U.S. GOVERNMENT PRINTING OFFICE

67–148 WASHINGTON : 2001

ONLINE MUSIC: WILL SMALL MUSIC LABELS AND

ENTREPRENEURS PROSPER IN THE INTERNET AGE

HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

WASHINGTON, DC, MAY 24, 2000

Serial No. 106–59

Printed for the use of the Committee on Small Business

(

For sale by the U.S. Government Printing Office

Superintendent of Documents, Congressional Sales Office, Washington, DC 20402

(II)

COMMITTEE ON SMALL BUSINESS

JAMES M. TALENT, Missouri, Chairman

LARRY COMBEST, Texas

JOEL HEFLEY, Colorado

DONALD A. MANZULLO, Illinois

ROSCOE G. BARTLETT, Maryland

FRANK A. LOBIONDO, New Jersey

SUE W. KELLY, New York

STEVEN J. CHABOT, Ohio

PHIL ENGLISH, Pennsylvania

DAVID M. MCINTOSH, Indiana

RICK HILL, Montana

JOSEPH R. PITTS, Pennsylvania

JOHN E. SWEENEY, New York

PATRICK J. TOOMEY, Pennsylvania

JIM DEMINT, South Carolina

EDWARD PEASE, Indiana

JOHN THUNE, South Dakota

MARY BONO, California

NYDIA M. VELAZQUEZ, New York

JUANITA MILLENDER-MCDONALD,

California

DANNY K. DAVIS, Illinois

CAROLYN MCCARTHY, New York

BILL PASCRELL, New Jersey

RUBEN HINOJOSA, Texas

DONNA M. CHRISTIAN-CHRISTENSEN,

Virgin Islands

ROBERT A. BRADY, Pennsylvania

TOM UDALL, New Mexico

DENNIS MOORE, Kansas

STEPHANIE TUBBS JONES, Ohio

CHARLES A. GONZALEZ, Texas

DAVID D. PHELPS, Illinois

GRACE F. NAPOLITANO, California

BRIAN BAIRD, Washington

MARK UDALL, Colorado

SHELLEY BERKLEY, Nevada

HARRY KATRICHIS, Chief Counsel

MICHAEL DAY, Minority Staff Director

(III)

C O N T E N T S

Page

Hearing held on May 24, 2000 ............................................................................... 1

WITNESSES

Dube, Ric, Senior Editor/Analyst, Webnoize, Cambridge, MA ............................. 3

Silverman, Tom, Founder & CEO, Tommy Boy Records, New York, NY ........... 9

Harter, Peter, Vice-President, Global Public Policy & Standards, Emusic.com,

Redwood City, CA ................................................................................................ 12

Chuck D, Founder, Rapstation.com ........................................................................ 16

APPENDIX

Opening statements:

Talent, Hon. James .......................................................................................... 53

Bono, Hon. Mary ............................................................................................... 55

Prepared statements:

Dube, Ric ........................................................................................................... 57

Silverman, Tom ................................................................................................ 61

Harter, Peter ..................................................................................................... 67

Chuck D ............................................................................................................. 81

Additional Information:

Statement of Home Recording Rights Coalition ............................................ 84

Statement of the Future of Music Coalition ................................................... 89

(1)

ONLINE MUSIC: WILL SMALL MUSIC LABELS

AND ENTREPRENEURS PROSPER IN THE

INTERNET AGE?

WEDNESDAY, MAY 24, 2000

HOUSE OF REPRESENTATIVES,

COMMITTEE ON SMALL BUSINESS,

Washington, DC.

The Committee met, pursuant to call, at 11:15 a.m., in Room

2360, Rayburn House Office Building, Hon. Jim Talent [chair of the

Committee] presiding.

Chairman TALENT. We will go ahead and convene the hearing. I

expect the Ranking Member any minute, and if she comes after I

finish my opening statement we will go right to the testimony and

then we can just take a convenient moment and let her make her

opening statement.

Thank you for joining the Committee today for our hearing to

discuss the future of on-line music distribution models and the

ways new technology will affect smaller record labels and music

acts.

This is the third in a series of hearings that the Committee has

held regarding e-commerce issues. It is one that is certainly very

timely. So much attention these days is being devoted to the controversial music-file-swapping software Napster, it is a good time

to explore how issues like piracy as well privacy concerns, marketing budget and the omnipresence of the worldwide web affect

the bottom line of smaller music entities.

The advent of MP3, which is essentially a file format that allows

computer users to download near CD quality music and audio files,

has made listening to music via the Internet a reality for many

computer users. The algorithms used to encode MP3 files compress

data to convert a file that would take 40 minutes to download a

regular CD format, so that takes 5 minutes to download as an MP3

file. In order to attain the smaller file size, this compression destroys some audio parts that will never be reconstructed which is

why MP3 cannot reach exact CD quality. That is at least as of the

time this statement was drafted, which was last night. Perhaps in

the meantime the technology has changed.

As more people have access to the Internet and MP3 files, there

have been various concerns voiced by various parties in the music

industry. Today, one of the main concerns is Napster, which gives

everyone who uses the software access to all the MP3 files on one

another’s computers that they are willing to share. Napster’s own

servers compile a large, constantly updated index of all the music

2

available from its users. Users simply type in the song title or

name of the artist they are looking for, and Napster generates a

list of other users who already have it. Clicking on one of the selections automatically copies the file from one user’s hard drive to the

other’s. It makes everybody, in essence, a music store reservoir.

Many in the music industry believes programs like Napster will

cause music listeners to cease purchasing musical recordings. Indeed, a recent New York Times article highlights the use of

Napster by a college student who downloaded 800 musical recordings from the Internet. There are others, though, who believe that

free access to music via the Internet is a powerful marketing tool

and that this new form of distribution will help, not hurt, sales of

musical recordings.

The development of this type of software also has ramifications

for the movie industry. Once this file-sharing software is perfected

and digital delivery via the Internet becomes quicker, computer

users may be able to swap high-quality movie files in the same

way, thus affecting film studios, movie theaters, and video rental

chains.

In this age of Napster and other file-sharing programs like

Gnutella, the question arises as to ‘‘how will record labels and musicians control the distribution of their music and will they be able

to make a profit?’’ The Recording Industry Association of America

has undertaken the long-awaited Secure Digital Music Initiative

which is working to develop an open, interoperable architecture

and specification for digital music security. Once completed, purchasers of SDMI-compliant music files and software will be able to

play their music in SDMI-compliant portable and home players.

Until then, though, there are a multiple of file formats available on

the Internet, most without the copyright protection that SDMIcompliant files are projected to have.

The music industry, as well as other industries we have examined, the Internet is purported to be able to balance the inequities

faced by small entities. While it is true that smaller businesses

have the flexibility to adapt quickly to changes in the marketplace,

the Committee is concerned about their ability to absorb losses that

may incur due to piracy.

Additionally, in the wilderness of the Internet, how will small

music labels to get their voices heard above the roar of the big

soon-to-be-four record labels?

To answer these questions and to provide us with an excellent

background on these issues, we have a distinguished panel of witnesses.

Rick Dube is a Senior Analyst and Editor with Webnoize, which

focuses on the entertainment industry’s relationship with the Internet. Tom Silverman, founder and CEO of Tommy Boy Records is

testifying on behalf of the RIAA. Peter Harter is Vice President for

Global Public Policy and Standards of Emusic.com, the Internet’s

leading retailer of licensed and authorized MP3 music files. And

Chuck D, recording artist and founder of Rapstation.com, which

features free MP3 downloads, a television station and information

for aspiring artists.

I appreciate the witnesses being here and look forward to their

testimony.

3

Mr. Dube, we will go right ahead with you, and then when Ms.

Vela ́zquez—I am informed that Ms. Vela ́zquez just wants to put

her statement into the record; and, without objection, we will do

that.

[Ms. Vela ́zquez’s statement may be found in appendix.]

Chairman TALENT. So we will go right to the witnesses.

First, staff is going to give us a demonstration of how this music

can be downloaded, and also we are not going to do anything illegal

here. I tried, but Mr. Andrews just passed the bar exam, and he

doesn’t want to lose his license. So we will go ahead and give a

demonstration. And, Dwayne, why don’t you explain what you are

doing so the Committee members understand.

Mr. ANDREWS. Thank you, Mr. Chairman.

What I am going to do today is essentially for the Committee just

to demonstrate how we can download musical files in two different

formats, one being the MP3 format and the other being in the

streaming audio using real player which can be downloaded from

the real player website real.com. Today we are going to use the

EMusic.com website, surprise, surprise, and go into the classical

musical section since my tastes are a little different from the Committee member’s taste as far as music is concerned.

The first thing I wanted to demonstrate is how quickly it would

take to download an MP3 file onto the hard drive on this laptop

computer here at the desk. I click onto the sample track MP3 file,

and it starts downloading the file. This is about a 30-second file,

I believe; and within seconds the file will be complete onto our hard

drive and I can play it right now.

Also, this is through our regular computer speakers. These are

speakers that are usually hooked up to the computers in our offices. So this 30-second snippet took about 5 seconds to download

and is permanently on our hard drive until we decide to erase it.

Chairman TALENT. The technology is available to play this

through higher quality speaker systems; is that right?

Mr. ANDREWS. Since it is an MP3 file I can download this onto

either a portable MP3 player, Walkman-type device or even home

MP3 players.

Also, I can download the same song using Real Player which is

a streaming audio file which it won’t be captured onto our hard

drive. It is sort of just like a radio transmission. It goes through

the computer and it is lost again until I click on that site again.

This, in essence, is just how easy it is to obtain music via the

Internet.

Chairman TALENT. All right. Thank you, Dwayne.

Mr. ANDREWS. Thank you, Mr. Chairman.

Chairman TALENT. Now we will go to our first witness, Mr. Rick

Dube, who is the Senior Editor and Analyst for Webnoize of Cambridge, Massachusetts, sir, with your statement.

STATEMENT OF RIC DUBE, SENIOR EDITOR/ANALYST,

WEBNOIZE, CAMBRIDGE, MA

Mr. DUBE. Mr. Chairman and Members of the Committee, on behalf of Webnoize thank you for inviting me to testify today at this

very important hearing regarding the future of music on the Internet and small businesses.

4

I am Rick Dube, an analyst with Webnoize and interim editor of

the company’s news publications. I have been on the Internet since

1991, an Internet industry professional since 1994, and I have always been a music fan and consumer, heavy-duty consumer. Ask

my wife, ask my mother, I am troubled with a wallet.

Webnoize provides news coverage and analysis of the entertainment industry’s relationship with the Internet, new media, cross

markets and emerging technologies. Our news reports reach 75,000

industry leaders in music, film, broadcasting, technology, telecommunications, consumer electronics, media and business.

We started Webnoize with what at the time was a bold premise,

that the Internet represents the single most significant outcome of

the post-industrial revolution but does not represent a revolution

in and of itself—it is an evolution. Evolution is bigger. The Internet

represents change and progress and opportunity. Revolution is just

one possibility.

Our news is published all day, every day from our offices in Cambridge, Mass. Each year in Los Angeles we host the largest, most

successful annual conference showcasing and discussing how new

technologies affect the entertainment industry.

We have always covered small businesses, because that is where

the action is and because the Internet presents as much opportunity for them to flourish as it does massive conglomerates. The

problem for both is that taking advantage of the Internet to evolve

a business model requires understanding outside of the core competencies of many existing companies.

A member of the Committee asked me yesterday whether large

on-line retailers like Amazon.com were hurting privately-owned

music retailers. The answer is not yet. Internet sales of music are

actually not all that impressive. About 1 percent of all CDs are sold

on-line. That is about the same in 1999 as in 1998.

Now it is true that traditional record stores have lost about 20

percent of their market share over the last 10 years, but most of

that ground has been lost to electronic superstores and department

stores that sell CDs as a loss leader. If anything is hurting mom

and pop record stores, it is the growth of superstores and large

music chains in the real world, not the virtual world.

But I did say not yet. The Internet will affect small retailers in

the long run but not because Amazon.com sells CDs. It is because

the Internet is so much more interesting than a convenient place

to sell CDs.

At Webnoize we have an internal slogan, one of many. We say

that ‘‘the web is passe.’’ the worldwide web is just one manifestation of the Internet. The Internet is an information network that

can add functionality to any electronic device. There is a microwave

oven in development by Samsung, a refrigerator by Frigidaire and

wireless telephones all over Europe and Asia, all of which offer

Internet connectivity.

I don’t know now how much demand there is for a microwave

that downloads——

Chairman TALENT. I was going to say, what could a refrigerator

do on the Internet?

Mr. DUBE. Well, you would run out of the milk and you’d blip

it, you could wand it in, and the next time your groceries are delivVerDate 11-MAY-2000 09:07 Mar 22, 2001 Jkt 071190 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 E:\HEARINGS\67148 pfrm09 PsN: 67148
5

ered you don’t have to make a list, you don’t have to go out shopping, but you can also stream music through it and leave messages

for people in the house.

Chairman TALENT. Music to drink milk by or something like.

Mr. DUBE. Yeah. On the microwave, you blip the food in, and it

cooks it automatically. It downloads the instructions from the

Internet. I don’t know if there is any demand for that.

The point is that the Internet is not just one way to use a personal computer. Thus, using the Internet to grow a business is not

about putting up a dot.com site. So let me give some examples.

Traditional music retailers, traditional stores, brick-and-mortar

stores like Virgin Megastores, HMV and the Trans World chains

are planning ways to bring the Internet into their stores to provide

more comprehensive services and create more foot traffic. One example, imagine stepping up to a kiosk in a record store, browsing

through a list of the top 40 hits of the day, selecting 12 of your favorites and having a CD of them created for you while you wait.

Or maybe some record that came out 30 years ago that only you

cared about, you lost your copy 25 years ago and haven’t seen it

since. With digital Internet connections and CD burners and laser

printing, nothing ever needs to be out of stock or out of print.

Another example, this is my MP3 player. I try not to go anywhere without it. This particular one was manufactured by Diamond multimedia. It weighs a couple of ounces and holds about 2

hours of digital music. I am looking forward to a day when, say I

am stuck in an airport, I can pop this device in a slot in a kiosk

and load it with a couple of hours of music, an hour of songs that

I asked for specifically, maybe an hour of things I haven’t heard

of but the computer knows it is something I will probably like, and

maybe that kiosk is branded by a popular record store chain,

maybe it is a Tower Records kiosk, because a couple of square feet

of space on the airport floor is a lot cheaper than leasing space for

a whole store.

What this does, it takes the retail experience outside of stores.

We are quite a ways off from that now. It is unlikely the small

independent retailer would bother to participate in that sort of

market opportunity, but there may be other ways for them to participate. The real opportunity for small retailers is to extend what

has always been their core competency, serving consumer niches.

We already know that this is working. If you look at a survey

by the National Association of Recording Merchants, Internet retail

represents about 1 percent of chain store sales, but they represent

about 3 percent of sales at independent stores. Indie stores have

more quickly found a way to connect with their niche and serve

them.

The natural course of any market is to limit the number of sellers, but that never lasts long because consumers grow frustrated

when generalized services fail to meet their individual needs, and

then small businesses come in and fill the gap.

Small record labels serve the same function. They release the

music that the major record companies don’t. It is music that plays

to a significantly smaller audience but generally one that cares

more about the music.

6

And the Internet has been a great place for independent music.

Websites let small labels market their acts to audiences in ways

that TV and radio could never allow. Any band that wants to promote itself on line can upload music and pictures to MP3.com or

Riffage, GarageBand.com, or the Internet Underground Music Archive. MP3.com offers music by 67,000 artists, one or two of which

actually make a living from the CDs they sell on the site.

The independent labels have led the charge to experiment with

downloadable music. Giving away downloadable songs can be a

great way to expose music that will not get air play on the radio

or on MTV. By doing that, indie labels are leading a very provocative experiment, finding out whether giving away music online affects sales and, if so, in what direction.

You have probably heard about Napster. Napster has been called

by music executives the most insidious development on the Internet. Whether or not it is that, it is certainly one of the most ingenious.

Napster is not a website per se but a software application that

lets users swap most MP3 files back and forth. Most of the files

available using Napster are illegally reproduced copies of copyright-protected music. Millions of songs are available, all for free.

Napster is most popular with college students because they have

high bandwidth Internet connections that let them download music

real fast. A Webnoize survey found that over 70—— Chairman TALENT. Let me just interrupt you for a minute.

