the handling or recording of such unmarked content. 

6. Unscreened and marked content should be recorded by, or output from, covered 

products exclusively through the following permitted methods: 

a. Through certain legacy outputs and recording methods, including analog outputs and recording methods; 

b. Through certain non-legacy digital outputs that do not pose undue risk of unauthorized redistribution; and 

25

c. Through non-legacy digital outputs and recording methods that provide adequate protection against unauthorized redistribution. The parties have agreed 

on three alternative ‘‘market acceptance’’-based criteria and one alternative 

‘‘just-as-good-as’’ criterion for determining which outputs and recording methods meet the ‘‘adequate protection’’ test (as discussed in further detail below). 

The parties have also agreed on certain recommendations to the Policy Group 

as to how to handle disputes and the ‘‘hacking’’ of authorized output and recording protection technologies. 

B. The Impact of the Agreed BPDG Conclusions on Alternative Technologies for Protecting DTV from Unauthorized Redistribution 

These are the pillars of the MPAA/5C/CIG proposal, a proposal that carefully balances the rights of content owners, of device manufacturers, of the proprietors of 

technologies currently available to protect DTV from unauthorized redistribution, 

and of the proprietors of such technologies that will become available in the future. 

As I’ve noted, the agreement provides for four alternative methods by which a particular protection technology can be proposed for inclusion on the list of approved 

technologies (the so-called ‘‘Table A’’) or added later. The first method requires 

agreements with just three content providers (of whom only two need be studios) 

by which such providers use or approve the particular technology. The second requires agreements with just two studios—as well as 10 device manufacturers. The 

third method is the ‘‘just-as-good-as’’ method, by which a proprietor of a new technology can get on the list without having had to get anyone to adopt the technology, 

merely by showing a neutral arbiter that the technology is ‘‘at least as effective’’ as 

an uncompromised technology already on the list. This fourth method enables protection technologies linked to technologies already on the list to also be added. 

Some participants in the BPDG have argued that technologies should be candidates for inclusion on the list just by virtue of the sheer volume of content protected, regardless of whether content owners have had any say whatsoever in this 

protection. Such an approach strikes us as far too manipulable by device manufacturers and unlikely to ensure that only effective technologies be added to the list. 

Other participants have suggested that an array of technical criteria be adduced to 

determine whether a technology is ‘‘good enough’’ to be added to the list. While such 

a proposal sounds even-handed, no list of technical factors could realistically represent the complex ways those factors interact to make an overall system architecture effective (or not). Furthermore, no list of factors developed in 2002 could possibly anticipate all of the revolutionary ways in which future protection technologies 

might evolve. As such, the ‘‘technical criteria’’ approach would stifle creative technology development without necessarily keeping ineffective technologies off the list. 

By contrast, the ‘‘market acceptance’’ criteria outlined in the MPAA/5C/CIG proposal serve to screen for ineffective technologies while protecting the proprietors of 

effective technologies against slow marketplace acceptance by content providers. Nor 

do these criteria discriminate against innovative and unorthodox approaches. Just 

to take one example, Philips has presented BPDG with a proposal whereby 

unencrypted recordings of broadcast content could be protected by an alternative 

‘‘flag preserving’’ mechanism. Protection in this scheme would be derived from ‘‘compliance’’ rather than ‘‘self-protection.’’ Because Philips has not yet specified exactly 

how this compliance would be achieved, its proposal is currently incomplete. However, nothing in the agreed criteria will preclude Philips from petitioning to add its 

proposed technology to the list of approved recording protection technologies in the 

future, once it has a complete proposal to submit. We look forward to evaluating 

this proposal, as well as other examples of the benefits of innovative thinking we 

expect to receive in the future. 

C. The Impact of the Agreed BPDG Conclusions on Consumers’ Enjoyment of Digital 

Technology 

It’s equally important to point out that nothing in the proposed BPDG requirements will adversely affect consumers’ enjoyment of digital equipment in all its exciting variety. To the contrary, the emerging consensus on how DTV should be protected will accelerate the proliferation of such equipment by better informing manufacturers exactly what sort of protections to incorporate. Nor will protection requirements hinder the operation of new digital equipment. Consumers will continue to 

be enabled to make secure copies of DTV content marked with the Broadcast Flag, 

either on personal video recorders like TiVo or ReplayTV or on removable media 

such as D-VHS tapes or recordable DVDs. Similarly, the requirement that non-legacy digital outputs be protected will do nothing to hinder the ability of consumers 

to send DTV content across a home digital network with connections to digital set 

top boxes, digital recorders, digital servers and digital display devices. Finally, the 

26

compliance and robustness requirements will not extend to professional broadcast 

products that are not used to insert and carry the Broadcast Flag, or to bona fide 

academic and commercial research and development activities, and so will not 

hinder such activities in any way. 

4. INDUSTRY EFFORTS TO ADDRESS THE ‘‘ANALOG HOLE’’ AND P2P

I have focused most of my testimony on protecting the ‘‘DTV hole’’ not just because of this Subcommittee’s laudable interest in and concern for the DTV transition. It is also because the ‘‘DTV Hole’’ is the gap in the digital content protection 

scheme for which we have a solution that is ready to implement today. This solution 

is the ‘‘broadcast flag.’’ For the other two dangerous gaps—the so-called ‘‘analog 

hole’’ and the problem of online theft—solutions are every bit as necessary (if not 

more so), and promising technologies have been identified, but finalized solutions 

are regrettably more elusive. 

A. Plugging the ‘‘Analog Hole’’

Long into the foreseeable future, content providers will need to deliver content to 

consumers in an analog form; after all, hundreds of millions of TV sets are not 

digitally equipped. Unfortunately, analog content (including protected digital content converted to analog for viewing purposes) can easily be converted into an unprotected digital form that can in turn be copied or redistributed without authorization. This is called the ‘‘analog hole’’ in digital content protection schemes. The 

BPDG identified the ‘‘analog hole’’ in its Work Plan as a subject for further study, 

but has more recently realized that because this issue applies to a range of content 

far broader than DTV, and because the BPDG is already late in finishing its work 

on the Broadcast Flag, the BPDG is not the appropriate forum in which to address 

it. 

Fox strongly recommends that the multi-industry approach that has brought us 

so far towards achieving protection of DTV broadcasting, turn next to developing 

and implementing a solution for the ‘‘analog hole.’’ In the meantime, Fox and its 

industry colleagues are working on a plan that includes harnessing watermark technology to close the gap in content protection that’s created by the digital/analog conversion. . We hope to secure inter-industry consensus on such a proposal, and we 

welcome your assistance in encouraging all relevant parties to make this happen. 

Once it does, we would hope to have that solution quickly ratified by Congress. 

B. Online Theft of Content 

Finally, we are working intensely on a plan to prevent the unauthorized viewing 

of content delivered via the Internet. It is a difficult problem to address because 

there are so many ways unauthorized content can be distributed on the Internet. 

We are also mindful of not over-correcting the problem and burdening Internet appliances any more than necessary. But we are confident that the problem can be 

solved; we know it must be. It is reported that every day, hundreds of thousands 

of copies of movies are being downloaded without compensation to their copyright 

holders, and this number is growing rapidly, in tandem with the increasing speed 

and proliferation of Internet-delivered broadband. The competition from pirated copies of our movies and TV shows is the single biggest obstacle to our developing a 

viable business model for marketing movies and TV shows legally on the Web. 

Again, we are optimistic that we can develop a technological solution to address this 

phenomenon in a cost-effective way, just as we have with DTV, and as we will soon 

be doing with the ‘‘analog hole.’’

However, it is critical that Congress play an active role in ensuring that the parties reach a consensus on how to solve this problem as quickly as technologically 

possible. This is an Internet problem that needs to be solved at Internet speed. As 

with the broadcast flag and analog hole solutions, we will need Congress to codify 

the solution to the illegal download problem. We at News Corporation are working 

to build the necessary support in the private sector, including consumer electronics 

and computer manufacturers, Internet service providers and others in order to come 

up with solutions that would benefit industry and consumers. With our combined 

technological expertise, we have a chance to stop the rampant theft of copyrighted 

works and to provide the business opportunities that will drive the development of 

new and innovative products and services long into the future. 

At the end of the day, Mr. Chairman and Members of the Subcommittee, if we 

do not find creative solutions to this real and growing problem, consumers will be 

the ultimate losers. While some consumers may see a short-term gain in obtaining 

free unauthorized material from the Internet, the long-term result will be less consumer choice, lower quality of content, and the stunted growth of American technology and entertainment. 

27

Thank you for providing me this opportunity to present the views of News Corporation. I will be happy to answer questions.

Mr. UPTON. Thank you. 

Mr. Parsons. 

STATEMENT OF RICHARD D. PARSONS 

Mr. PARSONS. Chairman Upton, Chairman Tauzin, Ranking 

Member Markey, and distinguished members of the committee, my 

name is Dick Parsons. I am CEO-Elect of AOL Time Warner, and 

I am grateful for this opportunity to appear before you today. 

Since a full version of my testimony has been submitted to the 

committee, I will touch only on the most salient points. I want to 

begin, however, by thanking the committee, and the chairman in 

particular, for the DTV roundtables you have held, as well as for 

your overall efforts to spur the transition to digital distribution. 

Your understanding of the importance of content protection is a 

linchpin in moving this transition along. 

AOL Time Warner has been out front in recognizing the landmark significance of digital technology and in bringing its benefits 

to the public. Warner Bros., for instance, pioneered the DVD. HBO 

was the first premium channel to offer nationwide high definition 

digital television, and today it delivers more than 60 percent of its 

programming in that format. Time Warner Cable is leading the 

cable industry’s digital transition, while AOL encompasses what is, 

by far, the world’s largest online community. 

As head of our movie, music and television businesses, I have 

witnessed the profound impact digital media may have on the creative process, but no matter how digitized content becomes, its 

power and potential will always depend on the unique, idiosyncratic magic of storytelling. It is that magic which stands to be hurt 

most by digital piracy. 

Illicit use of digital technology’s unlimited copying capacity 

threatens the economic equation which fuels the creative process. 

Who will invest the time and talent and material that can instantly 

be ripped off? Where will capital come from for new studio productions when there is no possibility of return on that capital? 

The legal remedies we have pursued to stop digital piracy are not 

sufficient by themselves. To the greatest extent possible, content 

must be made secure at the point of distribution in ways that do 

not impede legitimate consumer use. 

With our colleagues in the information technology and consumer 

electronics industries, we are developing efficient methods of protection. Among these are: An encryption system to secure DVD 

video; safeguards for content as it moves from computers to monitors; and a secure means for making recordings for home use that 

inhibit the potential for digital piracy. 

Our business is dependent on consumers, and we think our efforts in copy protection offer them easily available, legal, and affordable content. Under the content protection licenses we have 

signed, consumers can make digital copies of over-the-air broadcasts, basic cable, satellite and premium channels for their own 

use. 

In view of this significant progress, we see no need for a broad 

government mandate regarding design requirements. Such sweepVerDate Sep 04 2002 09:35 Sep 20, 2002 Jkt 010199 PO 00000 Frm 00031 Fmt 6633 Sfmt 6602 W:\DISC\79464 79464
28

ing regulatory action would be counterproductive, and would seriously hinder the development of new technologies. However, since 

it is impossible to require all manufacturers to join the effort, certain gaps cannot be closed solely through licensed based, voluntary 

protection systems. 

These gaps occur when content is either delivered without access 

controls, so called in the clear, or are later converted into unprotected formats. Let me talk briefly about the three gaps, Mr. Chairman. Now you have identified them. Several of the committee 

members have identified them, and Mr. Chernin just spoke about 

them, the need for a broadcast flag to protect content that is broadcast in the clear, the need to close the analog hole so that when 

content that is broadcast in a protected format but then is converted into an analog or unprotected format, can be captured and 

then redistributed, and then the need to do something about peerto-peer file sharing. 

I won’t go through that again, because I am keeping my eye on 

this clock, but we think that there is in each of those three areas 

possibly an appropriate role for targeted legislation to take what 

the industry is working on, which are negotiated among our various industries, standards to either implant broadcast flags or watermarks to protect the analog hole problem, or yet to be developed 

technological solutions on the peer-to-peer file sharing, and make 

those uniform across the land through some targeted legal requirement. 

That is where we see the role of government being most appropriate, but we clearly see the role of the various industries involved 

as being preeminent in terms of taking the lead to define how to 

attach those discrete problems. 

So we have worked together very closely, in particular, with our 

colleagues at Intel, in establishing some principles that outline 

what is the growing consensus among the industries, and I am 

pleased to report that a number of other companies, including Mr. 

Chernin and his company, News Corp, as well as Toshiba and others, are coming on board this articulation of these principles, and 

we will file a copy of those with our statement for your record. But 

the fact that we are all coming together to design and put in place 

consumer friendly solutions with only limited government involvement is, to me, very encouraging. 

It makes me confident that we can work with each other and 

with you to overcome whatever barriers exist to unleashing the full 

potential of the digital economy. Thank you. 

[The prepared statement of Richard D. Parsons follows:]

PREPARED STATEMENT OF RICHARD D. PARSONS, CEO-DESIGNATE, AOL TIME

WARNER

Mr. chairman, ranking-member markey, and members of the subcommittee, I’m 

grateful for this opportunity to discuss an issue of great importance to my company, 

our entire economy and, above all, consumers. 

AOL Time Warner is both the largest producer of information and entertainment 

and a leader in developing innovative digital technologies for their delivery. As such, 

we appreciate the DTV roundtables you’ve held as well as your overall efforts to 

spur the transition to digital distribution. 

I’m here today to answer publicly the questions you’ve been asking many of us 

privately for some time: Where is AOL Time Warner in its efforts to provide consumers the benefits of digital media? And how far along are our intra- and interVerDate Sep 04 2002 09:35 Sep 20, 2002 Jkt 010199 PO 00000 Frm 00032 Fmt 6633 Sfmt 6621 W:\DISC\79464 79464
29

industry efforts to develop reliable, consumer-friendly digital content-protection 

technologies? 

Our company has been out front not only in recognizing the landmark importance 

of digital technology, but also in bringing its benefits to the public. Warner Bros., 

for instance, pioneered the DVD. HBO is the first premium channel to offer nationwide high-definition digital television and today delivers more than 60% of all its 

programming in high definition format. Time Warner Cable offers digital distribution in 42 markets—leading the cable industry’s digital transition. AOL encompasses what is, by far, the world’s largest online community. 

At AOL Time Warner we also have the world’s finest library of film, music and 

tv programming—content that we’re eager to offer consumers in new digital formats. 

In my role as head of AOL Time Warner’s movie, music and television businesses, 

I Witnessed first-hand the profound impact digital media have on the creative process. On the delivery side, more innovations will reach the market in the next three 

to five years, introducing new levels of reliability, variety and quality. 

But no matter how digitized content becomes, or how tremendous the impact of 

convergence, the power and potential of the entertainment industry will always depend on the unique, idiosyncratic magic of storytelling. 

It’s that magic which stands to be hurt most by digital piracy. Along with breakthrough benefits, digital technology enables users to make unlimited perfect copies 

and, with the click of a mouse, distribute them globally. 

The illicit use of this copying capacity threatens the economic equation which supports and fuels the entire creative process. What artist will invest years of sweat, 

struggle and talent in developing content that can instantly be ripped-off? Where 

will the capital come from for new studio productions when there’s little or no return on what’s been produced? 

When viewers can download an entire season of West Wing from the Internet, for 

free and without commercial advertising, what value does syndication have? When 

Lord of the Rings is available for free on Morpheus, how many people will skip the 

trip to the theater? 

Last year, record sales were down 10%, much of it due to online file-stealing on 

Napster-like services. 

With the spread of peer-to-peer swapping sites encouraging and enabling online 

theft, there’s definite urgency to our plight. 

We’ve vigorously pursued the legal remedies that exist. But litigation isn’t 

enough. We need to protect content at the source while simultaneously driving the 

use of digital technologies. 

Over the past six years, we’ve worked with our colleagues in the information technology (IT) and consumer electronics (CE) industries to develop efficient methods of 

content protection. It’s been a productive partnership, and we’ve accomplished a 

great deal in this voluntary cross-industry process. 

Among the results are an encryption system to secure DVD video; protection for 

content passed through device-to-device connections in home networks; safeguards 

for content as it moves from computers to display on monitors; and a secure means 

for making recordings for home use that inhibit the potential for digital piracy. 

Of course, our business is dependent on providing consumer benefits and making 

consumers happy and we think our efforts in copy protection will do just that—making content available easily, legally and at a reasonable price. 

We’re continuing to work together to meet new challenges. Today companies like 

realnetworks are providing drm solutions that we’re already using in the marketplace. 

The cornerstone of these cross-industry efforts is the awareness that, to the greatest extent possible, digitally delivered copyrighted content should be made secure 

at the point of distribution. 

These new technologies also offer consumers both familiar and new ways of using 

their devices to enjoy content. For instance, under the content protection licenses 

we’ve signed to date, consumers will be able to make digital copies of over-the-air 

broadcast, basic cable, and satellite, and premium channels (such as HBO) to watch 

at their convenience. 

That means a son can copy band of brothers from HBO for his WWII veteran father to watch when he comes to visit. Other technology will permit a family in the 

middle of watching Harry Potter via video on demand to pause the movie for its 

own intermission. That’s the type of convenience we plan to offer consumers through 

digital technology. 

In view of the significant progress we’re making in cross-industry content protection, we believe there’s no need for a broad government mandate of design requireVerDate Sep 04 2002 09:35 Sep 20, 2002 Jkt 010199 PO 00000 Frm 00033 Fmt 6633 Sfmt 6621 W:\DISC\79464 79464
30

ments. That type of sweeping regulatory action would be counterproductive, seriously hindering the development of new and better technologies. 

However, since it would be impossible to require all manufacturers to join the effort, it’s clear that certain gaps cannot be closed solely through license-based, voluntary protection systems. These gaps occur when content is either initially delivered without access controls (i.e., ‘‘in the clear’’), or later converted into unprotected 

formats. 

Over-the-air broadcasts, for example, are delivered in the clear, with no access 

controls. Work is underway to identify copyrighted broadcasts with a ‘‘broadcastflag,’’ indicating they shouldn’t be redistributed over the Internet. To ensure that 

devices receiving the broadcast signal obey the flag, there must be a legal requirement to detect and respond to it. 

Such a requirement can be accomplished by narrowly focused government action—possibly through an FCC regulation. Many of our partners in the ce and it 

industries agree that this targeted government action is necessary as well as desirable. 

A more critical and systemic problem is known as the ‘‘analog hole.’’ Even when 

delivered digitally in a protected manner, video content must be converted to an unprotected analog format that allows it to be viewed on millions of analog TV sets. 

Once content is ‘‘in the clear’’ in analog form, it can be converted back into a digital 

format and is subject to unauthorized copying and redistribution. 

This involves all delivery means for audiovisual content, from DVDs to pay per 

view, to over-the-air broadcasts. 

One way to plug this hole is through watermarking. This embeds copyright status 

and permitted uses within the content. Although not perceptible by the consumer, 

the watermark can be read by devices designed to detect and respond to it. 

As with the broadcast flag, efforts are underway to develop and select a consensus 

watermark. But these have been hampered by patent disputes. a single watermark 

must be agreed upon. If private industry can’t agree, we are likely to turn to the 

government for guidance and assistance. 

Once a watermark is selected, some government action will be needed FOR appropriate detection and response. This can be strictly focused on the particular devices 

or parts of devices capable of receiving an analog signal and converting it into digital. No broad mandate concerning the overall design of computers or consumer electronic devices is necessary. 

Implementing the broadcast flag and filling the analog hole with watermark technology are goals on which we are making good progress. But these solutions won’t 

solve the vexing problem I mentioned earlier of piracy on peer-to-peer networks. 

This is the third gap, and the most difficult to close. The popular term for trafficking in copyrighted works—‘‘file sharing’’—is a misnomer. It isn’t sharing. It’s online shoplifting. Indeed, it’s worse than shoplifting because it’s not simply making 

a copy for oneself but duplicating and distributing multiple copies throughout the 

world. 

The pace and reach of this illegal activity continues to increase. New peer-to-peer 

services, such as KazAA, Morpheus and Grokster, flourish on the Internet. Studies 

have shown that at any given moment 500,000 to 1 million people are using one 

of these services and networks to find, reproduce and redistribute files. If Napster 

is any guide, approximately 90% of this activity consists of unauthorized trafficking 

in copyrighted works. 

And we face new peer-to-peer challenges all the time. For example, the new replay 4000, among other things, allows users to copy premium cable shows and then 

easily send them to other replay owners who don’t subscribe to the channels involved. In effect, it creates an internet ‘‘black box.’’

No single approach—technical, legal, legislative or economic—can provide a solution. The active cooperation and committed participation of all industry sectors—

content, consumer electronics, computer and service provider—will be necessary to 

reach workable solutions. 

The main impetus will come from business, and we’re strongly committed to working with our colleagues across the relevant industries. Yet, it’s clear to me—and I 

believe there’s a growing consensus across the entertainment, computer and consumer electronics industries—that at certain critical points our work must be complemented by targeted government action to support private-sector solutions. 

In conjunction with Intel, which has led the development of many copy-protection 

technologies, we’ve worked to establish principles that outline this growing consensus. I am pleased to report that newscorporation, led by my colleague Peter 

Chernin, issued a statement last week applauding these principles. 

31

The fact that we are all coming together to design and put in place consumercentric solutions, with only limited government involvement, is a very encouraging 

sign. 

It makes me confident that we can work with each other and with Congress to 

overcome whatever barriers exist to unleashing the full potential of the digital economy. 

Thank you.

Mr. UPTON. Thank you. 

Mr. Liao. 

STATEMENT OF PAUL F. LIAO 

Mr. LIAO. Mr. Chairman, Ranking Member Markey and members 

of the subcommittee, thank you for the opportunity to testify before 

you today. I am here today in my capacity as Chief Technology Officer of Matsushita Electric Corporation of America and President 

of its Panasonic Technologies Company division. 

As a company on the cutting edge of the transition to digital television, Panasonic has been deeply involved in efforts to ensure that 

digital content is adequately protected. My written testimony summarizes some of the many technological developments that 

Panasonic has been involved in, including the development of the 

CSS encryption system used to protect DVD discs, the development 

by the 5C group of companies of the Digital Transmission Content 

Protection technology that protects copyrighted content as it moves 

digitally from device to device in a home network, and the invention of the Content Protection for Recordable Media technology to 

provide secure, encrypted recording and storage of authorized copies of copyrighted content. 

In participating in these technology development efforts, we have 

been guided by two overarching principles: (1) Ensuring that the legitimate interests of consumers, which are the bedrock of our business, are preserved in the transition to digital technology; and (2) 

by enabling—We need to enable new business opportunities for 

consumer electronics companies such as ourselves, information 

technology companies, and content companies alike. 

Although in my prepared remarks today,I will focus most particularly on the experiences of Panasonic, I am here also as a representative of the 5C group of companies, and I will be happy to 

answer any questions with respect to those activities and initiatives. 

At the onset, I need to express my gratitude to this committee 

and its leadership for your continued focus through private meetings, industry roundtables and other means for bringing the various stakeholders together to address and resolve issues that have 

been affecting the transition to digital television, DTV. 

Although the topic of today’s hearing is ensuring content protection in the digital age, I believe that the availability of robust content protection systems is only one of the building blocks necessary 

to promote the transition to the digital world. Really, three C’s are 

necessary to make this transition: Carriage, content, and consumer; 

carriage of DTV signals by broadcasters, cable operators and satellite services; of course, the availability of compelling content, the 

second C; and obviously, consumer, the consumer awareness of digital TV, including the benefits of consumer DTV equipment that is 

appealing and, most importantly, affordable. 

32

In terms of carriage, good progress has been made with respect 

to ensuring the carriage of DTV, and particularly HDTV, by broadcasters, cable operators, and satellite systems alike. I think all 

should be proud of the progress that has been made toward DTV 

availability. 

I believe the transition to DTV could be accelerated even further 

if consumers had access to DTV via cable-ready DTVs and a choice 

at retail of cables, digital set top boxes. 

In terms of consumer awareness, Panasonic promotes consumer 

awareness of DTV opportunities every day through our advertising, 

our joint efforts with retailers and broadcasters, for example, by 

sponsoring and co-financing the production of HDTV programs, and 

through CEA’s industry-wide promotion and education efforts, as 

well as by providing a variety of DTV products that, we hope, consumers are finding appealing. 

All of the affected industries need to continue these efforts to 

build consumer awareness around DTV and HDTV. However, with 

respect to the issue that is the main focus of this hearing, content 

protection, Panasonic is proud to be part of a private sector interindustry effort to develop technologies that protect content from the 

source to the time it is displayed on the consumer’s TV or PC, and 

those technologies can continue to provide that protection when an 

authorized recording of the content is made. 

The challenges proposed by the digital environment are rapidly 

evolving. Therefore, all the companies involved in these efforts 

have continued to innovate new solutions and, of course, all this 

has to be done with the interest of consumers in mind, because 

serving our customers, the consumer, is Panasonic’s most important goal. 

These private industry initiatives have proven to be the most effective way to proceed. It is simply not possible for government to 

mandate from above broad design requirements that address the 

myriad of interests and technological challenges as effectively as 

collaborative private sector efforts. We expect, nonetheless, that for 

any solution to be successful, it must withstand public scrutiny. 

Therefore, we welcome, and in fact encourage, your continued interest in our efforts to address these challenges. 

We have mentioned three key elements: Protection of in-the-clear 

broadcast content using the broadcast flag; addressing the analog 

hole; and preventing unauthorized peer-to-peer file sharing. In our 

written comments as well as the comments made by Mr. Parsons 

and Mr. Chernin already, we have reviewed some of these progresses in each of these areas. 

I would only like to add that this process is rapidly moving to 

a conclusion with a return to the broadcast flag. In fact, the 5C 

companies, the CIG Computer Industry Group, and the MPAA met 

late last night and reached agreements in a proposal that will be 

recommended to the full group. In fact, we expect that to be circulated today. 

The problem of peer-to-peer distribution of copyrighted content is 

very, very difficult to resolve. To my knowledge, no concrete proposals concerning how to solve this problem have been proposed. In 

fact, it is quite likely that no single solution to this problem will 

33

be developed, and that instead a variety of technical and legal and 

business approaches will be necessary. 

At the moment, the immediate, admittedly partial solution appears to be consumer education efforts and strong enforcement of 

copyright laws. 

I would like to conclude by just saying that we have built our 

business on delivering innovative products to our consumers, and 

we realize that, in order to develop and deliver the greatest value 

to our customers, we must likewise provide strong copyright protection to the owners of copyrighted content. 

[The prepared statement of Paul F. Liao follows:]

PREPARED STATEMENT OF PAUL F. LIAO, CHIEF TECHNOLOGY OFFICER, MATSUSHITA

ELECTRIC CORPORATION OF AMERICA AND PRESIDENT, PANASONIC TECHNOLOGIES

COMPANY

Mr. Chairman, Members of the Subcommittee, thank you for the opportunity to 

testify before you today. I am here today in my capacity as Chief Technology Officer 

of Matsushita Electric Corporation of America and President of its Panasonic Technologies Company division. Our company is the principal U.S. subsidiary of 

Matsushita Electric Industrial Co., Ltd. (‘‘MEI’’). Our principal brand, and the name 

by which the companies are commonly known is ‘‘Panasonic.’’ Panasonic is one of 

the world’s largest producers of innovative electronic and electric products for consumer, business and industrial use. Our consumer and broadcasting product lines 

include a broad array of audio, video, communications and computing products and 

components. In the DTV realm, for example, we were proud to introduce the first 

consumer HDTV in the United States in the summer of 1998. 

As a company on the cutting edge of the transition to digital television, Panasonic 

has been deeply involved in efforts to ensure that digital content is adequately protected. My testimony summarizes some of the many technology development efforts 

Panasonic has been involved in, including the development of the CSS encryption 

system used to protect DVD discs, the development by the ‘‘5C’’ group of companies 

of the Digital Transmission Content Protection (‘‘DTCP’’) technology that protects 

copyrighted content as it moves digitally from device to device in a home network, 

and the invention of the Content Protection for Recordable Media (‘‘CPRM’’) technology to provide secure, encrypted recording and storage of authorized copies of 

copyrighted content. 

In participating in these technology development efforts my company has been 

guided by two overarching principles:

(1) Ensuring that the legitimate interests of consumers—the bedrock of our business—are preserved in the transition to digital technology; and 

(2) Enabling new business opportunities for Consumer Electronics (‘‘CE’’). Information Technology (‘‘IT’’) and content companies alike. 

Although my prepared remarks today focus most particularly on the experiences 

of Panasonic, I am here also as a representative of the ‘‘5C’’ group of companies and 

would be happy to answer questions with respect to 5C activities and initiatives 

during the question and answer portion of the hearing. 

At the outset, I would like to express my gratitude to all of the Members of the 

Committee on Energy and Commerce, including the Ranking Members of the full 

Committee and this Subcommittee, and especially to both the Chairman of the full 

Committee and to you, Mr. Chairman, for your continued focus through private 

meetings, industry roundtables and other means on bringing the various stakeholders together to address and resolve issues that have been affecting the transition to DTV. While the topic of today’s hearing is Ensuring Content Protection in 

the Digital Age, I believe that the availability of robust content protection systems 

is only one of the building blocks necessary to promote the transition to the digital 

world. Because this Committee has been so dedicated to encouraging the transition 

to DTV, and because 5C has played an important role in advancing the transition 

to DTV, I will use the DTV example to illustrate the role that content protection 

systems can play in the transition to and availability of new digital technologies and 

compelling content for consumers. Our experience has shown that careful balancing 

is necessary to achieve the public policy goals articulated by this Committee, and 

to harmonize the needs of consumers and of the various affected industries. 

I believe that three things are necessary to make the DTV transition a reality:

• Carriage of DTV signals by broadcasters, cable operators and satellite services; 

34

• Availability of compelling content; and • Consumer awareness and education about DTV and consumer DTV equipment 

that is appealing and affordable 

To encourage the development of each of these components, a careful balancing 

of interests is required.

• Compelling content is required to encourage consumers to look into, learn about, 

and buy in to DTV; • Adequate security is required before content owners will release compelling content; and • DTV products must be affordable and must respect legitimate consumer expectations about how consumers will be able to use and enjoy content they rightfully 

acquire. 

