```

[Senate Hearing 106-1060]
[From the U.S. Government Publishing Office]

                                                       S. Hrg. 106-1060

       MUSIC ON THE INTERNET: IS THERE AN UPSIDE TO DOWNLOADING?

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

                                HEARING

                               before the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 11, 2000

                               __________

                          Serial No. J-106-96

                               __________

         Printed for the use of the Committee on the Judiciary

                   U.S. GOVERNMENT PRINTING OFFICE
74-728                     WASHINGTON : 2001

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                       COMMITTEE ON THE JUDICIARY

                     ORRIN G. HATCH, Utah, Chairman
STROM THURMOND, South Carolina       PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa            EDWARD M. KENNEDY, Massachusetts
ARLEN SPECTER, Pennsylvania          JOSEPH R. BIDEN, Jr., Delaware
JON KYL, Arizona                     HERBERT KOHL, Wisconsin
MIKE DeWINE, Ohio                    DIANNE FEINSTEIN, California
JOHN ASHCROFT, Missouri              RUSSELL D. FEINGOLD, Wisconsin
SPENCER ABRAHAM, Michigan            ROBERT G. TORRICELLI, New Jersey
JEFF SESSIONS, Alabama               CHARLES E. SCHUMER, New York
BOB SMITH, New Hampshire
             Manus Cooney, Chief Counsel and Staff Director
                 Bruce A. Cohen, Minority Chief Counsel

                            C O N T E N T S

                              ----------                              

                    STATEMENTS OF COMMITTEE MEMBERS

                                                                   Page

Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah......     1
Kohl, Hon. Herbert, a U.S. Senator from the State of Wisconsin, 
  prepared statement.............................................    60
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont.     4
Schumer, Hon. Charles E. a U.S. Senator from the State of New 
  York...........................................................    73

                               WITNESSES

Barry, Hank, Chief Executive Officer, Napster, Inc., San Mateo, 
  CA.............................................................    15
Ehrlich, Fred, President, New Technology and Business 
  Development, Sony Music Entertainment, Inc., New York, NY......    27
Griffin, James Hazen, Founder and Chief Executive Officer, Cherry 
  Lane Digital, Los Angeles, CA..................................    46
Hoffman, Gene, Jr., Founder, President and Chief Executive 
  Officer, EMusic.Com, Inc. Redwood City, VA.....................    34
Kan, Gene, Gnutella Developer, and Founder, Infrasearch, Inc., 
  Belmont, CA....................................................    38
McGuinn, Roger, Former Member and Co-Founder, The Byrds Musical 
  Group, Windemere, FL...........................................    13
Rosen, Hilary, President and Chief Executive Officer, Recording 
  Industry Association of America, Washington, DC................    55
Robertson, Michael, Chairman and Chief, Executive Officer, 
  MP3.COM, Inc., San Diego, CA...................................    21
Ulrich, Lars, Member and Co-Founder, Metallica Musical Group, New 
  York...........................................................     9

                         QUESTIONS AND ANSWERS

Responses of Fred Ehrlich to Questions from:
    Senator Kohl.................................................    80
    Senator Thurmond.............................................    81
Responses of Gene Kan to Questions from:
    Senator Kohl.................................................    83
    Senator Thurmond.............................................    82
Responses of Robert H. Kohn to Questions from Senator Kohl.......    84
Responses of Lars Ulrich to Questions from Senator Thurmond......    89

                       SUBMISSION FOR THE RECORD

Bergman, Marilyn, President and Chairman of the Board, on behalf 
  of the American Society of Composers, Authors and Publishers...    90

 
       MUSIC ON THE INTERNET: IS THERE AN UPSIDE TO DOWNLOADING?

                              ----------                              

                         TUESDAY, JULY 11, 2000

                                       U.S. Senate,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:05 a.m., in 
room SH-216, Hart Senate Office Building, Hon. Orrin G. Hatch 
(chairman of the committee) presiding.
    Also present: Senators Leahy, Kohl, Feinstein, and Schumer.

 OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM 
                       THE STATE OF UTAH

    The Chairman. We are happy to welcome you all out to the 
hearing this morning. It is a very important hearing. It has a 
lot to do with so many things that go even beyond the music 
business.
    This morning's hearing focuses on issues that have been 
much in the press and are near and dear to many of us on the 
dais and those of us listening in the audience.
    In case you missed it, there has been an upheaval of sorts 
concerning how music is copied over the Internet. What Newsweek 
magazine dubbed ``The Noisy War Over Napster'' involves more 
parties and has much broader implications than that moniker 
implies. Fortune magazine has called the technology embodied in 
Napster and Gnutella ``The Next Big Thing'' for the Internet.
    At the outset, let me make it clear that it is not this 
committee's purpose or intention to interfere with the 
litigation and settlement discussions that are presently taking 
place. Nor do I see our discussions entering into the wider 
array of issues concerning technology standards for players or 
related topics.
    Our reasons for holding this hearing are to learn more 
about what is taking place in the marketplace and, in doing so, 
better equip us to advance the interests of consumers and 
creators. Insofar as consumers are concerned, they desire 
access to downloadable music which is not unnecessarily 
restrictive or unduly burdensome. I want to ensure that the 
marketplace provides them with the opportunity to access the 
music they want to hear over the Internet and to do so legally. 
Insofar as creators are concerned, I want to ensure that 
artists and creators are protected through an approach to 
copyright that empowers them to generate maximum revenue for 
their creative works.
    Recognizing the potential the Internet offered consumers 
and creators, I led the efforts to pass, and Senator Leahy and 
I did, the Digital Millennium Copyright Act which sought to 
harmonize the copyright laws with the technological changes 
taking place.
    Now, this law sought to ensure that copyrighted content 
would continue to be protected by copyright law in the digital 
environment, but also sought the flexibility necessary to allow 
the Internet technology and businesses to flourish while making 
copyrighted content available.
    For the most part, passage of the DMCA has proven to be a 
prescient achievement, settling many complex liability issues 
up front and allowing the online businesses to grow. It was our 
hope that it would give creators incentive to make their 
products available on the Internet. In short, it was believed 
that a stable, predictable legal environment would encourage 
the deployment of business models which would make properly 
licensed content more widely available. Sadly, this has not yet 
occurred to any great extent in the music industry, and the 
DMCA is nearly 2 years old.
    As chairman of the Judiciary Committee, I take it as a 
basic premise that our copyright laws must play a role, a 
strong role, in protecting creative works over the Internet. 
These protections, however, must be secured in a manner which 
is mindful of the impact regulation can have on the free flow 
of ideas that a decentralized, open network like the Internet 
creates. We must protect the rights of the creator, but we 
cannot, in the name of copyright, unduly burden consumers and 
the promising technology that Internet presents to all of us.
    With this in mind, it is my hope that we can learn more 
about the online music marketplace and why there is so much 
disharmony. We have with us this morning a number of different 
models of online music services.
    MP3.com is a music service provider and offers a number of 
different services to users. MP3.com shares revenues with 
artists, often on a 50/50 basis. And we have Emusic, which 
offers downloads of singles or whole albums, paid for either 
per song or per album. Emusic has deals with many independent 
record labels and offers deals to artists that are structured 
similarly to recording contracts.
    Both Emusic and MP3.com can track usage levels to 
accurately account to the artists for use of their music and 
pay them accordingly. And both Emusic and MP3.com are 
structured with a central server Web site that makes music 
licensing relatively easy for creators and consumers. Their 
organization is similar to the chart on display which diagrams 
a traditional Web-based search engine, where an individual's 
computer deals with information sources through the 
intermediary of a single server.
    By way of contrast, consider the architecture of the 
Napster and Gnutella communities, as represented in these 
schematic charts over on the right here. As you can see, 
Napster, which is a business, operates with a central server 
site through which members submit requests. Requests proceed 
from the central site out to other Napster users. And with 
Gnutella, there is no central point, but we are linked directly 
to other Gnutella users' PC's. We can download the music 
directly from any Gnutella users' computer to which we are 
linked.
    This organization has implications for both music licensing 
and for broader Internet technology. To quote Andy Grove, of 
Intel, ``The whole Internet could be re-architected by Napster-
like technology.'' Using this peer-to-peer technology to search 
for information on the Internet allows us to get the most up-
to-date information direct from the source, as opposed to 
traditional Web search engines that are made through 
intermediaries.
    With regard to music licensing, however, as you might guess 
from the charts, peer-to-peer file-sharing poses a much greater 
challenge than single-source licensing. With each user being a 
publisher to a greater or lesser degree, the relative lack of a 
real distribution center makes licensing somewhat chaotic and 
haphazard, which brings us to the nub of this hearing.
    This technology presents a unique opportunity to those who 
make a living by producing copyrighted works. They can be self-
publishers dealing directly with their fans. But it also 
presents a unique threat, if misused, to rob them of their 
livelihood, which could rob all of us of their continued work 
by destroying the incentives to create and publish their works, 
all of which will require much greater creativity in licensing 
or distributing copyrighted creative works.
    To illustrate the file-sharing technology that has proved 
so controversial, we will demonstrate how a search and download 
of music is done using Gnutella. If you will direct your 
attention to the monitors, you will be able to see the process 
from a live Internet connection.
    First, we submit a request for particular music or a 
particular artist. As I mentioned before, we do not submit the 
request to a central site, but rather we link directly to other 
Gnutella users and relay our requests through the individual 
hard drives of members of the new telecommunity who are online.
    If you look at the bottom left-hand corner of the screen, 
you can see how many connections we have made with other users. 
The search engine returns to us a list of the relevant music 
files available to us from other Gnutella users, together with 
information on the size of the file and the other users' 
bandwidth, and hence probable download speed. We can choose 
from among the many options returned which files to download, 
and can watch the progress of downloading. Since the 
downloading will take a few minutes, we will return to play the 
music after the ranking member's remarks.
    Once the file is downloaded, because the music is in a 
digital format, I can copy it onto a number of different 
listening devices to take the music with me. I think music fans 
have expressed a strong interest in getting popular, legitimate 
music in this format.
    One continuing problem raised throughout the evolution of 
online music, however, is the complaint that the major record 
labels have not been willing to license online music 
distributors to provide their music, or have offered licenses 
on terms much different than online entities related to those 
labels.
    While I do not think that copyright owners have any general 
duty to license their products to others, a complete lack of 
licensing puts in question the labels' professed desire to be 
ubiquitous. And a policy of merely cross-licensing among major 
label-related entities might raise some competition concerns 
that this committee would have a duty to consider.
    In short, I believe there are opportunities for synergy 
here between the creators of music and the technology companies 
who can help make that music available to consumers in more 
convenient and enjoyable forms. Some creative cooperation might 
be to everyone's benefit, especially consumers and creators. I 
look forward to hearing what each of our witnesses envisions 
for the future of digital music.
    We will turn at this time to the ranking member.

  STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM THE 
                        STATE OF VERMONT

    Senator Leahy. Thank you, Mr. Chairman. I do feel this is 
an important hearing. In fact, I came back around 2 a.m. or 
2:30 a.m. this morning from Ireland, where somebody with my 
name should probably be more often, to be here for the hearing.
    I should mention, as I mentioned to Mr. Ulrich and others 
earlier, I did become a hero in my daughter's eyes because I 
took her to lunch with Bono and the other members of U2. She 
got to go down to their studio and listen to them recording 
their new album, and now she realizes that there is a reason 
for her father to be in the U.S. Senate.
    The Chairman. You should have taken me, too.
    Senator Leahy. I would have. They asked about you 
immediately.
    The Chairman. I can imagine. [Laughter.]
    Senator Leahy. And after they asked about you, I told them, 
I want you to know.
    The Chairman. Well, I want you to know we helped Bono on 
his World Hunger Campaign.
    Senator Leahy. I know.
    The Chairman. He has been in the office. He is a great guy.
    Senator Leahy. He is; Irish, too. A lot of the Irish are 
nice. There is Manus, for example, and myself.
    The Chairman. I happen to be Irish, too.
    Senator Leahy. Are you reinventing yourself? I thought only 
members of our party did that, Mr. Chairman.
    The Chairman. I have so many mixtures that I can almost 
claim everybody, let me tell you.
    Go ahead.
    Senator Leahy. This could go on forever.
    You know, it is interesting, talking about downloading this 
music, as the chairman said, it is going to take a while to do 
it, and it also points out an interesting situation we have in 
the Senate. The Senate is so far behind in technology on these 
things, it is going to take us that long because we don't use 
DSL lines. We don't use anything like that.
    We will do oversight on companies that do those things, but 
we have barely moved beyond the quill pens ourselves. And I 
would hope--this is one more example--that maybe the leadership 
in the Senate will let us move, if not into the 21st century, 
at least into the latter part of the 20th century on 
technology.
    When I go out to spend time with my son in California--and 
I will talk about this a little bit later on--we find in 
downloading these kinds of things it is virtually 
instantaneous, which is also both the good and the bad. As 
Hilary Rosen and others will think about sitting here, it is 
the good and bad of the news.
    America's Founders recognized and valued citizen creativity 
so much that they rooted intellectual property rights in the 
Constitution. Article I, section 8, clause 8, of the 
Constitution grants that, ``The Congress shall have power * * * 
[t]o promote the progress of science and useful arts, by 
securing for limited times to authors and inventors the 
exclusive right to their respective writings and discoveries.'' 
It is in the Constitution right from the beginning. The 
Continental Congress proclaimed, ``Nothing is more properly a 
man's own than the fruit of his study.''
    Protecting intellectual property rights is just as 
important today as it was when America was a fledgling Nation, 
at a time when none of us could have conceived what might 
happen. In fact, the intellectual property generated in our 
country is the envy of the rest of the world.
    The challenge of protecting intellectual property, such as 
computer programs, sound recordings, motion pictures, and other 
copyrighted works in electronic formats has been the focus of 
this committee's attention for the past few Congresses. In the 
last Congress, we passed the No Electronic Theft Act to close 
the loophole in the law that granted complete immunity from 
criminal liability to willful copyright infringers. Closing 
this loophole was something I had worked on since 1995, and 
together with Senator Kyl, we were able to close that loophole 
in 1997.
    In 1998, the chairman and I worked closely together on the 
DMCA, the Digital Millennium Copyright Act. We wanted to 
advance the complementary goals of protecting intellectual 
property rights in a digitally-networked world and promoting 
the continued growth of electronic commerce. Bruce Cohen, Beryl 
Howell, and others on my staff have spent a disproportionate 
amount of their time on these kinds of issues.
    As new online services are launched and new Web sites 
created, the DMCA is helping order the online environment. In 
fact, earlier this year a Federal court relied on the DMCA to 
shut down Web sites that were used to post a computer program 
permitting users to break the encryption used to protect 
copyrighted motion pictures on DVD's and then to copy the 
movies without permission. So it did work.
    In other pending cases, involving some of the witnesses we 
will hear from today, the applicability of provisions in the 
DMCA which limit liability for Internet service providers when 
they act as mere conduits for networked communications or 
simply provide tools are also being explored.
    Often, the discussion over how to protect intellectual 
property rights has developed into a debate over whether such 
protection will stop technological innovation. I don't want 
that to be the case, and I would be the first person in the 
Senate to oppose that. I want this technological innovation.
    As we wrote some of these laws 2 or 3 years ago, none of us 
could have even foreseen what was going on there. And I can 
bet, among all of you here who probably know as much about this 
as anybody in the country, you could not predict what we are 
going to see 4 years from now or 5 years from now, maybe even a 
year from now.
    Protection of intellectual property provides incentives to 
promote scientific and artistic advancement. But the interests 
of intellectual property protection and technological 
innovation sometimes appears to collide, as we have seen in 
MP3, Napster, and so on.
    Two years ago, a 19-year-old college freshman created a 
software program called Napster that has grown exponentially in 
popularity. I don't know a kid in Vermont at any of our 
colleges who doesn't use it. It allows users to find music 
files in other users' hard drives. Then you access the music 
file, you download it, all in a matter of really minutes; 
actually, seconds, if you don't have a Senate connection, or 
within an hour or two if you are up here in the quill pen area.
    Sharing files in this way among strangers has been likened 
by some to sharing a CD among friends. The courts are in the 
process of sorting out the legality of sharing files of 
copyrighted music on the scale of Napster, and we should think 
about that.
    You know, there is a lot of publicity about Napster, but 
that is not the recording industry's worst nightmare. Other 
software programs are being developed that pose far more 
difficult challenges for copyright protection. Gnutella and 
Freenet are file-sharing programs; we are going to hear more 
about those. They don't require a central server for users to 
connect to each other. Instead, Gnutella uses the Internet 
service providers of its users for connectivity.
    In just going back and forth trying out these different 
technologies, I realized how easy it is for anybody to do it. 
The programs are not proprietary. They are not owned by a 
specific company. It leaves copyright owners in search of a 
responsible party to hold accountable.
    Online music programs show strong consumer demand for new 
artists and for good music delivered over the Internet. Let's 
not forget about that. There are a lot of new artists who are 
being discovered this way. It allows new artists to become 
known. They are going to open new avenues for the copyright 
industries to reach consumers. The music industry is 
accelerating development of legitimate means for satisfying the 
consumer demand for online access to music.
    History has shown that when new technologies emerge, they 
may seem to threaten to trump intellectual property protection. 
In the end, things tend to get sorted out. Remember how the 
movie industry was so afraid of videotape? They wanted us to 
block that. There is not a movie made today that they don't 
plan in it what is going to be the after-sale on video. In 
fact, some movies that bomb at the box office make their money 
back on video.
    The concert tapes of Grateful Dead fans come to mind. I 
used to go to a lot of Grateful Dead concerts. It used to be 
kind of funny seeing the Volkswagen vans parked out back and 
here is one car with Vermont license plate ``1'' looking a 
little bit out of place. I remember how everybody used to be 
able to tape those, and now those are traded and sold. Dick's 
Picks does very well on it.
    So I hope we are going to find how best to make this work, 
how best to expand, the same way the movie industry did, but to 
protect the legitimate rights. If you write a song, if you 
record something, if you have gone to the work of putting your 
expertise on it, you ought to be rewarded for it. If people are 
going to enjoy it, you ought to be rewarded for that work, in 
the same way if I came over and painted your house, I ought to 
be paid for that. At the same time, let's not strangle the baby 
in the crib; let's make it work.
    Mr. Chairman, I notice there is a vote on. I don't know 
what you want to do.
    The Chairman. I think what we are going to do is the 
Gnutella download is complete, I understand. We searched for 
music from a popular rock group called Creed, and our search 
turned up hundreds of Creed songs from their million-selling 
albums. We downloaded just one of these songs.
    Senator Leahy and I want to hear every one of you, so we 
are going to go vote while you listen to one of these songs. Is 
that all right? [Laughter.]
    Senator Leahy. I am going to put my laptop up here so I can 
download a couple of them, too.
    The Chairman. I have to say that I was listening to 
Metallica this morning in my office. [Laughter.]
    Actually, you could use my lyricist ability.
    Mr. Ulrich. Thank you very much.
    The Chairman. Actually, they are pretty darn good--well, 
not pretty darn good. Anybody that can sell 10 million CD's on 
one thing, I am all for, let me tell you. I am really proud of 
you. [Laughter.]
    I don't want to say too much more, because of the 2,000 
that we normally sell.
    Let me just say this. I would like you all to listen to 
Creed, and then we want to come back and we will start with Mr. 
Lars Ulrich. I want to hear what he has to say, as well as 
every one of these witnesses. We have one of the most diverse 
groups of people we have ever had on any Internet hearing that 
we have had in the U.S. Senate, and really very exciting people 
as far as I am concerned. So we appreciate all of you coming.
    We will go vote and we will be right back.
    Senator Leahy. Mr. Chairman, are you sure you don't want to 
come up and hear my music?
    The Chairman. Listen, I like the Grateful Dead, too, but I 
am not a slavish devotee. We will put it that way. [Laughter.]
    We will listen to the music and we will be right back.
    [The committee stood in recess from 10:26 a.m. to 10:41 
a.m.]
    The Chairman. If we can have your attention, we have eight 
distinguished witnesses here with us today. Our first witness 
is Mr. Lars Ulrich, a member of the musical group Metallica. 
Mr. Ulrich co-founded Metallica in 1981 and has been the band's 
spokesperson on a number of occasions, including most recently 
in its dispute with Napster.
    In 1999, Metallica became only one of three bands to 
receive the Diamond Award from the Recording Industry of 
America, signifying sales of over 10 million copies from a 
single title. That is pretty impressive, very impressive, 
stupendously impressive.
    Mr. Ulrich. Thank you.
    The Chairman. And you don't need a lyricist either; you are 
doing a very good job yourself. We are very happy to have you 
with us.
    Mr. Ulrich. Thank you.
    The Chairman. Next, we will hear from Mr. Roger McGuinn. 
Mr. McGuinn is co-founder of the musical group The Byrds. 
Today, Mr. McGuinn tours the world virtually non-stop, often 
performing acoustic numbers as a solo musician. We are really 
honored to have you here.
    Mr. McGuinn. Thank you.
    The Chairman. Moreover, Mr. McGuinn primarily makes his 
music available to his listeners on the Internet through his 
own Web site and the MP3.com site.
    Mr. Hank Barry will address us. Mr. Barry is the Chief 
Executive Officer of Napster, a software company that enables 
users to share files, and mostly famous music files, through 
their computers. Mr. Barry is also currently a partner at 
Hummer Windblad Venture Partners. Mr. Barry has had over 15 
years' experience working with media and technology companies, 
and prior to joining Hummer Windblad, Mr. Barry was the 
corporate and securities partner at Wilson, Suncini, Goodrich 
and Rosatti.
    We will then hear from Mr. Michael Robertson, Chairman and 
CEO of MP3.com. MP3.com is a Web-based Internet site that sells 
and distributes music of almost every genre to its users. Prior 
to starting MP3.com, Mr. Robertson has worked as a consultant 
to many high-tech companies. What you have accomplished is 
nothing less than sensational yourself. In fact, all of you are 
just top people in your fields.
    Mr. Fred Ehrlich will then address us. Mr. Ehrlich is the 
President of New Technology and Business Development for Sony 
Music Entertainment. Mr. Ehrlich is responsible for online 
promotion and marketing of the company's music. Prior to 
joining Sony, Mr. Ehrlich served as Vice President and General 
Manager of Columbia Records. We are looking forward to your 
point of view as well, Mr. Ehrlich, and I have great respect 
for you.
    Next, Mr. Gene Hoffman, Jr., will speak to us. Mr. Hoffman 
is the founder, President and CEO of Emusic.com. Emusic.com is 
a leading site on the Internet for sampling and purchasing 
music, and currently has licensing agreements with over 600 
independent record labels.
    I think I have that right, don't I?
    Mr. Hoffman. Yes.
    The Chairman. It is terrific to have you here.
    After Mr. Hoffman, we will be pleased to hear from Mr. Gene 
Kan. Mr. Kan is the developer of Gnutella. Now, I have to say 
that is quite an accomplishment. Gnutella, of course, is a 
real-time information search protocol. Prior to developing 
Gnutella, Mr. Kan has worked as a computer engineer in software 
development. Mr. Kan graduated from the University of 
California at Berkeley in 1997 with a degree in electrical 
engineering and computer science.
    Our final witness will be Mr. Jim Griffin, the founder and 
CEO of Cherry Lane Digital LLC and OneHouse LLC. Both companies 
provide consulting services to entertainment companies working 
to provide digital products and services. Prior to founding 
Cherry Lane and OneHouse, Mr. Griffin was the Director of 
Technology at Geffen Records from 1993 to 1998, where he 
created and ran the label's technology department. And we are 
all familiar with Geffen Records.
    So I want to thank each of our distinguished witnesses for 
being with us today. We know that you are all busy people and 
we know that you have taken time out from not only busy but 
very important schedules, and we are honored to have all of you 
here.
    Mr. Ulrich, I really look forward to hearing your 
testimony, as well as all the others. So we will start with 
you.

  STATEMENT OF LARS ULRICH, MEMBER AND CO-FOUNDER, METALLICA 
                       MUSICAL GROUP, NY

    Mr. Ulrich. Mr. Chairman, my name is Lars Ulrich. I was 
born in Denmark. In 1980, as a teenager, my parents and I came 
to America. I started a band named Metallica in 1981 with my 
best friend, James Hetfield. By 1983, we had released our first 
record, and by 1985 we were no longer living below the poverty 
line.
    Since then, we have been very fortunate to achieve a great 
level of success in the music business throughout the world. It 
is the classic American dream come true. I am very honored to 
be here in this country, and I am very honored to appear before 
the Senate Judiciary Committee.
    Earlier this year while completing work on a song for the 
movie ``Mission Impossible 2,'' we were startled to hear 
reports that five or six versions of our work in progress were 
already being played on some U.S. radio stations. We traced the 
source of this leak to a corporation called Napster. 
Additionally, we learned that all our previously recorded 
copyrighted songs were, via Napster, available for anyone 
around the world to download from the Internet in a digital 
format known as MP3. In fact, in a 48-hour period where we 
monitored Napster, over 300,000 users made 1.4 million free 
downloads of Metallica's music. Napster hijacked our music 
without asking. They never sought our permission. Our catalog 
of music simply became available for free downloads on the 
Napster system.
    I do not have a problem with any artist voluntarily 
distributing his or her songs through any means that artist so 
chooses. But just like a carpenter who crafts a table gets to 
decide whether he wants to keep it, sell it, or give it away, 
shouldn't we have the same options? We should decide what 
happens to our music, not a company with no rights to our 
recordings, which has never invested a penny in our music, or 
had anything to do with its creation. A choice has been taken 
away from us.
    With Napster, every song by every artist is available for 
download at no cost, and of course with no payment to the 
artist, the songwriter, or the copyright holder. If you are not 
fortunate enough to own a computer, there is only one way to 
assemble a music collection the equivalent of a Napster user--
theft. Walk into a record store, grab what you want, and walk 
out. The difference is that the familiar phrase ``files done'' 
is now replaced by another familiar phrase, ``you are under 
arrest.''
    Since what I do is make music, let's talk about the 
recording artist for a moment. When Metallica makes an album, 
we spend many months and many hundreds of thousands of our own 
dollars writing and recording. We typically employ a record 
producer, recording engineers, programmers, assistants, and 
occasionally other musicians. We rent time for months at 
recording studios which are owned by small businessmen who have 
risked their own capital to buy, maintain, and constantly 
upgrade very expensive equipment and facilities. Our record 
releases are supported by hundreds of record companies and 
employees, and provide programming for numerous radio and 
television stations.
    Add it all up and you have an industry with many jobs, a 
few glamorous ones like ours, and lots more covering all levels 
of the pay scale and providing wages which support families and 
contribute to our economy. Remember, too, that my band, 
Metallica, is fortunate enough to make a great living from what 
we do. Most artists are barely earning a decent wage and need 
every source of revenue available to scrape by.
    Also keep in mind that the primary source of income for 
most songwriters is from the sale of records. Every time a 
Napster enthusiast downloads a song, it takes money from the 
pockets of all these members of the creative community. It is 
clear, then, that if music is free for downloading, the music 
industry is not viable. All the jobs I just talked about will 
be lost and the diverse voices of the artists will disappear. 
The argument I hear a lot that music should be free must then 
mean that musicians should work for free. Nobody else works for 
free. Why should musicians?
    In economic terms, music is referred to as intellectual 
property, as are films, television programs, books, computer 
software, video games, and the like. As a Nation, the United 
States has excelled in the creation of intellectual property, 
and collectively it is this country's most valuable export. The 
backbone for the success of our intellectual property business 
is the protection that Congress has provided with the copyright 
statutes. No information-based industry can thrive without this 
protection.
    For instance, our current political dialogue with China is 
focused on how we must get that country to respect and enforce 
copyrights. How can we continue to take that position if we let 
our own copyright laws wither in the face of technology?
    Make no mistake about it, Metallica is not anti-technology. 
When we made our first album, most records were on vinyl. By 
the late 1980's, cassette sales accounted for over 50 percent 
of the market. Now, the compact disc dominates. If the next 
format is a form of downloading from the Internet, with 
distribution and manufacturing savings passed on to the 
American consumer, then, of course, we will embrace that 
format.
    But how can we embrace a new format and sell our music for 
a fair price when somebody with a few lines of codes, no 
investment costs, no creative input, and no marketing expenses 
simply gives it away? How does this square with the level 
playing field of the capitalist system?
    In Napster's brave new world, what free-market economic 
model supports our ability to compete? The touted new paradigm 
that the Internet gurus tell us we must adopt sounds to me like 
good old-fashioned trafficking in stolen goods. We have to find 
a way to welcome the technological advances and cost savings of 
the Internet. However, this must be done without destroying the 
artistic diversity and the international success that has made 
our intellectual property industries the greatest in the world. 
Allowing our copyright protections to deteriorate is, in my 
view, bad policy both economically and artistically.
    In closing, I would like to underscore what I have spoken 
about today. I would like to read from the Terms of Use section 
of the Napster Internet Web site. When you use Napster, you are 
basically agreeing to a contract that includes the following 
terms, ``This Web site or any portion of this Web site may not 
be reproduced, duplicated, copied, sold, resold, or otherwise 
exploited for any commercial purpose that is not expressly 
permitted by Napster. All Napster Web site design, text, 
graphics, the selection and arrangement thereof, and all 
Napster software are Copyright 1999-2000 Napster Inc.'' Napster 
itself wants, and surely deserves, copyright and trademark 
protection. Metallica and other creators of music and 
intellectual property want, deserve, and have a right to that 
same protection.
    Finally, I would just like to read to you from a recent New 
York Times column by Edward Rothstein, ``Information does not 
want to be free. Only the transmission of information wants to 
be free. Information, like culture, is the result of a labor 
and devotion, investment, and risk. It has a value, and nothing 
will lead to a more deafening cultural silence than ignoring 
that value in celebrating * * * [companies like] Napster 
running amok.''
    Mr. Chairman, Senator Leahy, the title of today's hearing 
asks the question: ``The Future of the Internet: Is There an 
Upside to Downloading?'' My answer is yes. However, as I hope 
my remarks have made clear, this can only occur when artists' 
choices are respected and their creative efforts protected.
    Thank you very much.
    The Chairman. Thank you, Mr. Ulrich. We appreciate your 
testimony.
    [The prepared statement of Mr. Ulrich follows:]

                   Prepared Statement of Lars Ulrich

    Mr. Chairman, Senator Leahy, Members of the Committee, my name is 
Lars Ulrich. I was born in Denmark. In 1980, as a teenager, my parents 
and I came to America. I started a band named Metallica in 1981 with my 
best friend James Hetfield. By 1983 we had released our first record, 
and by 1985 we were no longer living below the poverty line. Since 
then, we've been very fortunate to achieve a great level of success in 
the music business throughout the world. It's the classic American 
dream come true. I'm very honored to be here in this country, and to 
appear in front of the Senate Judiciary Committee today.
    Earlier this year, while completing work on a song for the movie 
Mission Impossible-2, we were startled to hear reports that a work-in-
progress version was already being played on some U.S. radio stations. 
We traced the source of this leak to a corporation called Napster. 
Additionally, we learned that all of our previously recorded 
copyrighted songs were, via Napster, available for anyone around the 
world to download from the Internet in a digital format known as MP3. 
As you are probably aware, we became the first artists to sue Napster, 
and have been quite vocal about it as well. That's undoubtedly why you 
invited me to this hearing.
    We have many issues with Napster. First and foremost: Napster 
hijacked our music without asking. They never sought our permission--
our catalog of music simply became available as free downloads on the 
Napster system.
    I don't have a problem with any artist voluntarily distributing his 
or her songs through any means the artist elects--at no cost to the 
consumer, if that's what the artist wants. But just like a carpenter 
who crafts a table gets to decide whether to keep it, sell it or give 
it away, shouldn't we have the same options? My band authored the music 
which is Napster's lifeblood. We should decide what happens to it, not 
Napster--a company with no rights in our recordings, which never 
invested a penny in Metallica's music or had anything to do with its 
creation. The choice has been taken away from us.
    What about the users of Napster, the music consumers? It's like 
each of them won one of those contests where you get turned loose in a 
store for five minutes and get to keep everything you can load into 
your shopping cart. With Napster, though, there's no time limit and 
everyone's a winner--except the artist. Every song by every artist is 
available for download at no cost and, of course, with no payment to 
the artist, the songwriter or the copyright holder.
    If you're not fortunate enough to own a computer, there's only one 
way to assemble a music collection the equivalent of a Napster user's: 
theft. Walk into a record store, grab what you want and walk out. The 
difference is that the familiar phrase a computer user hears, ``File's 
done,'' is replaced by another familiar phrase--'' ``You're under 
arrest.''
    Since what I do is make music, let's talk about the recording 
artist for a moment. When Metallica makes an album we spend many months 
and many hundreds of thousands of our own dollars writing and 
recording. We also contribute our inspiration and perspiration. It's 
what we do for a living. Even though we're passionate about it, it's 
our job.
    We typically employ a record producer, recording engineers, 
programmers, assistants and, occasionally, other musicians. We rent 
time for months at recording studios which are owned by small 
businessmen who have risked their own capital to buy, maintain and 
constantly upgrade very expensive equipment and facilities. Our record 
releases are supported by hundreds of record company employees and 
provide programming for numerous radio and television stations. Add it 
all up and you have an industry with many jobs--a very few glamorous 
ones like ours--and a greater number of demanding ones covering all 
levels of the pay scale for wages which support families and contribute 
to our economy.
    Remember too, that my band, Metallica, is fortunate enough to make 
a great living from what it does. Most artists are barely earning a 
decent wage and need every source of revenue available to scrape by. 
Also keep in mind that the primary source of income for most 
songwriters is from the sale of records. Every time a Napster 
enthusiast downloads a song, it takes money from the pockets of all 
these members of the creative community.
    It's clear, then, that if music is free for downloading, the music 
industry is not viable; all the jobs I just talked about will be lost 
and the diverse voices of the artists will disappear. The argument I 
hear a lot, that ``music should be free,'' must then mean that 
musicians should work for free. Nobody else works for free. Why should 
musicians?
    In economic terms, music is referred to as intellectual property, 
as are films, television programs, books, computer software, video 
games, and the like. As a nation, the U.S. has excelled in the creation 
of intellectual property, and collectively, it is this country's most 
valuable export.
