```

[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]

                    DIGITAL MUSIC INTEROPERABILITY 
                            AND AVAILABILITY

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

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON COURTS, THE INTERNET,
                       AND INTELLECTUAL PROPERTY

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 6, 2005

                               __________

                            Serial No. 109-9

                               __________

         Printed for the use of the Committee on the Judiciary

    Available via the World Wide Web: http://www.house.gov/judiciary

                                 ______

                    U.S. GOVERNMENT PRINTING OFFICE
20-389                      WASHINGTON : 2005
_____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512�091800  
Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001

                       COMMITTEE ON THE JUDICIARY

            F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
HENRY J. HYDE, Illinois              JOHN CONYERS, Jr., Michigan
HOWARD COBLE, North Carolina         HOWARD L. BERMAN, California
LAMAR SMITH, Texas                   RICK BOUCHER, Virginia
ELTON GALLEGLY, California           JERROLD NADLER, New York
BOB GOODLATTE, Virginia              ROBERT C. SCOTT, Virginia
STEVE CHABOT, Ohio                   MELVIN L. WATT, North Carolina
DANIEL E. LUNGREN, California        ZOE LOFGREN, California
WILLIAM L. JENKINS, Tennessee        SHEILA JACKSON LEE, Texas
CHRIS CANNON, Utah                   MAXINE WATERS, California
SPENCER BACHUS, Alabama              MARTIN T. MEEHAN, Massachusetts
BOB INGLIS, South Carolina           WILLIAM D. DELAHUNT, Massachusetts
JOHN N. HOSTETTLER, Indiana          ROBERT WEXLER, Florida
MARK GREEN, Wisconsin                ANTHONY D. WEINER, New York
RIC KELLER, Florida                  ADAM B. SCHIFF, California
DARRELL ISSA, California             LINDA T. SANCHEZ, California
JEFF FLAKE, Arizona                  ADAM SMITH, Washington
MIKE PENCE, Indiana                  CHRIS VAN HOLLEN, Maryland
J. RANDY FORBES, Virginia
STEVE KING, Iowa
TOM FEENEY, Florida
TRENT FRANKS, Arizona
LOUIE GOHMERT, Texas

             Philip G. Kiko, Chief of Staff-General Counsel
               Perry H. Apelbaum, Minority Chief Counsel
                                 ------                                

    Subcommittee on Courts, the Internet, and Intellectual Property

                      LAMAR SMITH, Texas, Chairman

HENRY J. HYDE, Illinois              HOWARD L. BERMAN, California
ELTON GALLEGLY, California           JOHN CONYERS, Jr., Michigan
BOB GOODLATTE, Virginia              RICK BOUCHER, Virginia
WILLIAM L. JENKINS, Tennessee        ZOE LOFGREN, California
SPENCER BACHUS, Alabama              MAXINE WATERS, California
BOB INGLIS, South Carolina           MARTIN T. MEEHAN, Massachusetts
RIC KELLER, Florida                  ROBERT WEXLER, Florida
DARRELL ISSA, California             ANTHONY D. WEINER, New York
CHRIS CANNON, Utah                   ADAM B. SCHIFF, California
MIKE PENCE, Indiana                  LINDA T. SANCHEZ, California
J. RANDY FORBES, Virginia

                     Blaine Merritt, Chief Counsel

                         David Whitney, Counsel

                          Joe Keeley, Counsel

                     Alec French, Minority Counsel

                            C O N T E N T S

                              ----------                              

                             APRIL 6, 2005

                           OPENING STATEMENT

                                                                   Page
The Honorable Lamar Smith, a Representative in Congress from the 
  State of Texas, and Chairman, Subcommittee on Courts, the 
  Internet, and Intellectual Property............................     1
The Honorable Howard L. Berman, a Representative in Congress from 
  the State of California, and Ranking Member, Subcommittee on 
  Courts, the Internet, and Intellectual Property................     2
The Honorable John Conyers, Jr., a Representative in Congress 
  from the State of Michigan, and Ranking Member, Committee on 
  the Judiciary..................................................     4

                               WITNESSES

Mr. Mark Cooper, PH.D., Director of Research, Consumer Federation 
  of America, on behalf of the Consumer Federation of America and 
  Consumer Union
  Oral Testimony.................................................     5
  Prepared Statement.............................................     7
Mr. Raymond L. Gifford, President, The Progress & Freedom 
  Foundation
  Oral Testimony.................................................     9
  Prepared Statement.............................................    11
Mr. William E. Pence, Ph.D., Chief Technology Officer, Napster
  Oral Testimony.................................................    14
  Prepared Statement.............................................    16
Mr. Michael Bracy, Policy Director, Future of Music Coalition
  Oral Testimony.................................................    18
  Prepared Statement.............................................    20

                                APPENDIX
               Material Submitted for the Hearing Record

Prepared Statement of the Honorable Howard L. Berman, a 
  Representative in Congress from the State of California, and 
  Ranking Member, Subcommittee on Courts, the Internet, and 
  Intellectual Property..........................................    27
Prepared Statement of the Honorable John Conyers, Jr., a 
  Representative in Congress from the State of Michigan, and 
  Ranking Member, Committee on the Judiciary.....................    28

 
                    DIGITAL MUSIC INTEROPERABILITY 
                            AND AVAILABILITY

                              ----------                              

                        WEDNESDAY, APRIL 6, 2005

                  House of Representatives,
              Subcommittee on Courts, the Internet,
                         and Intellectual Property,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10:37 a.m., in 
Room 2141, Rayburn House Office Building, the Honorable Lamar 
Smith, (Chairman of the Subcommittee) presiding.
    Mr. Smith. The Subcommittee on Courts, the Internet, and 
Intellectual Property will come to order. I am going to 
recognize myself for an opening statement, and then recognize 
other Members, and then we will proceed to introduce the 
witnesses, and we will look forward to hearing from them.
    Today, this Subcommittee continues its work to update music 
licensing for the digital era. New technologies are providing 
numerous and competing methods for delivering music content to 
consumers. Consumers can buy music on-line for immediate 
download, subscribe to unlimited amounts of music that can be 
downloaded to a portable device, listen to webcasts of their 
favorite radio stations on the Internet, and subscribe to music 
broadcasts from satellites in space.
    Each of these different types of music services is a new 
and unique business model that brings different values and 
opportunities for consumers. Consumers have multiple choices 
for how they can purchase and listen to legal music. 
Unfortunately, just as the number of legal options has 
increased, so has the number of illegal ones.
    Legitimate questions have been raised regarding the impact 
of digital interoperability on consumers. In the physical 
world, consumers didn't expect that music audio cassettes were 
interoperable with CD players. Consumers switching from music 
cassettes to CDs bought the same music for $10 to $20 per CD 
that they already owned. Consumers accepted this, since they 
felt they were getting something new with more value, a digital 
format that made every reproduction sound as good as the first 
playback.
    Music is quickly becoming an on-line business with no 
connection to the physical world, except for the Internet 
connection. Even that connection is increasingly becoming 
wireless. Some of the same interoperability issues that occur 
in the physical world are now appearing here. Consumers who 
want to switch from one digital music service to another must 
often purchase new music files and sometimes new music players. 
For example, music purchased from the iTunes Music Store will 
only work on Apple's iPod music player. Music purchased from 
RealNetworks cannot be accessed on the iPod.
    Last year, both companies became involved in a dispute over 
Real's attempt to offer software called ``Harmony,'' that would 
have allowed legal copies of music purchased from Real's on-
line music store to be playable on Apple's iPod music player. 
Apple objected to this effort, calling it ``hacker-like,'' and 
invoking the DMCA. Apple blocked Real software from working a 
short time afterwards.
    This interoperability issue is of concern, since consumers 
who bought legal copies of music from Real could not play them 
on the iPod. I suppose this is a good thing for Apple, but 
perhaps not for consumers. Apple was invited to testify today, 
but they chose not to appear. Generally speaking, companies 
with 75-percent market share of any business, in this case, the 
digital download market, need to step up to the plate when it 
comes to testifying on policy issues that impact their 
industry. Failure to do so is a mistake.
    As a result of disputes like the one between Apple and 
Real, some have suggested that efforts to boost digital music 
interoperability should be encouraged by regulation or 
legislation. Others have urged Congress to leave the issue to 
the marketplace and let consumers decide what is best for them.
    Just last week, the Supreme Court heard a copyright case 
dealing with the 1984 decision in the Sony-Betamax case. 
Consumers ultimately chose the VHS format over their Betamax as 
their preferred technology in their homes without any 
intervention by Congress. At the same time, broadcasters chose 
the Betamax standard for their internal broadcast operations. 
If anything, this example demonstrates not only how consumers 
will decide for themselves what standard best meets their 
needs, but also that multiple standards can survive in the 
marketplace.
    The digital music interoperability issue is of interest to 
more than consumers. Performers and songwriters are affected by 
the decisions made about how their music is made available. 
Music that is made available on only one digital music service 
will limit the options for artists to earn royalties. Many of 
the licenses and rights in the music industry stem from 
compulsory licenses and exclusive contracts. Since one of these 
licenses, the compulsory section 115 mechanical license, is now 
being updated for the digital era, the time is appropriate for 
the Subcommittee to learn more about the impact of digital 
interoperability on consumers and artists.
    That concludes my opening statement, and the gentleman from 
California, the Ranking Member, Mr. Berman, is recognized for 
his.
    Mr. Berman. Thank you very much, Mr. Chairman, for 
scheduling this hearing on digital music interoperability. The 
explosion of technologies that enable consumers to digitally 
download music has provided many new opportunities to the music 
lover. The ultimate goal is to provide consumers with their 
choice of music any time, anywhere, in any format. However, 
this new environment has come at a great cost; that of rampant 
piracy on peer-to-peer networks. What is considered free music 
available on the Internet comes at the expense of numerous 
people involved in the development of the sound recording, the 
artists, songwriters, musicians, sound engineers and others.
    The consequences of piracy are felt throughout our economy, 
but they are especially harmful in my district, as well as 
several other Members on this Committee, where many jobs depend 
on the lawful sale of music. The proliferation of legitimate 
music distributors in the marketplace has helped stem the tide 
of piracy. The number of available digital music delivery 
alternatives has increased, enabling technology companies to 
help copyright owners make inroads against unauthorized 
downloading and sharing of music files. However, music 
companies will always have to compete with free music, and 
analysts claim that it will take a number of years before 
download services can provide a significant sales boost for the 
content creators.
    One of the major impediments to achieving a more level 
playing field according to analysis is the bewildering array of 
competing technologies. As with any nascent industry, the 
development of new business models have unintended results. In 
the case of digital music, there are concerns that 
interoperability barriers between the various suppliers could 
actually hinder growth in the market.
    Brandenburg, the father of the MP3, has warned that rival 
technologies will baffle consumer and risk alienating fans, 
driving them to unsanctioned file-sharing networks, where the 
songs are free and encoded in the unprotected MP3 format.