We explained in my opening statement what Napster was. I

think it is real important that the Committee understand how it

works, and would you just take a minute and explain it? When I

was preparing for this hearing, I had no prior knowledge. I was a

kind of a blank slate. So I don’t think I am showing any disrespect

to my colleagues when I say to you that don’t assume a level of

knowledge about Napster here. Okay? So explain how it works

please.

Mr. DUBE. I might borrow a quote from them. They don’t necessarily explain it in the clearest way possible—because I think—

well, you know, they are in legal trouble.

What Napster lets you do is search each other’s libraries of MP3

files. I have a folder on my hard drive that has a hundred MP3

files in it. Maybe one of you does as well. We both log into the

Napster server, and then I can see the MP3 files on your hard

drive, and you can see the names of the ones on mine. And if I

want any of the ones that you have, I click on them, and it creates

a direct connection between you and me through which the file

transfers.

The file doesn’t pass through Napster’s server. Napster serves

just as the conduit for us to search each other’s libraries and then,

when we find something we want, we click and order it, and it

passes through some other chain on the Internet to get to us, to

get to you or to get to me.

Mrs. BONO. Mr. Chairman, may I ask a quick, relevant question,

please?

Chairman TALENT. Sure, go ahead.

Mrs. BONO. Can you please explain to me where you get the first

file that you put up on Napster?

7

Mr. DUBE. Sure. Perfectly legal to create MP3 files from the CDs

that you own for your own personal use. It is covered by various

copyright law. You cannot transfer those files to somebody else for

their personal use. That is an act of music piracy. Readily available

software available for free anywhere that pulls the track off of the

CD and then compresses it into an MP3 file. When it comes off the

CD, it is like a huge, huge file; and then a compressor turns it into

an MP3 file, which is about a megabyte a minute.

Mrs. BONO. Would you please explain to me the copyright infringement, let us hypothetically say——

Chairman TALENT. If the gentlelady will suspend, let us take a

minute, and if you have questions, let us ask Mr. Dube the questions so we understand. Because I don’t think, if we don’t understand how Napster works, a lot of the rest of the testimony won’t

be as meaningful to you. So if anybody has a follow-up on Ms.

Bono’s questions, fine. And please go ahead.

Mrs. BONO. Thank you, Mr. Chairman.

Once again, so you are taking—I don’t know what you listen to.

Let us say it is the Eagles, Hotel California, for example. You turn

that into an MP3 file, put it up on your server. It is there for anybody to come exchange with you. Can you explain to me where

there is a copyright infringement at some point, correct?

Chairman TALENT. Or you might be listening to, say, a Diamond

Rio song?

Mrs. BONO. Okay. Diamond Rio.

Mr. DUBE. It is a copyright infringement as soon as you traffic

the file, if you are not using it for personal use. The equivalent of

making a cassette of an album you want so that you can listen to

it in the car, creating an MP3 file is covered by the same end of

copyright law, but as soon as you transfer that file to someone else,

that is an act of music piracy.

Mrs. BONO. Thank you.

Mr. DUBE. Is that a sufficient explanation?

Chairman TALENT. Does anybody else have a question on

Napster?

Ms. MILLENDER-MCDONALD. Mr. Chairman, thank you very

much. I did want to—and I am kind of piggybacking my colleague

Mrs. Bono’s question as to the copyright issue. It just appeared to

have been perhaps infringement on privacy, but the privacy laws—

I suppose I would like your further explanation of that.

Mr. DUBE. Privacy infringement because people can see on my

hard drive?

Ms. MILLENDER-MCDONALD. Yeah. But I think you kind of explain because you say once you have seen what you want from the

other party then it goes through another channel and it does

not——

Mr. DUBE. It is a voluntary process. Nobody could see any files

on anybody else’s hard drive if that person themself wasn’t logged

into Napster as well at the same time.

Ms. MILLENDER-MCDONALD. It is kind of like obligatory name or

your name, and then if they so choose to move into your file it goes

to another channel?

8

Mr. DUBE. Yeah. A file can take zillions of routes on the Internet,

and so the file takes the most direct route it can from me to you.

It doesn’t go through Napster. It just zips straight over to you.

As far as the privacy issue goes, I think anybody logged into

Napster is there voluntarily. They have clicked on some sort of

agreement.

Chairman TALENT. The point is, anybody who has Napster can

log into and download quickly music of anybody else who has

Napster. So, in effect, you can get anything that way.

Go ahead. Thank you.

Mr. DUBE. Real quick, I have been handed a quote from an older

version of their website. With Napster you can locate and download

your favorite music in MP3 format, all from one convenient, easyto-use interface. Oh, and it is 100 percent free.

So a survey of our own finds that over 70 percent of students are

using Napster at least monthly. More than 19 percent said they are

using it daily.

I met one young woman who said to me that she hated dorm life,

she hated the food, she hated the noise. I said, why don’t you move

out. She said, I don’t know where I would get my music.

In that same Webnoize study, 63 percent of students said they

are listening to more music downloaded from the Internet than 1

year ago; and 23 percent said they are spending significantly less

time listening to CDs.

The question is whether Napster is killing the music industry. It

would be rash to assume that every time someone downloads an illegal music file that the recording industry has lost a sale. When

music is free, people will try a lot that they wouldn’t have otherwise. And while Napster may have enabled the climate for casual

piracy, the music industry is growing. Total revenue is up. CD

shipments are up. However, it is possible that sales and shipments

would be up even higher if it weren’t for all the Internet music piracy going on.

We know that Napster is most popular with young people. The

market share for music accounted for by consumers between the

ages of 15 and 24 has dropped considerably over the last decade.

One reason for this, music competes with games, movies, television

and the Internet itself for disposable income, and there is a lot

more media out there than ever before. This creates more volume,

takes things away from other things, and as a result the music

market has dropped for young people.

But they love Napster. We asked college students who use it

whether they would be willing to pay $15 per month to use it, and

more than 58 percent said that they would. It hints that it might

be time for the recording industry to consider the possibility of letting people pay for music not just by the song or by the album but

by the month.

Napster touts the size of its user base as its strength. They call

it the Napster community, that the software enables the sense of

community. They have 10 million users, and I don’t know if any

of them care a bit about the Napster community. I think they like

Napster because that is where the content is. Record companies

have released very little of their music on the Internet. Our economy operates on a supply-and-demand dynamic, and when supply

9

fails to come through demand creates its own supply. It is sort of

a perverse version of the notion that small businesses fill the niche

gaps left behind when there are too few sellers.

New revenue models for music like digital distribution, subscription access, personalized radio, pay-per-view webcasts are all possible, and for now there is nothing stopping independent labels or

private retailers from getting in on them, exploring them, looking

for ways to improve the value of on-line music experience and the

off-line music experience.

And it won’t be long before the most enterprising businesses on

the Internet are run by the artists themselves. It is going on now.

The Internet enables music distribution and programming that

fans will pay for. Artists that already have a following will leave

the established music label systems and strike out on their own.

Webnoize values companies like Napster because they have great

ideas and they put them in action. Just as major labels watch to

see which independent artists have wide commercial potential, they

are also watching smart young companies to see which ideas to coopt.

Thank you for the opportunity to testify. I would be happy to answer any questions that you have.

Chairman TALENT. Thank you, Ric. We will have further questions after all the witnesses have testified, and thank you for your

very informative testimony.

[Mr. Dube’s statement may be found in appendix.]

Chairman TALENT. Our next witness is Mr. Tom Silverman, who

is the founder and CEO of Tommy Boy Records of New York, New

York. Mr. Silverman.

STATEMENT OF TOM SILVERMAN, FOUNDER & CEO, TOMMY

BOY RECORDS, NEW YORK, NY

Mr. SILVERMAN. Thank you. I passed around—I guess everybody

has got a copy of my testimony, but I am not going to read my testimony. I am going to go freestyle.

Chairman TALENT. That is always preferable. Please do.

Mr. SILVERMAN. I want to tell you a little bit about myself. About 20 years ago, I got a loan of $5,000 from my parents, and I started

Tommy Boy music in my bedroom in an apartment in New York

City. I was the only employee at the time, and I didn’t know what

was going to happen, but we just had a few good breaks, and we

are still in business today, and we have about 140 employees now

and an office in London.

Chairman TALENT. Would you move the mike a little closer?

Mr. SILVERMAN. Yeah. So our company has grown to be one of

the largest, if not the largest, independently distributed label in

America. And at various times we have been involved with major

labels as well, so I have a pretty good perspective of both.

We present artists like Everlast, De La Soul, Capone and

Noreaga. We had artists like Digital Underground, House of Pain,

Queen Latifah, RuPaul, Naughty by Nature, Africa Bambaata,

Force MD and many, many others. We are in the music business

in many genres, not just rap music but also dance music, gospel

music now, and rock music, as well as we are preeminent in the

compilation business.

10

I would like to talk a little bit about what a record company

does. This is what all record companies do—independent labels,

small labels and large labels, the majors. Really, record companies

find music that they think will have a demand with consumers,

and they contract the services of the artist. Then they help the artist to make the record, in most cases. Then they market the record.

So they put up all the money to do this and to market the record;

and the marketing would include everything from radio promotion

to making videos, to giving tour support, to promoting the record

in clubs and other venues, to advertising, many, many different

ways to get exposure. And now we have added another weapon to

the arsenal of promotion, which is the Internet as another medium

to allow people to find out about the music.

All of this stuff is very expensive, and whether it is an independent label or a major label, a very small proportion of the

records that we sign or release actually make a profit for us. So the

ones that do make a profit end up having to pay for all the ones

that don’t. It is a real crapshoot.

But the difference between an independent label and a major

label, Ric started to discuss a little bit, because we have to be niche

finders. We have to find music. Especially the smaller labels—we

have to get into the music that the majors aren’t in because they

will crush us because they take all the slots and we won’t get any

exposure.

So when I started in 1981, for example, rap music was a new

thing. There were maybe only like 20 rap groups in the world. So

we had an idea to put out rap records, and there wasn’t that much

competition, and no major labels were in it. So we were able to

build our company with the growth of rap as a musical genre. We

were faster, and we were more creative than the majors, and we

weren’t afraid of doing something unknown.

The other thing that makes independent labels—you know, this

is probably true of all small businesses—is that we are undercapitalized, and we are working without a net. If we make too

many mistakes, we are out of business. There is nobody who is

going to bail us out. Forget about getting a loan, we don’t get loans.

My loan was $5,000 from my dad. He got paid back in a year because I got a lucky break, and I had a small hit record that broke

in New York within the first year. Otherwise, he wouldn’t have gotten his money back. But that is the nature of an independent label,

and it is really true today.

I have served on the board of the Association for Independent

Music for 13 years. I have been on the board of NARM, which is

the National Association of Record Merchandise. I am currently

also on the board of the RIAA as an independent label member.

I would like to mention a few facts about the music industry that

are very relevant and very few people know. In 1999 in America

there were 38,856 albums released; 31,933 of those albums came

from the independent labels. So the vast majority of the releases

came from the independent label community.

In that same year, of the records released in that year, in the

independent sector, only 257 titles that were released out of that

31,933 that they released sold over 25,000 units. And I think it is

pretty safe to say that if you didn’t sell 25,000 units probably you

11

didn’t make money on that record because it costs so much money

to make and market music. And, for example, probably 20,000 releases by the independents didn’t even sell 1,000 units; and, in fact,

industry-wide only 1.1 percent of all the releases sell over 100,000

units. That includes the majors and the indies. So these are factors

to keep in mind.

When you hear about the Backstreet Boys doing 2.4 million or

N’Sync doing 2.4 million units the first week, that is one release.

That may be 10 percent of all the record sales in that release week.

It is very top heavy, just the way it is with retail. In retail, the

top 10 accounts are 70 percent of all record sales. So it is true with

artists as well.

So you have this dichotomy between the massive artists that sell

all the records and the tens of thousands of releases that sell almost nothing to core niche markets, and the independents dominate that market. Every now and then one of those records breaks

through and becomes really big, and the majors go out and try and

snatch it up, keeping the independents at around 16 percent of the

market share for overall sales. They do only 16 percent—between

15 and 18 percent of the market share with, you know, with 80

percent or 85 percent of all of the releases that come out. So that

is a fact.

And you gave the fact that 67,000 artists have their music online. And it is pretty safe to say that 66,999 of those are artists

that probably don’t even have a record out that sold a hundred

units and that nobody’s really interested in owning. I may be

wrong about that, but somebody would have to correct me if I am.

I really believe the technology will help drive the future of our

business for the independent labels and for the major labels. We

can’t be afraid of it, but technology is really just a conduit for our

content. It is the messenger. It is not the message.

I was really disturbed when I was at my mother’s house for

Mother’s Day, and my cousin was there, and he was listening to

a CD in the car, and he was kind of holding it secretively. And he

had made this CD himself in his computer on his own CD burner.

He is 11 years old, and he had downloaded from Napster one of my

songs off of the Internet. Eleven years old. We are not talking college students here.

A CD burner which is how you can make your own CD. What

you described, yes, you can download it onto this or you can burn

your own CD and make an infinite number of copies of those CDs

and sell them or give them away to whoever you want. So the fact

that he was able to do that isn’t what disturbed me—well, I guess

it did disturb me that he could figure it out and he was into it so

fast. I thought it would take a while before it was going to get

down to the 11 year-olds, but it didn’t really take that long.

The other thing that really bothers me is I had a meeting with

my biggest artist who just sold three million albums on his last release and has a new single out, won a Grammy with Santana for

a song called, Put Your Lights On, which is coming out this week

as a single on another label. He brought his new album, which will

come out in the fall, and he played it for us, but he wouldn’t leave

the DAT, the tape of the music with us because he was afraid of

it showing up on Napster and—or anywhere on the Internet before

12

the release so that everybody would have it. Because he says routinely you can get records a month before they are even out free

online.

It is bad enough you are losing the sales, but you are also losing

the elements of surprise that, okay, Tuesday it is in the store, everybody gets excited. Well, I have had the record for a month already; I just downloaded it. That is another issue.

All of my biggest artists now—this is a new thing—refuse to give

me copies of their work in progress. They will not let anyone in the

record company, not even their A&R person, the person who makes

the record with them, hold any of the music because they are so

afraid of this music leaking out and being on there.

De La Soul gave me a copy of their CD, and the copy has three

times over every single song on their new album, property of Tom

Silverman, to make sure that if it gets out he knows where it came

from. So I can’t even listen to the music without this guy’s voice

all over it. The same thing with Capone and Noreaga. They will not

leave a copy in our office. They refuse to do that.

The combination of Napster and the piracy that is going on in

the street which can also be aided and abetted by the Internet has

made it really difficult for us to actually set up and market these

records because we can’t hear them and live with them. They have

to play them and then bring them back. So I feel for them, but it

is affecting us in a different way.

So, you know, that is where we are at right now. Those are some

issues that we are dealing with. And I am open to questions.

Chairman TALENT. Thank you. I am sure there will be a lot of

questions for you later, Mr. Silverman.

[Mr. Silverman’s statement may be found in appendix.]

Chairman TALENT. Our next witness is Peter Harter, who is the

Vice President of Global Public Policy and Standards of

EMusic.com, Redwood City, California. Peter.

STATEMENT OF PETER HARTER, VICE PRESIDENT, GLOBAL

PUBLIC POLICY & STANDARDS, EMUSIC.COM, REDWOOD

CITY, CALIFORNIA

Mr. HARTER. Thank you, Mr. Chairman and members of the

Committee. It is a pleasure to be here this morning.

First, a little bit of history about EMusic as a small business.

And I am going to describe EMusic and some of the issues that

have been raised so far this morning from my own personal point

of view as well.

I have been on the Internet since 1986, and I have used all these

file-sharing technologies to exchange information, to access information. Frankly, in college in the 1980s, I used file-sharing technology to access publications from computer servers at universities

all over the world to help me with my work on my papers I had

to write for class. So file-sharing technology is not a bad thing. It

is just how people use it may be controversial or illegal.

But, first, about EMusic, about 21⁄2 years old, originally started

as a company called GoodNoise, but changed the name, when we

bought another company, to EMusic. It was started by two people,

Gene Hoffman, who is our President and CEO; and Bob Kohn, who

is our Chairman.

13

Gene is one of those many young executives. He is now 24 years

old. When he started the company, he was 22; and EMusic is his

third company. His first company called PridNet he started in college, and within a year he sold it to a another company called Pretty Good Privacy, moved out of North Carolina to California, worked

for Pretty Good Privacy, and PGP, Pretty Good Privacy, was sold

to network associates. So after that Gene and Bob, who met at

PGP, decided to start a company in the on-line music area. This

MP3 craze was very, very popular back in 1997 and 1998.