Panasonic—through the 5C and through other private licensing initiatives—has 

been working hard to meet the legitimate interests of content companies, broadcasters and consumers. I am pleased to report that much progress has been made 

in each of the three areas I mentioned, however significant issues remain that merit 

the Committee’s attention. 

Carriage of DTV 

Good progress has been made with respect to ensuring carriage of DTV by broadcasters, cable operators and satellite systems. I would like to extend congratulations, on behalf of Panasonic to the broadcast industry which has made great strides 

towards DTV availability. Over 300 broadcast DTV stations are already on the air 

and carrying a variety of programming in TV markets that comprise over threequarters of all TV households. 

I would also like to extend congratulations to the cable industry which has been 

offering increasing DTV content over the past few years to their digital subscribers. 

There are many digital and some interactive program services already, and several 

cable operators have recently announced plans to provide more on their systems, including HDTV programming. Congratulations are also in order to satellite service 

providers, which have carried digital, and to borrow FCC Chairman Powell’s phrase, ‘‘value-added’’ TV content from the time satellite services were launched. 

Panasonic has supported the availability of such value-added content in a variety 

of ways. Our company has made direct financial contributions to cover program development and HDTV production costs. For instance, we provided significant program production equipment support for the first HDTV presentation of ‘‘Monday 

Night Football’’, and for the past two years we have sponsored CBS’s prime-time 

HDTV line-up. We likewise provide digital equipment loans and HDTV production 

support for the efforts of several producers of high-quality digital programming, 

such as nature, natural history, documentary and other programs which are being 

aired on public and commercial broadcast, cable and satellite channels. Panasonic 

is also providing professional DTV and HDTV production equipment to producers, 

program makers, and special-venue presenters in order assist in the transition to 

DTV. 

Progress with respect to carriage of content is encouraging, but I believe the transition to DTV could be accelerated if consumers had access via ‘‘cable ready DTVs’’ and a choice at retail of cable set top boxes. After all, cable is the largest provider 

of television service to American TV households. A key element of these cable ready 

DTVs and retail set top boxes is the POD-Host Interface technology. We would like 

the license agreement for this technology to include clear rules, such as those included in the 5C license for DTCP technology, to ensure that the technology cannot 

be used to undermine consumers’ customary home recording expectations. I applaud 

the Committee’s efforts to date and urge the Committee to keep a keen focus on 

these issuesContent 

As I mentioned at the outset, CE and IT manufacturers such as the 5C group of 

companies involved in developing and licensing the DTCP technology, realize that 

in order for content providers to fully embrace DTV and other new digital forms for 

delivery of content, security concerns must be adequately addressed. Panasonic has 

been at the forefront of developing content protection technologies for use with both 

audio and video. We have been directly involved in developing and licensing technologies that can protect content from the source to the time it is displayed on a 

consumer’s TV or PC. We have likewise developed technologies to protect the content from unauthorized copying and redistribution if/when it is recorded in the 

home. 

In participating in these technology development efforts Panasonic has been guided by several themes:

• Technologies should be developed through a process of inter-industry consultation 

and collaboration to ensure that they are (a) practical to implement; (b) achieve 

35

the legitimate copyright protection goals set forth by the content community; 

and (c) deliver value to consumers. • Technology initiatives should be led by the private sector. The objectives should 

be achieved by voluntary license agreements where possible, and complemented 

by narrowly-focused government action only where necessary. • Technology solutions should include rules to preserve consumers’ customary recording expectations. 

We realize that both the opportunities and the potential challenges posed by the 

digital environment are ever evolving. Despite the fact that the content protection 

technologies we have been involved in developing were each designed to meet specific sets of requirements outlined by the content companies, the CE and IT companies involved in these efforts have been willing to keep innovating and adding to 

the existing technologies (and creating new ones) to meet unanticipated or previously unarticulated goals of the content owners. Of course, this has all been done 

with the interests of consumers in mind, because serving our customers is 

Panasonic’s most important goal. In our view this is the most effective way to proceed. It is simply not possible for the government to mandate from above broad design requirements which as effectively address the myriad of interests and technological challenges as do collaborative private sector efforts. We expect, nevertheless, 

that for any solution to be successful it must withstand public scrutiny. We therefore welcome your continued interest in our efforts to address these challenges. 

Some specific examples of our activities with regard to content protection are summarized below. 

5C—

Panasonic is one of five companies (sometimes therefore referred to as the ‘‘5C’’), 

that developed the Digital Transmission Content Protection (‘‘DTCP’’) technology 

used to protect content as it traverses the IEEE 1394 home network.

• DTCP was developed and is being licensed by a license administrator established 

by the five CE and IT companies to address requirements set forth in a request 

for proposals by the CPTWG, a multi-industry group that included direct participation by the motion picture industry. • The technology protects content that enters the home via cable, satellite or other 

means of conditional access technology from being copied or retransmitted beyond the home (e.g., via the Internet) without authorization of copyright holders 

and will be adapted for use to protect content that enters the home via 

unencrypted digital broadcast pursuant to the ‘‘broadcast flag’’ technology described below. • DTCP employs encryption and authentication in order to ensure that content is 

exchanged only among devices which agree to continue to protect the content. • Since approximately 85% of TV households in the U.S. receive programming 

through cable or satellite conditional access technologies, the DTCP technology 

may be applied to this conditional-access protected content to prevent unauthorized Internet retransmission. 

• The DTCP technology license incorporates ‘‘encoding rules’’ modeled after 

§ 1201(k) of the Digital Millennium Copyright Act (‘‘DMCA’’) to preserve customary home recording practices. These rules were developed through manufacturer and Content industry consultation beginning in the early 1990s. Pursuant 

to these provisions, content companies may use the DTCP technology to protect 

content according to the following minimum rules—

• Free TV is freely copyable, but may be restricted from redistribution; 

• One generation of copies must be permitted for paid programming such as 

HBO; and 

• Copying (other than as part of a ‘‘pause’’ function that is periodically deleted) 

may be prohibited with respect to packaged media, Pay Per View (‘‘PPV’’) and 

Video On Demand (‘‘VOD’’) type content. 

CSS—

Together with Toshiba, Panasonic developed the Content Scramble System technology used to encrypt pre-recorded DVD discs

• This technology enabled the launch of DVD—the most successful consumer product ever. 

• Licensing of CSS has now been turned over to a multi-industry group called the 

DVD Copy Control Association (‘‘DVDCCA’’) which is comprised of representatives of the CE, IT and Motion Picture industries. 

• Beyond licensing the encryption technology used on pre-recorded DVD discs, 

DVDCCA is tackling a number of additional projects, including the evaluation 

of a ‘‘watermark’’ to be used in conjunction with pre-recorded DVD content to 

36

1The CPTWG is the open forum of CE, IT, and content companies and consumer groups which 

meets, typically on a monthly or bi-monthly basis in Los Angeles, to consider technical copy protection issues.

provide additional security against recording and playback of unauthorized copies of the content. 

4C—

Together with three other companies (sometimes referred to as the ‘‘4C’’, Panasonic developed Content Protection for Prerecorded Media (‘‘CPPM’’ used e.g., 

to protect DVD-Audio) and Content Protection for Recordable Media (‘‘CPRM’’ used 

for secure recording and storage of content)

• The technology was developed and is being licensed by CE/IT companies. • The technology license incorporates rules that allow for customary consumer copies such as for time-shifting and place-shifting of audio content. 

Consumer Equipment 

The third and central part of the puzzle in making the DTV transition a reality 

is consumers. Consumer technologies succeed when consumers are aware of them 

and see value in them for their own lives. In the national transition to DTV, all 

involved must be part of the effort to alert and educate consumers to the DTV opportunities and choices they have. And all must provide enough value for consumers 

to want to ‘‘buy in’’ to the DTV revolution. Panasonic tries to do this every day with 

its retail partners, in its advertising, in joint DTV ‘‘launch parties’’ and special 

events with broadcasters and others, through support of CEA’s industry-wide promotion and education efforts, and, most importantly, by providing a variety of DTV 

products we hope will be appealing to consumers. 

This also means that consumer DTV products must be affordable, easy to use, and 

respect consumer expectations about how the consumer will be able to interact with 

and use content. Panasonic’s activities, both in the 5C and elsewhere, have been 

guided by these concerns. Therefore:

• The 5C technology is licensed on a cost-recovery basis so as not to unnecessarily 

add to the cost of consumer products • The 5C technology was developed in order to provide effective protection, yet not 

impose undue burdens on product implementations so as not to compromise 

product functionality • The 5C DTCP technology license incorporates ‘‘encoding rules’’ aimed at protecting consumer’s fair use expectations. 

Current Challenges & Future Efforts 

During hearings before the Senate Commerce Committee in February, representatives of the motion picture industry advocated the need for a government-mandated 

solution to three specific problems:

• Protection for ‘‘in the clear’’ broadcast content to prevent unauthorized redistribution of such content via the Internet, 

• Addressing the so-called ‘‘analog hole,’’ and 

• Preventing unauthorized ‘‘peer to peer’’ file sharing of copyrighted content. 

Panasonic agrees that these are serious issues deserving of attention. A brief summary of inter-industry efforts to consider these challenges follows. 

Protection of broadcast content delivered in the clear 

Because digital terrestrial television broadcasts and certain basic tier cable video 

programs are delivered in unencrypted (‘‘in the clear’’) form, unlike pre-recorded, 

encrypted, digital media such as DVD or digital cable and satellite transmissions 

delivered via conditional access systems, there is no technical or legal authorization 

necessary and no licensing predicate by which to establish conditions for the secure 

handling of such content. As a result, unprotected DTV content can, as a technical 

matter, be delivered outside of the home environment, such as over the Internet 

without authorization from copyright holders. In November of 2001, representatives 

of the 5C members described to the Copy Protection Technical Working Group 

(‘‘CPTWG’’) a refined version of a proposal, originally presented to the 5C members 

by Fox following on industry standards activity in the Advanced Television Standards Committee, which would require certain devices which demodulate DTV content to respond to a ‘‘Broadcast Flag’’ and securely route content which a copyright 

owner has indicated should not be redistributed via the Internet, only to protected 

digital output and recording technologies, or to analog outputs. The 5C members 

recommended that a group be formed under the auspices of the CPTWG 1 to evaluate this proposal and to determine whether there is sufficient industry and conVerDate Sep 04 2002 09:35 Sep 20, 2002 Jkt 010199 PO 00000 Frm 00040 Fmt 6633 Sfmt 6621 W:\DISC\79464 79464
37

sumer organization support for the proposal as a solution to the problem of unauthorized redistribution of broadcast content. To date, the group formed as a result 

of this initiative has undertaken considerable activity—

• The Broadcast Protection Discussion Group (‘‘BPDG’’) has met 13 times in four 

months, in person and by phone. • The participants in these discussions appear to be in fundamental agreement that 

an approach based on a ‘‘Broadcast Flag’’ is technically sufficient for the purpose of signaling protection of DTV content in digital form, beginning at the 

point of demodulation, against unauthorized redistribution. • There is likewise substantial agreement as to the particular flag to be used, and 

that content that is either marked with the flag or has not been screened for 

the flag may only be recorded or output from covered products by either (a) analog products and recording methods; and (b) digital outputs and recording methods that provide protection against unauthorized redistribution. • Certain issues currently remain unresolved, including (a) finalization of criteria 

used to determine whether a particular recording technology or digital output 

protection method should be deemed ‘‘authorized;’’ and (b) whether there is adequate support for an alternative proposal, advanced by Philips, which would 

allow unencrypted digital-to-digital recordings of broadcast content for at least 

some period of time. • The schedule for BPDG now calls for a final report by mid-May, and I believe that 

this is achievable. 

• Since the BPDG was primarily focused on technical matters, a separate, ‘‘parallel 

group’’ has been formed to begin discussing how to enforce the hoped-for technology solution. It is possible that narrowly focused government action will be 

necessary to support any private sector technology approach. 

Plugging the so called ‘‘analog hole’’

Digital content delivered in a protected manner must nevertheless be converted 

to an unprotected analog format in order for it to be viewed on the vast majority 

of HDTV and digital televisions in consumers homes. The ‘‘analog hole’’ refers to the 

potential which exists for redigitization and subsequent unauthorized redistribution 

of content (via peer to peer networks or otherwise) because of this need to convert 

digital signals to analog form in order for them to be viewed. It is currently thought 

that the most effective means by which the so called ‘‘analog hole’’ issue can be addressed is by using a watermark to indicate how content marked with the watermark can be copied and redistributed. 

There are efforts currently underway, under the auspices of the DVDCCA, to 

evaluate ‘‘standard definition’’ watermarks which we hope will be extensible to ‘‘high 

definition’’ content. This process has shown that there are serious business, legal 

and technical issues that need to be resolved before a watermark can be identified 

for use to plug the ‘‘analog hole.’’ Further efforts are necessary before it can be determined how such a watermark might practically be implemented in order to mitigate the analog hole problem. It is possible that narrowly-tailored government efforts may be necessary to address this problem once an appropriate watermark has 

been identified, however these decisions should await identification of such a watermark. 

Preventing unauthorized peer to peer distribution of content 

The problem of unauthorized peer to peer distribution of copyrighted content is 

most difficult to solve. CE and IT companies, including the members of 5C, are sympathetic to the concerns of content owners, yet it is in the arena of solving the peer 

to peer problem where the legitimate concerns of content owners, the legitimate interests of consumers, and the ability of CE and IT manufacturers to deliver products 

that are affordable and innovative may be hardest to harmonize. The problem is 

made even more difficult by the fact that digital devices are used to enjoy (and 

sometimes share) a variety of data—some of which are not copyrighted. 

To my knowledge no concrete proposals concerning how to solve the peer to peer 

problem have been proposed by any industry sector. It is quite likely that no single 

solution to this problem will be developed and that instead a variety of technical, 

legal and business approaches will be necessary. At the moment the immediate, although admittedly partial, solution appears to be consumer education efforts and 

strong enforcement of copyright laws to punish commercial piracy of copyrighted 

content. In the event that inter-industry efforts to address the issue are convened, 

Panasonic stands ready to contribute its technical knowledge to find a solution 

which promotes the availability of digital content while promoting the twin goals of 

preserving consumer rights and protecting the intellectual property of content owners. 

38

Conclusion 

Panasonic has built its business on delivering innovative products to consumers. 

We realize that in order to deliver the greatest value to our customers we must likewise provide strong copyright protection for the owners of copyrighted content. For 

this reason we, together with other members of 5C have been at the forefront of 

developing technologies that aid the transition to the digital environment for all parties involved. Panasonic will continue to contribute, where it can, to help address 

technical challenges faced by the industries represented here today and to promote 

a rapid and fruitful transition to DTV.

Mr. UPTON. Thank you. I note that the House is going to have 

votes in a short time. So my goal is to try to strictly adhere to this 

5-minute rule so that we can get into some questions before the 

votes start, knowing that we will come back. 

Mr. Blanford. 

STATEMENT OF LAWRENCE J. BLANFORD 

Mr. BLANFORD. Mr. Chairman and members of the subcommittee, my name is Larry Blanford. I am president and CEO 

of Philips Consumer Electronics in North America. I do appreciate 

the opportunity to appear before you today, and applaud your leadership on this extremely important and complex set of content protection issues. 

I am accompanied today by the Managing Director and Senior 

Vice President of Philips Research in New York, Dr. Barry Singer. 

Now Philips is a global leader in display, storage and 

connectivity in the digital age. We have nearly a century of experience in consumer electronics, research, design, and manufacturing, 

and a proud history of inventing and developing consumer electronics products from the audio cassette and the compact disc to 

high definition television. 

We also have a long history of constructive participation in content protection activities and in developing content protection technologies, from the pioneering serial copy management system to 

what we believe is the leading candidate for video watermarking 

technology now being evaluated. 

Philips has been guided in its development of its consumer products and protection technologies by certain principles: maintaining 

ease of use and user friendliness; providing backward compatibility 

with existing devices; preserving the opportunity for new, innovative products; respecting intellectual property rights; preserving the 

consumer’s fair use rights; and, importantly, balancing among the 

various competing rights and interests. 

Philips comes before you today with a call for action, one which 

I believe is important, if collective we are to achieve technological 

solutions that strike the all important proper balance of rights in 

the emerging digital age, those of consumers, device manufacturers 

and content owners. 

I say collectively, because when it comes to setting content protection policy and ensuring the balance of interests and rights, your 

role is just as critical as that of the private sector. Simply put, the 

process we are now using to pick a technological solution and balance these interests is flawed, and we need your help to fix it. 

Today you are reviewing the status of the most recent developments in digital age content protection, the need to protect digital 

terrestrial television broadcasts from unauthorized retransmission 

39

over the Internet. Philips fully supports the goal of the Broadcast 

Protection Discussions Group to protect against such retransmission, and we support the concept of a flag in the ATS signal to 

achieve this end. 

We also appreciate much of the progress made by that group. 

However, we along with a growing number of participants are 

deeply concerned about the direction that the group is taking with 

respect to what happens after the broadcast flag is identified and 

how DTV would be constrained inside the home. 

Basically, the only paradigm being considered by BPDG is one 

that would, in most cases, require public broadcast content to be 

encrypted upon receipt in the home and on any copies on removable media. You have heard repeatedly that a solution to this problem is imminent. We appear here today, however, to say that, although we are actively involved in those discussions, we do not believe we are anywhere close to a consensus solution. 

Philips, along with Thompson, RCA, and Zenith, shared their 

concerns as formal objections to the recent BPDG interim report, 

and raised them with you at the April 9 DTV roundtable discussion. Others have expressed similar concerns privately. I am here 

to reiterate those concerns today. 

No. 1, the direction of the current discussions threatens to constrain the consumer’s fair use rights and expectations. For example, if future DVD recorders are obligated to encrypt recordings of 

television broadcasts from digital sources, any such recordings 

made on those recorders would not be usable on the 35 million 

DVD players consumers own today. 

No. 2, the process by which decisions are being reached is not 

fair, reasonable or open, and is not seeking consensus. Rather, it 

is a carefully choreographed drive toward a preordained result. 

No. 3, the decisions regarding how products will be allowed to 

handle content and the rights of consumers would reside with a 

few companies through private contractual relationships. 

No. 4, companies interested in making devices that handle digital 

television would be required to sign up to a complex web of overreaching contracts. These contracts include obligations called compliance rules and robustness rules that extend deeply into the design and functionality of each device, and dictate what actions the 

devices may take and what consumers can do. 

Put simply, those driving BPDG are rushing the group to judgment without a thorough public consideration of how the group’s 

approach will diminish the rights of the consumer and competition 

in affected industries. 

At the April 9 DTV roundtable discussion, important questions 

were posed by Chairman Tauzin: Who has control? Who makes the 

final decisions? In this case, no public official, no consumer, no licensee, no other interested party has a seat the decisionmaking 

table. Only the licensors of the preferred technologies and the content community can set policy and make decisions. 

Balancing the rights of consumers and differing business interests are a matter of public policy. Consumers’ rights must not be 

left in the hands of private interests. We call upon you today to establish a forum under government auspices in which we can all 

participate in order to get this right. 

40

While we do not know the perfect forum of this private-public 

partnership to take, we believe the former Advisory Committee for 

Advanced Television Services with its strong and effective leadership serves as a useful model. Again, we are not recommending 

that government mandates the solution, but provides a governance 

to a process so that we can get the solution correct. 

Philips wants to be part of that solution, and we, as much as any 

company, want this digital transition to flourish and flourish quickly. We believe an appropriate public-private partnership will move 

us to that consensus solution more rapidly. 

Thank you for this opportunity to share our views and our concerns. I would be happy to answer any questions you might have. 

[The prepared statement of Lawrence J. Blanford follows:]

PREPARED STATEMENT OF LAWRENCE J. BLANFORD, PRESIDENT AND CEO, PHILIPS

CONSUMER ELECTRONICS COMPANY

Mr. Chairman and Members of the Subcommittee, my name is Larry Blanford. 

I am President and Chief Executive Officer of Philips Consumer Electronics Company, a division of Philips Electronics North America Corporation, which is the US 

subsidiary of Philips Electronics of the Netherlands. In the United States, Philips 

employs over 35,000 people manufacturing and selling over $10 Billion dollars of 

goods and services in the areas of consumer electronics, lighting, medical systems 

and devices, semiconductors, displays and domestic appliances. 

I thank you for the opportunity to appear before you today and commend you for 

conducting this hearing entitled, Ensuring Content Protection in the Digital Age at 

such an important juncture in the transition to that new age. Your attention to the 

Digital Television (DTV) transition and to the complex set of issues that remain to 

be addressed is vital to the ultimate success of that transition. You rightfully focus 

today on a key challenge—resolving copy protection and digital rights management 

in a way that is consistent with public policy goals of protecting content, allowing 

technology to thrive and, most importantly, preserving the fair use rights and expectations of the consumer in this new digital age. The manner in which we proceed 

will dictate the measure of success we attain. 

The combined efforts of the public and private sectors have come a long way toward ushering in this new digital age, but I come before you today to raise a caution—that the current direction embodied in the on-going Broadcast Protection Discussion Group addressing ways to prevent Internet Retransmission of digital television broadcasts is not in the interest of sound public policy, is not in the best interest of the affected industries and is certainly not in the interest of the consumer. 

Mr. Chairman, Philips raised its concerns in the most recent DTV Roundtable Discussion on April 9. We are here today because we feel it is very important to bring 

to your attention the fact that the chorus you will hear today, as Senators Leahy 

and Hatch heard at their hearing only weeks ago, that a solution to the problem 

of Internet redistribution is imminent misrepresents the current state of affairs and 

the nature of the challenge that still lies ahead. 

Philips, as much as any company in the US wants to see this transition to the 

digital age, and more specifically this transition to digital television, move as swiftly 

as possible. But we also know from decades of involvement in the consumer electronics industry that we must get this right, meaning that we cannot rush to judgment on technological solutions that are not widely accepted as the best solution for 

all parties involved—the CE industry, the Information Technology industry, the 

Content Community and, of course, the consumer. Philips calls upon the Congress 

today to reassert its role in this critical public-private partnership by providing an 

appropriate, public forum to continue these industry discussions and to foster workable solutions on a timely basis. Further, today we offer to provide our complete 

support to such an effort, including offering related Philips technologies to all 

comers, under open, fair and easily available terms. Philips has an extensive technology portfolio, which we believe can contribute to the development of solutions 

every bit as robust and effective as those embodied in the current, BPDG direction. 

Philips has long history in development of consumer electronics products and technologies 

Philips is no stranger to the world of inventing and developing products and technologies in the area of consumer electronics. From the Compact Cassette to the 

41

Compact Disc to the one chip TV, Philips has invented and developed products that 

have enjoyed widespread acceptance in the industry and among consumers. The 

Compact Disc is the most widely implemented digital technology on the face of the 

earth. Open, public standards helped make this so, open, public standards should 

help us select new copy protection schemes. 

Our untiring commitment to the development and implementation of advanced 

television in the United States began in our research labs in Briarcliff Manor, New 

York in 1981. With decades of financial investment and enormous scientific effort, 

we worked to help create and commercialize Digital Television. Philips is extremely 

proud to have been instrumental in the development of Digital HDTV, beginning 

with its own system, later as a member of the Advanced Television Research Consortium, and finally as a founding member of the ‘‘Grand Alliance,’’ which produced 

the DTV standard adopted by the FCC in 1996. This unprecedented standards setting process involved numerous private companies from each affected industry but 

just as importantly involved an extraordinary public-private collaboration fostered 

by the Congress and the Federal Communications Commission embodied in the Advisory Committee for Advanced Television Services (ACATS) chaired by Mr. Richard 

Wiley. The positive result has propelled the United States into an historic transition 

to advanced digital television and related services. 

Philips has been an active participant in the development of Copy Protection Technologies and Adheres to Basic Principles to Protect the Consumer 

The implementation phase has certainly presented its challenges, not the least of 

which has been the development of copy protection technologies. Philips has long 

developed solutions along with the content community that struck the proper balance between the interests of the copyright holder and the consumer. Philips invented, and offered to the consumer electronics industry for free, the Serial Copy 

Management System, which simply provided the necessary instruction to the recording device as to whether a copy was or was not allowed. We continue to be equally 

involved and committed to seeking solutions that strike the proper balance. Philips 

has for years been a constructive participant in inter-industry copy protection activities. We have dedicated millions of dollars and thousands of hours of effort from our 

best engineers to groups such as the Copy Protection Technical Working Group 

(CPTWG), the Secure Digital Music Initiative (SDMI), and the Broadcast Protection 

Discussion Group (BPDG). Drawing on our expertise in digital video we were the 

lead developer of one of the two watermark technologies being considered for the 

protection of digital video content. Philips created and offered to the record labels 

an innovative technology to work with watermarks to address Internet file sharing 

of sound recordings. We have suggested several approaches to the BPDG. 

As these contributions suggest, Philips develops new products and technologies 

with the interest of the consumers’’ rights and expectations at top of mind:

• Consumers’ fair use rights must be preserved in any technical or public policy solutions to digital age challenges 

• Backward compatibility has been the backbone of the consumer electronics industries’ product designs. 

• Consumers react negatively and very strongly when their expectations for fair use 

and ease of use are not met. 

• Ever increasing levels of complexity in consumers’ devices will render products increasingly unreliable, more expensive and will constrain consumer activities. 

• User Friendliness is a hallmark of CE products. 

Consumers should not bear the costs, in dollar terms and in terms of technological 

complexity, when there are much simpler solutions to the agreed upon problem—

the prospect of Internet redistribution of digital terrestrial broadcasts. 

Philips Supports the Goal of Preventing Internet Retransmission of Digital Terrestrial Broadcasts, But Believes the BPDG Process Is Actually Retarding Industry 

Efforts To Move Forward 

We fully support the goal of BPDG to protect against retransmission of digital television over the Internet and the concept of a flag in the ATSC signal to achieve 

this end. We also appreciate the progress made by that group, including the general 

agreement that a flag in the ATSC signal can be used to trigger protection, the idea 

of starting protection upon demodulation, and many of the other details that have 

been advanced. However, we, along with a growing number of participants, are 

deeply concerned about the direction that the group is taking with respect to what 

happens AFTER the broadcast flag is identified, and how DTV would be constrained 

inside the home. 

This issue of protecting broadcast content is a complex one that merits careful 

consideration and the evaluation of a variety of alternatives. 

42

Regrettably, in this effort to address Internet retransmission, BPDG has been 

taken over by a small group of companies that are pressing a particular approach 

that would affect ALL retransmission of content inside the home. This proposal 

tramples upon the fair use rights of the consumer and introduces unnecessary levels 

of complexity and costs in consumer devices. 

Under the approach proposed by one Studio and a consortium of hardware companies called the 5C, digital television content would need to be ‘‘protected’’ once demodulated. The technologies that could be used for this protection, which are generally conceived to be encryption technologies, would be under the control of the studios and private consortia, such as the 5C. For example, the technologies that the 

studios wish to use as a benchmark for the protection are the encryption technologies licensed by the 5C entity (which encrypts content on digital links) and the 

related 4C entity (which encrypts content on removable recording media). 

Any party interested in designing and manufacturing devices using these technologies to encrypt digital television programs would be required to sign up to a 

Byzantine set of complex, over-reaching contracts for these proprietary technologies. 

These contracts include obligations called Compliance Rules and Robustness Rules 

that extend deeply into the design and functionality of each device and dictate what 

actions the devices may take. These Compliance Rules and Robustness Rules are 

in the control of the studios and the private consortia and will be created in the 

first instance, and may be changed in the future, wholly in their discretion. The 

public, consumers, licensees, and public officials are, unfortunately, not a part of 

this process. In short, private interests are taking control of consumer rights and 

as a result establishing public policy! A small number of our competitors and the 

studios are put in control of the functionality of our products! 

This result is possible because of the licensing construction built around the use 

of these technological solutions. Moreover, the technology licenses agreements and 

associated Rules include obligations that extend far beyond that which is necessary 

and appropriate to prevent the Internet retransmission of DTV. 

Even if it were appropriate to cede public policy to private interests, the implementation of this most recent proposal is rife with unintended consequences for 

products and for the consumer. The obligation to include multiple encryption technologies in each device that handles DTV content will burden consumer devices, increase their cost and decrease their legitimate functionality. 

Further, the 35+ million DVD players in the market today are unable to decrypt 

any discs recorded in the home using any proposed encryption system. If future 

DVD recorders are obligated to encrypt recordings of television broadcasts from digital sources, any such recordings made on those recorders will not be useable on any 

existing DVD player or on any DVD player likely to be shipped in the near future. 

Consumers should not be required to purchase a new set of devices or to make digital recordings of content of digital content through old fashioned analog interfaces 

simply to do what consumes have always done in their homes. To leave matters in 

this state is to deny the consumer the benefits of digital technology. Digital technology’s primary advantage is to move and copy data without any qualitative loss. 

Where this is appropriate (such as in a consumers home) it is reasonable that the 

consumer not only retain the ability to watch broadcast content at a convenient time 

or to move content from one room to another but also to gain additional flexibility 

to utilize content. To do otherwise is to restrain technology solely for the benefit of 

the copyright holder as a mechanism to subdivide content into smaller units, each 

of which can be sold at a premium price. 

The current proposal also would inhibit innovation in television products. Under 

the proposal, any innovative company interested in developing and marketing new 

products that would give consumers more control over how and when they view television would be required to sign these over-reaching, burdensome licenses for the 

‘‘approved’’ proprietary encryption technologies, pay the applicable license fees, and 

bear the costs of including encryption and decryption capabilities in their products. 

The complexity and cost of these licenses and the technologies alone will inhibit 

start-up companies, which are often the most innovative. 

The BPDG is not a consensus body and is certainly not a standards body. 

Philips has lost all confidence that the BPDG discussion group as currently constituted can achieve meaningful results, or that it will allow for serious consideration or adoption of technology solutions of equal merit presented by other interested parties. BPDG is not an open, consensus standards setting process. BPDG has 

no process for making decisions. In fact, the studios and 5C have made clear their 

view that there need be no process, because BPDG is not a standards body; it simply is a forum for discussion and the identification of points of agreement and disagreement. Such discussions may have their place, but on this matter of such critVerDate Sep 04 2002 09:35 Sep 20, 2002 Jkt 010199 PO 00000 Frm 00046 Fmt 6633 Sfmt 6621 W:\DISC\79464 79464
43

ical importance to the establishment of good public policy, this approach is seriously 

lacking. 