    The International Federation of Phonographic Industry has 
noted that ``one important problem that hinders growth of the 
on-line music business is the lack of interoperability between 
services and devices. The danger is of wide-scale consumer 
confusion and wasted opportunities in a market which has an 
extraordinary growth potential.'' They observe that there is no 
easy solution, that all players in the on-line market need to 
work harder to solve the interoperability difficulties in 2005. 
Yet the market continues to develop. The portable player market 
already presents consumers with an array of choices.
    Now, we see the convergence of music devices and mobile 
handsets. The goal of making music easier to buy than to steal 
is becoming a reality, and therefore these innovative services 
deserve our thanks. However, anti-piracy efforts must remain a 
focus for technology company industries as they develop their 
products. A legitimate distribution business model must be one 
that is based on payment and permission of the rights holder.
    With digital music moving into the mainstream of consumer 
life, I believe it will be helpful to further this conversation 
by just guessing what, if any, impediments are facing companies 
that are now distributing digital music and how they are 
addressing consumers' needs for legitimate music. In an ideal 
world, we would all have the major players in the digital music 
market at the table to hear their opinions about this issue. 
The Chairman made reference to at least one party not at the 
table, but I do look forward from hearing these witnesses to 
help define some of the issues.
    Thank you very much, Mr. Chairman.
    Mr. Smith. Thank you, Mr. Berman.
    I understand that the Ranking Member of the Judiciary 
Committee, Mr. Conyers, you have a statement?
    Mr. Conyers. Only a comment or two, sir.
    Mr. Smith. The gentleman is recognized.
    Mr. Conyers. I will ask unanimous consent that my statement 
be put in the record.
    Mr. Smith. Without objection.
    Mr. Conyers. First of all, I welcome this panel, and I 
think this is an important discussion. I want to say that I 
commend the Ranking Member, Mr. Berman, on his very thoughtful 
presentation, which leads me to put mine in the record and let 
it go at that.
    A couple of things have been said by witnesses that I just 
want to repeat; that market forces will continue to drive 
innovation and new ways to enjoy music and pricing and will 
eventually resolve the interoperability problem and that 
Government intervention can probably inhibit innovation.
    Finally, I join with those who believe that consumers will 
ultimately choose the interoperable systems over closed 
platforms.
    With that, I would return my time and thank the Chairman 
for his courtesy.
    Mr. Smith. Thank you, Mr. Conyers.
    I would, also, like to thank the gentlewoman from 
California, Ms. Lofgren, and the gentleman from California, Mr. 
Schiff, for their attendance here today as well.
    Before I introduce the witnesses, I would like you all to 
stand so I can swear you in.
    [Witnesses sworn en masse.]
    Mr. Smith. Thank you. Please be seated.
    Our first witness is Mark Cooper--oh, excuse me, in 
recognizing other Members who are present, I didn't look far 
enough or long enough to my right to see Bob English, the 
gentleman from South Carolina. We appreciate his presence as 
well.
    Our first witness is Mark Cooper, the director of Research 
at the Consumer Federation of America, where he has 
responsibility for energy, telecommunications and economic 
policy analysis. Dr. Cooper is a fellow of both the Stanford 
Law School Center for Internet and Society and the Donald 
McGannon Communications Center at Fordham University. He is the 
author of five books and has published numerous chapters and 
edited works and journal articles focusing on digital society 
issues. Dr. Cooper holds a Ph.D. from Yale University and is a 
former Yale University and Fulbright Fellow.
    Our next witness is Ray Gifford, president of the Progress 
& Freedom Foundation and a member of its board. Before joining 
the foundation in 2003, Mr. Gifford served as chairman of the 
Colorado Public Utilities Commission for 4 years. Mr. Gifford 
earned his law degree from the University of Chicago, where he 
served as president of the Federalist Society and chairman of 
the Edmund Burke Society. He earned a bachelor's degree in 
philosophy from St. John's College in Annapolis, Maryland.
    Later on, you can tell us the difference between the 
Federalist Society and the Edmund Burke Society, if you will.
    Our next witness is Dr. William Pence, chief technology 
officer of Napster. In 2000, Dr. Pence joined Universal Music 
Group as lead technologist for its on-line music initiative. In 
2001, he became chief technology officer of Pressplay, a joint 
venture between Sony and Vivendi Universal, designed to offer 
an on-line music subscription service. In 2002, Roxio acquired 
Pressplay and rebranded that service with the Napster name. Dr. 
Pence led the effort to build a legitimate service on the 
Pressplay technology infrastructure, culminating in the 
relaunch of Napster in October 2003. Most recently, he led the 
effort which resulted in the world's first portable music 
subscription service--Napster To Go.
    Dr. Pence holds several U.S. patents, he received a B.S. 
degree in physics from the University of Virginia in 1984 and a 
Ph.D. degree in electrical engineering from Cornell University.
    Our final witness is Michael Bracy, co-founder of the 
Future of Music Coalition, where he currently serves as a board 
member and its policy director. He, also, co-owns Misra, an 
independent record label based in Austin, Texas, which, as one 
would expect, is a city I have a particular interest in.
    The Future of Music Coalition is a not-for-profit 
collaboration between members of the music, technology, public 
policy and intellectual property law communities. The Coalition 
seeks to educate about music technology issues and to bring 
together diverse voices in an effort to come up with creative 
solutions. The Coalition, also, aims to identify and promote 
innovative business models that will help musicians and 
citizens to benefit from new technologies. Mr. Bracy graduated 
from Georgetown University.
    By unanimous consent, as I think you all know, your 
complete testimonies will be made a part of the record, and we 
look forward to hearing your testimony now.
    Dr. Cooper, we will begin with you.

TESTIMONY OF MARK COOPER, PH.D., DIRECTOR OF RESEARCH, CONSUMER 
FEDERATION OF AMERICA, ON BEHALF OF THE CONSUMER FEDERATION OF 
                   AMERICA AND CONSUMER UNION

    Mr. Cooper. Thank you, Mr. Chairman.
    Interoperability is an extremely valuable and important 
trait in the digital economy. Digital products are inherently 
networked, which means that they are made up of complimentary 
components or the current terminology is they are layers of a 
platform. These layers must interoperate if the product is to 
function properly.
    Over the past three decades, we have learned what I call 
the Internet lesson. The more open the interfaces within the 
platform, the more dynamic the development. Open platforms 
create large network effects and an innovation-friendly 
environment. Economists call them positive externalities 
created by these open platforms.
    However, it is extremely important to recognize that 
interoperability plays different roles and needs different 
policies at different points in this platform. The 
communications network at the core of the digital economy must 
be open and interoperable as a matter of obligation. Closed 
proprietary platforms in the core destroy the vast array of 
positive externalities that can develop above. Refusals to 
deal, discrimination in functionalities, foreclosure, 
anticompetitive bundling simply cannot be tolerated at the core 
of the communications network, and that is why the 
Communications Act requires just, reasonable, and 
nondiscriminatory terms for interconnection and carriage.
    But as we move above from that core or from the lower 
layers to the upper layers, the basis for interoperability 
changes. At the periphery of the digital platform, at the 
applications layer it is called, interoperability is very 
consumer friendly, but it needs to be enforced or created by 
market forces. Applications are the widgets of the digital age, 
the things that people make and sell directly to the public. In 
the digital content and distribution of applications, like 
music formats, the failure to interoperate affects the direct 
consumer. It hurts the music consumer if you don't 
interoperate, but only the music consumer. It doesn't damage 
the rest of the economy.
    If an applications developer fails to interoperate, we 
believe that developer will ultimately pay the price because 
consumers will migrate to interoperable offerings. We believe 
consumers demand interoperability, will pick interoperability 
if they have information, and they have a fair choice.
    Disclosure and expectations play a key role. Consumers must 
be aware that if they buy a certain product that will not 
interoperate, they will be locked in and cut off. Once they 
know that, they will exercise, they will vote with their feet.
    Similarly, a refusal to interoperate should not be a lever 
for anticompetitive strategies. If we see lots of exclusive 
deals and only a very few widget manufacturers, antitrust 
authorities should become concerned because we expect the 
applications layer, the widget manufacturers, to be plentiful 
and competitive. If they don't behave in that fashion, if there 
aren't a lot of choices, then there is a legitimate antitrust 
concern.
    As several Members have noted, last year, the recording 
industry finally accepted the inevitability of digital 
distribution of music. They sold more singles last year than 
any time in the previous 20 years, and consumers saved a great 
deal of money. The transition to digital distribution is 
inevitable because it reduces the cost of production marketing 
and distribution and may transform promotion as well. The cost 
of delivering music to the public will decline, and the nature 
of sales will shift from CDs and bundles to singles, and that 
is a good thing for consumers and artists who can make more 
money by selling lots of singles.
    Now, those who had the foresight to see this digital 
transformation coming and to put digital distribution in the 
world, they have got a lead. They have, one, a first-mover 
advantage. But as the entirety of the industry moves toward 
digital distribution, there are no guarantees that that 
advantage will persist, especially if they make a mistake on 
interoperability.
    It is not surprising to find that the very company that has 
a lead today also had a lead 25 years ago in the PC market. 
They were the dominant PC provider about a quarter of a century 
ago. They refused to interoperate. They refused to open their 
platform, and they were blown away. They are a niche market 
player today, with a market share around 5 or 6 percent of the 
market. Interoperability is consumer friendly, and it will 
prevail in the marketplace.
    I thank the Committee for giving me this opportunity, for 
recognizing how important interoperability is in the digital 
industries, and I look forward to working with the Committee to 
find the right mix of public obligations at the core of the 
digital economy and private incentives at the periphery and in 
the widget manufacturers so that we can create competitive, 
dynamic platforms that serve consumers, the economy and 
artists.
    Thank you.
    [The prepared statement of Mr. Cooper follows:]

                 Prepared Statement of Dr. Mark Cooper

    Mr. Chairman and Members of the Committee,
    My name is Dr. Mark Cooper. I am Director of Research at the 
Consumer Federation of America. I appreciate the opportunity to testify 
on the subject of interoperability and commend the Committee for having 
the foresight to hold hearings to explore the implications of this 
important topic.
    Interoperability is a critically important issue, not only for 
consumers, but also for producers and the economy. However, it is 
important for the Committee to appreciate that the role of 
interoperability and public policies to promote it vary greatly 
depending on the nature of the economic activity that is being 
analyzed.

          INTEROPERABILITY SHOULD BE REQUIRED AS A MATTER OF 
                     PUBLIC POLICY IN CORE NETWORKS

    Ensuring interoperability is a critical and pressing public policy 
concern when it affects the critical functions of a vital network in 
our economy. For example, we demand interoperability in the 
communications network, as a public obligation, because it is a vital 
infrastructure at the core of our economy.\1\ Telephone networks have 
interoperated for almost 100 years. The advent of the Internet has 
brought with it amazing new opportunities for communication-WiFi-
enabled telephones can connect with computers. E-mail users can connect 
to Blackberries. Macintosh users can send and receive files to and from 
Windows users. Interoperability supports a vast array of other 
activities and the failure to interoperate would chill innovation and 
distort economic activity.