Bob Kohn, he is a lawyer by training. He is from New York originally, and his family grew up in L.A. His father worked for Warner/Chappell Music Publishing for 25 years, and Bob was an entertainment lawyer working for a firm in L.A. That firm did work for

Liza Minnelli and Frank Sinatra. Then Bob moved north out of

Hollywood to Silicon Valley early on in the 1980s to work for software companies before anyone really knew or cared about software.

He was general counsel for a company called Borland and fought

many legal battles on copyrights and standards and really kind of

shaped the industry.

But he and his father had a joint effort. They published a book

on music licensing. It is literally 1,500 pages thick; and all the lawyers in the music industry, from the major labels to professors,

refer to this as the foundation for understanding music licensing.

So you combine Gene, who understands technology and new

trends in technology, with Bob, who understands music licensing,

you have a very powerful combination for a legal business in the

on-line music world where copyright law and Internet often collide

and people don’t understand how to apply copyright law on the

Internet.

I have been with EMusic for about a year, and in the time I have

been there we have grown dramatically. We are the largest retailer

of music online. Not many people actually try and sell music online

for a variety of reasons that have been discussed already on this

panel. But we believe as a philosophy in our small business that

if we make it easier, more convenient and, frankly, more fun and

interesting to buy music, then people won’t bother trying to hunt

down some random file and download it and it turns out not to be

the file you wanted in the first place. And piracy or free music, a

lot of college kids go after this where they put their own music on

the Internet, and there has been piracy before, and certainly the

Internet is accelerating piracy.

These are important issues. So I think as a business you work

hard enough and build up a loyal customer base, as we have, and

have a lot of great content from nearly 700 independent labels, the

small guy, you are going to make revenue.

We are actually making revenue. We are an Internet company,

and we have revenue. There is a lot of talk on Wall Street about

how Internet companies don’t have any real revenue. We have revenue from advertising because of a lot of traffic on our site but also

from the sale of music and we use the open MP3 format.

EMusic has been also a participant in something you mentioned

earlier in your opening comments, Mr. Chairman, which I want to

comment on briefly. There is this standards effort called SDMI. It

has been going on for nearly 2 years; and, frankly, it is not going

14

very far. I would not put your hopes on security unleashing on-line

music. The train has left the station.

In this industry, you have to have a good business, great content

and loyal customer base. You have to draw them in, your audience,

and we have done that in a variety of ways.

We charge a very low price for music. It is only 99 cents a track

or $8.99 an album, and if you happen to buy a few tracks and then

come back and want to buy the whole album, we will credit back

the tracks you already bought.

If your hard drive crashes—and, of course, PCs never break

down these days—because you are a customer and we have your

profile secure and protected—we protect your privacy, we have a

privacy policy and all that, we take privacy very seriously—we

have your profile, what you bought, you bought it with your credit

card, and you come back and say, hey, my computer got stolen, my

hard drive crashed, I can’t access the music I bought, we will give

it all back to you. And because we pay royalties to the rights holders, because those are actually new copies of the music, we will

repay the royalties again to the rights holders.

So everybody wins. And because there is no physical goods, we

download the music, all those costs of physical distribution and

marketing, they are removed from the business model. So we can

charge lower prices to consumers and have higher profit margins

to us and the content owners, the artists and independent labels.

So it is a fantastic business model. It has grown rapidly. We have

over 100,000 tracks for sale on our site and nearly 700 independent

record labels with us, and it is just going wonderfully. We have

about 200 employees, mostly in Redwood City, in Silicon Valley,

California. We have a large number of employees in Chicago.

We have a company called RollingStone.com which we bought

last year, and that provides some editorial content about music.

RollingStone is a wonderful brand.

We bought a company called IUMA, the Independent Underground Music Archive, that helps artists who are not commercial

become commercial. And, frankly, with our relationships with independent labels, if you are not a commercial artist but you want to

meet the independent labels which is, as Tom pointed out, actually

how you get a record released, we have that whole food chain lined

up pretty logically.

And we have offices in Los Angeles, of course; New York, of

course; people in Nashville and Austin, because that is where

music comes from; and we are looking at overseas expansion eventually as we grow.

But we are a small business, started out of Gene’s living room

in his house, and it is just going really well.

As for Napster and piracy, we have been watching the lawsuit

for some time. Bob Kohn, our Chairman, has made statements in

the press about the litigation but more so as a music licensing expert.

The company is not taking an official position because it is difficult for companies to take positions on matters of litigation when

they are not involved. It is something you don’t want to say publicly. So I am going to be a bit guarded in my remarks.

15

But if you look at what is happening in the industry, people often say that the music industry is actually a $100 billion industry

trapped inside a $40 billion straitjacket. It is because of the distribution. The traditional business model like the five major record

labels suffocates the release of music. The independents, as Tom

pointed out, release 80 to 85 percent of the content but only garner

between 15 and 18 percent of the revenue. And, actually, I have

figures that say they garner 25 percent of the revenue, but you get

the point. There is a huge imbalance.

And surely the majors have more revenue because they have the

big pop stars that are here today and gone tomorrow, like Britney

Spears. She is kind of the poster child for what characterizes the

major label. Now I personally don’t have anything against Britney

Spears, but just in the industry circle she is often held up as the

example of what the majors bring to the marketplace.

The independent record labels, they bring new genres, they create new markets, they get the small artists out to the market. And

the Internet completely goes around the major record labels. Now,

of course, with SDMI and other tactics the majors are trying to regain control over the Net. But the train has left the station, and

we have to focus on the issue of piracy. Because if the artist does

not get paid, why would they create music?

EMusic pays all the royalties. It is all on the computer. So if anybody wants to come look and say, hey, I didn’t get paid; why are

you holding my money back from me? We will show them this is

how many charts got downloaded, and there is the check; it went

to your bank account.

So we offer a very good way to open up the industry and its accounting practices to show that we pay the publishers and the

rights holders; and we are trying to automate it, pay more frequently than once a year or once every 2 years. Pay it monthly,

maybe even daily, if we can scale it fast enough.

So a lot of great things about selling music legally in open formats on Internet.

Another thing about MP3 and why it is so popular is the format

is easy to use. Sure, the sound quality can be better, but, frankly,

if you are going to download music into a little portable device—

not the same device that my colleague has—you are running down

the street, there are buses going by, you are not going to care about

having 100 percent quality music. It is good enough, it is fast, it

is fun, it is convenient.

Chairman TALENT. That is a question I did want to clarify and

I almost asked you, Ric, because I was told that the quality is less

than CD quality but it is good enough for practical purposes. Is

that a consensus here?

Mr. HARTER. I don’t think it is that black and white. We encode

our music files in MP3 at the highest quality, it is something called

120 fitness, and there is no point going into what that means.

The fact is, when you take a music file which is a very large file

and compress it so you can store it and transmit it conveniently,

what is happening is you are taking out the ones and zeroes—you

are taking out the sounds the human ear cannot hear, and that

may diminish the higher end music that—classical music has all

these nuances, and some genres may suffer, but I think technology

16

is changing so rapidly and the encoders are getting better, it is getting near CD quality, if not there already, and we encode it in the

highest quality encoders right now. So our sound quality is very,

very good at EMusic.

In closing, Mr. Chairman, I brought these props along.

Elvis Costello is one of our artists. All his music, except for some

recent stuff, is on our site. This is an album he put out in 1977,

Elvis Costello’s My Aim is True; and I have got this thing in here.

I don’t want to damage it. My friend gave it to me.

Remember these? I used to have 1,000 of these things. When I

moved from Pennsylvania to California, I couldn’t lug all these

things across the country, and that was 5, 6 years ago, so I gave

them away or sold them. I have a few as mementos. I never play

them anymore.

But we have gone from round plastic—and, of course, a CD is

round plastic. I won’t bother showing that. People know what a CD

is.

Now, in these devices or on your computer like Dwayne’s computer up there, you have silicon. It is square, square music. This

is a portable memory device. It is a chip that contains music. So

as if you were to take an album and make copies of the songs you

like on to your audio cassettes for personal, fair use, of course and

you were to play the cassette in your Walkman to go running—we

have all done that—or just to play the songs you want, this is the

digital progression of that.

People make their own compilations. The thing about silicon it

puts the power into the hand of the artists and the consumers. The

major record labels, when vinyl was king, they controlled, but control is gone from the vinyl in the majors, and control is shifting to

the artists and consumers and to silicon. It is going from southern

California, of Hollywood, to northern California, Silicon Valley.

Thank you.

Chairman TALENT. Thank you, Peter.

[Mr. Harter’s statement may be found in appendix.]

Chairman TALENT. Our final witness is one of the most powerful

advocates for cutting-edge use of the Internet to market music. He

is Chuck D, founder of Rapstation.com.

Chuck, thank you for your patience; and please proceed.

STATEMENT OF CHUCK D, FOUNDER, RAPSTATION.COM

CHUCK D. I thank you, Mr. Talent, and it is coincident because

I have been regarded as talent in the industry, it has taken advantage of talent.

Chairman TALENT. I wish I were as highly regarded in my line

of work. Go ahead.

CHUCK D. I would also ask that these doors be closed, because,

you know, that is kind of distracting, and beepers and cellies be

turned off, please.

First of all——

Chairman TALENT. If the members of Congress wish to come in,

I have to let them in, though.

Ms. MILLENDER-MCDONALD. Do we have to?

CHUCK D. I feel like Reggie Miller. I have got this shot clock in

front of me.

17

But, first of all, I would like to say I admire the comments and

facts and figures and respect everything that Mr. Dube and Mr.

Harter has said in their business models, so I am not going to repeat many of the same things that they said; and in all due respect

to Tommy Silverman, who I have worked with before, great guy,

and he also has a fantastic business model as an independent

record company, all due respect; but the major corporations have

caused the conditions that made it difficult for independent companies and artistry to compete in the game of music.

We at Rapstation.com, and I have been involved in downloadable

distribution for about 5 years as a saving grace for my artistry,

have used downloadable digital distribution to microfocus upon a

niche of rap music that I have been involved with. It has helped

build a world community through communication, cultural exchange, in 40 countries I deal with on a regular—and I take advantage of rap’s worldwide experience, and I just think the corporate

imbalances of the images making rap music and hip hop, like jail,

gun ganging, drug culture is sort of like balanced out with everybody participating into the reflecting imagery.

At Rapstation.com I also engage with thousands of artists to

equally market their music without complaint because they control

and own their own destiny. So I choose artistry over industry any

day of the week.

Also, we also have to realize technology whips technology’s ass

every time. The 20th century tree that was so fruitful, you might

not be able to pick from so easily. Napster or downloadable distribution, like we would call it, file sharing, is leading one million

MP3 march. It trades music like baseball cards, and digital distribution and file sharing is like those asteroids that wiped out all

the dinosaurs. And in this case the dinosaurs are the big four,

Sony, BMG, Time Warner and Universal.

Now these companies, which will soon probably be three any

week now, have always prided itself in the excitement of the music

industry and the fans. Well, Napster and downloadable distribution

is the biggest excitement since disco, rap and the Beatles. It is like

new radio. And it is not just free music, but it is a watchdog method for one site industrial rip-off. The chickens have finally come

home to roost.

I think if people look at the artificial price hiking of CDs, something they made for as little as 80 cents and then charged the consumers, in cahoots with retail, for as high as $17, that has never

been explained to the public up until recently. They have taken advantage of the artist and the public, squeezing out the small entrepreneur with a lawyer-accountant mentality, and now the industry

is now begging government for this illusion for their inconvenience.

I think the Federal Trade Commission, you know, also found out

the record companies were actually hiking their prices on the public; and they said, okay, how do you feel as an artist?

First of all, I think the system had to be eradicated for everybody

to participate and start from scratch. I mean, for the first time now

you have who was deemed as the consumer in the audience, now

they are participating in the music business. And how do we get

paid? Well, technology will be there again, but the select process

and the dominance will be eradicated, and now things will truly be

18

shared. A business model will come up out of this in the new century. It won’t destroy the old companies, but it will reconfigure

their ways.

Piracy, well, the talk of the label ’s bottom line is always the

case, and that is why they are screaming. To protect artists, that

is some BS.

You know, they come up with these promo copies and they press

up 5,000 or 10,000 and, you know, in many of the cases they go

to waste. And the downloadable distribution, you have something

that is called on demand, and I know that there is an artist graveyard out there of artists, especially black artists, back since Bessie

Smith in 1923, that have much more complaints than

downloadable distribution. Their complaints happen to be with the

one-sided contracts.

I have signed a contract that said worldwide rights, and they

couldn’t sell the records in Africa, South America or Asia. So why

am I signing something that says worldwide rights?

Then they say, well, the world and the universe. So that means

if I get to Venus, they got the right to sell my records? So they

want to control cyberspace, too, without knowing what it is.

I would bet, because of the corporate quagmire, more than 50

percent of all artistry is just stuck on shelves or never comes out

in the public anyway. So I think it is very imperative for artists

to adapt to the technology, to try to avoid this one-sided monopoly,

because I do think it is collusion, for companies now have to share

the marketplace; and I look forward to one million artists and one

million labels all on the Internet.

Now, RIAA, they only answer to people, you know, who are usually former lawyers and accountants who have assumed executive

jobs, taking in as high as eight-figure salaries. I have never seen

eight figures, but to look at a company’s president who is using

stockholders’ money and pulling in $18 million for a year, when he

gets fired, as an artist I have got a beef. So, you know, if it ain’t

about the artist, the industry damn sure ain’t caring about the fans

either, because why would they charge them $17 for something

that they make for 79 cents? So I think this organizes and creates

a new infrastructure.

New templates will be created. Yes, 95 percent of all music will

be free, but it has always been 5 percent that have driven it. And

now it is a global entertainment business. And I think the biggest

beef, just like Mr. Harter said, is that now the entertainment business—and we are not just talking records companies, we are talking movie industry and television—the entertainment business is

morphing into the entertain net business. And now you have technology companies that will actually push the button, as opposed to

these ex-lawyers and accountants that just happen to push pencils

and somehow fall into a 9 million a year salary there. I still don’t

know what they got paid for.

So will I think it will hurt actual sales? Nope. They said the

same thing back in 1967 with FM radio. They said the same thing

with the advent of the cassette recorder. The same beefs popped

up. People can tape, but they will still go to Blockbuster. If they

can get HBO and Cinemax and Showtime and they can tape on

their VCR, what makes them go to Blockbuster? Blockbuster deVerDate 11-MAY-2000 09:07 Mar 22, 2001 Jkt 071190 PO 00000 Frm 00022 Fmt 6633 Sfmt 6602 E:\HEARINGS\67148 pfrm09 PsN: 67148
19

pends on them people bringing back their videos 8 days late. That

is how they make their money.

So these companies will still be around. I think the laziness of

the American public will also keep the entertainment or the entertain net business at an all-time high. And this new digital distribution will be exposure, and now, truly, we have global exposure.

So, I mean, I am here testifying in the United States of America

in front of Congress, but the Island of Dominica has nothing to do

with this government and, therefore, they will get the music, too,

and then all of a sudden you will have Asia, Africa and South

America be able to get the music.

So I think it is imperative now that the artists also understand

that they can go to these places and become business people of

their own or set up their own business teams instead of being

locked outside the door because they don’t happen to be in the offices of New York, L.A. or Nashville. So now the hands are all in

the pot together. There is a million hands in the pot, and that is

why you hear a lot of screaming.

I am not screaming. I had ties with Universal, Universal, Edgar

B and the Universal Crew. And I had a lawyer tell me, well,

Chuck, you sold millions of records here, but you will never see a

dime because you owe us. And I said, like hell I do.

So you think I am caring about them? No. I am doing better in

the digital system selling 10 copies, even if 100 people or 1,000 or

1,000,000 people get my music for free. If I know 1,000 that is coming my way, I will deal with that as opposed to somebody being

shady.

Ms. MILLENDER-MCDONALD. Mr. Chairman.

Chairman TALENT. I think the witness can continue if he wants

to, as long as he would like to.

CHUCK D. I have got to go to London tomorrow. I really have

nothing else to say.

Ms. MILLENDER-MCDONALD. I would like to ask Mr. Chuck D,

‘‘how do you really feel?’’

CHUCK D. Well, I know that, you know, here in Congress, I know

you have many a stuffy day. I am seeing C–SPAN many a day

where the cameraman was like—so why not bring a little bit of the

entertain net business in the House?