We respectfully believe that the decisions of how DTV content broadcast over the 

public airwaves will be handled in the home and how it will be available to consumers raise important public policy issues; issues that are far too important to 

leave to any group of private companies no matter how well intentioned. Private industry should be given a chance to reach a consensus, but the process should be 

cleansed by the sunlight of government. Further discussion should be held in an 

open forum, with the involvement of those who are entrusted with the development 

of public policy. 

Philips believes the Congress should make clear that there will be no toleration 

of a system in which the private interests control the Rules for copy protection technologies that become de facto standards. The rules and licenses under which such 

technologies are used raise key public policy issues and must be subject to minimum 

standards of openness, reasonableness, scope and consensus. We have ideas for appropriate technologies that we are prepared to share with the industry in exactly 

this manner, as we have attempted in the past. 

Philips, therefore, calls upon the Congress to reassert itself in this ongoing endeavor by providing under its auspices or the auspices of the Federal Communications Commission, or a suitable standards body an organized, open and fair venue 

to oversee the continuation of efforts to develop and implement next generations of 

copy protection technology. In support of such a change, Philips pledges its full, continued support and further pledges to do its part to make technological solutions 

available on open, fair and reasonable terms to all interested parties. We look forward to this Committee’s continued leadership in this critical arena.

Mr. UPTON. Thank you. 

Mr. Jacobson. 

STATEMENT OF LARRY JACOBSON 

Mr. JACOBSON. Mr. Chairman and Ranking Member Markey and 

members of the committee, I am delighted to appear before you 

today to discuss the pressing issues facing the media and technology industries in our digital era. 

RealNetworks, founded in Seattle, Washington, in 1994, is a pioneer in the development of digital media technology and services 

that enable people to create, deliver, discover, and play digital 

audio and video content over the Internet, both through 

downloading and through a method RealNetworks invented called 

‘‘streaming.’’ Most of you probably know our RealPlayer or RO-1 

player. 

RealNetworks agrees that today’s Internet marketplace suffers 

from an unacceptable level of piracy of copyrighted works. As a person who has spent most of my career in the entertainment and 

broadcast industry, I understand that copyright protection lies at 

the core of America’s ability to create and sell entertainment products throughout the global marketplace on a variety of distribution 

platforms. 

Digital copying via the Internet poses fundamental challenges for 

the economics of both the entertainment and technology industries, 

and we need to meet that challenge head on in order to realize the 

potential of this new distribution medium. 

The good news is that RealNetworks is building distribution 

channels, business models, and new subscription services that will 

contribute to a robust and legitimate content marketplace for digital music, video, and other products. As a fundamental part of our 

digital media platform, RealNetworks has developed a robust and 

sophisticated digital rights management technology or DRM to protect content that is delivered to consumers. 

44

This DRM and our other security technologies are in the marketplace today, and currently protect premier content we offer, from 

major record labels, CNN, Fox Sports, ABC News, NASCAR, major 

league baseball and the MBA, among others. Already in 18 months 

since we began offering our premium protected subscription services, we currently serve over 600,000 monthly paid subscribers. 

In crafting legislation regarding the Internet, Congress to date 

has wisely refrained from sweeping regulation, resisting the temptation to become in essence the chief technology officer for the 

Internet. We should continue to be guided by three core principles: 

First, that government should only intervene in technology markets where there is a clear evidence of market failure; second, that 

private sector competition will always create the best technologies, 

resulting in new revenue, new quality jobs, and new consumer benefits; and, third, that all solutions must respect consumers’ fair use 

rights to fully enjoy digitally delivered content. 

In the spirit of these principles, scores of companies, including 

RealNetworks, are enabling secure content distribution through 

flexible DRMs that are protecting content in today’s marketplace. 

Software can be built and adapted to accept multiple DRMs and 

play back content that is encoded in a variety of file formats, and 

we see evidence that market driven solutions for security are rapidly evolving on the Internet today. 

In contrast to market driven solutions, we don’t believe that the 

government should pick a single winner and mandate a security 

standard for the rapidly evolving digital market. This approach 

would politicize the standard process, establish more bureaucracy, 

create a single target for hackers, and ultimately not lead to the 

best technology for security. 

Rather than focusing its energies on creating a new regulatory 

framework for digital media distribution, we believe it would be 

wiser for Congress to eliminate practical barriers to the growth of 

e-commerce and digital media. 

As the Copyright Office recently recommended, existing laws 

should be fine tuned to clarify that payments due for streaming 

and downloading of music content should be put in place. We must 

also address the economic imbalances in the field of Internet radio, 

where new legal regulations have made it harder for innovative 

programming services to compete on a level playing field with other 

content offerings. 

Moreover, Congress must always proceed carefully before tampering with our carefully balanced copyright laws. Clarifying the 

status of temporary copies in RAM and server copies, for example, 

would make it easier to lawfully perform and download digital content, all in a way designed to compensate copyright owners. 

Finally, Congress should clarify how longstanding fair use principles peacefully coexist with the anti-circumvention provisions of 

the DMCA. Any marketplace for digital goods must preserve longstanding consumer rights to use content they have purchased in a 

variety of ways. We must treat Internet users like potential customers and not potential criminals, if we are to build a marketplace based on mutual trust. 

In closing, RealNetworks stands ready to work with policymakers 

and all other concerned parties to create a digital marketplace that 

45

affirms the best principles of American innovation, consumer value, 

and the rule of law. 

Thank you for your attention, and I would be happy to answer 

any questions that you may have. 

[The prepared statement of Larry Jacobson follows:]

PREPARED STATEMENT OF LARRY JACOBSON, PRESIDENT AND CHIEF OPERATING

OFFICER, REALNETWORKS, INC. 

Mr. Chairman and members of the Committee, I am delighted to appear before 

you today and thank you for the opportunity to come to Washington—the ‘‘other 

Washington’’ for those of us with a Seattle orientation—to discuss some of the pressing issues facing the media and technology industries at this moment. 

RealNetworks as a Pioneer in Internet Media Delivery 

RealNetworks, founded in Seattle, Washington in 1994, is a pioneer in the development of digital media technology and services that enable people to create, deliver, discover, and play digital audio and video content over the Internet and within 

intranets, both through downloading and through a method RealNetworks developed called ‘‘streaming.’’ Streaming enables consumers to enjoy uninterrupted, realtime broadcasts over the Internet, by compressing digital media files and dividing 

them into packets, that then are delivered to the consumer’s personal computer. 

RealNetworks developed the first streaming media player and the first streaming 

media server in 1995. RealNetworks has released nine versions of the RealPlayer 

streaming media player. In addition, RealNetworks has released two versions of its 

RealJukebox software, which was first introduced in 1999, and which permits consumers to manage their music collections on their personal computers. That dynamic pace of innovation continues given the rapid adoption and increasing use of 

digital media on the Internet. 

RealNetworks offers a universal platform for end-to-end delivery of digital media, 

from creation to broadcasting to end-user consumption. This allows companies to 

build powerful digital media applications like video subscription services on our 

platform without regard to the underlying hardware or the software operating system. RealNetwork’s business model is based primarily on (1) licensing and selling 

software to create, deliver, play and secure digital media; (2) selling subscriptions 

for access to audio and video content from major content providers, including ABC 

News, CNN, Wall Street Journal, Fox Sports, E! Entertainment, Warner Music 

Group, BMG Records and EMI Music; (3) providing professional services, such as 

hosting others’ streaming media and technology implementation, and (4) selling advertising and promotions via RealPlayer, RealJukebox, and the RealOne Player for 

our RealOne sports, news and entertainment subscription service. 

As a fundamental part of our digital media platform, RealNetworks has developed 

a robust and sophisticated DRM—Digital Rights Management—technology to protect content that is delivered in streaming or digital download formats. This DRM, 

called the Real System Media Commerce Suite, currently protects digitally 

downloaded and streamed files from major record labels via the MusicNet platform 

and has been licensed to the MovieLink consortium, organized by Sony, Universal, 

Warner Brothers, MGM and Paramount Pictures, to protect the digital download of 

feature films. 

Today, we have licensed our technology to over 270 million unique registered 

users around the world with at least one of our products. These consumers have 

consistently proven their desire to enjoy music and video, whether streamed on demand, streamed in a webcast mode, or delivered via digital download. As bandwidth 

increases for connected users, music video and long-form video content are proving 

equally popular. In fact, broadband consumers are the heaviest users of our technology and as broadband adoption increases we can expect similar increases for 

streaming media technologies. 

As a company with applications on an estimated ninety percent of personal computer desktops in the United States and hundreds of millions of users around the 

globe, we are keenly aware of the challenges to Internet distribution of music, video 

and other forms of content that require licensing of intellectual property rights. 

The Challenge of Secure Digital Distribution at a Critical Time for our Industry 

Mr. Chairman, this hearing comes at a critical time for the Internet and specifically for companies that are building the new distribution channels for music and 

video content. We are all aware of the explosion of online file-sharing services and 

46

their global popularity. Countering this trend, both independent and major recording companies have licensed their works to subscription online services such as 

MusicNet, PressPlay, and Listen.com’s Rhapsody and other online ventures. 

RealNetworks has been one of the driving forces behind the creation of legal subscription services. As for the prospect of distribution of feature films on a pay-perview basis, RealNetworks is contributing technology to the MovieLink venture and 

we hope to see other pay-per-view and subscription video services roll out in the 

near future. Our technology and subscription services model is designed to facilitate 

just this sort of business. 

For any of these new content distribution channels to succeed, we will need to 

make sure that content is secured, that consumers see value in the digital purchases they make, and that the underlying business models make sense for all participants in the ‘‘food chain.’’ Security for music and video distribution is essential. Whether digital content is 

produced by a garage band or a global media company, content owners need to 

reach a comfort level with putting that content into the digital marketplace. 

We all know that today’s Internet marketplace is characterized by an unacceptable level of piracy of copyrighted works. The balance of copyright—providing authors with a fixed exclusive period of time to reap the rewards from creating new 

works—will be upset if this situation prevails. The business leaders testifying alongside me today will undoubtedly give a more detailed picture of the dimension of the 

piracy problem and the steps they are taking to address it. Let me simply say that 

RealNetworks does not take widespread Internet piracy lightly, both as a creator 

and licensor of our own intellectual property and as a long-standing partner of many 

content creators. 

RealNetworks was the first company to successfully invoke the anti-circumvention 

mechanisms of the DMCA to stop the distribution of software that attempted to 

break the proprietary content protection measures within our RealServer and 

RealPlayer software and we will continue to invoke legal mechanisms to prevent piracy. 

As a person who has spent most of my career in the entertainment industry, culminating from 1997 to 2000 as President of the Fox Television Network, I understand that copyright protection lies at the core of America’s ability to create and sell 

entertainment products throughout the global marketplace on a variety of distribution platforms. Digital copying via the Internet poses fundamental challenges for the 

economics of both the entertainment and technology industries and we need to meet 

that challenge in order to realize the potential of this new distribution medium. 

The good news is that RealNetworks is building distribution channels, business 

models and new subscription services that will over time create a robust and legitimate content marketplace for digital music, video and other products provided that 

license rights to that content can be efficiently and effectively obtained and administered. 

DRM technology is one key ingredient for establishing a legitimate digital marketplace. The Real System Media Commerce Suite currently is used by technology platforms such as MusicNet to protect tens of thousands of valuable sound recordings 

from major record labels. To protect valuable intellectual property with a level of 

assurance required for digital distribution, DRM’s must be universal, flexible and 

secure. We design our DRM with the ultimate goal of supporting all types of media 

to all devices. Further, these DRM’s must support flexible set of business rules that 

allow the content creator to determine payment scenarios ranging from pay per use 

to permanent ownership. Finally, we design our DRM to be native, end-to-end, tamper resistant and to be quickly renewable in the event of malicious attack. 

Technology alone will not create the legitimate marketplace for online distribution 

of content. After an era where first advertising and then e-commerce was widely expected to carry the new online industry to the promised land, we have learned from 

experience that a mix of business models, matched to consumer behaviors, are required for our industry to succeed. RealNetworks has led the way with premium 

content services—offering distinct packages of digital downloads, on-demand 

streamed content and webcast streamed programming—that reward content owners 

while providing unique value to end users. These services are prime examples of RN 

working in content with using RN technology to promote content to deliver it to consumers on a subscription basis. 

Baseball fans can’t get condensed games of complete baseball broadcasts on-demand on network TV, but they will be able to pay for this product this season 

through our RealOne subscription products. In parallel efforts, we are working with 

Fox Sports, CNN, E! entertainment, ABC News, NASCAR, the NBA and other 

world-class media companies and sports leagues to bring unique value to the online 

consumer. In this sense, the Internet won’t directly compete with television or radio, 

47

but it will offer programming that is uniquely interactive and well-suited to the online digital medium. 

While RealNetworks can build the launching pad for digital distribution, our content partners supply the rockets. Simply put, there can be no meaningful marketplace for digital goods without compelling content. From major media companies, to 

independent radio stations, to non-profits, to individuals seeking an outlet for creative expression, the Internet is a vast network of content markets. It is in fact a 

‘‘super market,’’ where great content can reach over 500 million globally connected 

users. Just as other digital products such as the compact disc and DVD video disc 

created new markets for traditional content, online digital distribution will enrich 

content creators and serve consumers in new ways. RealNetworks has played a special role in inventing the channels for digital streaming and downloading of audio 

and video and our philosophy here is simply to ‘‘Let a Thousand Flowers Bloom.’’

Building a Competitive Marketplace Absent Government Intervention 

When the history of the first decade of the Internet is written by some future historian, he or she will probably focus one salient fact: that public policymakers in 

the United States were wise enough to let the infant medium evolve with a minimum of government interference and regulation. It is hardly a secret that the 

United States, spurred by companies such as Amazon.com, E-Bay, Cisco and Intel, 

to name only a few, leads the world in innovating the software, infrastructure and 

business models that make the Internet run and that unprecedented economic value 

has been created in a very short span of time. In contrast to the European Union, 

where policymakers have an instinct to ‘‘regulate first’’ then let the market develop, 

the foresight of American public policy in this sphere must not be underestimated. 

Congress has stepped in wisely, to respond to distinct needs to protect certain classes of information such as healthcare, financial data, or information pertinent to children. Yet Congress has eschewed more sweeping regulation, and has resisted any 

temptation to become, in essence, the ‘‘Chief Technology Officer for the Internet.’’

We should continue to be guided by two core principles: First, that government 

should only intervene in technology markets where there is clear evidence of market 

failure. Second, that competition will always create the best technologies, resulting 

in new revenue, new quality jobs and new consumer benefits. 

Let me first address the issue of market failure. Recently, we have been told that 

unless a single unitary and open standard is created for digital content protection, 

the digital marketplace will not evolve. Concerned companies have sketched a scenario where competing and conflicting technologies will create a digital Tower of 

Babel, where consumers are confused by different technical choices and where systems fail to interoperate with one another, preventing the build out of an end-toend distribution channel for digital content. 

From our perspective, the Tower of Babel scenario ignores the realities of today’s 

marketplace. Scores of companies, including RealNetworks, are laying the foundation for secure content distribution through flexible DRM’s. Software can be built 

to accept multiple DRM’s and play back content that is encoded in a variety of file 

formats. For example, RealNetworks supports several different secure file formats, 

including Microsoft’s Windows Media DRM. Unlike a hardware environment where 

a media player is permanently ‘‘locked in’’ to one DRM or can only play content from 

one source, software media players are designed to be rapidly updated to accommodate new file formats and improved security schemes. In addition, our player technology supports multiple third party DRM solutions. In this manner, a consumer 

can get content secured by a variety of different DRM’s in different formats. In designing these DRM solutions, we also adhere to a principle of ‘‘ease of use’’ for consumers, with the digital rights management functions occurring through automation 

that is essentially transparent to the end user who simply wants to access interesting and entertaining content delivered online. 

To win the business of major media companies, technology companies will make 

sure that their security solutions meet the specifications outlined by copyright holders. If we fail to do this, we won’t get their business. As in the case of the VHS 

vs. Betamax systems, the marketplace will ultimately decide on the most appropriate technology for specific consumer and industrial uses. We see evidence that 

market-driven solutions for security is rapidly evolving on the Internet today and 

we will continue to design our software players and security solutions to be flexible, 

multi-platform and renewable. 

Market-driven solutions, as has been the case in American industry from the 

Nineteenth Century invention of the telegraph to the 21st Century mapping of the 

human genome, consistently create the most enduring economies—economies that 

reward inventors and consumers with products that become a part of the fabric of 

their daily lives. Only a few years ago, the Internet was primarily a text-based meVerDate Sep 04 2002 09:35 Sep 20, 2002 Jkt 010199 PO 00000 Frm 00051 Fmt 6633 Sfmt 6621 W:\DISC\79464 79464
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dium. Now we think of going online in terms of accessing the latest news, sports, 

entertainment, music videos and short films. Ten years from now, we may think of 

the convenience of the Internet like a literal ‘‘home video’’ store, where we can ‘‘stop 

by’’ to rent the latest films or our favorite television shows. This is why we are so 

excited about playing a role in creating these new digital distribution markets by 

creating platforms for rich media content delivered to millions of consumers and secured by our DRM solutions. 

Government-Mandated Standards will Stifle Innovation and Fail to Reduce 

Piracy. 

The alternative to market led solutions for digital rights management is a scenario where the government picks a winner and mandates that this government 

regulated standard become the ‘‘open standard’’ for the industry. This scenario is 

embraced in the Consumer Broadband and Digital Television Promotion Act, S 

2048, introduced a few weeks ago by Senators Hollings and Stevens. 

The Bill mandates that all hardware and software digital media devices respect 

standard security technologies that are approved by the FCC. If the undefined ‘‘industry’’ fails to develop the specified security technologies within a one year period, 

then the FCC is authorized to develop a standard based on the criteria listed in the 

proposed bill. 

The criteria may sound familiar to you, given my description of the RealNetworks 

and other industry developed DRM solutions that are already protecting digital content in today’s marketplace. 

Standard security technologies, according to the Hollings-Stevens legislation, must 

be: reliable, renewable, resistant to attack, readily implemented, modular, applicable to multiple technology platforms, extensible, upgradeable, not cost prohibitive 

and the software portion of such standards must be based on open source code. 

Aside from the last requirement, several current DRM’s meet the proposed legislation’s test. The recent advances in the Broadcast Protection Discussion Group for 

digital television affirm that the IT, consumer electronics and content industries can 

work together to develop effective security measures outside a framework of government bureaucracy and regulation. 

However, S. 2048 not only sets abstract requirements for a technical standard, 

but also poses serious issues for consumer use of digital content. We find it very 

troubling that S. 2048 appears to make it a crime for an individual to alter security 

technology to access protected content, unless their behavior fits within a very narrow safe harbor. To be precise, the person must be a lawful recipient of a personal 

copy for lawful use in their home and only play back such content at a time when 

‘‘it is lawfully performed.’’ This safe harbor is so narrow as to radically rewrite the 

long-standing Fair Use doctrine in our copyright law, which has been applied time 

and again by courts from every Federal Judicial Circuit to ensure that consumers 

can use purchased or public domain content for legitimate purposes. 

For example, S. 2048 could be read to prohibit—indeed criminalize—the practice 

of a consumer taping a digital TV program and saving that file for future multiple 

viewings with extended family and friends. 

Mr. Chairman, this proposed ‘‘government mandate’’ approach to solving the digital piracy problem will create a host of problems for the information technology industries, cause a firestorm of protest among American consumers, and ultimately 

do very little to prevent the proliferation of pirated digital music and video files. 

We reach this conclusion, based on our track record of developing successful software products that are used by millions of consumers to legitimately play back and 

store online content and from our observation of the history of government mandated standards. Please allow me to summarize these conclusions as seven ‘‘lessons’’

based on our experience, which call into question whether any government mandated standard would solve the piracy problem it is designed to address:

1. Forcing an industry to reach a ‘‘common standard’’ inevitably results in lost time 

to market for effective solutions. This was the case with the effort to protect 

digital music in the Secure Digital Music Initiative. It is especially true where 

RealNetworks, IBM, InterTrust, RSA, Microsoft and a host of other leading 

companies have already deployed DRM’s that meet many of the security criteria 

of S. 2048; 

2. Government standards inevitably try to solve ‘‘last year’s problem,’’ while technology, consumers and the hacker community march on. The FCC, already burdened with a full plate of important regulatory tasks, is unsuited to stay on top 

of the latest industry developments in encryption, tamper resistance, new formats and online security measures and would be unable to deploy solutions in 

the matter of hours required to stop system-wide hacks of the government administered standards; 

49

3. Creating a process for the government to pick a winner will politicize the standards process and favor those companies with staying power and political skill, 

not necessarily the best technologies; 

4. A single uniform standard presents a bigger target for hackers; 

5. Overbroad laws that mandate content protection for all digital media devices 

would potentially criminalize widespread lawful and reasonable consumer activity on home networks and common practices of making back-up copies for future 

use; 

6. New laws creating legal uncertainty will result in less investment in new technologies that in any way process digital content, thus slowing the roll-out of digital television and broadband deployment; 

7. Finally, we have learned that the adoption of new and confusing Fair Use tests 

that apply to narrow sets of consumer behavior, such as the safe harbor envisioned in S. 2048, lead to legal confusion, consumer confusion and eventual 

market paralysis. 

The Need for Targeted Legislation to Update Existing Copyright Law to Accommodate New Technologies and Promote Digital Content Services 

Congress must always proceed carefully before tampering with the regime of 

Copyright, Patent and technology laws that maintain the balance of copyright between the incentive to create new works and the rights of consumers to enjoy those 

works. S. 2048, as currently drafted, would radically alter the copyright balance in 

ways that disrupt the development of a robust marketplace for digital media, and 

therefore would benefit neither content creators, nor distributors, nor consumers. 

Only four years ago, Congress created new rights in copyright law and new security enforcement mechanisms with the passage of the Digital Millennium Copyright 

Act. Recently, in its Section 104 report, the Copyright Office recommended several 

changes that would update the DMCA to better solve the problems of digital distribution. Clarifying the status of temporary copies in RAM and server copies, for 

example, would eliminate legal uncertainty in the area of licensing of music for online distribution and speed up the legitimate offering of music on a subscription 

basis. Changing notice provisions to copyright owners, allowing for blanket notices 

to license thousands of works at a time, would similarly stimulate this music distribution channel—all in a way designed to compensate copyright owners. 

We don’t need additional new criminal penalties designed to make it harder for 

consumers to access digital works. In fact, the DMCA already provides powerful 

mechanisms to prosecute those who distribute software primarily designed to circumvent technical protection measures and, as I mentioned above, RealNetworks 

was the first company to enforce these provisions. If pirates reach a level of activity 

where they begin to pose a challenge to secure distribution of content in a given 

channel, the DMCA and current copyright and criminal laws provide the tools to 

go after them and shut down illegal products. 

Rather than focusing its energy on creating a new regulatory framework for digital media distribution, we believe it would be wiser for Congress to eliminate practical barriers to the current marketplace, particularly in areas such as Internet 

radio where new legal regulations have made it harder for innovative programming 

services to compete on a level playing field with other content offerings. Several of 

these measures are already under consideration in the House and Senate and 

RealNetworks would urge policy makers to adopt limited legislation designed to impact and resolve the following issues:

1. Online Music Licensing—we need to update existing statutory licensing provisions and make it easier, not harder, to pay writers and publishers for use of 

their works online via music subscription services. To compete effectively with 

unlicensed music file sharing services, legitimate online services should be legally enabled to offer comprehensive content offerings, such as complete libraries of songs, to end users, without burdensome notice requirements that necessitate thousands of individual licensing transactions before any content can be 

offered to music consumers; 

2. Web Radio—Congress should examine whether the current standard for the performance of sound recordings via web radio has been interpreted to create a 

burdensome rate structure on an innovative new medium that offers a diversity 

of content from a wide variety of webcasters to the public; 

3. Network Transmission—we need to clarify that copies that are not accessed 

by the consumer, but simply facilitate the transmission of a final copy to the 

end user, should not bear separate royalties or taxes; 

4. Performances and Reproductions—as recently recommended by the Copyright Office, Congress should distinguish between a performance, such as an onVerDate Sep 04 2002 09:35 Sep 20, 2002 Jkt 010199 PO 00000 Frm 00053 Fmt 6633 Sfmt 6621 W:\DISC\79464 79464
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demand stream, and a permanent reproduction, such as a digital download, for 

the purpose of computing royalty payments; 

5. Copyright Royalty Tribunal—Congress should explore the reestablishment of 

a permanent judicial panel such as the Copyright Royalty Tribunal—in order 

to speed up rate-making proceedings and foster new distribution models such 

as webcasting. 

Mr. Chairman, as set forth in Article I of The Constitution, our copyright system 

is predicated on the balance of consumer rights to enjoy content and the limited monopolies granted to creators of content in order to incentivize them to create works 

that promote the progress of ‘‘Science and the Useful Arts.’’ Yet recent changes in 

our copyright laws threaten this delicate balance and we believe it is time for Congress to address the confusion caused by the DMCA regarding the status of consumer Fair Use, not in the limited and restrictive manner contemplated by S. 2048, 

but in a way that clarifies that consumers have the right to store, archive and time 

shift purchased and public domain content. The simple act of breaking a digital seal 

should not be a crime in this country if the underlying purpose falls within the accepted personal use ambit of our long-standing copyright balance. A clearer zone of 

fair use will stimulate the invention of legitimate products designed to allow users 

to enjoy purchased music and video that is delivered by new digital services. In 

turn, this will create demand for broadband services and increase investment in 

new technologies. 

Working cooperatively, the content and technology industries will create a dynamic marketplace for digital distribution of content. Such a market will enrich consumers with new choices and lead to new product innovation. Eventually, it will 

stimulate artists to create new art forms unique to the new digital medium. 

RealNetworks has worked in partnership with independent artists and leading 

media companies to build the framework for online distribution in a way that respects copyright, pays artists and offers value to consumers. We stand ready to work 

with policymakers, consumer electronics companies, broadband providers, media 

companies and all other important actors in this environment to create a digital 

marketplace that affirms the best principles of American innovation and the rule 

of law. 

Thank you for your attention. I’d be happy to answer any questions you may 

have.

Mr. UPTON. Thank you. 

Mr. Assaf Litai. 

STATEMENT OF ASSAF LITAI 

Mr. LITAI. Thank you, Mr. Chairman. I am Assaf Litai, founder 

of Vidius, Incorporated. Vidius is a startup company that offers 

services for use by content owners concerned over peer-to-peer distribution of their products. We also offer auditing services for use 

by corporations and other institutions who may find that their corporate computers are being used without their knowledge or approval for peer-to-peer distribution of movies, games, computer 

software, books, data bases and objectionable material. 

Today I will demonstrate a video system called Clearsight that 

is capable of identifying, auditing, and interdicting such piracy. I 

want to emphasize the importance of its auditing feature. 

Most of the peer-to-peer services that deliver pirated material are 

owned and controlled by legitimate institutions in other lines of endeavor. This should not be a surprise, because most symmetrical 

broadband access today that is high band width for uploads as well 

as downloads is provided to institutions rather than private homes. 

This is unlikely to change anytime soon, because even cable 

modems and DSL lines provide for slow upload speeds. Viral distribution occurs where both the upload and download are a true 

broadband speed. 

Vidius has applied for over 20 patents on the techniques and 

services that I will demonstrate today, but demand for them thus 

51

far is limited. Many legitimate institutions, even corporations who 

are themselves major victims of piracy, are afraid to learn about 

their own hosting activity, that this could open them to prosecution 

for willful activity. To paraphrase an old song, they are afraid to 

find out who is hosting stuff on their own servers, whether they are 

out selling stuff. 

See, most of the material made available for peer-to-peer distribution is not stolen at all. It is licensed copies of programs, data 

bases or publications that employees are quietly and illegally publishing to the rest of the world. But these servers also offer lots of 

entertainment content that has indeed been stolen. 

What I will show you now is a movie recorded in our office of our 

system at work, not a simulation. It shows a server audit as to how 

many servers are offering a single movie and then focuses on a particular corporate server, including the number of copies. Our movie 

then shows us interdicting further mass anonymous distribution. 

We show a two-stage process. Stage one is localization, searching 

for and finding the host of the film. This utilizes our auditing system. Stage two is interdiction, removing the film from mass anonymous distribution. 

The auditing system display shows a navigation tree on the left 

panel and a detailed report of search results on the right panel. 

Using the navigation tree, we can zoom in from continents down 

to countries, down to specific hosts for this film. We could select 

any continent, but let’s look more closely at the U.S. 

On the left you see a list of very respectable institutions at each 

of which someone is offering one or more copies of this film for 

mass distribution. We could, for example, look at the University of 

California, but let’s pick one of the dozens or hundreds of companies that the search for this one movie turned up. 

Now you see a big list of numbers. Each of these numbers represents one machine somewhere in this company that is offering for 

distribution at least one copy of this particular movie. We will now 

take a look at just one of these servers. It is offering to the public 

two copies of Part One of the movie and one copy of Part Two. 

Now for the interdiction stage. This movie of our computer 

screens shows the beginning of a download, the entry of a command to interdict it, and the distribution of the content stopping. 

This is basically then the Gnutella client downloading the film, the 

search. We know who the host is. 

The information is filled in by the Clearsight system, and we 

start the interdiction. Look at the speed indicate there on the top 

righthand corner of the screen. As you can see, it is no longer available to the peer that requested it or to other peers. 

I want to emphasize a few points about what you have seen. 

First, our system operates only in data that has been publicly displayed to any inquiring computer. This data describes the content 

that has deliberately been made available to the public for piratical 

distribution. If this information was not personally delivered to 

anyone who inquired, the Vidius system could not operate. 

Second, our system does not require the identification of any one 

server, PC, home network nor consumer electronic product, nor 

does it interfere in any respect with the operation of such products 

on an institutional or home network. 

52

Third, our audit system can also be used to help this company 

identify all illegally offered content of all types, data, software, 

games, etcetera, on its computer systems so that they can clean it 

up themselves. Since this material is publicly offered, we would not 

even have to go onto their premises to compile a report for them. 

I am not here to denigrate other approaches to dealing with peerto-peer distribution, particularly those favored by our potential clients. Our service, and perhaps those of some competitors, is designed to be part of a multi-faceted approach. I do believe, however, 

that our own element is least intrusive to consumers and corporate 

employees and most productive for those who employ it. 

In summary, Mr. Chairman, I have demonstrated two separate 

approaches to dealing with peer-to-peer piracy, and we think both 

can contribute to dealing with the problem. One is to help content 

providers protect against illegal distribution of otherwise unprotected content. The other is to help those who unwittingly make 

such distribution possible to audit and police their own premises. 