---------------------------------------------------------------------------
    \1\ Mark Cooper, Open Architecture as Communications Policy 
(Stanford Law School Center for Internet and Society, 2004), available 
for download under a Creative Commons License at http://
Cyberlaw.Stanford,edu/blogs.cooper/openarchitecture.pdf.
---------------------------------------------------------------------------
    Over the past quarter of a century, as the digital economy has 
grown and influenced the broader economy, the importance of 
interoperability has grown because ``platforms'' play an increasingly 
important role. ``A platform is a common arrangement of components and 
activities, usually unified by a set of technical standards and 
procedural norms round which users organize their activities. Platforms 
have a known interface with respect to particular technologies and are 
usually 'open' in some sense.'' \2\
---------------------------------------------------------------------------
    \2\ Shane Greenstein, ``The Evolving Structure of the Internet 
Market'' in Understanding the Digital Economy (Erik Brynjolfson and 
Brian Kahin (Eds) (2000), p. 155.
---------------------------------------------------------------------------
    Interoperability to maximize the availability of functionality has 
been the hallmark of digital platforms for a simple reason. By keeping 
interfaces open and making the functionality available, the entire 
platform is driven forward, expanding the opportunities for all who 
build to and take from (use) the platform. ``Interfaces exist to entice 
other firms to use them to build product that conform to the defined 
standards and therefore work efficiently with the platform.'' \3\
---------------------------------------------------------------------------
    \3\ Anabelle Gawer and Michael A. Cusumano, Platform Leadership 
(2002), p. 56.
---------------------------------------------------------------------------
    The superior value of interoperability of critical networks through 
open interfaces was recognized by the National Research Council of the 
National Academy of Sciences in a 1994 analysis of the Internet, just 
before it exploded into wide popular use in America. ``The telephone 
system is an example of an open network, and it is clear to most people 
that this kind of system is vastly more useful than a system in which 
the users are portioned into closed groups based, for example, on 
service provider or the user's employer.'' \4\
---------------------------------------------------------------------------
    \4\ National Research Council, Realizing the Information Age 
(1994), p. 43.
---------------------------------------------------------------------------
    In contrast, interoperability in the digital content and consumer 
goods industries, like video games or music formats, is a consumer-
friendly way to do business. The failure of interoperability in the 
music industry affects the music industry and the consumers who 
purchase digital music. The failure of interoperability in the 
communications industry affects the entire economy.

      INTEROPERABILITY SHOULD BE PROMOTED IN CONSUMER APPLICATIONS

    We believe that interoperability best serves the interest of 
consumers and producers throughout the digital platform, but as the 
question moves from the interoperability of the network, to how that 
network is used for music it becomes important for the marketplace to 
provide better clarity. If an application developer refuses to 
interoperate, we believe that developer will ultimately pay the price, 
because consumers will migrate to interoperable offerings. Applications 
developers should be allowed to discover the consequences of their bad 
decisions in the marketplace.
    We believe consumers demand interoperability, and will pick it when 
given the choice. However, the development of converged or open 
platforms takes time, and it requires that consumers understand their 
options. Disclosure and consumer expectations should be taken into 
consideration. Sellers of closed platforms need to better inform 
consumers that their platforms are closed, and that consumers might be 
locking themselves into future hardware and software purchases in that 
platform.
    Consumers have certain expectations that they could pop a record 
onto a turntable or a compact disc into a CD player and music would 
come out. If digital formats are not going to replicate that 
interoperability, retailers of digital music and digital music players 
have a special obligation to inform consumers who have built up 
expectations of interoperability over years, even decades of 
experience. Given good information-such as where and how things will 
work, and where it won't--we are confident consumers will choose the 
interoperable systems over closed platforms,

            WHEN THE FAILURE TO INTEROPERATE RAISES CONCERNS

    An industry's refusal to interoperate should also not become a 
lever for anticompetitive strategies. This is a special concern in 
platform industries where a company may come to dominate one critically 
important component (layer) of a platform and seeks to use that 
dominance to frustrate competition in other components.\5\ This is a 
problem of vertical leverage in antitrust analysis and it grows in 
significance in platform industries precisely because of the heightened 
importance of interfaces between components (layers) in these 
platforms. Closing interfaces takes on special importance. 
Unfortunately, antitrust practice has drifted away from concerns about 
vertical leverage, at precisely the moment it demands greater scrutiny 
and attention.
---------------------------------------------------------------------------
    \5\ Mark Cooper, ``Antitrust as Consumer Protection in the New 
Economy: Lessons from the Microsoft Case,'' Hastings Law Journal, 52:4, 
2001. Available at http://www.consumerfed.org/cooper--hastings--law--
review--200106.pdf
---------------------------------------------------------------------------
    We believe that music, movies and other digital content could 
quickly grow to become that anti-competitive lever, if it is not 
already. For the consumer who purchased any digital music player other 
than an iPod, there's no simple recourse when R.E.M. releases a series 
of songs exclusively on iTunes Music Store.\6\ Nor is there any 
recourse at all for a Mariah Carey fan with an iPod on a Macintosh when 
she releases an exclusive song on MSN Music--a platform that simply 
won't work with Macintosh or iPods.\7\
---------------------------------------------------------------------------
    \6\ While iTunes allows consumers to burn purchased protected 
digital music to a CD--n open platform--it must be pointed out that a 
consumer would need to install a new program, purchase the song, burn 
the song to CD, rip the burned CD into a format their current player 
will understand and then enter all the song information manually--a 
cumbersome process digital music stores were supposed to make 
automatic.
    \7\ A consumer with an iPod and Windows might have more luck if 
they followed the steps in Footnote 6, but users with a Mac are out of 
luck--and won't be able to download that song legally.
---------------------------------------------------------------------------
    Consumers who run up against these problems with music, movies or 
other digital content will increasingly turn to methods that 
potentially infringe copyright to get the song they want, including 
searching the Internet for a copy of the song converted to an open 
format. This is a less-than-adequate solution, and one that all parties 
should be wary of inadvertently promoting. Both the content and device 
industries surely recognize that every time they drive a consumer to 
infringe copyright because of their support for a closed platform, they 
create new incentive to create and deliver an open platform.

             DIGITAL DISTRIBUTION OF MUSIC HAS JUST BEGUN: 
                  INTEROPERABILITY WILL LIKELY PREVAIL

    Last year, when the recording industry finally accepted the 
inevitability of digital distribution of music, the industry sold more 
singles than at any time in the past two decades. The transition to 
digital distribution has begun in earnest. This transition is 
inevitable. Digital distribution reduces the costs of production, 
marketing, and distribution. It may also radically alter the approach 
to promotion. The cost of delivering music to the public will decline 
by 50 percent or more and the selling of music will shift from bundles 
of songs to singles.
    Major record labels--whose artists account for over 80% of the 
music purchased in America--are belatedly considering alternative 
business models for digital distribution. This lead to subscription 
services like Real Rhapsody and Napster 2.0 or a la carte services like 
those two companies offer, iTunes Music Store, and others.
    The music industry is not facing a format war, like the battle they 
are currently fighting over high-definition music--where some labels 
exclusively sell content on SuperAudio CD while others only release 
premium music on the DVD-Audio format. A format war clearly would have 
impeded the adoption of digital music. But as the amount music 
exclusively available on one format increases, and as consumers 
discover they've purchased thousands of dollars of music to fill up 
their digital music devices, locking themselves to one type of player 
forever, they are more likely to get confused and frustrated. To 
alleviate both, record labels and device manufacturers should 
proactively inform consumers about the limitations of their closed 
systems, and work to develop open standards.
    Those who had foresight and created a digital music platform with 
portable digital music players and digital music download stores now 
have a lead, winning a first-mover advantage. But as the entirety of 
the music industry makes the inevitable transition to digital 
distribution, there are no guarantees that the initial advantage will 
persist, especially if mistakes are made with regard to 
interoperability. A quarter of a century ago a closed platform 
dominated the computer desktop market. A more open platform quickly 
replaced it, forcing all platforms to improve compatibility. Given a 
choice that is not distorted by anticompetitive practices and good 
information consumers will prefer and migrate to the interoperable 
platforms.

                               CONCLUSION

    Last week oral argument in two critical cases (National Cable and 
Telecommunications Association et al. v. Brand X Internet Services et. 
al and Metro-Goldwyn Mayer Studios Inc. et al v. Grokster) that will 
determine the future of the Internet made it clear that technology 
policy requires a careful balance between the public and private 
interests. Interoperability in core infrastructure industries has been 
a key ingredient in this nation's economic success since the railroad 
track was standardized and the telecommunications network was obligated 
to provide interconnection and carriage on just, reasonable and 
nondiscriminatory rates, terms and conditions.
    I thank the Committee for recognizing that in the digital economy 
interoperability has even broader implications and I look forward to 
working with the committee to find the right mix of public obligations 
and private incentives to achieve open, competitive platforms that 
provide a dynamic, consumer-friendly economy.

    Mr. Smith. Thank you, Dr. Cooper.
    Mr. Gifford?

          TESTIMONY OF RAYMOND L. GIFFORD, PRESIDENT, 
               THE PROGRESS & FREEDOM FOUNDATION

    Mr. Gifford. Thank you, Mr. Chairman.
    When I begin to agree with my friend, and sometimes 
nemesis, Mark Cooper I start to doubt myself, but I appreciate 
the opportunity to speak with you today and the Members of the 
Subcommittee.
    In seizing on this topic, the Committee has hit upon one of 
the key conundrums of the digital age, namely, the role of 
standard-setting and the subsidiary goal of interoperability. 
Interoperability is a key challenge to firms and network 
industries. The success of a given platform depends on its 
attractiveness to consumers, and a key value for consumers is 
the platform's ability to interoperate with a variety of 
applications. Interoperability, to be sure, is a value to 
consumers and firms, but it is not an absolute value.
    The Progress and Freedom Foundation recently hosted a 
series of events in Europe on standard-setting and 
interoperability. My conclusions from those events will serve 
as my introduction here.
    First, standard-setting is hard. We do not know, before the 
fact, the optimal method or amount of standards or 
interoperability. For public policy, this should inspire a 
great deal of caution from mandating any given outcome or 
particular standard. Because there are undeniable tradeoffs 
from any standard-setting or interoperability decision 
Governments should be wary of thinking they have sufficient 
foresight to make proper interoperability decisions and 
deferential to private attempts to achieve interoperability.
    Finally, for public policymakers, we can never forget the 
lessons of public choice theory, which predict that firms and 
interest groups will seek Government favor in promoting their 
interoperability solution and in handicapping their rivals.
    I have three specific theses:
    First, protect the Schumpeterian incentives to innovate and 
compete for not just in the market;
    Second, allow open and closed platform business models to 
compete;
    And, third, permit the freedom to use digital rights 
management.