    The backbone for the success of our intellectual property business 
is the protection that Congress has provided with the copyright 
statutes. No information-based industry can thrive without this 
protection. Our current political dialog about trade with China is 
focused on how we must get that country to respect and enforce 
copyrights. How can we continue to take that position if we let our own 
copyright laws wither in the face of technology?
    Make no mistake, Metallica is not anti-technology. When we made our 
first album, the majority of sales were in the vinyl record format. By 
the late 1980's, cassette sales accounted for over 50% of the market. 
Now, the compact disc dominates. If the next format is a form of 
digital downloading from the Internet with distribution and 
manufacturing savings passed on to the American consumer, then, of 
course, we will embrace that format too.
    But how can we embrace a new format and sell our music for a fair 
price when someone, with a few lines of code, and no investment costs, 
creative input or marketing expenses, simply gives it away? How does 
this square with the level playing field of the capitalist system? In 
Napster's brave new world, what free market economy models support our 
ability to compete? The touted ``new paradigm'' that the Internet gurus 
tell us we Luddites must adopt sounds to me like old-fashioned 
trafficking in stolen goods.
    We have to find a way to welcome the technological advances and 
cost savings of the Internet while not destroying the artistic 
diversity and the international success that has made our intellectual 
property industries the greatest in the world. Allowing our copyright 
protections to deteriorate is, in my view, bad policy, both 
economically and artistically.
    To underscore what I've spoken about today, I'd like to read from 
the ``Terms of Use'' section of the Napster Internet web site. When you 
use Napster you are basically agreeing to a contract that includes the 
following terms:
    ``This web site or any portion of this web site may not be 
reproduced, duplicated, copied, sold, resold, or otherwise exploited 
for any commercial purpose that is not expressly permitted by 
Napster.''
    ``All Napster web site design, text, graphics, the selection and 
arrangement thereof, and all Napster software are Copyright 
1999-00 Napster Inc. All rights reserved Napster Inc.''
    ``Napster, the logo and all other trademarks, service marks and 
trade names of Napster appearing on this web site are owned by Napster. 
Napster's trademarks, logos, service marks, and trade names may not be 
used in connection with any product or service that is not Napster's.
    Napster itself wants--and surely deserves--copyright and trademark 
protection. Metallica and other creators of music and intellectual 
property want, deserve and have a right to that same protection.
    In closing, I'd like to read to you from the last paragraph of a 
New York Times column by Edward Rothstein:
    ``Information doesn't want to be free; only the transmission of 
information wants to be free. Information, like culture, is the result 
of a labor and devotion, investment and risk; it has a value. And 
nothing will lead to a more deafening cultural silence than ignoring 
that value and celebrating . . . [companies like] Napster running 
amok.''
    Mr. Chairman, Senator Leahy and Members of the Committee, the title 
of today's hearing asks the question, ``The Future of the Internet: Is 
there an Upside to Downloading''? My answer is yes. However, as I hope 
my remarks have made clear, this can only occur when artists' choices 
are respected and their creative efforts protected.
    Thank you.

    The Chairman. Mr. McGuinn, we will take you at this time.

 STATEMENT OF ROGER McGUINN, FORMER MEMBER AND CO-FOUNDER, THE 
               BYRDS MUSICAL GROUP, WINDEMERE, FL

    Mr. McGuinn. Thank you, Senator. It is a pleasure to be 
here. My name is Roger McGuinn and I have been in the recording 
business for approximately 40 years. I started back in 1960 
when I recorded with a group called the Limelighters, and 
subsequently recorded with the Chad Mitchell Trio and Judy 
Collins and Bobby Darin, and I was not a royalty artist at that 
time.
    I became a royalty artist when I signed a contract with 
Columbia Records with a group called the Byrds, and we recorded 
15 albums, or so, during that period. Aside from modest 
advances for each of these albums, I never saw any royalties, 
and so I am just saying that the protection for artists, the 
issue of that--the artists don't always get the royalties they 
are supposed to get from the record companies.
    When you sign a contract that says you are going to get 15 
percent, there are ways the record companies have of not paying 
these royalties. And in my experience, even though we have had 
number one hits with ``Mr. Tambourine Man'' and ``Turn, Turn, 
Turn,'' I saw nothing but the advance, which is divided five 
ways. It was only a few thousand dollars apiece, and with the 
advent of MP3.com, I am getting 50 percent of the CD's that 
come out now. I think it is a wonderful thing.
    I have a Web site, mcguinn.com, and there I have a project 
called The Folk Den, where I am preserving traditional songs. 
Each month, I upload a traditional song for people to listen 
to, and it is free. It is a public service and it is sponsored 
by the University of North Carolina. And somebody from MP3.com 
invited me to put my songs over on their site as well, and I 
thought it was a good opportunity to get them to a more global 
market. So I really appreciate the transmission of MP3's over 
the Internet.
    These songs are traditional, public domain songs, and I am 
not worried about the copyright or publishing problem. I can 
see how someone might be if they were not being paid their 
publishing rights, and I think that MP3 servers should make 
deals with the publishing companies. They should make deals 
with BMI and ASCAP, and have proper royalties paid to artists. 
But as far as my experience in the record business, the artist 
doesn't always receive royalties from the record companies. 
That has been my experience.
    The Chairman. Well, thank you, Mr. McGuinn. That is a 
complaint I have heard from a number of people.
    [The prepared statement of Mr. McGuinn follows:]

                  Prepared statement of Roger McGuinn

    Hello, my name is Roger McGuinn. My experience in the music 
business began in 1960 with my recording of ``Tonight In Person'' on 
RCA Records. I played guitar and banjo for the folk group the 
``Limeliters.'' I subsequently recorded two albums with the folk group 
the ``Chad Mitchell Trio.'' I toured and recorded with Bobby Darin and 
was the musical director of Judy Collins' third album. In each of those 
situations I was not a royalty artist, but a musician for hire.
    My first position as a royalty artist came in 1964 when I signed a 
recording contract with Columbia Records as the leader of the folk-rock 
band the ``Byrds.'' During my tenure with the Byrds I recorded over 
fifteen albums. In most cases a modest advance against royalties was 
all the money I received for my participation in these recording 
projects.
    In 1973 my work with the Byrds ended. I embarked on a solo 
recording career on Columbia Records, and recorded five albums. The 
only money I've received for these albums was the modest advance paid 
prior to each recording.
    In 1977 I recorded three albums for Capitol Records in the group 
``McGuinn Clark and Hillman.'' Even though the song ``Don't You Write 
Her Off'' was a top 40 hit, the only money I received from Capitol 
Records was in the form of a modest advance.
    In 1989 I recorded a solo CD, ``Back from Rio'', for Arista 
Records. This CD sold approximately 500,000 copies worldwide, and aside 
from a modest advance, I have received no royalties from that project.
    The same is true of my 1996 recording of ``Live From Mars'' for 
Hollywood Records. In all cases the publicity generated by having 
recordings available and promoted on radio created an audience for my 
live performances. My performing work is how I make my living. Even 
though I`ve recorded over twenty-five records, I cannot support my 
family on record royalties alone.
    In 1994 I began making recordings of traditional folk songs that 
I'd learned as a young folk singer. I was concerned that these 
wonderful songs would be lost. The commercial music business hasn't 
promoted traditional music for many years. These recording were all 
available for free download on my website http://www.mcguinn.com on the 
Internet.
    In 1998 an employee of MP3.com heard the folk recordings that I'd 
made available at http://www.mcguinn.com and invited me to place them 
on MP3.com http://www.mp3.com They offered an unheard of, non-exclusive 
recording contract with a royalty rate of 50% of the gross sales. I was 
delighted by this youthful and uncommonly fair approach to the 
recording industry. MP3.com not only allowed me to place these songs on 
their server, but also offered to make CDs of these songs for sale. 
They absorbed all the packaging and distribution costs. Not only is 
MP3.com an on-line record distributor, it is also becoming the new 
radio of the 21st century!
    So far I have made thousands of dollars from the sale of these folk 
recordings on MP3.com, and I feel privileged to be able to use MP3s and 
the Internet as a vehicle for my artistic expression. MP3.com has 
offered me more artistic freedom than any of my previous relationships 
with mainstream recording companies. I think this avenue of digital 
music delivery is of great value to young artists, because it's so 
difficult for bands to acquire a recording contract. When young bands 
ask me how to get their music heard, I always recommend MP3.com http://
www.mp3.com.

    The Chairman.  Mr. Barry, we will take your testimony at 
this time.

  STATEMENT OF HANK BARRY, CHIEF EXECUTIVE OFFICER, NAPSTER, 
                      INC., SAN MATEO, CA

    Mr. Barry. Thank you, Senator. Good morning, and thanks for 
inviting me to appear here today. I represent Napster, Inc., 
and the members of the Napster community. If you would for a 
moment, I would like to recognize Shawn Fanning, who is 19 
today. He is the inventor of Napster and he is sitting right 
behind me, right there.
    This committee is at the center of the great constitutional 
debates of our country and the protection of the rights we 
cherish as Americans. In the coming years, your committee will 
continue its important oversight role of the legal issues in 
the Internet world, and I am happy to be part of that endeavor.
    Let me begin with a general point on which I think everyone 
in this room can agree. Americans love music, and Americans are 
listening to and making music like never before. Record sales 
and music radio listening are up. Schools bands, choirs, and 
drum and bugle corps are back, and Napster's success reflects 
that love of music.
    As of this morning, after less than a year, without any 
advertising or promotion, Napster has attracted nearly 20 
million users. Over half of them are over 30 years of age and 
they are evenly split between men and women. In the evenings, 
we consistently have about 500,000 people using the service 
simultaneously. By comparison, that is about one-third the 
number of people using America Online at the same time.
    I would like to talk to you today about Napster's 
technology, Napster's impact, and Napster's future. As you 
noted, Andy Grove, the Chairman of Intel, recently said, that, 
``The whole Internet could be re-architected by Napster-like 
technology.'' Let me try to place his observation in some 
historical context.
    As you know, the Internet began as a redundant 
communication network among scientists involved in defense 
research. They needed to reliably share information that was 
distributed all over the system, all over the DARPANet. The 
commercial use of the Internet for media purposes abandoned 
that structure. Instead, Internet companies adopted the 
broadcast model, with large centralized computers that served 
the information to the consumer's PC as if it were a television 
receiver. Serving, and not sharing, became the dominant 
approach.
    Shawn Fanning began a revolution that is returning the 
Internet to its roots. Napster is an application that allows 
users to learn about other's tastes and share their MP3 files. 
If users choose to share files, and they are not required to, 
the application makes a list of those files and sends the list, 
and only the list, to become part of the central Napster 
directory. The Napster directory then is a temporary and ever-
changing list of all the files the members of the community are 
willing to share.
    Users can search that list, comment on the files on others' 
computers, and see what other people like and chat about all 
this. They do this all for no money, expecting nothing in 
return, on a person-to-person basis. That is it. Napster does 
not copy files. It does not provide the technology for copying 
files. Napster does not make MP3 files. It does not transfer 
any files. Napster simply facilitates communication among 
people interested in music. It is a return to the original 
information-sharing approach of the Internet, and it allows for 
a depth and a scale of information that is truly revolutionary.
    Napster is helping and not hurting the recording industry 
and artists. A chorus of studies show that Napster users buy 
more records as a result of using Napster, and that sampling 
music before buying is the most important reason that people 
use Napster. Users that transfer more than 20 files soon delete 
over 95 percent of those files.
    In the last 6 months, as you all know, record sales are up 
more than 8 percent from the previous year, an increase of more 
than $1 billion. Like other advances in technology, what 
Napster shows is that more access to music leads to more 
interest in music and more music sales.
    Lawsuits against Napster contend that our 20 million users, 
the recording industry's best customers, are guilty of 
copyright infringement. We strongly disagree. Copyright is not 
absolute. As Senator Leahy mentioned, it has limits; it is for 
a limited time in the Constitution.
    Companies that hold copyrights on behalf of creators and 
which control distribution of creative works have a strong 
inclination to change the copyright laws from a balanced 
vehicle for public enrichment to an unbalanced engine of 
control. Copyright holders traditionally are reluctant to allow 
new technologies to emerge.
    This committee's hearing records are replete with examples 
of new technologies struggling to survive as copyright holders 
argue that these new technologies will impede their ability to 
be compensated for copyrighted works. You and the courts have 
allowed, over their objections, technological advances like 
radio, the cassette player, cable television, and the VCR, 
advances which proved to be a financial boon to these same 
concerned copyright holders.
    Napster can work with the recording and the music 
publishing industries. We remain enthusiastic about creating a 
market-based solution that will benefit consumers, artists, and 
the traditional recording and music publishing companies. Since 
my first day on the job, I have been reaching out to the major 
recording and music publishing companies.
    In conclusion, I would say that we should not brand as 
thieves the 20 million Americans who enjoy the Napster service. 
Instead, we should let history be our guide. Americans love 
music, and every time a new technology makes it easier for 
listeners to discover, enjoy and share music, the recording and 
music publishing industries benefit.
    Thank you for your time today.
    The Chairman. Thank you, Mr. Barry.
    [The prepared statement of Mr. Barry follows:]

                    Prepared Statement of Hank Barry

                              INTRODUCTION

    Good morning and thank you for the opportunity to appear before you 
today to discuss music and the Internet. I am Hank Barry, Chief 
Executive Officer of Napster, Inc., and I am here today on the 
Company's behalf and on behalf of the members of the Napster community.
    I am honored to be here today. Both through your jurisdiction and 
your historical concerns, this Judiciary Committee has been at the 
center of the great Constitutional debates of our country and the 
protection of the rights we cherish as Americans. In the coming years, 
your Committee will continue its important oversight of the laws that 
govern how we handle delicate copyright issues in the Internet world, 
and I sincerely value the opportunity to contribute to that endeavor.
    Napster is a revolutionary technology based on person-to-person, 
non-commercial file sharing. It was invented in 1999 by Shawn Fanning, 
then a college freshman, who is seated behind me today. In less than a 
year, without any advertising or promotion, Napster has attracted 
millions of users of all ages and backgrounds, while gathering praise 
from Internet experts for its technology and contributions to the on-
line community. As Andy Grove, former Chairman of Intel, recently 
stated, ``The whole Internet could be rearchitected by Napster-like 
technology.''
    We at Napster respect and believe in the copyright laws and the 
values--both public and private--that they are designed to promote. We 
believe that copyright can successfully take into account new 
technologies and innovations, and that Napster and its millions of 
users throughout all fifty states are operating in compliance with the 
law. The core issue is not copyright, although the recording and music 
publishing industry, struggling to overcome its late entry into the 
Internet economy, is attempting to paint it as such in court. The real 
issue concerns business models.
    My remarks today will address these technology, copyright and 
business issues.

                             THE TECHNOLOGY

    Two key elements of context are essential to understanding 
Napster's technology. The first is the current architecture of most 
Internet information. The second is the technology related to music 
that is not part of Napster, but which is the enabling foundation that 
allows Napster and similar architectures to exist.
    Congressional support for DARPA was central to the beginning of the 
Internet. Essentially, the Internet was set up as a redundant 
communication network among scientists, many of whom were doing defense 
related work. Using the Internet, they could share that information via 
a system that would continue to allow communication even in the event a 
great portion of the physical infrastructure were destroyed.
    We have only begun to explore the potential of the Internet for 
person-to-person communication. With notable exceptions like e-mail, 
instant messaging and chat rooms, the Internet has largely been used to 
create an experience for users that is similar to television. We have 
taken the broadcast tower and replaced it with large computers that 
``serve'' information to the consumer--and we have relegated the 
personal computer, which is increasingly powerful, to little more than 
a receiver of text, pictures and sound from the ``broadcasting tower'' 
web site. This ``client/server'' architecture tracks the broadcasting 
model, but it does not in my opinion take advantage of the 
fundamentally interactive nature of the Internet.
    Concurrently with the adoption of this client/server architecture, 
developments in computer technology have greatly affected the way 
millions of people listen to music. Napster contains none of this 
technology, but without it the Napster community could not exist.
    In the early 1980s, Sony and Phillips promulgated the ``Red Book'' 
standard for making compact discs. As the recording and consumer 
electronics companies (and some companies were both) adopted this 
standard, we moved from a world where analog recordings were published 
on analog media, such as vinyl records and cassettes, to a world where 
music is represented by ones and zeros. Since their inception, both the 
Microsoft Windows and Apple Macintosh operating systems have supported 
the copying of any digital file, regardless of type. This effectively 
allowed people to copy CDs onto the hard drives of their computers. 
However, since the files for a song on a CD were on the order of 40 to 
50 megabytes of data per song, this was not at all practical at that 
time.
    In 1987, the Morton Picture Experts Group, an industry standards 
group that included representatives of the recording and music 
publishing industry, promulgated the MP3 standard for taking these 
large digital files and compressing them into smaller files 
(approximately 3 to 4 megabytes per song). These smaller files could 
more easily be stored on a computer, processed by a computer and 
transferred between computers over the Internet. The file is 
decompressed for listening by ``player'' software, but because of the 
compression, the sound quality is not as good as that of a CD.
    About four years ago, newly available software applications 
combined the steps of copying the file from the CD and compressing the 
file into the MP3 standard format. At the same time, the average speed 
of an Internet connection increased. People found that if they had a 
relatively fast Internet connection, the smaller MP3 file format 
allowed them to effectively transfer digital versions of sound 
recordings. They did this via e-mail, so-called FTP file transfer 
software and many other means. This usage was promoted as an important 
feature by all the leading Internet service providers.
    In sum, the ability to listen to music digitally depends on the 
ability to copy audio files into a computer, compress them into the MP3 
format and transfer them over the Internet. Napster does none of these 
things. So why all the fuss about Napster?
    Napster is an application that allows users to learn about others' 
musical tastes and share their MP3 files. If they choose to share 
files--and they are not required to--the application makes a list of 
the files designated by the user and sends the list to become part of 
the central Napster directory. The Napster directory is a list of all 
the files that members of the community are willing to share. Users can 
search that list, comment on the files on others' computers, see what 
other people like and chat about all this. If they want to and if the 
other person is then online, they can share the files designated as 
``shareable.'' This is accomplished by a file transfer from one 
person's computer directly to another's. They do this for no money, 
expecting nothing in return, on a person-to-person basis.
    That's it. Napster is an Internet directory service. Napster does 
not copy files. It does not provide the technology for copying files. 
Napster does not compress files. It does not transfer files. Napster 
simply facilitates communication.
    Napster is a throwback to the original structure of the Internet I 
described above. Rather than build large servers, Napster relies on 
communication between the personal computers of the members of the 
Napster community. The information is distributed all across the 
Internet, allowing for a depth and a scale of information that is truly 
revolutionary.
    The Napster method of person-to-person, non-commercial file sharing 
is a new tool, a new way of sharing information. All new tools change 
the way we do things, and that often upsets the established order. In 
the case of Napster, the established order is the recording and music 
publishing industry. When presented with this new tool, the industry 
reacted by attempting to crush Napster, as it has tried to do with 
other technologies in the past. As it has before, the industry has 
sought refuge in the copyright laws.

          NAPSTER RESPECTS AND BELIEVES IN THE COPYRIGHT LAWS

    Napster believes in copyright and its benefits to society. Napster 
believes that copyright law can work well in the new Internet 
environment, and foster innovation and technological advances like file 
sharing, so long as we do not lose sight of what the copyright law is 
truly meant to protect.
    Copyright is a tool of public policy; it does not vindicate a 
private right. The copyright laws are meant to find the balance between 
the ``embarrassment of a monopoly''--to use Jefferson's term--that we 
offer to authors in order to encourage their production of works, and 
the public interest that otherwise would not allow such a monopoly to 
occur. Copyright is therefore an incentive we as a society grant so 
that we may have better access to more original expression. In the end, 
the copyright laws are for the benefit of the public as a whole, not 
the individual copyright owners. The balance requires that these rights 
be limited so that we as a society can share, grow and build upon one 
another's creativity. But that balance is always at risk in the 
struggle between copyright absolutists and those who think more limited 
protections are appropriate.
    Companies that hold copyrights on behalf of creators, and which 
control distribution of creative works, have a strong inclination to 
extend copyright into a complete monopoly control over the creative 
work--to change the copyright laws from a balanced vehicle for public 
enrichment to an unbalanced engine of control. As a result, copyright 
holders traditionally are reluctant to allow new technologies to 
emerge. This Committee's hearing records are replete with examples of 
new technologies struggling to survive as copyright holders argue that 
these new technologies will impede their ability to be compensated for 
copyrighted works.
    Faced with these innovations and the copyright holders' protests 
against them, Congress has repeatedly maintained the correct balance, 
whether by only granting a limited term for copyright, by codifying the 
fair use doctrine, or most recently, by recognizing the right of 
individuals to make digital or analog copies of musical works for 
noncommercial purposes.
    As a result of decisions made by Congress and the courts, 
technological advances like radio, the cassette recorder, cable 
television and the VCR have survived copyright holders' attacks and, in 
the end, proved to be a financial boon to these same concerned 
copyright holders. The fact that this is true can be demonstrated by 
the statement made by Jack Valenti, the President of the Motion Picture 
Association of America, in the context of the Sony Betamax litigation. 
At that time he testified before Congress that the VCR was to the movie 
industry ``as the Boston Strangler is to a woman alone.'' Sixteen years 
after Valenti's statement, the movie industry is thriving as never 
before. U.S. box office receipts in 1999 reached $7.5 billion, their 
highest level ever. All of this in spite of an 85.1 percent VCR 
penetration rate in U.S. households. By all accounts, the VCR has 
enormously helped the movie industry, and now accounts for more than 
half of the industry's revenues.
    It is my firm belief that the consumers who use Napster are not 
committing copyright violations. Let me clarify that point. Nobody, not 
even the recording and music publishing industry, is saying that 
Napster is committing direct copyright infringement. Instead, they are 
saying that the millions of people who use Napster, the hundreds of 
thousands of citizens in every state, are copyright infringers. It is 
the fundamental premise of their suit against Napster that, by engaging 
in the very conduct--music sharing--that the recording and music 
publishing industry has known about and encouraged for many years, your 
employees, your colleagues, your friends, your family members and your 
constituents are violating the law. We disagree, and believe that the 
vast majority of Napster users appropriately operate in a non-
commercial manner within the bounds of the copyright laws. Napster's 
view on this issue is based on a review of the copyright statutes, 
court decisions and the expert opinions of copyright scholars. In that 
regard, I would refer you to our brief on this subject in opposition to 
the current preliminary injunction sought by the recording industry's 
plaintiffs.
    After years of uncertainty surrounding the copying of records for 
non-commercial use, in Section 1008 of the Copyright Act, Congress 
sought to clarify that consumers could make copies for noncommercial 
use without fear of violating copyright laws. Today these same people 
are flocking to Napster. The music industry should embrace these users 
for who they are, the industry's most loyal consumers of music.
    Further, even if one were to assume that some Napster users were 
violating copyright law, Napster would still not be liable for any 
copyright infringement pursuant to the landmark Sony Betamax decision. 
The Betamax case recognized that Sony's offering of the Betamax VCR did 
not constitute copyright infringement because the Betamax was capable 
of non-infringing uses, such as copying for time-shifting purposes. 
Napster allows similar uses. For example, Napster users often transfer 
an MP3 file onto their hard drive as a complement to a CD they already 
own. Further, studies show that Napster users share songs as a way to 
sample music before purchasing it, including music that the user would 
not normally consider buying. Finally, Napster provides a critical link 
between new artists and the public. Too much creative talent fails to 
get through the recording and music publishing industry filter. Lack of 
recording contracts and radio play should not deny creators from 
finding an audience. Napster is a great way for fans to find music of 
artists they read about or hear play at a local club.

       TECHNOLOGICAL CHANGE WILL IMPACT THE DISTRIBUTION OF MUSIC

    The Internet revolution of which Napster is a part challenges many 
companies. Often, existing methods of distributing goods and services 
are at risk of being supplanted by new, more efficient and vibrant 
Internet-based distribution systems. As a result, businesses try with 
varying levels of success to adapt to the new environment the Internet 
economy is still in the process of creating. These existing companies 
take one of two approaches. Some embrace the new economy and mold 
themselves into Internet-friendly companies. For example, UPS, FedEx 
and WAL-MART are all examples of companies with significant pre-
Internet market share that are actively adapting to the new Internet 
environment. Others, however, seek to exploit their position in the 
existing market to dominate the development of this vibrant new market 
space. In other words, these companies attempt to protect themselves by 
keeping down innovative Internet technologies.
    That is exactly what is happening here. The recording and music 
publishing industry has known of the technology for creating and 
distributing MP3 files for years. Yet they have chosen not to take any 
actions to stop or even slow this widespread proliferation. Indeed, the 
recording and music publishing industry actively encouraged this 
proliferation by forming partnerships with and investing in companies 
that direct consumers to MP3-encoding software that will enable them to 
transfer music files over the Internet. They did this because they knew 
that rather than hurting their sales, as they now claim, MP3s on the 
Internet in fact help their sales. The recording and music publishing 
industry's goal in attempting to crush Napster appears to be to retain 
control over the flow of competing unsigned artists' music into the 
marketplace, and the means of and business model of distributing music 
over the Internet.
    Despite all this, we at Napster remain enthusiastic about the 
possibility of working with the recording and music publishing industry 
to create a market-based solution that will benefit consumers, artists, 
Napster and the traditional recording and music publishing companies 
alike. Before my arrival, Napster's attempts to negotiate with the 
industry were at first seemingly welcomed, but then, while talks were 
still continuing and without notice, the recording companies sued. 
Nevertheless, since my first day on the job, I have been reaching out 
to the major recording labels. Ironically, all this is occurring in an 
environment of steadily increasing record sales.
    Recording industry statistics show that the music business is 
booming. For example, according to the RIAA, U.S. CD sales increased 11 
percent in 1999 to a dollar value of $12.8 billion, and are up 8 
percent for the first quarter of 2000 compared to the same time period 
last year. These figures discredit a study commissioned by the RIAA in 
the litigation that attempted to show that sales of CDs near certain 
colleges from 1997 to 2000 had gone down. That report focused on 
declining sales at these selected stores over that time period, but 
failed to take into account the fact that Napster did not even exist 
until late 1999, and that big box and online retailers probably played 
the most significant role in any declining sales that may have occurred 
at these selected college stores.
    In fact, numerous studies show that Napster users are more likely 
to buy CDs after using the Napster directory service. For example, a 
recent study showed that 28.3 percent of users who have transferred 
files using Napster have increased their CD purchases, as opposed to 
only 8.1 percent whose purchases have decreased. In addition, a Pew 
Foundation report found that people are going out and purchasing music 
they first sample online. Further, more than half of all users use 
Napster to sample songs before purchasing them, and 42 percent of these 
samplers actually purchase more CDs as a result. In fact, one study of 
college-aged users showed that over 95 percent of all files that are 
shared between those Napster users are soon erased, supporting the view 
that Napster is a sampling and listening experience, and not a 
permanent copying experience that could displace conventional CD sales. 
The excitement that Napster creates for new and established artists is 
helping to drive increased sales, reaping even greater profits for the 
recording and music publishing industry.
    Further, far from hurting the creative community, Napster is 
offering thousands of artists a new and effective distribution system 
for their work. Last year, the major recording labels released only 
2,600 albums. In contrast, in the past four months Napster has signed 
over 17,000 artists to participate in its new artist program, more than 
7,500 of whom reside in the states represented by members of the 
Judiciary Committee. Through this program and Napster-run chat rooms 
that allow users to discuss new artists and songs, Napster provides 
independent artist an inexpensive, alternative method of promotion. In 
one case, a student at the University of Florida posted his songs on 
Napster. The ensuing buzz resulted in increased sales of his CD on his 
own web site, which allowed him to partially fund his college tuition.
    In an industry where a few large companies operate as the 
gatekeepers to the American listening public, artists clearly see 
Napster as a revolutionary way to gain access to those who would not 
otherwise have a chance to appreciate their work. Jim Guerinot, an 
industry veteran who currently owns the Time Bomb recording label and 
is personal manager for The Offspring, a multi-platinum-selling rock 
band, has said: ``It is the band's and their manager's opinion that 
allowing fans of The Offspring to hear their music on Napster will make 
fans more, not less, likely to purchase the group's records, T-shirts 
and other merchandise, and attend live performances by the band. *  *  
*. The Offspring view Napster as a vital and necessary means to promote 
music and foster a better relationship with fans.''
    In conclusion, we should let history be our guide. Every time a new 
technology makes it easier for listeners to discover, enjoy and share 
music, the recording and music publishing industry ends up benefiting. 
In the end, artists, the industry and new technologists will create a 
solution that benefits consumers, artists, Napster and the recording 
and music publishing industry. Until that time, however, we believe it 
would be rash to construe or change existing laws in such a manner as 
to destroy Napster. To do so would brand as thieves the millions of 
music lovers throughout the United States who have come together to 
share and enjoy music on Napster and the Napster community will 
disappear. I hope you in Congress will watch closely these developments 
and I thank you for your time.

    The Chairman. Mr. Robertson, we will turn to you.

 STATEMENT OF MICHAEL ROBERTSON, CHAIRMAN AND CHIEF EXECUTIVE 
             OFFICER, MP3.COM, INC., SAN DIEGO, CA

    Mr. Robertson. Thank you, Mr. Chairman, distinguished 
members of the committee. Good morning. My name is Michael 
Robertson. I am the Chairman and CEO of MP3.com.
    You invited me here to discuss with you, the members of the 
Senate Judiciary Committee, the future of digital music and how 
that future will impact both consumers and artists. I would 
like to address how music and technology together are making it 
possible for consumers to access their music anytime, anywhere, 
on any device, and how companies like MP3.com are taking 
advantage of new technologies in a responsible way to bring 
artists and consumers closer together.
    I am going to provide a demonstration of our technology. I 
will also discuss what happened after we introduced our 
technology, the lawsuits that ensued, the confusion which 
exists around current copyright law, and how consumers are 
ultimately losing in the battle between technology and the 
recording industry.
    MP3.com has many parts. Roger talked about how we are the 
host for 80,000 digital artists today, and we are proud to be 
that. But what I want to talk about is one of our services, 
called My.MP3.com. This revolves around our concept of an MSP.
    I think I am going to be the only one to risk a live demo 
here, and hopefully I won't regret it. I want to talk a bit 
about our concept in MSP. The concept is a very simple one. 
Because music can be digitized, we can store music digitally. 
We can take an entire person's music collection, their entire 
collection, the CD's that they have bought, the music that they 
have purchased online, and store that. The beauty of that is 
then those consumers can access that music from anywhere that 
they are. Last night in my hotel room in Washington, DC, I had 
with me my music collection, not because I lugged my CD's, but 
because I had my computer and an Internet connection.
    I want to show you this technology. We call it My.MP3.com. 
So the first thing I am going to do is log in. Each account is 
password-protected, so each person has their own account which 
only they can access. The interesting part here is how we made 
it possible to get the music into this online storage. Music is 
generally very large, so we had to come up with technology that 
would make it easy for a consumer to load their music in. We 
rolled out two technologies to do that.
    Perhaps the music that people care most about is the music 
they have already bought, and so we came out with some software 
called Beam-It, and I want to show you how that works. A 
consumer takes an audio CD which they have purchased through 
traditional means, loads this Beam-It software onto their 
computer. Once the Beam-It is loaded, they simply enter in 
their user name and password so that it knows what account is 
being accessed. Then they take the audio CD, put it into their 
computer, click a button, Beam-It, and literally 20 seconds 
later all the tracks from those CD's are available in their 
online account that they can access from anywhere. And so here 
is an example where I just beamed a CD for Stevie Ray Vaughn. I 
will click ``play'' and that music will load immediately and 
start playing, we hope.
    So, that is an example of a consumer loading their own CD 
collection into the system. I want to show you another tool 
that we rolled out which allows retailers to also be included 
in the process. Today, when you buy a CD online at CDnow, it is 
not really CD now; it is CDinfourdays.com, because you have to 
wait for that CD to come in the mail. [Laughter.]
    We rolled out technology that includes retailers in this 
process, that encourages people to buy more music. I am going 
to buy a CD from Steve Miller here at Djangos, who is one of 
our retail partners. So I am going to purchase a CD as any 
online customer would by putting in their credit card, their 
shipping address. But as soon as this purchase is completed, 
that Steve Miller CD that I just bought is immediately loaded 
into my account. I can click ``play'' and all the songs from 
that CD that I just purchased are mine to listen to in a 
digital version while I wait for the physical CD to appear.
    That is my favorite one, ``Fly Like an Eagle.'' But you 
will notice here, Senators, I can click between these songs. 
This is a virtual CD player. This allows me to access my music 
not in a radio form, but as a virtual CD player online. That is 
the core of the My.MP3.com technology.
    What I want to do now is go back to what happened after we 
rolled this technology out. The day we rolled this technology 
out, we called the music industry and invited them to see this 
technology firsthand. They sent their attorneys, they sent 
their technologists to investigate this system, and we 
encouraged them to do so.
    After looking at this technology, they said they felt they 
had concerns and wanted us to immediately cease the system. We 
said that we were happy to discuss this, but we first wanted to 
know a time line and what the issues were. They refused and 
immediately leveled a lawsuit without so much as a demand 
letter. From there, it went into the courts.
    For us, this is really an issue of fair use. Does a 
consumer who buys a physical CD have the right to load that 
into an online service and listen to it? Does a company have 
the right, like MP3.com, to assist them in doing this? To make 
this easy, we built a database of CD's to make the upload 
process quicker, but at the end of the day it is consumers 
listening to their own CD's.
    On to the lawsuit. We lost in the Second Circuit--I am 
sorry--district court, my attorney tells me. That is why I 
brought him. The judge did not agree with us that this was fair 
use, so we immediately voluntarily disabled the system and 
began licensing talks that were actually going on for some 
time. We settled with two record labels of the five that are 
suing us.
    We haven't received complete licenses from any of the major 
record labels. So although we have paid enormous amounts of 
money, many times more than the largest copyright settlement 
ever in history, for a system that was up for 4 months that 
they can show had no damage to them, that, in fact, raised CD 
sales to all the retailers that supported us, we are still not 
able to offer that music to consumers.