If major organizations and institutions had incentives to clean up 

their own computer servers, the majority of illegally posted movies, 

books, songs, software, games, data, training manuals, and objectionable matter that we find in our audits could disappear overnight. 

Thank you, Mr. Chairman, for the opportunity to have appeared 

today. 

[The prepared statement of Assaf Litai follows:]

PREPARED STATEMENT OF ASSAF LITAI, FOUNDER AND INTERIM CEO, VIDIUS, INC. 

Chairman Upton, Ranking Member Markey, and members of the Subcommittee: 

I am Assaf Litai, Founder of Vidius, Inc. Vidius is a start-up company, co-founded 

by veterans of Israel’s underseas and land defense forces. It offers technology services and support to those who are concerned about the unauthorized, mass distribution of their products—movies, music, games, computer software, books, and databases—over peer-to-peer networks. Vidius has developed and applied for twenty patents on techniques and services, which I will demonstrate today, to assist owners 

of such products in protecting themselves. But current law actually provides disincentives for these owners, and for legitimate institutions and businesses whose facilities are the unwitting hosts for pirate distribution, to take simple and effective 

steps to stop the unauthorized mass distribution of these valuable entertainment, 

computer software, game, and publishing properties. 

Industry and congressional concern over copyright has focused increasingly, and 

now almost exclusively, on the business that Vidius is in—addressing mass, unauthorized distribution of content that is ‘‘hosted’’ on servers scattered around the 

country and the world. These servers are of two general types—those that are maintained for other purposes by large institutions, and, to a far lesser extent, those 

maintained expressly for this purpose by some individuals. A letter recently sent by 

a group of motion picture CEOs to a group of hi-tech industry CEOs said:I22

‘‘[U]nauthorized peer-to-peer file distribution... harms existing theatrical, home 

video and subscription outlets, and discourages legitimate on-line services which 

cannot sell access to movies, music and other entertainment content... available for 

free. We... should all work together in a consensus-based and cooperative fashion 

to find solutions to this problem that is threatening the very essence of our business.’’

Indeed, this understates the problem—our research has shown that these very 

same servers also host computer software, books, games, etc., responsible for much 

or most of the piracy in several other industries. 

Today I will demonstrate a Vidius system called ClearSite TM that is capable of 

identifying, auditing, and interdicting such piracy. I want to emphasize the importance of its ‘‘auditing’’ feature. Most of the ‘‘servers’’ for piracy in fact are owned 

and controlled by legitimate institutions in entirely unrelated businesses or endeavors, without their knowledge. Let me repeat that—most of the peer-to-peer servers 

that deliver pirated material are owned and controlled by legitimate institutions in 

53

other lines of endeavor. This should not be a surprise, because most symmetrical 

broadband access today (hi-bandwidth for both uploads and downloads) is still provided through institutions rather than private homes. Real, viral distribution occurs 

when participants have high bandwidth for uploads as well as downloads. This is 

the case today primarily in institutional settings, and is unlikely to change any time 

soon. While we know that much of the motion picture material distributed on peer-topeer networks has been obtained, as well as distributed, in an unauthorized fashion, 

many of the items distributed—particularly in the area of computer software—were not ‘‘stolen’’ at all. Rather, they are legitimate, purchased and licensed copies. However, they have been illegally made available for mass distribution by employees or 

others at these institutions or companies, many of which themselves have been, and 

are, prominent victims of piratical distribution. To paraphrase the song— ‘‘Who’s hostin’ stuff on your own servers 

While you are out sellin’ stuff?’’ Before demonstrating ClearSite TM I want to provide some assurances as to what 

the ClearSite TM system is not:

• First, our system does not invade the privacy of any data stored on anyone’s serv- er or hard drive. It operates only on data that has been publicly displayed to 

any inquiring computer. This data describes the content that has deliberately 

been made available to the public for piratical distribution. If this information 

were not purposely delivered to anyone who inquired, the Vidius system could 

not operate. • Second, our system does not require the modification of anyone’s server, PC, home 

network, or consumer electronics product. Nor does it interfere in any respect 

with the operation of such products on an institutional or home network. • Third, the ClearSite TM system cannot operate against the wishes of the ISP that 

connects the server to the network. 

Now for our demonstration. In our offices we recorded an actual instance of finding one product on a server that offered it for mass unauthorized distribution. We 

can collect and audit this information either by product or by host. Thus, in a different demonstration from today’s, we could show how XYZ corporation’s peer-topeer servers—generally PCs used by its employees—are today hosting a range of 

software, books, games, databases, and audiovisual material for mass unauthorized 

distribution. Today, however, we will focus on tracking and addressing the distribution of a particular piece of content—a motion picture. 

To track and audit a particular movie, we need not have implanted any information in it, or have been given any special knowledge about it. We can figure these 

things out for ourselves, through a process known as ‘‘fingerprinting.’’ Our demonstration shows our actual survey, acquisition, and evaluation of a single case, including a determination as to how many copies of the movie are on the server. (This 

part we could have demonstrated in real time, remotely, using any laptop computer 

tied in to our office.) Our movie then shows us interdicting further illegal distribution. (This part we can only do from our office facilities, which is why we recorded 

the entire demonstration.) This is a demonstration of our actual process at work, 

not a simulation. 

Our system is sufficiently flexible to be applied only to those servers that offer 

a certain number of illegal copies, or that have downloaded a particular movie a certain number of times. That is another reason why our audit function is so important. 

I am not here today to denigrate other approaches, particularly those favored by 

our potential clients in various business. We are, after all, a startup company building a clientele among the various industries that are here before you today. Having 

listened to the debates about other approaches, however, I submit that from the 

standpoint of law-abiding consumers and businesses, ours is the approach to stopping piracy that is least intrusive to consumers and employees, and most productive 

for those who employ it. 

I also should note that neither Vidius nor I am opposed to distributed computing 

in general, or peer-to-peer networking in particular. To the contrary, I agree with 

those who have said that distributed computing and peer-to-peer networks present 

many new opportunities to the information technology industry. To be kept free 

from regulation, this activity needs the advantage of self-protection. Such protection 

is available to top-down networks through DRMs. 

I said at the outset that existing law provides disincentives to such self-protection. 

I can point to two areas in which the law needs to be understood or amended: 

First, there are some who would interpret existing privacy laws, originally addressed to intrusive practices such as wiretapping, so as to support aggregated civil 

damages, and even criminal penalties, against any touching of a peer-to-peer servVerDate Sep 04 2002 09:35 Sep 20, 2002 Jkt 010199 PO 00000 Frm 00057 Fmt 6633 Sfmt 6621 W:\DISC\79464 79464
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er—even where it only involves the public ‘‘out box,’’ and the subject is clear, redhanded, repeated piracy. Under such a legal interpretation, the more piracy that is 

tracked from a single server, the greater the number of incidents of ‘‘touching’’ that 

might be aggregated, by some court, into ‘‘damages’’ in favor of the pirate, against 

the owner of the illegally distributed property. This is a complicated issue involving 

both Federal and state law. The subject needs to be addressed with care, with complete regard for the rights of consumers and technologists. But unintended legal 

consequences cannot and should not persist, in state or federal law, as a barrier to 

self-protection. 

Second, existing law provides a disincentive for legitimate institutions—businesses, universities, foundations, even congressional offices—to audit and address 

their own unwitting activity in supporting piracy through their own computer systems. The ‘‘NET Act’’ provides criminal penalties for use of such systems in piracy, 

but rightly provides that the system operator is liable only if specifically aware of 

the activity. But if the law stops there, legitimate institutions will continue to have 

a strong incentive to turn a blind eye to their own support of mass, piratical distribution. Even companies that can point to millions or even billions of dollars in 

losses as to their own products still have a very strong legal disincentive to find out 

whose products their own employees are distributing via their own systems. 

What is needed is to go further—to provide a ‘‘safe harbor’’ from criminal liability, 

under the NET Act, for entities that do try to find out what is being illegally distributed via their own systems. Remember, Mr. Chairman, most broadband exchanges 

today occur via institutional networks. If major organizations and institutions had 

the proper legal incentive to clean up their own computer servers, the majority of the 

illegally posted movies, books, songs, software, games, data, training manuals, and 

pornography that we find in our audits could disappear overnight. 

Thank you, Mr. Chairman, for the opportunity to have appeared today.

Mr. UPTON. Thank you. 

Mr. Kraus. 

STATEMENT OF JOE KRAUS 

Mr. KRAUS. Thank you, Mr. Chairman. Mr. Chairman, members 

of this committee, good afternoon. My name is Joe Kraus, and I am 

co-founder of a national membership organization dedicated to safeguarding citizens’ fair use rights to digital media. 

Specifically, we want to be sure that any digital rights management solution or legislation protects the rights of consumers as well 

as the rights of the entertainment industry. I am here to represent 

the views of the 35,000 Americans who have become members since 

our formation 6 weeks ago, and on their behalf we thank this committee for holding this hearing and allowing us to testify. 

Our members are not teenagers swapping songs on the Internet. 

They are ordinary, law abiding citizens who insist that Congress 

protect their historical fair use rights. They are people like Gregory 

Brewsaugh, a self-described Republican high school physics teacher 

in Huntington Beach, California. Mr. Brewsaugh has purchased 

over 400 CDs. He has copied his CDs onto his personal computer, 

which he now uses as a 4,000 song personal jukebox to deliver endless varieties of music throughout his home. Mr. Brewsaugh simply 

loves music and enjoys his freedom to listen to the content in the 

manner of his choosing. 

DigitalConsumer.org members respect intellectual property. We 

do not condone piracy. However, unlike what media companies 

would like you to believe, not all unauthorized copying is piracy. 

Let me say that again. Not all unauthorized copying is piracy. 

For example, we have all made mixed tapes of our favorite 

music. We have all made copies of CDs to take to the gym or listen 

to in the car. We have all recorded a sporting event to watch after 

our child’s soccer practice. None of these copies were authorized by 

55

the media companies. Yet is there anyone on this committee who 

believes that those are acts of piracy? Of course not. Although they 

are unauthorized, they are examples of legal, personal, fair use. 

Unfortunately, the entertainment industry has consistently denied the existence of consumers’ fair use rights. In July of 2000, 

Hilary Rosen represented the RIAA before the Senate Judiciary 

Committee. Senator Hatch asked if it was fair use for him to copy 

a CD to take in his car or copy a CD to give to his wife. She responded, ‘‘none of those examples is fair use.’’ Instead, they are examples of what she called, ‘‘tolerance’’ on the part of the music industry. 

We disagree. Consumers have fair use rights, and they expect 

Congress not to tolerate any erosion of them. Fair use is not a set 

of consumer expectations. Fair use is not a set of tolerated behaviors. Fair use is a set of rights, and because those rights are being 

encroached upon, they need to be strengthened and affirmed. 

We encourage the content industry to pursue pirates, but that 

pursuit must not sweep so broadly that it also punishes law abiding citizens; and, unfortunately, the media industry’s agenda goes 

far beyond piracy, and instead intends to create a legal system that 

denies consumers their personal use rights, and then charge those 

consumers additional fees to recoup them. 

Let me give you some examples of the methods the content industry is using to erode fair use rights. No. 1 is technology. Copy 

protection technologies in the market today have impacts beyond 

their stated goal of reducing piracy. 

For example, my mother called me to insist her MP3 player was 

broken, because she couldn’t copy a recently purchased CD to her 

portable player. She was surprised to learn the CD was operating 

as intended. It was explicitly designed to prevent her from making 

her legally allowed copy. 

Method number 2 is legislation. As we all know, the content industry is urging the passage of legislation like the Hollings bill in 

the Senate, which does not fully protect fair use by consumers. 

Number 3, commercial exclusion: Ordinary people have historically been excluded from decisions that affect how they enjoy the 

media they pay for. For example, consumers had no voice in deciding that DVDs could disable the menu button during previews, 

thereby forcing consumers to watch the previews. 

A moment on the Broadcast Protection Discussion Group: The 

erosion of fair use rights is occurring in many different places. The 

forum that concerns us today is the Broadcast Protection Discussion Group. We see three main problems with the process adopted 

by the BPDG. 

No. 1: No consumers are participating. As in previous cases, citizens are not participants in a process that will affect the way that 

they watch, record, and enjoy their television. 

No. 2: No provisions for fair use. Fair use is not protected by the 

specification. In fact, it is not even mentioned. While the interim 

progress report to this committee briefly discusses some fair uses, 

the draft of the specification ignores it completely. If we all agree 

that fair use is going to be protected, then why haven’t the parties 

to the process included it in the specification? 

56

No. 3: Too much control in industry hands. The charter of the 

BPDG is to prevent the unauthorized retransmission of digital 

broadcast television. That may be the charter, but the document 

produced thus far establishes a technical regime which would give 

a small subgroup of the BPDG members, which, by the way, include no consumer representatives, far greater control, control over 

how consumers watch, record, and enjoy their digital television. 

For example, the specification would allow the deployment of 

technologies which could give media companies the control over 

when your VCR recordings expired. Imagine recording all Sesame 

Street programs to replay for your child whenever you needed to, 

only to find out your recordings expired after 24 hours. 

The entertainment industry wants you to ratify a regime that 

gives them usage control without guarantees of fair use. I would 

urge the members of this committee not to approve any specification that does not explicitly assert and defend consumer fair use 

rights. 

In conclusion, I urge this committee that stopping piracy—I urge 

this committee to recognize that stopping piracy is just one goal of 

copyright law. That goal needs to be balanced against the goal of 

protecting the rights of citizens. Congress needs to pass into legislation a positive assertion of consumers’ fair use rights. 

Your constituents need to rest assured that their historic rights 

are safe. They need to know that no technology, no legislation, no 

commercial exclusion and no industry consortia will abridge their 

rights, and until such a positive assertion is passed into law, consumers’ rights will continue to be eroded. Thank you very much. 

[The prepared statement of Joe Kraus follows:]

PREPARED STATEMENT OF JOE KRAUS, CO-FOUNDER DIGITALCONSUMER.ORG

Introduction 

Mr. Chairman and members of this committee, good afternoon. 

My name is Joe Kraus and I am co-founder of DigitalConsumer.org, a new consumer advocacy group dedicated to safeguarding citizens’ fair-use rights to digital 

media. To be more specific, we want to be sure that any digital rights management 

solution or legislation protects the digital rights of consumers in addition to protecting the digital rights of the entertainment industry. 

I am here to represent the views of the 35,000 Americans who have become members since our formation 6 weeks ago. We thank the Committee for holding this 

hearing and for allowing us to testify. 

Our members are not teenagers swapping songs on the Internet. They’re ordinary, 

law abiding citizens who insist that Congress protect their historical fair-use rights. 

They are people who respect intellectual property but who also believe that their 

rights should not be ‘‘collateral damage’’’ in the ‘‘war against piracy’’. They’re people 

like Gregory Brewsaugh, a self-described Republican high school physics teacher in 

Huntington Beach, California. Mr. Brewsaugh has purchased over 400 CDs. He has 

copied his CDs onto his computer which he then uses as a 4,000 song personal jukebox to deliver music throughout his home. Mr. Brewsaugh simply loves music, loves 

electronics and enjoys the freedom he has to listen to the music he lawfully acquired 

in a manner and form of his choosing. 

DigitalConsumer.org members are proponents of intellectual property protection. 

We do not support or condone piracy. However, unlike what media companies would 

like you believe, copyright does not confer on the holder of a copyright the power 

to control every access, use, or copy of a work from cradle to grave. Not all ‘‘unauthorized’’ copying is piracy and not all consumers are potential criminals. 

We’ve all made mixed tapes of our favorite music. We’ve all made copies of CDs 

to take to the gym or listen to in the car. We’ve all recorded a sporting event to 

watch after our child’s soccer practice. None of these copies were ‘‘authorized’’ by 

the content companies. Yet, is there anyone on this Committee who believes that 

57

these are acts of piracy? Of course not. Although they are unauthorized, they are 

all examples of legal, personal, fair-use. 

However, the entertainment industry has consistently denied the existence of con- sumers’ fair-use rights. In July of 2000, Hilary Rosen represented the RIAA before 

the Senate Judiciary Committee. Senator Hatch asked if it was fair-use for him to 

make a copy of a CD for him to listen to in his car, or for him to make a copy of 

a CD to give to his wife. Ms. Rosen responded that ‘‘none of those examples is fair- use.’’ Instead, they are examples of what she called ‘‘tolerance’’ on the part of the 

music industry. In other words, the recording industry takes the view that these are 

examples of ‘‘unauthorized’’ uses that the entertainment industry chooses not to 

take us to court for having committed. 

We disagree. Consumer’s have fair-use rights and they expect Congress to safeguard them. Congress and the courts have carefully crafted a deliberate balance between the rights of copyright holders and the rights of citizens. Generally speaking, 

rights holders have the exclusive right to distribute and profit from artistic works. 

Consumers who legally acquire these works are free to use them as they see fit, so 

long as that use is personal and non-commercial. 

We respect the right of the content industry to pursue pirates. But, that pursuit 

must not sweep so broadly that it also punishes law-abiding citizens. Unfortunately, 

the media industry’s technical and legislative agenda does precisely that—it goes far 

beyond preventing piracy to prohibiting legal personal use. Content companies have 

used anti-piracy laws to effectively criminalize what to date have been ‘‘unauthorized’’ but nevertheless legal uses of media. The result? Consumers will wind up paying for what they have had previously been allowed to do for free. 

Erosion of our personal use rights 

Let me give you some examples of the methods the content industry is using to 

erode fair-use rights. 

Method #1. Technological Barriers to Fair-Use. Copy protection technologies in the 

market today have impacts beyond their stated goal of reducing piracy. These technologies give content companies an unprecedented ability to reduce or even revoke 

fair-use rights. My mother called me to insist that her MP3 player was broken because she couldn’t copy a recently purchased CD to her portable player. She was 

surprised to learn that the CD was operating as intended—it was explicitly designed 

to prevent her from making her legally allowed copies. 

Similarly, my dad called to tell me his DVD player was broken because the 

‘‘menu’’ button wasn’t working when the previews were playing on his DVD (thereby 

preventing him from skipping the previews). He was surprised to learn that existing 

law made it illegal to create a DVD player that would skip through content that 

the media companies flagged as ‘‘must watch’’. 

The irony is that these technical barriers have been more effective at preventing 

my mom from copying her legally bought music to her MP3 player than at diminishing major commercial piracy operations in China and Taiwan. Copy protection 

isn’t breakable by my mother, but it is very breakable by computer hackers. 

Method #2. Legislative Barriers to Fair-Use. In 1998 the entertainment industry 

came to Congress with a proposition: give them greater copyright protection and 

they would unleash a tidal wave of legal, downloadable digital movies and music 

for consumers to enjoy. As a result, Congress passed the Digital Millennium Copyright Act (DMCA). 

Congress lived up to its end of the bargain but the entertainment industry did 

not. Four years after the passage of the DMCA, consumers are still waiting for the 

flood of legally available content; meanwhile the law is being used to diminish or 

erase consumer’s fair-use rights. 

Now, the entertainment industry is back making claims similar to those made in 

1998: ‘‘Give us more protection and great things will happen.’’ We have no reason 

to believe the outcome for consumers will be any different this time around. 

Method #3. Commercial Barriers to Fair-Use. Many decisions relevant to fair-use 

are increasingly made by entertainment and consumer electronics industry consortia 

with little or no input from citizens. Ordinary people have historically been excluded 

from many of the decisions that affect how they enjoy the media they legally pay 

for. For example, consumers had no voice in deciding that DVDs could disable the 

‘‘menu’’ button during previews. Consumers had no voice when copy protection technologies for CDs were developed that denied consumers their ability to copy CDs 

onto their portable music players. Consumers were not represented when it was decided that DAT tapes could only be copied once (even if the voice on the DAT tape 

was your own). And no members of the press were permitted to observe and report 

on the most recent standards setting consortium—the so-called BPDG. In general, 

consumers have not been allowed to participate in decisions that affect their daily 

58

lives nor has the press been permitted to observe how these decisions are made and 

report their findings to the public. 

The terms of the debate 

Most importantly, fair-use rights are being threatened by the way that the entertainment industry is framing this debate. They would have you believe that all 

copying that they have not authorized is piracy, even though Congress and the 

courts have affirmed our rights to make personal copies of movies and music. When 

my mom makes copies of a CD—one to take to the gym, one to listen to on her computer, one to give to her husband—that is not piracy. 

The content industries have gone so far as to make a frontal assault on the industries that support consumers’ legal rights. They have accused Apple, Intel and Gateway of sponsoring piracy simply because they give citizens tools to exercise their 

fair-use rights. 

The content industries complain that the rest of the country has been slow to 

come to consensus on copy protection issues. But a compromise will inevitably be 

difficult when the content industry refuses to concede a fundamental fact—fair-use 

exists. 

I urge Congress to recognize that stopping piracy is just one goal of copyright law. 

That goal needs to be balanced against the goal of protecting the rights of citizens. 

Citizens have been left out of this debate even though they stand to be the most 

affected by the outcome. Your constituents expect Congress to safeguard and assert 

their fair-use rights. 

The Broadcast Protection Discussion Group 

The erosion of fair-use rights is occurring in many different places. The forum 

that concerns us today is the Broadcast Protection Discussion Group—a group this 

committee is very familiar with. We see three main problems with the process 

adopted by the BPDG. 

No consumer participation. Most importantly, the process has excluded consumers. As in previous cases, consumers are not participants in a process that will 

affect the way that they watch, record and enjoy their television. 

No provisions for fair-use. Second, fair-use is not protected by the specification—

in fact, it is not even mentioned. While the interim progress report to this committee briefly discusses fair-use (section 2.7), the draft of the specification ignores 

it completely. If we all agree that fair-use is going to be protected, then why haven’t 

the parties to the process put it in writing and included it in the specification? 

When I attended the most recent BPDG meeting I asked for a positive assurance 

that fair-use rights would not be abridged by any technology placed on the contentious ‘‘table A’’. Unless the Congress acts to insure that fair-use rights will not be 

abridged by any technology implemented pursuant to the BPDG, then how can it 

be sure that devices which enable free time shifting, space shifting, multiple copies, 

or even multimedia homework assignments, won’t be prohibited by this process? 

Too much control in industry hands. Third, the BPDG members tell you their intent is to prevent the unauthorized retransmission of content over the Internet. 

That may be the charter, but the document produced thus far establishes a technical regime which would give BPDG members far greater control—control over how 

consumers watched, recorded and enjoyed their digital television. Nothing in the 

specification prevents the deployment of technologies which would: allow media 

companies to control when your VCR recordings expired (imagine going on a two 

week vacation only to find out that your recordings of your favorite programs expired after a week); stop you from taking your home recordings on your laptop to 

watch on the train to work; or prevent you from watching recorded shows during 

primetime. 

When I raised these issues at the latest BPDG meeting, I was told that the technologies deployed would most certainly have ‘‘baggage’’ that would affect fair-use. 

While fair-use rights may be ‘‘baggage’’ to the entertainment industry, those rights 

are cherished by citizens. And citizens expect Congress to act in their defense. 

It is one thing for the entertainment industry to grant their blessing to one or 

more technologies that will erode the rights of consumers. If consumers choose to 

adopt a technology that diminishes their rights, that is their decision. However, it 

is quite another for the Congress to give the entertainment industry’s preferred 

technologies the force of law. And that is precisely what this entire debate is about. 

The members of the BPDG say that Congress should enforce the consensus of the 

content and technology industries or give the FCC the power to do so. We believe 

Congress also has an obligation to safeguard the rights of citizens who have not had 

a voice in this debate. Congress should insist that consumer’s fair-use rights be explicitly asserted and defended in the BPDG specification. 

59

Legislation to give more rights to copyright holders is not needed. 

The entertainment industry is back in Washington asking for more changes to the 

law. They claim that the marketplace has failed to help them develop technologies 

to protect their intellectual property and that therefore the government needs to 

step in legislate. We believe this is the wrong path for Congress to take for several 

reasons. First, Congress should think of this problem in terms of rights, not in terms of 

technological mandates. Define the rights of the respective parties (copyright holders and citizens) and let the market develop technologies which adjudicate between 

the two. Copyright holders have strong rights while consumers’ rights are weak and 

ill defined. Therefore, to help the market to work effectively, the first step to solving 

the piracy problem is not a government mandate, but a strong assertion of consumer 

rights. 

Second, many computer science experts believe that a secure system is not possible. Princeton Computer Science Professor Ed Felten, a computer security expert, 

noted in his testimony to the Senate Judiciary Committee on March 14, 2002 that 

‘‘a standard for copy protection is as premature as a standard for teleportation’’. Further quotation from his testimony illustrates this point. ‘‘Every copy protection 

scheme for general purpose computers that has undergone serious public scrutiny 

has been found to be ineffective. Consider what will happen if a government mandated protection measure turns out not to work. Such a measure would do many 

things: it would inconvenience honest consumers; it would raise the price of media 

players; it would lengthen product development cycles; it would impede the development of new and better standards. Everyone would suffer, except the pirates. The 

industry that devised the measure would look technically inept, and the government 

that mandated its use would look worse.’’

The solutions that the content industry has advanced to date have been more effective at preventing consumers from copying their legally bought music to their 

MP3 players than at diminishing major commercial piracy operations. As we all 

know, copy protection isn’t breakable by the average citizen, but it is very breakable 

by software experts. 

A government mandated technology standard will not be any more effective at 

preventing piracy. Instead, the consumer will lose as another technology that deprives them of control and flexibility is forced upon them. 

Third, putting the government in charge moves the decision from a market-based 

one to a political one. The development of technology should be driven by the private 

sector, not by a government agency. 

Fourth, given the slow speed of a government-driven process, the chosen standard 

will inevitably become outmoded and the process for revising it and updating it will 

be slower than a market-based approach. 

Finally, while some in Hollywood claim that a government standard is needed to 

ensure interoperability, legislation has not been needed to guarantee other critical 

types of interoperability: CDs play in all CD players, DVDs play in all DVD players, 

Internet Protocols allow all computers to talk to one another. None of these examples required government intervention. 

A dearth of viable, legal alternatives. 

We believe that one of the causes of the illegal copying of music and movies (although not the only one) is the dearth of commercially viable legal alternatives. 

MusicNet and PressPlay (the music industry’s legal alternatives) have serious flaws: 

they lack deep catalogs and they don’t provide consumers with the flexibility they 

expect from their music. For example, in many cases consumers cannot transfer 

music to portable players, or in the case of PressPlay the music ‘‘expires’’ as soon 

as users stop paying the subscription fee. Consumers are voting with their feet and 

avoiding these services. I believe this is not primarily because the competition is 

free, but because the competition delivers what consumers expect: they can find the 

music they’re looking for and once they find it, they can do with it what they expect 

(i.e. take it to the gym, listen to it in their car, etc). As the Economist magazine 

(March 21, 2002) accurately observed, ‘‘the meaner the industry is over what people 

can do with the [content] they pay to download, the more the studios’ own services 

will be a second-rate alternative to piracy’’

It is instructive to contrast the approach of the media companies with the approach of software companies in the digital world. As we’ve heard many times in 

this debate, media companies claim to lose $3.5B per year to piracy. But, software 

companies claim to lose $12B per year. Therefore, one would logically expect the 

software companies to have the same reservations about the digital medium that 

the media companies have. One would expect that the software industry would be 

clamoring for government mandates like the media industry. One would expect that 

60

the software industry would be shying away from digital distribution like the media 

industry. 

But the software industry does not behave like the content industry even though 

they suffer nearly 4 times the piracy. Unlike their media company counterparts, 

software companies have generally chosen to embrace the digital medium. A huge 

number of software titles are available for digital download. Once downloaded, these 

software programs behave just like software bought at the store. 

We believe it’s important to ask why the software companies who lose so much 

more to piracy embrace the digital medium while the media companies claim that 

their business will be ruined if they embrace digital delivery in its current ‘‘insecure’’ state? 

Along those same lines, it’s important to ask why the Business Software Alliance 

(an organization dedicated to detecting and stopping piracy) does not support government mandated technologies for copy protection. I believe the reason is that the 

software industry has been down this path before and has found that it does not 

work. In the early 1980s, many major software companies decided to implement 

strong copy protection schemes on their products. They discovered two things. First, 

their schemes did not stop piracy. Dedicated commercial pirates circumvented the 

copy protection. Second, their copy protection alienated and infuriated paying customers because the copy protection altered the expected behavior of the software. 

For example, consumers could not back up their software, and if a consumer upgraded his computer by buying a new one, they could not re-install the software on 

that machine. Software companies discovered that treating all customers as potential criminals was bad for business; it didn’t stop theft and it alienated the people 

who actually paid for their products. 

Instead of forcing technical solutions that inconvenienced paying customers, the 

Business Software Alliance shifted to a strategy of actually pursuing pirates. Today 

the BSA investigates piracy allegations, conducts raids, and assesses large fines on 

violators. Through the enforcement of existing law, the BSA has been extremely effective at diminishing piracy in the United States. 

In short, computer security experts believe and software history teaches that technical solutions will not solve the problem of piracy. The only way to reduce piracy 

is to engage the market by offering viable legal alternatives to consumers and to pursue the pirates, not the average consumer. 

Conclusion 

Content providers have a right to pursue and prevent piracy. However, law abiding consumers cannot have their personal use rights swept away in the process. In 

order to protect consumers’ rights from further erosion and in order to ensure that 

any technical solution to content protection respects consumer’s fair-use rights, the 

members of DigitalConsumer.org urge this Committee to make a positive assertion 

of citizens’ personal use rights. The vehicle is a set of principles we call the Consumer Technology Bill of Rights and it is a statement of fair-use principles grounded 

in history, legislation and the courts. 

After years of successful litigation and legislative efforts, many in the entertainment industry are back in Washington asking for more changes to the law. All the 

while, they have been quietly developing services, technologies and products that 

eliminate fair use for their customers, your constituents. Many in the copyright community will not admit that there is such a thing as fair use. This denial persists 

despite 30 years of Congressional action and Supreme Court rulings affirming consumers’ fair use rights. And, while I am not a lawyer, I do know this much: consumers believe they have personal use rights and they expect Congress to insure 

that they are safeguarded. Before this Committee considers yet another change in 

the law at the behest of the copyright community—a change in law that would make 

‘‘unauthorized’’ copying synonymous with piracy—I would respectfully urge you to 

insure that the rights of consumers are protected and spelled out in the legislation. 

Thank you very much for the time to address this committee today.