Chairman TALENT. We were counting on it. You delivered as always. Thank you so much.

[Chuck D’s statement may be found in appendix.]

Chairman TALENT. We will go to some questions. I have a couple,

and then I want to defer to members who have been so patient.

I don’t think anybody referred to something that is going on in

the business that again is important for background; and maybe,

Ric, you can comment on this. We talked before about Napster.

And for those members who came in late, Napster is a software

program that millions of people have and through which you can

access other people’s reservoir of music. So if you want a song you

can go on Napster and download it from somebody else’s file without paying for it. This is at least the concern.

There is a lawsuit going on now—Ric, would you just tell us

about that, please—against Napster.

20

Mr. DUBE. Dealing with three lawsuits right now. One from the

Recording Industry Association of America for contributor copyright

infringement and vicarious copyright infringement, and then two

artists have sued the company as well, Metallica and Dr. Dre.

Chairman TALENT. So there is an attempt to control this—since

I think most people recognize you can’t control it through the consumers—to control it through the people who are selling the software.

One question I had, is any of that going to be effective? I think

somebody referred to the fact that there is going to be no way to

have security kind of blocks or to control the use of this anyway,

even if legally Congress tried to do it or the courts tried to do it.

I think, Peter, you talked about that. Maybe, Tom, you can comment, or anyone who wants to. Because all this discussion about

whether we should or shouldn’t do this is, in effect, moot because

it is going to happen whether it is legal or illegal?

Mr. SILVERMAN. I think it is important to recognize that copyrights have value and that they are proprietary. Because if you lose

that, I could go out and take the software from Napster and start

Tomster tomorrow and get my $15 million from Wall Street, which

is what happened like last week or this week with Napster, to finance another kind of theft operation, you know, that frees up

somebody else. And then somebody will steal my thing because

nothing is protected.

I mean, this country is really based, especially small businesses,

on ideas, great ideas. That is all we have, because we don’t have

money.

When I started my company, I had an idea. When I heard Afrika

Bambaata DJ and how he put this stuff together, I said, man,

let’s—make a record. I didn’t know what I was doing. He goes, all

right, why not? And that is how the company really started.

It was just an idea, and that is intellectual property. If there is

no way to control it, movies, books, television, nothing creative has

any value anymore. You know, software is all up for grabs, and

why would anybody be creative then? It becomes a Nation of

thieves, and it is almost like a riot. Let us go loot the Pathmark.

Chairman TALENT. Chuck, tell us why anyone would be creative

under those?

CHUCK D. I think you have to adapt to technology, and none of

those really—except for books, none of those things meant anything

in the previous century. So what we are talking about, intellectual

property and certain laws, existed within the paradigm I guess of

the 20th century.

Now in the 21st century it would take some kind of adaptation

to whatever is going to come along, and a whole new set of rules

may be set up, but as we go along we will figure those things out,

but it is old hat.

What happened last century, like I said, was a whole different

type of tree. And now as we go into the next century, I look at it

as an artist, it is almost like being an outfielder. Now it is raining

on the outfield grass, but the umpire says play ball anyway. I know

I can’t haul tail over in the corner trying to catch a fly ball if the

field is wet, so I have got to figure out how to run on that wet grass

and make do with what is there.

21

So my whole thing is I know how to adapt. How a major super

dinosaur corporation is going to adapt—I don’t care about Time

Warner’s bottom line. I don’t care about Sony, BMG or Universal’s

bottom line. I just don’t.

To me, if I make something for $10 and $20 comes in, boom, now

I can get a fish sandwich and a peach drink. But, you know, the

way those cats have swindled the public on, as far as, you know,

stockholders’ money and how they all went in there and raided

those companies and pulled all the money out and now they are

crying and saying, well, they are protecting the artist, that is just

a crock of BS.

They just should say, ‘‘hey, you know we want to become richer

than we were in the last century; we want to get paid more for

than we did in the last century. And this is why it is bothering us.’’ Because they have made it in the industry, they created the auspices of creating artists that are disposable every year around and

throwing them out so they won’t renegotiate. So they say the artists never renegotiate, but the executive salaries go up.

And I say that Tommy is an exception to the rule because he is

an independent owner of a company. Yes, he has dealings with

those guys, but he is not one of those guys. You don’t see one of

those guys here.

You know, I would like to see Edgar Bronfman, Jr., here or a

head from Time Warner or a head from Sony or a head from BMG,

and I would torch them. But I have got respect for Tom because

I know he is dealing with elements that have got to keep him

afloat because he has been torched by the same climate that these

guys have concocted.

Chairman TALENT. I wish we had them here. Boy, it would be

fun.

And you will just respond as you want, but also please include

the answer to this. My interpretation is that what is happening

here is the technology may make the middleman unnecessary, and

if that is the case, as difficult as that is for the middleman or the

middleperson, isn’t that just something that a lot of mom and pop

grocery stores aren’t in business anymore because of Wal-Mart either?

Mr. DUBE. Mr. Talent, copyright laws are incredibly important,

but it would be tragic if an industry used copyright law to ignore

the demand of the public. You have supply and demand. It is called

demand. It is not, pretty please, can we have downloadable music?

They are saying, by any means necessary, this is what we want.

Now the way things are going, it would enable record labels to

sell direct to the public, but that is not their core competency.

Their core competency is building artists, marketing them, production, distribution. That is what they are good at. There is a whole

set of middlemen that are good at getting the music to people, helping people connect with the music that they have never heard of

that they will love, and so it is an evolution that everybody has to

go through. It is no different from a century ago, horse raisers

going out of business unless they wanted to turn their factories

into car shops.

Chairman TALENT. I promise you, Tom, if you want to comment,

go ahead.

22

Mr. SILVERMAN. There is two ways to look at it. There is the

issue about artists/labels, be they big or be they small, losing revenue, you know, and that is artists and labels. So that, for example, someone yesterday called me and said, ‘‘I hear you are going

to give testimony tomorrow, I want you to know about this artist

called The Magnetic Field. They are a small artist, but they have

a devout, college-oriented audience. Their music is a little bit left

field, but they have like a triple box set, triple album box set out

now that has sold 30,000 units. That is an enormous number, and

they are a tiny, tiny, tiny independent label that probably does a

tiny amount of business. And this guy Stephen Merritt, who is the

head guy in the group, is very, very concerned because he thinks

he could lose half of his business, because that is exactly who the

core of the Napster world is, college kids, really.’’ So that is one argument.

The other argument is, you know, what it costs to make a record.

And if it is of interest to anybody I could break it down, because

Chuck oversimplifies.

It is not 75 cents for a piece of plastic. It is not at all. I did talk

about it a little bit, but, you know, it is $2 to the artist and the

publishers, it is $1 for manufacturing, and it is $2 for marketing,

and it is $2 for distribution, and it is $2 against the massive

overheads or the small overheads of the labels, you know. And all

that equals $10, and the $10 is what they sell it to the distributor

or I mean the one-stops or the retailers for. And then they mark

that record up from the $10 to whatever they charge, $15, $18,

whatever, and that is what the retailers make.

If there is this disintermediation that you are talking about, who

is going to be disintermediated? Will it be the retailer? Will it be

the record company? Will it be a little of both? I don’t know, and

time will work that out.

I am trying to find a new way to look at the entire record business now and have a pioneer-like leadership role in changing the

whole model between artists and labels. Because Chuck is pointing

out things that in the new age are more and more clear that they

don’t work.

We have a model that has a percentage in there for breakage of

when records were 78s, and they used to break all the time. It is

still in the contract. He is totally right about that stuff, and I am

not down with that. It is just what the tradition was, so that is

what we do.

But I think now we are at a crossroads. It is a time to re-examine our relationship with an artist. Because an artist will always

need a partner to finance their career, especially at the beginning

in terms of how are they going to get exposure. Because it is all

about mass impressions. Television, radio, movies, whatever, is

mass impression, secondary college radio, college touring, press and

the Internet. At some point, the Internet might be a massive impression provider like TV might be and like cable has become, but

right now it is all still really radio and TV specific.

Chairman TALENT. If you are not selling the exclusive right to

own that artwork because it is no longer possible to protect that

exclusive right or because we choose no longer to protect it, then

23

what are you going to be selling? What is it you can make money

off of?

Mr. SILVERMAN. No one is going to be able to invest in breaking

Public Enemy and no one can pay Bill Adler to publicize it.

CHUCK D. Those days are over, Tom. Them days are over.

You are going to have a million artists out there. Technology has

allowed many people to have these home studios where they are

making record-ready material, and there is not enough room for

the major or independent companies that are your size to actually

sign everybody. But they are going to actually have all their art out

there, and those areas on the Internet are going—you are going to

see and more and more radio stations appear on the Internet, television stations appear on the Internet in a short amount of time.

You are talking about radio station screaming. Look at an old

network like CBS. They are going to be screaming because the attention span—as far as everybody going elsewhere for entertainment, nobody’s going to visit CBS. I mean, they treat it like a goldfish bowl now.

What I am saying is, you are going to have a massive—and it

is not just going to be national. You are going to have a massive

international pot of artistry, as many as 10 million artists who

made their material in their basements. And now, you know, the

majors are going to try to say, well, we don’t want that little kid

from Ohio to actually outshine us, but we can’t purchase

everybody’s copyrighted material. We are going to have to figure

something else out.

Mr. SILVERMAN. They would just wave money in front of them

like they always do.

CHUCK D. But they can’t wave money in front of everybody.

Chairman TALENT. What value are you going to add to this artwork since you are not going to be able to protect the exclusive

right—what are you going to offer the consumer that is going to

make them go to you, the legitimate business? Even those words

are going to go out. It is going to go to you instead of somebody

else. How are you going to make money? I guess that is what I am

asking.

Mr. HARTER. I think that is the big question. Internet business

models offering high-quality sound recordings on-line at a convenient, all-one-stop-shopping site, where, you know, you go there and

you don’t have to hunt around for hours on end.

Napster is interesting in that its library of music is only as big

as the number of people who are logged on at the time that you

are on. So you can be on Napster one day and you find the track

you want, but, hey, I have got to run out and do something and

come back, you can’t find it again. That is not the same easy, fun

experience that consumers enjoy by going to a commercial retailer

where the music is there, its quality is not a fraudulent copy.

Artists who are not commercially an optimal label, their music

tracks are on the Net with famous names of the song, inducing

somebody to download in the hopes they will listen to it and then

go and track down that real music. So you think you are

downloading the U2 song, Where the Streets Have No Name, and

it is some thrash metal band, and that is not what you are looking

for.

24

Mr. SILVERMAN. Or you didn’t pay so you got your money’s

worth.

Mr. HARTER. That is a very good point, too, if you didn’t buy it

from a legal site.

What I will say about Napster, they are start up, they are a

small business, they have made some tactical errors in their litigation in how they structured their business. I am not sure how sophisticated they are, but there are a lot of interesting relics in Silicon Valley.

There was a company in 1995 called Point Cast. Anybody remember Point Cast? The start up that was pushing content to you,

as opposed to you going out and getting content. It would push content to you, and it was so popular that Murdoch was going to pay

almost a half billion dollars for it, but Point Cast wanted more

money. I think what happened to Point Cast, their executives left,

they didn’t make any revenue, and it was sold to somebody else for $10 million, and that company is in trouble now, too. So Napster

could be the great new business or it could be the next Point Cast.

I think a lot of things in Silicon Valley depend upon who you

hire, how sophisticated the management is, who your partners are.

And if Napster is going to be a player in the on-line music area

they have to have good relations with artists. And, frankly, if they

are not paying out royalties to artists, besides maybe some promotion, I frankly as a businessperson don’t see how they are going

to provide a competitive advantage to artists.

Artists can go on-line like Chuck D right now and do their own

thing, or maybe the majors will reform themselves and be more

competitive, but I think Napster is going to be one of these end

notes like Point Cast in the industry. There are a lot of factors at

play here; and, as Tom said, let us wait for time to play things out.

Chairman TALENT. Chuck, you want to make a comment? And

when you do—because I think it is a fair point Tom made. You are

so big in the business that you can do a different business model

and you are going to still do okay and you may do better. What

about the new artist trying to get a toehold, needs to make some

money off the first song they get that people really want to buy and

then can’t do it because it is being pirated?

CHUCK D. Number one, I am telling every artist to be realistic

and start from the bottom up. You get fans one by one. And also

you figure out ancillary areas. I have been involved in the Silicon

Valley areas as far as entertainment is concerned for the last I

guess 4 to 5 years, and just recently we have designed a model

with a few companies and specifically one unnamed company that

has come up with a signature MP3 format which still would allow

the public to get it for free but still would generate income to the

artist and to the company.

I am not going to give that in front of Congress today because

I am not the president of that company, but, you know, I mean I

do work on this as an artist, and as an artist I have to explain a

way that artists can eventually get paid. But, number one, I would

like to see artists get into the game. See, the music business is

probably choosing 2 percent of the artistry that is out there. So

what does that mean for the other 98 percent, that they can’t participate?

25

At least in sports you have a high school kid play on the school

basketball team. There is no infrastructure in music at all. It just

happens to be there is this big company, I have got money, I see

something I like, and I am going to pick you, and I choose you. So

for the first time a structure can be built where, if the companies

are at the top and they have the top dollar, they can see a level

of recruitment rise to the top. So this is something where the doors

are open for them to participate, as opposed to being on the outside

waiting for somebody to anoint them or select them.

And I think, you know, I have—I think we have about 1,200 artists on Rapstation.

John Hee, if he is still here, and you know, he has no complaints.

He is trying to—he is in control of his destiny, and he is looking

upwards.

Nobody wants to see the big guys destroy those companies, but

they want to be able to see a fair game out there. So I think what

this has done has leveled out the playing field where it is a fair

game and artists can at least look forward to areas of business like

joint ventures instead of one-sidedness. Hey, you get 10 percent,

and they will say—I used to ask the question, why would I get 10

percent on my contract? And a lawyer told me, well, because nine

out of every 10 artists fail, Chuck. That is why you get 10 percent.

I said, what has that got to do with me? I am successful.

So, you know, you will see a change in the rules this century,

and I don’t think you will see anything go away. You will just see

a lot of adaptation.

Chairman TALENT. I recognize the gentlelady from New York. I

appreciate the Committee’s patience.

Ms. VELA ́ ZQUEZ. Chuck, can you give me an example of any recording artist who has successfully marketed themselves through

the Internet without a label behind them?

CHUCK D. Well, first of all, if I am going to talk about myself,

and I used to be on the other side, it wasn’t just through records

or music. I had like the first full downloadable album ever last

year, and the whole key is I made the record for nothing.

Mr. SILVERMAN. I think she means from scratch, a new artist.

CHUCK D. I had artists along with me who made money off their

materials and off their exposure by me putting them on tour in different countries around the world. They weren’t able to do that before. On Rapstation.com we have 1,200 artists who are finding

ways to expose their art in different area where they are finding

ancillary areas to actually make money.

Well, money comes from—okay, I have a copyright, and I am

going to stay at home and make sure that this record goes out

there and just makes me money. I think that template is over with.

I think now it is up to the artist to find nine or 10 different ways

and say, okay, I have got this one song. Hey, Tommy Boy, can I

actually get this one song on that compilation so that you can sell

out there in the marketplace while I have made 30 other songs and

it is doing its other work or whatever or what might not sell?

So you will see a new paradigm of artistry come about this. You

won’t see the lazy artist anymore, Tom, the lazy artist who wants

to stay home and not work. It is over, because you have a million

artists out there.

26

You have artists like John Hee, who moved here from Cleveland,

who took—he took advantage of the whole Ohio market, moved

here to D.C., is now taking advantage of this whole market here

and actually getting his music around. He is a true Internet artist

right back there. And he wants to go up, but in the past he couldn’t

even get in the music game. He would have to send a demo. And

demos, you know, 95 times out of 96 times will sit up in the office

and never would get listened to, and he would have a hard time

getting in the game from Cleveland.

Mr. SILVERMAN. But the answer to her question really is that no

artist has broken from the Internet without assistance of another

person or other exposure from somewhere else.

CHUCK D. That will come, because what you are going to have

is more exposed areas.

Ms. VELA ́ ZQUEZ. But to answer my question, it hasn’t happened?

Mr. SILVERMAN. Hasn’t happened yet.

Mr. DUBE. MP3.com claims to have a couple of artists that make

a living selling CDs through that site, maybe one or two. They are

not household names, but they are making disks in a way that you

don’t have to sell very many to break even and to make money

from it.