    We requested the license. We have the money to pay, but we 
have not gotten licensed. There can only be two reasons. One, 
money; two, barriers. We are willing to pay, but that isn't the 
issue, in my opinion. The issue is more about barriers to 
competition.
    While we disagree with the judge's ruling, we are 
respectful of it and we immediately went working on licenses. 
But I want to explain to you how difficult this licensing 
process is. Because the copyright law is vague, because it 
deals with mechanical and analog realities, moving those to the 
digital world is sometimes impossible.
    To turn on our service, we need the following rights: one, 
the right to copy the master recording onto a database suitable 
for streaming over the Internet; two, the right to perform the 
master recording via streaming over the Internet; three, the 
right to copy the composition into a database suitable for 
streaming over the Internet; four, the right to perform the 
composition via streaming over the Internet; and, five, the 
right to copy the composition each time it is streamed over the 
Internet. That is for every song that we want to offer for 
consumers who have already purchased this music. Clearly, this 
makes a venue that is nearly impossible for any company to live 
within.
    I think today My.MP3.com presents the industry with a fork 
in the road. Will licensing bodies work in a free-market 
environment to license responsible technologies like My.MP3.com 
or will they use this opportunity to squeeze competitors and 
consumers?
    I have heard this hearing referred to as the Napster 
hearing. It is not the Napster hearing; it is the consumer 
hearing. That is what this is about. I would contend that these 
new technologies are being thwarted or reduced in their ability 
to roll them out to consumers because of the ambiguities in 
copyright law.
    Completely new applications are impossible to know what 
licenses are required. For example, we have a license with 
ASCAP and BMI that pays publishers. Meanwhile, Harry Fox has 
sued us for billions of dollars. They also collect money for 
publishers. So you can see in this example there is double-
dipping, or even triple-dipping in some instances.
    Additionally, the stiff copyright damages that surround 
these gray areas can potentially wipe out any company for even 
the slightest infraction over an issue that is very difficult 
to ascertain. Technology for My.MP3.com is doable today. Yet, 
there is no service available to the consumer, and that is a 
shame.
    Finally, consumers are paying more for music, not less, in 
spite of the incredible efficiencies of digital delivery where 
we should be seeing enormous price decreases. I can't deliver a 
loaf of bread, I can't deliver a pair of shoes over the 
Internet, but I can deliver music. We should be seeing great 
price decreases, but we are not. Digital music is the only 
industry that is moving to the Internet with higher costs for 
the consumer.
    When a consumer buys a CD, they are now being asked, if it 
is in digital form, to pay every time they hit the ``play'' 
button on their computer. They don't pay every time they hit 
the ``play'' button on their home stereo, and they shouldn't 
have to on the Internet.
    So with that, I want to point out that the key to growing 
the music business, the key to protecting artists, the key to 
protecting the music industry is not by charging existing 
customers more and giving them fewer options, but by growing 
the entire business by offering more options to those that pay. 
This is about making the pie bigger, not about charging more 
for each slice.
    What is needed is a business landscape which encourages 
experimentation without a long list of companies simply seizing 
an opportunity to garner a potential economic windfall on the 
backs of entrepreneurial companies, or worse, block their 
entrance into the market entirely.
    What we ask from you, the committee, is clarity, clarity 
for the consumer. What can the consumer do with the music that 
they have bought and own outright? We encourage this committee, 
as well as other Members of Congress, to continue this 
dialogue. By encouraging innovative technology advances, by 
encouraging all parties in the digital music space to work 
together to embrace free-market enterprises which will drive 
this to a new level, will help consumers in this battle.
    Thank you for your time.
    The Chairman. Thank you, Mr. Robertson.
    [The prepared statement of Mr. Robertson follows:]
    [Additional material is being retained in the Committee 
files.]

                Prepared Statement of Michael Robertson

                              INTRODUCTION

    Mr. Chairman, distinguished members of the Committee, good morning. 
My name is Michael Robertson, and I would like to thank you for your 
invitation to testify before the Committee. You have invited me here 
today to discuss with members of the Senate Judiciary Committee the 
future of digital music and how that future will benefit both consumers 
and artists. I would like to address how music and technology together 
are making it possible for consumers to access their music anywhere and 
at anytime. Also, how companies like MP3.com are taking advantage of 
new technologies to bring artists and consumers closer together by 
providing a demonstration of the My.MP3.com service. I will discuss 
what happened following the introduction of My.MP3.com and the 
confusion which exists with current copyright law. Lastly, I would be 
pleased to engage in an open discussion of how the respective 
constituencies can work together to the benefit of both consumers and 
artists. Let me first begin by talking about my company, MP3.com 
(http://www.mp3.com) and the My.MP3.com service.

                          MP3.COM--THE COMPANY

    I am here representing MP3.com as its chairman and chief executive 
officer. Since the founding of the company, MP3.com has been dedicated 
to becoming the premier Music Service Provider, or MSP, which I will 
describe in greater detail later in this testimony. While the company's 
vision has evolved since its beginning in 1998, today it is to make 
digital music accessible to consumers on any net-connected device. In 
the near future, home and car stereos, cell phones, PDA's and other 
devices not yet imagined, will access the world's largest fully 
interactive database of music in an easy and seamless manner.
    Currently, more than 74,000 artists and over 469,000 songs and 
audio files are posted to our web site. These numbers continue to grow 
with an average of over 100 artists and more than 1,000 songs and audio 
files added daily.

                     BEING A MUSIC SERVICE PROVIDER

    Music Service Provider (MSP) is a term MP3.com coined last year to 
describe a significant new sector of the music business in which a 
personal music library is delivered to users anywhere over any net-
connected device. Just as an ISP provides access to the Internet, an 
MSP provides access to music. Imagine being able to listen to your 
music collection from your desktop at work, any room of your house via 
your home network, portable devices like your phone or Palm Pilot, and 
even in your hotel room via an Internet connection. The proliferation 
of bandwidth, PC penetration and portable devices is quickly giving way 
to the demand for music anywhere. As an MSP, we are dedicated to 
enhancing and improving our infrastructure which has been designed to 
allow consumers to instantly discover, listen to, freely download, buy, 
store and organize their favorite music online. We are partnering with 
other technology companies to satisfy consumers' desire to enjoy their 
music anywhere and at anytime. Our MSP model is great for music lovers, 
a blessing for artists and a necessity for growing the music industry. 
An MSP manages all of your personal music digitally and, because it is 
stored on the net, allows it to be delivered to any net-connected 
device--making music more versatile, portable and valuable than ever 
before.
    In January of this year, we rolled out some of the first MSP 
services to all music fans on the net.
    My.MP3.com represents a complete relaunch of our My.MP3.com service 
that lets users store, manage and play back virtually their entire 
music collection from any web browser. Sorting albums and artists, 
creating playlists, and streaming music in Lo Fi or Hi Fi are just a 
few of the features available via a personal account.
    Instant Listening gives consumers the ability to buy a physical CD 
online and instantly listen to that CD. This innovative service gives 
instant gratification a whole new meaning. When purchasing CDs from 
MP3.com's e-tailers, all tracks from the CD are made available in a 
user's password-protected MY.MP3.com account. Consumers can instantly 
enjoy the tunes they just purchased while waiting for the post office 
to deliver the plastic disc.
    Beam-it is a technology that makes it a snap to move CDs you have 
already purchased into your My.MP3.com account. Once the Beam-it 
technology is installed, any time users place a CD into their CD-ROM 
drive, they will see a polite window offering to ``beam'' their CD to 
their MY.MP3.com account. Ten to 60 seconds later, the tracks are 
available. In addition, visitors to MP3.com can select any of the more 
than 469,000 tunes, which have been authorized by the content owners, 
from our web site and add them to their catalog with a just a click of 
the mouse.
    In offering these new features to consumers, we built-in extensive 
security hurdles, creating a system that encourages positive behavior. 
To gain access to the music, users must represent that they own the 
physical CD. All of the accounts are password-protected, so the music 
in one account is not available to another account. Also, if we detect 
multiple users on the same account, we can terminate the users of that 
account entirely.

                     EXISTING LAWS AND THE INTERNET

    As you can see, the Internet and the technological applications 
applied to this new medium are both exciting and dangerous. It's 
exciting when consumers can access their paid-for music and all new 
free music offerings effortlessly on any Internet-connected device such 
as cell phones, Palm Pilots, home and car stereos (to mention just a 
few) and enjoy their music in new ways. It's exciting when, for the 
first time, a digital artist has access to a marketplace without an 
intermediary. This is good for artists--it allows them to gain access 
to a marketplace that was heretofore denied them. This is good for 
consumers because this new medium allows for individual diverse and 
vast choices of music that cannot be heard anywhere else. It is also 
exciting because, with commercial music available on the Internet, new 
complimentary sources of revenue can be had for all to benefit.
    Now for the dangerous part--with the vast consumer demand for 
popular music on the Internet, we face an immediate and critical time 
that I believe requires immediate governmental intervention. Without 
this intervention, the potential for ``lawful'' music on the Net may 
very well die, and we will be left with demand continuing to seek and 
find illicit supplies of music. What I mean by intervention is clarity 
for the consumer and simplicity for the technology company. Today, 
MP3.com is faced with a very frustrating and apparently futile 
challenge--the challenge to make music (that people already own) 
available for storage and retrieval on the Internet without running 
afoul of multiple parties claiming rights and control over that music.
    What is at issue are consumers' rights. The rights of consumers to 
listen to, manage, and share their music--music they already own. 
Because of current legal and regulatory roadblocks, as well as existing 
and outdated copyright provisions, consumers are caught in a quagmire 
of bureaucratic regulations and prevented from enjoying music in ways 
never before imagined.
    Let us again take a look at what MP3.com did that caused all of the 
uproar. We created a system that required as the price of admission to 
the My.Mp3.com service that the consumer had in their possession a 
physical CD. If the consumer did not have a CD, there was no way to 
access this system. Unrelated parties at Rice University intentionally 
and formally tried to hack into our system for access without a CD. In 
every case, this access was denied. Respectfully, I remind you that 
these CDs were already bought and paid for by a consumer. Further, the 
various rights holders have been compensated upon that purchase. If now 
the law tells me as a technology company that MP3.com must ensure that 
the various rights holders are to be paid yet again, we can live with 
this. However, look at the landscape that Internet technology companies 
now apparently find themselves in. From what the courts and other 
interested parties are telling MP3.com, in order to allow consumers to 
listen to their CDs at their discretion, the technology company has to 
separately negotiate for: (1) the right to copy the master recording 
onto a database suitable for streaming over the Internet; (2) the right 
to perform the master recording via streaming over the Internet; (3) 
the right to copy the composition into a database suitable for 
streaming over the Internet; (4) the right to perform the composition 
via streaming over the Internet; and (5) the right to ``copy'' the 
composition each time it is streamed over the Internet--and that's with 
respect to each separate song put on the Internet.
    It seems only fair, prudent and utilitarian that we should be 
required to only negotiate one royalty for the use of one song. Today, 
we have (at great expense) procured a performing rights license for all 
content, a master recording license for much of the content, and we are 
still faced with the prospect of all of this for nothing if we cannot 
get a publishing license. How can any company, or any consumer, for 
that matter, have hope that their music will be lawfully available on 
the Internet if the service provider must first negotiate with three 
different parties and then have to negotiate with potentially thousands 
more in order to become an infringement-free company. This, as you can 
see, is futile and puts consumers in the position to fill their needs 
only one way and that is via a systemless, licenseless, lawless 
copyright-trampling outlet, many of which you are seeing today. And 
they have just begun.
    Now, as for clarity--consumers look to you to provide clear 
understanding of the parameters under which personal property can be 
used. Never before in history has there been such a fog surrounding 
what a consumer can lawfully do with their music. I do not have the 
answers, but I do know the questions: Can I play my music over the 
Internet? Can I store my music using a music service provider without 
fear of shutdown? Can I stream my music to my cellphone? How about to 
my Palm Pilot? Where do my rights start, and where do they end? What do 
companies that I need to help me access these rights have to do so I 
know they are lawful companies to choose to help me?
    Today, MP3.com respectfully requests that answers to these 
questions for the consumer along with common sense and ease of the 
content licensing process be addressed as soon as practical.

                           THE BUSINESS MODEL

    The ability to listen to a personal music collection from anywhere 
on the Internet is a monumental advancement for consumers. The benefits 
for artists, while more subtle, are no less dramatic and something that 
artists and rights-holders should welcome with open arms. Using the 
My.MP3.com technology as springboard, we laid the foundation for new 
revenue sources that will grow the business.
    For example, much of the current digital music opportunity on the 
Net centers around offering music wrapped in advertising, much like 
network television (NBC, ABC, CBS). Today, MP3.com's ``Payback for 
Playback'' model is attracting and rewarding artists for giving away 
their music on the Internet, with some artists making up to $20,000 per 
month based on the popularity of their music. The ``Payback for 
Playback'' fund pool is generated through advertising revenues.
    In addition, consumers currently pay a subscription fee for many 
services, including TV (cable), film (premium channels), Internet 
access, phone and cellular access, which creates a valuable, steady 
stream of ongoing revenue. The obvious missing item is music. 
My.MP3.com illustrates how music can be transformed into a digital 
service whereby users can store their music on the Internet. Here they 
can sort, create playlists and access their music not only from their 
personal computer, but eventually from any digital device with Internet 
access, including cell phones, Palm Pilots, etc. A subscription system 
has the potential to double the music business, just as cable TV grew 
the film business to more than double its previous revenues. It's 
important to note that this revenue stream is in addition to CD sales 
as the subscription system complements CD sales. In May, our first 
subscription channel was introduced--the Classical Music Channel--and 
offers classical masterworks for a monthly subscription fee of $9.99. 
The Classical Music Channel provides unlimited streaming access to more 
than 4,000 tracks and over 300 free downloads from the collection. 
Other channels slated for release include alternative, jazz, 
children's, urban, world and more.

                               CONCLUSION

    As the leader in the digital music space, we have employed 
technology to build new delivery methods for music fans and new revenue 
streams for artists. Today, at MP3.com, we have two main objectives:
    (1) Continue to build the infrastructure that creates an easy and 
convenient way for consumers worldwide to discover, listen to, 
download, interact with, manage and purchase music; and
    (2) Grow the music business through new revenue models such as 
advertising and subscriptions, which will benefit individual musicians, 
record labels and other companies in the digital music business.
    MP3.com will continue to be a force in shaping the future of 
digital music delivery and distribution. At the heart of MP3.com has 
always been a vast technology infrastructure that can accept, 
structure, manage, move and report massive amounts of data. By 
executing on our MSP strategy, we are building the infrastructure to 
deliver music to any device, anywhere and at anytime. Along the way, we 
are dedicated to making the music business a better place for consumers 
and artists.
    We encourage this Committee, as well as other members of Congress, 
to continue their dialogue on this issue. By encouraging innovative 
technological advances in the online digital music space and creating 
clarity of both law and licensing procedures, consumers, rights-holders 
and artists worldwide will win. Please help create clarity and 
stability in this space.
    Thank you for your time.

    The Chairman. Mr. Ehrlich, we will turn to you.

   STATEMENT OF FRED EHRLICH, PRESIDENT, NEW TECHNOLOGY AND 
BUSINESS DEVELOPMENT, SONY MUSIC ENTERTAINMENT, INC., NEW YORK, 
                               NY

    Mr. Ehrlich. Thank you, Mr. Chairman. My name is Fred 
Ehrlich and I am the President of New Technology and Business 
Development for Sony Music Entertainment. This committee has 
always been on the cutting edge of technology and intellectual 
property issues, and I thank you for holding this hearing.
    There is no longer any doubt that the digital revolution 
will radically change the way that artists create and consumers 
enjoy copyrighted works. We in the music industry think this is 
a great thing. These new opportunities pose great challenges, 
both to traditional copyright law and to certain longstanding 
business models of how music is created and enjoyed. I am glad 
to say, however, that the music industry is ready to meet these 
challenges. Let me give you an example from my own company.
    At Sony Music, we established a New Technology and Business 
Development Department more than 6 years ago. Its charter is to 
review, evaluate and, where appropriate, enter into 
partnerships with digital technology companies. Sony Music is 
committing hundreds of millions of dollars to develop these new 
technologies, and we are at the same time licensing our content 
to more and more legitimate distribution companies.
    When you buy a CD today, you are, in fact, acquiring a 
product that represents the creative contributions of a complex 
chain of players, a value chain, if you will, that constitutes 
the music industry. The price you pay for your CD flows back 
through the chain to compensate each and every one of the 
contributors involved in the production of that sound 
recording.
    Music companies were among the first to use the Internet to 
market and promote our recordings online. Some of our earliest 
efforts at Sony Music included artist chats and making 
available samples of new music, tour dates, and up-to-the-
minute artist information on our promotional Web sites. The 
goal was to allow consumers to communicate directly with the 
artists they love.
    Music companies and our recording artists were eager to use 
the Internet to distribute music. As early as 1997, we began 
what we call online music distribution, where a consumer orders 
product online and the product is delivered via mail in 
physical format. This was just a start, but we wanted to start 
to take the next step; that is, to deliver the music digitally.
    The music industry has now enthusiastically entered the 
world of digital distribution and it is testing a wide variety 
of new business models. One key feature in these new models is 
greater consumer choice. Another is maintaining and even 
exceeding the high level of quality that our music consumers 
have come to expect.
    We in the music industry firmly believe that at least some 
of these new, innovative distribution methods will provide the 
path to the future of the music business. Some of these new 
models include streaming transmissions in which the sound 
recording is transmitted to the consumers, but not in a 
downloadable format--we have been providing live Internet 
broadcasts of our artists' concerts since 1997--and 
subscription models that allow record companies to offer tiered 
services in both the streaming and downloadable format to more 
closely match customer preferences. Cyber lockers offer 
consumers the ability to store their music remotely and to 
access their music wherever they are and whenever they want.
    A number of major labels have licensed their repertoire for 
use in creating customized CD's. Also, a number of major 
labels, including Sony Music, hope to offer music via kiosk. 
These kiosks will allow consumers to access a far greater 
reserve of available product to purchase, especially our back 
catalog. And every major label has announced plans to begin 
digital downloads of music.
    At Sony Music, we are making our music available in 
downloadable format not only on our own Web site, but on some 
40 other sites, and are continuously looking for more and more 
places to take our music to consumers. We are constantly 
exploring new options for downloading music to digital lockers, 
personalized radio, and bundling tracks on hand-held devices, 
to name but a few.
    All of this is just the tip of the iceberg. It is my job at 
Sony Music to explore new business models aimed at getting our 
music to the e-marketplace. I assume other labels have a 
similar agenda. We are doing all this in partnership with 
technology companies of every size and shape, large and small, 
in the new digital music space.
    We view digital distribution as offering ways to expand the 
value chain associated with music, while also offering ease and 
quality and choice for the music fan. If in the future this 
value chain is not honored and compensation declines, it will 
be very difficult to sustain the level of investment involved 
in developing music, and that would be a shame both for the 
artistic world as well as for the consumer.
    All we ask is the continued application of copyright law to 
ensure a system that respects and protects music rights in 
cyberspace. We believe that a legitimate system of the 
protection of rights sets off a domino effect for true e-
commerce where creators of technology, creators of music, and 
the consumer all benefit.
    I have absolutely no doubt that a breakdown in that 
protection of rights would result in the lack of any incentive 
for anyone in this value chain to continue. It is our view that 
the opportunities we see will outweigh and outlive the 
challenges. The music industry is ready, willing, and able to 
use digital technology to bring music to consumers in evermore 
creative ways.
    Thank you for the opportunity to appear before you today. I 
would be happy to answer any questions you might have.
    The Chairman. Well, thank you.
    [The prepared statement and an attachment of Mr. Ehrlich 
follow:]

                   Prepared Statement of Fred Ehrlich

    Mr. Chairman, Senator Leahy, and Members of the Committee, my name 
is Fred Ehrlich, and I am the President of New Technology and Business 
Development for Sony Music Entertainment Inc. Sony Music is a leading 
global producer, manufacturer, and marketer of recorded music, video, 
and music publishing, headquartered in New York. Sony Music employs 
over five thousand people in the United States in our many record 
labels (which include Columbia and Epic), and at our four disc 
manufacturing plants and our state-of-the-art recording facilities in 
New York, and generates significant U.S. revenue from our record and 
music publishing businesses worldwide. I am here before you today 
representing The Recording Industry Association of America, the trade 
association of America's record companies. The RIAA's member record 
labels range from large companies with major distribution systems to 
small independent companies who average just a few recordings a year, 
and are responsible for producing and distributing over 90 percent of 
the legitimate sound recordings sold in the United States.
    This Committee has always been on the cutting edge of technology 
and intellectual property issues, and I thank you, on behalf of Sony 
Music and the recording industry, for holding this oversight hearing 
today.
    There is no longer any doubt that the digital revolution will 
radically change the way that artists create, and consumers enjoy, 
copyrighted works. We in the music industry think this is a great 
thing. The digital world opens up an almost unlimited number of 
opportunities for the public to experience music in ways that were 
never imagined before. Of course, these new opportunities pose great 
challenges both to traditional copyright law and to certain long-
standing business models of how music is created and enjoyed. I am glad 
to say, however, that the music industry is ready to meet these 
challenges. In fact, we have a long history of embracing and developing 
the new digital technologies, including, for instance, our adoption of 
the compact disc format in the mid 1980's.
    Today, I hope to explain to the Committee some of the ways in which 
the music industry has employed digital technologies to expand the ways 
we bring music to consumers. I will also try to predict, to the extent 
that anyone can, some of the ways we expect to even further 
revolutionize the creation and enjoyment of music via the Internet, 
broadband, and other digital technologies. First let me outline, in 
broad strokes, what is involved in bringing a piece of music into the 
marketplace from the date of inception to the moment the first consumer 
has it in hand--to describe the ``value chain,'' as it were, involved 
in delivering new music to the marketplace.
    When you buy a CD today, you are in fact acquiring a product that 
represents the creative contributions of a complex chain of players, 
coordinated by the record label, that constitute the music industry. 
There are obviously many different creative combinations starting with 
a singer songwriter or a band that writes their own music like 
Metallica, but the creative chain may also begin with a songwriter (or 
team of a composer and lyricist) who puts together the words and music 
for a new song. The record label and its recording artist work with 
that songwriter's music publisher to fit the right song with the right 
artist. The recording artist will then go into a studio to record the 
song, joined by an array of background musicians and vocalists, and a 
team consisting of a record producer, studio engineers, mixing 
engineers, and others. Meanwhile, the record company creates the 
graphics and album art for what will become a CD in a jewel box. The 
record company finances the recording of the song and all of the other 
songs on the album, secures all worldwide rights for the album, and 
manufactures the CD.
    Now the work of getting it into the consumer's hands begins--the 
promotion and distribution. The record company promotes and markets the 
album throughout the world, working closely with domestic and 
international broadcasters, music video channels, retailers and other 
distributors. With the advent of new digital distribution technologies, 
we now have a whole new range of venues where we can bring our music to 
music fans: these include our own websites; those traditional record 
stores having an online presence; and a vast array of online 
destination sites such as AOL and Launch.com.
    New digital delivery channels open the door for new entrepreneurs 
to help deliver our music in ever more innovative ways to consumers. 
These new participants in the music value chain include companies that:
           digitize and compress our music to maintain the 
        sound quality consumers have come to expect from Sony Music;
           encrypt our music and maintain digital rights 
        management systems to protect the work from theft;
           create identifiers such as watermarks to preserve 
        the integrity of the work and the identity of its author;
           constitute an ever-expanding network of retailer/
        affiliates to offer our music for sale;
           serve as financial clearinghouses for transactions 
        such as credit card, micro-transaction, debit card, and 
        electronic wallet transactions;
           support the development of secure software/hardware 
        players on which our recordings will be played; and
           support customer service and tech support.
    The price you pay for your CD flows back through the chain to 
compensate each and every one of the contributors involved in the 
production of that sound recording. It is primarily the responsibility 
of the record label to effectuate that flow of monies. As you might 
imagine, it is extraordinarily costly for a record label to acquire 
talent, record, promote, market, manufacture, and sell recorded music.
    Our experience over the past years of music-making is that only a 
very small minority of recordings are profitable. For every artist 
embraced by the marketplace (the artist whose tunes you recognize, 
whose songs get played on the radio, whose records get sold in the 
stores), there are many more for whom the investment will never be 
recovered. It is the relatively few hits that fund all of the 
investment in new music. I am not trying to say that one can't make 
money in the music industry. In fact, we can, and do, and hope to 
continue to be profitable. I am saying, however, that every record made 
requires compensation to a large number of individuals, whether or not 
the record is successful. And the reason that record companies have 
been willing to pursue this business model--a model that has worked, 
year after year, to bring America and the world a steady stream of new 
talent and great music--is our certainty that we will enjoy the 
benefits of success. A certainty that, when the marketplace likes what 
we produce, we will get paid for our work and our goods. That 
certainty, so critical to the model, is rooted in the Copyright Law. 
When someone buys a CD, it is the Copyright Law which assures that 
everyone in the value chain gets their share.
    With this framework in mind, I would like to highlight for the 
Committee some of the ways in which record companies have embraced the 
digital technologies for many years.
    As far back as 1994, music companies were among the first to use 
the Internet to market and promote our recordings online. At Sony Music 
at that time, part of our job was evangelizing to our artists. Not only 
we were not afraid of the Internet, but we were actively encouraging 
our artists to take advantage of some of the Net's earliest 
opportunities. For instance, Sony Music's online website, which 
included artist biographies and unique content as well as samples of 
current music, was launched in 1995. Our artists found online promotion 
to be an exciting tool which empowers music fans to communicate 
directly with their favorite artists. A number of record labels, 
including Sony Music, also began an to use online websites to find 
unsigned new bands. At about this time, record labels also begin to 
experiment with new formats on which to present our artists' music, 
such as the ``enhanced CD'' format which allowed us to include, along 
with a standard audio CD, photos and other materials selected by the 
artist to enhance the consumer's experience of the music. Also at this 
time Sony Music created customized CD's which were bundled with new 
personal computers sold by IBM, Toshiba, Sony, Packard Bell and others. 
Our goal in these early endeavors was to encourage artists and their 
fans to embrace the emerging Internet and digital technologies to 
enhance the music experience.
    From the outset, music companies and our recording artists were 
eager to use the Internet to distribute music. As early as 1997, we 
began what we call ``online music distribution,'' where a consumer 
orders products online and the product is delivered via mail in 
physical format. This was a start, but we wanted to take the next step; 
that is, to deliver the music digitally. We identified several hurdles, 
including slow access to the net, which made it difficult for us to 
quickly transmit even small sound files; an early lack of Internet 
penetration among American consumers; inadequate compression 
technologies for the truly high quality recordings our consumers have 
come to expect from us; and the need for digital rights management and 
security technologies.
    While time and technology are addressing the first three challenges 
[modem speed, Internet penetration and compression technology], the 
music industry has taken and continues to take the lead in solving the 
fourth: the need for a secure transmission method. We helped recruit 
IBM and other record labels to launch a trial digital download program 
called the Madison Project. The Madison Project enabled us to test a 
rights clearinghouse system. In a more fundamental way, it helped open 
the eyes of record labels and their technology partners to the 
practical complexities of making digital download a reality, from 
encoding our music, digitizing the album artwork, clearing rights, 
securing the transmission, and working out such logistical puzzles as 
how a consumer could print out our CD packaging and liner notes on a 
standard home printer. Perhaps most importantly, the Madison Project 
enabled us to learn from the feedback of the trial participants about 
the ease of use of the system, and the quality of the music experience.
    At about the same time, under the aegis of the Recording Industry 
Association of America, the worldwide music industry launched a 
collaborative effort with the global consumer electronic and 
information technology industries to develop an open standard for 
secure music distribution online, which came to be known as the Secure 
Digital Music Initiative, or SDMI. Thanks to those efforts and a level 
of extraordinary cooperation among more than 200 companies in the 
music, consumer electronics, and information technology industries over 
a relatively short period of time, specifications have already been 
written for SDMI-compliant portable devices, and several compliant 
portable playback devices have already been brought to market. The SDMI 
group is now working to move beyond portable device standards to issue 
written specifications for all aspects of digital music use.
    In parallel discussions, similar intra-industry groups are 
currently working towards the establishment of standards for a new 
generation of CD device which is both compatible with current CD 
players, but is secure (that is, that includes digital watermarking and 
encryption to protect the integrity of the recordings).
    Now that some of these initial hurdles are being resolved, the 
music industry in the United States has enthusiastically entered the 
world of digital distribution. Inspired by the potential of digital 
delivery to allow music to be created and distributed without physical 
package, and to reach music fans more directly with the music they love 
best, we plan to test a wide variety of new business models. One key 
feature in these new models is greater consumer choice. Another is 
maintaining and even exceeding the high level of quality that our music 
consumers have come to expect from our industry. We in the music 
industry know that some of these new business models may prove 
successful, and some will not. We firmly believe, however, that at 
least some of these innovative new distribution methods will provide 
the path to the future of the music business. Some of these new models 
include:
     Streaming Transmissions: A number of major labels, include 
Sony Music have licensed their repertoire in the so-called ``streaming 
media'' format in which the sound recording is transmitted to the 
consumer but not in a downloadable format. These streams may be 
promotional or for sale.
     Webcasting: This already thriving business is one in which 
consumers enjoy a new form of on-line radio with music more directly 
targeted to their genre likes and preferences. These are operating 
because of the encouragement of the DMCA.
     Live Streams: We have been providing live Internet 
broadcasts of our artists' concerts since 1997. Many other labels are 
doing the same.
     Subscription Models: Subscription models allow record 
labels to offer tiered services, in both the streaming and downloadable 
format, to more closely match consumer preferences. These services 
might be delivered through a variety of playback media, including 
digital TVs and wireless and other portable devices. For instance, a 
monthly fee might allow you to enjoy all of the music and video from 
your favorite artist, with access whenever you want it, and perhaps 
access to special chat rooms. A number of major labels, including Sony 
Music, have announced that we will soon be offering subscription 
services.
     Cyberlockers: Warner and BMG are licensing MP3.com, BMG is 
licensing MusicBank, and Sony Music is in active discussions with 
similar companies, to offer consumers the ability to store their music 
in ``cyberlockers'' and to access their music wherever they are and 
whenever they want.
     Customized CDs: A number of major labels have licensed 
their repertoire for use in creating customized CDs. For example, EMI 
sold a Beastie Boys 2-CD package; the first was new material from the 
band, and the second was a customized disc made specially for each 
purchaser of that buyer's favorite Beastie Boys songs.
     Kiosks: A number of major labels, including Sony Music 
have entered into partnerships with companies to offer music via kiosks 
in traditional and non-traditional outlets, from records stores to 
train and bus stations and fast-food restaurants. These kiosks will 
allow consumers to access a far greater reserve of available product to 
purchase--especially artists' back catalogues--than would normally be 
available in most stores.
     Digital Downloads: Every major label has announced plans 
to begin commercial digital downloads of music. At Sony Music we are 
already online with this new program; EMI is scheduled to launch in 
about a week; and all of the other major record companies are slated to 
begin operations in the near future. In addition, over the years we 
have offered numerous promotional digital downloads, designed to 
enhance our marketing efforts and mindful of our obligations to artists 
like Lars.
    We are constantly exploring new options for downloading music to 
digital lockers, personalized radio, and bundling tracks on hand-held 
devices, to name a few. Many of us are out there on the edge, 
literally, trying to find new and better ways to deliver our music. But 
all of these final decisions must be guided by sound business 
practices.
    All of this is just the tip of the iceberg. I oversee these efforts 
at Sony Music, where we have established an entirely new division 
dedicated to exploring new business models aimed at getting our music 
to the e-marketplace, and I've got to assume that our competitors are 
doing the same. We're doing all of this in partnership with technology 
companies of every size and shape, large and small, in the new digital 
music space and our goal of a high quality music experience for our 
consumers.
    But let me state here and now that none of us at this table can 
predict with any certainty what the digital music marketplace will look 
like a year from now, let alone a decade from now. There are new 
developments almost daily in transmission and distribution 
technologies, and those developments influence our decisions. My 
company made a conscious and early decision to work with a wide variety 
of companies in these fields. In addition to our strategic partnerships 
with technology companies, we also are funding some of these companies' 
efforts to address some of these technological challenges.
    As to the best way to deliver our music to the consumer: It must be 
easily found by and easily delivered to the consumer. It must be 
delivered in a secure fashion, protecting the consumer in the 
transactional phase and the quality of the artist's performance in the 
transfer process, living up to the obligation to all parties in the 
value chain. And it must ensure that music consumers will continue to 
enjoy the great music experience they have come to expect from the 
music industry. We view the digital world as offering exciting new 
opportunities to expand the music value chain while also offering ease 
and quality and choice for the music fan. If, in the future this value 
chain is not honored, and compensation declines, it will be very 
difficult to sustain the level of investment involved in developing 
music.
    And that would be a shame both for the artistic world as well as 
for the consumer. It's our view that the opportunities we see will 
outweigh and outlive the challenges.
    Let me be clear. The music industry is ready, willing and able to 
use digital technology to bring music to consumers in ever more 
creative ways. We have the best artists in the world, are witnessing 
continued technological advancements, and we continue to seek out new 
strategic partners who will help us do so. All we ask--and it seems 
fairly basic--is the continued application of copyright laws to ensure 
a system that respects and protects music rights in cyberspace. We 
believe--in fact, this belief is at the core of our business--that a 
legitimate system of the protection of rights sets off a domino effect 
for true e-commerce, where creators of technology, creators of music, 
and the consumer all benefit. It is that system which has made the 
creative and intellectual output of the United States the economic 
leader in the world. I have absolutely no doubt that a breakdown in 
that protection of rights would result in the lack of any incentive for 
anyone in this value chain to continue. That surely is not the intent 
of the Copyright Law nor is it in the interest of public policy.
    Thank you for the opportunity to appear before you today. I'd be 
happy to answer any questions you might have.
    Attached is a summary prepared by the RIAA of some of the pending 
litigation on cases that may be of interest to the Committee.