Mr. UPTON. Thank you all, and we all appreciate the testimony 

and having a chance to review it last night as well. 

I am going to work with Mr. Chernin here for the first question. 

I am going to ask a question of both Mr. Chernin and Mr. Parsons. 

I would like each of you to respond. 

If we can get the broadcast flag done and maybe the analog hole, 

to come pretty close to getting those accomplished, will that be 

enough for the sake of the DTV transition to unleash the content 

61

as we continue to move toward the other content protection measures? For the purpose of that question, notice I did not include 

peer-to-peer. I know we made some progress on peer-to-peer but 

have not yet been able to resolve it. What are your thoughts, each 

of you? Why don’t we start with Mr. Chernin first. 

Mr. CHERNIN. Thank you, Mr. Chairman. I think that, clearly, 

the broadcast flag is the single biggest impediment for us making 

any digital—all of our digital content available on digital television. 

So I think that will go a long way toward solving our problems. 

Clearly, we would like to see everything solved, but specifically related to the digital transition on terrestrial television, I think the 

broadcast flag is the single biggest issue, and I think its, hopefully, 

imminent solution will allow us to rapidly speed up this transition. 

Mr. UPTON. So you think, just with that, if we are able to get 

that done, that, in fact, we will see the content be able to flow? 

Mr. CHERNIN. I think it is the single biggest current impediment, 

and the removal of that impediment will do more than any other 

single thing for, specifically, the digital terrestrial transition. We 

would still like to struggle with the other problems, but they are 

less related to the digital terrestrial transition than the broadcast 

flag issue. 

Mr. UPTON. Mr. Parsons. 

Mr. PARSONS. Basically, I agree with Mr. Chernin in terms of the 

way you have framed your question. Will that help speed the DTV 

evolution? Moreover, we don’t have a solution yet. I mean the industry groups. It is the same group of engineers and the same 

group of both technicians and lawyers who are working on this. 

So taking it incrementally, I think, actually makes some sense, 

rather than trying to solve all the problems at once. That is not to 

say, however, that solving the peer-to-peer file sharing is not an 

enormous piece of a larger question, which is how you protect intellectual property in the digital age. But from the digital television 

perspective, I agree with Peter, that the broadcast flag is probably 

80 percent of it, and the analog hole is probably 19 percent of that. 

Mr. UPTON. Mr. Parsons, in your testimony you are more of an 

Upton/Markey individual: The glass is half-full, root for the Cubs 

and the Red Sox. 

Mr. PARSONS. I wouldn’t go quite that far, Mr. Chairman. 

Mr. UPTON. Well, but you are optimistic, in fact, that things are 

on the right course, and I notice in Mr. Blanford’s testimony, he 

was more of a—I don’t want to call him a realist, but in his statement not anywhere close to getting this resolved. Tell me what you 

think the two differences are, and I will have Mr. Blanford respond 

as well. 

Mr. PARSONS. I can simply tell you why I have a sense of optimism about it. I do not think we are there yet, but I think real 

progress is being made. If you tick them off, we are pretty close to 

being there, I think, on the broadcast flag issue. We’ve got our 

arms around—— Mr. UPTON. How close is close? Six months? 

Mr. PARSONS. Well, I think—I don’t know that I can put it in 

months but, you know, we have got the sort of technology down, 

as I understand where the groups are. What they are doing now 

is trying to formulate a uniform specification. 

62

I think that not everybody in the industry is pleased with where 

we are on that, but that there is a broad consensus among the consumer electronics, information technology, and entertainment industry that we have found the right place to be. There are some 

people who have—and I am sure we will hear from Mr. Blanford 

on it. Some people are aggrieved by that, but I think within a matter of months—— Mr. UPTON. I know there is a meeting next week, April 29. Do 

you have some hopes on what you are going to be able to accomplish at that meeting? 

Mr. PARSONS. Well, I think on the broadcast flag issue, yes, I 

think that we are very close to having something that most of the 

industry could get its arms around. 

Mr. UPTON. Mr. Blanford, would you like to respond? 

Mr. BLANFORD. Yes. Thank you. I would say, first of all, that we 

overall are optimistic that these problems can be resolved and, certainly, Philips historically has been involved in other similar endeavors. I think indeed we see that we will get there. However, we 

are most concerned, as I related in my testimony, that the process 

which we are using right now, although some progress has been 

made, is fundamentally a closed process, and that other technologies that could be helpful are not being considered. 

More importantly than the selection of the technology, although 

that is important, is the fundamental decisions about how that 

technology will work downstream of the flag. The fundamental 

rules which guide how equipment will work, talk with each other, 

is being controlled fundamentally by this small group. 

It is in the decisions and those rules where fundamentally the 

balance of consumer use and content protection which, many of the 

members here have certainly highlighted, is the balance we are 

striving for. It is in the setting of those rules that that balance is 

determined. Our concern is we have a very small group setting 

those rules with not all participants being involved. 

That is why our suggestion for a more open process with Congress, in one form or another, stepping up and helping to provide 

some governance of the process to ensure it is open, that it is transparent, and that that balance can be found. 

Mr. UPTON. Thank you. I know my time has expired. Mr. Boucher. A series of votes have been called. I think we will have time 

for Mr. Boucher, and then we will break for a time, and then we 

will come back. 

Mr. BOUCHER. Well, thank you very much, Mr. Chairman. I want 

to express my appreciation to all of these witnesses, those who are 

physically here today and Mr. Chernin who is here by means of our 

video conferencing equipment, for the very informative testimony 

that they have prepared and presented to us, which I find to be 

very enlightening on the subject we are addressing. 

The operating principle that we have had for sometime is that, 

as soon as the private sector working group can develop the appropriate set of standards for protecting content, while also observing 

home recording rights, that we in the Congress would then be 

called upon to legislate in such a way as to assure that all devices, 

receivers, players, and recorders recognize and respond to the 

agreed upon standards. 

63

My first question to you is what is the right time for us to legislate? To date, there has been an agreement that would protect content delivered by cable and by satellite. In fact, that agreement has 

now been in place for a number of months. 

I am told that just last night basic outstanding differences were 

resolved on a means of protecting content delivered over the air, 

and that now the various parties are examining the various means 

by which those outstanding issues were resolved, and that potentially, within a matter of days, we could have the announcement 

of a final agreement that would create a broadcast flag for protecting the content delivered over the air to antennas and to rabbit 

ears. 

That is truly substantial progress, and I am wondering if the 

time to legislate is upon the conclusion of that agreement. If, in 

fact, you do close that issue within the next several days, can we 

here in this committee expect that you will be coming to us with 

a legislative recommendation that we then enshrine those agreements and require that devices respond? 

Let me begin with Mr. Parsons. 

Mr. PARSONS. Not being at the table, Congressman, I can’t tell 

you exactly what was determined last night, but your understanding and mine is about the same, that they have really reached 

closure. The industry working group has reached closure around 

the technological definition of broadcast flag, and now they have to 

move to the next step, which is to design the standard which we 

would then come and ask the Congress to have made uniform 

throughout the land. 

It is the same answer to the chairman’s question. I think that 

is not weeks but a couple of months. I do not think it is 6 months, 

but I think we are getting very close, and I think what we are 

hearing to some extent from Mr. Blanford, and maybe even to a 

lesser extent from Mr. Kraus, is that there may be jots and tittles 

that can be added to it, but I would remind the committee, in this 

area in particular, the perfect can be the enemy of the good. 

If we really want to get moving on DTV, you are going to have 

to do something that constitutes good action, largely consensus action, even though there may be on the outlier people who feel aggrieved, for one reason or another. 

Mr. BOUCHER. So you would agree that the proper time to legislate is the time at which we do have agreement on protecting cable, 

satellite delivered content, as well as over the air content; and 

when you have done that, it is time for Congress to do its part. 

Would you agree with that? 

Mr. PARSONS. I would say it would be the appropriate for Congress to take a step, and particularly as relates to the issue we are 

talking about, which is DTV and the broadcast flag. 

Mr. BOUCHER. Mr. Chernin, would you care to comment on that 

question? 

Mr. CHERNIN. Yes. First of all, I am probably even more optimistic than my colleague, Mr. Parsons. I think we should be able 

to come out with a recommendation within, at most, a matter of 

weeks. 

I guess the place where I do most agree with my colleague is I 

do think we should approach this incrementally, and rather than 

64

wait for everything and wait for government to do one big thing, 

as we are ready to move on satellite and cable, as we are ready to 

move on the broadcast flag, we can pursue limited, targeted legislation to codify those solutions and get on with the next one. 

So I am quite optimistic that we are within a very short time of 

coming and proposing a solution. 

Mr. BOUCHER. Thank you. Mr. Liao, as the representative of the 

5C companies, would you agree with Mr. Parsons and Mr. Chernin? 

Mr. LIAO. Let me tell you what the official schedule is. The 

schedule is for the——

Mr. PARSONS. You mean, all this time you had a schedule, and 

you let me hang out there? 

Mr. LIAO. I am sorry, Dick. The schedule is for an issuance of the 

final report on May 17. Now there are many issues that we think 

are basically resolved, and as you referred to, Congressman, last 

night the MPAA, the computer industry group, as well as the 5C, 

came to some very important agreements on how to move forward. 

That does not mean that all members of the BPDG, the Broadcast Protection Discussion Group, have agreed yet. In fact, the proposal that is coming from these groups of companies will be put on 

the website, I think, today. So that it is going to take some more 

discussion, but we are very optimistic that, by the deadline of May 

17, in fact, there will be an issuance of a final report. We certainly 

hope that will be the case. 

At the same time, the CPWG, which is a technical working 

group—I should emphasize, a technical working group. It typically 

does not deal with policy issues, but because of the importance of 

this one, it has developed a parallel committee that is investigating 

the sort of policy ramifications of this. 

It is probably from that committee that will come sort of a recommendation or at least an analysis of what kind of legislation 

might be required, and definitely we are thinking, I think everyone 

agrees, on some very limited legislation that might be appropriate 

for this issue. 

Mr. BOUCHER. Well, thank you. We will all look forward to getting that report. My time has expired. I again want to thank these 

witnesses for assisting us in this inquiry today. 

Mr. UPTON. I would note that there is a little less than 61⁄2 minutes left in the vote on the floor. So at this point we will take a 

break, and we will come back as soon as the votes are over. 

[Brief recess.] 

Mr. UPTON. Take our seats, please. We are done voting on the 

House floor for the week. A number of us are going back to our districts this weekend as well. I know that Mr. Chernin has to leave 

at 3:30 Eastern time. So we will resume, and we will resume with 

Mr. Barton. 

Mr. BARTON. Thank you, Mr. Chairman. I appreciate this hearing. I focus, as you know, much more on energy issues as chairman 

of that subcommittee, but I am a member of this subcommittee, 

and I really, really enjoyed the hearing. 

I don’t have but one or two questions. I was sitting here during 

the testimony, and we have these little fancy gadgets now called 

blackberries. So I sent a message to one of my constituents down 

65

in Texas, telling him what I was doing and said, do you think you 

have the right to copy a CD or a video that you buy? 

The constituent e-mailed back immediately and said, ‘‘I already 

do with CDs anyway. I can see both sides of this issue, but as a 

consumer I love the fact that I can copy or burn my own CDs. In 

my opinion, the music industry is making a killing, and they 

haven’t been smart enough to keep up with today’s technology. If 

I was a musician, I would hate it, of course. There’s my two cents’ worth. You are very busy today, aren’t you?’’ So that kind of puts it in a nutshell. If you are on the production 

side, you can see why we want copyright protection that is enforceable, even in the home; and if you are on the consumer side, as the 

gentleman on the end of the panel is, you can see why people want 

to have the ability to at least, as I think the buzzword is, have fair 

use. 

I am more on the fair use side. I think that it should be reasonable—that we should have a way technologically to reasonably protect copyright, and I am with Mr. Boucher and what he said about 

let’s try to let the private sector and the industry work it out. But 

I don’t believe we need to go to the extremes that some in the production side, some of the studios and producers, would have us attempt to go to. 

So I am going to—I would oppose the Hollings bill, if it were to 

come over here, and hope that we can work out a little better 

agreement. 

I also see my good friend, Mr. Valenti, in the audience, good 

Texan, new book out on LBJ, and I am sure you are going to be 

mentioned in it. But I just want to send a message to your folks. 

I went to see a movie not too long ago, and I don’t go to many movies anymore. But I went to see a movie in which the plot was a 

group of renegade Marines that had assassinated some people in 

El Salvador, and one of the Marines later went AWOL and married, and then was tracked down by the FBI. It turned out that his 

boss was the Marine general in charge of Congressional affairs for 

the Congress. 

He is shown wearing the Congressional Medal of Honor. Now 

there is a Marine from my home town of Ennis, Texas, named Jack 

Loomis who died in World War II, one of the few Marines from 

Texas who won the Congressional Medal of Honor. I know we have 

freedom of speech in the First Amendment, but it is a travesty to 

have Hollywood showing a corrupt Marine general, in my opinion, 

wearing the Congressional Medal of Honor, because we don’t give 

those away. 

You know, we’ve got freedom of expression in this country, but 

that really chapped my pants. So if you see some of your friends 

out in Hollywood, remind them what the valor is in the Congressional Medal of Honor. It is not just another award that you put 

on somebody’s uniform. ‘‘Black Hawk Down’’ is supposed to be a 

pretty good movie, but I will get with you on that privately, but it 

really chapped my tail. 

My question: Mr. Liao, you in your testimony talked about an 

agreement, and the staff apparently is not aware of that agreement 

or not very aware of it. Could you enlighten us or elaborate a little 

bit on that agreement? 

66

Mr. LIAO. Yes. First of all, the agreement happened very, very 

late or, I should say, early this morning on the west coast. So to 

be honest, I only learned about that agreement today as well. So 

it is not surprising that your staff did not know. I did not know. 

As you know, since the—over the last few months, all of the industry participants have been working diligently to solve these 

issues, and the agreement, again, is focused on the broadcast flag. 

So it only addresses that single issue, the broadcast flag issue. 

Also as you know, the way that the CPTWG works, it is a public, 

multi-industry forum that even public interest groups can and do 

attend. It is really kind of a venue for companies to make proposals, to get feedback, and for the industry or the multiple industries to kind of analyze those proposals. Then some of these groups 

may or may not implement them in their businesses. 

In this particular case, three groups—so I want to distinguish 

this. This agreement is not a BPDG agreement. This is three 

groups who have in the past and, in fact, will continue to make 

proposals to the CPTWG, either independently or together, namely 

the MPAA, the CIG, the Computer Industry Group, and the 5C 

group of companies. 

They have agreed on some of the criteria by which technologies 

might be deemed as useful for the—to be used in conjunction with 

the broadcast flag. 

Mr. BARTON. Thank you. I yield back the balance of my time, Mr. 

Chairman. 

Mr. UPTON. Thank you. Ms. Harman. 

Ms. HARMAN. Thank you, Mr. Chairman. On the way to vote I 

learned that this meeting last night concluded at around 1:30 in 

the morning. It is exciting to me to learn that the industry keeps 

the same hours that Congress does. 

I also am impressed that you can bring together the disparate interests you describe. Maybe we should turn over the Middle East, 

the problem of the Middle East, to you. My serious point is that 

it would be wonderful to see real progress on this issue. We know 

it is a hard issue, and we know it is balancing a to of important 

interests. 

As I listened to you, at least I heard you say the MPAA, the CIG 

and the 5C group is all in the same place. That covers a lot of territory, and I am happy to hear that. What is not in the room is, at 

least if we define interests, maybe there is a fourth set of interests, 

and those might be consumers. 

Now I understand you are all consumers, too, but a separate 

group of consumers. So I want to direct a few questions to Mr. 

Kraus today, because I was interested in his testimony, and anyone 

who can build an organization of 33,000 people in 6 weeks gets any 

politician’s attention. How did you do this? 

Mr. KRAUS. Well, the short answer is there is actually a lot of 

latent interest in the issue of fair use rights, and I think people out 

on just the average consumer is very concerned about recent 

trends. So while I think the average consumer understands the notion that piracy is not a good thing, the average consumer is concerned that the trends so far seem to be overreaching in the other 

direction. So there is just a lot of latent interest. 

Ms. HARMAN. But who can join your organization? Can I joint it? 

67

Mr. KRAUS. Absolutely. 

Ms. HARMAN. Can Mr. Parsons join it? 

Mr. KRAUS. Yes. The organization is open to anyone who wants 

to join, and essentially it is an ability—It is a gathering point for 

consumers who are concerned about fair use rights to be able to 

channel their interests to politicians and to people who are making 

both industry decisions and policy decisions regarding fair use. 

Ms. HARMAN. Who sets your policy? Do your members set your 

policy or does some governing board set your policy? 

Mr. KRAUS. We currently have a relatively informal structure of 

an executive committee. We take input from our member base, and 

we essentially use that input to define a set of policies that we 

think our constituency is concerned about. 

We represent that policy back out to our members, and they vote 

with their e-mails and their feedback to us about whether they approve of that or not. By signing up as members, this group of people essentially are saying this is what I am concerned about. 

I have to stress that the membership is really most concerned 

about seeing a positive assertion of their fair use rights put into 

law, because I think the overall concern is that, little by little, fair 

use rights get whittled away without a legislative positive assertion 

of fair use rights. I think consumers are worried that their interest 

will not be protected. 

Ms. HARMAN. Well, I appreciate that. Where are you located? 

Mr. KRAUS. We are currently located in Palo Alto, California. 

Ms. HARMAN. And so the goal here is to have, it sounds to me 

like, a democratic organization which will sign up anyone who 

wants to sign up, and which has a kind of interactive agenda. So 

that if people don’t like your agenda, they drop off or they have a 

chance to vote no? I mean if they did not like your consumer bill 

of rights, could they say we don’t like this, change it to that, and 

would you change it? 

Mr. KRAUS. Well, I mean, I think that the key is that there is 

a governing body that essentially takes input from the members 

and makes decisions, and then the consumers who are members of 

those organizations essentially vote with their feet and vote with 

their faxes to the Members of Congress. 

Ms. HARMAN. Who is the governing body? 

Mr. KRAUS. The governing body essentially is a smaller set of 

members and consumers. I myself am included. Graham Spencer, 

also in Silicon Valley, is a member, and we are looking to actively 

grow that executive committee to make sure that it is as broad and 

representative as our members. 

Ms. HARMAN. So is your model at some point—I realize you are 

6 weeks old, and it is highly impressively that you have done this 

in 6 weeks. 

Mr. KRAUS. Thank you. 

Ms. HARMAN. Is your model something like the Consumer Federation of America or Consumers Union or—I am listening to Mr. 

Markey at the same time—or Common Cause? I mean, what are 

you trying to become, the digital version of one of those things? 

Mr. KRAUS. Well, not being as familiar as maybe I should be 

with those organizations, and not having actually done this kind of 

68

organizing before, I don’t really have a specific model in mind, and 

I apologize for not being able to liken it to anything else. 

Again, I think our general goal is to use—I myself am an entrepreneur and involved in the web. Therefore, I am familiar with 

how to use the web as a wonderful organizing tool to essentially 

give disparate consumers who share interests a common voice. 

So I don’t have any particular model in mind that I can point you 

to, but I can say that what is wonderful about the web is that it 

is able to achieve and able to organize consumers with disparate 

geographies into a common voice and allow that voice to be channeled to policymakers and people in industry. 

Ms. HARMAN. Well, my reaction to what you have said is to be 

impressed with your entrepreneurial expertise, but also to be a little bit cautious, and I hope you are, too. This engine you are creating really needs, as it operates, to represent fairly, I would hope, 

the views of its members and to operate fairly in a set of problems 

where what we really are seeking is balance. 

Mr. KRAUS. Yes. 

Ms. HARMAN. You wouldn’t argue that fair use is the only good 

here. I am sure you wouldn’t. 

Mr. KRAUS. No. Let me be very, very clear. DigitalConsumer.org 

does not support, condone in any way piracy. I completely recognize—I am a businessman in my professional career. I completely 

recognize the problems that Mr. Parsons, Mr. Chernin are facing, 

absolutely. I understand that those are important issues. 

My constituency of DigitalConsumer.org, however, namely, is 

concerned both about the issues that the industry is facing, but 

also want to make sure that their rights are not taken away in the 

process. So, believe me, this is an organization that does take a balanced view and understands that there are serious issues involved, 

is not looking to legalize or condone piracy in any way, but also 

wants to defend the fair use rights of consumers that, so far, have 

not actually, in our opinion, been adequately represented. 

Ms. HARMAN. Well, I thank the panel for all that you are doing. 

I am always optimistic, but I am much more optimistic, having 

heard all of you and having heard the progress made last night, 

than I was when I came in here. Thank you very much. 

Mr. UPTON. Mr. Stearns. 

Mr. STEARNS. Thank you, Mr. Chairman. I would like to direct 

my question to Mr. Litai, if you could. How old is your company, 

Vidius? 

Mr. LITAI. Two years old. 

Mr. STEARNS. Two years old? How many employees do you have 

now? 

Mr. LITAI. About 20 employees. 

Mr. STEARNS. Okay. And if your system were in use, would protection measures still be necessary to keep content from being 

uploaded to the Internet in the first place? 

Mr. LITAI. As I said, the technology that we are discussing is 

part of a comprehensive solution which we think should be made, 

and that should consist of elements to prevent the leakage of the 

content onto the Internet in the first place, and then because you 

cannot prevent all leaks onto the Internet, then eventually interVerDate Sep 04 2002 09:35 Sep 20, 2002 Jkt 010199 PO 00000 Frm 00072 Fmt 6633 Sfmt 6602 W:\DISC\79464 79464
69

dict, search, find, locate and interdict those copies which do appear 

on the Internet. 

Mr. STEARNS. So protection measures would not be necessary? 

Mr. LITAI. I think that protection measures in some form will be 

recommended. Yes. 

Mr. STEARNS. This is to Mr. Chernin in Los Angeles. From what 

you just heard, is that type of DRM enough to adequately protect 

News Corporation content? If not, why not, and what is not protected? 

Mr. CHERNIN. Mr. Stearns, I am not sure I have enough knowledge of the Vidius system to judge whether it is enough to protect 

us. You know, my sense of it, just looking at it, was that it was, 

more than anything, a way for companies to monitor whether their 

employees were illegally putting illegal or inappropriate video files 

up on the Internet, but I have no basis other than the 2-minute 

demonstration I just saw. 

I do think, you know, as I said earlier, this is an incredibly complicated problem and is going to need careful thought and the goodwill and participation of everyone at this panel and lots of other 

people, and is going to involve solutions that are technological, that 

probably will need some legislation and, as much as anything, also 

need public opinion, need us all to take an active role saying that, 

while we believe in the fair use of consumers and we have no desire to restrict them, we also must stop online digital looting. 

Mr. STEARNS. Well, let me ask you this. Is there anything, in 

your opinion, out there right now that provides the protection 

measures? 

Mr. CHERNIN. No. 

Mr. STEARNS. No? Okay. 

Mr. CHERNIN. I don’t think there is. I think we have some ideas, 

and I think some other companies have ideas, and they involve 

some very traditional methods, because a lot of these files end up 

on the Internet, you know, illegally. They are stolen out of trucks. 

They are stolen from movie theaters. They are used by camcorders. 

So we got to do a better job of that, but then even once we get 

there, I think there are some watermarking ideas we have. 

I think the key is how do we stop the transmission of inappropriate and illegally obtained files, and yet at the same time not restrict in any way whatsoever consumers’ fair use to transmit files 

that are either legally obtained or transmit their son’s soccer game 

or their 1-year-old’s birthday party. 

Mr. STEARNS. Well, let me ask you this. Are you doing online 

streaming now, and how are you protecting yourself now? 

Mr. CHERNIN. We are not doing any online streaming right now. 

Mr. STEARNS. Okay. Mr. Litai, what precisely is the service you 

would sell to a corporation whose equipment may be subject to misuse? What happens when peer-to-peer networks evolve? Would 

your system no longer work? 

Mr. LITAI. To answer No. 1, what we offer for corporations is the 

reports of the data hosted on their network, along with a very comprehensive itemized list of the specific users who are hosting content on their machine so that the corporation can actually go and 

remove that peer-to-peer from those employees’ computers. 

70

In terms of what happens when the peer-to-peer networks evolve, 

this is the reason that what we offer is basically a service. There 

needs to be an ongoing evaluation of the peer-to-peer networks as 

they evolve, and to change basically, or to evolve the response system to those new peer-to-peer or to these evolving peer-to-peer networks; because, certainly, the hackers will continue to evolve their 

systems. So we will need to, as well. 

Mr. STEARNS. Can you explain a little bit more about the privacy 

issues associated with your system? What do you mean that it, ‘‘operates only on data that has been publicly displayed to any inquiring computer,’’ and, I guess, what are your company’s privacy policy regarding information on consumers’ viewing habits that may 

be identified by your tracking system? 

Mr. LITAI. Okay. We do not access anybody’s computer. It is very 

important to understand. We do not access anybody’s computer. 

What we do is, using the peer-to-peer network, basically, we use 

the peer-to-peer network within the confines of the way it is intended for use. 

So what we do is go to the peer-to-peer network and ask it who 

hosts this file. Now we know how to do it in a very robust and very 

efficient manner, but we go and ask the peer-to-peer system where 

this content lies, the content that belongs to the content providers. 

What we do is receive these responses from the different computers saying I have this over here. This is how we know where 

the content is located, and where it resides. In terms of the privacy 

issues—— Mr. STEARNS. Sort of your privacy policies. 

Mr. LITAI. The privacy policies is that the information is only 

made available to the owners of the content or to the corporations 

who ask specifically for those reports. 

Mr. STEARNS. But if I was a corporation and you were doing this 

on me, would you notify me that you are doing this? 

Mr. LITAI. In terms of—We get information from all over the 

world, not just the U.S., all over the world. 

Mr. STEARNS. The specific question is: I am a corporation, and 

you are doing this—you are taking this information that is happening on my site. I mean, do I get notified at all? Is that a fair 

question to ask? I mean, am I in the right ballpark here? Should 

I be notified? 

Mr. LITAI. The question—because what happens is, when you ask 

a peer-to-peer network,the peer-to-peer network does not filter the 

answers. So as far as we are concerned, we get results from computers everywhere, within corporations, outside of corporations, on 

ISPs, and basically aggregate that information. 

Mr. STEARNS. And it doesn’t identify IBM, General Motors or 

anybody like that? 

Mr. LITAI. It does, because the IPs in general tell you——

Mr. STEARNS. You have all the IPs, but you never notify the people that you are taking all this information? 

Mr. LITAI. We are not taking any information. 

Mr. STEARNS. Okay. Thank you, Mr. Chairman. 

Mr. UPTON. Thank you, Mr. Stearns. Mr. Markey. 

Mr. MARKEY. Thank you, Mr. Chairman. Mr. Litai, congratulations on Vidius. No one ever heard of Vidius before this afternoon, 

71

but every person in the room has now written down your company’s name, and they are going to learn something about it in the 

next week, or someone in their company is going to learn about it 

for them, because they don’t know whether it is Vidius or invidious. 

So they are all trying to figure it out now, and none of them are 

quite sure, but you’ve got everybody’s attention. 

My concern is on peer-to-peer networks, but just in general, you 

know, a philosophical question, because I know that some people 

see peer-to-peer networks as kind of a software access of evil, and 

I would like to get at the heart of the philosophical positions which 

the people who are sitting here. 

The cultural mores of millions of youngsters and certain adults 

have seemingly changed to the extent that they believe that all information is free, that music and movies are all made of digital 

data yearning to be free and liberated on the Internet. 

Some of the remedies for recalibrating the balance between content protection and fair use from the content community would 

simply prohibit home recorded digital data from being uploaded or 

retransmitted on the Internet. I will leave aside whether this is 

possible or not, but assuming it can be done, it raises the question 

of what our policy should be. 

So I think everyone realizes the right and the need for content 

creators to safeguard their products. Digital copies are, no doubt, 

easily copied, and there is a risk that, once out in the marketplace, 

someone could massively distribute that movie or TV show illegally, doing great financial harm to the content owner. 

Yet not every consumer is a potential thief. If a consumer can legally record material in digital form, doesn’t it make sense, consistent with fair use, that a consumer would share it or a portion 

of it with a friend or use it in school? 

My question is: Is it pro-broadband to push the industries to lock 

in a standard that prohibits all uploading of legally copied content 

on the Internet? How can it be pro-broadband to force people to use 

the U.S. mail or FedEx to deliver legally copied, fair use content 

when the Internet exists to deliver that same material? How can 

we make an Internet friendly standard? 

So on the one hand, we are impatient and pushing and exhorting 

the industry to reach an agreement on a standard. On the other 

hand, we may unwittingly lock in a standard that may prove difficult to undo and seemingly embrace a policy that may prove difficult to change, that limits or thwarts consumer ability to use the 

Internet or fully use their broadband connection, which we want to 

see increase exponentially in its use? 

Can any of you take that question and help us to get a perspective in terms of this interrelationship between our desire to see 

rapid broadband expansion in terms of use and the need from some 

perspectives to protect copyright almost absolutely? Mr. Parsons? 

Mr. PARSONS. I think, Mr. Markey, that you’ve put your finger 

on one of the important balancing acts that not only the industry 

but Congress is going to have to come to. In terms of driving 

broadband, what will drive broadband—You know, what I think 

what has been driving it so far is simply speed, but will ultimately 

drive it and really cause it to be fully penetrated throughout our 

72

country and indeed the world will be more and more entertaining, 

compelling, rich media uses. 

Those will be driven primarily not by consumers swapping things 

back and forth but by people going to places where content is created or aggregated and downloading it. 

For our stake in this, we don’t have—and I am talking now about 

AOL Time Warner, but I think I can speak more broadly for Mr. 

Chernin’s company and the entertainment industry. No one has a 

real issue with consumers making copies of things for their use 

around their home, and that is using the extended definition of 

home. 

So if you can download something legitimately and make numbers of copies so that you can play it in different rooms in your 

house or carry it to the beach in your portable player or put it in 

your car or make a copy for a friend, that has gone on for time immemorial and will go on going forward. 

The problem is when you can take a digital copy, upload it, and 

send it not to a friend but send it to anyone in the world or, for 

that matter, to everyone in the world. You know, the nub of your 

question is do you continue to permit that until you find some way 

to differentiate between that individual who has a legitimate right 

to send a distinct copy to a specific friend and, in the meantime, 

let the—In my statement that I skipped over because I was running out of time, we are looking at now probably—We looked at 

some of the Napster data about a million files being shared every 

hour. 