    First, much of the brow-furrowing over interoperability and 
digital music stems from the success of the Apple iPod 
platform. I urge this Subcommittee not to give into the 
politics of platform envy. Joseph Schumpeter, you may recall, 
was the economist who described capitalism as a process of 
creative destruction, with new firms and new products spurring 
innovation and creating new markets. Digital music is a new 
market, and the iPod platform and its remarkable success is the 
harbinger of those types of markets and what they can be. The 
law, intellectual property and antitrust law, specifically, 
should encourage this dynamism.
    Second, a related question to the types of competition that 
is occurring in this market is the platform models that firms 
choose to compete in the market. This gets to the heart of 
interoperability as different firms opt for platforms of 
varying degrees of openness on the one hand or closed 
integration on the other.
    From a business standpoint, you can see the tradeoffs and 
strategic decisions the companies are making. By opting for a 
more open platform, the firm hopes to attract more users to its 
platform and increase the number of applications compatible 
with its platform. The tradeoff involves sharing more of the 
profits from that platform and, also, perhaps some of the 
quality control over the whole consumer experience. In 
contrast, a more closed platform rather audaciously attempts to 
gather all of the rents from production, but perhaps at a cost 
of interoperability.
    Should public policy be concerned with these business 
decisions? Probably not. If you start looking for standards to 
scrutinize, you will see them everywhere, from razors and 
blades, to PSPs and disk drives, to MP3 Players and iPods. 
Because we cannot know in advance what consumers will prefer or 
what is truly superior, we should forbear from interfering.
    A final value of public policy should be to ratify the 
acceptability and use of digital rights management or DRM 
technologies. DRM allows content providers a reasonable degree 
of confidence in bringing digital music to market and consumers 
the ability to purchase digital music. DRM will be integral to 
consumers' access to digital content and, hence, must be 
allowed its place as a valid market mechanism.
    Standards are hard. Interoperability is a good thing, but 
not an absolutely good thing. Consumers' tastes for the most 
part will drive toward interoperable platforms, but not 
necessarily. Intellectual property law, antitrust and 
administrative regulation point in slightly different 
directions on these issues, but are up to the task of 
confronting the policy challenges presented by digital 
technologies. From Congress's point of view, the best course 
would be to resist calls for mandates or technology limitations 
in this dynamic space.
    I thank the Committee for the opportunity to testify today 
and look forward to your questions.
    [The prepared statement of Mr. Gifford follows:]

                 Prepared Statement of Raymond Gifford

    Good morning, Mr. Chairman, Mr. Berman and members of the 
subcommittee. Thank you for the opportunity to speak to you today on 
digital music interoperability and availability. In seizing on this 
topic, the Committee has hit upon one of the key conundrums of the 
digital age; namely, the role of standard setting and the subsidiary 
goal of interoperability. As you know, markets for digital music are 
nascent and emerging. Different platforms, different file formats and 
different digital rights management systems are competing for 
dominance. Indeed, even different business models are duking it out, 
with Napster To Go's subscription model taking on iTunes and Wal Mart's 
(among others) pay-per-song model. All of this indicates a competitive, 
functioning market working within the bounds of copyright and patent 
law, with a backstop of antitrust should unlawful monopoly concerns 
arise.
    Interoperability is a key challenge to firms in network industries. 
The success of a given platform depends on its attractiveness to 
consumers, and a key value for consumers is the platform's ability to 
interoperate with a variety of applications. Interoperability, to be 
sure, is a value to consumers and firms, but it is not an absolute 
value. Standards and interoperability can be achieved through a variety 
of institutions: within single firms, within private consortia, with 
government blessing and with government mandate. Standards can be open 
and non-propriety, or closed and proprietary, and gradations in between 
these extremes. In digital music markets we see all of these models, to 
varying degrees. There is the relatively more closed and integrated 
iPod platform; there are the relatively more open MP3 platforms. There 
are different file formats; there are different DRM solutions.
    I appreciate the opportunity to speak to you on this topic because 
I have been thinking about it so much myself. The Progress & Freedom 
Foundation recently hosted a series of events in Europe. My conclusions 
from those events serve as my introduction here:

        First, standard setting is hard. We do not know ex ante the 
        optimal method for standard setting, or the optimal model. Are 
        open standards preferable? In some cases, yes; in others, no--
        you are making a trade-off. Are proprietary or non-proprietary 
        standards going to give the greatest amount of innovation? We 
        cannot be sure. Do we prefer competition for a standard or 
        competition within a standard? Depends on the quality of the 
        standard you start with, and also requires recognition of the 
        (unknown and unknowable) costs of the standard foregone.

        For public policy, all this should inspire a great deal of 
        caution for mandating any given outcome or specific standard. 
        Because there are undeniable trade-offs from any standard-
        setting decision, governments should be: a) wary of thinking 
        they have sufficient foresight to make proper standard-setting 
        decisions; and b) deferential to private attempts at standard 
        setting. Different business models will emerge, different 
        appetites for risk will be revealed--some firms will hedge risk 
        and cooperate with others in standard setting; others will 
        audaciously seek to ``win'' the standard with a fully closed, 
        vertically integrated model (large parts of the iPod business 
        model come to mind here). Only where the collective action 
        problem seems overwhelming should government deign to enter the 
        standard setting sphere.

        Finally, for public policy makers, we can never forget the 
        lessons of public choice theory, which predicts that firms and 
        interest groups will seek government favor in promoting their 
        standards solution and handicapping their rivals. Any call for 
        government to prefer one standard or model over another must be 
        subject to the most exacting skepticism given what we know 
        about the propensity for the public policy process to be 
        perverted toward private ends.

With that, let me address three issues relating to digital music 
interoperability that occasioned this hearing today. I have three 
specific theses: first, protect the Schumpeterian incentives to 
innovate and compete for, not just in, the market; second, allow open 
and closed platform business models to compete; and, third, permit the 
freedom to use digital rights management technology so digital music 
will be brought to market.

    PROTECT THE SCHUMPETERIAN INCENTIVE TO INNOVATE AND CREATE NEW 
                               PLATFORMS

    Much of the brow-furrowing over interoperability in digital music 
stems from the success of Apple's iPod platform. I urge this 
Subcommittee not to give in to the politics of platform envy, however. 
Instead of being concerned with the business decisions of a firm, and 
the preferences of consumers, the Committee should celebrate the 
triumph of the iPod platform as Schumpeterian competition at its best.
    Joseph Schumpeter, you may recall, was the economist who described 
capitalism as a process of ``creative destruction,'' with new firms and 
new products spurring innovation and creating new markets. Digital 
music is a new market, and the iPod platform and its remarkable success 
is the harbinger of that market and what it can be. In turn, this 
competition for the market has spurred other innovation, other 
platforms and other business models to emerge to challenge the iPod 
platform. This is a type of competition that benefits consumers 
immeasurably. It is the type of dynamic competition that is making 
digital music a reality to millions of American consumers. The law--
intellectual property and antitrust law, specifically--should encourage 
this dynamism.
    There are at least three benefits to this Schumpeterian 
competition: firms compete to build a valuable customer base, firms 
bring new products to market more quickly for fear of being displaced, 
and companies are driven to develop superior technologies. All of these 
are benefits we are now seeing from inter-platform competition for 
digital music markets. To be sure, this competition may create some 
hiccups and difficulties for interoperability as it goes on, but the 
innovation benefits are worth it. Furthermore, these markets usually 
trend toward interoperability, as that is usually where consumer 
preference directs them.
    By contrast, government-mandated interoperability sacrifices the 
dynamic competition for the standard for competition within the 
standard. This mandate would appropriate the value that the platform 
innovator has created, and allow others to interoperate on the 
platform. Long-term, such mandated unbundling of digital music 
platforms in the name of interoperability will quell innovation and 
investment in the platform. Furthermore, this call for mandated 
interoperability is, by definition, going to be opportunistic. No one 
calls for access to failed platforms, say the Betamax, the Commodore 
64, or the Digital Audio Tape.
    One of the questions here is how law will treat cases of reverse 
engineering, such as Real Networks has attempted to do with the iPod, 
and various hackers have done with the Fairplay DRM system and the 
Napster To Go DRM. Interestingly, copyright law tends to be more 
solicitous of reverse engineering, while patent law tends to be hostile 
toward reverse engineering attempts. On balance, it seems to me that IP 
law should encourage this inter-platform competition such as we see 
happening in digital music, and thus be suspicious of attempts to 
reverse engineer and de facto ``unbundle'' the successful platform.
    So, my first advice is: don't give into platform envy and mandate 
some sort of interoperability. Antitrust law and the common law-like 
doctrines of intellectual property law are adequately suited to address 
the challenges from new digital music platforms.

        (RELATIVELY) MORE OPEN AND MORE CLOSED PLATFORM MODELS 
                       WILL COMPETE FOR DOMINANCE

    A related question to the type of competition that is occurring in 
this market is the platform models that firms choose to compete in the 
market. This gets to the heart of interoperability, as different firms 
opt for platforms of varying degrees of ``openness,'' on the one hand, 
or closed integration, on the other. For Congress, I do not think this 
should be of particular concern because the market will sort out what 
is superior, or at the very least make a better judgment about the 
inevitable trade-offs involved.
    From a business standpoint, you can see the trade-offs and 
strategic decisions that companies are making. By opting for a more 
``open'' platform, the firm hopes to attract more users to its platform 
and increase the number of applications compatible with its platform. 
The trade-off involves sharing more of the profits from that platform, 
and also perhaps some of the quality control over the whole consumer 
experience. In contrast, a more closed platform rather audaciously 
attempts to garner all of the ``rents'' from production, but at a cost 
(perhaps) of interoperability. We saw this very dynamic in the 
competition for the personal computer standard with the lower-cost, 
modular Wintel platform competing with the higher-cost, more tightly 
integrated Apple MacIntosh platform. We see reflections of that same 
business strategy difference now with digital music players.
    Recently, The Wall Street Journal had a story about a new trend 
toward ``closed'' non-interoperable platforms--in coffee makers. Yes, 
coffee makers, which have traditionally been ``open-architectured'' 
devices with standard filter basket design and open to any brand or 
grind of coffee. Now, companies such as Nestle with a Nespresso, Sara 
Lee with Senseo and Kraft with a Tassimo, are making closed-platformed 
coffee makers that use special fiters and coffees that work just with 
the specific maker. And just last week a new, relatively closed 
standard emerged on the consumer electronics scene, the Sony PSP. I 
know this because my 10 year old son is bugging me for one. The PSP 
uses a disk size that is proprietary to Sony. As a consumer, I may fear 
``lock in'' on these closed platforms, but I can make the decisions 
whether to buy or not.
    Should public policy be concerned with this turn in the annals of 
coffee maker platform design or video game devices? Probably not. If 
you start looking for standards to scrutinize, you will see them 
everywhere--from razors and blades, to PSPs and disk drives, to MP3 
Players and iPods. Because we cannot know in advance what consumers 
will prefer or what is truly superior, we should forbear from 
interfering.