     Summary of Pending Litigation by Record Companies and Artists

                                MP3.COM

    On January 21, 2000, record companies filed suit against MP3.com 
for copying 45,000 copyrighted CDs onto computer servers as part of new 
services called Instant Listening and Beam-It. These services are 
designed to allow users to listen to their CDs anywhere they have an 
Internet connection. With Instant Listening, when a user buys a CD from 
an online retailer partnered with MP3.com, that user can choose to have 
the album immediately put into his or her MP3.com ``locker'' for 
immediate listening. With Beam-It, when a user puts a copy of a CD into 
his or her ROM drive, MP3.com will put that album into that user's 
MP3.com locker. But, users are not actually copying their CDs into 
their MP3.com lockers. Instead, MP3.com is giving those users access to 
a digital music library of over 45,000 albums that MP3.com had 
previously created. On April 28, 2000, Judge Rakoff issued an order 
granting ``summary judgment'' to the plaintiff record companies. This 
means that MP3.com's reproduction of tens of thousands of CDs into a 
database without authorization constitutes copyright infringement, and 
is not a ``fair use.'' The judge issued a written opinion which is 
available at www.riaa.com.

                                NAPSTER

    On December 6, 1999, record companies brought suit against Napster 
because it launched a service that enables and facilitates piracy of 
music on an unprecedented scale. At any single point in time, hundreds 
of thousands of users may be logged onto Napster offering millions of 
pirated sound recordings. Napster has built a system that allows users 
who log onto Napster's servers to obtain MP3 music files that are 
stored on the computers of other users who are connected to the Napster 
system at the same time. Napster provides advanced search capabilities, 
as well as direct hyperlinks to the MP3 files housed on its users' 
computers. Based on sampling by record companies, close to 90% of the 
MP3 files offered on Napster are infringing--and we believe Napster 
knows this and even encourages it. Napster is thus enabling and 
encouraging the illegal copying and distribution of copyrighted music. 
Napster has claimed that they are simply facilitating noncommercial 
fair uses of works. That is not the case. There is a big difference 
between a consumer making a copy for his or her own personal use, and 
that same consumer making the file available on Napster where it can be 
freely downloaded by thousands of people. Not even the staunchest 
proponents of consumer rights have suggested that the latter is fair or 
lawful. Napster's service is unfair to the artists and musicians who 
have invested time and effort to create music. It is illegal, and 
wrong. It is also a deterrent to record companies who are embracing new 
technologies that enable faster, easier, and wider distribution of 
music on the Internet. Record companies are actively involved in the 
development of new Internet business models.
    In June 2000, the court ruled that Napster did not qualify for an 
exemption under the Digital Millennium Copyright Act from liability for 
copyright infringement based on the fact that it claimed to be a ``mere 
conduit.'' The court found that Napster is not merely a conduit under 
the DMCA for copyrighted works. Judge Patel's decision on this issue 
can be found at www.riaa.com. Therefore, Napster cannot shield itself 
from liability if it is found to have contributed to piracy. The 
hearing on the record companies' request to prevent Napster from 
contributing to the infringement of our works will take place on July 
26, 2000 in the U.S. District Court for the Northern District of 
California.

                                MP3BOARD

    On June 23, 2000, the record companies brought suit against 
MP3Board for contributing to the infringement of our copyrighted sound 
recordings. MP3Board is an extensive and egregious link site that 
facilitates widespread copyright infringement on the Internet. The 
website has knowingly constructed a business from thousands (or more) 
of links to illegal sound recordings on the Internet. Essentially, they 
run an ever-expanding clearinghouse for illegal music in an effort to 
create ``one-stop-shopping'' for anyone looking to steal music. 
MP3Board not only posts these illegal links--which is bad enough--but 
they take an active role in fostering the site's illegal offerings. For 
instance, they encourage site visitors to post their own infringing 
links and to download infringing files posted by others. They assist in 
finding specific copyrighted sound recordings at the request of users. 
They separate many of the links into various genres for easy searching. 
Likewise, they provide a step-by-step online tutorial that teaches 
visitors how to find and download infringing sound recordings.
    The record companies do not oppose the concept of hyperlinking, any 
more than we oppose the concept of MP3 compression technology. Both of 
these represent useful technical tools that can offer great social 
benefit when used properly. We are opposed, however, to the use of such 
tools by MP3Board to knowingly create a business founded substantially 
on our intellectual property. This case isn't about hyperlinking; it's 
about a corporate defendant that is profiting from the deliberate 
facilitation of copyright infringement.

    The Chairman. Mr. Hoffman, we will take your testimony.

 STATEMENT OF GENE HOFFMAN, JR., FOUNDER, PRESIDENT AND CHIEF 
     EXECUTIVE OFFICER, EMUSIC.COM, INC., REDWOOD CITY, CA

    Mr. Hoffman. Mr. Chairman, members of the committee, thank 
you very much for having me here. I want to enter my written 
testimony into the record and go directly from my notes here.
    The Chairman. Without objection, we will put it in the 
record.
    Mr. Hoffman. Thank you very much, sir.
    First of all, let me tell you a little about Emusic. I am 
Gene Hoffman, the President, CEO, and co-founder of Emusic.com. 
We run a downloadable music service, and also the 
Rollingstone.com Web site. But we are the leading seller of 
downloadable music online. We sell songs for $.99 a song or 
$8.99 an album. We have sold nearly 2 million MP3's since 
inception, and it is music from people like Green Day and Bush, 
Phish. Mel Torme might be a better person for this crowd.
    Senator Leahy. Oh, come on. [Laughter.]
    Senator Feinstein. Now, now.
    Senator Leahy. Oh, come on.
    Mr. Hoffman. Senator Leahy, we do have Phish, so we make 
sure we take care of you.
    Senator Leahy. OK.
    Mr. Hoffman. It is kind of funny because I sit up here 
wondering if I should get sued, being the only Internet company 
on the panel who hasn't been sued. I am kind of proud of the 
fact that we have, since inception, licensed all the music we 
have offered for sale, paid royalties to songwriters, artists, 
and labels throughout the entire period.
    In fact, we were the first company to ever get what is 
called a digital phono record delivery license, which is a 
really fancy term from the Digital Millennium Copyright Act, 
and the 1995 Act as well, that talks about what it is to sell a 
downloadable file. The interesting thing is, in the face of all 
this technological change and all of the supposed threats to 
copyright, downloadable music sales continue to increase off of 
our site. We currently offer 120,000 MP3 songs from 
approximately 6 to 7,000 artists.
    I want to make three main points and then I would look 
forward to questions later. First of all, one of the important 
things to consider as you look at the digital music debate is, 
frankly, somewhat of a balkanization of a lot of the different 
issues here. We are in an era of prohibition. Basically, what 
consumers want really badly is the world music recording 
catalog in a format they care for that is really easily 
compatible with portable devices, like the Creative Nomad which 
I have here. It is a little portable Walkman that has no moving 
parts and holds an hour's worth of music.
    This is interesting, this is really kind of fun. The really 
compelling ones are ones that hold 150 albums' worth of music. 
Literally, in my briefcase, I have most of my music collection 
that I care about, and when I am over in Nevada later this 
afternoon on the way back to California, I will be listening to 
it. That is a compelling change in how music is used. I know 
most of you probably have CD changers in the back of your car, 
and while mine has the same six CD's in it from about 6 months 
ago--it drives me nuts--having my entire collection with me is 
why this matters.
    Now, again, as I said, it is prohibition. You have got a 
lot of consumers doing frankly behavior that is not exactly the 
highest esteemed behavior we would hope from the American 
constituency. But we actually trust customers. We think if you 
give customers the opportunity to do the right thing, to pay a 
reasonable price for exactly what they want, they will. And 
customers have voted with their pocketbooks. Again, we have 
sold nearly two million MP3 files so far.
    The real issue about copyright piracy or illegal copying, 
or whatever you want to call it, is scalability. Everyone has 
always had the ability to make illegitimate copies of 
copyrighted material. In fact, that is why copyright law 
exists. Copyright law was a reaction to technology; it was a 
reaction to the printing press. People somewhat forget about 
the fact that copyright law is actually a law all about 
technology, and the only reason it exists is because of new 
advances.
    But it is important to note that the services that are 
frightening are the ones that have corporate backing because 
they are able to scale. Frankly, I am not so sure that Napster 
would be a very big thing if it wasn't for the fact that 
someone can afford to run the central servers.
    But it is important to note that the legality of Napster is 
a much stickier question, and it is a question I happily leave 
up to the Ninth Circuit Court. I am not sure what the right 
answer is, but I can tell you one thing. I can tell you that 
the people on Napster are often making copies of music 
illegally. They are making music available that they do not 
have the right to distribute.
    Now, the real problem is--and this brings me to my third 
point--market forces and the court system will solve this 
situation. There is no real need for a major look at copyright 
law. Copyright law as it exists today is actually pretty good. 
It says quite clearly in the Net Act that even distribution or 
copying of copyrighted material is illegal even if it is only 
for possibly monetary gain, not actual monetary gain.
    The question is it is sort of a problem of a death by a 
thousand cuts. The issue is that the way the Net Act currently 
works, it takes a very large trigger and then it starts very, 
shall we say onerous enforcement proceedings, basically 
felonious copyright triggers. People lose the right to vote.
    Well, the problem is that copyright piracy online is simply 
a lot like speeding. Basically, right now, a whole bunch of 
people are going down the freeway at 110 miles an hour and 
there isn't a single person out there to stop them. Setting up 
a situation where people like Lars Ulrich have to actually go 
after their own fans is not a system that we who are granting 
government monopoly right there in the Constitution should be 
continuing.
    What we should look at is new ways to enforce what is 
already illegal so that people realize that they actually do 
have some risk in doing something that is not currently legal 
in the United States. But, importantly, I think that has to 
happen with the making available of the music that people 
really want to have. It is very difficult from a moral position 
to say to someone, you can't distribute that, when there is no 
other option other than going to the store and paying $16 for 
the CD and encoding it in the format you wish.
    I frankly think that from an enforcement point of view, we 
have a much better moral position, even though the legal 
position is the same for all of us. We actually offer you the 
opportunity to buy that song for $.99, and if you are willing 
to rip off us and the artists and the songwriters over a measly 
dollar, I am concerned about your moral fiber and your ability 
to respect the laws of the United States.
    So with that said, and the fact that these are people 
running $2,000 computers with $40-a-month or $50-a-month 
Internet access who just can't afford music, I am concerned 
that we need to look at how we enforce copyright law on the 
Net.
    Thanks very much.
    The Chairman. Thank you, Mr. Hoffman.
    [The prepared statement of Mr. Hoffman follows:]

                Prepared Statement of Gene Hoffman, Jr.

                              INTRODUCTION

    It is a pleasure to take part in this hearing on the future of 
digital music and the market for downloading music over the Internet. I 
greatly appreciate the Judiciary Committee's leadership in creating 
this opportunity for artists, consumers, government and industry to 
focus together on how we can encourage our nation's continued 
technological and economic leadership toward further advancement of 
human expression of literary or scientific value.
    My remarks today will focus on a top priority of the music and 
Internet technology industries: the role of knowledge and intangible 
assets in the New Economy. For the companies that make up the New 
Economy, nothing is more crucial to success than striking a balance 
between using technology and respecting the rights of others. Whether 
it is the balance between marketing and protecting an individual's 
privacy or freedom of speech and protecting children from harmful or 
illegal content, those companies that balance breaking new ground in 
the electronic frontier with enabling those with assets today to 
continue to benefit from their work will succeed. My vision for the 
future of the digital music industry is one that combines downloadable 
music with subscription services, with new forms of promotion and 
marketing that breaks the revenue ceiling from today's 40 billion to 
the often touted 100 billion mark. Simply, physical promotion and 
distribution has peaked in economic terms; there is so much music 
already produced but unavailable to the consumer due to inherent 
inefficiencies in the physical business model. These inefficiencies 
either keep content from the market (e.g., back catalog) or drive 
consumers to pirate music or to not buy at all.

                     BACKGROUND ON EMUSIC.COM, INC.

    Let me take a few moments to tell you abut EMusic. Since it was 
founded in January 1998, EMusic has established itself at the forefront 
of how new music will be discovered, delivered and enjoyed in the next 
decade. In addition to having the Internet's largest catalog of 
downloadable MP3 music available for purchase, EMusic operates one of 
the Web's most popular families of music-oriented Web sites--including 
RollingStone.com, EMusic.com, DownBeatJazz.com, and IUMA. The company 
is based in Redwood City, California, with regional offices in Chicago, 
Los Angeles, New York and Nashville.
    EMusic.com is the web's leading site for sampling and purchasing 
music in the MP3 format, which has become the standard in the digital 
distribution of music. Through direct relationships with leading 
artists and exclusive licensing agreements with over 650 independent 
record labels, EMusic.com offers music fans an expanding collection of 
more than 100,000 tracks for purchase--individual tracks for 99 cents 
each or entire downloadable albums for $8.99. EMusic.com features top 
artists in all popular musical genres, such as Alternative (Bush, Kid 
Rock, They Might Be Giants, Frank Black), Punk (Blink-182, The 
Offspring, Pennywise), Jazz (Duke Ellington, Dizzy Gillespie, Louis 
Armstrong, Concord Records), Blues (John Lee Hooker, B.B. King, Buddy 
Guy), Hip Hop (Kool Keith, The Coup), Country (Willie Nelson, Merle 
Haggard, Patsy Cline), Rock (Phish, Goo Goo Dolls, David Crosby), World 
(Nusrat Fateh Ali Kahn, Lee ``Scratch'' Perry) and Vintage Pop (Liza 
Minnelli, Eartha Kitt, Judy Garland).
    To give you an idea of how fast the downloadable music industry is 
growing, the company has now sold over 1 million songs in the popular 
MP3 format since its launch. This total includes single-track sales as 
well as tracks included as a part of albums and special collections. In 
addition, EMusic.com's catalog has grown to offer more than 100,000 
high-quality MP3s for sale from over 650 independent labels.
    EMusic is part of the New Economy, both culturally and 
technologically. At twenty-four years old, I am the youngest CEO in 
NASDAQ. I am one of those freaks of nature in the high tech world--but 
in a very good sense. I am very proud of the fact that I have taken 
ideas and created companies with my friends and with many new people 
that I have been fortunate to meet along my journey. EMusic is my third 
company. My first, PrivNet, I created while in college. I sold it to 
GP, Inc., and went to work for PGP. PGP was sold in 1997 to Network 
Associates. While at EMusic I have bought four companies. Creating 
companies, jobs, and economic wealth--all depend on sound accounting 
principles supported by well thought-out public policy. EMusic is a 
young company that has grown by acquisition. So far EMusic has done 
purchase transactions because we are not poolable. This is one aspect 
of the impact of accounting rules on the New Economy. I will come back 
to that point shortly.
    It is important to understand that EMusic represents significant 
intangible assets. Many companies in the New Economy do not and will 
not have any physical assets. Their value is either between the ears of 
their employees or on the hard drives of their computers and networks.

                          THE FUTURE OF MUSIC

    When pirated music is easy to find, so are the people who are 
making it available. In other words, those who publish their digital 
music collections through programs such as Napster and Gnutella are 
unwittingly bringing attention to their less-than-legal behavior--kind 
of like speeding down the highway at 110 miles per hour. Unfortunately, 
some people will lose their license to drive.
    Nobody responds well to threats such as these, but like traffic 
laws and patrol cars, their existence is actually a very good thing. In 
fact, I believe that a perceived risk associated with illicitly trading 
music will end up benefiting not only artists and record companies, but 
also digital music fans themselves, Let me tell you how this will all 
work.
    First off, let's be realistic: There is absolutely nothing illegal 
about encoding your CDs into MP3 for your own personal use and 
enjoyment. Even sending a selection of those same MP3s to some of your 
friends is not going to get you into any real trouble. Additionally, 
there are plenty of free, promotional MP3s being circulated by both 
ametaur and well-known artists, and those tracks are perfectly OK to 
share. And sites such as ours (EMusic) even sell MP3s licensed from 
independent record labels. The controversy in today's digital music 
industry stems from making MP3s available to potentially millions of 
people through file-sharing programs such as Napster and Gnutella, 
without the permission of (or compensation to) the copyright holder.
    Besides the legal and moral issues involved, one of the main 
problems with the recent Napster phenomenon is that most people who are 
using these types of tools have the misperception that their actions 
are electronically anonymous and, therefore, completely risk free. In 
truth, these users can be easily identified and exposed, as Metallica 
proved when it produced the names of 300,000 participants who the band 
says have been illegally making its music available. Consumers and 
music fans do not realize that they are actually exposing themselves to 
a worldwide lens through which their music listening habits can be seen 
by anyone on the Intenet. And with a few chicks and searches it is 
likely that they can be personally identified. Napster and other file 
sharing systems force people into the public eye of the Internet; 
question is whether consumers fully understand this and appreciate the 
downside to their privacy and security.
    Firms are sprouting up to help artists and other copyright holder 
find the pirated music. NetPD and Copyright Control Services are just 
two examples of this new breed of business. Using technology very 
similar to Napster's, their companies can easily identify as user's IP 
address, ISP, and email address. When faced with the prospect of losing 
their Internet access, how many people will risk making their music 
collections available to a bunch of strangers? The pool of easily 
accessible pirated music will begin to run dry.
    So how could this possibly be a good thing for fans that want their 
music in digital format? Because once we move beyond the current 
``music should be free'' stage-rife with lawsuits, threats, and panic--
more musicians and record companies should be willing to make their 
music available online in digital formats, and to do so legitimately.
    The Internet is a wonderful way for artists and fans to get better 
connected and to expand and experiment who how music in produced, 
experienced, and enjoyed. The whole reason that Napster is so popular 
is because fans have recognized that music in a downloadable format is 
much more convenient to collect that compact discs. It also removes a 
lot of the barriers that keep lesser known musicians and niche types of 
music from being heard by more people.

                               CONCLUSION

    When so much of the value of the American economy is tied up in 
intangibles assets, how these assets are perceived is really the driver 
of value. If the market is being driven more by perception than by the 
principles and rules that artists, consumers, government, industry and 
professionals have set out, then effective governance no longer works 
and anarchy has taken over. This is not fair to individuals and is not 
reflective of our nation's democratic values. Intellectual property is 
an extremely important part of our nation's economy. I doubt that even 
Napster's investors and employees and consumers want anarchy at the end 
of the day. Their consumers want a reliable service and those with a 
vested interest in Napster wish to see a return on their investment.
    Whether it is Hollywood in southern California or Silicon Valley in 
northern California, ideas and intellectual property are drivers of our 
nation's economic growth and international economic influence. While I 
an not in favor of any new governmental role here or in any new body 
charged with setting rules or standards for digital music distribution, 
we do need to work together in a new way to develop a better 
understanding of where music and other forms of digital intellectual 
property are going in this country and around the world. I look forward 
to the day in the not-so-distant future when we can focus on these 
positive effects and wonder what all the fuss was about.

    The Chairman. Mr. Kan, we will turn to you.

    STATEMENT OF GENE KAN, GNUTELLA DEVELOPER, AND FOUNDER, 
                 INFRASEARCH, INC., BELMONT, CA

    Mr. Kan. Thank you for having me here. My name is Gene Kan. 
I am a Gnutella developer, one of many. I am not the inventor 
of Gnutella, but I am simply one of the people who happily 
talks about it. There are many people behind me on the Internet 
who work to make Gnutella succeed.
    Gnutella is an interesting technology, one which, in fact, 
I have used as the foundation block for a company which I 
recently founded called InfraSearch. We took investment from 
people who founded Netscape and Excite, and they are all very 
interested about the technology. In fact, Silicon Valley is 
abuzz with the impact of fully distributed, decentralized 
technologies such as Gnutella and its applications outside of 
music download.
    So let's get to the heart of the matter. This hearing is 
about the future of profiteering on the mass distribution and 
duplication of intellectual property. It is a do-or-die 
situation, but the future is unclear, so let's hear the good 
news first.
    The good news is that the Internet is on our side in this; 
it is on everyone's side. The Internet is a huge distribution 
channel with infinite shelf space. Take, for example, the 
examples which I cited in my written testimony, which I would 
like entered into the record.
    The Chairman. Without objection, we will put it in.
    Mr. Kan. Thank you.
    I have searched for 2 years for John Denver and Johnny Cash 
albums at local record outlets in the Bay Area of California. I 
have been unsuccessful. However, previous to this hearing, I 
tried. On Napster and Gnutella, I found several hundred copies 
of John Denver and Johnny Cash tracks--``Ghost Riders in the 
Sky,'' ``Take Me Home Country Roads,'' both great songs, but I 
have been unable to listen to them through conventional 
outlets.
    Really, the Internet is the Holy Grail of distribution 
channels. It is a zero marginal cost distribution channel. That 
means that it costs the same to transfer one copy of 
intellectual property as it costs to transmit 10,000 copies or 
1 million copies or 10 million copies. This is truly the Holy 
Grail of distribution channels. There is no physical media, 
there is no marginal cost. We don't have to print CD's, we 
don't have to ship CD's. We don't have to mine the aluminum, 
make the CDs, destroy our environment. The list goes on and on. 
The benefits of digital downloadable media are infinite.
    Twenty million Napster users can't be wrong. People like 
this stuff. People love to download music from the Internet. It 
is convenient. I can take my entire record collection with me 
on the plane. It is just an incredible experience. The rollout 
of broadband nationwide and worldwide makes this number swell; 
20 million today, 100 million tomorrow. Everyone will want to 
download music.
    Our goal is to try to establish a method by which artists, 
whom I call the intellectual property profiteers, can profit 
side by side with these people exercising their rights to 
listen to music in a convenient format. The question is how are 
we going to harness the Internet, how are we going to make the 
Internet work for us, us as consumers and us as intellectual 
property producers and owners.
    The answer is simple. I refer to my friend, Tracy Scott, 
who developed this very simple model where we incentivize 
pirates, we turn pirates into legitimate distributors. The fact 
that we are here shows the efficacy of these pirates, and we 
can only assume that if we were able to appeal to the profit 
motive of pirates, they would be equally efficacious in 
profiteering.
    So what am I talking about? Let's assume that I can buy a 
track for $1.50 from, say, Sony or BMG. I can resell that track 
to you, Mr. Leahy, or Mr. Hatch, for $1.00. Let's split 50-50. 
I make $.50, the record company makes $.50. Everybody is happy. 
I am out there trying to profiteer. The profits are 
staggering--20 million users today downloading what Lars Ulrich 
claimed as an average of four songs per night. The profits are 
simply staggering, and people will love to do this because we 
are appealing to the profit motive.
    So what about the bad news? The bad news is that old-world 
tactics may no longer work on the Internet. This is the new 
economy. That is a familiar term. Technological relief may be 
impossible to stem the tide. Encryption, locks, whatever, they 
are all useless. If we can hear it, we can pirate it. The only 
way to manage this is through incentive. We must incentivize 
people who are pirating and working against the system right 
now. We have to use the carrot and not the stick.
    In fact, legislative relief is a questionable possibility 
here. People are infringing now and they might not change their 
habits simply because of the law. People speed all the time. We 
roll through stop signs, not a big deal. In fact, we just 
infringed right now and everybody sort of chuckled about it. So 
what does that say about the future?
    And perhaps injunctive relief is questionable. With 
distributive systems of today such as Gnutella and Freenet, it 
is already nearly impossible to enjoin people who are acting in 
an infringing manner. The technologies of tomorrow will be even 
worse; they will be even more difficult to police.
    Can we stem the tide of new technologies? Highly unlikely. 
So what does the future hold? Great things if profiteers adapt, 
if intellectual property profiteers adapt. There is room only 
for the leaders. The Internet is inhospitable to middle men and 
followers. Technology moves forward and leaves the stragglers 
behind. The adapters always win and the stalwarts always lose. 
Mechanized farming is a good example. You don't see anyone out 
there with a horse and plow these days.
    The future is in the creative exploitation of new 
technologies. Maybe the express control over intellectual 
property distribution is out. That doesn't mean that 
intellectual property owners and profiteers are going to go 
hungry. The Internet touches everyone and everything. Everyone 
must adapt. Business and intellectual property owners are not 
excluded.
    Thank you. I hope that we can reach a reasonable conclusion 
here and make everybody happy. Thank you for having me.
    The Chairman. Thank you very much. That was a very 
intelligent statement, except I don't think we infringed when 
we downloaded because it was for educational and governmental 
purposes, so it is fair use. And since we define what that is, 
I will hold you in correction on that. [Laughter.]
    [The prepared statement of Mr. Kan follows:]

                     Prepared Statement of Gene Kan

                            1. INTRODUCTION

    The future of intellectual property in the face of broadband is 
uncertain.
    Intellectual property control on computer networks has long been a 
problem for the software industry.\1\ Most recently, old-economy 
enterprises such as the Recording Industry Association of America 
(RIAA) have taken notice. Music is the topic of the day, so let's focus 
there.
---------------------------------------------------------------------------
    \1\ Software and Information Industry Association (http://
www.siia.net), 9 July 2000. The SIIA claims a loss of 59.2 billion USD 
in the past five years with 12.2 billion USD lost in 1999 alone.
---------------------------------------------------------------------------
    Technologies enabling the simple and fast exchange of music have 
existed for decades. In the physical world, audio cassettes led the 
charge. Remember recording songs off the radio? Minidisc and recordable 
compact discs made it easy to swap and pirate music en masse with near-
original quality. In the virtual world, swapping MIDI, tracker, and 
other formats of digitized audio were already commonplace when I began 
BBSing in 1994.
    Other media have had similar histories. Movies, images, and text 
have had their equivalent of the audio cassette: that first easy-to-use 
duplication instrument. Video cassettes, video compact discs, 
photocopiers, scanner, email, optical character recognition. * * * The 
list goes on for some time, and has been going for some time now.
    So what is it about the Internet that has made the long-lived 
problem of media duplication such a pressing issue? Recording industry 
executives claim that one main factor is ease of use. Anyone, 
particularly university students,\2\ can easily download whatever music 
they want in minutes.
---------------------------------------------------------------------------
    \2\ American universities are commonly blessed with extremely fast 
Internet connections. They are also populated by young, technologically 
savvy people with few financial means.
---------------------------------------------------------------------------
    For typical home Internet users (56 kbps modem) it takes 
approximately eleven minutes to download a high-quality MP3-encoded 
song.\3\ For a typical university student it takes about thirty 
seconds. The recording industry would argue that the downloaded file, 
when played back using an MP3 player,\4\ is similar in sound quality to 
the original compact disc.
---------------------------------------------------------------------------
    \3\ Popularly encoded songs (128 kbps at 44 KHz) are approximately 
one megabyte per minute.
    \4\ MP3 players are numerous and varied. Software-based players 
include the popular Winamp (http://www.winamp.com). Hardware players 
include the Walkman-like Diamond Rio and the in-car empeg (http://
www.empeg.com).
---------------------------------------------------------------------------
    The cost to download? In the US, most Internet Service Providers 
(ISPs) charge a flat rate, as does the telephone company for local 
calls. That makes the incremental download cost approximately zero. 
It's mainly a matter of patience and hard disk capacity.
    With the impending globalization of inexpensive broadband access, 
what is becoming a headache for the music industry will become a 
headache for the movie industry.

                           2. CONSUMER DEMAND

    Downloadable music attracts all manners of people. Recording 
industry employees, doctors, lawyers, students, adolescents * * * the 
list goes on. The people who use Napster are not criminals. They are 
not the thugs you see on the evening news. The people who use Napster 
are your family and friends.
    There are numerous theories on why MP3 is so popular, and I'll 
cover a few of them below. But the simple fact is that digital 
downloadable music is hugely popular. So popular, in fact, that the 
recording industry recently capitalized on Napster's success by using 
it to ``leak'' new songs by Madonna and Dr. Dre, among others. No, 
they'll probably never admit to it, but it did happen, and it's well 
known throughout the music industry that these songs were leaked from 
within the record companies to generate hype the same way movie 
trailers do.

Convenience
    The convenience of MP3 is undeniable. For less than 1000 USD one 
can buy a 20 gigabyte hard disk, which stories approximately 5000 near-
CD-quality songs. The hard disk fits in your shirt pocket, or neatly 
into your computer, where it will provide about 20000 minutes (fourteen 
days) of continuous listening. Portable MP3 players are about the size 
of audio cassettes. Compare that to compact discs which store about 
seventy-four minutes of audio and don't fit into standard pockets.
    Finding music is typically a very tough process. These are the 
steps I take: Drive to the record store. Scour the shelves. Buy, if I'm 
lucky enough to have found something worth trying. Drive home. Listen. 
Remember the tracks that I like.
    The steps for Internet music purchases are much more simple. Let's 
take a brief look at the buyer experience at Amazon.com. Click over to 
Amazon.com. Click ``popular music''. Type in ``John Denver''. Get a 
screenful of results. Click. Buy. Moreover, when I clicked on ``John 
Denver's Greatest Hits'', Amazon recommended several other albums I 
might be interested in. Record stores don't do that, and if they did, 
I'd have to scour the shelves again for the recommended disc.
    Unfortunately, at this time, Amazon doesn't sell MP3s. Buyers must 
wait for the physical CD to be delivered. And MP3.com, which does sell 
MP3s, doesn't sell an MP3 version of ``John Denver's Greatest Hits''. 
So while the Internet makes a step in the right direction, there is 
currently no well-known non-infringing method of downloading ``John 
Denver's Greatest Hits''.
    The ultimate, really, is found in information-sharing communities 
such as Napster and Gnutella.\5\ Users are able to search for exactly 
the information they want, and download it instantly. As it relates to 
music, that means users can search for exactly the artist and song 
title they are interested in. Forget scouring the store shelves only to 
find that what you wanted is not in stock.\6\
---------------------------------------------------------------------------
    \5\ Gnutella is a fully distributed network comprising individuals 
and computers which actually build the strength of the network as they 
join it. Without users, Gnutella is nothing but a definition of how 
computers might communicate over a network to exchange information. 
Gnutella is developed by hundreds of individuals around the world. 
Numerous Gnutella-compatible softwares are released with complete 
source code, increasing its appeal to technologists.
    \6\ I have searched for two years for John Denver and Johnny Cash 
at San Francisco Bay Area music outlets (Tower Records, Wherehouse, 
Fry's etc.) and have been unsuccessful. I suppose my tastes are a bit 
unusual, but I heard their songs as a child, and wanted to hear them 
again. Strangely, even immediately after Denver's death, no record 
stores carried his music. No stores even had a slot for John Denver! On 
Gnutella, I found hundreds of Johnny Cash and John Denver tracks. 
Similarly on Napster. If nothing else, this demonstrates the power of 
the Internet to assist consumers.
---------------------------------------------------------------------------
    It's my personal guess that if people could pay a reasonable price 
for the music they download, they would. At this time the only well-
known pay-for-download services do not carry downloadable versions of 
popular albums. People have no choice. If they want the convenience of 
downloading, they unfortunately have no way to compensate the copyright 
holder.

Cost
    The marginal cost of an MP3 is zero. Even for consumers. When the 
telephone company comes to your house to install your DSL, they might 
charge 150 USD for installation and 50 USD per month. Using that line, 
an infinite amount of music and be downloaded with little hassle.
    Compare that to compact discs. Mine, transport raw materials, 
acquire raw materials, manufacture, box, transport, unbox, stock, 
inventory, sell, re-order, etc. All that costs a lot of money, and the 
Internet eliminates the whole cycle. On the Internet, it's: record the 
music, sell the music.

Flying
    A popular argument for MP3 is that it makes music easily portable. 
Flying on airplanes imposes interesting space constraints. When I fly, 
I generally have a laptop computer with me so I can work while I'm in 
the air. Before MP3, I carried a portable compact disc player and a 
handful of the CDs I liked most. Now, I can carry MP3 versions of all 
of my CDs on my laptop's hard disk. The best part: a full hard disk 
weighs no more than an empty one, and I don't have to find a place to 
stow my fragile CD player and CDs.

Environmental considerations
    Compact discs, unfortunately, are made of matter. Matter which must 
be mined, manufactured, and delivered. Each step in that process holds 
numerous environmental disasters, and in the end the thing consumers 
are really after is the music carried on the compact disc, not 
necessarily the compact disc and its associated packaging.
    The Internet makes near-zero-marginal-impact music ownership 
possible. Downloading an MP3 does not require the manufacture and 
delivery of a compact disc, box, liner notes, etc. To summarize its 
sweetly: no environments were harmed in the download of this MP3.

Quality control
    One thing consumers demand above all others is product quality. 
Currently, Internet bootlegs of music vary greatly in quality. Some are 
ripped \7\ from CDs which have scratches. Others are encoded at 
horribly low bitrates, diminishing the audio quality to unbearable 
levels. Yet others are encoded using low-quality encoding software, 
leading to diminished quality.
---------------------------------------------------------------------------
    \7\ Ripping is the process of extracting the data from a compact 
disc into a manipulatable file. After a CD is ripped, it is typically 
compressed an encoded into a space-saving format such as MP3.
---------------------------------------------------------------------------
    The RIAA and its constituent record companies have an opportunity 
to exploit their own brand name and quality control procedures to 
produce digital downloadable music with consistent high quality. Surely 
music downloaders would pay a small amount to ensure they aren't 
wasting their valuable download resources.
    When you buy toothpaste, do you buy Colgate, or do you buy Brand X 
Tartar Control?

                 3. BENEFITS FOR THE RECORDING INDUSTRY

    Artists and recording companies alike can benefit from digital 
music. The reasons are numerous. For artists, it is a chance to reach 
directly to their audience: a global audience. They have the 
opportunity to capture nearly 100% of the gross sales of their product. 
For recording companies, there is an opportunity to reduce the marginal 
cost of distribution to nearly zero, and to expand the scope of 
distribution to the entire Internet.
Artists
    Whether or not it actually happens, artists have complained for a 
long time that they don't get a fair deal in their record contracts.\8\ 
Even Metallica, a band rumoured to have struck an outstanding contract 
with their recording company, sees the pot of gold:
---------------------------------------------------------------------------
    \8\ Courtney Love has recently made statements to this effect at 
the Digital Hollywood Conference. A summary can be found at http://
rollingstone.lyocs.com/news/newsarticle.asp?D=10847&Artist=23 (9 July 
2000).