About 90 percent of that was of copyrighted material, as opposed 

to material in the clear. So you know that the Internet is being 

used to facilitate kind of broadband piracy of protectable material. 

Mr. MARKEY. Well, let me ask you this then. Is the Internet only 

broadband friendly for the purposes of commercial downloads but 

not for fair use downloads, or at least not yet ready for fair use. 

Help us to just understand where we are or where the industry is 

in terms of your perspective. 

Mr. PARSONS. First of all, the Internet, which is sort of a network 

of connected computers, is indifferent to the bits that are being 

moved around it. So it doesn’t know whether it is, let’s call it for 

these purposes, a legitimate bit or an illegitimate bit. What 

broadband does is it simply enables people to move more around 

on the Internet more rapidly. 

The issue, I think, that the industry is facing, and not just the 

entertainment industry but software and, in fact, the whole intellectual property establishment, is that it can facilitate the wholesale pirating of material in which people have lawful rights. So 

what we are trying to do is find ways to secure those rights at the 

place of publication, and then to make sure that the system honors 

that security after a protectable piece of intellectual property is put 

out from wherever it is being published. That’s all. 

Mr. MARKEY. Mr. Chernin, can you take a shot at that question? 

Mr. CHERNIN. Yes. First of all, I think you are, as Mr. Parsons 

said, getting to the heart of the issue, and it is a very complex and 

difficult issue. I think the first part of your question, I think nothing will speed up the adaption of broadband and the spread of 

broadband as much as copyright protection, because I think there 

73

is no more attractive product than sort of high quality, rich media 

that is produced by Hollywood, produced by the sporting leagues, 

etcetera; and to the degree we are protected, I think that consumers will have tremendous desire to get broadband in order to 

get legally obtained, high quality product. 

I think, when you get to the issues of fair use, these are complex 

issues that need tremendous debate, that need a lot of light shone 

on them in the new environment. I think guiding fundamental 

principles are that all of us in the media business acknowledge 

that people should have the right and the ability to shift content 

for their own personal use around their home, to multiple devices 

in their home, their cars, etcetera, etcetera. 

I think where the common sense and the more complex part 

comes, what happens when they want to send it out of their home, 

and how do you allow them—I think Mr. Parsons is correct to say 

none of us would mind if they sent it to a friend or two or three 

friends. The problem is that, if they do that, how do we stop them 

from sending it to 10,000 friends, 1 million friends, 10 million 

friends, in perfect digital copies? 

Now we do have the right and the ability, or we will have the 

right and the ability to instruct content to do certain things. For 

example, we can sell copyrighted movies to people and give them 

the right to transmit it over the Internet three times or for a day 

or for things like that. 

So I think that working with technology partners, we can begin 

to put sets of instructions on this content which will ensure its fair 

use, which I don’t think there is anyone on our side who is looking 

to restrict consumers’ fair use, and yet at the same time restrict 

the unlawful, potential massive illegal copying. 

I also agree with Mr. Parsons that the issue isn’t the Internet. 

The Internet is agnostic and just sends stuff back and forth. The 

issue is how do we instruct content once it appears on the Internet 

for the first time, and how do we instruct it so that consumers are 

allowed to do lawful uses and not allowed to do unlawful uses? 

The final thing, if you will indulge me for one more moment, is 

that I think we have to be careful about allowing business model 

arguments to get into this. There are people who say our content 

is too expensive and, therefore, it is right for people to steal it. 

Well, in my opinion, it is never right for people to steal and, furthermore, I think those of us certainly in the movie and television 

industry work very hard at making our content available in multiple ways. 

You can see a movie for $10 in a movie theater. You can rent 

it for $2 on video. You can see 60 of them a month on HBO for 

a $10 subscription. You can see them for free on broadcast networks. So there’s lots of ways for consumers to get our product and 

get it at reasonable prices and, even if there weren’t, there is no 

pricing that suggests that theft is a viable or a legitimate usage. 

Mr. MARKEY. Let me just conclude. Mr. Chairman, I thank you. 

I appreciate the two of you helping us to analyze the issue. We 

have got a conundrum in our country, on our committee. People are 

not subscribing to broadband. Sixty, 70 million Americans have access to some form of broadband, but only 8-10 percent are subVerDate Sep 04 2002 09:35 Sep 20, 2002 Jkt 010199 PO 00000 Frm 00077 Fmt 6633 Sfmt 6602 W:\DISC\79464 79464
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scribing to it, and it is $70 a month, you know, $50 more than 

narrowband. There’s got to be something there. 

So one of the ways you can deal with it, of course, is to have commercial goods on it, but another way is to have a fair use policy 

where, if I want to send something to one friend of mine online 

that I find interesting—I don’t have 10 million friends—that I 

would be able to just do that and not have to go over to FedEx and 

pay $15 to mail the same thing to them. Otherwise, I should be investing in FedEx stocks, not in broadband stocks, because you are 

not giving me the flexibility I need just as an individual to send 

something to my family, to my friend, and just do one thing. 

So we need to telescope the timeframe, in other words, that we 

resolve the issue so that we can give some instructions to the 

American people so that they can use broadband, because that is 

a big part of this puzzle that we have that we have yet to solve. 

Mr. Parsons. I’m sorry, Mr. Chairman. 

Mr. PARSONS. Just because I now have a clearer fix on your question, people are not not taking up broadband because they are limited in their right to send things to other people. They are not subscribing to broadband, those who aren’t, because they don’t see the 

value proposition. They don’t see what they are going to get out of 

it. 

What Mr. Chernin just said, I think, is almost irrefutable. Until 

we get to the point where you can get something different on 

broadband than you can get on narrowband—that is to say, different programming, media rich program—the mass market is not 

going to be there. The only way you are going to get to that point 

is if people who create content can put it out and believe that it 

is protected. 

Mr. JACOBSON. Can I jump in on this, Mr. Markey? Just from the 

technology side and our working in the marketplace with content 

holders, what we are seeing—and we have to realize that this industry is really just born in some respects. Yes, the numbers are 

big, but the use of the Internet in a mass way to consume media 

that we all know and love on broadcast and cable and satellite is 

just beginning. 

We are seeing what you are alluding to, which is a different experience for rich media in broadband for people to subscribe. So everything from your Red Sox game so you can watch on a condensed 

basis after they are played, which doesn’t interfere with the live 

signal on broadcast, to Fox sports material to CNN is all coming 

now in a very rich way into the broadband market. 

What we are finding is that part of the solution, which I have 

not heard yet today, is a more active approach to creating a system 

wrapped in digital rights management technology for people who 

want to stay on us to have legitimate content through broadband, 

and that is everything from the music to the video business. 

I think that the report is that we are getting started here and 

that there are legitimate music services that are available. They 

have problems associated with them which relate to things like getting all the music aggregated so that they can compete with these 

pirated sites, and also that the movie industry is coalescing and licensing digital rights management to release their movies via 

75

broadband, we are told by the Movie Link organization, hopefully, 

sometime during the year. 

So we are beginning to find that this mix of broadband accessibility from the home matched with technology that protects content 

on an affirmative basis and putting those business models into 

place with the media companies is starting to grow. 

Mr. UPTON. Congressman Markey, I just want to say we have 

Mr. Chernin, and he has got to leave shortly. I know Mr. Tauzin 

is ready as well. So we have gone long overdue. So we will come 

back to you, if you need. Mr. Tauzin. 

Chairman TAUZIN. Thank you very much. Mr. Chernin, I particularly want to thank you for appearing in this fashion interactively 

with us. I was noting the technology. 

This is technically a broadband connection, although it is not yet 

the really great broadband connections we are eventually going to 

have in this committee room, but what is interesting is it still sort 

of looks like a Korean movie, you know, where your lips are moving 

and we hear you a little later. 

As somebody commented, we can’t even tell if you are wearing 

pants over there, you know. But I do appreciate your coming in 

this fashion. I think it is beginning to demonstrate the capabilities 

of the technology, even as we consider issues relating to the new 

technology. So thank you for that. 

I would like your attention and perhaps Mr. Parsons’ and Dr. 

Liao’s attention to an issue, and I apologize if you may have covered it before I returned. I have been on the Senate side celebrating prematurely the victory in the Senate for an energy bill 

that this committee is, obviously, very invested in. 

I wanted to get to the broadcast flag issue with you very quickly. 

We were told at one of the roundtable discussions that there would 

likely be a resolution and an agreement on the broadcast flag issue 

by March 31. That obviously did not happen. Another meeting, we 

know, is scheduled for April 29. I know that you came this close 

to getting an agreement before this hearing, because you wanted 

to announce it at this hearing, and I appreciate all the effort you 

made to try to do that. 

You obviously, are not quite there. But the questions I have is, 

once you do have such an agreement, absent all the other agreements that must come, would it be appropriate at that point for us 

to have very specific legislation that would enforce that agreement 

to ensure, in fact, that digital receivers would be built with the 

broadcast flag technology built in, so that we could at least begin 

to move this part of the digital transition forward? 

Perhaps anyone of you—Mr. Chernin, you may want to start. Are 

you of a mind that that would be appropriate? 

Mr. CHERNIN. Yes, Chairman Tauzin. First of all, I suggest you 

study the expression on my face to see whether I am wearing pants 

and draw your own conclusions. 

Chairman TAUZIN. I want you to know, I am wearing them, too. 

Mr. CHERNIN. I think we actually covered this briefly. We are 

hoping our schedule to be done by May 17 to be there with a full 

recommendation. I guess my point of view is that we should keep 

legislation as narrowly targeted as possible. We shouldn’t burden 

it with trying to solve everything, and to the degree we have a viaVerDate Sep 04 2002 09:35 Sep 20, 2002 Jkt 010199 PO 00000 Frm 00079 Fmt 6633 Sfmt 6602 W:\DISC\79464 79464
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ble broadcast flag solution, which I am highly, highly optimistic 

that we are days away from, we should have narrowly focused legislation, hopefully, drafted and passed quickly. Then we can check 

that off and get on with putting as much rich digital content on 

broadcast terrestrial television and, hopefully, speed up the rollout 

of digital TV. 

Chairman TAUZIN. I am glad you take that view. I will ask Mr. 

Parsons and Mr. Liao the same question, but I want to comment 

quickly. The reason I like that view is that gets the content into 

play, and that gets more broadcaster networks interested in doing 

more and more digital production and, obviously, studios doing 

more digital production as well. I think that advances the ball significantly when it comes to content. But perhaps, Mr. Parsons, Mr. 

Liao, you would like to also comment. 

Mr. PARSONS. Same answer. We think that proceeding incrementally here as matters get resolved and issues become clarified, taking steps is better than waiting for all the issues to be resolved, 

and it will begin to create some momentum here. 

Chairman TAUZIN. Mr. Liao. And I will also ask you, Mr. 

Blanford, on behalf of Philips, to give us a similar response. Mr. 

Liao. 

Mr. LIAO. I agree with Mr. Parsons and Mr. Chernin that we are 

getting closer, and I am very hopeful that by May 17 that we will 

have a final report that the entire industry—the cross-industry 

groups can agree to. 

My personal opinion is that the government will have a role, but 

we need it to be a very specific role. In general, government I see 

having many—well, has a role in two respects. First, sometimes the 

government needs to step in when there is no marketplace mechanism in place that could really enforce something of this complexity. 

The second place where government intervention is often needed 

is to assure there is a level playing field. Often in that case, it is 

because of past government mistakes. 

Chairman TAUZIN. I follow that, but in this specific case, if flag 

technology is agreed upon, would you support targeted legislation 

to ensure that the technology is built into all digital receivers that 

go out to consumers? 

Mr. LIAO. Yes. 

Chairman TAUZIN. Thank you. Mr. Blanford, would you comment 

for us? 

Mr. BLANFORD. Yes. Philips supports the flag. I think the question, Congressman, is what happens after the receiving equipment 

sees the flag? That gets into then the whole DRM issues that we 

have been talking about. That is where we are struggling. 

Chairman TAUZIN. Yes, I understand that. But at least you 

would support the notion of ensuring through legislative requirement that the flag technology was in every digital receiver, would 

you not? 

Mr. BLANFORD. We support the flag technology. 

Chairman TAUZIN. Would you support the requirement that it be 

in every digital receiver, once you agree upon flag technology? 

77

Mr. BLANFORD. I think we would like to see where the continued 

discussion goes with respect to DRM after that flag is, in fact, received. 

Chairman TAUZIN. So you, of all the four who have responded, 

would take the view that we should not legislate until we are prepared to legislate on enforcement of all the agreements or at least 

the agreement on what happens once the signal is received with 

the flag on it? Is that your view? 

Mr. BLANFORD. Yes. We believe that the—again, what happens 

after the flag is received is critical. I am not confident that, without 

that understanding, we should go forward with the flag in a legislative mode. I think we still need the benefit of the process to determine what does happen after the equipment receives the flag. 

Chairman TAUZIN. My time has expired. Obviously, the concern 

I have and the concern we have discussed at some of the 

roundtables was that, if we wait for all the agreements to be 

reached and all the investments and upgrades to be made before 

we begin the process of instituting such things as the technology 

that will embrace the flag, that we again push back our capabilities 

of reaching the 2006 date. We deny digital content in the marketplace that could help invigorate consumers’ desires for these new 

technologies and products. 

I would urge you to think about that. If I had a confidence we 

could settle all the other issues in the next 3 or 4 or 5 or 6 months, 

I would say maybe you are right. We could do it all at one time. 

But if we can’t, would you rethink that position? 

Mr. BLANFORD. I guess I am optimistic that many of those other 

issues can be resolved, and I appreciate your comments regarding 

the speed with respect to moving forward with broadband and high 

definition content. 

This is a decisionmaking process, and every decisionmaking process that I am aware of does, though, need to balance speed of decision, quality of decision, and the acceptance of the decision. I am 

very fearful that we are moving too quickly. Again, I am optimistic 

that, under the proper forum with broader participation, we can resolve many of these issues. I again state that we don’t believe that 

there is that proper forum, that the BPDG is not a standard setting body and is fundamentally closed. 

So I think, again, under the right forum, right principles, right 

leadership, as we have suggested earlier, we can make faster 

progress and meet your needs and do it in a holistic way. 

Chairman TAUZIN. I know time is up. I would be very grateful 

if you would communicate to us after this hearing what might be 

the minimum conditions under which you would see enough 

progress made on those issues where you would support a targeted 

mandate to get the flag going. 

Thank you, Mr. Chairman. 

Mr. BLANFORD. I would be happy to do that, Congressman. 

Mr. UPTON. Thank you. Ms. Eshoo. 

Ms. ESHOO. Thank you, Mr. Chairman. This has been a wonderfully instructive hearing, and I think all of my colleagues would 

agree with me in stating that. Thank you to all of the participants, 

both interactively and the ones—the gentlemen that are at the 

table. 

78

First, I would like to just make a quick observation about 

DigitalConsumer.org. There has been kind of an interchangeability 

with the terms customer and consumer. I think that the companies 

have customers and that, in a much broader sense, we are here to 

look after the consumer, and I don’t think one is right and one is 

wrong. 

I also think that an organization that can be up and running 

with 35,000 people in 6 weeks is one heck of a campaign, and as 

a politician I really respect that. I think it is something that we 

need to pay attention to. 

I think the whole issue of fair use is one that is ultimately going 

to have to be built into this, and whether it is out of respect for 

that organization that Joe Kraus heads up or anyone else. So it 

simply cannot be left out. So consumer rights and consumer protection and the embracing of where the companies want to go with 

their customers—all of those things are going to have to be balanced out. I say that with respect to all of it. So that is just an 

observation. 

To Mr. Chernin: Protecting content at the outset is something 

that, I think, we have heard addressed over and over again today, 

and how to do it, and then where the government steps in to assure 

that, I think, we are still grappling with. But protecting it at the 

outset and from the source is very important. 

We have heard that content is often copied by an individual, and 

in some cases with a digital camera at a theater. Can you tell us 

what steps you are taking to eliminate that? 

Mr. CHERNIN. There are tremendous efforts—— Ms. ESHOO. Excuse me. The next time I go to the movies, I am 

going to look around in the dark to see if there is anyone there 

with a camera. But do you have agreements with theaters? How do 

you approach this? 

Mr. CHERNIN. First of all, we ought to applaud your helping us 

in the policing activities. 

You know, actually, my friend and colleague, Mr. Valenti, has 

helped us take the lead in this thing. I think—— Ms. ESHOO. He is our friend and colleague, too. 

Mr. CHERNIN. I think that the MPAA through the member mo- tion picture companies spends, I believe, in excess of $20 million 

a year trying to fight piracy in all parts of the world, and ranging 

from things like video cameras in movie theaters to people stealing 

our prints to people in other countries making illegal disks, 

etcetera. 

So we do have agreements with theater owners to restrict this. 

We look to law enforcement to help us. There are State laws restricting it, and we play a very active and, I might add, very expensive role through Mr. Valenti’s leadership in the MPAA. 

Ms. ESHOO. Thank you. Let me ask—Is it Mr. Litai? Am I pronouncing your name correctly? I have an odd name. So I am sensitive about mispronunciation. 

I am curious about the answer that you gave earlier to Representative Stearns when you were asked does anyone know that 

you are doing this, and you did not give a direct answer. My sense 

is that people don’t know. How appropriate is that? 

Mr. LITAI. Well, I would like to just make it very——

79

Ms. ESHOO. I mean, it sounds a little like a high security meeting 

with Members of Congress where the agency has to inform us of 

the appropriateness of what they are doing. I am not casting aspersions, but it really raised a flag with me when you didn’t answer 

that directly. 

Mr. LITAI. The answer, first of all, is to say that everything that 

we do, we do on public information that is offered directly from the 

networks. We do not in any way, shape or form access anybody’s 

computer or anybody’s system. 

Regarding have we talked to people regarding this, the answer 

to that is yes. There are people, lots of people, companies, who are 

in this room and others who know what we do and have seen this 

information. 

Also, we make it a point to notify people that they have problems 

regarding these types of situations. 

Ms. ESHOO. So if find what you are looking for, you then notify 

either the party or the company? Have you notified them ahead of 

time that you are looking or do you notify them once you have 

found something or do you report them to someone? How does it 

work? 

Mr. LITAI. First of all, we don’t look for specific—We can’t access 

computers. So we don’t look for specific people. I can’t access anybody’s computer, because they are, for example, behind the firewall. 

So I can’t go and access anybody’s computer nor do I want to. 

What we receive is just as if someone would post it on their 

website and say, look, this is my website. I am a corporation, this 

is my website, and over here is a movie. Click on this, and 

download a movie. 

The peer-to-peer is the interface which basically the users who 

put this content on the peer-to-peer network use to turn this misinformation into public information which everybody has access to, 

just like a website. 

So there is nothing that we do that actually accesses anybody’s 

computer. There is nothing that we do that looks into anybody’s directories or anybody’s information. 

In regard to whether we do anything under any sort of hiding it 

or anything like that, no, we do not. 

Ms. ESHOO. I have two more questions. I appreciate your response. 

Is there anyone on the panel that agrees with the Hollings approach? Why is this such a stumper? 

Mr. KRAUS. Silence is probably no, I would imagine. 

Ms. ESHOO. Is that so? I mean, no one can voice it? Well, I think 

that we heard——

Mr. UPTON. Mr. Chernin has had to leave, but I think he 

might——

Ms. ESHOO. Yes, I noticed. It would be two, four, six against one. 

So that is a quick poll. 

Let me ask out of curiosity, going back to what I first referenced, 

consumers and customers: You have a working group. Is it just industry or do you have representation relative to consumers at the 

table? And if so, great; and if not, why? 

Mr. JACOBSON. I am happy to give my perspective and then, certainly, expect the perspective of others. 

80

I attended the last CPTWG and BPDG meeting—lots of acronyms. There are really no consumer organizations in the room, and 

it costs $100 if you want to attend. So——

Ms. ESHOO. Why? 

Mr. JACOBSON. Why? Because I imagine—I can’t speak for why. 

I imagine it is because they have a meeting room, and they need 

to cover the cost of the meeting room and those sorts of things, but 

it does cost money for anyone to attend. 

The other unfortunate thing, I believe, is I have not seen a member of the press attend. So even if consumers are prohibited from 

the $100 fee—let’s say that is not something that they want to pay 

in order to express their opinion—my concern also is that I have 

not seen members of the press being in those meetings and able 

to effectively report out whether consumers were being represented. 

So consumer representation certainly is a concern of ours, when 

it comes to these kind of inter-industry consortia. 

Mr. PARSONS. If I may, Madam Congresswoman, and then Mr. 

Liao is going to speak. First of all, the working group at that working group level, the issue is who brings knowledge to bear to deal 

with the technical issues that have to be solved here, and that is 

not necessarily—The purpose of those groups is not to sort of mediate and balance the broad public interest versus the interests of 

the industry. That, frankly, is for this body to deal with. 

I would just like to say—and in terms of the press, again, the 

purpose of the working group is to try and find technical solutions 

to technical problems and understand how the people who have 

that knowledge and understand the operation of their business 

would work, and then we will come back here, as we have indicated, if we think we need a standard that has to be enacted into, 

‘‘public policy.’’

You made mention earlier about your concern about fair use. The 

only thing I would ask the committee—You know, sometimes what 

you call things can head you down an interesting road, and you can 

lump a lot under it. But actually, the fair use doctrine is, in my 

judgment, fairly named, and the question is what uses are fair? 

If you buy a CD or a movie, should you be able to invite friends 

over to see that? Yes, that is pretty fair. Should you be able to 

make a copy of that so that you can have it in your car or upstairs 

in the bedroom and downstairs in the den? Fair. Should you be 

able to make a copy of that so that you can give that copy to your 

brother-in-law so he doesn’t have to buy that movie? Should you be 

able to make 100 copies of that so that you can give it to your 100 

best friends, so none of them have to buy the movie? 

I think, you know, we can lump a lot of things under fair use, 

but one needs to think about our system, how it works, what the 

source of its strength is, and how to balance the need to protect 

property rights and allow people to exploit those property rights 

with the legitimate needs of those who buy a piece of property and 

how they can use it for their own consumption. 

Ms. ESHOO. It is an eloquent statement, but that is what we are 

trying to figure out how to do. It is like trying to get socks on an 

octopus. I mean, it is a pretty tall order. But I appreciate what we 

81

have heard from all of you today, and I have been enlightened in 

several areas. 

I hope, more than anything else, that you all work out most of 

it, because I think many times, when you come to the Congress 

asking, you may get something you don’t like or didn’t expect. So 

I think that there is a real charge to all of the stakeholders in this 

to see what you can come up with, and then come back to us and 

report that. I hope that the steps that the Congress takes are 

smaller steps and not get into the area of mandating the standards. I don’t think we know how to do it. I don’t think, even if we 

hit the nail on the head, it would change tomorrow, and we can’t 

pass legislation fast enough to keep up with product cycles and 

technological standards. 

Thank you, Mr. Chairman. 

Mr. UPTON. Thank you, Ms. Eshoo. We are going to have just a 

very brief second round, and I know Mr. Chernin had to leave. 

I have a question. A year and a half ago I bought a digital TV 

set. It works terrific. It is hooked up to cable. What is going to happen if we sell this broadcast flag issue, if we get the agreement 

made? What is going to happen to those folks who have this type 

of TV with a tower, if they don’t live in a cable area, with an antenna? Tower and antenna are the same thing. What is going to 

happen with the folks who have that type of equipment? 

Mr. LIAO. First, the broadcast flag is meant to prevent retransmission—or so that the content copyright owner could—— Mr. UPTON. I am going to want to get that show. I want to watch 

that. 

Mr. LIAO. So there is nothing to prevent you—— Mr. UPTON. The Cubs and the Boston Red Sox will be on digital 

by then. 

Mr. LIAO. So there is nor elation. You will get that show. 

Mr. UPTON. It will be okay, even with a flag on it? 

Mr. LIAO. Yes. The flag is only meant to prevent retransmission, 

sort of republishing of the material over the Internet. 

Mr. UPTON. Okay. So that will work for existing sets as well? 

Mr. LIAO. Yes. 

Mr. BLANFORD. Congressman, there is still an issue, though, as 

to what happens with all of your equipment after that flag is received, which is what I was trying to address earlier. For instance, 

if you were to now take that show or game or whatever and record 

it digitally on your DVD recorder and then take that DVD out of 

the recorder in your family room and walk into the bedroom and 

put it in your DVD player, it won’t play. 

So it’s these issues after the flag is received that really get into 

fundamentally the balance of rights, business rights between all of 

the various industries, as well as consumer rights. It is in that balance of rights that we have asked for help from Congress or an 

agency like FCC to ensure transparency in the process, not to mandate the solution, just to ensure transparency in the process and 

to ensure that everybody is at the table. 

Mr. UPTON. Go ahead. 

Mr. LIAO. If I may make a comment, I think the salient word 

that Mr. Blanford mentioned is balance, and it is the balance of all 

these different interests. It might be helpful for the committee to 

82

understand the kind of structure by which this protection is 

achieved, and I think this goes to the heart of the issue that Mr. 

Blanford has been discussing. 

The broadcast flag signals the TV receiver that this content 

should not be retransmitted over the Internet. So sure enough, that 

TV receiver will know this is a no-no, don’t do that. But there are 

outputs to the TV receiver. For example, with the set top box there 

needs to be an output that brings it to the television. 

Those outputs may be analog in nature. They may be digital in 

nature. If they are analog in nature, actually, the agreements of all 

the industry participants—to my knowledge, all the industry participants has been that the broadcast flag, no matter what its setting, will permit, continue to permit, that analog output to output 

the signal. 

So for example, today if you have a receiver, it will output that 

thing through the analog output and display it on your display, 

perhaps the high definition display that you have recently purchased. No problem. Or you could take that analog output and put 

it into your DVD player or recorder and make a very nice DVD recording, probably equivalent to the kind of displays you are seeing 

because, after all, that is the same output that you use for your 

display, and make a recording. 

That recording, if you make it on the right DVD media, will be 

able to play on the legacy players. For example, if you bought a 

Panasonic DVD recorder today and recorded on DVD RME, you 

could record it on that and play it on most of the legacy players. 

On the other hand, if it is a digital output, and it is really digital 

protection that we have been talking about in the Broadcast Protection Discussion Group, in order to protect that digital copy, what 

we have been talking about is encrypting it. Now why should it be 

encrypted? The reason it is being encrypted is that is how you protect it from being misappropriated at a later stage in some other 

part of the chain. 

Remember, the whole thing about today’s network world is that 

we are talking about going from one box to another through all 

these networks. So in order to maintain that protection in the digital world, we have taken the approach of encrypting it. It was 

something that was not easy for all of us to agree to, but it provides that kind of a balance between this protection of that material and the use of the consumer. 

The consumer can always make the recording and can make as 

many recordings as they want. Those recordings will always play 

in, for example, the recorder that they made it in, because the recorder is made to play its own recordings. So there is never a problem with playing a recording that he makes on a consumer’s own 

recorder—her own recorder. It will play, no problem. 

So this is the kind of balance we have had to struggle with. 

Mr. BLANFORD. I don’t want to get into point-counterpoint, but 

what was just described, though, locks the consumer to a degree, 

a large degree, in the analog world; because, yes, you can see the 

digital signal on your display, but to record it you are not able to 

use it on the 35 million DVD players that are in existence today 

unless you record it as analog. Then, I mean, what is the point? 

83

We have locked the consumer in the digital world, and we are not 

able to take advantage of the full promise of digital. 

So we are in a point-counterpoint. That is correct, but I think, 

again, it is this fundamental balance that we are speaking to in 

terms of who all should be at the table. The 5C only represents 

four consumer electronics companies. I wish that is all I had to 

compete against. Last I looked, I think it is more like 15. So it is 

a very small group. It does not represent the consumer electronic 

industry nor those other constituencies that have not been represented either. 

I think this is just a huge—I mean, we recognize it is very complex. It is very huge. I think the consumer at the end of the day 

is going to speak. I think, if we don’t get it right, your in-boxes are 

going to be very full. 

Mr. JACOBSON. Mr. Chairman, if I may. I applaud the notion of 

a very narrow mandate at the BPDG when it comes to preventing 

the unauthorized retransmission of content over the Internet. I understand that. My concern is that, from what I have seen of the 

specifications, and I am on the mailing list for those specifications, 

the power of the specification is actually far broader. 

It gives the ability for, as far as I can tell, a small group, subgroup, of BPDG to determine what technologies are essentially approved, and the scope of those technologies doesn’t necessarily have 

to be limited to only retransmission. 

So, for example, a technology could get approved. As I mentioned 

in my testimony, nothing in the specification prohibits, I might 

say—not necessarily that it will happen, but nothing prohibits the 

ability of a technology to get deployed which might make my VCR 

recordings expire. Yes, I might be able to make them, but maybe 

they expire without my choosing. 

So what I believe—and there’s been questions about when should 

we give this specification the force of law. My interest is not so 

much a question of when, but what. I believe that this specification 

needs to have—and I am heartened by the comments of Mr. Parsons and Mr. Chernin on fair use, but I believe that the specification gives broad powers to a group of people, and before you stamp 

that into law, I think you need a fair use assertion in that document to make sure that none of the provisions, none of the technologies that do get approved—and consumers are not going to be 

in the room when that gets approved. You need to make sure that 

what you pass, regardless of when you pass it, has fair use assertions in that specification itself. 

Mr. UPTON. Mr. Markey. 

Mr. MARKEY. I have no further questions. I thank you all for 

your excellent testimony. 

Mr. UPTON. Mr. Boucher. 

Mr. BOUCHER. Thank you very much, Mr. Chairman. I will be 

brief, since I am the last person to question this panel, and it has 

been a long afternoon. 

Mr. Blanford, I can’t resist the opportunity of your presence here 

today to discuss with you another subject. It is also a subject relating to the protection of content in the digital era, but from a very 

different vantage point. That is the general matter of the introduction of copy protected CDs into the U.S. market. 

84

Philips, as I recall, was one of the companies that developed the 

original standard for CDs. 

Mr. BLANFORD. That is correct. 

Mr. BOUCHER. I think, in fact, you own some intellectual property in the brand. I will tell you that I am somewhat perplexed by 

the rationale of those who are introducing the copy protected CDs. 

If you look at the circumstance carefully, you readily see that copy 

protected CDs will do virtually nothing to guard against Internet 

free, peer-to-peer file sharing. Someone will crack the code. That 

someone will put the then unprotected CD up on the Internet. Once 

it goes up, it is likely to stay there forever, and it will find its way 

into the free peer-to-peer file sharing services. 