                FREEDOM TO USE DIGITAL RIGHTS MANAGEMENT

    A final value for public policy should be to ratify the 
acceptability and use of digital rights management or DRM technologies. 
DRM allows content providers a reasonable degree of confidence in 
bringing digital music to market, and consumers the ability to purchase 
digital music. DRM will be integral to consumers' access to digital 
content and hence must be allowed its place as a valid market mechanism 
to bring digital music to market.
    Some argue that DRM is a limitation on consumers' freedom and its 
used should be circumscribed. This is wrong on two fronts. First, the 
price system in a functioning market takes this into account and 
reduces consumers' costs correspondingly. If I purchase a song with DRM 
attached that limits its platform compatibility, those limits are in 
the price I pay. Because the nature of digital technologies allows 
perfect, costless copying, my consent as a consumer to purchase a DRM-
restricted song may be the only way I can enjoy digital music. If the 
choice is between digital music with DRM and no digital music, I will 
take the former.
    The argument that DRM--and its associated technological arms races 
to break it--is socially wasteful proves too much. By this logic, my 
investment of locks on my home is socially wasteful because a 
determined burglar will be able to break in anyway. DRM does, as we 
see, inspire a hack and counter-hack arms race, and this is indeed not 
salutary for the mass of consumers who want to properly use licensed 
digital music. And indeed, DRM can be overrestrictive to consumers' 
desires for interoperability. But right now, I do not have a better 
idea. More important, the market opportunity for more-tailored DRM 
should provide the opportunity for it to become better and more 
accommodating of consumers' wishes.
    Indeed, HR 1201, pending in another committee, would in effect 
remove DRM as a marketplace option. By permitting consumers to 
circumvent copy-protection mechanisms, currently a violation of the 
Digital Millennium Copyright Act, any contract between a consumer and a 
content provider involving a fixed payment for a fixed set of rights 
could be unilaterally voided by the consumer.
    We are constantly hearing calls for more flexible business models 
in digital content. If HR 1201 were to pass, I could approach the 
existing smorgasbord of digital music offerings, for example, and 
purchase the most affordable option, which likely involves limitations 
on platforms and devices, enforced through DRM technology. I could then 
legally hack through those protections and use the content however I 
may see fit, gaining the same flexibility of use as a consumer who paid 
full price for that use. It's not hard to imagine that in a world where 
DRM hacking is legal, there would be little incentive for content 
providers to compete with various rights models, as we see now with 
Napster To Go. That would mean less content with fewer price options, 
and thus a loss for consumers.

                               CONCLUSION

    Standards are hard. Interoperability is a good thing, but not an 
absolutely good thing. Consumers' tastes, for the most part, will drive 
toward interoperable platforms, but not necessarily.
    Intellectual property law, antitrust and administrative regulation 
point in slightly different directions on these issues, but are up to 
the task of confronting the policy challenges presented by digital 
technologies. From Congress' point of view, the best course would be to 
resist calls for mandates or technology limitations in this dynamic 
space.
    I thank the Committee for this opportunity and ask that my written 
remarks be made part of the record. I am happy to answer any questions 
you may have.

    Mr. Smith. Thank you, Mr. Gifford.
    Dr. Pence.

             TESTIMONY OF WILLIAM E. PENCE, PH.D., 
               CHIEF TECHNOLOGY OFFICER, NAPSTER

    Mr. Pence. Thank you, Mr. Chairman, Mr. Berman, Members of 
the Subcommittee for inviting me here today. Thank you, also, 
for the leadership that you have exercised in the fight against 
piracy and for recognizing the importance of the legitimate on-
line music marketplace.
    Like our colleagues in the on-line music industry, Napster 
has a vision for what consumers want in a service: great music, 
deep catalog, easy-to-use technology, high-quality files 
without spyware, pornography or viruses, and flexibility and 
portability all at a fair price.
    Recently, as you may be aware, Napster introduced the first 
portable music subscription service, Napster To Go, that allows 
consumers to enjoy our large catalog of music on a variety of 
portable devices for a plat price of only $15 a month. Combined 
with unlimited downloading and streaming, we believe this 
service provides consumers with all of the key elements they 
want in a digital music service: freedom to discover music on 
an unlimited basis and the ability to take that music with them 
wherever they go.
    For many users, this is a more attractive option than 
buying individual tracks for 99 cents. We support an ala
    carte download store as well, and we strive to offer as 
many choices to consumers as possible. All of these choices, 
and more to come, are enabled through our underlying digital 
rights management platform which is based on Microsoft software 
components.
    I have been asked to testify today specifically about 
digital music interoperability, about the value of 
interoperability to consumers, creators, and legitimate on-line 
music marketplace and about when full digital music 
interoperability may be available. In particular, some have 
asked whether Congress should help jump-start the legitimate 
marketplace by mandating digital music interoperability so that 
consumers will no longer be confused, so that they will know 
for sure that every digital song they acquire lawfully will 
play on any portable music player and on any PC.
    We have been asked whether digital interoperability might 
be the magic bullet that enables legitimate on-line music to 
win the battle against piracy and black-market networks.
    As a technologist, it seems important to appreciate that 
each digital song file has two essential components, the audio 
compression software and the digital rights management software 
and that each can be a source of interoperability confusion. 
You may be familiar with audio compression software or codecs 
that have been developed by Real Networks and Microsoft, as 
well as the MP3 format developed by Fraunhofer and the AAC 
format utilized by Apple. But there were literally dozens of 
audio codecs offered in the late 1990's.
    Historically, codecs were incompatible, and if one 
downloaded a song in the MP3 format, it would not play if your 
PC utilized a different format. Today, however, this is less of 
an issue, generally, because audio codecs have been in the 
marketplace for several years, and traditional marketplace 
forces have evaluated the qualities and sustainability of each. 
As a result, only two or three codecs are relevant in the on-
line marketplace today, and interoperability is considered 
essential and made possible by licenses that are easily 
available and economically reasonable.
    For consumers, the generally successful outcome is that PCs 
and portable music devices today support more than one of the 
surviving codecs, minimizing, although not eliminating, 
dysfunction for end users. Today, for example, users can copy 
their CD collection onto their PC in the MP3 format and combine 
those music files with songs purchased from Napster in the 
Microsoft WMA format and seamlessly transfer all to portable 
devices without ever knowing that two separate formats were 
involved.
    In contrast, DRM interoperability has remained at the 
center of debate in the on-line music industry. In the last 
several years, high-quality DRM technologies have been 
developed and offered by dozens of companies. While the market 
has narrowed the field from dozens of DRM technologies to less 
than a handful today that are commercially meaningful, the DRM 
market is still significantly less mature than the codec 
market, and the competing offerings are not fully rationalized 
or stabilized.
    More importantly, DRM technology is still in a stage of 
rapid innovation. This is best demonstrated by the pace of new 
business models being introduced in the market, including our 
own Napster To Go service. As consumers' on-line services and 
copyright owners have become more sophisticated, technology 
innovators have responded rapidly and brought improved products 
to market, but DRMs are still being developed, tested, 
challenged and upgraded, and I encourage Congress to welcome 
and promote this innovation and the improved music offerings 
that result.
    It is my belief, and the essential point of my 
participation today, that marketplace forces will continue to 
drive innovation in the DRM arena with the tenant consumer 
benefits, new ways to enjoy digital music at a variety of 
different price points, while also gradually solving the 
interoperability problem.
    The solutions will be evident through a combination of 
consumer devices that support multiple DRM formats and services 
that will translate from one DRM format to another, as content 
flows legitimately between devices, always maintaining the user 
rules as defined by the service that originally makes the 
content available. Already we see evidence of DRM market forces 
in action, as companies coalesce around platforms.
    Historically, the Government has not been a participant in 
competition between early-stage consumer technologies. 
Government intervention in the innovation business can lead to 
politicizing and inhibiting such innovations rather than 
allowing the marketplace, based on actual demand, to select 
winners that must continue to provide viable solutions.
    In contrast, Napster wholeheartedly endorses the 
conclusions of Chairman Smith and Representative Berman that 
were offered in a recent Subcommittee hearing about our music 
licensing laws. Congress has a critical role to play in 
facilitating the legitimate on-line music marketplace by 
modernizing the Copyright Act.
    Thank you, again, for providing the opportunity for Napster 
to address the issues that continue to hamper industry and for 
your continuing support in helping royalty-paying, on-line 
music services defeat piracy.
    [The prepared statement of Mr. Pence follows:]

                 Prepared Statement of William E. Pence

    Mr. Chairman, Mr. Berman, and Members of the Subcommittee:
    Thank you for inviting me, on behalf of Napster, to testify at 
today's hearing at which the Subcommittee is considering the importance 
of digital music interoperability. Thank you also for the leadership 
that you and the Members of the Subcommittee have exercised in the 
fight against piracy, and for recognizing the importance of the 
legitimate online music marketplace, both for its independent value as 
an opportunity for creators and consumers to distribute and enjoy more 
and different types of music, and for the value of royalty-paying 
online music as the marketplace solution to piracy.
    Napster is also particularly appreciative of the Subcommittee's 
leadership with regard to the education and youth market. Napster, as 
you know, is working closely with the recording industry and a number 
of universities to bring legal music to the campuses of America in a 
manner that encourages this important consumer group to respect the 
legitimate marketplace while recognizing its hunger for a full-featured 
digital music service at a reasonable price.
    Like our colleagues in the online music industry Napster has a 
vision of what consumers want in an online music service: great music, 
deep catalog, easy-to-use technology, high-quality files without 
spyware, pornography, or viruses, and flexibility and portability, all 
at a fair price. Moreover, our company story demonstrates that 
consumers are willing to pay for this: from a standing start four years 
ago as PressPlay to today's Napster, we now have more than 400,000 
paying subscribers worldwide, including more than 50,000 subscribers on 
college campuses.
    Recently, as you may be aware, Napster introduced the first 
portable music subscription service, Napster-to-Go, that allows 
consumers to enjoy our large catalog of music on a variety of portable 
devices for a flat price of only $15 a month. Combined with unlimited 
downloading and streaming, we believe this service provides consumers 
with all the key elements they want in a digital music service--freedom 
to discover music on an unlimited basis, and the ability to take that 
music with them wherever they go. For many users, this is a more 
attractive value than buying individual tracks for $0.99, though we 
support an a la carte download store as well, and we strive to offer as 
many choices to consumers as possible. All of these choices, and more 
to come, are enabled through our underlying digital rights management 
platform, which is based on Microsoft software components.
    I have been asked to testify today specifically about digital music 
interoperability--about the value of interoperability to consumers, 
creators, and the legitimate online music marketplace--and about when 
full digital music interoperability may be available. In particular, 
some have asked whether Congress should help jump-start the legitimate 
marketplace by mandating digital music interoperability so that 
consumers will no longer be confused, and rather they will know for 
sure that every digital song they acquire lawfully will play on any 
portable music player, on any PC, and if burned to a compact disc that 
it will play on every CD player. We have been asked whether digital 
interoperability might be the magic bullet that enables legitimate 
online music to win the battle against black market networks that 
enable music theft and generate no royalties to artists.