---------------------------------------------------------------------------
    ``Yes, of course, the scenario that the gentleman asked in the 
question is very, very possible, and we've been looking at that for a 
long time. An when we are done with our record contract, I would say 
that something in that direction is somewhere (sic) between a real 
possibility and a certainty.'' \9\
---------------------------------------------------------------------------
    \9\ Metallica drummer Lars Ulrich on Slashdot.org (http://
slashdot.org/interviews/00/05/26/1251220.shtml), 26 May 2000.
---------------------------------------------------------------------------
    The Internet allows artists to reach their listeners directly. 
Listeners can provide feedback at the click of a mouse button. They can 
use the same mouse button to purchase music directly from the artist. 
In effect, the Internet combines the best of the patron and performance 
systems. The entire audience can function collectively as the artist's 
patron: each individual listener funding the particular aspects of the 
artist that he likes, each listener encouraging the type of performance 
he funds.
    Finally, artists will return to a situation where they can net much 
of the gross.

Recording companies
    The benefit for recording companies is very simple: near-zero 
marginal cost of distribution.
    Typically, this would be a business's dream. Why it has apparently 
become a nightmare is the subject of rampant speculation.
    Perhaps it is because recording companies want to protect their 
current model of operation. Lars Ulrich summarized the role of 
recording companies very simply:
    ``Because what really, essentially, is a record company? A record 
company is really essentially a bank, a bank that funds a bunch of 
money to make records, and videos and promotion, publicity appearances 
and so on, and they take that shot that one day the artist is going to 
be successful that they're going to first of all get all their money 
back, second of all make a profit.'' \10\
---------------------------------------------------------------------------
    \10\ Metallica drummer Lars Ulrich on Slashdot.org (http://
slashdot.org/interviews/00/05/26/1251220.shtml). 26 May 2000.
---------------------------------------------------------------------------
    Recording companies are in fact exactly like venture capitalists. 
They fund, promote, and advise their portfolio artists. What they 
mainly do is everything necessary to distribute music in the physical 
world. They maintain relationships with radio stations, record stores, 
and they arrange for manufacture and shipment of CDs.
    Of course, the Internet changes that last bit. If communities such 
as Napster and Gnutella are really successful, then perhaps the market 
for music on physical media will shrink. But is that a bad thing? 
Environmental considerations aside, a near-zero marginal cost 
distribution system should be a boon to the companies which own the 
copyrights to popular music. They would be able to sell the 
intellectual property and net the gross.

                    4. RETOOLING MEDIA DISTRIBUTION

    Exploiting new technologies often requires retooling. Automobile 
manufacturers, computer chip manufacturers, the United States Postal 
Service. * * * All have had to continuously change their methods of 
doing business in order to remain competitive. In the efforts to retool 
have proven themselves time and again to be worthwhile. Costs of 
production and distribution decline, profits increase. The music 
industry is not exceptional. Nor is the motion picture industry.\11\
---------------------------------------------------------------------------
    \11\ Historically, both the music and motion picture industries 
have faced challenges from recordable media. One example is the video 
cassette recorder, which found motion picture companies suing Sony over 
Betamax. Video cassettes have since proven to become a huge profit 
centre for the motion picture industry by way of sales and home video 
rentals. After all, what would moviemakers do with straight-to-video 
productions if there were no video cassettes? Perhaps some day we will 
have straight-to-Internet music.
---------------------------------------------------------------------------
    The only thing missing is a method for the record companies to 
financially exploit the Internet for what it is: the best intellectual 
property distribution mechanism yet seen on Earth. So here is an idea; 
turn pirates into paying distributors.

Turning pirates into paying distributors
    Napster and Gnutella are giant music distribution networks. Every 
file-sharer is in fact a voluntary distributor. These communities are 
like potlucks. Everyone brings what he or she wants to share, and 
perhaps partakes in what others brought. Right now it all happens for 
free, mainly because there is no infrastructure in place to do it for 
profit.
    Installing that infrastructure is a small matter, and its effects 
are huge. Tracy Scott's method of turning pirates into paying 
distributors is elegantly simple, and its success is predicated on only 
two assumptions. First, Internet connections have finite capacity. 
That's not just an assumption; it's a rule. Second, people have a 
pecuniary motivation. Suppose I have a finite-capacity Internet 
connection and lots of music to share. Lots of people like to download 
the music I share. Now suppose I could charge each downloader in a way 
that made it easy for them to compensate me for the music I am sharing 
with them. I would, of course, also compensate the record company for 
the resale of their intellectual property.
    Now, because I have a finite-capacity Internet connection I would 
seldom, if ever, allow someone to download from me for free when I 
could charge for the privilege. If I charged 1.50 USD for each track, 
and split the revenues evenly with the record companies, the record 
companies would make 0.75 USD for each download! They would never have 
to promote or distribute their products themselves again.
    You and I would be doing our very best to promote and distribute 
their product for them, as we would have a profit motive. Multiply this 
over the thirteen million you and I's on Napster alone, and the profits 
for distributors and copyright holders are staggering.

Do or die
    Technology has interesting effects. Those who realize how to 
integrate and exploit new technologies gain potentially huge advantages 
over their competitors. Those who do not will acquire an equal 
disadvantage with respect to their competitors.
    Intellectual property profiteers are now at a crossroads. If they 
adapt quickly, as they have in the past, they can leverage the Internet 
to revolutionize their industries. If not, they may find grassroots 
efforts invading their bailiwicks.
    It's happened before: phonographs led to the demise of the player-
piano music industry. The forward movement of technology always leaves 
behind the stragglers.

                    5. TECHNOLOGY IS JUST TECHNOLOGY

    Technology is neither good nor evil. Individuals choose how to 
employ technologies. Some choose for good, others for evil. Some use 
automobiles as a conveyance. Others use automobiles to rob banks and 
kill people. To boil it down into a popular refrain: guns don't kill 
people, people kill people.
    To adapt the saying for the discussion at hand: Napster doesn't 
pirate music, people pirate music. In fact people have pirated music in 
large scale for decades. What's happening on the Internet is nothing 
new.
    Napster and Gnutella are on the one hand user communities. These 
users are the ones who are possibly pirating music. On the other hand, 
Napster and particularly Gnutella are notable technologies which are 
changing the way we look at the Internet.
    Certainly these technologies are not running rampant on computer 
networks seeking out the latest Eminem tracks and pirating them. Humans 
are doing that.
    People routinely use other means to distribute music over the 
Internet as well. Email, FTP, Usenet, IRC, ICQ, etc. All are used to 
distribute music on the Internet.

                            6. INEVITABILITY

    Keeping in mind that music is only a current-day analog for all 
types of intellectual property, we will spend a little time analysing 
how duplication of intellectual property is inevitable, and why it 
makes sense to use the carrot instead of the stick.
    When my family got its first IBM PC/XT in the mid-1980's, the first 
thing on my mind was games. In those days copy protections on games 
were very creative. They involved placing magic bits of data at secret 
parts of the floppy disks on which the games were distributed. For some 
time it was impossible to pirate those games. That is, until more 
advanced disk copying software was developed. After that, there were 
secret codes and product registration keys. Even physical keys 
(dongles). All have been defeated, generally on the day of the 
software's release.

Copy protection doesn't work
    Certain cable television channels are scrambled. You can either pay 
fairly high recurring fees to watch those channels, or you can purchase 
a relatively inexpensive descrambler to watch those channels. More 
recently, DSS satellite television signals are encoded. So savvy 
consumers reprogram the DSS card to circumvent the encoding.
    Protection schemes seldom work. Encryption for Microsoft WMAa 
format files was broken almost immediately after its release. The 
process was incredibly simple. One would purchase the right to listen 
to the encrypted audio file. Play it back through special software 
which records the decrypted audio file, and mission accomplished.\12\ 
You now have on your hard disk a permanently decrypted audio file.
---------------------------------------------------------------------------
    \12\ This piece of software was interestingly called UNFUCK.EXE and 
has made its way around the Internet like a brushfire. Copies of it are 
largely found outside US borders, where the road to stamping it out is 
rife with jurisdictional hurdles.
---------------------------------------------------------------------------

SDMI
    SDMI, or the Secure Digital Music Initiatives, is what many record 
companies are betting on to preserve their control over music 
distribution.
    My suspicion is that people in significant numbers will choose to 
re-encode SDMI music into MP3 (or some other freely distributable 
format). In fact, if even a few people reencode and distribute a song, 
the fluidity of information-sharing communities will ensure its rapid 
and extensive duplication.

End-to-end encryption
    One onerous tactic I have heard is postied end-to-end encryption. 
The idea is that at no point is the media unencrypted. The file is 
encrypted. The data travelling from your hard disk to your digital 
speakers or your digital monitor is encrypted. Currently even encrypted 
media formats are decrypted long before the data makes it out of your 
computer. In end-to-end encryption the data is encrypted right up until 
it is presented visually, audially, or otherwise.
    It's an interesting idea that at first appears to put a stop to 
piracy. But in my mind there are few if any panaceas that are 
predicated on authoritarian control, and end-to-end encryption is not 
among them.
    End-to-end encryption is easily defeated. Currently, movies are 
often copied using a method commonly termed ``telesynicing.'' \13\ If 
end-to-end encryption became a reality, audio and video would surely be 
telesynced. The encryption would be rendered meaningless.
---------------------------------------------------------------------------
    \13\ Telesyncing is crude, at best. The process is simple: a person 
enters a movie theatre with a video camera and tapes the movie. Later 
he digitises his tape and releases the results on the Internet. A large 
network of pirate movie FTP (File Transfer Protocol) sites propagate 
the digital media worldwide.
---------------------------------------------------------------------------
    The end-to-end part of the end-to-end encryption idea is 
misleading. Since humans don't have decryption systems built into their 
anatomy, information must be deciphered before we experience it. And 
that is the failing. The only way to make music that cannot be copied 
is to make music that cannot be heard. The only way to make movies that 
cannot be copied is to make movies that cannot be viewed.

Napster and Gnutella are just the first wave
    Napster and Gnutella are but the first of a succession of 
technologies which will make it increasingly difficult to control the 
distribution of intellectual property.
    Napster was the first. It involved a central server, which has 
demonstrated that it can be a point at which controls can be 
applied.\14\ Gnutella was second. It involves no central server, 
eliminating the possibility of easily controlling the habits of 
Gnuetella users by strictly legal means.\15\ Gnutella is only pseudo-
anonymous. FreeNet corrects that. It, like Gnutella, is fully 
distributed with no central server, and it is completely anonymous.
---------------------------------------------------------------------------
    \14\ Both Metallica and Dr. Dre have exploited Napster's 
centralization in their campaigns to thwart piracy on the service.
    \15\ The idea that the RIAA or its designates may ``spam'', or 
purposely overburden the network to cripple it, has crossed my email 
inbox numerous times. Fortunately for the legitimate users of Gnutella, 
spam and its relatives have been outlawed.
---------------------------------------------------------------------------
    If laws are enacted against these technologies, the ensuing 
replacements for these technologies would only be more difficult, if 
not entirely unfeasible, to police.\16\ This is only the beginning.
---------------------------------------------------------------------------
    \16\ Perhaps when Vice President Al Gore created the Internet he 
never thought it would come to this, but then. Senator Trent Lott 
probably didn't think of the myriad uses for paper clips either.
---------------------------------------------------------------------------

                         7. WHAT SHOULD WE DO?

    A zero-marginal-cost means of distribution is a rare opportunity. 
It should be seized and exploited. Tracy Scott's viral marketing method 
is a clear and simple way to give incentive to Internet music shares to 
promote the legitimate sale of music. The current crop of technologies 
should be encouraged and adopted, not restricted or abolished, lest 
lawmakers and industry leaders wish to bring forth truly intransigent 
technologies.
    We're on the precipice of slippery slope. The toothpaste is already 
out of the tube. It can be exploited nicely, or be turned into a huge 
mess.

    The Chairman. Mr. Griffin, we will turn to you.

 STATEMENT OF JAMES HAZEN GRIFFIN, FOUNDER AND CHIEF EXECUTIVE 
         OFFICER, CHERRY LANE DIGITAL, LOS ANGELES, CA

    Mr. Griffin. Mr. Chairman and members of the committee, my 
name is Jim Griffin. I am the CEO of Cherry Lane Digital, part 
of the Cherry Lane Music Group, created by world-renowned 
musicologist Milton Okun. I serve as co-chairman of a start-up, 
along with Jeremiah Chechik, of a company called Evolab, an 
evolutionary laboratory where we focus on the wireless delivery 
of media.
    I thank you and your staff, most especially Sean Bentley, 
for the opportunity to appear today and address these issues. I 
believe they are of paramount and universal importance, to name 
just two of the companies that will be affected by them. Your 
foresight in convening these hearings is to be commended. There 
is and always will be enormous change in the delivery of 
entertainment and all intellectual works, whether music, 
movies, books, or other forms of art.
    Essentially, my remarks are a brief presentation centered 
around a half a dozen fundamental points, but they deal with 
the basic instinct that was expressed best by Nicholas 
Negroponte. Things that think like to link, and that will not 
change.
    My first point is that no one is here to defend free music. 
But music can and should be made to feel free even when it is 
not free. Few will honestly suggest long term that music should 
be free, as this would be absurd from either a business or an 
emotional point of view. Indeed, if it were truly free, there 
wouldn't be much more of it, as any economist can tell you and 
as any artist will readily verify, and as some here today have.
    However, as certain as I am that it must not be free, I 
suggest that it is our obligation and our opportunity to, 
insofar as possible, make it feel free, at least at the moment 
we decide to use it. The delivery of music is approaching zero 
marginal cost, the cost of enabling each listen after the 
first. And for some, this is a terrifying prospect, as their 
income may have depended upon charging a price much higher than 
marginal cost, say $18 for a disc that costs no more than $1.00 
to reproduce.
    For others, this is not at all terrifying. To Mel Karmizan, 
who runs CBS Radio and its Infinity broadcast stations, it is 
expected of him. He makes music played on CBS stations feel 
free to its listeners, though they pay indirectly each time 
they patronize an advertiser.
    Today, it can be truly said that music behaves more like 
Thomas Jefferson's candles. He pointed out that when he lights 
one with another, it diminishes the flame of the first not at 
all, and that information and knowledge does not act like an 
object subject to the laws of supply and demand. Respectfully 
to Mr. Ulrich, music is not his table. There is no fair use 
applied to his table, nor does his right to own his table have 
an expiration date. Neither can his table change from a product 
to a service. Much like an attorney who writes a good will, 
once the word is out others will adopt it and there will be 
less compensation.
    Another part of the disconnect is that music fans no longer 
feel like consumers. We use the word ``consumer'' liberally 
here, but there is no consumption today, as there is no less 
music after playing it than there was beforehand. The supply of 
boxes containing music is decremented not at all, and arguably 
the demand is increased. So this explains some of the 
disconnect.
    My second major point, I think, addresses how we can deal 
with the disconnect. It is that in the music world, like so 
many others, service is replacing product. Quite simply, we are 
moving from a world of music as a product to a world where 
music is a service. Essentially, we are learning that the 
answers like in new business models, not technology-based 
solutions.
    The video industry that once emphasized control now sees 
greater value in growing the crowd. The best forms of copy 
protection are new business models that destroy the motive to 
copy, not its mechanism. A wireless, flat-fee, advertising-
supported jukebox of unlimited capacity would strip us of our 
desire to make MP3 files. We are transitioning, as my friend 
John Perry Barlow likes to say, from an economy of nouns to one 
of verbs, an economy that emphasizes the wine and not the 
bottle.
    It is time to set a price for the interactive license and 
administer it. The consumer wants option value without the 
disc. In an increasing mobile and wireless world, this is not 
an unreasonable request, certainly no more unreasonable than 
wanting to watch a local network television station via my 
DirecTV satellite dish, which you mercifully enabled over the 
objections of local network television stations which had 
copyrighted the content.
    The third major point I will make is the digits will become 
ubiquitous and will increasingly arrive just in time and in a 
customized way. They will eventually cease to be distributed 
digitally through downloads or transferred in analog boxes. The 
arrival of wireless digital access will permit this just-in-
time access. The commonly held belief that we are moving from a 
world of analog distribution to digital distribution, I think, 
is wrong. I think that the just-in-time delivery of content 
will obviate distribution entirely.
    Fourth, I think history proves by analogy that these things 
are true. The transition that entertainment went through in the 
1920's is an example, and we saw it more recently with the 
video cassette recorder. The sports industry, too, claimed that 
those who would broadcast or electronically transmit their 
events were attacking a product, the stadium seats. And yet 
Ronald Reagan was one of the very first pirates, if we apply 
this analogy, recreating games in a booth down the street, 
allowing others to listen to a sporting event that they would 
not otherwise be able to attend. And so in many ways, Ronald 
Reagan was the Michael Robertson of his day.
    The fifth major point I will make is that there will be a 
renaissance of creative expression. Technology's deepest impact 
will be from enabling the digital delivery of art, such as 
music, movies, books, other intellectual property. 
Respectfully, this is not about how we move the Metallicas or 
the Alanis Morrisettes or the Guns and Roses. This is about how 
we enable dead art to come back to life, new art to have a life 
it wouldn't otherwise have, and unusual art to find an audience 
that it would not have found.
    And, finally, my sixth major point is that, in the 
alternative, the unfortunate possibility is that we could 
condemn billions of people to access to knowledge conditioned 
only on their ability to pay. Friction was a very useful tool 
in allocating access to art. Riding my bicycle to the library 
overcame the friction that others would pay to defeat.
    If the delivery of intellectual property is to truly become 
friction-free, new models must evolve to restore and preserve 
balance. Digital lending institutions must evolve and flourish. 
The potential of every individual is at stake. Will their 
parents' wallet determine the music they hear, the books they 
read, the music and videos that they watch?
    The digital delivery of intellectual property is our 
generation's nuclear power. We can either liberate knowledge 
through its friction-free delivery or we can develop these same 
tools to condition access to art, dependent only on our ability 
to pay. Knowing her love for libraries and hatred for 
restrictions on sharing art, I know how Eleanor Roosevelt would 
feel, and it is a sad fact that not many of us remember her 
contributions.
    Thank you.
    [The prepared statement of Mr. Griffin follows:]

               Prepared Statement of James Hazen Griffin

    My name is James Hazen Griffin. I am the Chief Executive Officer of 
Cherry Lane Digital, part of the Cherry Lane Music Group created by 
world-renowned musicologist Milton Okun. At Cherry Lane Digital we hope 
to absorb the uncertainty of our clients regarding the change inherent 
in entertainment technology. I serve as co-chairman along with Jeremiah 
Chechik of Evolab, the Evolutionary Laboratory, where we are focused on 
the wireless delivery of media. Before my involvement with these 
companies, I started in 1993 and ran for five years the technology 
department at Geffen Records.
    I am also a founder and leader of the Pho group, approximately a 
thousand people connected electronically and through over a dozen meals 
held weekly around the world. The Pho group takes no position on these 
issues, but is instead a catalyst for discussion on issues such as 
those we are addressing here today. In addition, I write a column in 
every issue of the magazine Business 2.0.
    Counsel accompanying me here today is Phil Corwin, a partner at the 
Washington, D.C., firm of Butera & Andrews. This appearance would be 
considerably less coherent without Mr. Corwin's guidance and that of 
the Senate Judiciary Committee's staff, and I thank all these people 
along with you for the opportunity to appear today and address these 
issues, which I believe to be of Paramount and Universal importance, to 
name just two of the studios that will be affected by them.
    The Pho group and my advisors and associates have contributed 
mightily to my comments today, but they are not to blame for its 
presentation and my nervousness and perhaps resultant failure to fully 
articulate them.
    Your foresight in convening these hearings is to be commended, as 
there is and always will be enormous change in the delivery of 
entertainment and all intellectual works, whether music, movies, books 
or other forms of art.
    Essentially, my remarks are a brief presentation centered around a 
half-dozen fundamental points:
    1. No one is here to defend free music, but music can and should be 
made to feel free, even when it is not free.
    Few will suggest music should be free, as this would be absurd from 
either a business or emotional point of view. Indeed, if it were truly 
free, there wouldn't be much more of it, as any economist can tell you, 
and any artist will readily verify. I am certain there are some here 
today who will.
    However, as certainly as it must not be free, I suggest that it is 
our obligation and our opportunity to insofar as possible make it feel 
free, at least at the moment we decide to use it.
    The delivery of music is approaching zero marginal cost--the cost 
of enabling each listen after the first. For some, this is a terrifying 
prospect, as their income may have depended upon charging a price much 
higher than marginal cost, say $18 for a disc that costs no more than a 
dollar to reproduce.
    For others, this is not at all terrifying. To Mel Karmizan, who 
runs CBS radio and its Infinity broadcast stations, it is expected. He 
makes music played on CBS stations feel free to its listeners, though 
they pay indirectly each time they patronize an advertiser. Likewise, 
Jerry Seinfeld feels free to his viewers, none of whom can remember 
paying, though they all do. If we suggested to either of these 
gentleman that they encrypt and protect from non-paying eyes and ears 
their words and images, they would laugh, as this would reduce the 
income they receive.
    Indeed, for those who pay a subscription fee to watch MTV or listen 
to an audio service, though they pay directly, each decision to listen 
or watch returns more value for fees already paid, making the use of 
music or movies a positive economic act.
    Today, it can be truly said that music behaves more like Thomas 
Jefferson's candle--which when lit with another candle diminishes the 
flame of the first candle not at all--than it does like an object 
subject to the laws of supply and demand.
    To the music listener who shares music, there is no consumption, as 
there is no less music after playing it than there was beforehand. The 
supply of boxes containing music is decremented not at all, and 
arguably the demand is increased.
    These are the new clothes the music industry must wear if it is to 
grow to the $100 billion business it wishes from the $40 billion 
business it is.
    2. This is because in the music world, like so many others, service 
is replacing product.
    The economy that affects the jobs of steelworkers and artists alike 
is changing in fundamental ways, and like so many industries, the 
artist's world is transitioning from product to service.
    Essentially, we are learning that the answers lie in new business 
models, not technology-based solutions. The video industry that once 
emphasized control now sees greater value in growing the crowd.
    The best forms of copy protection are new business models that 
destroy the motive to copy, not its mechanism. A wireless flat-fee/
advertising-supported jukebox of unlimited capacity would strip us of 
our desire to make MP3 files. We are transitioning, as my friend John 
Perry Barlow likes to say, from an economy of nouns to one of verbs. An 
economy that emphasizes the wine, not the bottle.
    Digitization and data networks liberate content from control over 
its quantity and destination, in much the same way that broadcast of 
radio and television remove control over the number and location of 
listeners or viewers. Control over quantity and destination are 
customary requisites for establishing pricing schedules that leverage 
maximum price over marginal cost.
    If control is lost, price falls and hovers at or near marginal cost 
of delivery. For example, if DeBeers lost control over the distribution 
of diamonds, their price would drop dramatically. Absent DeBeers' 
control, the price of diamonds would obey the standard laws of supply 
and demand and command a lower price in the market.
    Digital service relationships, on the other hand, can and do 
flourish in an environment where there is no control and the audience 
is left to grow virally. With the service provider serving as a 
gatekeeper to the growing audience, profit can follow. Service 
relationships, such as those established by radio or television 
stations, emphasize repeat visits and informal or formal ``data 
mining'' to extract full value from the business affiliation.
    The Net of the future will continue to exhibit flat-fee/flat-free 
pull, where we choose to monetize our presence by tolerating 
advertisements or by paying a subscription fee to banish the ads and 
the loss of privacy. We've already seen online services such as America 
On-line adopt the flat-fee model, as have telephone companies such as 
Sprint and AT&T. Where these companies once billed us for our 
activities and their duration, we now enjoy a smorgasbord of 
communication for one price.
    At its most rational, consumer behavior suggests they believe media 
should be priced at or near marginal cost of delivery, which is closer 
to zero than 99 cents. This is the price to which they have grown 
accustomed in radio, television, newspapers, magazines, and so on. 
Where media can be controlled, such as concert seats or difficult-to-
replicate analog items, consumers are more likely to be compelled to 
accept a wide disparity between price and marginal cost, but 
uncontrolled media generally move at or near marginal cost.
    Even if we can control the destiny of songs, we give up control 
over quantity and commoditization, creating a singles business where 
none has ever proved profitable. Even singles at a dollar apiece reduce 
album-related income because debundled consumers will skim the cream 
off a market built on bundled pricing. For years we've promoted singles 
and sold albums.
    At its most irrational, by the way, consumer behavior suggests the 
obvious: We are often doing business with teenagers! This should be 
little surprise because it is teenagers we target with the music. It's 
as if we were complaining that they should like our dinosaur books more 
than those silly Pokemon cards--value is in the eye of the beholder, 
and the beholder is distracted and empowered in ways our experience 
cannot appreciate.
    Regardless, we must realize that our digits will flow like water 
from their source to their destination. Whether disintermediated from 
broadcast or networks or disk duplication or kids plugging into 
listening posts or whatever, our reality is that our inability to 
control has a dramatic effect on pricing and our business plans.
    Great music was made long before music the product was even 
conceived. Music the product is a relatively modern invention, and has 
been part of music for only a blip in history.
    Promoting ubiquitous music as a service creates the right business 
model--with the permission of the appropriate rights holders (which may 
or may not include the artist, and may or may not include the music 
listener). When we move away from the package we liberate the content 
to seek larger audiences, and serving as gatekeeper to that ever-
growing crowd is the key to viral success.
    Even product-based business will thrive from entertainment the 
service. By creating a flat-fee buffet instead of the current tax on 
trying new things ($15 to see if you might like more than one song from 
that new band), we'll likely see merchandise and concert tickets and 
all manner of ancillary income increase. At the same time, we can grow 
the bundled subscription revenues to support the financial licensing 
needs of the industry.
    It's time to set a price for the interactive license and administer 
it. The consumer wants option value without the disk, and in an 
increasingly mobile and wireless world this is not an unreasonable 
request, certainly no more unreasonable than wanting to watch a local 
network television station via my DirecTV satellite dish (which 
Congress mercifully recently enabled over the objections of the local 
network television station, which copyrights the content).
    3. Digits will become ubiquitous and will increasingly arrive just-
in-time, and in a customized way. They will eventually cease to be 
distributed digitally through downloads or transferred in analog boxes.
    The arrival of wireless digital access will someday permit just-in-
time, customized access to music, movies, books and other media 
content. These digits and the content they carry will be streams, not 
downloads.
    The capital markets enthusiastically support the growth of 
connectivity by whatever means, including wireless, copper cable, and 
fiber optic. Connectivity becomes an assumption, not a complicated 
arrangement. Our American obsession with wires and set-top boxes 
ignores belies the fact that China and Africa and others are not 
wiring, they're skipping head, leap-frogging to wireless, ubiquitous 
connectivity.
    It's a commonly held assumption that digital distribution will 
replace the analog distribution system that traditionally delivers 
services and information-based products. In the music industry, for 
example, there is much talk about the future of downloading music 
singles for a dollar apiece--or free--in MP3 or some other digital 
format.
    More likely, however, the notion of offering music or other data, 
such as Websites or movies or newspapers, to be downloaded and stored 
will give way to business models that emphasize the widespread 
availability of content. When we can access all the bits we want, 
wherever we are, whenever we want them, we won't want to carry them 
around. Delivery on a disk or fixed storage of any kind will atrophy, 
as consumers tire of digital-asset management lessons and content 
providers become annoyed at giving those lessons.
    Products we once could only conceive of as tangible are now fully 
functional services without form, ubiquitously delivered just-in-time 
at marginal cost and customized for each use and user. Put more simply, 
the ability to decide what I want and get it where and when I want it.
    Economists call it option value. What it means to you is that this 
content is available at your option. Conversely, the song you hear on 
the radio or video you see on MTV isn't at your option, and is priced 
accordingly. We pay a price for the ability to have option value over 
something. A movie or song broadcast ephemerally has low economic cost 
to the viewer, but on a prerecorded cassette it draws a premium for its 
option value. The entertainment business refers to it as the difference 
between a performance license (inexpensive, compulsory, generally 
embodied in a radio or television broadcast) and a mechanical license 
(relatively expensive, discretionary, and generally a box containing a 
disc or tape).
    Today, however, consumers have access to a multiplicity of 
recording devices, some real products we plug into the wall (such as 
the Replay or TiVO devices or standard audio or video recorders), 
others are software services downloaded or accessed over the Web. They 
are buffers, repositories of digits that hold them for your later use, 
cached to enable you to summon them at will.
    These products and services offer consumers option value over 
streams, the ability to retain an ephemeral performance and use it when 
and where they want to do so.
    In other words, these buffers transform push into pull. They take 
content pushed aimlessly by broadcasters and make it content you pull 
when you want it, and if you don't want the commercials, you click a 
button and they disappear. They buffer or cache the output of the 
broadcast and allow consumers the ability to retain the content and use 
it virtually at will.
    Ultimately, the only purpose of the buffers and caches we rely upon 
today, such as diskettes and compact discs and DVDs, is to overcome 
real or perceived supply inefficiency.
    Buffers and storage are determinative factors of our media 
interaction today, but long-term they are obsolete, the equivalent of 
today's floppy disk--or disk of any kind. Disks are like traveler's 
checks in an era of automatic teller machines. Who amongst us didn't 
rely upon traveler's checks when we absolutely, positively had to have 
the money we needed to feed and shelter ourselves in a foreign land? 
Today, with the just-in-time efficiency of customized cash available 
with the swipe of a plastic card, I know few who bother.
    In the final analysis, products, hard drives, and downloads 
disconnect, depriving the audience--and the creator--of a relationship 
bonded with continuous access. Every streamed use, however, is an 
opportunity to grow a closer, better relationship between artist and 
fan.

    4. History proves this analysis by analogy.

A. 1920's
    Radio was the first Napster, just as Gutenberg made simple the task 
of printing previously difficult papal indulgences. Radio meant that we 
could no longer control the quantity or destiny of the music, or 
sporting event, or church service, once broadcast.
    The New Economy is anything but new. Like a recently purchased 
vehicle, it's new to us. But let there be no illusion: this economy has 
been around the block a few times. Sadly, we put out to pasture decades 
ago those who could teach us now. There are few old-timers remaining to 
bear witness to the truth: The Roaring '20s make our 2,000 days in the 
throes of dot-com fever look tame by comparison.
    Acoustic became electric during the '20s with far more savage 
impact on the economy of art than we see now with electric becoming 
digital.
    Radio was followed almost immediately by television. In 1925 the 
image of a revolving windmill was broadcast, and by 1928 the first 
patent was filed for color television.
    Music and movies and books not only survived the 1920's, they 
thrived because of them, not in spite of them. Where radio was once 
viewed as a threat to the music business, it is now viewed as a 
necessity to success, and television and then cable television and the 
video cassette recorder have proven no different.
    We recognized this and acted accordingly: There is a blanket, 
compulsory license applicable where control is difficult or impossible 
(i.e., broadcast, performance, satellite, etc.), and for the same 
reasons I am suggesting here it should be applied to electric becoming 
digital. These systems produce a known cost and easy licensing. 
Blanket, compulsory licenses imposed by Congress were the outcome of 
the recent DirecTV/DBS/DSS debate over rebroadcasting the copyrighted 
material of network broadcast stations, and in my opinion they will and 
should be applied to interactive use.
    At some point, there will be so many digital licensees and so many 
digital licenses and so many digital licensors that we will likely 
agree to lower the overhead of negotiations and establishing a simple 
rate and an easy way to pay. The Digital Millenium Copyright Act itself 
offers a similar analogy in our world, because it promises (but has not 
yet delivered) one simple rate with automatic licensing.
    Ironically, today we live in a world of blanket, compulsory 
enforcement (there is one organization per industry enforcing the laws 
on behalf of every company in roughly the same way) instead of blanket, 
compulsory licensing.

B. Video cassette recorder
    The entertainment industry must learn from its mistakes. In the 
1970's, Universal City Studios fought the introduction of the 
videocassette recorder. Universal felt that losing control of the 
quantity and destiny of content would lead to ruinous damages for 
information purveyors, and took Sony to court as the primary 
manufacturer. The case went all the way to the United States Supreme 
Court, but fortunately Sony won. Today, Sony shares with Universal the 
rich revenue stream provided by videocassette distribution, and most 
television companies participated in the VCR+ system that makes 
videotaping easier.
    Print purveyors took a similar view in the early days of the Web. 
Many that previously feared copying today offer a one-click button to 
``send this story to a friend.''

C. Sports
    Sports team owners were once certain that televising sporting 
events would be the death of their sport--why go to the game if you can 
watch it on television, our business is selling stadium seats--who now 
could not and would not survive without it.
    It is legend that Ronald Reagan was one of the very first sports 
broadcast pirates, recreating games in a booth after reading them over 
a wire service. Ultimately we've come to realize that not only was 
there no threat to Reagan's game broadcasts, but they actually grew the 
size of the crowd, and served an important purchase that we once 
confused with theft. Little wonder we now encourage broadcasts from the 
ballpark.

D. Biology
    Whenever I wade deep into law and technology, I find an analogy 
helps shed light on the otherwise incomprehensible. Biology fuses the 
wondrous with the incalculable, and it is instructive where methodology 
fails. Our rising level of digitization is like the Mississippi River 
during a flood, with whole towns and small cities disintermediated by 
water seeking the shortest path from source to destination.
    Every day I find evidence of this flood, but technological or legal 
sandbags will not stop the deluge. As they say, the water eventually 
finds its way to the sewer and floods your home anyway. Technology has 
no switch, no lever to throw, no way to reverse the course that history 
and fate have chosen for intellectual property. Napster, Gnutella, and 
their progeny are the first flood waves to crest the berm. These peer-
to-peer file-sharing systems were born to swap music, but are already 
finding use for movies, photographs, and other rich media content.
    Intelligent storage is also part of this flood. The video business 
has its TiVo, Replay, and other devices that buffer push-based content 
and make it feel interactive to the viewer, allowing pull at push 
prices (flat-fee or flat-free), and without the commercials if you 
prefer. Audio versions of TiVo and Replay will likely arrive soon, 
permitting users to fill jukeboxes from digital and analog broadcast 
stations.