I think that is absolutely inevitable. So copy protecting the CD 

does not really protect against Internet peer-to-peer file sharing, 

and we have heard repeatedly from the recording industry that 

their greatest concern about the escape of their digital content and 

the piracy of that content is with respect to Internet peer-to-peer 

file sharing. Copy protecting doesn’t guard against that. 

It does guard against the casual making of a CD at home and 

giving that to someone else. Frankly, I don’t term that fair use, Mr. 

Parsons. I am a big fair use advocate, but I don’t think recording 

a CD at home and giving that to another person is fair use. For 

your own purposes, it is. I mean for your own convenience, it is, 

but once you give it to somebody else, I think it is not. 

Really, all copy protecting CDs does is guard against that, and 

historically the record industry has more or less accepted that, kind 

of tolerated that low level of piracy. That is rather casual. So I am 

perplexed by the rationale for this. 

On the other hand, introducing copy protected CDs is angering 

a very large number of the best customers of the recording industry 

who are now frustrated in their ability to exercise their fair use 

right to make a copy at home of music they have lawfully acquired, 

when that music is going to be used for their own convenience and 

personal use in the home setting or the extended home setting. 

I suspect eventually millions of people are going to express that 

same concern. Let me ask you as the developer of the original format for your view of this general subject matter or any concerns 

that you might have about the dysfunctionality that attends the 

copy protection technology that disables CDs from playing perhaps 

on a personal computer or in a DVD drive, and I understand some 

of the technologies have that characteristic. 

Are you concerned that consumers will be confused? Are you concerned that some of the blame will be directed toward the manufacturers of equipment, potentially your own equipment, and do you 

think that perhaps, assuming there is that confusion and that misdirected blame, that the case is made for Congress to step in and 

to require appropriate labeling when CDs are copy protected? 

Mr. BLANFORD. Congressman, I think you articulated the issue 

extraordinarily well, and I am not sure I can add a lot. Yes, we are 

very concerned that consumers will be confused, that they will 

blame their equipment. Indeed as the copy protected CDs do hit 

the market, in many cases they will not play on existing equipment, leading to confusion, leading to consumers that feel that 

85

their equipment is broken, leading to calls to our consumer care 

centers. 

There is already a fairly, I think, sizable revolt going on, on the 

Internet. My own e-mail box is getting swamped with letters from 

consumers who are actually supporting Philips as we have been attempting to put the brakes on such copy protection, and again 

making sure that we all understand what we are doing as we go 

forward. 

So it is a very serious area. I think you are also right, to the true 

pirate they are going to find a way around it. So it is casual copying that we are talking about, but a very serious problem for us 

right now, and growing. 

Mr. BOUCHER. Should we legislate to require appropriate labeling 

when the disk is dysfunctional because of the copy protection? 

Mr. BLANFORD. Well, I think, you know, that would be certainly—I mean, the ethical thing for the producer of that particular 

disk to do would be to label, and we could legislate that. Unfortunately, I think consumers will still be surprised. They may not see 

the label. They are still going to take it home, tear open the wrapper, put it in their CD player, and it is not going to play. 

So I am not sure if—I would support it, but I am not sure that 

that is going to solve the problem, and it is another area where, 

again, more discussion is needed. 

Mr. BOUCHER. Well, thank you, Mr. Blanford. I think more discussion is needed and, hopefully, this subcommittee will take the 

opportunity to look at this issue at the proper time. Thank you 

again. 

Mr. BLANFORD. Thank you, Congressman. 

Mr. UPTON. Mr. Markey. 

Mr. MARKEY. Fourteen years ago, we set up a screen in this 

room, and we had the first international broadcast of an HDTV signal from Canada into this room. The members on this committee, 

they just fell over wanting to know where they are going to be able 

to get the sets, when they were going to be able to see all this programming in HDTV. 

The policy that our country constructed was essentially 6 megahertz for the broadcasters, and then walk away. Even when I, in 

1997, had an amendment here that said that all television sets sold 

in the United States that would be digital at least have a digital—

have an ability to receive a digital signal, even if it was an analog 

set, by 2001, it was rejected like 35 to 7 here on the committee. 

So just dealing with that one issue, the 6 megahertz, doesn’t 

really create a policy, if that is the only role the government is 

going to play, because if you walk away, you wind up with chaos. 

Same thing as here, and after I have heard all of the testimony 

here today. 

We can deal with flags or this or that or the other thing, but we 

just can’t deal with any one part of it. We have to deal with all of 

it, and we have to deal with all of it at the same time or else any 

un-dealt-with part of the puzzle has the capacity to paralyze all the 

rest of the resolved issues. 

My own personal experience now 14 years later after conducting 

that hearing—I have been on the committee for 26 years—was the 

breath taking response from the committee members. I think the 

86

same desire is there for a resolution of all of these issues. That is 

the product that is promised to the American public, this combination of broadband and content. But in order to telescope the timeframe for us to have this miracle, this product presented to the 

American public, in my opinion, it is going to require an industrial 

policy. 

It is going to require the Federal Government to intervene, because I do not see any likely near term resolution of any of these 

issues in a way that resolves the big issue of presenting something 

to the consumer anymore than, in the absence of the Federal Government intervening, do I see any ultimate resolution of the HDTV 

conundrum; because there are so many moving parts, you cannot 

ultimately rely upon any one industry to resolve it. You have to 

have the Federal Government come in and make very difficult decisions. 

That is my recommendation, Mr. Chairman, and it would be that 

this hearing be followed by a whole series of additional hearings 

that can allow us then to go down the list of still unresolved questions, because ultimately, I think, left to the private sector, we will 

just have a repetition syndrome of what has happened with HDTV, 

going back to 1988. We will not see the full resolution of all of 

these problems. 

Thank you, Mr. Chairman. 

Mr. UPTON. Thank you, Mr. Markey. I just want to say that I 

know that your participation in our roundtable meetings has been 

very constructive and productive, as we have all worked together. 

We are looking to have another one next month, and we will follow 

up with additional hearings. That is for sure, as the country watches what is going to happen. 

Thank you very much. The hearing is adjourned. 

[Whereupon, at 4:23 p.m., the subcommittee was adjourned.] 

[Additional material submitted for the record follows:]

PREPARED STATEMENT OF THE ASSOCIATION FOR COMPETITIVE TECHNOLOGY

INTRODUCTION

The Association for Competitive Technology (ACT) submits the following views on 

the subject of protecting digital content. ACT represents over 3,000 information 

technology (IT) companies and professionals, including those involved in creating solutions to transmit digital content. We strongly believe that the marketplace, without the assistance of additional legislation or regulation, is in the best position to 

respond to the demands of consumers and copyright holders. Legislative proposals 

that install government mandates for security standards (or DRM) are unnecessary 

and will be counterproductive. 

The potential market for digital content is an estimated $270 billion, and Digital 

Rights Management (DRM) technologies and solutions are the keys to unlock it. IDC 

has estimated that the market for Digital Rights Management (DRM) software is 

expected to reach more than $3.5 billion in revenue by 2005. Without a doubt, 

emerging and maturing DRM technologies will enable a secure electronic marketplace where content providers can be compensated for the use of their digital content. Small and mid-size technology companies make up the bulk of the DRM developers heeding the call to action. 

Currently, the flow of legitimate online content is a trickle compared to what it 

could be. Content owners are hesitant to release content for fear that once a song 

or movie is lost to digital pirates, all value in the investment and commercial opportunities are lost as well. The IT industry and entertainment industry seem to agree 

that it’s going to take continued development of new technology and new business 

models to provide DRM while expanding consumer distribution, convenience, and 

choice. In other words, a DRM model needs to allow consumers to rent, buy, time 

87

shift and place shift any piece of lawfully acquired digital content. To that end, the 

industry is already devoting billions in R&D to develop these technologies. 

HOW DRM WORKS TO PROTECT DIGITAL CONTENT

DRM technologies can be grouped into three basic categories: 1) the access control 

with authentication and/or encryption mechanisms; 2) usage control according to 

rules that are set by the content distributor, e.g., listen-only rights, where the user 

is unable to save or distribute the music. 3) tracking mechanisms that allow the 

content provider to track subsequent use with watermarking and digital footprints. 

DRM technologies offer content owners the aforementioned dynamic solutions 

through passive and active methods. An example of a passive DRM technique is consumer identification and trace back to find illegally copied content. Methods include: 

serial numbers, digital fingerprints, traitor tracing. In order to ensure the integrity 

and authenticity of digital content, its accompanying metadata and the hardware 

and software components of a DRM system, security features such as digital signatures, fragile watermarks, and challenge-response protocols are included. 

In terms of active protections, DRM systems have been developed that utilize specialized filters and marking techniques such as ‘‘audio fingerprinting’’ or ‘‘robust 

hash’’ that block unauthorized access to pirated content. In addition, fair-exchange 

protocols ensure technically that the consumer receives access to protected content 

only after having paid the appropriate price. If the DRM system detects a security 

breach, it can revoke and disable compromised consumer devices. 

EXAMPLES OF ‘‘APPLIED’’ DRM

In order to be successful on the mass-market, DRM technologies must continue 

to be effectively integrated into consumer devices. A positive sign is that a number 

systems for playing digital content currently utilize DRM technology. DRM components can be found in pay TV systems, DAT and some types of compact disc players. 

The DVD system employs various technological protection measures, including the 

Content Scramble System (CSS). Other DRM standards include the High-bandwidth 

Digital Content Protection (HDCP) for protecting digital video outputs, and Content 

Protection for Recordable and Prerecorded Media (CPRM/CPPM). DRM solutions are 

being integrated into new devices and software including digital audio and video 

players, e-book readers, operating systems and mobile devices. These solutions all 

have one thing in common; they were created without technology mandates. 

The technology industry remains focused on creating marketable solutions. Content owners, device manufactures and IT companies have agreed that the successful 

DRM solutions for digital content should have these features:

• DRM software and devices should be so easy to use that they’re nearly invisible 

to the consumer, even as they move digital entertainment content among their 

own household and personal devices. 

• Users should be able to recombine and share any of their own digital content. 

• DRM solutions should be inter-operable among devices and distribution channels, 

and the technology should have consistent enforcement of rights wherever the 

content goes. 

• DRM technology should be flexible enough to adapt to different business models 

(e.g., charges for a single use or for a specified time period). 

• DRM technology and devices should be capable of online updates with new protection software. 

• Content providers will need DRM databases and systems to define and manage 

rights to their content. 

• Enterprises such as corporations and educational institutions need DRM systems 

to manage content and group rights. 

No doubt integrating the above features creates challenges in balancing the rights 

of content owners with the demands of consumers. There should also be no doubt 

that thousands of technology developers are racing to deliver solutions that meet 

those challenges. The enormous value of the music market provides a powerful financial incentive for DRM innovation, but it’s up to content owners, the IT industry 

and consumers to pick the winning solutions. 

XrML 

In the attempt to implement these features, one machine-to-machine standard has 

emerged. The extensible rights Markup Language (XrML) syntax provides content 

owners the opportunity to attach data about royalty arrangements, ownership, listening limitations, and context pricing (e.g., sale or rental) to the content, so it can 

‘‘travel’’ across devices without degrading the copyright. XrML as been embraced by 

Microsoft and is a primary feature of their DRM function. Moreover, the number 

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of licensees of XrML’s is growing rapidly and is already in the thousands. Now that 

XrML is emerging as the industry standard language for digital rights, companies 

are taking initiatives that will keep the DRM marketplace moving. 

As mentioned above, XrML supports trial use, rental and sale distribution models. 

This means that ‘‘old’’ models of selling music will find ‘‘new’’ viability. For example, 

music content owners, utilizing XrML based DRM distribution systems, can provide 

a consumer the opportunity to listen to parts of songs for free, purchase singles for 

a competitive price and purchase albums for download to a digital device. 

Eliminate the incentive 

Technologists at RSA and Bell Labs have begun addressing the piracy problem 

by developing a practical solution designed to make it less economically viable to 

steal content. Their models are aimed at the typical scenario most feared by content 

owners. The case is which a pirate obtains a legitimate, secure copy, potentially alters, and then distributes copies in order to make a profit. RSA and Bell Labs have 

offered a solution currently targeted toward software, but applicable to digital content, relying on periodic updates. The key is required interaction between the owner 

of the content and the legitimate distributor. 

Subscriptions 

DRM integrated into a subscription model allows content owners to bundle a large 

number digital content for a fixed price. In a variety of circumstances, a multi-product content owner can extract substantially higher profits by offering one or more 

bundles of digital media than by offering the same goods separately. At the same 

time, bundling can be used to introduce new songs, movies, documents and titles 

to create a continuous relationship with the consumer. This relationship offers a 

foundation on which content owners can generate revenues. The subscription model 

may represent a mix between indirect and direct revenues with the option of consumption combined with transparent pricing. Forrester expects additional revenues 

from digital music subscriptions of $3.3 billion. Subscriptions provide flexibility that 

will attract consumers. For example, a premium membership might offer a flat rate, 

eventually combined with services from the second scenario, while an advertisingbased membership might limit access in quantity, time or actuality. 

By utilizing DRM technology to securely encrypt the music with a key, the package can be digitally delivered to the consumer’s device. There, the locally installed 

trusted tool gains access to the digital content with an unlock key which leaves the 

file locally encrypted and streams the digital content into the memory for ‘‘on the 

fly’’ decryption. The user, who has agreed to the terms and conditions of use, has 

now the license to access the content. His usage is recorded and the transaction is 

reported to a clearinghouse to initiate payments and backup system information. 

The content owner is being protected and the content owner maintains control and 

determines payment collection. 

Companies providing ‘‘applied’’ DRM 

There are dozens of companies that are creating and deploying DRM solutions for 

a number of scenarios. The table below lists some emerging ones and their area of 

expertise:

Company DRM Solution 

Authentica ............... Focused on ‘‘digital rights management software for protecting and controlling valuable business information shared internally or across company boundaries. Product suite lets users share valuable 

digital content—e-mail, documents, and Web content—without giving up the rights to determine 

what happens to it, no matter who has it or where it’s stored.’’

e-Vue ....................... ‘‘e-Vue also integrates digital rights management (DRM) tools into its MPEG-4 solutions to provide a 

powerful and secure multimedia content delivery engine.’’

MediaDNA ................ ‘‘MediaDNA’s patented solutions provide business enterprises and publishers of valuable information 

with a framework for safely promoting and controlling content distributed over the Internet, 

intranets, extranets, and other media such as CD-ROM. MediaDNA’s approach is unique in that 

its comprehensive solutions not only include proven, Digital Rights Management (DRM).’’

SealedMedia ............ ‘‘[P]rovides Digital Rights Management (DRM) technology for organizations requiring persistent control for digital content delivered over the Internet. Unique to SealedMedia is its support for multiple media formats, its association of licenses with people rather than devices, and the flexibility 

of the usage models it enables. SealedMedia customers include ipicturebooks.com (AOL Time Warner), Harcourt, Pearson Education, Congressional Quarterly and Xansa.’’

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GOVERNMENT TECHNOLOGY MANDATES ARE UNNECESSARY AND WILL DO MORE HARM

THAN GOOD

History has shown that the market, not government regulators, is responsible for 

bringing copyright protections to bear. The same can be said in the digital media 

context. The DRM solutions in the section above demonstrate that there can be any 

number of ways to address the need to protect content owners while providing consumers maximum utility. In this regard, the IT industry is currently working feverishly to develop and deploy robust rights management technology. 

We share with the content owners, the goal of providing rich digital content to 

consumers at an attractive price. However, legislation proposed by some content 

owners will frustrate our ability to achieve this goal. The Consumer Broadband and 

Digital Television Act (CBDTA) proposal is myopic with respect to rights management solutions and have the potential of lock out promising technologies. Further, 

CBDTA creates a scenario where companies not involved in digital media will inadvertently find themselves in violation of a law never meant to be applied to their 

business model. 

ACT remains steadfastly opposed to government-mandated rights management 

technology standards, for the following reasons:

• The government should not pick winners and losers through its certification process; especially while the IT industry is working to achieve an open DRM standard. 

• These standards will ‘‘freeze’’ technology by requiring government approval of design changes. Instead of real-time innovation, we could easily end up with a 

one-size-fits-all standard. 

• Publishing standards on government web sites makes it too easy for hackers to 

circumvent. 

• Innovators can’t receive government certification if your copyright protection technology isn’t ‘‘reasonably priced’’ according to a current draft of a legislative proposal. 

CBDTA is out of touch with the realities of the DRM marketplace. Not all solutions will have the same features. Currently, companies focusing on DRM are able 

to quickly tailor their solution to the evolving need of the content owners. CBDTA 

requires that content owners, IT companies, devices manufactures and consumer 

groups come up with standards for all permutations of digital media distribution in 

one year. The history of DRM shows that there is no such thing as a quick fix. Current technologies are years, not months in the making. It is absurd to believe that 

all security standards can be discussed and agreed upon in one year. Meanwhile, 

development of DRM will have to slow pending the discussion. If not, the discussions would have to continue in perpetuity or risk leaving some standards outside 

the law. The bottom line is that the bill will cut off the development of promising 

technologies. 

Small technology companies, which are the bulk of the DRM innovators, will also 

suffer under the CBDTA. The proposal calls for representatives of content owners, 

IT companies, devices manufactures and consumer groups to create security standards. Although the bill attempts to bring all interested parties together, the reality 

is that small companies will be shut out. Again, the result will be a cessation of 

innovation. Only the most well funded companies will dare continue because they 

will have the resources to switch gears when the standard is announced. The smaller companies risk running afoul of the law by putting out illegal software. There 

is no doubt that venture capital and other funding sources will find ‘‘safer’’ places 

to put their money. Widespread DRM development will become a distant memory. 

The net effect will be fewer companies able to provide cost effective, targeted DRM 

solutions for content owners. 

Finally, CDBTA is overly broad and invites unintended consequences. Its definition of ‘‘digital device manufacturer’’ was created to capture any type of digital 

media software and hardware. Such a definition must be written broadly lest it create loopholes for digital pirates. Its application to ‘‘any’’ type of software that can 

transmit digital content captures an array of software (and the companies that develop them) that are not intended to transmit content. Companies that develop and 

ship spreadsheets, word processors and e-mail programs would be in violation of the 

law unless they implemented security standards. These vendors will face the 

Hobbesian choice of either raising prices to cover the new development costs (which 

will not sit with consumers) or break the law (which doesn’t sit well with anyone). 

These problems are inherent within legislative approaches like CBTDA are unwarranted and should be avoided. ACT and the IT industry are not alone in taking 

this position. Even content providers such as Pressplay (an online music distributor 

90

created by music labels), have urged Congress to focus on applying existing law to 

the marketplace instead of creating new laws. 

CONCLUSION

Development of DRM technology will take two things: continued innovation and 

time. Unfortunately, government technology mandates do not encourage either. 

Given the tremendous opportunity for a digital media marketplace, nothing should 

stand in the way of technologies aggressively competing to create solutions that protect the rights of content owners while meeting the needs of consumers. The only 

way this will happen is through an unfettered market. 

PREPARED STATEMENT OF STEVE GRIFFIN, CEO AND CHAIRMAN, STREAMCAST

NETWORKS, INC. 

I would like start out by asking a simple question. What would life be like in 

America today, if you could not go down to the local Blockbuster and get a movie 

on a Friday night? 

Since 1906 when music publishers fought the introduction of the player piano to 

today, content companies have tried to slow down or eliminate technologies that 

they believe threaten their rights and their methods of business. 

In the early 1980’s the climate surrounding advancements of technology was just 

as confused as it is today. Then it was the call to arms by the entertainment industry that VCRS needed to be recalled from consumers’ homes and banned from sale. 

We are in the latest chapter of a familiar story; one of content companies vs. technology companies. 

I am pleased to have the opportunity to share the story of Morpheus and discuss 

with you today our vision Peer-to-Peer (P2P) communications and the role it will 

play in this universe of Digital Media. 

The Fear of Technological Innovation 

As they say, hindsight is 20-20. Today we have the benefit of looking back and 

seeing that the VCR was not the threat the motion picture had imagined it to be. 

Indeed, without the introduction and acceptance of the VCR, entire industries would 

not exist, the entertainment industry would not have experienced the powerful and 

profitable growth it has enjoyed, and consumers would have continued to be forced 

to watch media either in a theatre or on TV. 

The ability to enjoy the freedom to go down to your local Blockbuster and get a 

movie if you chose and watch it in your own home is provided only by the Supreme 

Court decision in the Sony Betamax case. 

I look forward to the day when we will all look back on the early fears of Morpheus and other P2P technologies and recognize them as just as misplaced as the 

fears of the Betamax were. 

P2P Allows People to Communicate Directly Like Never Before 

I believe that P2P networks will become as common as the telephone, where people can connect directly to one another without having the operator listen in on your 

calls. 

There has been a lot of misunderstanding surrounding P2P Networks and products like Morpheus by the press and by the community. A true P2P software product, like Morpheus, allows consumers to connect directly with each other and to exchange any type of information—anything—recipes, family photographs, a poem 

from a budding poet, commentary on public issues, anything. Once the consumer 

has downloaded the Morpheus software they choose what electronic information 

that they want to make available to people around the world. 

With Morpheus our business model started with advertising and has provided us 

a revenue platform to achieve profitability. This year we will introduce several additional revenue streams as we attempt to be responsive to the Morpheus users, potential business partners and new marketing strategies. We are passionate about 

incorporating different tools that empower consumers to communicate and exchange 

information while protecting the creators’ content. 

When consumers launch the Morpheus software, they join and help create a selforganizing, self-sustaining network of users around the world. The more users that 

join the network and share content—the richer the experience. It is a true decentralized P2P network since StreamCast has no involvement with the consumer as 

it relates to the sharing of information. Consumers can chat using Morpheus just 

like AOL instant messenger. They can post promotional brochures, they communicate in multiple languages. 

91

In short, Morpheus allows consumers to directly connect to each other like the 

Internet was intended to be. In fact, many call decentralized P2P ‘‘the New Internet.’’ It is a new gateway or alternative to the World Wide Web. 

Decentralized P2P offers the most cost effective and efficient distribution that exists in the world today. By leveraging millions of consumers’ computers and their 

distributed bandwidth, enormous cost of goods savings can be realized. With the 

Morpheus software a file can be transferred very rapidly. In fact the more copies 

of the same file that are on the P2P network means a couple of significant things: 

First the file is persistent so any time night or day a person joining the user created 

network can find any information that they want. Second, by having a very sophisticated file transfer protocol, parts of a file are downloaded from multiple sources. 

This means that even a 56K modem contributes to the richness of the user created 

network. Our bench testing indicates that it only takes approximately 10,000 copies 

of a file for it to achieve persistence around the world. The cost to deliver this persistence for a music CD is under $500. 

Consumers Have Voted—They Want P2P 

Let me share a few numbers about the Morpheus User Network. Since April of 

last year we have had somewhere around 90 million downloads of our software 

product. It is even been exchanged on other P2P platforms. For the past year we 

have averaged an estimated 6 million new users per month who download the software. Over the past year on the Morpheus User Network, approximately 3 million 

unique users use Morpheus each day. Furthermore, 24 hours a day, seven days a 

week the user network averages 1 million simultaneous users connected together. 

An independent study just released indicates that 49.7% of Morpheus users use 

broadband. Around 45% of the users are from outside the United States. 

The reason that I am so passionate about the technology platform of P2P is that 

this ‘‘New Internet’’ is capable of providing a world wide societal change. In this new 

world consumers are no longer receivers of information, they are also senders. And 

it is my belief that consumers around the world represent an incredible opportunity 

to release creative expression. They have never had a platform for distribution or 

a chance to monetize their expression. Now they do with Morpheus. 

Today we are in a time of great conflict and great confusion. And it is no wonder—marketing messages are inundating the consumer with a message of freedom. 

They hear ‘‘rip it, strip it, and burn it’’. Manufacturers provide millions of writable 

CD’s to assist in the process. Many different companies make software that allows 

consumers to create MP3 files. Millions of media files are attached to emails using 

Microsoft Outlook, and many others attach files to an AOL instant message. How 

is a consumer to figure out what they can do with the media companies’ approval 

and what they can’t do? Why is it that the media industry has not chosen to litigate 

against the companies that make these products? 

StreamCast will continue to support the evolution of the P2P platform so that in 

the near future even consumers will be able to create content and securely publish 

it with micro commerce with any one around the world. StreamCast has developed 

the CintoA technology to allow content to be wrapped in a secure Morpheus wrapper 

so it actually becomes a software program. This program allows rules to be generated by the content owner. The wrapped content can be freely traded across the 

Morpheus User Network via downloads which eliminates the un-scalable cost of 

sales that affects centralized download and streaming initiatives. Once downloaded 

the consumer can listen to, view, and review the information. Each wrapper will include a buy button, which allows the Morpheus user to complete a Micro payments 

transaction and unwrap and then fully enjoy the content. 

Two Buckets of Content and Two Ways to Look at Content 

We believe there are two buckets of content in this brave new digital world. Consumer created and commercially created. There are also two ways to look at content, 

today backwards and today forward. Today back is the situation we are in today 

where content has been unprotected and today forward is the time when content 

owners choose to protect and wrap content. It is our strong opinion that the concept 

of today backwards and today forwards needs to be understood and different compensation models need to be created for each timeframe. The media companies are 

attempting to convince everyone, including Congress, that we need a one-bucket solution to a two-bucket problem. 

We believe that a solution for today back is best represented by the continued perception of a free model represented by 75 years of successful experience in broadcast 

radio and television. In this model content is paid for by advertisers but perceived 

‘‘free’’ by the consumers. The today forwards model most likely will require a pay 

to listen or pay to view. A one price fits all system does not benefit the consumer! 

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Today, Morpheus, with its 90 million software downloads, along with millions of 

other consumers using other decentralized P2P platforms, are being forced into discussion between the value of content companies and technology companies. I would 

argue that consumers are confused and wondering what this fight is really all 

about. Is it about copyright, creativity, and growth of science and the human spirit? 

Or is it about control, power, money and maintaining the status quo? 

We Must Find Common Ground 

We need to understand that there are two very important issues: one of content 

and technology and how they converge. One that can have a dramatic impact on 

both industries. At StreamCast we believe that P2P is an important technology that 

not only can create important societal changes but itself reflects important societal 

changes that have already taken place. Individuals—on their own, unaided by the 

communications giants—are finding their own new ways of connecting, of communicating, and of creating and controlling their own communication channels. Their 

will—connected and empowered—will prevail. It is prevailing now and we cannot 

forget them. 

I have no doubt that P2P will become as ubiquitous as the telephone. To 

StreamCast this is not about content. It is not about media. It is about recognizing 

the freedom, and the power, of consumers to connect directly with each other and 

share and exchange information and communications. It is about developing an architecture that works with individuals, that provides tools that respect individual 

control and empowerment, and that offers pleasing and satisfying opportunities for 

communication and commerce. We must never lose sight of our common ground, 

that this is really all about the consumers and our future together with them. 

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

This document sets forth the goals that the American movie industry urges the 

Congress to seriously examine. The future of these unique creative story-telling 

works is in danger of being shrunk and squandered by an increasing thievery on 

the Internet. We cannot stand mute and observe the slow undoing of a formidable 

American economic and creative asset, which would cause terrible injury to the consumers of America. 

Broadband (high speed, large pipe entry to the Internet) is an OPPORTUNITY 

to make available to consumers another delivery system for transporting visual entertainment to their homes. This means more freedom of choices for consumers. 

The Economic Worth of the Copyright Industries 

What kind of asset is at stake here and what does it mean to this country? The 

facts are these: The Copyright Industries (movies, TV programs, home video music, 

books and computer software) are America’s greatest trade export prize. They are 

responsible for some five percent of the GDP of the nation. They gather in more 

international revenues than automobiles and auto parts, more than aircraft, more 

than agriculture. They are creating NEW jobs at three times the rate of the rest 

of the national economy. The movie industry alone has a SURPLUS balance of trade 

with every single country in the world. No other American enterprise can make that 

statement. And all this at a time when the country is bleeding from a $400 Billion 

trade DEFICIT. 

Which is why we come to you with a clear statement of what is needed to preserve 

this extraordinary economic/creative engine of growth in a broadband world. 

As you may surmise, producers of visual entertainment are enthusiastic, ready 

and eager to offer their creative works on the Net. And to dispatch those works LEGALLY, at a fair and reasonable price to those American homes who choose to view 

them. It should be noted that ‘‘fair and reasonable’’ will be defined by the consumer 

and no one else. 

But there is an obstacle. Consider this: The cost of making and marketing movies, 

for example, has risen to nerve-shattering heights. In 2000, the total cost to the 

major studios for making and marketing their films was, on the average, an astounding $82 Million! Only two in ten films ever retrieve their total investment from 

U.S. theatrical exhibition. Those films must journey through various marketplace 

sequences: airlines, home video, satellite delivery, premium and basic cable, over the 

air TV stations and internationally. They must make that journey to try to breakeven or ever make a profit. 

Today as that movie travels its distribution compass course, it is exposed to great 

peril, especially in the digital environment. If that movie is ambushed early on in 

its travels, and then with a click of a mouse, and without authorization, sent hurVerDate Sep 04 2002 09:35 Sep 20, 2002 Jkt 010199 PO 00000 Frm 00096 Fmt 6633 Sfmt 6621 W:\DISC\79464 79464
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tling at the speed of light to every nook and cranny of this planet, its value will 

be seriously demeaned. Who on earth would continue to invest huge sums of private 

risk capital when the chances of redeeming that investment become remote, if not 

impossible? 

Broadband entices and allows piracy of films and TV programs on a massive, unprecedented scale. And at this precise moment, movies and other visual entertainment works are in ever-multiplying numbers swarming illegally throughout socalled file-sharing sites (a more accurate description would be ‘‘file-stealing’’ sites). 

And this is in an environment where most people’s broadband connections are not 

fast enough to enable speedy downloads of these illegally copied files (funny how 

people will wait a long time for something when it is free!). 

Thus, the problem will only get worse as the speed of broadband increases. University-based piracy provides especially troubling evidence of this phenomenon, because university Ethernet systems are state-of-the-art, large pipe, highest speed 

broadband connections. These university systems are over-run and heavily burdened 

by student downloading of pirated movies and TV shows. It’s easy. It’s fast, and it’s free. It is also illegal. 