    As a technologist, it seems important to appreciate that each 
digital song file has two essential components--the audio format 
software and the digital rights management software--that can each be a 
source of incompatibility. You may be familiar with audio format 
softwares, or codecs, that have been developed by RealNetworks and 
Microsoft, as well as the MP3 format developed by Fraunhofer and the 
AAC format utilized by Apple. But there were literally dozens of audio 
codecs offered in the late 1990s, including software developed by AT&T 
Labs and Universal Music.
    Historically codecs were incompatible, and if one downloaded a song 
in the MP3 format it would not play if your PC utilized Liquid Audio 
software, and vice-versa. Today, however, this is less of an issue, 
generally because audio codecs have been in the marketplace for several 
years and traditional marketplace forces have evaluated the qualities 
and sustainability of each. As a result only two or three codecs are 
relevant in the online music industry today, and interoperability is 
considered essential and is made possible by licenses that are easily 
available and economically reasonable. And for consumers, the generally 
successful outcome is that PCs and portable music devices today support 
more than one of the surviving codecs, minimizing (although not 
eliminating) dysfunction for end users. Today, for example, users can 
copy their CD collection onto their PC in the MP3 format and combine 
those music files with songs purchased from Napster in the Microsoft 
WMA format, and seamlessly transfer all to portable devices without 
ever knowing that two separate formats were being integrated.
    In contrast, DRM interoperability has emerged recently as the 
center of debate in the online music industry. In the last several 
years high-quality DRM technologies have been developed and offered by 
dozens of companies, including Liquid Audio, AT&T Labs, Universal 
Music, RealNetworks, IBM, Microsoft, Contentguard, Intertrust, Verance 
and Macrovision. While the market has narrowed the field from dozens of 
DRM softwares to less than a handful today that are commercially 
meaningful, the DRM market is significantly less mature than the codec 
market, so the competing offerings are not fully rationalized or 
stabilized.
    Importantly, the market's immaturity is driven by the technology's 
immaturity, as DRM technology is still in a stage of rapid innovation. 
This is best demonstrated by the pace of new business models being 
introduced in the market, including our own Napster to Go service, 
based on the just released DRM10 technology from Microsoft. As 
consumers, online services and copyright owners have become more 
sophisticated, technology innovators have responded rapidly and brought 
improved products to market, but DRMs are still being developed, 
tested, challenged, and upgraded--and I encourage Congress to welcome 
and promote this innovation and the improved music offerings that 
result.
    It is my belief, and the essential point of my participation today, 
that marketplace forces will continue to drive innovation in the DRM 
arena with attendant consumer benefits--new ways to enjoy digital music 
at a variety of different price points--while also gradually 
``solving'' the interoperability problem. The solutions will be evident 
through a combination of consumer devices that support multiple DRM 
formats, and services that will translate from one DRM format to 
another as content flows legitimately between devices, always 
maintaining the user rules as defined by the service that originally 
makes the content available.
    Already we see evidence of DRM market forces in action as companies 
coalesce around platforms. A good example of this is the many online 
services and device manufacturers that have licensed and deployed the 
Microsoft DRM. Others, such as Apple, have chosen not to license their 
technology platform under any terms to services and manufacturers eager 
to offer innovative business models to consumers. Perhaps Apple is 
confident that its market-leading position is best maintained by 
promoting a closed environment, and that is a legitimate business 
decision that some endorse and others may question. Napster believes 
that allowing the iPod to work with multiple service offerings would 
benefit consumers. Nevertheless, I do not see Government intervention 
as the solution, as it would stifle competition and innovation that 
will benefit consumers and copyright owners at a very early stage of 
the market's development.
    Historically the Government has not been a participant in 
competition between early-stage consumer technologies, such as between 
the VHS and the Betamax, the cassette and the 8-track tape, USB and 
Firewire, or the current competition between DVD Audio and Super Audio 
CD. Similarly, it does not seem prudent for Government to pick a winner 
in the continuing (but still quite early-stage) marketplace battle 
between Apple's Fairplay DRM and its competitors. Government 
intervention in the innovation business can lead to politicizing and 
inhibiting such innovation, rather than allowing the marketplace, based 
on actual demand, to select ``winners'' that must continue to provide 
viable solutions or lose their market--deservedly--to the next great 
offering that someone develops in his or her garage or corporate lab.
    In contrast, Napster wholeheartedly endorses the conclusions of 
Chairman Smith and Representative Berman that were offered in the 
recent Subcommittee hearing about our music licensing laws. Congress 
has a critical role to play in facilitating the legitimate online music 
marketplace, by modernizing the Copyright Act--in particular, Sections 
115 and 112 as they relate to music publishing rights and royalties. 
Napster and our legitimate online music competitors compete with pirate 
services, and it is critical to creators and all who support them that 
royalty-paying services win the day.
    If this Subcommittee helps legal services to secure blanket 
licenses for music publishing rights, we will offer the full catalog of 
music that, ironically, only the black market networks players can 
currently provide to consumers. Once we are actually functioning on an 
equal music playing field, Napster believes that our then-significantly 
larger number of consumers who realize that our features and 
functionality are so much more robust and appealing than the virus-
ridden free option, will speak out on the subject of interoperability 
and encourage the market to adapt.
    Thank you again for providing the opportunity for Napster to 
address the issues that continue to hamper our industry, and for your 
continuing support in helping royalty-paying online services defeat 
piracy.

    Mr. Smith. Thank you, Dr. Pence.
    Mr. Bracy?

         TESTIMONY OF MICHAEL BRACY, POLICY DIRECTOR, 
                   FUTURE OF MUSIC COALITION

    Mr. Bracy. Thank you, Mr. Chairman, Mr. Berman, Mr. 
Conyers, for being here today, and the rest of the 
Subcommittee. We appreciate the opportunity to present some 
testimony, some thoughts.
    You have our written statement, so I am just going to kind 
of give some reflections off that if that is okay with the 
Committee.
    As we are preparing for this hearing, it occurred to us 
that this is actually the 5-year anniversary of the formation 
of Future Music Coalition, and it gave us an opportunity to 
reflect on sort of what we have seen over the last 5 years and 
some kind of larger themes.
    I think one of the things that is important to recognize is 
that a lot of what we are dealing with in the music community 
is the idea that new technologies have dropped the cost of 
actually getting involved in the music community, that 
technology creates more musicians because more people have 
access to capital to create music and to distribute music, to 
promote themselves, and to build that one-on-one relationship 
with friends.
    The challenge that you see, as more and more people come 
into the community, is that the existing music structures, the 
historic music structures don't really support the amount of 
content that comes into the marketplace, and, frankly, didn't 
support in the traditional models the way and the ability for 
consumers to then to access that content.
    And while there is a lot of disagreement and a lot of 
different sort of visions as far as how you get to the end 
game, as far as the legitimate digital marketplace for music, 
there are some themes that we think cut across all aspects of 
the music community of musicians an songwriters; the first 
being that whenever possible artists need to maintain control 
over their copyright and their career decisions.
    Second is that artists, as independent entrepreneurs, need 
the ability to compete in the marketplace, meaning they need 
access to the basic networks, they need the ability to be 
compensated for their work, and they need the ability to access 
consumers.
    The third is something that you have done a great job 
throughout this process with the Committee is that artists need 
to be seen by policymakers as valued participants in this 
process, that is, the new systems are designed, new structures 
are designed that artists need to be at the table, and we 
certainly appreciate your leadership.
    Now, this transition, as we said, is necessary and it is 
welcome, and it is important, and that as more people get into 
this marketplace, you are starting to see the type of 
experimentation that really leads to this development of a 
legitimate marketplace. Five years ago, we said the only way to 
compete with Napster, an unlicensed Napster, was with a legal 
Napster, that you have to really try to create incentives in 
the marketplace to grow the market, to create legitimate 
models.
    And in the music community and among musicians, you really 
see an embracing of those technologies. We recently published a 
study with the Pew Internet and American Life project that 
really had two major conclusions:
    The first is that, on a universal basis, artists are 
embracing the Internet. They are embracing technology. They are 
trying to integrate that into their careers as a way to reach 
their fans directly and to promote their work.
    Of course, at the same time, there is this wide diversity 
of opinions as far as where we are today. There are a lot of 
different opinions in terms of peer-to-peer. You see that 
emerging artists embrace peer-to-peer, to a certain degree, 
because it gives them exposure. It is a way to get their name 
out there. Existing artists, established artists, they are 
concerned about what is happening to their revenue streams. 
They are skeptical about what is happening with the new models, 
and they are eager to see revenue flow into them directly. They 
see what is going on with their checks.
    Now, as the other witnesses have talked about, you are 
starting to really see this digital marketplace emerging. It is 
remarkable, 5 years on, to think about the growth of satellite 
radio, digital subscription services, music blogs, e-zines, 
Internet radio, webcasting, podcasting, iTunes.
    Consumers are demonstrating their willingness to adopt 
legitimate digital services. The marketplace is beginning to 
take hold. The question is can we continue to see a legitimate 
marketplace that really will benefit musicians and music fans. 
In fact, the point is not that this industry is perfect or that 
there even is a ``solution'' in place. It is a complicated 
process. It includes multiple competing markets which are 
dependent on evolving, technological innovation and regulatory 
policy decisions. The future music marketplace will be driven, 
to a large degree, by consumer adoption of broadband and high-
speed services to the home, which has its own regulatory and 
technological uncertainty. Spectrum policy and the transition 
to digital radio are going to play a big part of this as well.
    So vigilant congressional oversight to date has been 
critical to this process. We are making a lot of inroads. We 
are seeing the growth of the market. Now, there are a lot of 
other sort of issues that are involved here that some don't 
have the jurisdiction of this Committee, some do, but that help 
sort of inform the growth of this digital marketplace.
    They include looking at issues of consolidation of the 
existing commercial radio industry, accusations of structural 
payola that limit the amount of songs or the type of songs they 
can get on the public airwaves, expanding community-based low-
power radio networks into urban markets, looking at the digital 
audio broadcasting question to make sure that DAB is 
implemented in a way that addresses the fundamental concerns 
about localism, competition and diversity that we have raised 
as far as what is happening in the commercial radio 
marketplace, and bringing digital radio in line with other 
noninteractive digital transmission services that are required 
to pay an additional performance royalty to performers for the 
use of the music.
    Finally, I want to echo Mark Cooper's point, which is that, 
as independent entrepreneurs, it is absolutely critical that 
musicians and artists have access to the underlying networks, 
that they can't be blocked off of the main channels.
    So, again, we appreciate the opportunity to testify. We 
look forward to answering any questions and thank the Committee 
for their leadership.
    [The prepared statement of Mr. Bracy follows:]

                  Prepared Statement of Michael Bracy

    My name is Michael Bracy. As a founder and the Policy Director of 
the Future of Music Coalition, I appreciate the opportunity to speak 
with you today.