    Technology does not have a switch, there is not a way to decide to 
go back. We can pass laws and we can hire lawyers to enforce them and 
they can employ technologists to enable their legal vision, but 
ultimately control of art is shifting from push (instigated by the 
artists and their enabling companies) to pull (at the will and at the 
instigation of art lovers).

    5. There will be a renaissance of creative expression.
    Technology's deepest impact will be from enabling the digital 
delivery of art, such as music, movies, books, and other intellectual 
property. The effects will go deeper than just changing the way we 
listen to popular music. Currently, we kill art regularly due to our 
need to balance the costs of distribution with its rewards. Once 
delivery is digitized, art need never die, and new art can come to life 
that might not otherwise find an audience.
    The enabling effects of digitization will not be found in today's 
or yesterday's stars or big names. After all, they achieved worldwide 
delivery and distribution.
    The primary effects of digitization are three:

A. Dead art will come back to life, and in the future art need never 
        die
    Today, it is necessary that we kill most art to ensure that some 
can live. Like a gardener who prunes a rose bush, we kill some art to 
enable others.
    Entertainment studios routinely discontinue music products. They 
must determine where the cost of distribution exceeds the rewards, and 
act to keep the rewards greater than the costs.
    Once digitized with the costs of delivery commoditized to a 
marginal cost near zero, no art will be said to have delivery costs in 
excess of its rewards, and it is likely we will not only bring dead art 
out of the vaults and back to life, but we will find that art will 
never die in a digital future.

B. New art
    Likewise, we abort new art even more often than we kill it. 
Everytime we turn away a new artist, what we mean to say is that we've 
decided that the costs of distributing their art will exceed the 
rewards.
    We are essentially a college admission committee, denying an 
opportunity to dozens for the same of the few we admit.
    Once commoditized with a minimal delivery cost, digital art can 
find a life it might never have otherwise found. We can enable new 
artists to find their audience where once distribution costs prohibited 
many such bold and noble experiments.

C. Unusual art
    The rock band Nirvana, for example, might like to release every 
concert the band ever performed, but in an analog world of distribution 
this is impractical.
    Now these bands can make available their entire repertoire of 
music, and so we will likely see in the future that we are able to 
purchase any Rolling Stones concern ever performed, or watch any 
baseball game played and kept in an archive.

    6. In the alternative, this could condemn billions of people to 
access to knowledge conditioned only on their ability to pay.
    Friction was a very useful tool in allocating access to art. Riding 
my bicycle to the library overcame the friction that others would pay 
to defeat. If the delivery of intellectual property is to become truly 
friction-free, new models must evolve to restore and preserve balance 
in access to art.
    Digital ``lending institutions'' must evolve and flourish, 
spreading entertainment and information, replacing product with 
service. We must promise our children that like us they deserve to hear 
any song, read any book, watch any movie--regardless of their ability 
to pay.
    The potential of every individual is at stake. Will their parents' 
wallet determine the music they hear, the books they read, the movies 
and video they watch?
    Ultimately, digital delivery may prove as problematic as it is 
enabling. Once digitized, art can be liberated, but equally if not more 
tempting is the idea of making access conditional through encryption. 
If we choose the course of predicating access to intellectual property 
on ability to pay, a class-based society of information haves and have-
nots will emerge.
    Sadly, those with access will find the content pool diminished 
unless we open access to all, through digital libraries and ad-based 
services that make a mockery of content as product.
    Once replicated, books--and by extension--movies, and music are 
available to everyone. As a child, I became addicted to books and music 
that librarians and others were happy to supply, regardless of my 
ability to pay.
    I was encouraged to borrow any book or record in existence with the 
promise that if it was unavailable locally, other libraries would lend 
it to my library. I was promised access to any intellectual property I 
might seek.
    Librarians schooled me in what could now be called the instruments 
of piracy. The library was the first place I saw a photocopy machine 
and a tape recorder. use of these copying tools was openly encouraged 
and taught by those who also made change for the nickels needed to feed 
the copy machine.
    No one called us pirates. None dared--though our actions violated 
any corporate interpretation of copyright laws, we were considered the 
opposite of scofflaws. We were scholars.
    The fine balance between scholarship and piracy eludes us today in 
our relentless struggle to monetize the digital delivery of art and 
other intellectual property. Devoid of contextual motive, we now 
declare illegal and immoral any use of digits outside their predefined, 
technically based rule set.
    Quite the opposite of the situation in my youth, it can now be said 
that some digits (and the knowledge they embody) are off-limits, and 
those limits are based purely on my ability to pay.
    The digital delivery of intellectual property is our generation's 
nuclear power. We can either liberate knowledge through its friction-
free delivery, or we can develop these same tools to condition access 
to art on ability to pay.

    The Chairman. Thank you very much. You do remind me a 
little bit of Ronald Reagan. You are probably never going to 
survive this hearing. [Laughter.]
    Senator Leahy. Everybody reminds you of Ronald Reagan, Mr. 
Chairman.
    The Chairman. Oh, no, you don't, I will tell you. 
[Laughter.]
    Mr. Griffin. They both loved Ireland.
    The Chairman. You are just fine.
    I am going to ask Hilary Rosen, the head of the Recording 
Industry Association of America, to maybe come up to the table, 
as well, so she can answer questions if anybody has them.
    If you could sit by Mr. Ehrlich, that would be a good 
thing. We are glad to have you here. We are happy to have all 
of you here. This has been a very stimulating hearing to me, 
and each of you has a major role to play in these areas.
    Mr. Ulrich, you have said that Metallica is not anti-
technology and will embrace new formats to make your music 
available. Do you have plans to make your music available in a 
downloadable fashion?
    Mr. Ulrich. Well, you have to remember that we are the 
artists, so I don't feel that it is my responsibility to spend 
my time seeking out those new technological avenues to do that. 
Our main concern is really when you have companies like Napster 
selling it for free. You know, it is sort of the analogy of if 
me and Mr. Barry were standing on a street corner together and 
I am holding a Metallica CD and I am selling it for a price and 
Mr. Barry is giving it away for free, which line are you going 
to stand in? So we don't feel that it is our responsibility to 
come up with the solutions. What we want to protect is the 
artist's choice.
    The Chairman. I don't either. I just wanted to know if you 
were doing any downloadable----
    Mr. Ulrich. Well, as soon as we stop spending all our time 
trying to defend and deal with this whole issue where it is at 
right now, we feel we look forward to moving on to the 
solutions at some point in the future. But right now, most of 
my energy is taken up just dealing with the situation at hand.
    The Chairman. Let me ask you, Mr. Ulrich, again, and Mr. 
Ehrlich, what is your response to those who argue that if you 
put out of business companies like MP3.com and Napster through 
litigation, or businesses like Emusic by failing to grant them 
licenses for your music, you will greatly empower the Gnutellas 
and Freenets that do not have a business office to call when an 
unauthorized version of, say, ``I Disappear'' suddenly appears?
    Do you want to start Mr. Ehrlich?
    Mr. Ehrlich. We are in the business of making sure that our 
music is available to as many places as possible, and so it is 
not our intention at all to stop businesses from succeeding. 
But we do want to make sure that businesses don't unjustly 
enrich themselves without getting authorization.
    The Chairman. But you do license to Mr. Hoffman's firm, 
Emusic?
    Mr. Ehrlich. To date, we have not. We are in active 
conversations with a tremendous amount of companies and we have 
licensed through others.
    The Chairman. Do you license Mr. Robertson?
    Mr. Ehrlich. We are in active conversation with MP3.com.
    The Chairman. Mr. Ulrich, do you care to respond?
    Mr. Ulrich. Well, I mean we are looking forward to dialogue 
with all the gentlemen up here at the table at some point. Mr. 
Barry has reached out to us a few weeks ago. There was a little 
bit of dialogue, not much that was close to anything that we 
felt comfortable with.
    But we certainly understand, like I said in my statement, 
that this is the future. We have no problem with the Internet. 
It is just on whose conditions. We believe that, as the 
artists, we have the right to control what happens to our 
music, and that choice has clearly been taken away from us and 
we are opposed to that.
    The Chairman. Now, Mr. Robertson, you have drawn an analogy 
between people making recordings of their own CD's for use in 
other devices and your Beam-It virtual locker service. Now, 
please explain the fair use purposes involved in a person 
making a single non-commercial copy for personal use and a 
business copying 45,000 CD's and selling access to them.
    Mr. Robertson. I think to describe a little bit about our 
Beam-It technology, the question really is when a person buys a 
CD, what are they buying? I would contend that they are buying 
a license to listen to that music on any format, on any device. 
And perhaps there needs to be some clarity in copyright law so 
that every time a new device comes out, like a cassette player, 
like a CD, like a VCR, we don't go through the same issue of 
does a consumer have a right to listen to the music which they 
have legally purchased on a new device.
    With our particular Beam-It technology, we had to overcome 
some technology hurdles for the consumer. An average CD has 
about 600 megabytes of data. That would take hours and hours, 
if not days, on slow modem connections like the one we have 
here for a customer to load it into their personal locker.
    The Chairman. Rub it in. I will tell you, both Pat and I 
were moaning and groaning about that as we went to the vote.
    Mr. Robertson. And so, yes, we did buy 45,000 CD's or so. 
We went out and purchased those through traditional retail 
channels, and they sit there unused. The only time they are 
ever activated is when a consumer verifies that they indeed do 
have the physical CD. That is an important thing to note here, 
is that we are rewarding paying customers. If they have a 
physical CD, they are allowed to listen to that tune. That is 
the real challenge here. If you reward customers that do pay 
for the music, you by definition encourage them to pay for the 
music instead of going to Napster and other resources.
    The Chairman. Mr. Ehrlich, do you care to respond to that?
    Mr. Ehrlich. Well, I am not a copyright attorney, and I 
feel that the courts evaluated the particular occurrence and 
they determined that illegal copying took place on MP3.com.
    The Chairman. Go ahead.

   STATEMENT OF HILARY ROSEN, PRESIDENT AND CHIEF EXECUTIVE 
OFFICER, RECORDING INDUSTRY ASSOCIATION OF AMERICA, WASHINGTON, 
                               DC

    Ms. Rosen. Thanks, Mr. Chairman. I think it should be 
pretty clear, given the fact that these litigations have gotten 
a lot of attention, that in the case of MP3.com, they never 
sought licenses before they started this service. And in the 
case of Napster, they never sought licenses before they started 
this service.
    The court did say that MP3.com is liable to seek licenses, 
and they have been doing that. And there might be some edgy 
disputes with Mr. Robertson and the companies about how those 
negotiations are going, but you might expect a negotiation to 
be a little difficult once there has been a court verdict such 
as the one that we had.
    So I think it is important to know that these are business 
negotiations and that the artists and record companies didn't 
have a choice at the outset of the businesses to grant licenses 
because they weren't sought. In the case of MP3.com--and I 
really distinguish that business from what Napster is doing--
MP3.com has a burgeoning new artist development section. They 
ask artists' permission before they put music through their 
site. This committee should not put these two companies' 
current business models in the same category.
    The Chairman. Did you care to comment, Mr. Robertson?
    Mr. Robertson. If I could add one thing, yes, we are 
respectful of the judge's decision that we do need a license. 
The problem that we have is that we are faced with punitive 
damages that go into tobacco-esque numbers for a service that 
we were running for 4 months that they can show no damages, 
that they didn't lose any CD sales. In fact, we presented 
evidence that they sold more CD's through this process.
    So for a service that was up for 4 months that allowed 
consumers to listen to their own music, my company is 
threatened with its very existence, not from one company, but 
from five major record labels, as well as from institutions 
representing multiple publisher entities. And that is the issue 
here, is having monstrous punitive damages over these arguably 
legal gray areas. I think everyone agrees they are gray areas.
    The Chairman. Well, I want to be careful to stay away from 
the litigation if I can. I know it is tough to do, but I want 
to do that.
    Now, Mr. Ehrlich or Ms. Rosen, either one of you, I would 
like to ask you a few questions about fair use. Are you ready?
    If I purchase a CD to play at home, it is fair use for me 
to copy that CD onto a cassette to play in my car. Is that 
right?
    Ms. Rosen. Keep going.
    The Chairman. The answer is yes.
    Ms. Rosen. You know, the copyright law is a strict 
liability statute. It was written, you know, by this committee. 
I think the issue that we are running into now and the issue 
that is unclear for these businesses is not what consumers have 
the right to do.
    The Chairman. Right.
    Ms. Rosen. So we shouldn't be lost that that is the issue.
    The Chairman. Well, I am going down the steps. Now, is it 
fair use if I give a copy to my wife to listen to in her car? I 
have made a cassette copy for my car and now I want to make one 
for my wife.
    Ms. Rosen. Mr. Chairman, you are leading me down the 
Napster argument before the Ninth Circuit Court. I can't go 
there.
    The Chairman. Well, is it fair use for me to rip a CD onto 
my hard drive to listen to in my office? Now, if so, if it is 
fair use, then I assume it is similarly fair use for me to 
store that file on a server rather than on my hard drive. Yes?
    If the server host decides for efficiency reasons that one 
copy of ``Enter Sandman'' is sufficient. [Laughter.]
    You and I are going to get along well.
    Mr. Ulrich. It is never sufficient. [Laughter.]
    The Chairman [continuing]. Is sufficient to serve its 
storage clients rather than 200 identical copies, is that fair 
use?
    Ms. Rosen. None of the things you are saying are fair use. 
The issue, though, is one of enforceability, and what has 
happened is now the argument before the court that Napster is 
making about them taking the individual's fair use right is 
proving that old adage that no good deed goes unpunished.
    The fact that Metallica allows their fans a souvenir--or 
the Grateful Dead did--allows their fans a souvenir from their 
shows to make a copy and take it home, and maybe even share it 
with a friend, does not justify the idea that a commercial 
operation can enrich themselves with billions of dollars 
exploiting that tolerance. And that has been what it is; it is 
a tolerance for individual consumers to use their music as they 
see fit. And those two things are very different.
    The Chairman. My time is just about up, but let me ask Mr. 
Barry and Mr. Kan a question. Can Napster or Gnutella peer-to-
peer architecture be made to work with either accounting 
software that allows for accurate accounting for copyright 
royalties or access control software to ensure payment for 
using the music? And if it can, explain how. We will start with 
you, Mr. Barry, and then we will go to Mr. Kan.
    Mr. Barry. Mr. Chairman, I would just like to make sure 
that we understand that Napster is not Gnutella, and I do not 
share the views that Mr. Kan expressed in his testimony with 
respect to the future. The world of music lovers that I have 
experienced in the last 7 weeks as interim CEO is very 
different from the vision that he painted. I have great faith 
in the American people and the degree to which we take pride in 
law abiding.
    So technology does not mean the end of intellectual 
property. I think that is your question. Can we work out 
regimes where intellectual property is respected? The answer is 
yes, and I think Napster is doing that. I think what 20 million 
people are doing on Napster is sharing music. They are doing 
that for previewing purposes, they are doing that for sampling 
purposes, and then they are going out and buying CD's. CD sales 
are up 8 percent, over $1 billion, Senator, and the reason they 
are is that more people are interested in music. So we are 
generating interest in music. Now, do we want to work out a 
private arrangement whereby something could be done along the 
lines you describe? The answer is yes.
    The Chairman. Can you do it, though?
    Mr. Barry. Technologically?
    The Chairman. Technologically.
    Mr. Barry. I think that it would be extraordinarily 
difficult, but probably worth the effort.
    The Chairman. Mr. Kan, we will let you finish and then I 
will turn--well, before I go to you, Mr. Kan, let me just say 
this.
    Mr. Barry, some of your arguments against Napster's 
copyright liability are predicated on the assertion that 
Napster users are operating within the bounds of fair use, as 
you have stated here today.
    Mr. Barry. Yes, sir.
    The Chairman. Now, let me understand what you understand as 
the contours of fair use to be. If I buy a CD and I make a copy 
for the car or one for Senator Leahy, my friend, that is 
probably fair use. It may not be, in Ms. Rosen's eyes.
    Mr. Barry. Well, indeed, Senator, Hilary Rosen has said, 
``it's cool to make tapes, it's cool to trade them with your 
friends, it's cool to share music.''
    The Chairman. OK, but how about if I make a copy--she is so 
outgoing, I will tell you, it is just wonderful.
    How about if I make a copy----
    Ms. Rosen. If that is the strongest argument you have, I am 
not worried.
    The Chairman. How about if I make a copy for anyone who 
comes to my office? Is that fair use?
    Mr. Barry. For anyone that comes to your office?
    The Chairman. Yes.
    Mr. Barry. For non-commercial purposes? I think the Audio 
Home Recording Act says yes.
    The Chairman. If I post a copy on my Web site and invite 
people to download it, is that fair use?
    Mr. Barry. If you post it on your Web site and you invite 
people to download it for non-commercial purposes, I would say 
yes.
    Mr. Ulrich. Mr. Chairman.
    The Chairman. I will be right with you.
    How about if I generate revenue through ads or access fees 
by attracting people to my site by offering a free download of 
that CD?
    Mr. Barry. Senator, just let me make one quick point and I 
will answer your question. You need to understand that the 
architecture which is described up here of Napster is sort of 
semi-correct, and the reason it is a little bit incorrect is 
that Napster does not host any files. There is no big Napster 
server where there are files.
    Napster is an index, and that index is generated by the 
individuals who participate in the Napster community. So what 
you have are about 20 million people who have decided to agree 
to share some files among each other. It is all person-to-
person. They do it for no money on a one-to-one basis. We 
believe that is----
    The Chairman. You are saying that yours comes close to 
being Gnutella.
    Mr. Barry. No, sir. What I am saying is that we provide the 
index, we provide the community.
    The Chairman. They can all plug into that index, which 
would be the server.
    Mr. Barry. Well, it doesn't serve them, sir. The actual 
transfer is done on a one-to-one basis from one computer to 
another. We play no part in that. In fact, the court ruled that 
we play no part in that. So to get to the answer to your 
question, the point is that it is a community where that one-
to-one sharing goes on.
    The Chairman. OK. Did you want to say something, Mr. 
Ulrich?
    Mr. Ulrich. I just have to comment. The use of the word 
``sharing,'' I think, is wrong in this discussion. The word 
``sharing'' has such a positive, community type of friendliness 
attached to it. And I really think that you have to replace the 
word ``sharing'' with ``duplicating.'' If I share a sandwich 
with you, I am left with half a sandwich. If I share my car 
with you, I lose the use of my car one day.
    But what is really going on here is that we are 
duplicating; they are using the word ``sharing'' instead of 
``duplicating.'' My music is the currency in this situation, 
and my music provides somebody else with getting access to 
another song. So, really, you know, my music is the currency 
here, and this sort of free-spirited thing, everybody sharing 
it, and so on, we feel that that is really not just the right 
terminology to use in this situation.
    The Chairman. Mr. Kan.
    Mr. Kan. Could you reiterate your question, please?
    The Chairman. Yes. Basically, what I was saying is can 
Napster and Gnutella really--in your peer-to-peer architecture, 
can you make either or both of them work with accounting 
technology or software that allows for accurate accounting for 
copyright royalties, or access control software to ensure 
payment for using the music? And if you can, then tell us how.
    Mr.  Kan. Well, I think that it would be extremely 
difficult. Even if we were to force that upon software 
developers in this country, we throw in a couple of national 
boundaries, cross a few jurisdictions and that sort of control 
evaporates. There are going to be open-source efforts, such as 
Gnutella, wherein developers are not forced to conform to a 
particular set of constraints.
    And if we were to constrain developers of Napster to say 
that they needed to do accounting, and so on, then there would 
be massive leakage. Everyone would just run to Gnutella or the 
successor technologies which would be even more onerous than 
Gnutella.
    I think that the solution really is to apply the carrot, 
not the stick. We need to make people sort of want to allow 
profiteering on the mass duplication and distribution of 
intellectual property. In fact, today we haven't really talked 
about the real sort of philosophical question of who should own 
intellectual property or anything like that. We have talked 
more about really the mechanics of profiteering on intellectual 
property in the digital age.
    So I would like to really just kind of close my answer with 
a quotation from Mr. Lars Ulrich, dated May 26, on 
Slashdot.org, which is a popular Internet geek site. Mr. Ulrich 
says, ``yes, of course, the scenario that the gentleman asked 
in the question is very, very possible, and we've been looking 
at that for a long time. And when we are done with our record 
contract, I would say that something in that direction is 
somewhere between a real possibility and a certainty.'' He is 
talking about using the Internet as a distribution mechanism 
for his music, and he makes that commitment in spite of the 
lack of accounting controls and access controls on digital 
music.
    The Chairman. But I guess what I am asking is do you 
believe that the Gnutella technology could be used by 
businesses which want to implement accounting or access 
controls.
    Mr. Kan. Yes, it could, but I think that really the term 
``control'' is something which the Internet has sort of 
despised for the 30 years of its existence. Really, the 
Internet----
    The Chairman. But you think you can?
    Mr. Kan. Yes. I think that people can be incentivized into 
putting that kind of thing into their software, yes. We must 
appeal to their profit motive, though.
    The Chairman. I have got to turn to Senator Leahy, but I 
just wanted to ask you, Mr. McGuinn, how has the ability to 
access music digitally increased interest in your music?
    Mr. McGuinn. Well, I have a bigger consumer base. There are 
more people who listen to the Byrds. I get e-mail from young 
people under 20 all the time who have discovered the Byrds 
basically from listening to Byrds tracks on the Internet. And 
there is a renewed interest in folk music because I have been 
putting traditional songs on the Internet, and the publicity 
that I have generated from doing that has increased people 
coming to my concerts. So it has been a good thing as far as 
that is concerned as well.
    The Chairman. That is great. I have a lot more questions, 
but I will turn to Senator Leahy.
    Senator Leahy. Did we determine whether we owe performing 
royalties to Creed?
    The Chairman. I decreed that we didn't.
    Senator Leahy. And you know I always follow your decrees, 
Mr. Chairman.
    The Chairman. That is right. I have noticed that.
    Senator Leahy. Mr. Kan, I was interested in listening to 
you. We do have .com, .gov, .org. Are we going to do a .geek? 
Is that what you were----
    Mr. Kan. No, Slashdot.org.
    Senator Leahy. I see. I think your suggestions on 
incentives we should listen carefully to----
    Mr. Kan. Thank you.
    Senator Leahy [continuing]. But determining how we make 
those incentives, though, and doing it fairly, because as has 
been suggested here, there will be no more music if artists 
cannot get the benefit of their music, if songwriters, artists, 
and others cannot get the benefit of that.
    Incidentally, Mr. Chairman, I am going to insert an opening 
statement by Senator Kohl, who is the ranking Democrat on the 
Antitrust Subcommittee.
    The Chairman. We will keep the record open for opening 
statements.
    [The prepared statement of Senator Kohl follows:]

Prepared Statement of Hon. Herbert Kohl, A U.S. Senator From the State 
                              of Wisconsin

    The Internet has already dramatically changed the way we work, shop 
and play. And now, with the rise of digital music files known as 
``MP3s,'' the Internet is beginning to change the way we listen to 
music as well. This new technology promises a world of digital music-
on-demand; where we can listen to whatever music we want, whenever we 
want it--instantaneously via the Internet. So, clearly, there is an 
``upside to downloading'' but there's a darker side as well. It we 
don't meet the challenge that this new technology poses, the 
intellectual property rights of those who work tirelessly to create and 
produce music will become devalued.
    The threat to our system of copyright posed by the new computer 
technology known as Napster is easy to understand. Napster permits 
anyone who is connected to the Internet to obtain, for free and without 
the copyright owner's permission, a high quality copy of virtually any 
musical performance. This copy can be downloaded on to a computer hard 
drive, copied onto a CD, shared with any other user of Napster.
    Napster argues that its users are engaging in a perfectly legal 
activity--the one-on-one ``sharing'' of music files for non-commercial 
uses--akin to someone copying a TV show with his VCR to watch later. 
But it's one thing for a person to pay a subscription fee or a royalty, 
download a song, and then make a personal copy of the song to listen to 
while driving in his car. In contrast, it is entirely different for a 
college student to be able to sit down at his computer and very quickly 
find and download the collected works of Bob Dylan, the Rolling Stones, 
or even Britney Spears to listen to and ``trade'' with his friends--
without paying a cent in royalties. And that is what Napster permits, 
encourages, is almost entirely used for and plans to profit from.
    I don't know about you, but while they say that this is music 
``sharing,'' it certainly looks to me more like music stealing. Just 
because my supermarkets were open for people to enter, didn't give them 
the right to take things off the shelves without paying.
    I sympathize with the many students who use Napster and complain 
about the high price of CDs. It is rather curious that, over the years, 
the price of CDs has remained more or less stuck at a stubbornly high 
level. Indeed, the Federal Trade Commission seemed to agree when they 
forced the five major record companies to stop their practice of 
withholding advertising subsidies where retailers advertised discounted 
prices. But the fact that CDs are expensive does not excuse the 
wholesale theft of intellectual property on the Internet. We do not 
allow art-lovers to break into the National Gallery and make off with 
Renoirs simply because art is expensive.
    At the same time however, one must eye the music industry's 
doomsday predictions about Napster with a health dose of skepticism. 
The entertainment industry has a long track record of opposing new 
innovative technologies--fearing they would bankrupt their existing 
products. For example, the music industry fought against the 
introduction of cassette recorders, fearing they would harm vinyl album 
sales. Before that, musicians even opposed LPs, fearing they would 
destroy live concerts. And in each case, the new technology only made 
the recording artists and the entire entertainment industry wealthier 
overall. Indeed, in spite of MP3s and Napster, album sales are 
increasing this year at a record-setting pace.
    The music industry, in my view, must learn to adapt to the new 
world of digital music rather than try to maintain an old music 
delivery system that is rapidly becoming obsolete. It must alter its 
business models and add value to its products to compete with new 
distribution channels and to prevent unauthorized copying. And with new 
and potentially more problematic file-sharing tools like Gnutella and 
Freenet on the horizon, the music industry had best move quickly. But 
while the industry must adapt to the changing reality of the Internet, 
it also should not be forced to accept the wholesale theft of 
intellectual property by Internet pirates.

    The Chairman. We will also put all of your statements in 
the record as though fully given.
    Senator Leahy. I know Senator Feinstein of California and 
Senator Schumer of New York have been here with us, and I 
wanted to clarify one thing. The Senate has T3 inside of our 
firewall. We don't take advantage of DSL or virtual private 
networking for our remote use or telecommuting staff.
    While we have been talking, in case some of you wonder what 
I have been doing up here, I have gone onto Napster and 
MP3.com, and others. I have been downloading some things, 
trying to download a couple of versions of ``Touch of Gray.'' I 
went from touch of gray to touch of white by the time it got 
downloaded, it takes so long under the systems we have, 
although I would mention I would take it any color I could get 
it, I suppose. But we do move along slowly.
    I couldn't help but think--and I am going to go into some 
questions on this, but if there are 20 million voting-age 
Napster users and if they suddenly get cut off, I suspect that 
even those Senators who are not sure what that large screen is 
in their office, called a computer, are going to start hearing 
from these people. But also by saying that, if the parties 
don't quickly move to some voluntary licensing arrangements, 
then I suspect there is going to be pressure on Congress to 
create statutory, compulsory licenses.
    There will be pressure for Congress to create a single fee 
for the writers, the performers, the record companies, and all 
concerned. Think about that. Frankly, I am not sure everybody 
is going to be happy with it if we did do that, and I would 
hope that the parties might continue to work together.
    If I could wave a magic wand today and tell you exactly how 
to do it, and even if you all agreed, from the artists to the 
providers to the record companies and everybody else--even if 
you all agreed that you would take my solution, I am not sure 
what would be the fairest solution. But when you can move so 
quickly on some of these sites, and when I go on college 
campuses, as many of us do, to talk and everybody is talking 
about what they have downloaded, how they share, and so on, and 
when my kids pick up a ``Black Muddy River,'' which happens to 
be one of my favorites of the Dead, and send it to me--they 
have heard a new version--and I log on in the morning while I 
am having my breakfast and there it is, I mean this is a whole 
different world, and I think we have to recognize that on where 
we go.
    Mr. Barry, one of the things I have pulled up here while we 
have been talking is the new artist program of Napster. Tell me 
a little bit about that, and tell me what your results have 
been so far.
    Mr. Barry. Let me describe it first and then I will tell 
you how we are doing with it. We post on the Web site a special 
place for new artists where they can voluntarily sign up to 
have their music promoted on Napster, and essentially what that 
means is they get a special area within the Web site. They are 
able to characterize their music for other listeners, 
essentially do some promotion on their own, and it is going 
great.
    We started in April. We have 17,000 artists who have signed 
up already from all the 50 States. I would say in every State, 
over 200 artists have signed up, and we think it is terrific. 
In fact, it turns out that they are buying music. As you know, 
records sales are up, and the people who are getting onto the 
new artists program and looking artists there are also buying 
things. In fact, they are buying them through MP3.com.
    I have an e-mail from an artist who is a member of the new 
artists program who then went over to MP3.com and did a 
download over there. So we think Napster is primarily a 
sampling and a previewing service, and that it is going to be 
something that we will be able to work with the record 
companies, both traditional and new.
    Senator Leahy. Well, let me ask a little bit further on 
that of both Mr. Ulrich and Mr. McGuinn. Again, using this 
college campus thing, I hear people talk about it, but I also 
hear from various administrators that they are having a little 
trouble getting on sometimes their own computer systems because 
it is, especially during certain hours, very busy.
    Have either of you noticed any increase in fan interest 
since the introduction of Napster, or even talking among--Mr. 
Ulrich, you and I were talking about a mutual friend of ours 
who is a recording artist earlier this morning, Sheryl Crowe. 
In talking with others, do you see any increase in interest in 
the music because of, say, Napster?
    Mr. Ulrich. Not anything that we can feel. The numbers have 
not gone particular up, down, or sideways. I mean, the numbers 
that we monitor in terms of sales and concert tickets are sort 
of pretty right in line with what they have been for us for the 
couple of years.
    Senator Leahy. You do monitor those, obviously.
    Mr. Ulrich. Absolutely, and we have people that do that for 
us.
    I would like to just make one comment on what Mr. Barry 
said a minute ago, which I think is really just what all this 
boils down to. He used the word ``voluntarily''; have new 
artists that are voluntarily on our Napster services. We did 
not have that option, and what we believe really is that the 
reason that new bands get the choice to be on a Napster-like 
service is because they depend and they need the big bands like 
us to get people into the system.
    When we monitored Napster for those 48 hours, I think the 
most interesting statistic, apart from the 1.4 million 
Metallica downloads in those 48 hours, was that there was one 
download, one single download of a file by an unsigned artist. 
So it is clear that the big bands are the ones that generate 
all the traffic and attract all the attention. And this whole 
thing about the new artists, the up and coming artists--of 
course, they should have those outlets if they so choose, but 
the bigger bands have never been given that choice.
    Senator Leahy. Sort of the same reason a bookstore puts the 
bestsellers in the window?
    Mr. Ulrich. I think that is a good equivalent, yes.
    Senator Leahy. Mr. McGuinn.
    Mr. McGuinn. I have seen a certain percentage of increase 
in people coming to concerts as a result of my exposure on the 
Internet through MP3's, and I would say it is a definite 
benefit to me. I would be probably in a better position to 
notice it than a major group that has lots of sales like that. 
So, you know, I would say it is maybe a 15- to 20-percent 
increase.
    Senator Leahy. Well, I look at this software that Shawn 
Fanning did, and we are talking about the kind of technological 
innovation in this country, whether it is in this or anything 
else, as the kind of thing we want to promote, not stifle.
    Now, Napster may--I don't want to get involved in the court 
case that is going on here, but let's assume it infringes on 
copyrights. Well, then if that is the case, you can find out 
some kind of a licensing scheme, whether it is done, as I said 
before, negotiated among everybody. Can you negotiate a 
licensing scheme on the Napster system? I mean, is that 
possible?
    Mr. Barry. A question for me, Senator?
    Senator Leahy. Sure.
    Mr. Barry. I think that it is possible, but I think you 
would have to first accept your fundamental assumption that 
what 20 million people are doing on a regular basis is 
copyright infringement, that all 20 million users are guilty of 
copyright infringement. Now, that is what the position has been 
in the lawsuit. We just don't think that is right. We think 
that those people are engaged in sampling and previewing, and 
that both under fair use doctrines and under the Audio Home 
Recording Act, what they are doing is absolutely correct.
    Senator Leahy. But at some point, you know, you have to 
figure out what you do. You don't really have a business model. 
You have no profits, you have no revenues, but just picked up--
what is it--$15 million in venture capital fundraising?
    Mr. Barry. Thereabouts.
    Senator Leahy. So you have got venture capitalists whom I 
find, anyway, in talking to them tend to be a little bit more 
particular in the last few months, with their eyes on Nasdaq 
and what not.
    Mr. Barry. Yes, sir.
    Senator Leahy. But they are willing to invest in a company 
that makes no money and is currently mired in litigation being 
done by hard-nosed business people. Then how do you make a 
return on the investment? How do you make money? You have got 
more people coming in than I think AOL did in 15 years or 
something like that.
    Mr. Barry. Well, the growth has been spectacular. I think 
that the reality is that we have to remember it is a one-to-one 
system, a person-to-person system. And reality of our economy, 
I think, is that if what those people are doing is legal, then 
we will have the right at some point in the future to work out 
a business model where we can derive some economic benefit from 
making that legal activity more convenient.
    The index that we host and all the chat and community that 
goes on there, we are facilitating that, and at some point in 
the future I believe that we will be able to derive some 
revenue from that. But I come from the premise that what is 
going on on the system user to user, this one-on-one non-
commercial file-sharing where no one is making any money--and 
certainly as you correctly point out, we have no revenues 
today--is correct and legal. And therefore I have to believe 
that we can make some money from making it convenient.
    Senator Leahy. Let me go to Mr. Robertson. As I said, I was 
downloading up here. You were doing it a little bit faster than 
I was able to. You settled a lawsuit with two major record 
companies, Warner and BMG. You have got EMI, Universal, and 
Sony who still have legal action against you, and I realize 
your settlement is confidential.
    But I also notice that shortly after you launched the 
service that led to the litigation, you invited the recording 
industry to your offices to inspect the new system, and you had 
mentioned that earlier in your testimony. Some people said that 
if you had approached the record companies before your launch, 
you would still be at the negotiating table right now. But you 
are at the negotiating table because of the hammer of a 
judgment hanging over your head.