CHUCK D. You got people that sell a million records, but it takes them $7 to $8 million to sell a million records, and they are not

making a profit. So, I mean, how much, you know, how does that

idea work?

I mean, increasingly—what got me out of the record business in

this old model is the fact that, you know, I would have a record

and then they would tell me that, ‘‘Chuck, it is going to cost you about $750,000 in order to get the record played on radio.’’ And I

would say, ‘‘well, I have got a good record.’’ You know, I have got

a good record regardless, so why have I got to go through that political red tape to get my record played? It sounds like a whole

bunch of hogwash to me. I want to create something that destroys

radio. You know, if they are going to red tape me out——

And the same thing with television. If you don’t have a $250,000

to $400,000 video, you can’t get your video seen on MTV. So what

does that do to the small business person? That is not right.

Ms. VELA ́ ZQUEZ. You answered my question. Thank you.

Mr. Silverman, there has been occasion when I have purchased

the same music in several formats—CD, cassettes and albums; and

I assumed that the artist is receiving a royalty as a result of that.

In these instances, the artist has received a royalty several times

over as a direct result of the technology enhancements. My question is, is MP3 technology driving the music industry or is the industry driving technology? In other words, has the music industry

in some small way helped create its own Frankenstein in Napster

through the ability of users to obtain free music?

Mr. SILVERMAN. Well, it is a complicated question. Because when

CD came out, vinyl and cassettes would be replaced, so people

would rebuy the records that they already owned, and so there was

sort of a free ride for record companies. For a while, that helped

them. Besides selling the new music they were selling the old stuff

over again. That has stopped now, and that is one of the reasons

for the lethargy in the record business now.

27

Could this be the same thing? Yeah. If a device comes out that

I could put 12,000 songs on tomorrow and an easy way to download

them for a reasonable amount of money comes out, I could do two

things. I could take all my CDs and put them in my computer and

spend 6 months copying them all into the hard drive or whatever

on something that is the size of that little Walkman thing, and I

will carry that around with me and have every song I like that I

have ever had, that I have ever liked with me in the car, when I

am jogging or at home in a thing the size of a Walkman. I think

that is a beautiful thing. Do I want to rebuy all my music? If it

is easier, I think people do what is easier if the price is reasonable.

So there may be a chance for the replacement again of CD collections. By just pressing a few buttons and saying I want these, you

wake up in the morning, they are all downloaded. And they are

also filed with names and artists’ names so that whenever the song

comes up they are that way, and I can program them at a party

so I can get Yo! Bum Rush the Show and then I can have Planet

Rock right after it. So I can have a jukebox.

The thing has all this programming capability that you don’t

really have even with CDs, but for 10,000 songs, we are only a few

years away from that. So, you know, it might be that way. Some

people say we are going to not own music at all anymore, we are

just going to have cell phones that we plug—— You know, in Sweden, they are working on this model. They are

calling it WAP, W–A–P. Because other technology that is coming,

where you just put your headphones into your thing and some

wireless system gives you the song you want to hear whenever you

want to hear it. So I want to hear this song and every time I play

it, it costs me a quarter, just like a jukebox, or 50 cents. I will just

listen to whatever I want when I want it. If it is the Delphonics

or if it is a record coming out tomorrow, I can just listen to it for

the same price or it might be multiple prices. I don’t know.

All we know is that nothing is going to be the same. It is the

most exciting time in the history of the record business, I think,

certainly in the 23 years that I have been in it. So I am really excited, and I see that it is a possible opportunity, but the opportunity only exists if the copyright can be controlled by the artist.

And the artist’s partner is the record company, and I don’t want

to talk about what the nature of that partnership is because that

is a whole other——

CHUCK D. Tommy, you are honorable, like I said. It is not like

you are Hillary here or the rest of the record companies, because

they would get beat down.

Chairman TALENT. Chuck, given the venue, you ought to make

clear which Hillary you are referring to.

Ms. MILLENDER-MCDONALD. Thank you so much, Mr. Chairman.

CHUCK D. Well, not the one that is running for Senate, but you

know—and I am a good friend of Hillary Rosen. It is just that you

said—you are protecting cats that really, you know, look at you as

having a job, you know. You are protecting their interests, and

their interests—you know, and I am not saying the guys in the

record companies are shady or bad guys. I am just saying this has

been a one-sided system over the last umpteen amount of years,

and now all of a sudden the audience or the consumer has gotten

28

to the technology first before the industry. Now the industry is begging government to help them out. You know, did the consumers

beg government to help them out when the industry was high-pricing them?

So I mean it is the laws of nature that have just balanced out.

It is like the guy that walks to the corner, and he has this gigantic

bag of M&Ms, and he dishes them out one by one, here, here, here,

and this guy—— Ms. VELA ́ ZQUEZ. Mr. Chairman, I think I have consumed my 5

minutes.

CHUCK D [continuing]. The bag breaks all of a sudden, and there

are M&Ms all over the corner. It is hard to tell them, no, don’t pick

that M&M up, don’t pick that up. It is like it is all over the street.

Chairman TALENT. Is the gentlelady finished?

Ms. VELA ́ ZQUEZ. Yes.

Chairman TALENT. All right.

Next, I will recognize another gentlelady from New York, Mrs.

Kelly.

Mrs. KELLY. Thank you, Mr. Chairman.

You know, with the Internet, e-commerce explosion, this Congress has had to deal with lots of issues of security and privacy and

taxation and infrastructure development. We are sitting here struggling with a lot of issues on not just your field but many fields, and

I would like to ask each of you to answer just one question for me.

If you could write legislation that would affect and protect small

music labels and entrepreneurs, how would you write it? What

would you do to help protect yourselves?

CHUCK D. First, I would like to be able to say that everyone

would have the opportunity to become a small record label.

Mr. SILVERMAN. You don’t need legislation for that. They do have

the opportunity.

CHUCK D. Now they do.

Mrs. KELLY. What would you do to protect the small record labels, the artists?

Mr. SILVERMAN. First of all, I think that it is possible that the

judiciary can deal with the issue based on the laws that are currently on the book. If new legislation were necessary, you know, it

would be hard to write it that would protect only the small business, but you would want a level playing field for sure so that no

economy of scale would give an unfair disadvantage in the creative

process to somebody who had more money which to some extent is

the case right now.

For example, you know, because of economies of scale, those four

majors own slots on radio stations and thus on the chart. I can’t

break in and I can’t get my record that is worthy of getting played

because I don’t have the flow.

Chairman TALENT. Explain what slots—you referred to that several times.

Mr. SILVERMAN. Radio’s top 40 radio station plays 40 records.

They play in the top 10 those records are getting played 50 times

a week or more. If you look at every radio station in the country,

the top 10 records, 99 percent of their records they are playing on

their entire play list are major label records. They are not from this

31,000 selection. They are from the 7,000 selection.

29

Part of the reason is the big companies have, you know, so much

flow of product at such a high level and they are spending so much

money that they have special relationships with independent promoters, they have special relationships with the radio stations

themselves in terms of how much advertising that they can spend.

So the cream doesn’t necessarily get to rise to the top.

I am saying the same thing that Chuck has been saying, because

an independent label and an artist are so close in what our concerns are. And as I have grown as a label I can see it from the major’s perspective, too, but I have always fought for systems that will

give us a level playing field.

I don’t believe an independent label has the same shot to get a

record played on the radio that a major label does because they

have a guy who goes into every station every week and knows the

guy and buys presents for his kids. We only go maybe twice a year.

And, you know, we have to do it over the phone because we only

have a few people in the field and we don’t have one in every market like the big companies do. So that is an economy of scale, for

example, where it shuts out things.

We actually haven’t had that problem at MTV, and we certainly

don’t have that problem at BET. So on the video side we don’t have

that problem, but we find that problem is incredibly insidious at

both black radio and pop radio.

Mrs. KELLY. Mr. Silverman, if I understand you correctly, you

implied by your testimony just now that you feel we should let the

lawsuits play out.

Mr. SILVERMAN. Yes.

Mrs. KELLY. That you feel that the laws that we have are on the

books, that should be enforced, they are adequate enough, and you

would not willingly go into this and rewrite law. Is that what I understood you to say?

Mr. SILVERMAN. Yes. I think that would add another level of confusion. I think the consumer and businesses are already confused.

You know, the dust has to settle. Like Chuck said, no one knows

what’s going to happen next.

So if we wrote laws now they probably wouldn’t be sufficient in

2 years because we don’t know how it is going to shake out. We

don’t know if people are going to want this or they are going to

want it through their cell phone. There is a hundred ways we

might get digital music. Like you said with Point Cast, a million

things are going to happen. There are way too many variables to

be able to write laws. We have to wait until there is more consistence and we can see how it is going to play out.

I think the only thing that is important is that Congress has to

understand that intellectual properties have to be protected because it is probably the biggest—it is the biggest export of this

country; and we cannot condone cultural piracy, which is a

Napster, Gnutella or whatever kind of a model. That is a model

that gives no credence to the concept that an artist or an artist and

its partner, the label, could possibly own a copyright, and I think

that is the one thing—it is just clarity that is necessary now. If

Congress can understand that and if the judicial can understand

that, there shouldn’t really be a problem for very long. These entities will come, and they will go.

30

I can’t believe that people are financing these companies because,

you know—basically, why don’t you just finance an underworld operation? Because it is criminal activity.

Mrs. KELLY. Ric, do you have something you want to add to that?

Mr. DUBE. I think, in terms of the specific question, the independent labels are the ones best poised to benefit from what is

going on right now. The Internet brings unprecedented exposure to

those labels and those acts. It also means that a lot more labels

are coming on board, so competition becomes fierce.

We are in a real awkward period right now. It sort of speaks to

a question that was asked earlier whether the industry made its

own bed here. It did, to a certain extent, but it wasn’t conspiratorial. I think they were caught very much unaware, had no idea

how quickly technology was going to be embraced and how quickly

digital copies can be made and spread around. As a result, now

they have got to figure out what they are going to do.

Right now, I think it is far too awkward to commit to any sort

of legislation that would end up impacting things far down the road

before we know how anything is going to pan out. What are consumers going to embrace? We have no idea. And how are the old

world industries going to evolve their business models to take advantage of what people want.

Mrs. KELLY. Thank you very much. I thank all of you panelists

for being here, because you are really giving us an insight that we

would not have had otherwise.

Chairman TALENT. All right. I thank the gentlelady.

Let us at least begin Ms. Millender-McDonald’s questioning before the vote.

Ms. MILLENDER-MCDONALD. I kudo, not kudo, just piggyback on

the remarks that my colleague from New York has said. You have

absolutely opened our eyes to something that otherwise would have

been totally blinding to us. Because this concept was not privy to

me, I should say; and I did not even know it existed. We are at

a crossroads in this country, in this world, and it appears to me

like, as I look at the MP3, you are working under the joint directions of international standards organization, international

electrotechnology, everything that is international, which means

everything is going global, everything is coming in from many

fronts, many areas, many countries, and we have got to deal with

that.

But in Congress, as you speak about laws, and perhaps we need

to hold off until we find out where industry is going in this type

of thing, we are makers of laws. We have to abide by laws, and

those laws are on the books. Ofttimes, they are sometimes an infringement on rights or deals or the laws—the laws do not bring

about competitive environments. And it appears to me like the laws

that we have on the books have been as such where it is choking

those who want to be innovative in their thoughts and their

thinkings and want to move from areas that have been so restrictive.

And I say this because, as I look at you and look at what you

have brought into the music world and how you are causing artists

to have other directions for creating climates for selling their

wares, then we need to look at the laws that might be restrictive

31

for your doing that, especially those that are, I guess, promulgating

the lawsuits that we have here.

But my question to you is, what do you feel is a level playing

field and how do we—you know, what is the level playing field

here?

Mr. DUBE. I think one way to look at a level playing field is in

terms of copyright law. The World Intellectual Property Organization wants to make as many countries as possible ratify a treaty

that would bring some sort of similarity, resonance to copyright law

across the world. The issues that we are talking about are not domestic issues. They are worldwide issues. And if every country

adopts different sorts of copyright laws to protect what is going on,

there will be even more confusion than there already is.

Ms. MILLENDER-MCDONALD. I was about to say, until you open

up these markets, can you then talk about that?

Mr. SILVERMAN. China is the biggest source of pirated CDs right

now, and it is the army that runs the plants.

CHUCK D. Yeah, but there are no record companies in China.

Mr. SILVERMAN. There are.

Ms. MILLENDER-MCDONALD. Oh, what a day this has brought

about.

CHUCK D. What does this mean if I want to have my record company from Nigeria? Is that not a country that is part of the world?

So how does this apply? I am a worldwide person. I am heading

to London tomorrow. I deal with the world. I just don’t deal with

the U.S. Of A.

I would like to know that my music is getting around now because of the Internet. Whereas I had a contract that said they

would get it around and exploit my work through a company that

said they could get it around but couldn’t get it around and let me

go to Nigeria and worry about that. Let me go to China and figure

that out. Because I will be damned if I am letting the company say

they went to China and not pay me for it.

Ms. MILLENDER-MCDONALD. Well, Mr. Chuck.com, see, you are

thinking global, and a lot of us aren’t there yet. We are beginning

to be and have that concept, but we are not—some of us are, but

some of us are aren’t, and this is where I suppose conflicts are coming in.

What do you perceive—I mean, when I hear the whole concept

of artists can go on-line, but where does that put that artist if he

or she needs those traditional entities like distributor, whatever

the promotional things are to promote your business? Is that not

the traditional way by which you move your record on the Internet

now?

CHUCK D. No, ma’am. It is a whole new thing happening. The

Internet has allowed global exchange and global communication

with a lot of people that want to be able to get in the game of entertainment music.

You have promoters that are in the Eastern Bloc that want to

do hip hop, and they want to figure out how they can involve themselves or how they can get a group over into Prague or how they

can get somebody over in Ghana. And now this interaction is creating a parallel industry to the industry that has existed before but

just was really, you know, held to a domesticated situation. So

32

these new understandings have to also be equipped with people

that understand how this process is going down or how the radio

station—how can I play something on Internet radio and it actually

is listened to at the same time in Korea that it is listened to in

East St. Louis. This is all new.

Ms. MILLENDER-MCDONALD. The only thing I want to say in ending my statement is that competition is what has been the norm.

You are stating that competition by the mainstream music industry

has kind of circumvented some of what is going on by the Internet,

but then what happens when yours take on fire and the mainstream then becomes more dormant or can we expect that?

Mr. SILVERMAN. Then he will be the mainstream.

CHUCK D. But the thing about it, if you have got a million people

all participating in the mainstream it is a better situation than

what exists now. You have got four companies, soon to be three,

making all the determination on what goes down. That is wrong.

Ms. MILLENDER-MCDONALD. So you are saying that this really

opens up a better competitive type of environment?

CHUCK D. Yes, and Tom knows. It is like he is pressured into

having one of his top groups have to do a $500,000 video, where

if he doesn’t have the flow why does he have to do a $500,000 to

get it on MTV standards? What is good is good. It is not based on

the money you spend, but the money is based on the corporate

game of how they operate.

I don’t want to be privy to be none of that. I want to be able to

say, well, I have X amount of artists with me and what we present

is good and we just want a fair chance to compete. And what

Napster has done is just say, hey, you know what, it has created

out of that limitation that existed before. So I mean, you know,

what has come up out of this is that there is a lot of independent

people who are now participating in the music business. And you

know, of course somebody said, well, they are taking it or they are

doing this for free, you know. Now they are in the music game, and

this is the situation.

Ms. MILLENDER-MCDONALD. Mr. Chairman, thank you so much

for such an innovative hearing.

Chairman TALENT. We have to break for the first vote today on

China trade, and so we will come back in about—we will try and

come back in 15 minutes with—Mrs. Bono will be next.

[Recess.]

Chairman TALENT. Could I call the Committee to order, please?

If the witnesses could take their seat, please.

When Mrs. Bono returns, I will recognize her, but I had a couple

of questions, and I thought I would take advantage of this lull to

ask them.

Really I am pursuing, following up on what I asked before, to

some extent pressing your imaginations. Tell me what this market

is going to look like and let me pose an assumption here that may

or may not be correct. Let us assume for a second that either the

Congress and the courts do not have the will or do not have the

ability to control the free flow of this art through the Internet, so

that, as a practical matter, a person who is willing to do it can legally or illegally get somebody’s music—or let us take the next

33

step, get a motion picture, you know, get the next other piece of

art over the Internet.