    FMC was founded on the belief that the terrestrial music industry 
is fundamentally broken. By that we mean that the structures that 
dominate the marketplace underserve the majority of creators and music 
fans. We did not form FMC simply to complain, but to effect substantive 
change in the music community by injecting the critical voices of 
artists and creators in the midst of this transition from analog to 
digital. By including these often absent voices at this critical 
juncture, we work to build more equitable and responsive models. By 
that we mean:

        1.  Whenever possible, artists must maintain control over 
        copyright and career decisions.

        2.  Artists must be able to compete fairly in the marketplace, 
        meaning they must be able to receive compensation for their 
        work and have access to consumers.

        3.  Artists must be seen by the policymaking community as 
        valued stakeholders in policy debates

    The music community is in the midst of a necessary and welcome 
transition to a digital business model. Major labels and commercial 
radio stations have became integrated into huge corporations focused 
less on music and culture but on maximizing revenues. The fundamental 
basics of the major label structure--the need for huge capital 
investment and scarcity of promotion and retail outlets--have been 
overrun by technological innovation.
    This innovation has reshaped the way that music is recorded, 
manufactured, promoted and distributed. Digital studios and software 
programs dramatically reduce production costs. The Internet vastly 
increases promotional and sales opportunities. The marketplace for 
independent music has exploded, as indie labels proliferate to serve 
the expanding artist community. While much of this music is simply not 
aimed at the kinds of mass audiences of interest to major labels or 
commercial radio, there clearly is a market for this music, and 
alternate and Internet-based economies have begun to take shape.
    As these digital models take flight, many musicians are embracing 
new business models that allow greater independence, direct contact 
with their fans and more control over their careers. Others point out 
the uncertainty of these times, and express skepticism that legitimate 
digital distribution structures can be monetized at a level that would 
replicate their revenue streams they are used to receiving from 
previous models.
    In this context, the results of a recent study conducted by FMC and 
the Pew Internet and American Life Project should not be surprising, or 
controversial. This study found that musicians fully embrace the 
Internet to promote and sell their work but remain divided over the 
question of file-sharing.
    To a large degree, we found that these results could be tracked 
according to demographic factors--emerging artists were more likely to 
embrace file sharing services as a way to promote and distribute their 
work, while established artists who made a majority of their income 
from being a musician or songwriter raised more concerns.
    From our standpoint, it is important to recognize that we are still 
in the early days of a significant marketplace transition. While peer-
to-peer remains extraordinarily popular, a legitimate digital 
marketplace is emerging. Consumers are exploring new, licensed ways of 
accessing and enjoying music, including satellite radio, digital 
subscription services like Rhapsody, Emusic and Napster, music blogs 
and ezines, the growth of Internet radio, webcasting, podcasting and 
digital download stores like iTunes. This trend demonstrates consumers' 
willingness to adopt legitimate digital services, and reinforces the 
critical notion that the combination of technical innovation, access to 
the underlying delivery mechanisms and reasonable licensing terms can 
create a revitalized industry that serves both musicians and music 
fans.
    The point is not that this industry is now perfect, or that we even 
can see the ``solution''. Rather, we all should acknowledge that the 
digital transition is complicated. It includes multiple competing 
markets, dependent on evolving technological innovation and regulatory 
policy decisions. The future music marketplace will be driven by 
consumer adoption of broadband to the home, an area full of regulatory 
and technological uncertainty of its own. Spectrum policy and the 
transition to digital terrestrial radio will play a significant role in 
determining how consumers are able to access digital content, and how 
performers will be compensated in the future.
    Vigilant Congressional oversight of the transition of the music 
marketplace has played a critical role in its success to date. At the 
same time FMC sees a number of potential opportunities for action 
today. Will Congress listen to the concerns of the music community by 
addressing consolidation of the commercial radio industry and 
accusations of structural payola that limit the songs that appear on 
the public airwaves? Will the FCC be permitted by Congress to expand 
the wildly popular non-commercial Low Power Radio licenses to urban 
markets? Will Digital Audio Broadcasting be implemented in a way that 
addresses the fundamental concerns about localism, competition and 
diversity in the radio marketplace? And will digital radio be brought 
in line with other non-interactive digital transmission platforms that 
are required to pay an additional performance royalty to performers?
    Most importantly, will Congress be able to defend the ability of 
musicians and songwriters to compete in the marketplace by ensuring 
access to high speed networks? As independent entrepreneurs, musicians 
and songwriters require that the fundamental open structures of the 
Internet remain in place and that innovation is allowed to continue.
    Over the past five years, the Future of Music Coalition has been 
fortunate to collaborate with dozens of organizations, representing 
hundreds of thousands of musicians, songwriters, retailers, promoters, 
community broadcasters and fans. The transition to a digital economy 
represents real threats and real opportunities to these communities. 
That being said, there are core themes that cut across all aspects of 
the music community. These shared values of artists' control over their 
copyright and career decision, ability to compete in the marketplace by 
receiving compensation for their work and accessing consumers, and 
being active participants in the policy process can serve us going 
forward.
    Thank you again for the opportunity to participate in this hearing, 
and I look forward to answering your questions.

    Mr. Smith. Thank you, Mr. Bracy.
    Dr. Cooper, in your testimony you said sellers of closed 
platforms need to better inform consumers that their platforms 
are closed. How would you suggest that they do that? Are you 
just talking about a warning label or something else? And if 
there's anyone who disagrees with that, I'd like to know that 
as well.
    Mr. Cooper. You know, we could hypothesize a labeling 
program which would be an obligation, but I don't necessarily 
want to get there because that creates a process of gaming that 
Mr. Gifford talked about.
    But the simple fact of the matter is, imagine if we had--if 
iPods had to be labeled that said, ``This music won't play on 
anything else,'' or vice versa. That would actually, people 
would then start to think. And as people build up libraries and 
they discover that they can't move their music from one device 
to another, although if that continues what you'll get is 
hackers who will start making it possible because innovation is 
hard to quell in this marketplace.
    So the point is that policymakers need to engage in a 
little bit of jawboning here, as maybe instead of a regulatory 
position.
    Mr. Smith. So maybe not a Government mandate, but still 
full disclosure.
    Mr. Cooper. Sure. Full disclosure, and attorneys general 
ought to be asking these questions, this Committee, et cetera. 
Jawboning can frequently get you a lot of help in the 
marketplace rather than having a formal process about is this 
labeled.
    Mr. Smith. Is there anyone who disagrees with the idea of 
full disclosure and labeling for the consumers?
    [No response.]
    Mr. Smith. Okay. Mr. Gifford, I'm tempted to ask you if you 
think Schumpeter should be the patron saint of Congress, but 
let me ask you a more colloquial question, which is, do you see 
any role for Government at all in the process?
    And that's a question I'd like the other members to address 
as well.
    Mr. Gifford. Not at this time, Congressman. You have an 
emerging nascent market. I think Dr. Pence spoke well, that you 
have DRM technologies that are less mature than file format 
technologies, and there's a lot of foment going on right now in 
this marketplace, a lot of business models that are being 
tried, a lot of reliance interests that are just taking root, 
and I don't know how Government can do anything but upset that 
very tentative equilibrium we're seeing.
    Mr. Smith. Dr. Pence and Mr. Bracy, what do you think about 
any role for Government?
    Mr. Pence. Well, I mentioned the 115 issue in my opening 
remarks. Short of that I don't think there is much of a role to 
play at this time. We think the market is very dynamic. We've 
been introducing new business models as some of our competitors 
have been, and we think the market is in the early stages where 
it should be allowed to evolve and offer more choices to 
consumers. So we don't--I don't see any additional role at this 
time.
    Mr. Smith. Okay. Mr. Bracy?
    Mr. Bracy. Mr. Chairman, I think one of the challenges is 
that to a certain extent it's important that Congress look at 
ways of demonstrating that there is this broader marketplace 
for local and independent music. I mean one of the realities of 
the music community is that it is local, it's independent. The 
music community has very little to do as far as the mass 
marketing of music that you see in terms of major, you know, 
huge platinum selling artists. And there are little things that 
I mentioned in our testimony that can be done tangentially, 
less on technology mandates or DRM discussions or things like 
that, but more on looking at the existing ways that most 
consumers access music and making sure they have access to 
independent voices.
    Mr. Smith. Okay. Thank you, Mr. Bracy.
    Mr. Bracy, let me ask you and Dr. Pence to go beyond your 
testimony. And you don't have to answer this question if you 
don't want to, but I want to ask you about the Apple business 
model, whether you think limiting the interoperability to 
iTunes and the iPod is going to be a successful business model 
or not, just your opinion?
    Mr. Bracy. You know, with the understanding that this is 
really we have very limited expertise, but as a personal on the 
specific concept, you know, business people do business and we 
do different things, but, you know, that we are glad to see the 
market evolving and obviously they have first mover advantage, 
but you know, the challenge is will the market speak? And the 
question is will the market speak or not? And I don't really 
have an opinion on that.
    Mr. Smith. Dr. Pence, do you have a----
    Mr. Pence. I do have an opinion. I think it is a business 
model that has clearly had some success. It's actually--the ala 
carte model is one that we offer as well. However, we have 
offered other business models and we expect to offer additional 
models in the future, so we think choice is very, very 
critical, and that's the path we've embraced, choice not only 
in business models but an open approach to devices and support 
on different platforms. The choice Apple has made about 
retaining a closed environment is a legitimate business choice 
they have made and time will tell whether the marketplace will 
reward that or not.
    Mr. Smith. And I think as the market evolves you're 
probably going to have consumers want more choice, but that's 
also just my opinion as well.
    Mr. Gifford, anything to add to that?
    Mr. Gifford. Well, actually, I think, and I mentioned----
    Mr. Smith. Well, actually, Dr. Cooper. I called on Mr. 
Gifford, but then I'll ask you for your response in a minute 
too.
    Mr. Cooper. I think this history of the last 25 years 
really, I started from that one example of--I'm sure Mac thinks 
they had a very successful business model, and they have 5 
percent of the market now, and that may make them happy. But we 
can go back and find other examples.
    One really interesting example has to do with the World 
Wide Web, and the predecessor to World Wide Web was a service 
known as Gopher. It was an application, and some people in this 
room may remember that. And there was a key moment where the 
owners of Gopher, the creators of Gopher had said, hey, we're 
going to start charging people royalties and reorganizing this, 
and folks dropped it like a rock. And the World Wide Web came 
along, which is a magnificently open system. And I could give 
you other examples.
    So what happens here is that business people can make 
decisions about what serves their interest, and they'll be 
happy with a nice little niche market, but our society is much 
better served by the drive toward open platform.
    Mr. Smith. Thank you, Dr. Cooper.
    Anything to add, Mr. Gifford?
    Mr. Gifford. First of all, Mr. Chairman, I've been on 
enough panels with Dr. Cooper to know that he can't help 
himself. [Laughter.]
    I don't think I have anything to add. I think you could, 
you can recognize a general trend, that digital markets tend 
toward interoperability, but not necessarily.