Gresham’s Law works its will in such a landscape. Just as cheap money drives 

out good money, so we are afraid that pirated movies will spoil the market for 

broadband delivery of high-quality films with superior fidelity to sight, sound and 

color once these high-speed connections proliferate. A consulting firm has estimated 

that more than 350,000 movies are being illegitimately brought down EVERY DAY. 

Who would choose to pay for movies when you can have them delivered to you 

FREE? It is this infection which corrodes the future of creative works. But if 

through technological measures, producers of visual entertainment could defeat the 

spread of pirated movies populating ‘‘outlaw’’ Net sites, the Net would be cleared 

of illegal debris and able to hospitably welcome legitimate, superior quality entertainment in a user-friendly format. The Consumer Electronics and Information 

Technology industries have been working cooperatively with us to find methods to 

deliver our legitimate content in a more secure digital environment. The largest 

beneficiary of such an environment would be American consumers. 

The THREE GOALS I outline below are designed to protect valuable creative 

works in visual entertainment, and at the same time expand the reach and attraction of broadband in the consumer society. 

How to achieve these GOALS? First and foremost both the House Energy and 

Commerce Committee and the House Judiciary Committee must be involved because these goals are umbillically connected to the oversight jurisdiction of both 

Committee. 

Our Three Goals, whose Objective it is to Protect movies, TV programs and other 

visual entertainment on the Net. 

Goal One: to create a ‘‘broadcast flag’’ which would prevent broadcast programs 

exhibited on over the air TV stations from being re-distributed on the Net, which 

is a form of thievery. 

Because just about all such TV creative material is in ‘‘deficit,’’ (that is, its production costs are higher than the license fees it receives from the network) TV series 

and other high value broadcast material must go to ‘‘syndication’’ when they leave 

the network. Syndication means those programs must be licensed to local and international TV stations in order to recoup their total investments, and hopefully make 

a profit. If such programs are re-distributed on the Net while they are still on the 

network, it shrinks and decays the earning power of that program in the syndication 

market. As of last week, a technology for constructing the ‘‘broadcast flag’’ was nearing agreement among the Information Technology, Consumer Electronics and movie 

industry companies. We are deeply appreciative of these efforts. 

Action: The parties will need to agree on how to achieve this goal, either through 

narrow congressional or agency action. 

Goal Two: To ‘‘plug’’ the ‘‘analog hole.’’

This is technical jargon. Let me sort this out in plain English. All digital protection designs can only work in a digital environment, which is the environment of 

the Internet. When a digital signal comes down to a TV set in the consumer home, 

that TV set in 95% or more of American homes is an ‘‘analog’’ set. This means the 

digital signal is immediately transformed into an analog signal in order for the consumer to watch it. If the analog signal is then converted back to digital, it cannot 

be protected by any known protection device. This is called ‘‘the analog hole.’’ One 

way to ‘‘plug the hole’’ could be through a ‘‘watermark detector.’’ The ‘‘watermark’’

is an ingenious design, which commands the signal converter in the TV set to respond to the instructions on the movie. This can be accomplished through a concord 

agreed to by the Information Technology, Consumer Electronics and Movie industries. 

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1 Established in 1981, VSDA is a not-for-profit international trade association serving the $19 

billion home entertainment industry. VSDA represents more than 1,700 companies throughout 

the United States, Canada, and a dozen other countries. Membership comprises the full spectrum of video retailers (both independents and large chains), as well as the home video divisions 

of major and independent motion picture studios, and other related businesses that constitute 

and support the home video entertainment industry. 2 17 U.S.C. 109(a). 

Action: To reach this goal, Congressional assistance will be necessary. 

Goal Three: To stop the avalanche of movie theft on so-called ‘‘file-sharing’’ Web 

sites, such as Morpheus, Gnutella, etc. (the more accurate name would be ‘‘file-stealing’’ sites). 

Unhappily, neither the ‘‘broadcast flag’’ nor ‘‘plugging the analog’’ hole will stop 

this relentless thievery that is endemic. 

We have not hesitated to spend considerable resources to fight these sites and 

services in the courts. But litigation alone cannot possibly provide an adequate solution, particularly as these services become increasingly decentralized, fragmented 

and anonymous. Constructive discussions need to take place with the Information 

Technology and Consumer Electronics industries to determine how best to develop 

effective technical solutions to crush online theft of our valuable creative works. 

Action: Continuous negotiations must take place to develop technical solutions, 

which may require legislative enforcement. 

There is one truth that sums up the urgency of this request to the Congress to 

enlist in the battle to preserve and protect an American economic and artistic asset, 

which attracts the enjoyment, the patronage and a most hospitable reception by 

every creed, culture and country throughout the world. 

That truth is: If you cannot protect what you own, you don’t own anything. 

PREPARED STATEMENT OF THE VIDEO SOFTWARE DEALERS ASSOCIATION

The Video Software Dealers Association (VSDA), the international trade association representing the home video industry and video stores across the nation,1 submits this statement for the record of the hearing on ‘‘Ensuring Content Protection 

in the Digital Age.’’

We respectfully suggest that Congress focus not only on protecting digital content 

from copyright infringement but also on protecting the rights of the owners of lawfully made copies of digital works. We are concerned that digital rights management 

constructs are being used not only to prevent piracy and to ensure payment for purchases, but also to circumvent constitutional and statutory limitations on the copyright monopoly. 

For example, digital rights management systems can be used to:

1. Prevent a lawfully purchased, digitally delivered movie from being played more 

than a certain number of times, or from being played on any machine other 

than the first computer or player on which it is played (thereby preventing rentals, resales, lending, or gifts of previously viewed movies). 

2. Lock out, delete, or disable lawfully made copies of motion pictures residing on 

a computer hard drive or other storage system. 

3. Prevent consumers from privately performing a work over a home network. 

4. Lock up material that is not copyrightable or is in the public domain. 

5. Effectively expand the term of the copyright monopoly indefinitely. 

This overreaching promises to undermine copyright law and the public policies it 

serves, suppress consumer choice and retail competition, and ultimately impede the 

development of online entertainment, to the detriment of consumers, retailers, and 

copyright owners. 

COPYRIGHT LAW AND HOME VIDEO

Having built the world’s first home distribution system for motion pictures on the 

strength of the first sale provision of the Copyright Act,2 video retailers may have 

as much at stake in this discussion as any other market segment. 

Copyright law provides the legal foundation that has facilitated the phenomenal 

growth of the home video industry over the past two decades. The copyright monopoly supplied motion picture copyright holders with the economic incentive to develop 

new markets for their motion pictures, which led first to the emergence of videocassettes, then digital versatile disks (DVDs), and most recently, Internet-based 

‘‘video on demand.’’ These innovations have enhanced the consumer’s access to motion pictures and created a vibrant, competitive industry. 

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3 U.S. CONST., art. I, cl. 8. 4 U.S. Copyright Office, ‘‘DMCA Section 104 Report,’’ 78 (2001). 

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 be. For an overwhelming majority of America’s 250 million plus consumers, 

renting and buying prerecorded videocassettes and DVDs 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, it is projected 

that approximately 24 million U.S. households now own a DVD player. It is estimated that almost 3 billion videotapes and DVDs were rented in 2001. Approximately one-third 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 2001 was a record $8.42 billion. More than $10 billion was spent purchasing the 

most popular videotapes and DVDs in retail establishments. 

Essential to the success of the home video industry is the first sale doctrine of 

copyright law, codified at 17 U.S.C. 109(a). By giving retailers the right to sell and 

rent lawfully made videos and video games without restriction by the copyright 

owner, the first sale provision benefits society by promoting retail competition and 

maximizing distribution of creative works. 

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 studios. 

Over the past several years, revenue from home video has accounted for more than 

half of the studios’ gross domestic film revenue. Total revenue to the studios from 

domestic video sales and rentals totaled $10.7 billion in 2000. 

Video retailing, while experiencing some of the consolidation and slowing of 

growth of a maturing industry, remains a vibrant competitive enterprise. There are 

24,000 video rental specialty stores in the U.S. These stores include the major public 

chains such as Blockbuster, Hollywood Video, and 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 4,000 non-specialists, primarily supermarkets and drugstores, also rent video as a regular part of their business, and numerous other retail outlets sell prerecorded videos. 

Home video has flourished precisely because copyright holders could not control 

the home video rental and resale market. The freedom to rent and resell videos 

guaranteed by the first sale provision has provided consumers with access to a wide 

variety of affordable, quality entertainment from different sources, generated a tremendous revenue stream for the copyright holders, and created a thriving industry 

with a high level of competition. 

THE FIRST SALE DOCTRINE

Copyright law maintains a careful balance between protecting the intellectual 

property of copyright holders and promoting the broad dissemination and enjoyment 

of protected works. The Constitution provides Congress with the authority to enact 

copyright laws ‘‘[t]o promote the Progress of Science and the useful Arts, by securing 

for limited Times to Authors and Inventors the exclusive Right to their respective 

Writings and Discoveries.’’ 3 The intent of this provision is to encourage authors to 

create and to disseminate their works. Nevertheless, copyright law carefully limits 

the scope of the copyright monopoly. The copyright holder and the owner of a lawful 

copy of a copyrighted work each have distinct rights under the Copyright Act, and 

the rights of each must be respected. 

One of the essential rights of an owner of a lawful copy is embodied in the first 

sale provision. Section 109(a) provides that, notwithstanding a copyright owner’s 

distribution right, the owner of a particular copy lawfully made under U.S. copyright law ‘‘is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy.’’ The first sale provision applies to ‘‘copies,’’ including digital copies fixed in a tangible medium,4 without regard to where 

or how they were made. Moreover, the Copyright Act also makes clear that the first 

sale doctrine need not involve a sale. Rather, the pivotal question is whether the 

person asserting the first sale doctrine right is the ‘‘owner’’ of a ‘‘lawfully made’’

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5See United States v. Sachs, 801 F.2d 839, 842 (6th Cir. 1986); see also United States v. 

Cohen, 946 F.2d 430, 434 (6th Cir. 1991) (‘‘This [first sale] doctrine recognizes that copyright 

law does not forbid an individual from renting or selling a copy of a copyrighted work which 

was lawfully obtained or lawfully manufactured by that individual’’); M. Nimmer and D. 

Nimmer, Nimmer on Copyright § 8.12[B][3][c]. 6 Under 17 U.S.C. 101, ‘‘[t]o perform or display a work ‘publicly’ means—(1) to perform or display it at a place open to the public or at any place where a substantial number of persons 

outside or a normal circle of a family and its social acquaintances is gathered; or (2) to transmit 

or otherwise communicate a performance or display of the work to a place specified by clause 

(1) or to the public, by means of any device or process, whether the members of the public capable of receiving the performance or display receive it in the same place or in separate places 

and at the same time or at different times.’’ 7Twentieth Century Music Corp. v. Aiken, 422 U.S. 151, 155 (1975). 

copy. There is no requirement that the tangible medium of expression have been 

sold by the copyright holder. 

Copies can be mass produced at a factory or singularly by the consumer at a home 

computer. The owner of a lawfully made copy may assert his or her first sale rights 

regardless of whether the copy was purchased or, after the purchase of a blank medium, ‘‘made’’ by exercising a license to make a copy.5

Thus, a person who lawfully makes a copy of a motion picture through a digital 

download at a retail location or at home is authorized, under Section 109(a), to sell 

it to the highest bidder, loan it, trade it, or give it away, and the copyright owner 

is powerless under the Copyright Act to prevent it. Video retailers would also be 

free to rent them for profit, just as is the practice today with audiovisual works lawfully reproduced on videocassettes and DVDs. 

PRIVATE PERFORMANCES

The Copyright Act gives copyright holders the exclusive right to perform a work 

‘‘publicly,’’ but reserves to the public the right to perform privately copies they own.6

Theater owners need a license to show a motion picture, but the person who sneaks 

into a theater without paying infringes no right of the copyright owner. Owners of 

lawful copies need licenses to play them in public for pay, but need no one’s permission to play them at home for private enjoyment. In short, there is no copyright to 

control or in any way limit private performances.7 To limit such performances is like 

preventing parents from reading books to their own children. 

‘‘LIMITED DOWNLOADS’’ AND ‘‘ONLINE RENTALS’’

Today, technological restraints have been fashioned to give copyright holders de 

facto control over the distribution and use of copyrighted works where de jure control has been denied to them. These restraints seek to disable the protections that 

copyright law provides to legal owners of lawfully made copies of copyrighted 

works—and expand the limited privileges granted to copyright holders by Congress 

in order to give them control over the lawful distribution and use of copyrighted materials, control Congress has expressly denied to them in the Copyright Act. They 

seek this control in order to impose a business model under which they can charge 

for repeated use or multiple users of copyrighted works. 

Copyright holders have taken the position that they are free to control the distribution and use of digitally delivered copyrighted works by reclassifying the transfer of ownership of digitally delivered copies of copyright works as ‘‘limited 

downloads’’ or ‘‘online rentals.’’ The classifications are imposed on the owners of lawfully made copies through digitial rights management constructs such as non-negotiable contracts and access control technology. 

Non-negotiable contracts in the digital environment are most commonly presented 

as ‘‘click-thru end user license agreements.’’ These contracts of adhesion typically 

incant that the download does not transfer ownership of the copy of the work and 

declare that there are restrictions on the length of time or number of times the purchaser can view or listen to the product, the ability to transfer ownership of the 

copy, and/or the number of devices on which the product may be played. The restrictions are enforced by ‘‘access control technologies’’ that automatically disable the 

copy after a certain amount of time or number of plays (‘‘timing out’’) and/or prevent 

the copy from being played on any device other than the device on which it was 

downloaded (‘‘tethering’’). 

For example, a download from a soon-to-be-launched ‘‘video on demand’’ online delivery service for motion pictures reportedly will have to be watched within 30 days 

from the date of download and will be operable only for 24 hours after the first 

viewing, after which the movie will be rendered as inaccessible code. In addition, 

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8The anticircumvention provisions of the DMCA ‘‘[do] not apply to the subsequent actions of 

a person once he or she has obtained authorized access to a copy of the work... even if such 

actions involve circumvention of additional forms of technological protection measures.’’ H. Rpt. 

No. 105-551, Part 1, at 18 (1998). 9 U.S. Copyright Office, ‘‘DMCA Section 104 Report,’’ 75-76, 164 (2001). We do take issue, however, with the Copyright Office’s conclusion that the problems raised by access control technologies and non-negotiable contracts are speculative, or premature, or beyond the scope of its 

report. The restrictions on retailers’ rights to distribute and consumers’ rights to transfer and 

use fully the products they lawfully purchase and download are not speculative and considerContinued

the download will be tethered to the computer on which it is downloaded. The video 

on demand service is a joint venture of copyright owners. 

The limited download construct is designed to gain the revenue stream consumers 

might be willing to pay for access to public performances of these works, while at 

the same time enjoying the control and efficiencies (but not the limitations) of a single digital reproduction (the download). It is intended to turn every digital player 

into a pay-for-play video jukebox, where the consumers own the copies, but lose 

their federal right to privately perform them or transfer to others the physical medium on which they are lawfully recorded without permission from or further compensation to the copyright owner. 

In fact, non-negotiable contracts and access control technology can be used to restrict the redistribution and use of a copyrighted work even after the copyright in 

the work has expired, effectively extending the copyright term in perpetuity. 

Unfortunately, Section 1201 of the Digital Millennium Copyright Act, which prohibits circumvention of technological protection measures such as access control 

technologies, is being misinterpreted to apply even where the technological protection measure does more than just protect the copyright from infringement, but also 

furthers objectives unrelated to copyrights. Under this interpretation, which is contrary to Congress’ intent,8 technological protection measures cannot be circumvented 

so as to limit their effect to only lawful objectives. 

Non-negotiable contracts and access control technology are being used not only to 

prevent piracy, but to restrict the legal rights of lawful owners to give away, sell, 

rent, and view the digital copies they own. Although technological measures may 

lawfully be used to prevent copyright infringement and to ensure payment for the 

reproduction, they should not be used to permanently control the lawful distribution 

and use of copies once the legal right to do so has been exhausted. 

Because the first sale provision furthers the important public policies of promoting 

competition and maximizing dissemination of copyrighted works, the rights it confers cannot be extinguished either by non-negotiable contracts or technological controls. To conclude otherwise would make the rights granted by the first sale doctrine 

merely contingent on the technological prowess or goodwill of copyright owners. 

ANTITRUST CONCERNS

Non-negotiable end-user license agreements and access control technology can be 

abused to suppress retail competition, to the detriment of consumers and retailers. 

It must be understood that entertainment products are not fungible. A consumer 

that seeks to view ‘‘Shrek’’ will not be fully satisfied by substituting ‘‘Training Day.’’

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 non-negotiable contracts and excessive access control technology will deprive consumers of the value and flexibility 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 in 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. 

The U.S. Copyright Office recognized the anticompetitive potential of these technologies in its DMCA Section 104 Report to Congress. The Copyright Office noted 

that access control technologies that tether digital downloads to a single computer 

and non-negotiable ‘‘click-thru’’ contracts that attempt to override copyright law may 

negatively impact consumer choice and retail competition.9

98

ation of their impact is not premature, as evidenced by the video on demand joint venture referenced above. These issues also fall squarely within the Copyright Office’s mandate from Congress. Yet the Copyright Office’s report makes no mention of the video on demand joint venture, 

despite the fact that it was public knowledge that this service was being developed. The problems created by overly restrictive access control technology and non-negotiable contracts need 

to be addressed now, not at some indefinite time in the future. To fail to do so leaves to the 

designers of access controls the allocation of rights between consumers and copyright owners, 

a function that previously was the exclusive responsibility of Congress. 10See, e.g., Fogerty v. Fantasy, Inc., 510 U.S. 517, 527 (1994) (because of the social value of 

increased public exposure to a musical work, ‘‘a successful defense of a copyright infringement 

action may further the policies of the Copyright Act every bit as much as a successful prosecution of an infringement claim by the holder of a copyright’’). 

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 a small number of approved providers, to the exclusion of competing retail channels. Consumer choice and competition would be further eroded. 

CRITERIA FOR DIGITAL RIGHTS MANAGEMENT

Retailers are firm believers in protecting copyrighted works from piracy. In fact, 

because the retail sector often feels the most immediate effects of piracy, it is not 

unusual for retailers to complain that copyright holders are too lax in enforcing 

their copyrights against pirates who compete directly with retailers. Despite the 

strong leadership of retailers in fighting piracy, they are unwilling to give carte 

blanche to copyright holders to control all distribution and uses of their works. 

Claims that the digital sky is falling as a result of piracy need not lead to a 

wholesale shift in power to copyright owners. First, copyright holders need not take 

away public rights to protect their copyrights. For example, the technology to prevent a motion picture from being copied is different from the technology needed to 

‘‘lock’’ a legal copy 24 hours after its first use. In addition, the Supreme Court has 

admonished that the rights of the public as against copyright holders are just as 

important, under the Constitutional framework, as the rights of copyright holders 

against the public.10

Accordingly, there should be two criteria for security standards:

1. The degree of security against copyright infringement. As a practical matter, the 

only rights at issue here are the rights of reproduction (Section 106(1)) and public performance (Sections 106(4) and (6)). 

2. The degree of accountability for lawful reproductions and public performances. 

That is, the extent to which the technology can assure that the copyright owner 

is being compensated for the number of reproductions or public performances 

actually licensed and made. 

CONCLUSION

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. Congress must ensure the proper balance is maintained between 

the rights of copyright holders on the one side and consumers and retailers on the 

other so that lawful digital distribution can move forward. 

Security technologies that protect true intellectual property rights from infringement are commendable. Video retailers have long supported Macrovision encryption 

of analog copies of motion pictures and the CSS system of protecting DVD copies 

of motion pictures from unauthorized reproduction. Such systems derive their legitimacy from the fact that they only protect the right of reproduction from infringement. 

However, VSDA is deeply concerned about the overreaching that is part of some 

technological controls for online entertainment. For the first time in history, copyright holders have the power to control mass distribution of their works (at least 

those in digital form) from the point of manufacture all the way to the end consumer 

and beyond. They are now able to distribute copies to millions of people in a matter 

of a few minutes, simultaneously distributing at the wholesale and the retail level. 

At the same time, digital technology gives copyright holders the unprecedented 

power to control and suppress the lawful use, resale, and rental of digitally delivered entertainment. 

The issue is indeed quite simple. Copyright holders do not have a right of private 

performance, so they should not be permitted to force consumers to pay for private 

performances. Holders of copyrights in audiovisual works do not have a rental right, 

99

so they should not be permitted to prevent rentals. No copyright holder has the 

right to control redistribution of lawfully made copies, whether made in a factory, 

in a retail store, or at home, so they should not be permitted to use technology to 

prevent redistribution, nor to charge the new owner or renter a fee for access. 

Video retailers see tremendous possibilities in digital distribution and want to see 

this market grow. They do not fear a free market, and believe that copyright holders 

should not be able to expand the limited privileges granted to them under the Copyright Act to lock out or limit retail competition. They ask only for the opportunity 

to compete fairly for consumers in the digital marketplace. They disagree with the 

notion that any single participant in the marketplace should be allowed to dictate 

the winners and losers. 

While it can be argued that, ultimately, business models that rely on consumerunfriendly technology will fail, in the interim some retailers may be driven out of 

business and the development of the market for digital delivery will be severely impeded. 

Therefore, public policies for digitally delivered copyrighted works must: (1) maintain the balance of rights and limitations of copyright; (2) promote competition for 

consumer allegiance; (3) protect consumer rights; and (4) stimulate creativity. Such 

policies are necessary to facilitate artistic, business, and technological innovation 

that benefits society, enhances the quality of life, and fuels economic growth. 

Thank you for the opportunity to present our views. 

PREPARED STATEMENT OF HILARY ROSEN, PRESIDENT AND CEO, RECORDING

INDUSTRY ASSOCIATION OF AMERICA

I would like to thank the Subcommittee, under the leadership of Chairman Upton 

and Representative Markey, for the opportunity to submit written testimony today 

about the most important issue facing the recording industry—rampant digital 

music piracy and possible technological solutions to help control piracy. 

The Piracy Problem 

Any discussion concerning the use and protection of copyrighted works on the 

Internet, and certainly any discussion of digital music issues, has to begin with an 

understanding of how large a problem piracy is. Put simply, the quantity of digital 

music piracy is staggering. The International Federation of the Phonographic Industry (‘‘IFPI’’) recently estimated that for every CD purchased legitimately, another 

one is ‘‘burned’’ on a computer. This rate of unauthorized reproduction—that is, 

100% of the legitimate market—is unheard of in any industry. Just imagine if half 

of the automobiles, computers or shoes in the market were illegitimate. 

The biggest sources of unauthorized copies of recordings are the various ‘‘peer-topeer file sharing’’ systems. I use the term ‘‘peer-to-peer file sharing’’ because everyone does, but I should be clear that there is no true sharing involved. Everyone involved in the ‘‘sharing’’ process gets to keep his or her own copy. These services are 

also ‘‘peer-to-peer’’ only in the sense that there is no centralized storage of our 

works. That term obscures the fact that they are organized networks specifically designed and operated to further the unauthorized distribution of copyrighted works. 

And they accomplish their objective with great efficiency. Just one of these peer-topeer services alone is responsible for over 1.8 billion unauthorized downloads per 

month. In fact, it appears that in any month this one service provides more infringing downloads than the total number of tracks contained on the legitimate products 

shipped by the entire U.S. recording industry. 

These peer-to-peer systems are so widely used that one analyst recently estimated 

that over half of the broadband traffic in the United States is attributable to the 

unauthorized ‘‘file sharing’’ of copyrighted works. In some places it is worse—one 

university has found that over 80% of its network traffic is dedicated to the use of 

KaZaA, the leading peer-to-peer application. 

Peer-to-peer systems aren’t the only problem facing the recording industry. CD 

‘‘ripping,’’ which is the process of converting CD recordings into computer files, and 

‘‘burning,’’ which is the process of turning those computer files into CD recordings 

playable by conventional CD players, on a mass scale is also a substantial threat 

to our industry. The hardware and software necessary to rip and burn CDs has become standard equipment on personal computers. Indeed, 40% of active music consumers now own CD burners—up from 14% in 1999. This has led to troubling results:

• 77% of active music consumers with CD burners have used their burners to copy 

music. 

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• 50% of those who have downloaded music for free copy the downloaded music onto 

a burned CD or a portable MP3 player. 

• 23% of active music consumers say they did not buy more music last year because 

they downloaded or copied music for free. 

The piracy problem has reached a level that threatens to cause serious damage 

to those of us who create and market music. Last year, record sales in the United 

States were down 10%. IFPI recently reported that record sales were down almost 

7% worldwide. Moreover, piracy has had particularly significant effects on sales of 

the top hits that provide the profits that allow us to invest in the development of 

new artists and creation of new music. In 2000, the top ten albums sold a total of 

60 million units. In 2001 the top ten albums sold only 40 million units—a drop of 

33%. These trends hurt all of us who earn our livelihoods from the music industry. 

They also hurt our business partners, the legitimate digital music services, which 

find it hard to compete against infringing services that provide consumers all of the 

same content for free. 

It would be difficult to overestimate the long term consequences if these trends 

continue. The creation of new recorded music involves enormous levels of cost, 

amounting to hundreds of millions of dollars. Thereafter, the cost of marketing and 

promotion may amount to many hundreds of millions of dollars more in order to create a demand for the music. The current levels of piracy will not long allow us to 

sustain this level of investment. That not only will impose economic pain on every 

participant in the digital music value chain, but it also will deprive consumers of 

the rich musical diversity they have come to expect from our industry and of the 

promise the Internet provides for legitimate commerce in copyrighted works. 

Technological Solutions 

Despite the rather gloomy picture I’ve just painted for you, I truly believe that 

the music industry has a bright future. Record companies look forward to embracing 

technology in two ways—to curb piracy and to form new business models with technology partners and licensees to deliver music in new ways at new price points to 

consumers, offering more choices in the legitimate marketplace 

Record companies are looking at and testing various digital rights management 

and copy protection technologies that balance personal use with the piracy concerns 

of both record companies and artists. There are technologies available that can offer 

some useful degree of protection against uncontrolled copying of recordings. For example, CDs can be copy protected to inhibit ripping. The mere protection of CDs 

alone, however, is not a solution to the piracy problem. It is very difficult to maintain the security of valuable intellectual property against the relentless incursions 

of new copying and distribution technologies so long as computer products and consumer electronic devices provide easy and open opportunities for piracy. 

The solution to the piracy problem, then, lies not in any technological silver bullet, but in an ongoing cooperative relationship between the music and technology 

industries. Such a cooperative relationship could create robust systems for digital 

copy protection. For example, all commercially released CDs are encoded with certain copyright management information for use in those devices that support the Serial Copy Management System (‘‘SCMS’’), which is the system required by the Audio 

Home Recording Act. CD ripping products have access to this copyright management information too, but their designers have chosen to ignore it. Why shouldn’t 

there be technological solutions that take advantage of this information and respect 

it in devices not covered by the AHRA as well as those that are covered by the 

AHRA? Perhaps these solutions could include ‘‘secure ripping,’’ whereby CD ripping 

and burning products would protect the resulting copies, or simply refuse to copy, 

when appropriate given the available SCMS information. One could certainly imagine solutions built on other copyright management information, such as ‘‘watermarks,’’ as well. 

Cooperation between the copyright and technology industries also could make it 

possible to close what has been called the ‘‘analog hole,’’ which is the ready ability 

of users to circumvent digital copyright protections through conversion from digital 

to analog to digital. The ‘‘analog hole’’ exists because digital music must be converted to analog sound waves to be audible to people—we humans can’t just listen 

to 1s and 0s. In this process, a secure piece of digital music loses its security at 

some point in the transmission from processor to sound card to speaker. Currently, 

it is rather simple to turn analog signals back into digital copies without regard to 

the security in place on the original and without a significant degradation in sound 

quality. A cooperative relationship might produce technologies to close the analog 

hole, or at least make the process sufficiently difficult or result in such poor copies 

that most people would not bother to try to exploit it. 

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Similarly, there are possible technical solutions to the problems created by peerto-peer networking. Technologies have been developed to recognize the ‘‘fingerprints’’

of copyrighted works, or to embed watermarks in those works, such that the unauthorized distribution of those works over the Internet can be recognized and either 

slowed or halted. Some universities and other Internet access providers are using 

software applications called ‘‘bandwidth shapers’’ that recognize peer-to-peer file 

sharing and can either stop or slow that activity. We saw some evidence of the success with which technologies can be used to address peer-to-peer file sharing in our 

litigation against Napster. During the early stages of the case, Napster vehemently 

protested that it would be impossible for it to screen for copyrighted works. Yet 

under the order of a court injunction, Napster blocked a substantial part of its 

former traffic in copyrighted music. 

What is required to develop and implement the potential solutions is a commitment from the technology industries to be partners in the process of promoting legitimate commerce in copyrighted works by restricting the unauthorized distribution 

of copyrighted content. I am excited about the opportunities that the Internet, personal devices and other new technologies offer for the distribution and enjoyment 

of music, and by the developing market for digital music. I hope that the market 

for digital music will develop into one of the strongest components of the music industry and prove rewarding for artists, record labels, technology companies and 

service providers alike. Thus, I believe that both the copyright and technology industries could benefit from a cooperative relationship to promote legitimate distribution of music and prevent piracy. 

We should be working together to develop technical standards that can be implemented in new devices and systems that will be secure and foster innovative business models, but avoid confusing or aggravating consumers through technical incompatibilities. Such standards could spur sales of both technology products and recorded music. At the same time, such standards would ensure that software and device manufacturers need only build certain technology into their products to provide 

access to works obtained through legitimate channels while helping control infringement. 

The recording industry believes that the free market is always the best choice for 

the development of any of these types of technological standards, and would never 

embrace government regulation lightly. Congress should analyze, however, and actively monitor, whether the marketplace is creating the incentive for technology 

companies to work with copyright owners to protect copyrighted works. The rampant and growing digital music piracy has reduced the incentives of technology companies to cooperate with copyright owners. Technology companies may see little reason to protect content when their products and services are already selling, even 

though those products and services are being used to acquire intellectual property 

illegally. Indeed, the growing sales of CD burners and blank CDs may actually provide a disincentive for technology companies to engage in constructive efforts to protect copyrighted material. Thus, digital piracy is likely to continue to flourish. So 

long as voluntary negotiations of security and digital rights management standards 

are not adequately addressing these problems, there may be a role for the government in restoring the incentives for the technology and copyright industries to work 

together. 

I again thank the Committee for its time and for the opportunity to address you 

on these important issues.

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