Now, what then will you be selling? Because you are the one in

this, you are still selling at bottom, yet you are selling convenience

of access, but you are still selling the right to this music. And, yes,

there is some piracy and the rest of it, but there is still a lot of

value to holding the license to that music.

If we can’t protect it for you, what will you—let me give you an

example of a market that was supposedly going to seed that was

a problem. The satellite TV companies were able to pipe in to people who had the dish the local network programming so that you

didn’t have to watch the 10 o’clock news on the local network anymore, you got it over the satellite, or you got Denver’s news if you

were living in St. Louis or something, which threatened to just

crumble this property interest that the local stations had. And Congress was able and desired to stop that because you could control

the satellite companies.

Tell me, is the technology going to get to that point? And, if so,

what is it you are going to sell to people, Peter?

Mr. HARTER. I am pretty confident that existing copyright law

will be enforced effectively in some way that is fair to consumers

and benefits artists.

Chairman TALENT. Let me press you on that. Because won’t the

technology be there? I mean you hit Napster, it is still out there,

the software is still out there.

Mr. HARTER. It sure is.

Chairman TALENT. And if you take a consumer—in many instances, somebody buys a house and they happen to be still hooked

up to the cable even though they haven’t paid for it. What are they

going to do, call the cable company and come out and say, you

know, cut us off because—some people will, a lot of people won’t.

So assume that they can’t. I mean, does this mean the end of the

legitimate music business?

Mr. HARTER. I think if you look at Napster and its traffic, the

amount of content available in Napster is highly unreliable and

varies, based on what I said before, on the number of people logged

on to Napster. And all of the tens of millions of Internet users out

in the world, a very small subset can even access Napster effectively. You have to have a broadband connection to really be able

to download music.

I mean, here Dwayne demonstrated downloading music. It is because there is a fast connection here. And we have this critical

problem of the digital divide where people don’t have access to the

net, let alone to a fast connection.

Most of the Napster traffic—if you analyze the IP address, the

Internet protocol address, most people on Napster are coming

through cable broadband networks, not DSL, no satellite not yet.

And I have talked to other broadband players about Napster, and

they are trying to understand why this traffic is on their network.

Because if all this music, all these big files are going back and

forth and they are not making money on it and it is potentially an

infringement issue that could go upstream back to them and it diminishes the quality of service—because if I am hogging the

network——

34

Too, some of these TV commercials on TV, Pacbell in California

advertises their broadband network to compete with cable. Because

of cable’s infrastructure if you are on the network all the time, your

neighbor, he can’t access the network as quickly. They call them

web hogs. And DSL is apparently a different architecture you can

access more quickly.

I think this is really a small, small problem. It has got a lot of

press that has kind of magnified it in way that is very interesting,

very amusing.

So if you look at the tantamount of users of Internet out there,

only a small, elite population of broadband networks have access

to Napster. And will it spread beyond that? Well, Napster doesn’t

work all that well, frankly. It is an unreliable supply.

And if Napster goes away because it has competitors—there is

Listen.com. They are a legal competitor. There is Scour Exchange

funded by Michael Ovitz in Hollywood. There is Gnutella, this

rogue program from AOL. These things are very hard to use, and

they are not going to transfer well into the mass market.

Chairman TALENT. So you are saying that we are going to end

up, if we are halfway smart about it and don’t panic, that we can

have our cake and eat it, too? We can have reasonable protection

for artists’ exclusive ownership and anybody they make a real deal

with and also be able to fully exploit the Internet for the benefit

of the consumer and for new artists? You think that we will be able

to control this enough so we can eliminate, you know, what all of

us would agree are real abuses of people’s right to profit off their

creativity? You are just denying the premise of what I am saying?

Mr. HARTER. I think the DMC is working fine to level the playing

field. Our business, EMusic, proves that, where consumers get

cheap access to great music from independent labels and artists,

the small guys, and we make it fun and affordable.

Piracy has always been in our industry, just like credit card

fraud is out there. It is a part of doing business. And I think people

are really getting too wound up on Napster because they have yet

to show what their business model is. How are they going to pay

their employees? They have got venture capital funding but how

are they going to build revenue? And then these lawsuits are going

to cripple the company. It is a mystery to me where they are going

to go. They are going to be Point Cast.

CHUCK D. I think there will be more music sold than ever. And

like I talked about previously, the Blockbuster analogy, you know,

people you know still have blinking VCRs, and they can tape off

of the television, and they still go to Blockbuster to rent the movie

that came on Showtime that they saw that they could have taped.

It is still sophisticated on the computers, and that is why I look at,

you know, downloadable distribution and file sharing as the new

radio. It is the new radio for this century or I should say this decade and—or at least this first 3 or 4 years, and now it is radio

across the planet, and as this technology gets better and better it

will expose more people to more music from more places.

Now, like I said, the domination of just four hands in the pot,

I think that has just got to be split and shared. So I think, yes,

you need a Tommy Silverman and a Tommy Boy who will look

across the terrain. And, matter of fact, it gives us A&R guys creVerDate 11-MAY-2000 09:07 Mar 22, 2001 Jkt 071190 PO 00000 Frm 00038 Fmt 6633 Sfmt 6602 E:\HEARINGS\67148 pfrm09 PsN: 67148
35

dence to say, well, instead of checking out a room full of CDs, tapes

and decks, now I can go to a bunch of sites and see who is doing

what and pick the best minor league home run hitter and see if

they can do their thing in a major.

And I just think the price of music will come down. I think the

contracts of artists will actually be, you know, you will see the

thousand dollar artist deal. I just think that with parity and everything across the board you will see a lot of different changes.

Do I think it is healthy? Yeah, I think it is healthy. I mean, because I looked at the music business for the longest amount of

time, and I never saw anything that quantified who was better

than the other. It was never that competitive field and especially

in rap music. It was just like a bunch of guys live around New

York so the A&R guys will pick a bunch guys that lived in the

area. Where rappers were coming out of Houston and Cleveland

and now Nigeria, but these guys wouldn’t get signed because they

wasn’t within the eyesight.

Now you have got all these business models that are coming up,

and I think people have to start from dollar one. They have to be

able to make their art for little or nothing. They can make it for

little or nothing with the new technology that allows them to make

this. So the CD has just become part of our language for the last

20 years. It is not like people were talking CD in 1948.

So when these changes take place and take about, you know, we

have to figure out, you know, how you go about making that art

without spending beyond your means, and I just think it got silly

for a while.

Chairman TALENT. And will deliver to people high quality music

for less than 17 or 19 dollars that the CD—when I buy a CD as

a gift or something to somebody, I am looking at this thing and I

think to myself, how do the kids who really enjoy this music, how

do they afford it? They can’t buy 17 or 19—— Go ahead, Ric.

Mr. DUBE. I am just going to say, labels charge as much as they

do for records because they release so many that fail, and to a certain extent successes have to compensate for a lot of the failures.

One of the ideas you are asking before, what will they sell, one

of the things they can sell is just a terrific experience. If they can

package a music experience on-line that is better than what

Napster or Gnutella or any illegal forum provides, people will pay

for it. Our research shows that people would be interested in paying for it. How would they? Well, maybe a subscription fee.

Right now, we know that 32 percent of college students said they

spend less than $10 on music monthly. If you get some subsection

of that group to commit to spending $15 a month on an all-you-canlisten-to subscription, whether it is streamed or downloadable,

whatever, you have just expanded that section of the music market.

So maybe it is time for the music industry to think, well, maybe

it is not just about selling by the song or by the album, by the

month, how do the consumers want to consume it, and give them

that experience.

The other way to look at it is, in terms of artists, who if they

make a buck and a half or two bucks on a CD sale on an $18 CD,

that is a pretty wild margin. If you look at what they make from

36

a performance, people will always want to go see a live performance. They make far more money on a concert ticket. There are

some musicians out there right now, top name acts, who are perfectly happy to let kids swap the music for free because they know

it is putting asses in the shows and you make a lot more on the

concert ticket.

So that brings up the question, maybe, should music be free?

Could music be like network television where everyone is invited

to come along and corporate sponsorships and commercials and

things like that bring in the money? Maybe that could actually expand the music market. Maybe media companies wouldn’t have to

take a hit on this.

Chairman TALENT. I recognize the very patient gentlelady.

Mrs. BONO. Thank you, Mr. Chairman.

First of all, I want to commend you for holding this hearing. I

was talking about this issue and these sorts of issues to some of

my colleagues not too long ago and saying we ought to get together

and at least begin a dialogue on where we are going, where the

music industry is going, and try to foresee some of the problems

that we are already hearing about here today. Of course, copyright

issues, I think are the most paramount among all of them.

But I wanted to say that my background in the music industry

is interesting, and I understand it somewhat, not as well as I

should or as well as I would like to. But beginning in the ’60s and

moving on until today for various reasons—and I have a lot of

friends who are in the business, I am trying with the best of my

abilities to understand where we are going and what you are trying

to do, Chuck. It is hard, and I am listening, and I want to learn

and understand where we are going.

But I want to say something, Tom, to you about what you said

earlier—and I also just want to let you all know that a friend of

mine is here—and he is an artist, and I am happy that he is here

and listening to this dialogue. I have watched some of the frustration he had with his label as well. Not too long—it was very funny.

They just cut a new record, and I asked him if I could hear it. Oh,

no, no, no.

It is back to your comment about nobody wants you to hear it.

Nobody will let you hear the music any more. He said, no, no, no,

I won’t let you hear it. And I said, you know what? I have a top

secret national security clearance, and you won’t let me listen to

your record. I had to prove that I had that before I could even hear

it.

Understanding where the industry used to be, we used to have

masters, and now everything is a master, correct? Everything,

every file except for an MP3 file, because it is somewhat less—although it is not audible to the human ear, it is not a master file.

It is not anything quite as good as master, but basically you want

to control your masters somehow. Is there a way that you can do

what you are doing and go right to the Internet but artists who

want to be on labels and be protected—can have a dual system

where people are happy to be with their label and continue on that

way, you can go your way and can we have a dual system of music

that would exist?

37

Mr. SILVERMAN. More than dual, probably be seven or eight different options.

Mrs. BONO. Well, basically by dual I would mean those who care

about their own copyright protection and those who don’t. I know

that Chuck, for instance, has permitted his material to be on the

Internet. But at the same time, as I understand you have a couple

of lawsuits pending against Bad Boy Records and St. Ives beverages because they have used your music without authorization.

There is always a fine line.

CHUCK D. But it was defamation of character in both instances.

It wasn’t just uses of the music for their purposes. The St. Ives was

a malt liquor company that used my voice, and I disdain the uses

of malt liquor and other elements by corporations amongst the

black community so I definitely took them on that. And the other

one was, the Bad Boy situation, the 10 Crack Commandments

record which endorsed crack with my voice all through it. So those

were the two instances.

Mrs. BONO. Good for you.

Mr. SILVERMAN. Let me ask him a question. I am going to crossexamine the witness here. Do you mean if it wasn’t that and they

were just using your copyright to make money for themselves you

wouldn’t have had a problem with that?

CHUCK D. Well, being that they was major corporations, I have

got problems with major corporations definitely tapping into me.

Mr. SILVERMAN. He was making a lot of money——

CHUCK D. I have been sampled, Tom, by millions of people. I

don’t have a problem with that because me as an artist—and this

is just something I just hold to myself—me as an artist it is like,

okay, boom, I will make art, and I will keep making art. I have got

five studios, so maybe that has something to do with it. I wouldn’t

necessarily want another artist to adapt and take on my beliefs,

but if somebody defames me as far as my opinion, oh, yeah, I am

going to try. Because I can’t go to them and beat them down because that is illegal. So you know, my manager says this is something that you should do.

So, you know, those were the two instances where I actually

sued. I have been sued like crazy.

Mrs. BONO. Any public figure gets sued. That is, unfortunately,

a given in this day and age.

But reclaiming my time a little bit here—and, Tom, I appreciate

that you would like to be a Member of Congress and ask questions,

but if I can do it now. I think this brings up a great issue, though,

of realizing that these things have far-reaching consequences. Two

years ago we had a major fight in the Judiciary Committee about

these sorts of things, with the restaurants broadcasting music and

to what level could they do it without paying royalties.

So these things do have far-reaching effects. These things need

to be thought out carefully, and I don’t want to see—and I understand again your frustration with record labels and have had them

myself, but I don’t want to see the artist throw out the baby with

the bath water. I think we have to recognize there has to be a fine

balance between artist and consumer, and we have to strike that

balance.

38

CHUCK D. Excuse me, Congresswoman, the only thing I was saying pretty much before was that these changes wouldn’t have come

about if it wasn’t for the technology forcing the hand, and the technology has forced the hand so now this is being dialogued where

before it was just like—this truly was an old boys’ network, and it

was dominated by a select few and still is, and they are the ones

that is crying now.

The RIAA has sent Tommy Silverman. The four major company

guys are not here, and they are screaming the most because they

played musical chairs with stockholders’ money and all of a sudden

they gutted these companies out, they stuffed the money in their

pocket, and they are jumping out trying to play three sides of the

fence. And, at the same time, don’t say that you are protecting the

copyright for the sake of artistry because the copyright pretty much

is controlled by the labels at the end of the day.

You know, there is an artist you know that could exist in the

1950s whose masters and copyright was soaked up and bought long

after they had moved on, and they really don’t know what is happening with their copyrights or works of art, either, within the legitimate system.

So it is very easy to point out an illegitimate system as it is

being formed, but how about this system that has existed that still

hasn’t paid Screaming J. Hawkins or many of the black artists that

existed in the ’40s and the ’50s and the ’60s who were exploited

with bad contracts and who still—to this day, works are still being

sold and they have yet to see a dime?

Because you know it is easy for somebody to say, oh, you haven’t

recouped the expenses that we divvied out to you. I had a lawyer

tell me, said, ‘‘Chuck, you are not going to see a dime from Universal because you haven’t recouped because we spent X amount of

money on your behalf’’ and I am like saying, ‘‘ain’t that something.’’

I mean, I would like to actually have the money, don’t spend it in

my behalf and then charge me and say I ain’t never seeing no

money again.

Mrs. BONO. I don’t want to be adversarial here, but maybe I am

misunderstanding the advance system. There are advances given to

artists by the record company and then you don’t actually pay that

back, do you?

CHUCK D. And money that is spent in your behalf you end up

paying back.

Mrs. BONO. The label asks you to pay back?

Mr. SILVERMAN. It is recoupable but not returnable, if that is

what you are asking.

Mrs. BONO. Mr. Chairman, may I have one additional minute?

Chairman TALENT. This is an interesting line. Go right ahead.

But what is recoupable but not returnable?

Mr. SILVERMAN. Means if I give an artist $100,000 to make a

record, they take the $100,000 and spend it and we never put the

record out because it turns out really bad or they never finish the

record, we don’t get that $100,000 back. It is 100 percent our risk.

If we sell a million records we can take out of their royalty payments the $100,000 and we get that back. That is called recouping

the $100,000.

39

Mr. DUBE. You can dock their pay, but you can’t make them

write you a check.

CHUCK D. I give you a case in point. My first artist contract was

7 percentage points, 7 out of a hundred. I am being real brief because it is a crazy mathematics, but I made my first album for

$17,000. That record to this date has sold over a million copies—— Mrs. BONO. That was your best album?

CHUCK D. No—at varied price ranges of wholesale prices and retail prices. And also it also brought in international figures that,

you know, you would have to really send a team of accountants to

comb out the money that that corporation had made.

Now, when they actually go into the area of recoupment, it gets

into a gigantic mathematical quagmire that maybe myself as a

fighter can go into, but not every single artist had the wherewithal

to actually do this. So the amount of change that they have that

has been split out of the glut of greed of pockets that have been

stuffed along the way is astronomical. And so when the companies

actually claim they have lost or are losing money you have to kind

of like—guess okay, where—and where you gain money in all these

aspects.

So I am not giving into that whole conversation, because that is

neither here nor there, but I am just saying, in the level of business and in the level of artistry, when you hear the corporations

talk about protecting copyrights and artistry, no, they are into protecting their masters that they own and the copyrights that they

have taken control of, and that is their biggest concern.

Mrs. BONO. Sort of changing gears here and going another way,

again, when you sell over the Internet, and you talked about technology that will allow you to pay per download or whatever to earn

the money on that, but at this point in time, are you earning

money or does an artist on the Internet earn money from eyeballs

or from advertising hits, from people buying spots there?

CHUCK D. That will come about. We will have ancillary areas in

all of the above. What we do at Rapstation is we set artists up with

their own sites where they are able to sell goods and merchandise

through the sites directly to them, 100 percent, without us being

a middle person.