    Mr. Smith. Agreed. And despite the sort of divergent 
backgrounds of the four panelists today, it's interesting that 
almost everybody seems to agree on the issue at hand.
    So I thank you all for your testimony, and the gentleman 
from California, Mr. Berman, is recognized.
    Mr. Berman. Thank you very much, Mr. Chairman.
    So, Dr. Pence, even though my daughter complains about not 
being able to get the Napster service on her iPod, you don't 
think Congress should make iPod get the Napster service?
    Mr. Pence. Well, Congressman, we have a very active 
community in the Napster service, as I'm sure your daughter 
knows, and we have very active message boards, and so the issue 
of iPod compatibility is raised all the time to our customer 
care group, to us directly. And there's no question that we 
would benefit with interoperability with iPod.
    However, having said that, I think to take that into a 
Government mandate for some sort of interoperability solution 
is not the right answer. The Apple service has been very 
successful. We announced 2 days ago very, very strong growth in 
our own business, as you may have heard. So we feel very 
confident that over time by offering choice and using every 
legitimate means to license the various platforms to take the 
Napster service to all devices and all platforms, we think that 
is the best way for us to proceed, and we think it's in the 
best interest of consumers in the market.
    Mr. Berman. All right. I'm going to tell her to quit 
bothering me and go to your message board. [Laughter.]
    Dr. Cooper, you make a differentiation in your testimony 
about when it's okay to demand interoperability, and you cite 
as an example the music industry is limited in that it affects 
only the music business, while the railroad industry affects 
the entire economy. Ignoring the fact that you brush over the 
role of music and the productivity of the workforce, I want to 
carry out your assertion, take the logic of your assertion and 
apply it to something else here. When you say the marketplace 
and not Government intervention or legislation should and will 
resolve the interoperability question for technology, why 
doesn't this analysis work for the copyright owners who use too 
restrictive DRM? Won't they also pay the price, consumers will 
choose formats more convenient for them? Isn't that the most 
efficient way for consumers to let it be known to the copyright 
owner instead of through legislation? What is the difference 
between the developer and the content owner in this particular 
area?
    Mr. Cooper. No. I agree. I think that DRM, once we have 
choices out there, different people will choose the level of 
use that they're allowing to their customers. And you've heard 
examples of different kinds of models. And the marketplace will 
decide that. I do also think that a too restrictive DRM is 
going to be a form of failure of interoperability and consumers 
will--we will get competition for DRM as well. And so I do 
think because--but that's still the widgets part, and we think 
that that marketplace will actually also address that problem. 
So I accept your challenge. And we consistently will argue and 
have argued that give consumers choices about the level of 
functionality and they will make their choice and it will drive 
the marketplace.
    Mr. Berman. Good answer. Not consistent with the Consumer 
Federation's position on some legislation that's come to 
Congress, but a good answer.
    Mr. Cooper. Well, I think it went too far but----
    Mr. Berman. The legislation the Consumer Federation 
endorsed or the ones it opposed?
    Mr. Cooper. No, no. We endorse a reasonable definition of 
``fair use'' for consumer and oppose the legislation that we 
think----
    Mr. Berman. And a mandate on labeling requirements, okay. 
You state that the retailers of digital music--well, actually 
what I'd like to--the French Consumer Federation, in effect, 
which is a better way for you to hear about this than me trying 
to pronounce the French name, has launched a legal action over 
the two companies' proprietary music formats, claiming that the 
respective digital rights management used by both Sony and 
Apple which prevents songs brought from their online music 
shops from being played on other manufacturers' media players 
is limiting consumers' choice. The total absence of 
interoperability between DRM removes not only consumers' power 
to independently choose their purchase and where they buy it, 
but also constitutes a significant restraint on the free 
circulation of creative works, that group said.
    It's interesting how the French perspective on this is 
different than the Consumer Federation's. Could you develop 
that?
    Mr. Cooper. Well, look, our testimony is clear. When we get 
to widgets, and in my opinion applications of widgets in the 
digital age, we believe market forces will solve these 
problems. I've identified the situation in which as the market 
matures if we have lots of exclusive deals and not lots of 
competition widgets, then we would get some antitrust concerns. 
But at this stage of this game, especially with the recording 
industry, the established recording industry just getting into 
this business--last year was our watershed year--we think that 
this is not the time or the place to impose mandates. We think 
we still have platform competition going on at the level of 
widgets, and we think that we are going to be much better 
served with the industry now adopting a digital distribution 
and allowing innovators to continue to innovate, including all 
forms of distribution.
    Mr. Berman. The only thing I'll say in closing because my 
time has expired is I understand this position and it makes a 
lot of sense to me. What I don't understand is supporting my 
friend's bill in the context of why won't the same market 
forces end up creating music that individuals be able to pass 
to their friends and take in other formats in their home and do 
all those things because it will serve a need that consumers 
want? Why are we getting into trying to draft the exact 
contours of that?
    Mr. Cooper. Well, the--one of the central concerns about 
DRM is that it is taking away some of my rights that I thought 
I had in terms of my fair use rights, and that's a source of 
concern to us. So that we used to be able to listen to music in 
a variety of ways, to make copies to share, and those were fair 
uses, and maybe unregulated uses that were not bones of 
contention. And our concern is that we don't want to lose a lot 
of functionality and flexibility in this transition, which is 
supposed to be increasing my functionality and flexibility. And 
so we'll be glad to come back and testify on that legislation 
too, if I can wangle an invite.
    Mr. Smith. Thank you, Mr. Berman.
    The gentlewoman from California, Ms. Lofgren, is recognized 
for questions.
    Ms. Lofgren. I'll be brief because our joint session of 
Congress is about to begin. But I'll just say that this has 
been interesting to hear such unanimity actually from all of 
the witnesses, that this is a situation where Congress doesn't 
have to get involved. I mean there are some interoperability 
issues that demand congressional attention in fire services and 
the like, but this is not one of them. So I appreciate the 
intelligent commentary and the pitch to get a hearing on my 
bill, which would be great.
    I yield back. Thank you.
    Mr. Smith. Thank you, Ms. Lofgren.
    There are no other Members here, no other questions, so we 
thank you for your expert testimony today. It's been very, very 
helpful and very, very conducive to our being able to move 
forward with the process. So thank you all very much.
    And we stand adjourned.
    [Whereupon, at 10:52 a.m., the Subcommittee was adjourned.]

                            A P P E N D I X

                              ----------                              

               Material Submitted for the Hearing Record

Prepared Statement of the Honorable Howard L. Berman, a Representative 
     in Congress from the State of California, and Ranking Member, 
    Subcommittee on Courts, the Internet, and Intellectual Property

    Mr. Chairman,
    Thank you for scheduling this hearing on digital music 
interoperability. I hope the testimony will be helpful in our 
continuing discussion of issues concerning the availability of 
legitimate distribution mechanisms for digital music.
    The explosion of technologies that enable consumers to digitally 
download music has provided many new opportunities to the music lover. 
The ultimate goal is to provide consumers with their choice of music 
anytime, anywhere, in any format. However, this new environment has 
come at a great cost, that of rampant piracy on Peer to Peer Networks. 
What is considered ``free'' music available on the internet comes at 
the expense of the numerous people involved in the development of the 
sound recording: the artists, songwriters, musicians, sound engineers, 
and others. The consequences of piracy are felt throughout our economy, 
but they are especially harmful in my district where many jobs depend 
on the lawful sale of music.
    The proliferation of legitimate music distributors in the 
marketplace has helped stem the tide of piracy. The number of available 
digital music delivery alternatives has increased enabling technology 
companies to help copyright owners make inroads against unauthorized 
downloading and sharing of music files. However, music companies will 
always have to compete with free music and analysts claim it will take 
a number of years before download services can provide a significant 
sales boost for the content creators. One of the major impediments to 
achieving a more level playing field, according to analysts, is the 
bewildering array of competing technologies.
    As with any nascent industry, the development of new business 
models can lead to unintended results. In the case of digital music, 
there are concerns that interoperability barriers between the various 
suppliers could actually hinder growth in the market. Brandenburg, the 
father of the MP3, has warned that rival technologies will baffle 
consumers and risk alienating fans, driving them to unsanctioned file 
sharing networks where the songs are ``free'' and encoded in the 
unprotected MP3 format.
    The International Federation of the Phonographic Industry (IPFI) 
has noted that ``one important problem that hinders growth of the 
online music business is the lack of interoperability between services 
and devices. The danger is of wide-scale consumer confusion and wasted 
opportunities in a market which has extraordinary growth potential.'' 
They observe that there is no easy solution, but that all the players 
in the online market need to work harder to solve the interoperability 
difficulties in 2005.
    Yet the market continues to develop. The portable player market 
already presents consumers with an array of choices. Now we see the 
convergence of music devices and mobile handsets. The goal of making 
music easier to buy then to steal is becoming a reality, and therefore 
these innovative services deserve our thanks.
    However, anti-piracy efforts must remain a focus for technology 
companies industries as they develop their products. A legitimate 
distribution business model must be one that is based on payment and 
permission of the rights holder.
    With digital music moving into the mainstream of consumer life, I 
believe it will be helpful to further this conversation by discussing 
what, if any, impediments are facing companies that are now 
distributing digital music and how they are addressing consumers' needs 
for legitimate music.
    In an ideal world, we would have all the major players in the 
digital music market at the table to hear their opinions about the 
issue--but I look forward to hearing from these witnesses to help 
define some of the issues.

                              ----------                              

Prepared Statement of the Honorable John Conyers, Jr., a Representative 
 in Congress from the State of Michigan, and Ranking Member, Committee 
                            on the Judiciary

    Content owners and the high-tech industry should be commended for 
responding to consumer demand for digital music. For years, consumers 
have been clamoring for access to digital content. Because content 
protection technology and content owners had not caught up with the 
Internet, music lovers turned to illegal download sites like Napster 
and Kazaa for digital content.
    We had heard that, if the content industry would just create a 
legal avenue for obtaining digital music, consumers would embrace it. 
The premonition was largely true. The record industry and high-tech 
worked together to develop digital content protection, to clear the 
rights needed to get music online, and to get music on the Internet. 
According to the Pew Internet and American Life Project, the response 
to legitimate digital content has been overwhelming: in 2004, only 
twenty-four percent of music downloaders had tried legitimate download 
sites; in 2005 to date, the number jumped to forty-three percent.
    It is probably safe to say that the reason for this overwhelming 
response is the late 2003 launch of Apple iTunes. In business for a 
little over a year, iTunes has sold a record-breaking 300 million songs 
through its online store. Other download sites, like Napster and 
Rhapsody, are gaining speed by offering alternatives such as monthly 
subscription services instead of just downloads and allowing transfers 
to numerous digital music players. No matter how you view it, the 
marketplace is working.
    Digital piracy existed long before legitimate services like iTunes 
came onto the market and, unfortunately, it likely will continue no 
matter how much easier the songwriters, recording artists, and record 
labels make it to obtain music digitally.

                                 

```