    Why can't you work out agreements with these others? If you 
were able to work it out with two, why can't you work it out 
with the others? And why didn't you, before you launched the 
service, seek out a licensing agreement? And if you feel that 
your answer may hurt you in your litigation, your lawyer is 
going to reach and grab you and that is OK.
    Mr. Robertson. Fair enough. It is important to note that 
what MP3.com is doing, we believe, is building an 
infrastructure. We don't own the content, we don't sign bands 
in the traditional sense. We build the delivery system for that 
music. So in that respect, we think that we are partners with 
artists and labels alike.
    However, as we learned last week, BMG has made investments 
in companies that are doing exactly what we proposed. And we 
heard earlier Mr. Ehrlich talk about a cyber jukebox, again 
exactly what we have done with My.MP3.com. So there is very 
much a competition there, and going to your competitor before 
you, rolling something out and saying, hey, I would like to 
talk to you about this new technology, is not a very prudent 
thing to do.
    So that is why we didn't go to the record labels, also 
because we fundamentally believe that people have the right to 
load their own CD's onto digital servers and have a company 
help them do that, and play them back for their own personal 
enjoyment, not to share with other people, but for their own 
personal enjoyment.
    As for our current settlement, it is true that we settled 
the copyright lawsuit with two of the five plaintiffs in the 
case. We have not settled with Sony, Universal, or EMI. We are 
working hard to do that, but there are some challenges, and I 
think maybe the question is better asked to Mr. Ehrlich of Sony 
about why they haven't given us a license to date.
    Senator Leahy. Mr. Ehrlich.
    Mr. Ehrlich. As I mentioned before, we have been in 
active----
    Senator Leahy. We didn't rehearse this, I want you to know.
    Mr. Ehrlich. We have been in active conversation. This is a 
very complex issue and it is something that needs to be done 
right. And so we are not opposed to the license and we have 
been in active conversation.
    Mr. Robertson. They have been in active discussions with 
us, I will say.
    Senator Leahy. Yes, and neither Senator Hatch nor I want to 
go into those aspects because it would not be fair to you.
    The Chairman. Well, I would like to, but I don't think we 
will.
    Senator Leahy. Yes, I know. We both would love to.
    I was thinking last night when I got stuck in an airport 
for several hours, Mr. Hoffman, I wish I had done as you have 
and had some of my favorite music along. You are absolutely 
right. The five CDs in the trunk are going to quickly become 
such a thing of the past. People are either going to come with 
their own disc or plug in to have whatever they want. You plan 
an hour's drive and you may decide what you want and move it 
around.
    I had heard discussion of this earlier. Any encryption can 
be broken and any kind of a security device can be placed and 
somebody will find a way to copy it. I think, Mr. Kan, that was 
probably you who said that. But is that true? Is that really 
true? Is it possible to work out licensing agreements, whether 
it is with Metallica, the Byrds, or anybody else, to do this?
    The idea of the distribution I find exciting. I see the 
same thing in movies. I mean, the day will come when I will sit 
in my farmhouse on a dirt road in Vermont and I want to watch a 
particular movie and 5 minutes later I will download a digital 
copy of it. My credit card will be billed and I won't have to 
drive down to the video store to watch it. And it is going to 
make great business for the movie companies if you can do it, 
and it is going to make great business for the artists. But is 
there any way of doing that and protecting it?
    Mr. Hoffman. Well, the interesting thing about copyright 
law is that it basically assumes the reality of these 
technologies. There is no real physical way--and I would use 
the term ``physical'' as in physics--to keep someone who has 
access to something from being able to duplicate it. It is kind 
of a fundamental law. If I can see this, I can copy it. If I 
get it on my computer, I can duplicate it.
    You can have the appearance, but you can't actually really 
keep it from happening. The reason is kind of fundamental to 
cryptography. I actually used to be at PGP, or Pretty Good 
Privacy, which is one of the leading encryption----
    Senator Leahy. I know. I love it.
    Mr. Hoffman. If you and I wanted to send e-mail to each 
other, we could be decently sure that no one else in the room 
could read it. But I would have to trust you because if I told 
you company confidential information about Emusic, you could 
call the New York Times with that same information. So the 
disclosure problem is always a problem to cryptographic 
systems.
    And the other problem is just more fundamental to how 
consumers use downloadable music. What customers really want is 
real strong flexibility, and unlike Hilary's response to fair 
use, I will draw some interesting lines. I think it is fair use 
for you to space shift, as the Ninth Circuit Court of Appeals 
has said, which is basically taking a CD, putting it on your 
hard drive, putting it on a portable player.
    I think it is fair use inside of your family basically to 
copy because we are talking about personal performance, 
personal private use for non-commercial means. I think it is 
stepping over the line when you make music available to others. 
But the interesting thing is when you make music available to 
others, it is pretty obvious, especially if you are at all 
effective, because if you are not effective, no one cares. If 
you make music available on your little Geocities Web page and 
no one ever comes, it clearly doesn't impact sales of recorded 
music. But if 20 million people come, well, unfortunately we 
all have to take note.
    The interesting thing is, though--and this is coming back 
to what I was saying about the Net Act and enforcement--it is 
not exactly legal to make music or software or whatever is 
copyrighted available without permission. And, you know, quite 
a few people have literally plea-bargained out of jail terms on 
Net Act violations. A college student in Oregon actually was 
found guilty of pirating both MP3's and software.
    So from that perspective, I don't think the fair use 
argument is actually that clouded. I think fair use is pretty 
simple. If you are doing something that doesn't replace a sale, 
you pretty much have a right to do that as a consumer. If you 
are a business trying to profit from that, you are going to 
have to license.
    One of the important things, I think, also in the kind of 
debate here is, you know, a lot of people say, well, people 
should license Napster because clearly you are going to have 20 
million voters complaining to you. But it is interesting that 
that generally penalizes the people like Myplay and others who 
have done it right, who have basically said we would like you 
to upload your songs and exercise your actual fair use rights. 
We won't violate any laws. In fact, we will work directly with 
and, in fact, have investment from, in the Myplay case, the 
major labels and others who are interested in that business, 
and we will play by the rules.
    So it is an interesting situation in some senses because 
what we are talking about around these systems is private 
legislation, basically taking copyright usage and using the 
DMCA's exemption to technical circumvention to be able to 
really litigate a system without necessarily having the fine 
ladies and gentlemen in front of us bless or not bless that 
system.
    Senator Leahy. My time is gone, and I see Senator Feinstein 
here. As one of the authors of the DMCA, what I am going to do 
is probably contact a number of you with some follow-up 
questions on that.
    Mr. Hoffman. May I make one last point?
    Senator Leahy. Sure, of course.
    Mr. Hoffman. Interestingly, DVD copy protection was broken 
not for malice, but frankly what I think was probably a pretty 
legitimate fair use reason. I believe a Finnish 16-year-old who 
had a LINEX machine at home had gone with his parents to France 
and really wanted to be able to view country-coded French 
movies. I mean, the French are always very excited to have 
French products exported instead of American products imported.
    He reverse-engineered the DVD copy protection system so 
that he could watch, basically perform his right to a private 
performance, which by the way here in the United States we 
specifically have the right to a private performance by any 
means necessary to be able to watch DVD's. And, in fact, it is 
interesting that very few DVD's are available downloadably.
    But it is questionable whether he is ever going to be able 
to exercise that fair use, and especially in a situation where 
the copyright licenses of the operating system he was using, 
LINEX, are actually somewhat diametrically opposed to the 
ability to maintain control over a secret system like DVD copy 
control. So I think it is important to note that the first 
major challenge, if you will, to the anti-circumvention 
technology was frankly probably legitimate fair use.
    Senator Leahy. Well, I will just close with this, Mr. 
Chairman. You and I authored the DMCA, and as one of the 
authors of it I will go back and look at it more. But I just 
want everybody to know I love the innovation that has come in 
this digital world. I am a photographer. I don't get published 
in music the way the chairman does; I get published in 
photography. I look at some of the amazing changes in that area 
in the last couple of years.
    So I want to push innovation, but we are not going to have 
photographers going out doing the work to get the fantastic 
photographs we want, we are not going to have artists like some 
of the wonderful artists represented here today, or others who 
are going to continue to do it unless there is some gain to 
them. So we have to figure out how to do that, whether it is 
the incentives or however, and that is what is before us.
    So, Mr. Chairman, I appreciate this hearing. I think it has 
been well worthwhile, and I am delighted the Senator from 
California, who is one who has spent an enormous amount of time 
on these subjects, is here with us.
    Mr. Griffin. Might I add a brief comment?
    The Chairman. Sure.
    Mr. Griffin. We regularly extend enormous amounts of public 
funds to build and support libraries that have these very same 
records in them. And they lend them out and they have tape 
recorders in those libraries and that is where I learned to 
tape record. And we also have copyrighted materials on the 
shelves and we have copying machines in those very same 
libraries. And it is our purpose and our hope that people will 
share copyrighted materials and to use them, and that is a 
public policy that our country has had for a long time, and 
rightly so.
    The Chairman. Senator Feinstein.
    Senator Feinstein. Thanks very much, Mr. Chairman. To my 
way of thinking after listening to this, what I think has 
happened is that Napster has found a methodology which entirely 
defeats the purpose of copyright protection. If carried to its 
logical conclusion, your very strength, which is your large 
use, is also your Achilles heel. The one saving grace so far is 
that you are not making money. It is hard for me to believe 
that venture capitalists gave you money, not to receive 
anything in return. So I would assume that somewhere down the 
pike, you are going to make money.
    About a week ago, the chairman gave me a CD of his. I 
haven't had a chance to listen to it yet, but I assume it is 
copyrighted. Now, essentially, I could put that through your 
server, and let's say 10 million people wanted to hear it. It 
would defeat his copyright.
    Mr. Barry. How so?
    Senator Feinstein. Because no one would pay anything for 
it.
    Mr. Barry. Well, sales are up, Senator, and most of the 
people who sample and preview things on our site are, through 
the Napster service, then going out----
    Senator Feinstein. Yes, but you could then do the same 
thing----
    The Chairman. I am willing to try it. I will tell you that. 
[Laughter.]
    Senator Feinstein. Same thing with a book. And I don't 
believe you can go to a library and copy a whole book without 
violating copyright rights, maybe a part of it, but not the 
entire book. You could do the same thing with a movie. You 
could essentially defeat any intellectual property copyright 
through your methodology, and it is all done under the cloak of 
anonymity on either end of the server. Now, the question is 
whether that anonymity is really a cloak to avoid copyright 
protection or something else. And I don't pretend to know that, 
but I am very curious.
    You say Napster makes no money, is that correct? You are 
incorporated as a corporation, a profit-making corporation?
    Mr. Barry. Yes. As many Internet companies do, we are going 
through a period where we have no revenues.
    Senator Feinstein. And how do you plan on gaining revenues?
    Mr. Barry. Well, as I said, Senator--you may have been out 
of the room--what we are planning to do--now, I think, you 
know, planning is probably an overstatement, but our position 
is that copyright has always been about a balance. It is a 
balance between the incentive that we give to the owners of 
these works to produce the works and the public interest in 
having access to those works. So the question is always what is 
the balance.
    And we think that the balance is struck in this particular 
instance on the side of the activities that are going on in the 
system. And so I don't want to get too much into our brief with 
respect to the litigation, but our arguments are there and I 
would just refer you to that. So we think that these 20 million 
people are not infringing copyright, and since they are not 
infringing copyright, there may be a time in the future when we 
are able--because we are able to provide this community of 
file-sharing which is a legal activity, we may be able to make 
money by the fact that we make that convenient to people.
    Now, having said that, I just wanted to make sure I respond 
to Senator Leahy's question here. I want to reiterate that we 
started talking to record companies the first day I got on the 
job, and I am continuing that discussion because I think 
Napster can make money for artists, labels, and for Napster, 
while still serving the needs of the Napster community. 
Senator, these people are sharing files one-to-one for no money 
and no promise of anything in return.
    Senator Feinstein. Well, let me ask you this question, and 
maybe Ms. Rosen is the one to answer it. The record labels, I 
understand, are claiming that 87 percent of the materials found 
on Napster are copyrighted and exchanged without authorization. 
Is that correct?
    Ms. Rosen. Yes.
    Senator Feinstein. How would you answer that, Mr. Barry?
    Mr. Barry. Well, without getting too much into the 
litigation, that is a factual question that is based on their 
expert survey. Our experts say some other things.
    Senator Feinstein. What percent do you say are copyrighted 
materials that you make available?
    Mr. Barry. I am not sure we know what percentage are 
copyrighted materials. Remember that the way Napster works is 
that the users decide what the file names are. When a user on 
their own personal computer takes an MP3 file and puts it on 
the computer, they decide what to name that file, and so 
getting these percentages is pretty difficult.
    But one thing we did do with a survey by our expert in the 
litigation is we found that the type of space shifting that Mr. 
Hoffman talks about as being exactly the kind of fair use, 
Senator, where you are moving it over to your MP3 player 
accounts for at least 36 percent of the use that goes on there. 
And, traditionally, in Congress under the fair use doctrine 
what we have said is we are not going to eliminate a whole 
technology because we think that it may be capable of some sort 
of infringement.
    In fact, the Supreme Court said, look, if a technology is 
capable of substantial non-infringing uses, not used for 
substantial non-infringing uses, but capable of substantial 
non-infringing uses, we are not going to eliminate that 
technology simply because it might also do one thing or 
another.
    Now, the point here is we are not being sued for 
infringement. It has never been a claim that Napster is a 
direct infringer. What is claimed is that the 20 million people 
who are using Napster are committing copyright infringement 
everyday, and we just don't agree with that. If they are not 
liable, then we are not liable.
    Senator Feinstein. I beg your pardon. Why are you not 
liable if you make it possible to convey a copyright 
infringement? Instead of allowing anonymity, you could, in 
fact, as others have done, have the individual's name and 
address and they would pay a fee and a copyright fee would be 
paid. But you have chosen not to do that.
    Mr. Barry. Senator, I think these questions really go to 
the heart of the litigation. It is difficult for me to comment 
on them. I think that the question of how we preserve the 
privacy of our users is one that I would be happy to spend some 
time on. We do preserve the privacy of our users and we think 
that is appropriate. What we are trying to do right now is to 
fight this battle. We have been sued by the major labels.
    Senator Feinstein. Mr. Barry, you are saying that any 
publisher of a book could have the same thing done to them. 
Their copyright would be null and void. Any producer of a movie 
would have the same thing; the movie could be downloaded. 
Essentially, you are setting up a technique which could be 
applied broadly across any kind of written or spoken 
intellectual property.
    Mr. Barry. Senator, first of all, Napster does not support 
any of those file types and has no plans to. So I think that we 
are talking about some future that we don't really know what it 
is going to be.
    And I would suggest to you that these arguments have been 
made previously with respect to almost every technological 
advance over the last 100 years, from the piano rolls, through 
radio and television, through cassettes, through the VCR. And 
the terrible things that have been prophesied have just not 
come true. In fact, every time, it has been a great financial 
boon to the people who are the most concerned.
    Senator Feinstein. Could I ask one other question?
    Mr. Barry. Sure.
    Senator Feinstein. How many pieces of music do you have 
being--I am looking for the word--not sold----
    Mr. Barry. Shared?
    Senator Feinstein [continuing]. Shared every month?
    Mr. Barry. Well, it varies tremendously because when 
someone is offline, then the files that are associated with 
their computer are not available to the other people who are 
part of the community. So it just depends on how many people 
are offline. You can actually look on our service and you can 
see at any one time how many files are there, and I would say 
it varies between 5 and 600,000 on a daily basis.
    Senator Feinstein. Being shared?
    Mr. Barry. Yes, ma'am.
    Senator Feinstein. Ms. Rosen, did you have something you 
wanted to say?
    Ms. Rosen. Yes, Senator, thank you. I know it is not lost 
on anyone in this room that Mr. Barry is saying they don't 
actually know what is being copied, but they sure know that we 
are selling more of it.
    Mr. Barry. Record sales are up.
    Ms. Rosen. I just wanted to address this general issue 
because so many members of this committee have good histories 
on balancing public policy and consumer access to new 
technologies, and that is that this argument that the music 
industry and entertainment industries before it, but 
specifically now the music industry, is against technology and 
that is the basis for a selected litigation is really silly.
    If, in fact, people were trying to keep this technology off 
the shelf, that might wash. But this is about establishment of 
new markets. There are people at this table--Mr. Hoffman is one 
company, Mr. Robertson is another company--that are investing 
in new businesses using new technologies, paying artists, 
paying songwriters, paying creative people down the food chain. 
This is about can the development of new technologies and new 
businesses using these technologies ever succeed if the rules 
are not the same for everybody. So this is not an anti-
technology argument. This is sort of a selected commercial 
target and we should not let anybody escape that difference.
    Mr. Hoffman. Senator Feinstein, may I?
    Senator Feinstein. Yes, please.
    Mr. Hoffman. It may very well be true that record sales are 
up for the major labels, but I can tell you as the sole 
proprietor of any business selling MP3's or selling 
downloadable music in any volume whatsoever $.99 is awful hard 
to compete with free for exactly the same content.
    And, respectfully, I submit that because our artists and 
labels, people like Tom Waits, Merle Haggard, on and on and on, 
choose to go with us and we pay them--we pay them advances, we 
pay them royalties--and choose to make the content available to 
consumers, we are allowing consumers to still rip them off, 
even though they are doing the right thing.
    And in the process, I can tell you that Wall Street and my 
investors tell me that the reason my stock has declined 70 
percent, not just because of the April pull-back, is because 
they are afraid Napster will invalidate the concept of paying 
for music, period. So I can tell you that my shareholders and I 
have definitely had financial push-back, and that hurts my 
artists and labels because it drops the amount of money I can 
spend to market. It restricts my access to the capital markets 
for me to go back and raise further funds to be able to fund my 
business toward profitability, which again further encumbers my 
ability to sell downloadable music.
    Senator Feinstein. So what you are saying is anyone, then, 
that respects copyright rights cannot survive in this kind of a 
situation?
    Mr. Hoffman. It is a really difficult climate out there. 
Now, having said that, there are opportunities here. We have 
spoken with people at different file-sharing services. We 
understand how to do direct enforcement. Now, I don't want to 
set up an adversarial relationship with my potential customers. 
I would much prefer to have, frankly, in some ways the police 
do the police's job and allow, be it the FBI, but it seems like 
an odd organization to have to do it, enforce copyright laws 
online because it is a Federal statute that says, gee, even if 
there is no commercial gain, it is still illegal.
    Mr. Barry. Senator, if I could just respond, I think the 
point is that what people do on Napster is sampling and 
previewing, and it helps all the people who are here at this 
table.
    Let me read you from an e-mail from Alex Smith, of the 
Cynic Project. ``We are currently the band who holds the number 
one electronic and techno song at MP3.com. I have gotten tons 
of e-mails from people who have found my music on Napster, used 
the ID3 tag to trace me back to MP3.com and download more of my 
music. This makes me money. I just want to tell you that not 
every artist who is out there is against you.'' So I think that 
is a great illustration of the power that Napster has to 
increase interest in music.
    The Chairman. Well, let me ask a question. Senator 
Feinstein mentioned that the Napster technology uses anonymity 
to further its business. So maybe, Mr. Ehrlich and Mr. Barry, 
you would care to answer this. I recently read an article about 
a Utah songwriter who was giving away a technology application 
designed to identify digital music pirates.
    Now, this technology, called Media Enforcer, was apparently 
designed to thwart illegal uses of Napster and works by 
identifying the Napster users' names. I believe it can also 
reveal the intellectual property addresses of Gnutella users. 
By allowing copyright owners to identify those who are 
infringing and possibly bring an action against them, couldn't 
this type of technology address the illegal piracy concerns 
that new and, when used legitimately, very promising 
technologies such as Napster and Gnutella pose?
    Mr. Kan. Sir, if I may address that, the IP addresses of 
both Napster and Gnutella users, although they are possibly 
revealed by Media Enforcer, are basically meaningless because 
I, although I sit here today, can have hundreds of Internet 
accounts offshore where I can infringe from afar, where I am 
not subject to the laws of the United States, not subject to 
copyright law as it is laid out in the United States. So, 
really, IP addresses are particularly a transient thing. They 
are not a fingerprint for individuals. I can log onto the 
Internet with a hundred different IP addresses in 1 day.
    Mr. Barry. Senator, that is a good technology. There are 
lots of other ones. SDMI, the Secure Digital Music Initiative, 
is something that the recording industry began a couple of 
years ago. We have, since the early days, been members of SDMI. 
We are following it and we intend to remain compliant with it 
as the standard is promulgated.
    The Chairman. Well, I can tell you right now I think I can 
figure out a lot of ways you can make money with Napster, just 
like Mr. Andy Grove said. So I have to say that I don't think 
there is any worry about you making money in the future. The 
question is how do we solve these problems.
    Mr. Ehrlich, do you care to comment? Then we will turn to 
Senator Schumer.
    Mr. Ehrlich. Listening for the last 10 minutes, I have a 
lot of thoughts, actually, on a lot of the conversations that 
have happened. First of all, Senator, you mentioned there are 
other files that potentially could be shared. It is currently 
happening in the marketplace right now. It may not be happening 
with Napster, but it is happening at other Internet sites. That 
is one.
    Two, the music industry has been very aggressive in trying 
to figure out how to sell and how to allow music to be 
digitally downloaded, and there is a complexity involved in 
allowing music to be downloaded in a secure fashion. A lot of 
the companies up here don't do it in a secure fashion. They 
don't have any thoughts about paying the artists, anything 
about intellectual property rights. And so we work with IT 
companies, CE companies, and others to make sure that our 
music, when it does get distributed, is distributed in a legal 
fashion.
    The Chairman. Thank you.
    Senator Schumer, we will end with you.

 STATEMENT OF HON. CHARLES E. SCHUMER, A U.S. SENATOR FROM THE 
                       STATE OF NEW YORK

    Senator Schumer. Thank you, Mr. Chairman. First, I want to 
assure the young people in the audience that they can download 
all my speeches free of charge. [Laughter.]
    The Chairman. We all do it.
    Senator Schumer. Yes, right.
    Senator Leahy. There goes the Senate server now. 
[Laughter.]
    Senator Schumer. I don't sing them, though, for the benefit 
of the listening public.
    Anyway, I also want to thank you, Senator Hatch and Senator 
Leahy, for your leadership on this issue and having this 
important hearing. To me, at least, this hearing is part of our 
ongoing series that particularly is involved in the Judiciary 
Committee. The Internet has created instantaneous information, 
the free flow of information. That is what has changed our 
society. That is what has changed America. Yet, that free flow 
of information bumps into other societal values.
    Today it is intellectual property, tomorrow it is privacy, 
and finally it is also respecting national boundaries. Mr. Kan 
keeps mentioning, well, someone could go overseas and do this. 
I wouldn't recommend that we throw out all drug prescriptions 
in the FDA because someone can go overseas and not write a 
prescription. We are going to have to grapple with that as 
well, and that is not, in my judgment, the right type of answer 
to just say, well, someone overseas can do it, therefore we 
should just throw up our hands.
    But there are going to be all of these types of balances, 
and I think that is the number one issue that at least the 
Federal Government will be dealing with over the next 5 to 10 
years. There are some who say government should never be 
involved. That is not going to be the case. The same people 
said it when we had our last major revolution. This is the 
information revolution. We had an industrial revolution, and 
there were some at the beginning who said government should 
never be involved. They were proved to be wrong. Child labor 
laws were needed, minimum wage laws were needed.
    I believe we will need some government involvement, but I 
do want to throw a cautionary note here, which is that when you 
are dealing with a changing world, and technology changes these 
things everyday, we ought to be very cautious. We ought to be 
quite sure that what we are doing is right and balanced, and 
the burden of proof ought to be on any type of legislation we 
propose.
    To me, at least, it is probably better to have the private 
sector--at least give them the benefit of the doubt and see if 
they can come up with something, and that is what my questions 
will focus on. I should say at the same time I have been a 
supporter of intellectual property and copyright protection of 
artistic works.
    Mr. Ulrich, my daughter was delighted to know you would be 
here. I said the Byrds are going to be here. She said, ``Who?'' 
She said Metallica is going to be here.
    But if somebody like either Mr. Ulrich or Roger McGuinn 
creates some property, they ought to have some kind of reward 
for it. So I don't think anybody at this table disputes either 
of those, that the free flow of information is important and 
that we need to reward intellectual property.
    But we have to be careful not to deal in false tradeoffs, 
especially when new technologies are blossoming at sonic speed. 
And we could pass some law this year that throws off the 
marketplace and doesn't do the job next year because of new 
technology. I guess we have to start facing up to the fact in 
Congress, Mr. Chairman, that while our first reaction is let's 
pass a law, what really regulates the Internet right now more 
than law is code.
    And as Professor Lessig puts it, the primary regulation of 
the Net is, ``the code of cyberspace itself, the software and 
hardware that together set the terms or rules or the law of how 
behavior will be.'' Well, researchers are working hard and fast 
to develop new systems through software that give copyright 
holders better control of their works.
    I read in the New York Times last week that there were 
three Brown University professors, mathematicians actually, who 
have patented an encryption code, and they say that it will 
make it impractical or impossible to infringe on copyrighted 
data like digital music. Now, if they are right, then we may be 
faced in the future with whether the perfect control offered by 
code goes too far or restricts appropriate uses like parody or 
commentary or personal use.
    I know Senator Leahy touched on this a little bit, but I 
guess my question to the entire panel is just their view. Will 
code like the encryption of digital music files, the use of 
trusted systems, down the road, because there is going to be a 
demand for it--just listen to Mr. Ehrlich and others--will that 
create sufficient copyright protection, not enough, not too 
much, but just right? Why or why not? Do you buy the argument 
that the digital music issue may end up playing out more in 
terms of code than in terms of law?
    Mr. Griffin. I think it will be dealt with by business 
models, and I say this because I think none of this is new. I 
think that in the 1920's we learned that we could give up 
control over quantity and destiny of content, but still make 
more money. In other words, radio came along and said we will 
take your music, we will take your sporting events, we will 
broadcast them to, we do not know how many people, and we do 
not know what they will do with it afterwards.
    Likewise, television did the same thing, and when DirecTV 
came before Congress, having been found guilty of violating 
copyright laws, never having sought licenses in advance, our 
response was to grant them a compulsory blanket license. So I 
think each time we find that we cannot control quantity or 
destiny of what we call intellectual property, we find it to 
our advantage and we find a way to monetize it, and we do it by 
creating pooled compensation funds and finding a fair way to 
deal with it.
    And that is and should be the province of private industry, 
and if there is any necessary public oversight, such as through 
the courts as occurs with ASCAP and BMI, that will happen. And 
we are advantaged now by the notion that we know how large the 
audience is. We can at least count through digital means.
    And so I think it clear that this market will evolve not as 
a new market, but as an extension of what happened in the 
1920's. And the sad truth is that so many of those people who 
created these great industries are not around to guide us now. 
I think it is just the passage of time; 80, 90, 100 years 
leaves us now grasping, but they could give us the best 
guidance. How did they deal with it when it first became 
possible through public address or radio or television to take 
quantity and destiny away from artists? And I think we will 
deal with it much the same way.
    Senator Schumer. Go ahead, Mr. Kan.
    Mr. Kan. When I was in high school, I was reasonably close 
to the pirate community.
    Senator Schumer. Was that a couple of years ago? 
[Laughter.]
    Mr. Kan. Yes. Yesterday, before I graduated, I was a 
software pirate on BBS networks, like many of my friends, in 
fact like millions of youth around this country. And in those 
days, modems were slower and the pirate community was really a 
closed community. Things were not very fluid at all. There was 
not a lot of liquidity.
    But now with the Internet, and combined with sort of pirate 
groups who are willing to pay for--so I am really going to 
respond entirely to the encryption idea.
    Senator Schumer. Yes, OK, because Mr. Griffin had a 
different methodology, but let's hear about all of them.
    Mr. Kan. So I would like to respond to the encryption idea, 
and that really is that, OK, so you can encrypt this file and 
lock it down and make it so that only the people who pay for it 
can view it or listen to it, or whatever. Well, pirate groups 
always were releasing what they called zero day wares. They 
would go to the store, buy a copy, release it for free, and 
because of the infinite fluidity of the Internet, you don't 
have to be a pirate anymore to have access to that stuff. You 
can just be anyone on AOL using Napster or Gnutella or 
whatever.
    And pirate groups are going to be willing and happy to 
contribute their small bit to buy a decryption key for a 
particular piece of encrypted media, and they will be happy to 
share it among their friends. And because of the fluidity of 
the Internet, it will be worldwide in seconds.
    Senator Schumer. All you need is one or two of these 
pirates, I guess.
    Mr. Kan. Exactly, one person to release it on Napster. I 
know the title of the next Metallica song or whatever it is and 
I am going to be on Napster searching for it--well, not me, 
necessarily, but millions like me.
    Senator Schumer. Does everyone agree with what Mr. Kan 
said, that because a pirate can decide, for whatever reason, to 
put the music out there that encryption is sort of useless?
    Mr. Kan. Locks, I think, aren't the answer.
    Mr. Hoffman. Let me step into this for just a second.
    Senator Schumer. Go ahead.
    Mr. Hoffman. We have been through this recently, and it is 
interesting that there is no one else from the software 
industry, except for Hank, basically sitting up here.
    The software business started out and it was a really 
expensive product and it was encrypted, and everybody hated it. 
It was called Lotus 1, 2, 3. And Borland released Quattro Pro 
and dropped the price by about a factor of 10, made it 
unencrypted, and it sold like mad.
    Well, what was interesting is that went on for a while, and 
then basically pricing pressures due to piracy started to creep 
back into the software business. And it got worse and worse, 
and the Software Publishers Association, who has changed names 
twice since then, I believe, was unwilling to take the radical 
step of enforcing against end users.
    So Microsoft and a few other companies started the Business 
Software Alliance. And just last week I was listening to the 
radio in my car and it said, call 1-800-PIRATE and turn your 
company or individuals in for software piracy. It is amazing 
how hard it is to find pirated software these days. If you are 
in the specific elite fringe and you know how to use IRC or 
other very difficult protocols, you can do it, but it is a very 
tight-knit community.
    The issue is scale. Your average user is not really willing 
to risk the Net Act consequences, basically, of making software 
available because software companies like Adobe and Microsoft 
and others significantly disincentivize them. But I would say 
the relationship between software publishers and users is 
considerably different than artists and consumers.
    Senator Schumer. Right.
    Mr. Hoffman. In fact, that is why I continually speak about 
the fact that I think there are concerns not with copyright 
law, but with how we do enforcement because right now the only 
option to really get redress is either to go after a 
contributory copyright infringer, which opens up all sorts of 
very difficult questions--I mean, sitting here with me, I would 
like to have Hank as a business partner because I think it is 
an actually very interesting network and there are interesting 
ways I could use it to promote the 600 independent labels that 
we have.
    What I am concerned with is actually his end users who are 
cheating, but I don't want to be the person seen to be the 
bully, nor do I want my artists to be seen to be the bully. 
That frankly is what the police are there for, and whatever 
that function ends up being to enforce the law we already have 
in the land, I think that is where we have to go.
    Senator Schumer. Yes, Mr. Ehrlich.
    Mr. Ehrlich. We fundamentally believe that honest people 
want to continue to be honest, so the issue on whether or not 
there will be people out there that have hacks to security--we 
envision that is going to happen, but we also envision, with 
time, technology will get better and better, and hopefully 
there will be a situation where we are predominately 
comfortable with the fact that security exists, and exists the 
way that we need it to exist for our artists and our labels.
    Senator Schumer. So you are optimistic about encryption 
technology working, despite what Mr. Kan says?
    Mr. Ehrlich. Well, I think, again, the various iterations 
of encryption technology--and a lot of these conversations are 
going forward. You know, we have a lot of music right now that 
it is going to be very difficult to pull back, so a lot of it 
is going forward. We do believe that there are going to be 
better and better technologies that will allow it. Will I say 
there will be a 100 percent certainty of security? I can't say 
that. I don't think anyone can say that.
    Senator Schumer. You don't have that now.
    Mr. Ehrlich. Right, we don't have that now. Do I believe 
there will be better iterations in the future? Yes.
    The Chairman. Let me ask just one final question to all of 
you, if I can.
    Senator Schumer. Mr. Chairman, I think Mr. Barry wanted to 
say something.
    Mr. Barry. Just briefly, I would say I agree with Mr. 
Ehrlich. I think that the point you made, Senator, about there 
not being any encryption or other even identification with 
respect to the files that are on CD's today is an issue. And 
this point about sampling and previewing by sending things by 
e-mail to your friends and by FTP file transfer, that was going 
on long before Napster, and it was going on because there are 
no ID's in any of these files.
    I am sorry, Senator.
    The Chairman. No. That is fine.
    Mr. Robertson. If I could add one thing, and that is the 
focus on encryption entirely misses the point. The focus is on 
building revenues. How do you build an industry that grows the 
revenue base and then fairly compensates those that are 
producing the content?
    In fact, securing music--we know this from even the 
Internet's short lifespan--securing anything reduces the 
revenue, not grows it. That happens with software. It is 
interesting to look at newspapers. When the Net first came 
along, they said, well, we have got to lock up our news stories 
because people will get them online and no one will subscribe 
to our newspapers.
    Well, it is very interesting to go to a newspaper site 
today and you will see a button there that says e-mail this 
article to everyone you know. They have gone the exact opposite 
way because they have realized that----
    Senator Schumer. In all fairness, some have, some haven't. 
Some newspapers still go for the limited ``we'll charge'' 
model, and some let it all out. I don't know which one will 
prevail.
    The Chairman. Well, let's ask just one last question on 
behalf of Senator Leahy and myself, and we will start with you, 
Mr. Griffin, and just go across. I would like short answers 
because we are way overdue here. Let me just ask this one final 
question that both Senator Leahy and I are concerned about, and 
that is at what point should Congress consider whether 
legislative action is warranted to ensure that Internet music 
is made available to consumers and that artists are 
compensated? And should we consider a compulsory license for 
Internet music or a clarification of the fair use doctrine in 
this area?