Mrs. BONO. So are we then at the risk of commercializing music

here? My fear—and I have a degree in art history. I know it is sort

of strange, but at the same time I do believe in the artists heavily.

I spent 5 years studying this and married to one and all of that,

but are we now at the risk of commercializing music? Will we see

one day product placements in song, where you are paid by CocaCola to sing—— CHUCK D. If a song is sold for one red cent, it is commercial. My

whole thing is like this, if the artist has to survive and the traditional way is outdated, then ancillary areas have to step up. You

know, if a person makes a song and it is legitimate for Coca-Cola

or whatever to pay them a million dollars, then that artist makes

a living. You have got these companies out there that say, hey, we

want to be able to trigger our products. How does Seinfeld get

paid? We don’t pay for Seinfeld when we turn on the TV. He is getting paid from somewhere or somebody. So is television commercialized?

40

Mrs. BONO. I am sorry, maybe I have given a bad description of

commercial here. Again, I guess I think more in two-dimensional

art form where—a painting versus a soup can label or something

like that.

CHUCK D. I think art is subjective.

Mrs. BONO. That is my point, are we at risk somewhere down the

road of hurting an art form because people——

CHUCK D. We are at risk by keeping it within three hands, truly.

Mrs. BONO. I am not disagreeing with you.

CHUCK D. I know.

Mrs. BONO. If nothing else—and thank you, Mr. Chairman, for

the indulgence of allowing me so much time. But I believe, if nothing else, that what you are doing should serve as a very loud wakeup call to the record companies. And I know tomorrow in the Intellectual Property Subcommittee of Judiciary we have a hearing on

the work for hire issue; and it is interesting because it is so diverse, these two issues, yet they are similar as far as looking back

at protecting past copyright and moving forward here.

CHUCK D. I disagree that companies should have a copyright and

then own it forever. They have talked about expanding it to 56

years, of owning a copyright for a situation, and I am like, okay,

you know, I could see that if it is a joint venture, but if it is not

a joint venture, you know, business to me, it is like something that

you work out. The music business has not been music business. It

has been music employment.

Chairman TALENT. I think Mary can answer this, but we lengthened the time you can own a copyright, didn’t we? That was for

Mickey Mouse because Mickey Mouse was going to enter the public

domain and that was considered to be not viable, anybody could

use Mickey for whatever they wanted.

Mr. DUBE. In response to that question, the way you are talking

about commercializing music, I think we will see that. I think

downloadable music, digital music in general, really, the ease of

the format means that pretty much anybody can be a music company if they want to be. And if that means that when artists’ contracts end, Procter and Gamble or Coca-Cola company wants to put

in a bid on a popular artist, that they become associated with that

product. Just like television in the ’50s. Everybody knew that Bob

Hope was Texaco or Dinah Shore was Colgate, Palmolive, whatever. We could have that same sort of close association.

Now, we talked about the risk of cheapening music or kids in

particular have pretty good bullshit detectors. If they put out crap,

they won’t embrace it.

Mrs. BONO. I disagree with that.

Mr. DUBE. Art is subjective.

Chairman TALENT. If the people who buy the music don’t want

you to talk about Pepsi, or don’t want you to talk about Pepsi if

you are getting paid to talk about Pepsi, you won’t be able to talk

about Pepsi, will you?

Mr. DUBE. On the other hand, artists already are subsidizing

their incomes with corporate sponsorships. If you have a real big,

expensive tour and there is no way you can make money on the

ticket, that is the biggest reason.

41

Chairman TALENT. It is the reason Tiger Woods wears Nike,

right?

Mr. DUBE. Exactly. We will see more of that with music.

Chairman TALENT. I thank the gentlelady.

Yes, Mr. Phelps, sure.

Mr. PHELPS. Thank you, Mr. Chairman. Just a few questions.

So I can be straight in my mind, as a new member and somewhat involved in the music industry, if I understand, all of you do

agree that the issue is not copyright protection. You all believe that

there should be protection of copyrights for artists’ work? Okay. I

guess I hear Mr.—but I should call you Mr. D?

CHUCK D. Call me Chuck.

Mr. PHELPS. Chuck, I believe your message is that you are wanting anything in the natural order of things to work in this industry

without too much regulation or any big attention being drawn to

what is concerning Mr. Silverman, as long as the big boys who I

guess have abused the system——

CHUCK D. Right.

Mr. PHELPS [continuing]. And the question I have is that people

like you that emerge through that bad system, how are you successful, as opposed to some of these little guys that you are giving

a break through the openness of this system now, what separates

the men from the boys here?

CHUCK D. I don’t know. I always rebelled the system while I was

within the system. I didn’t ask for a record label. I was recruited

by Rick Rubin. I told Rick Rubin, who was then the head of Def

Jam records, if I get in the music business I am going to change

the music business, and we are going to work something out between me and you. And I worked it out with Rick Rubin, not Russell Simmons, not CBS. That was his relationship with them.

Mr. PHELPS. So this agreement you had that you described some

time ago——

CHUCK D. My thing was to make rap music global music.

Mr. PHELPS [continuing]. $17,000 agreement that you mentioned

a few minutes ago, even though that was not good for you, you

thought that was all right to go ahead and proceed in the music

business?

CHUCK D. I made the record for $17,000, and therefore I turned

then to Rick Rubin who had agreements with the major record

companies. His agreement was with the major record companies.

He didn’t have the best of all deals either. I think Tommy could

attest to that. So, therefore, I understood the situation I was getting into. I had a goal to get into the music business——

Mr. PHELPS. For reforming it, evidently.

Mr. D [continuing]. To reform it, to get a lot of people involved

in it, to stand up for a genre that was scrutinized, to try to be an

ambassador for a genre, to try to make a global, cultural exchange

out of the genre, to try to speak up for a lot of people from my community, and to try to tie this together into being a participant in

the music business. And one thing led to another and certain

things, certain ideas were reached. And there is still work to do,

but don’t think I came in the music business because I had my

hand up just wanting to make a record. I was way past that.

42

Mr. PHELPS. So your view of this technology is sort of doing justice to what—the big guys have abused the system. It is a way of

bringing them to their knees maybe?

CHUCK D. I wouldn’t say that, but I would say that it is creating

one of the biggest transitions ever in the world of music, and I

think it needed it.

Mr. PHELPS. Because what I see in this is that—I know we are

talking about one segment of the music industry which is a big one,

but how do we not talk about all the other segments in the music

industry, such as your licensing organization—I am an affiliate of

BMI. What do we do about ASCAT, BMI, and what do we do about

the radio stations because without those vehicles it doesn’t matter

what you produced? Who decides what the Top 10 is? Is it 10 people who get in the room and say this is what we will play or is it

money flowing?

Mr. SILVERMAN. Up to now it has been record sales, and I know

that SoundScan that tracks record sales will also be tracking

downloads.

Mr. PHELPS. But record sales on the digital—— Mr. SILVERMAN. Both.

Mr. PHELPS. Right now it is?

Mr. SILVERMAN. They have just started tracking. They are planning to track all digital.

Mr. PHELPS. That could be deceiving in a way.

Mr. SILVERMAN. What?

Mr. PHELPS. About what really the public is wanting to hear?

Mr. DUBE. It has never mattered before whether a person bought

something on a CD or cassette. Format was irrelevant. So in terms

of singles which is the way most MP3 songs or digital songs are

distributed, hopefully then it wouldn’t matter. It would format agnostic.

Mr. PHELPS. Should we worry about BMI for them to collect their

fee, for a rider such as myself to get their part before it goes out

to the radio station or on disk?

CHUCK D. Like I say, you will see new paradigms being created.

I remember one time this well-versed person working at ASCAT

suggested that the mechanical rights for particular songs might go

down or might disappear but the performance rights of a particular

song might have to be adhered to with a downloading of a song on

the Internet. You know a lot of this stuff is just proposed and it

is guesses and people are trying to figure out which way this is

going to lead to.

Like I said, I am a big proponent of at least getting people into

the game and getting involved; and that is where this digital revolution has been, I guess, most rewarding. So when it comes down

to your works actually getting exposed or downloaded, yes, maybe

it could become a licensing issue. That is a sophisticated discussion

for the average artist who is usually kowtowed into the industry

and just told to make records and don’t think about anything else.

I think what you will see what come out of this is a more educated artist, and like I said before, the lazy artist is over with. The

guy who just wants to make records and just be dumb, those days

are over with. It is not my calling. It is just like rain, it is going

to rain on everybody, and technology is going to rain on everybody

43

and this is what is going to happen. My whole thing is, Chuck D,

how do you exist when it rains. Well figure out how I put up my

umbrella and adapt in walking on water.

Mr. PHELPS. So you don’t fear a Chuck D, Jr. taking your most

cherished rap work and maybe doing a different twist to it?

CHUCK D. Sir, I have been sampled more than anybody. I don’t

have a problem with anything.

Mr. PHELPS. Elvis might have a little bit different to say about

that if he was here. That is probably true now.

CHUCK D. Don’t combine me with Elvis.

Mr. PHELPS. But you are talking about global, the Beatles I don’t

think were really the Beatles until they came to the U.S. of A, were

they?

CHUCK D. But I don’t see—we can’t talk 1964 when we are in

2000.

Mr. PHELPS. We are talking about evolvement of an industry.

CHUCK D. But the industry is evolving. Over the last 5 years, it

has evolved at greater levels than it has ever evolved. Would you

agree? In the last 5 years, each and every month in the music business right now constitutes for a year that would have been in the

seventies.

Mr. DUBE. At least.

Mr. PHELPS. Thank you very much.

Chairman TALENT. A very interesting line. Thank you. Mr. Davis

has been very patient. I want to recognize him now.

Mr. DAVIS. Thank you, Mr. Chairman, and I want to commend

you for calling this hearing. I know it sounds kind of exotic and in

some instances erotic, but I think it is a very serious issue that we

are exploring. It is a very complex matter, and I think the level of

participation and the engagement that we have heard this morning

is indeed quite enlightening.

I also want to thank each one of the panelists and commend

them for their participation and appreciate very much the information that they have shared with us this morning.

I have two questions that will be kind of put into one, but Chuck,

let me suggest that I commend you for what you are doing in terms

of trying to expose in a way and take a hard look at what has happened in the industry and especially as it relates to artists. I have

a large number of very personal friends who are, in fact, in the

business. Foremost among them probably is also another elected official, Jerry Butler, whom I served with for several years on the

Cook County Board of Commissioners, who is a very serious politician in addition to being a great artist dating back many, many,

many years, and there are a number of other individuals as well.

You see, I hope that as a result of these kinds of discussions that

not only will artists but also, Chuck, in the case of the impact that

I think your involvement may have on many of your fans, that they

too would realize that they don’t have to take things simply as they

are, that they too can be engaged and be involved, and while some

of the art form itself, I can’t suggest that I am so heavy into it,

probably my age has something to do with that, especially when it

comes to certain kinds of language and that kind of thing but certainly the effort.

44

The question that I really have for the entire panel is, are you

suggesting in any way, shape, form, or fashion that maybe we

ought to be looking at regulation of the use of the Internet as it

relates to commercial property rights of any kind, I mean whether

we are talking about music or whether we are talking about something else that can be pirated, used? I come from the City of Chicago; and, of course, if there is any way to pirate anything, there

are people in Chicago who will find it. I mean, they will find it if

there is a way; and the other part of that question, though, is also

will use of the Internet result in an increase, decrease, or make

any difference in the amount of money that is generated by the

music industry?

CHUCK D. I would like to answer that, Mr. Davis. I would like

to say that there is no quantitative method that says that the

music business has lost money or will lose money. And looking at

particular companies, and I am not trying to go there again, but

looking at their wealth of catalog that they have, that they fail to

exploit, although they have the rights, if somebody wanted to go

get Jerry Butler’s, Your Precious Love, from 1959 and they was

going to the company that had that right to that master or that

copyright and they couldn’t find it in the store, the Internet serves

as a perfect vehicle to get it across to them.

Now what is going to happen, instead of regulation of the Internet, I think a navigation process of the Internet might take place

first to make this wealth of catalog which is obscured by I guess

the red tape of retail not being able to fit it in their stores. One

gentleman, I think it was Mr. Dube who said that you know an obscure song by a great, which might not be reprintable because they

say it is not beneficial to press up 20,000 copies, you know, that

one song that you probably liked from Jerry Butler in 1961 can be

searched, researched, and found on the Internet. If there is some

signature code and signature file on that MP3 which allows you to

get that song, I think we are moving to that point.

Like I told everybody before, I am involved in a situation that

still would allow the consumer to get the MP3 for free but moneys

still be generated for that copyright. The Internet is the saving

grace for the record companies because they are sitting on a wealth

of catalog that they don’t know what to do with. And understand

this, this primarily is the biggest problem with the music business

today, is that they are gigantic, but they don’t have people

equipped to handle the speed of technology, and they don’t have

the people that understand the wealth of catalog that they own. So

they haven’t even touched upon everything that they own because

you have a lot of people who—it is not a job that is built yet.

I had relationships with Polygram before they merged with Universal or got absorbed, that is really what happened, but their

catalog department which had a wealth of catalog and copyrights

that they control, the Motown catalog, the ANM catalog from Herb

Albert. The problem was—is that the heads of these companies

were business people and they could care less about the art. But

the people that were in the catalog departments were true music

people that wanted to do things musically and also commercially

with the music, but the overstructure on top of them wasn’t sophisticated enough to give them the go ahead answer. So these are big

45

corporations or multinational corporations, but the hand and elbow

might as well be three miles apart.

So what you have got is the business changing, the music business still operating off a traditional model, with people that haven’t

had clearly defined jobs. So you want to talk about waste, there is

waste because your good friend Jerry Butler has done hundreds of

songs, and there is a listening audience that want to hear those

hundreds of songs that cannot get those songs in the regular traditional marketplace. The Internet provides that opportunity.

Mr. DAVIS. Yes.

Mr. HARTER. There are some studies out there, and these are all

preliminary, but they project on-line distribution whether it is by

downloading or streaming will produce an additional amount of

revenue for the music industry on top of what they are already selling, and a lot of people already say on-line distribution takes away

from CD sales. I don’t think that is credible. I think that is a bunch

of hogwash. The fact is several billion dollars will be added to the

revenue of the record industry and largely independents who comes

to, like, my company because we are putting product on the market

that could not easily get to market.

And then the back catalogue is an excellent point. Publishers tell

me that over 50 percent of the art of the music ever created, produced is not on the market. It is not being monetized, it is not

being put into commerce because retail space is too expensive. If

you have a song from 50 years ago that will only ever sell 1,000

copies a year worldwide, you can’t put it on a CD in a store. It is

just inefficient. The retailer will lose their shirt on that kind of

business process.

But the Internet, it doesn’t matter. One copy or a hundred copies, it costs the same. You get a big server with millions of songs

on it, different versions of the same songs, anybody in the world

can come on the Net and download and pay for it. Or if you want

to have a subscription-based service or use advertising to pay the

artists then people can download for free. And you can charge a

quarter for it, charge a dime for it, charge $1 for it, or charge $18

for it; but I don’t think they will come to your site if you are charging those kinds of prices.

I think there is tremendous amount of money to be made for all

kinds of art that is out there that many people haven’t seen. All

we get is Britney Spears it seems.

Mr. DAVIS. Either one of you?

Mr. DUBE. Yeah. I would say that right now in the same ways

the stock market goes through correction periods, right now the

price of music and entertainment in general is going through a correction period, and until the industry and the public can figure out

what they want and how to make that happen, in direct response

to the question, I would advocate no specific regulation other than

to point out one more time that these are not domestic issues.

Some of these are worldwide issues, and then there are treaties

that exist to bring countries together. I think the U.S. laws are already WIPO compliant. I could be wrong about that but there is

a lot of countries out there that have committed to ratifying the

treaty that are not; and if we can help that, that is something that

can be done.

46

Mr. DAVIS. Well, go ahead.

Mr. SILVERMAN. I just think pricing, it is difficult to talk about

pricing, but pricing is really, it is about supply and demand, and

demand in music is how much somebody wants a record. Somebody

really wants a record, like a collector will pay 50 dollars for a 45

if they really want the record. A person who doesn’t care about the

record won’t pay $2 for that same record or if even you offer to give

it to them, because sometimes at our label, we get all these promos

and stuff, and we leave a stack out there for people to take. No one

takes them. The cleaning people won’t even take them. No one

wants them because they don’t know about them, and MP3.com is

like that, 60,000 tracks that people don’t want.

You have got mom and pop playing a banjo and singing along.

Everyone can have their record on there, great, I am published

now, I am a record company. You know what, you go into Tower

they have 50,000 titles. They have one of the biggest selections of

any of the record stores, and people get choice anxiety, they walk

out with nothing or they walk out with Britney Spears because

they went in there because wow they have an obscure blues artist,

wow, there is Ella Fitzgerald, Louis Prima, and all of these records

are all around and they walk out with Britney Spears anyway

which they could have gone to a store that only had 3,000 titles

and walked out with.

Now you go to an environment that has a quarter of a million

artists on-line, the people are even more confused, what do they do.

It is just too much for people. A lot of people just want to say, okay,

my kids, they want Britney Spears or Bloodhound Gang or whatever the hot record is because either they heard it on the radio or

they saw the video, period. That is what the record business is

going to be. Digital, analog, I don’t care, people want to buy what

they know and what everybody is talking about. They are talking

about what they saw the video on and what they heard on the

radio last, and that is irrelevant of whether there is an Internet or

there is not an Internet.

Chairman TALENT. Regardless of whether there is an Internet,

MTV is still going to tell everybody what to buy?

Mr. SILVERMAN. MTV and radio stations.

CHUCK D. I beg to differ because I think in 2 years, you know,

the fact you would be able to see a video on call instead of seeing— I would love to see an Afrika Bambaata video. But why would I

wait for them too? No, I would like to go to the Tommy Boy site

and drum that up on real player and then whoa, Afrika Bambaata,

or go to another name and say, wow, I want to be able to see that

Naughty By Nature, Feel Me Flow video, and then you are seeing

video on call and on demand which drives you right back to the

product again. This is all new paradigms. But I am saying the average consumer is changing. And I will say that, yes, there is going

to be tons of product out there. But you are going to have a billion

people with access; and like you just said, with the cellular phone

you are going to, like, say people are going to be in Kenya you

know probably being able to say—you know you won’t be able to

sell the album to them for five or $10, they might be able to buy

those albums for 30 cents Kenyan money. So it is going to add into

a world pot somewhere. You are going to have an expanded global

47

place. So you can have a lot of artists because you are going to

have umpteen amount of expanded target audience.

Chairman TALENT. Okay. I will let Peter have the last word; and

then if the gentleman is done, Mr. Sweeney will be next.

Mr. HARTER. To answer the gentleman’s question, I don’t think

there is a need for regulation right now. Let us see how the DMC

works out. I want to point out, there is another start-up business

that is going to be, if not already is, the leading directory, the leading information location tool for music on the net. It is called Listen.com. Now, for the record, the five major record labels have invested in the company as Madonna’s record label Maverick

Records, and they power the search engine on EMusic’s site, and

they are a business partner of ours.

But what I think they are doing is helping people make choices.

Where I go into Virgin Megastore in San Francisco, and they have

listening booths and have a DJ spinning tracks, all to influence you

to buy things, because buying music is largely impulse. Listen.com

has a director of music. They have artists reviewing music saying

this is what this music is and the career of this artist, this band,

and hey, there is a need to know this artist was in this band and

if you like this artist, this music, we suggest you like this because

it is similar for these reasons. They inform the consumer. So instead of just buying what is flashed in front of you on the cycle,

on MTV or the radio, you can actually learn more about the art,

find out what makes the artists make that art and where they got

the influences from and what is similar to it. So I like listening to

Miles Davis, I want to find out why he went through a different

stage of his career and who influenced him, like in the fusion age

and the sixties.

Mr. SILVERMAN. You are an anomaly, too.

Mr. HARTER. I think that is changing.

CHUCK D. People want to be interactive instead of being programmed. I think we are going from a program marketplace into

a marketplace that is being more and more interactive.

Mr. SILVERMAN. If that was true there wouldn’t be a blinking 12

on everyone’s VCR.

Mr. DAVIS. Let me thank the gentleman very much. You have

shed a tremendous amount of light on a very difficult and complex

subject, and I will certainly be using some of the components of it

as I speak with young adults and as I speak with young people

about not only the content of things but also what happens as we

explore this whole question of who makes decisions in our country,

and so I thank you very much, and thank you, Mr. Chairman.

Chairman TALENT. I thank the gentleman. As always his questions were gracious and enlightening; and I recognize another gentleman from New York, Mr. Sweeney.

Mr. SWEENEY. Thank you, Mr. Chairman. Let me say thanks to

you and commend you on holding this hearing and thank the witnesses as well in what is turning out to be one of the most informative panels that I think I have ever participated with. It is kind

of an interesting day. I missed some of your testimony, read a lot

of it. This is a day that we are in Congress trying to balance the

equities on how to make the world marketplace a freer place and

how to deal with 1.2 billion people in China and all of the judgVerDate 11-MAY-2000 09:07 Mar 22, 2001 Jkt 071190 PO 00000 Frm 00051 Fmt 6633 Sfmt 6602 E:\HEARINGS\67148 pfrm09 PsN: 67148
48

ments you have got to make in that, and I am listening to testimony.

I have got to say, Chuck, I came in with some preconceived notions; and you have turned me because I think your message is

about freedom, freedom of choice for people and the marketplace

largely. And I understand what you are saying, Mr. Silverman; but

I think in the end, we as a legislative body are always going to try

to strive to find the way to give Americans greater access to whatever it is as consumers because it is the definition of what we have.

I have also learned, where I grew up if you don’t know an awful

lot about something you sit back and listen and are quiet and so

I am going to do that, and in doing that, I am going to turn over

my time, to yield my time to someone who knows a lot more about

this than I do, and that is my colleague from California, Mrs. Bono.

I thank you.

Mrs. BONO. I thank the gentleman for yielding. I have been in

politics long enough if you can’t dazzle them with brilliance, baffle

them with something else. I don’t know that I know that much

more about this, and I don’t want to be the one to stand in between

Chuck D and a fish sandwich or a peach drink because I know this

hearing has gone on for a while. I just want to ask one last question of Peter and that is, you are saying that this has not yet hurt

CD sales, but isn’t that a little bit unfair—not unfair. Wouldn’t you

say in 2 or 3 years as people become far more familiar with MP3

format that will change?

Mr. HARTER. I think it is true that the physical delivery system

of music, whether it is buying through Amazon, have a CD shipped

to your house, or going to a big store in person, big store or local

store, chain, nonchain or mail order, that will always have a place.

That won’t be eliminated.

Mrs. BONO. But the ratio will change, CD sales are going to decline?

Mr. HARTER. If the market is $40 billion roughly today and if you

bring all this content that is not on the market that Chuck and I

have been talking about and independent artists break their music

on their own or with small labels on the net, you are actually making money on content that was never in commerce in the first

place. So the gross revenue of the industry goes from 40 billion to

a hundred billion dollars or more, and some of that will be CDs,

but I think a lion’s share of that will have to be Internet because

physical distribution is economically inefficient and defunct for a

small niche market.

If there are 90 million Francophones on the planet, in Europe,

in the former colonies in Africa and in southeast Asia and people

have that common language and they want to give back to their

roots French music, not many Americans are going to listen to

French music, but somewhere else in the world, people want that

French music, and say it is a Cajun artist in Louisiana and his

family has roots back in France, I am going to download it from

a Web site in New Orleans or wherever the server happens to be.

Is that music going to get marketed in the major stores? Probably

not because it won’t sell in the volume necessary to justify that

physical CD taking up precious retail space.

Mr. SILVERMAN. How are they going to know about it?

49

Mr. HARTER. Promotion on the Net.

Mrs. BONO. I hate to lose the respect of all four of you, but I just

bought Britney Spears new album last week on Amazon.com for my

9-year-old daughter. So I hope you still respect me.

Mr. HARTER. My girlfriend likes Britney Spears, and we had an

argument about that the other day. I lost.

Mrs. BONO. That is why you are here and she is not, right? My

last question, and thank you, Mr. Chairman again. Something we

haven’t talked at all about and I am glad to hear us all say go slow

in regulation, we don’t need it now and let us go slowly as this

evolves. I hate to bring up the big T word, but have y’all thought

about what could possibly creep in the form of taxation here and

what we do to avoid that?

Mr. HARTER. In preparing for this hearing, I talked to some very

smart lawyers who actually listen to digital music. And they

downloaded and I gave them players and they actually understand

the technology and asked them if copyright law were not to be held

by the courts or Congress to apply to Napster, what about State,

local or Federal tax law? And there is the issue of whether barter

or exchange taxes apply to Napster. And while Napster’s business

model is evolving, if it facilitates an exchange of commercial goods,

which music is, between two individuals and they profit from it because they make money on the eyeballs, they trap the site in advertising and other marketing revenue streams, some interesting

State and local or Federal taxes may be applicable to barter and

exchange of music. If Napster is going to do commercial business

with investors and shareholders and employees, people want to collect taxes for that kind of activity. I don’t know if they thought

about that issue. I am not sure if it really applies. I am not a tax

lawyer, but it is an issue that needs to be raised.

Mrs. BONO. Thank you. Anybody else?

Mr. SILVERMAN. Who do you pay taxes to?

Mr. HARTER. I am glad you asked. We want to pay all the royalties to artists and rights holders, and if there are applicable taxes

we will pay them. All our servers are in California, but if someone

is going to tell me that they think we have a customer over in Europe—and we don’t care where our customers come from. They pay

by credit card, and the artist gets paid.

We are not going to invade the privacy of the consumer to find

out where they consume the music. We are going to pay based on

the country of origin of our servers, not the destination of where

someone tells us that download occurs because that just requires

us to become Big Brother and find out where you are when the

music enters your ears. And I think there is some very large policy

questions in terms of Internet law about jurisdiction, which country

of origin, the server or the company or destination of where the

consumer is.

This administration is split on the issue, and the Europeans

want to move to a country of destination position. It is very controversial, and it applies to taxes and assessment of royalties. So

that is going to be an issue that may impede small businesses because they can’t afford to understand these issues or implement a

solution.

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Mr. SILVERMAN. Another example of what he is talking about

that is not necessarily taxes. If I have a licensee in France that

breaks my record in France and invests the equivalent of $100,000

in promotion to do that and I have a deal with EMusic and they

sell 10,000 copies in France digitally, should the French company

get a piece of that royalty because they are the ones who made it,

like they got it on the MTV of France and they got it played on

the radio stations in France, they are the ones who paid and invested in making the demand in that market, or should I get that?

I mean, that is a big question as well. Maybe a bigger question

than France, and I think that I would have to say, yeah. I have

to know where, if the records are being sold in France, I am going

to have to share with it with my partner who helped to break it

in that territory because they deserve it. Otherwise, if people aren’t

ordering from Italy because my guy didn’t break it in Italy and

they are ordering from France, why shouldn’t he get it? It is clear

that it was his responsibility.

I also have a study, I want to tell you about your prior question,

that just came in today that I thought I should share with you because I would be remiss if I didn’t. A new study came out today,

a entertainment study with VNU, with SoundScan basically, which

reveals on-line file sharing is the likely cause of decline in college

market album sales. They actually—this was just released, and the

study concluded that sales were down by 4 percent in stores within

a 5–mile radius of 3,000 colleges. And stores near 67 schools that

had banned Napster by late February had a greater sales decline

of 7 percent over the past 2 years, and that is in light of record

sales going up everywhere else. So this is the first actual study

that has actually shown a connection between file sharing and

sales drop offs.

Mrs. BONO. Thank you. Thank you, Mr. Chairman.

Chairman TALENT. Is that study of illegal file sharing or legal

file sharing or both?

Mr. SILVERMAN. Well, it says, here is the quote, ‘‘It is now clear

that the controversial practices of companies that provide directories and an easy interface to libraries of unlicensed music are, in

fact, detrimental to the growth of the music business and those artists whom they claim to support. Record sales are up despite the

widespread use of MP3, not because of it. These figures should put

to rest the ongoing debate about the effects of on-line file sharing.’’

Chairman TALENT. I think it is probably, owing to this one gentleman who wrote me, and maybe the retailers in general to read

this into the record, too. It is a letter from the man who owns Oliver’s Record in Syracuse, New York, as a matter of fact. It says,

‘‘Syracuse University allows free access to Napster. In several

interviews with the Syracuse newspaper, has stated that have no

plans in firewalling Napster. My business has fallen off to about

twenty percent of what it was before this started. I had not heard

of it until the Christmas break when a young man came in and

told us how great this new program was that allowed all students

across the country to trade their music and then asked me, so, how

long do you think you will be in business. And that kind of question can only come from the young. I didn’t think much about it

then since I had no idea what he was talking about. I then went

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on and tried it for myself and it is everything I thought it would

be. As for Limp Bizkit’s lame reply that people are just sampling

the music before they buy, Oliver’s has proved that that is totally

off the mark. I just wanted you to know from someone at the lower

end of the food chain. Thank you, Charles Robbins.’’

I guess maybe a closing question for you all. You have been very

patient. And I want to wrap this up by 1 o’clock, and we are almost

there. We have sort of—you all have told me, and I will accept on

what you say, that you think that the law can effectively control

the illegal on-line distribution of music. Will the legal distribution

of it, Mr. Harter, end up in cutting out the retailer? I am not saying that that is necessarily bad, the economic change affects people,

but is there going to be a place for people who still have music

stores and sell CDs?

Mr. HARTER. I love this question. People have a life beyond their

computers. They are not going to sit at their computers doing everything. They will be in Starbucks at a kiosk and buying music,

and actually Starbucks sells quite a few CDs of their prepackaged

compilations. And people love music and are going to get it where

it is fun and less convenient. I think people in retail stores pretty

well understand their customers and how to market to them and

appeal to them to get them to buy something and induce them. So

as Chuck was saying earlier, they have to adapt to the new market

and piracy has been around just like credit card fraud has been

around. It is the cost of doing business. I think everyone is going

to be able to adapt in some way.

Chairman TALENT. That assumes price competitive products. One

of the questions I have got is because there is significant overhead

to maintaining a retail establishment, if you can get the stuff off

the Internet and it is as good and you get it in the same form you

would buy it, in other words, not like a book where there is some

value in having a book, even if you can download it on a computer,

you like to give it as a gift or whatever, I am wondering whether

this may not be a line of business where Internet sales really will

swallow up retail businesses.

Mr. HARTER. I think it is a bit of back to the future. Richard

Branson, the founder of Virgin records, in reading his biography a

while ago, when he opened his record shop he drew people in because from what the book said, they could smell pot in the record

shop, hang out and listen to music all day, it was a lounge, and

the longer you stay in the record store, the more likely you will buy

more music. And I think now that we are kind of going back to the

situation where you go to a Virgin Megastore, they have a coffee

bar, a book shop, magazines, there is merchandising, there is a DJ

playing great music, there are listening kiosks, or Borders. I think

the retailers large and small will find very interesting ways to create a new customer experience.

Chairman TALENT. You are probably right. It comes down to

value added, doesn’t it?

Mr. SILVERMAN. And he is talking about the big stores. On the

small business level, George’s Music Room in Chicago and Rock

and Soul in New York and these small stores, DJs are going to go

there and people are going to go there who are regular customers

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because the people who work there know the music, know what

they want and turn them on to new music.

Actually, the independent record store, they used to call disrespectfully the mom and pop stores, are actually doing better now

against the Best Buys of the world even though they are selling

things at full list price and competing at $17 for a CD than they

were 5 years ago because they have realized that their niche is to

know their customer in the way that no big store can ever know

their customer. They have to put in espresso bars in order to compete and create an upbeat and entertainment destination for another reason. So I think that these independent stores are going to

be less vulnerable except in the college area unless they are offering other opportunities like these guys might make up for it by

selling blank disks.

Chairman TALENT. Part of the problem is not adjusting quick.

There seems to be some consensus here that assuming we can protect against piracy to a reasonable degree anyway, on-line purchase

or access to music is going to result in lower prices for consumers,

access to a whole lot broader range of music, a fairer deal for artists over the long term and maybe breaking the control over the

business that has heretofore been exercised by a few people. Is that

a good way to sum up what you all think? Does anybody disagree

with that?

Mr. SILVERMAN. Except it won’t break the control of the media

because they are the media. The same people who control the

media own the record companies.

CHUCK D. That will break up because the expanded media exists

in that parallel world of the Internet.

Chairman TALENT. When it is fractionalized enough. Thank you

all for coming. The hearing is adjourned.

[Whereupon, at 1:10 p.m., the committee was adjourned.]

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