    So let's start with you, Mr. Griffin. Have you got those 
two questions?
    Mr. Griffin. Sure.
    The Chairman. And then we will go right across. If you 
could give short answers, we would appreciate it.
    Mr. Griffin. Sure. I think that the clear answer here is 
that you need to engage in oversight like you are today, 
precisely in the fashion that you have, to determine if 
licensing is occurring. And if there is not an environment that 
provides for fair, reasonable licensing, then perhaps you will 
need to step in to ensure that this occurs, much for the same 
reasons that you did in the DirecTV case.
    The Chairman. So it comes down to reasonable and fair 
licensing?
    Mr. Griffin. Media or television, much the same way. We can 
only have these industries created if we have reasonable, fair 
licensing occur, and this kind of oversight leads to that. And 
I would say, too, you should consider a commission, as the 
National Academy of Sciences suggested, to continue to examine 
and extend your own oversight of these areas so that it can 
occur also in other rooms.
    The Chairman. These are complex areas.
    Mr. Griffin. Yes. Thank you.
    The Chairman. Thank you.
    Mr. Kan.
    Mr. Kan. I agree largely with Mr. Griffin. I believe that 
legislative oversight in this area is particularly good because 
it affects not only the music industry, but already today I can 
download a movie to my hard disc.
    The Chairman. Yes. We didn't even get into all the other 
applications.
    Mr. Kan. Yes. I can download a reasonably good-quality 
movie in about an hour. And broadband is only increasing around 
the world, particularly in this country. A reasonable and fair 
license is definitely needed. Clarification of fair use, I 
think, is definitely needed. It seems to be really the subject 
of so much discussion and things. Probably, you know, some 
clarification would really eliminate that.
    And the last thing I wanted to say is I think that really 
the best thing that could come out of this is a general 
framework that allows everyone to profit and allows everyone to 
access their music conveniently, and tomorrow their movies and 
who knows what next.
    Thank you.
    The Chairman. Thank you.
    Mr. Hoffman.
    Mr. Hoffman. To try to answer your questions quickly, as to 
a statutory license in sound recording, I don't think it is 
time yet. But I do think that the Senators shouldn't forget the 
power of the pen to influence those people who have to work 
together. I mean, you can force all of us to have real 
important dialogues by simply saying that that is something you 
expect us to do.
    As far as legislative remedies and such, I don't think the 
legislation is that bad right now. I think the copyright law as 
it stands is either well-defined or will shortly be defined by 
the various Federal courts out there with the more interesting 
questions that are in front of them. I think that DVD-CCA and 
the DVD anti-circumvention case are going to be very 
enlightening as they go through the appeals process.
    So I think right now legislation is not what we need to be 
looking at, but I do think we need to start addressing how we 
are going to enforce the Net Act because I think that is really 
what we are talking about here, is the death by a thousand 
cuts.
    The Chairman. Thank you.
    Mr. Ehrlich.
    Mr. Ehrlich. I agree that legislation is not needed right 
now. I believe in the private market, it will set itself right. 
We are in constant conversations with companies on licensing 
and selling our music, and we believe it will be worked out in 
the private marketplace.
    The Chairman. Hilary.
    Ms. Rosen. I think that is right, Mr. Chairman. I might 
feel differently in a year, but I think that the copyright law 
is adequate now, and I don't think that anybody should be 
fooled that the problem with some of these services like 
Napster is that we won't give them licenses. They just haven't 
asked. So I think the marketplace is working and I am glad that 
you have held this hearing today.
    Senator Leahy. If you feel differently in a year, I assume 
we can feel comfortable in knowing that you will let us know.
    The Chairman. I have the feeling you will let us know.
    Ms. Rosen. I have your phone number.
    The Chairman. Mr. Robertson.
    Mr. Robertson. I think there is no doubt there needs to be 
clarification of fair use. When the chairman asks Hilary, can 
you copy a CD to a tape, and she cannot or will not answer, I 
think that in itself indicates that there is need for 
clarification about fair use for your own personal use, 
especially property which you own.
    As for compulsory licenses, I detest them because you are 
guaranteed to be one of two things, too expensive or too cheap, 
and that is the dilemma that we face. However, in this 
environment that we have where we have companies at all ends of 
the spectrum, it is important for them to get licenses.
    We have license from two of the major record labels, but 
the publishing side is an absolute disaster, and it is not 
clear that we will be able to get the publishing licenses that 
are required for us to turn on this service. I think in that 
light, Congress has to look closely at some sort of input in 
the future.
    The Chairman. Thank you.
    Mr. Barry.
    Mr. Barry. I think you should continue your oversight. I 
applaud you for the hearing today. I think that we should let 
the market work and let history be our guide with respect to 
not squashing these technologies too soon.
    The Chairman. Thank you.
    Mr. McGuinn.
    Mr. McGuinn. I don't feel that legislation is necessary at 
this point either. I think the market will work itself out, and 
I think people should realize that the publicity aspect of 
music being available on the Internet is really important, much 
as it is with radio. Record companies give CD's to radio 
stations and encourage them to play them, and people can tape 
off the radio. So, you know, it is not new that people are 
getting free music over the airwaves or however. I think there 
is a lot of worry about nothing in some ways here.
    The Chairman. Thank you.
    Mr. Ulrich.
    Mr. Ulrich. I feel that the legislation should definitely 
be part of this soon. I think that we all are dreaming if we 
think that we can work this out between us. I think the issue 
is too deep on many, many levels, and I think that ultimately I 
think it comes down to a sort of fundamental look at the whole 
situation.
    We have sat here and you have heard many different points 
of view on this, and obviously when companies like Napster sit 
down and talk about sharing and trading and swapping of music, 
and talk about what a good thing it does, what it does for the 
record industry and all this type of stuff, when artists like 
myself have a completely opposite view--we have tried to have a 
little bit of dialogue with some of these people and I don't 
feel that there is going to be a situation where we can work 
this out without your involvement. So we look forward to that.
    The Chairman. Well, thank you. What I think we are hearing 
is that fair and reasonable licensing needs to take place. Now, 
that is not happening currently, apparently, except there is an 
offer to do it. At least that is what I am hearing.
    So we will be watching this very closely, and we would 
appreciate continual education from you. Feel free to write to 
us and to send us information because we want to do what is 
right here. We don't want to interfere with these great 
industries, but we sure as heck want to make sure things work 
right and that the law works right. We want to thank each and 
every one of you for being here today. This has been a really 
interesting hearing, and I think one that will have a dramatic 
impact over the next number of years. So you haven't wasted 
your time.
    I would like to come down and shake hands with each of you. 
So with that, we will recess until further notice.
    [Whereupon, at 1 p.m., the committee was adjourned.]

                          Question and Answers

      Responses of Fred Ehrlich to Questions of Senator Herb Kohl

    Question 1: Please respond to the following hypotheticals. For each 
hypothetical, answer whether or not you believe the practice would 
violate copyright laws. Explain why or why not, and, as a policy 
matter, whether you think it should violate copyright laws.
    (A) An individual goes on a music website, clicks on a song track 
and listens to the song on his computer--without downloading it to his 
hard drive.
    Assuming that the music site is legitimate (such as webcaster 
licensed to render interactive public performances), neither the music 
site nor the individual who requested the transmission from the site 
would be liable for infringement.
    (B) An individual goes onto the music website, clicks on a song 
track and downloads it to his hard drive for later use.
    Assuming that the music site is legitimate (such as a retail site 
authorized to make promotional downloads), neither the music site nor 
the individual who requested the transmission from the site would be 
liable for infringement. Of course, the situation would be different in 
the case of a pirate site of the kind that courts have enjoined on a 
number of occasions.
    (C) An individual takes a downloaded track and e-mails it to a 
friend.
    The individual's unauthorized reproduction and distribution of a 
new copy would seem to be an infringement unless authorized by the 
copyright owner, although it is hard to imagine a copyright owner 
interested in taking action against such occasional limited 
distribution among friends. Indeed, record companies are taking 
advantage of new technologies to enable and legitimize just this kind 
of distribution.
    (D) An individual or company creates a searchable file-transfer 
program to make it easier for all of his friends to find and transfer 
each other's music files among themselves.
    Use of such a program to reproduce or distribute copyrighted works 
without the authorization of the copyright owner would seem to be an 
infringement. However, as above, it is hard to imagine a copyright 
owner interested in taking action against such use if it really was 
limited to distribution among a few friends (as opposed to a circle of 
millions of anonymous online ``friends'' worldwide). The maker of the 
program would also be liable for infringement if its conduct meets the 
tests of contributory infringement or vicarious liability. If, for 
example, the program was designed primarily to reproduce or distribute 
copyrighted music without permission, then it would give rise to 
liability for infringement.
    (E) An individual or company creates a searchable file-transfer 
program and allows the general public to use it to download and 
transfer music files to others, intending to derive profits from the 
program.
    As above, the maker of the program would be liable for infringement 
if its conduct meets the tests of contributory infringement or 
vicarious liability. If the maker of the program not only distributed 
the program but also operated it knowingly to provide an online ``flea 
market'' for the distribution of copyrighted recordings like Napster, 
those tests clearly would be satisfied.
    (F) An individual or company creates a searchable file-transfer 
program, intending to derive profits from the program, and allows the 
general public to use it to find and listen to one another's music 
files--without the users' actually downloading the music files onto 
their individual hard drives.
    Use of this program to render unauthorized interactive public 
performances would violate the Digital Performance Right in Sound 
Recordings Act. The maker of the program would also be liable for 
infringement if its conduct meets the tests of contributory 
infringement or vicarious liability.

    Responses of Fred Ehrlich to Questions of Senator Strom Thurmond

    Question 1: Mr. Ehrlich, when the recording industry started 
backing the compact disc as a new medium to replace vinyl, record store 
owners were very slow to adopt the new technology. For years, CDs were 
shipped in throw-away cardboard ``long boxes'' because the record 
stores would not modify their vinyl racks to accommodate compact discs. 
Do you expect any resistance by traditional music retailers to the 
recording industry's attempts to exploit the internet?
    Answer: Traditional music retailers are in far better position than 
me to discuss their reaction to the new business models made possible 
by the Internet. However, I expect that many traditional retailers will 
embrace new forms of music distribution. Already many retailers have 
formed partnerships with record companies in offering digital 
downloads, kiosk services in their stores, and other innovative 
offerings. I'm confident that together we can draw on our years of 
serving music fans to create new services that create a better music 
experience for those fans than ever before possible.
    Question 2: Mr. Ehrlich, as the recording industry explores methods 
of using the internet to develop artists and create demand for music, 
do you see any implication for traditional broadcasters?
    Answer: The recording industry and traditional AM/FM broadcasters 
have historically enjoyed a mutually beneficial relationship. I see no 
reason why the creation of additional opportunities for consumers to 
use the Internet to access the music they love should affect the way 
people enjoy music from local, over-the-air broadcasts. Moreover, 
broadcasters are beginning to offer their programming on the Internet, 
too, so even ``traditional broadcasters are becoming Internet music 
services.
    Question 3: Mr. Ehrlich, if the recording industry does not keep 
pace with technology, it risks forfeiting any ability to profit and 
exploit new technology. For example, it appears that MP3 format has 
obtained a sizeable head start on the music industry's SMDI format. How 
do you respond to the argument that the recording industry is not 
moving as fast as it should in adopting to new technologies?
    Answer: As my testimony and the continuous stream of press reports 
show, record companies and others in the music industry are working 
hard to harness the power of new technologies to offer consumers new 
opportunities to access music. They have done this both by launching 
their own Internet music services and by licensing others to use their 
music on the Internet. I have attached a list of some specific 
initiatives in this regard.
    These efforts have taken time due to the enormous complexity 
involved in making sure that these new services respect the rights of 
recording artists, songwriters and record companies. However, it is 
unfair to compare these efforts to the relative speed of those who have 
launched infringing services. They can move quickly because they make 
music available without worrying about obtaining licenses, honoring 
artist contracts, paying royalties to songwriters or creating a secure 
system. When viewed in the context of other types of content being made 
available by companies ``playing by the rules,'' legitimate music 
services are being developed as fast or faster than many other forms of 
Internet distribution.
    Finally, a clarification regarding SDMI. SDMI is not intended to 
create a format to compete with MP3. In fact, it is not intended to 
create any specific format. Rather, it is intended to specify a minimum 
level of security that will provide consumers a better music experience 
using whatever specific technologies work best (including MP3 or other 
compression technologies) while also respecting copyrights.
    Question 4: Mr. Ehrlich, compact discs are arguably much cheaper to 
produce than are records and tapes. Consumers were willing to pay a 
premium for compact discs in order to obtain the better sound quality 
and features associated with that medium. But now, it appears that 
consumers expect to pay far less for digital music downloaded over the 
internet. Will the recording industry be willing to pass on the 
distribution and manufacturing savings of internet music to consumers 
in the form of lower prices?
    Answer: The recording industry is intent on doing much more than 
simply replicating the consumer's experience with CDs through an 
Internet service. There are--and increasingly will be--a wide variety 
of music services with different features, including services offering 
webcasting, on-demand streaming and downloads. Some of these services 
will be provided without charge, others will have promotional features 
like ``try before you buy,'' and others yet will have usage-based 
charges or be provided on a subscription basis. Like everyone else in 
business, the companies that offer those services will determine 
appropriate pricing based on many factors, including their cost 
structure and competitive considerations.

        Responses of Gene Kan to Questions From Senator Thurmond

    Question: Mr. Kan, you have proposed a system where individuals 
and/or businesses would charge a fee for offering music to the public, 
via Gnutella or something that functions like Gnutella, and then share 
the proceeds of the fee with recording artists. Under your proposal, 
would there not still be a need to shut down pirates who offer music 
downloads for free? How would such a system deal with artists, such as 
Metallcia, who wish to opt out of this method of distribution?
    Answer: Artists should be compensated for their works in some way. 
The exact way is under question right now, and is hotly debated on the 
various industry discussion groups, some of which I participate in.
    The idea that there would be localized piracy in spite of a 
widespread payment system for downloaded music is definitely a concern. 
Evaluation of the importance of the piracy comes down to its scale.
    This is the primary reason I proposed a business model in which 
incentives are employed to promote pay-for-download. Most other 
proposals for pay-for-download are mainly about enforcement, not 
encouragement. Enforcement on the fast and wild Internet is even more 
difficult than in the physical world, where there is rampant piracy 
despite the best efforts of industry and law enforcement.
    In an incentive model, the people who are providing the 
downloadable content are financially motivated (not financially 
threatened) to profit from downloaders. If we sort of extrapolate the 
desire to profit, we can see that file-sharers would only allow paying 
customers to download from them.
    The reason is simple: Internet connections have finite capacity. If 
I can squeeze ten downloaders onto my Internet connection, I would want 
ten paying customers, not ten freeloaders.
    In this scheme the content provider acts as a merchant, and he will 
see to it that customers pay, as all merchants do.
    Any piracy will be minimal, since even pirates want to make money. 
Sure there will be as mattering of piracy, but those pirates are going 
to turn right around and resell the music they pirated. And when there 
is only one payment network. Those pirates won't actually be pirates: 
they'll be legitimate merchants.
    Let me try to answer the second part of your question about artists 
who want to opt out of this system.
    It will be very difficult to opt out. Music is fundamentally easy 
to duplicate and distribute, especially on the Internet. No physical 
exchange needs to take place. The zeroes and ones just float easily 
around the ether.
    In such an environment, it would be very difficult for a group to 
police the distribution of its work. That does not mean it's difficult 
to profit (in fact it's easier), as I said in my answer to the first 
part of your question.
    Policing the distribution of content which is easy to replicate on 
what is a progressively larger and faster Internet will be nearly 
impossible. As Madonna and Dr. Dre saw, once one copy gets out there, 
it is rabidly consumed.
    If the infrastructure to ensure profitability exists then the only 
artists who would want to opt out of this are those who are 
philosophically opposed, for whatever reason. Unfortunately we may not 
be able to help those artists.
    Just as Luddites find it difficult to entirely avoid modern 
conveniences, it will be difficult for groups to completely divorce 
themselves from the Internet.

          Responses of Gene Kan to Questions From Senator Kohl

    Senator Kohl: I'll keep these answers short since I'm no legal 
expert. My answers are purely based upon my opinion of what ``should'' 
be reasonable to do.
          (a) An individual purchases a CD and makes a tape recording 
        of it to listen to in his car.
    This sounds reasonable. My understanding is that this is even okay 
under the Fair Use constraints of the various recording acts. It was 
found to be okay by the Diamond Rio suit a while back. But I see that 
suit has been refiled, so this point is in litigation again, I think.
    To borrow from what I know of software law: it's okay to make a 
backup copy.
          (b) An individual purchases a CD and makes a tape recording 
        of it for his wife to listen to in her car.
    I'm not so sure this is acceptable. If the two people can listen to 
the recording simultaneously, then it's hard to justify that this is an 
acceptable practice in the current copyright regime.
    But if this is getting into the husband's true intentions for the 
duplicated tape that seems pretty messy.
    So, to summarize: seems reasonable, but dubitably acceptable.
          (c) His son goes onto a music website, clicks on a song track 
        and listens to the track on his computer without downloading it 
        to his hard drive.
    Apparently this is widely acceptable behavior as long as the guy on 
the giving end doesn't try to capitalize on the child's listening of 
the recording.
    This is sort of like hobby radio stations. They may or may not be 
absolutely legal, but they are largely ignored by copyright holders.
          (d) His son goes onto a music website, clicks on a song track 
        and downloads the song onto his hard drive to listen to later.
    If he owns the physical media for this, I don't see how anyone 
could argue that this practice is unreasonable. This goes back to 
question A.
    If it's okay to make a backup copy, or a copy in a different 
format, then this should be okay too.
    If the child doesn't own the physical media then this is really 
what is at question in the Napster case. I believe that if the child is 
previewing the music, he should be allowed to do so.
    Many record stores encourage the previewing in the store. Why not 
extend that to the convenience of the Internet?
          (e) His son takes the downloaded track and burns it onto a CD 
        to listen to in his car.
    If the child already owns the physical media for the song, then 
this should be acceptable. He'd be creating a copy with degraded 
quality.
    But this is actually quite interesting, because many DVD players 
and recent car stereos are able to play MP3 CDs. This is where the CD 
stores MP3 files. On one CD it is possible to store 150 full-length 
songs. That's pretty compelling.
    So yes, this should be entirely acceptable as long as somewhere 
along the line the child paid for the music.
          (f) His son takes the downloaded track and e-mails it to his 
        friend.
    If you believe that emailing tracks is sort of a word-of-mouth 
marketing device, then this should be more than just acceptable: this 
should be landed by the by the copyright holder.
    People have been giving each other mixed tapes forever. Email is 
just an extension of that.

  Responses of Robert H. Kohn, Chairman, EMusic.com to Questions From 
                              Senator Kohl

                                          Emusic.com. Inc.,
                                                  Redwood City, CA,
                                                September 22, 2000.
Hon. Orrin G. Hatch,
Chairman, Senate Judicial Committee, Washington, DC.
    Dear Senator Hatch: This is in reply to Senator Kohl's request of 
my colleague, Gene Hoffman, for our response to several follow-up 
questions about the legality of certain activities relating to the 
digital transmission of musical recordings. Gene and I are co-founders 
of Emusic.Com, Inc., and because I have previously written extensively 
on the subject (See, Kohn On Music Licensing, Aspen Law & Business 
1992-2000), Gene asked that I submit the following response on behalf 
of the company.
    Specifically, you've asked whether or not we believe the practices 
set forth in scenarios A through F below would violate the copyright 
laws, and whether as a policy matter, that should violate the copyright 
laws. For the purpose of our answer, I start with the assumption that 
(a) all of the tracks in question contain both a sound recording and an 
underlying musical work, (b) a valid copyright subsists in both the 
sound recording and the musical work, and (c) no permission to effect 
the transmission (i.e., stream or download) in question has been 
granted by the owners of either copyrighted work.

    A. An individual goes onto a musical website, clicks on a song 
track and listens to the song on his computer--without downloading it 
to his hard drive.
    Answer: Yes, the foregoing activity would violate the copyright 
law, and, as a matter of policy, it should violate the copyright law.
    Discussion: A more precise answer demands that we made a 
distinction between a sound recording and a musical work, and the 
various exclusive rights for each under the Copyright Act (17 U.S.C. 
101, et. seq.).

Sound recording
    The person permitting the ``stream'' would clearly be violating the 
exclusive right to make digital audio transmission (under 17 U.S.C. 
Section 106(6) of owner of the copyright in the sound recording, unless 
there were an exemption under Section 114. Since the transmission is 
clearly interactive, no such exemption should apply.
Musical work
    A. The person permitting the ``stream'' would clearly be violating 
the exclusive right of public performance under 17 U.S.C. Section 
106(4)) of owner of the copyright in the musical work.
    Such person could avoid liability for infringement by obtaining 
permission from the copyright owner. Such person may be obtained on a 
``blanket'' basis from the applicable performance rights society (e.g., 
ASCAP, BMI, or SESAC) representing copyright owner with respect to the 
work, or by obtaining a license directly from the owner of the 
copyright, usually a music publisher.

    B. Would the stream also constitute a violation of the musical work 
copyright owner's exclusive right of reproduction under Section 106(l)?
    Herein lies a controversy that should be resolved by Congress, a 
Copyright Arbitration Royalty Panel, or the Courts.
    The music publishers have taken the position that songs digitally 
streamed from interactive services constitute digital phonorecord 
deliveries, even if no digital copy is, or can be, made by or for the 
intended recipient of the transmission. However, the interactive 
transmissions of purely streamed copyrighted musical work would be 
subject to the compulsory licensed set forth in 17 U.S.C. 115, 
requiring payment of the statutory compulsory license fee of 7.55 cents 
per stream.
    Opponents, which include an unusual alliance among the Internet 
community (i.e., those who don't want to pay anything, if they can 
avoid it) and the traditional record companies (i.e., those who don't 
want to pay music publishers, if they can avoid it), suggest that this 
would amount to ``double-dipping'' on the part of the music publishers. 
If a performance royalty is required to be paid to ASCAP and BMI for 
the stream, why, they say, should a reproduction royalty  also need to 
be paid?
    The music publishers argument may be stated as follows:
     Technology developed for use to facilitate the listening 
of these streams have made it trivial for the listener to convert the 
stream into a download;
     The stream in question is not like a stream of a 
traditional raid broadcast, consisting of a series of tracks in some 
random or programmed order which listeners are not likely to copy, but 
an interactive transmission where the listener may know in advance 
exactly what will be streamed to his or her computer and can prepare 
for it (i.e., prepare to download or save it to his or her hard drive;
     Accordingly, interactive streams of musical works will 
tend to displace sales of CDs and digital phonorecord deliveries, 
transactions which typically earn them a compulsory mechanical 
reproduction fee.
     Moreover, the saving of the transmission to your disk as a 
downloaded file eliminate the need for further public performances of 
the work, because when a listener listens to the rendering of a file 
that has been downloaded to his or her computer, as opposed to 
listening to a stream from a website, the rendering is a private 
performance;
     Since music publisher's have no exclusive right of private 
performance under the copyright law, only public performances, no 
further public performances royalties will be collected on performances 
rendered after the file has been downloaded (i.e., you only have to 
stream the file once and save the stream to get an infinite amount of 
performances from it);
     To the extent public performance royalties are reduced, 
they should be replaced by a mechanical reproduction fee, similar to 
that which music publishers typically collect upon the sale of a CD or 
the sale of a digital download;
    This argument, in my view, is compelling, even though it may mean 
the collection of both a public performance fee and a reproduction fee 
for the same transmission (but I'll deal with that below). Moreover, 
legally, under the current copyright law, the music publishers may be 
right. They take solace from a very specific provision that was in the 
Digital Rights in Sound Recording Act of 1995 which is now part of the 
compulsory license provision at Section 115(c)(3)(L): ``The provisions 
of this section concerning digital phonorecord deliveries shall not 
apply to any exempt transmissions or retransmissions under section 
114(d)(1).''
    In the view of the music publishers, the above language implies 
that the provisions concerning digital phonorecord deliveries, while 
not applying to any exempt transmissions under Section 114(d)(1) does 
in fact apply to those transmissions that are not exempt under Section 
114, which would include all transmissions made as part of interactive 
services. Thus, according to the argument, the transmitter must pay a 
mechanical reproduction fee, subject to Section 115's compulsory 
license, or about 7.55 cents per interactive digital audio 
transmission, whether or not a copy results in the recipient.
    Nevertheless, music publishers have not appeared to have taken an 
unreasonable position on the issue. First, they recognize that an 
interactive transmission of a song that is of a short duration and 
which is not intended to result in a copy being made for the intended 
recipient, is not likely to have an effect on the sale of a CD or a 
full digital phonorecord delivery of the song. Accordingly, the music 
publishers have informally let the record and Internet industry know 
that they will allow such interactive transmissions without requiring 
payment of the statutory fee if (a) no more than 30-seconds of the song 
is transmitted and (2) the transmission is effected by or with the 
permission of the owner of the sound recording embodying the song. 
(Note, this does not allow anyone to make such 30-second transmissions, 
only the record company who owns the recording, or its licensees).
    Second, Section 115 refers to something called an ``incidental'' 
reproduction or distribution.
    ``* * * Such terms and rates shall distinguish between (1) digital 
phonorecord deliveries where the reproduction or distribution of a 
phonorecord is incidental to the transmission which constitutes the 
digital phonorecord delivery, and (ii) digital phonorecord deliveries 
in general.'' 17 U.S.C. 115 (3)(C).
    The music publishers are willing to admit, at least privately, that 
they would be willing to consider interactive streams intended as mere 
performances, where copying to hard drivers is merely incidental to the 
transmission, are these very same ``incidental'' reproductions. The 
quoted portion of Section 115 above appears to contemplate that 
incidental reproductions may have a lower compulsory, statutory rate 
than full digital phonorecord deliveries.
    It is our view that this is where this controversy can and should 
be resolved. Allow the collection of both a performance fee and a 
mechanical reproduction on these interactive transmissions, but 
recognize a lower mechanical reproduction rate for incidental 
reproductions. Of course, no mechanical reproduction fee should be 
charged for non-interactive transmissions. However, where the 
transmission constitutes an incidental digital phonorecord delivery, it 
would appear that once the statutory royalty is paid, no further 
royalties would be due, including performance royalties (to ASCAP or 
BMI).

    C. Would the stream also constitute a violation of the musical work 
copyright owner's exclusive right of distribution under Section 106(3)?
    No, because the distribution right only applies to the distribution 
of copies or phonorecords, each of which are defined as material 
objects. Thus, the ``stream'' in question, which odes not involve the 
transfer of possession of material objects, does not constitute a 
distribution. The word ``delivery'' is better terminology than 
distribution in connection with digital transmissions that result in 
reproductions (i.e., downloads).

    B. An individual goes onto a music website, clicks on a song track 
and downloads it to his hard drive to listen to later.
    Answer: Yes, the practice would violate the copyright law, and, as 
a matter of policy, it should violate the copyright law.
    Discussion: Again, we make a distinction between sound recordings 
and musical works, and the various exclusive rights under copyright.
Sound recording
    There should be no controversy about the answer to this question: 
persons desiring to make digital phonorecord deliveries of sound 
recordings must obtain a license from the person who owns the 
recording, which is typically a record company. Further, unlike for the 
use of the underlying song, there is no compulsory license for these 
kinds of digital audio transmissions. In other words, you must obtain 
permission from the record company and the record company can charge 
whatever it likes or even refuse to grant you permission to make the 
transmission.
    The reason for this is straightforward: digital phonorecord 
deliveries directly replace sales of phonorecords. Without such sales, 
the purpose of the copyright law will be defeated: Record companies 
would be unable to finance, promote and distribute new recordings, and 
artists would be unable to earn royalties to support professional 
recording careers. As a result, there would be an economically 
insufficient supply of quality musical recordings for the buying 
public. It is the very purpose of the copyright law to ensure that 
artists and their record companies receive economic remuneration for 
their undertakings, so that an efficient supply of quality musical 
works and sound recordings will be produced and distributed to the 
listening public.

Musical Work
    Similarly, and for the same reasons, persons desiring to make 
digital phonorecord deliveries of a musical work must obtain a license 
from the person who owns the song, which is typically a music 
publisher.

    A. Reproduction Right. Recall that a copyright owner of a musical 
work has an exclusive right to reproduce the song in copies and 
phonorecords. This right is subject to the compulsory license provision 
set forth in Section 115 of the Copyright Act. Briefly, as long as 
records of a song were previously distributed in the United States, the 
compulsory license provision allows anyone else to compel the copyright 
owner of a song (e.g., a music publisher) to license the song at a 
license fee that is established by law--this fee is called, the 
``statutory rate.'' The license which authorizes these transmissions is 
called a ``mechanical license,'' and the organization in the United 
States that issues most of them on behalf of music publishers is the 
Harry Fox Agency.

    B. Performance Right. But there is a little controversy brewing 
here. The performance rights societies (e.g., ASCAP, BMI, SESAC) appear 
to be taking the position that a performance license is required to 
effect a digital phonorecord delivery, even though a statutory 
mechanical reproduction license has already been obtained for the same 
delivery. In their view, all transmissions of songs constitute 
performances of songs, whether or not they result in a specifically 
identifiable phonorecord made by or for the transmission recipient, and 
therefore, they say, you must also pay a public performance fee for 
these transmissions.
    The performance rights societies have not yet disclosed how much 
they intend to charge for these transmissions. They are likely to seek 
something less than what they charge for transmissions that do not 
constitute digital phonorecord deliveries, such as ``streaming'' audio 
transmissions.
    One may legitimately ask: If I am paying 7.55 cents for the digital 
phonorecord delivery, why must I also pay for its performance, 
particularly if the phonorecord is not truly performed or in any way 
rendered during the transmission? Isn't this a form of ``double-
dipping'' by the music publishing industry?
    The performance rights societies could point to the definition of 
``digital phonorecord delivery'' to support its position. The complete 
definition of that term, which was added to the Copyright Act by the 
DPRA, is as follows:
    A ``digital phonorecord delivery'' is each individual delivery of a 
phonorecord by digital transmission of a sound recording which results 
in a specifically identifiable reproduction by or for any transmission 
recipient of a phonorecord of that sound recording, regardless of 
whether the digital transmission is also a public performance of the 
sound recording or any nondramatic musical work embodied therein. 
(emphasis added).
    One could certainly infer from the italicized language that a 
digital phonorecord delivery may involve the public performance of the 
musical work embodied in the sound recording. But only that it may do 
so is the best you can say about it. If Congress intended to 
definitively answer the question, it certainly could have done so in 
unambiguous terms, such as, ``A digital transmission containing a sound 
recording that results in a digital phonorecord delivery constitutes a 
performance of any musical work embodied in that sound recording.'' But 
it didn't.
    Quite possibly, Congress recognized that some digital phonorecord 
deliveries may be performed or ``streamed'' for listening by the user 
while it is being downloaded; hence, the italicized language may have 
been needed to make certain that a digital phonorecord delivery will 
still be deemed such, even if the digital transmission happens also to 
constitute a public performance.
    The performance rights societies could point to the definition of 
public performance:
    ``To perform * * * a work publicly means--
    ``(1) to perform or display it at a place open to the public or at 
any place where a substantial number of persons outside of a normal 
circle of a family and its social acquaintances is gathered; or
    ``(2) to transmit or otherwise communicate a performance or display 
of the work to a place specified by clause (1) or to the public, by 
means of any device or process, whether the members of the public 
capable of receiving, the performance or display receive it in the same 
place or in separate places and at the same time or at different 
times.'' (emphasis added).
    It appears, from the italicized language, that it does not matter 
whether you hear the performance at the same time as you download the 
file. Certainly, when a recording is being streamed to you, it is first 
buffered in your computer's temporary memory, before the recording is 
actually played so that you can heart it. What is the difference 
between storing the recording in temporary memory and storing it on 
your hard disk (which is typically the case with a digital phonorecord 
delivery) prior to your hearing the records?
    The problem with these arguments is that the above definition 
concerns not what a performance is, but what it means to perform a 
working publicly (as opposed to privately). Nevertheless, even if the 
transmission of a work is considered a public one, it may still not 
constitute a performance. According to the Copright Act.
    ``To perform a work means to recite, render, pay, dance, or act it, 
either directly or by means of any device or process * * *''
    It may well be asked, where, for purposes of the definition of 
``perform,'' is the ``rendering'' or the ``playing'' of the work in the 
transmission of a downloaded music file? The performance rights 
societies could take the position that a sound recording of a work is 
itself a ``rendering'' (i.e. a performance, albeit a recorded one) of 
the work. This is as opposed to sheet music where the musical notations 
only are listed. When one digitally transmits the sound file, one is 
engaged in a transmission of the recorded performance, as hence, it may 
be said, the requisite ``rendering'' is taking place.
    This argument would be plausible but not for the definition of 
``sound recordings,'' which is defined in the Copyright Act as ``works 
that result from the fixation of a series of sounds.'' Thus, by 
definition, a sound recording is a fixation of sounds, not a rendering 
of sounds. Arguably, then, by transmitting a sound recording, you are 
transmitting a fixation of sounds, not a performance or rendering of 
them.
    A better argument, from the performance rights societies 
perspective, would be to say that the downloading of a digital file is 
part of a process that results in a rendering or playing of the work at 
the recipient's end. Recall that to perform a work means to render or 
play the work, ``either directly or by means of a device or process.'' 
Thus, arguably, the process of transmitting the bits constituting a 
digital sound recording file, the recipient's buffering those bits or 
saving them to his hard disk or other storage media, and his playing of 
the bits, either as the bits are being downloaded or later, even after 
the entire file has been saved to disk, constitutes a playing or 
rendering of the sound recording, ``either directly or by means of a 
device or process.''
    Because technology now permits the playing of the bits either as 
the bits are being downloaded or after all the bits in the file have 
been received, the distinction between a digital phonorecord delivery 
(DPD) and a non-DPD (i.e., a purely ``streaming'' digital audio 
transmission) is being blurred. The performance rights societies may 
argue that all of these transmissions should be considered 
performances, merely because it is too impractical, on a case-by-case 
basis, to make a distinction between them.
    In addition, the performance rights societies have argued that a 
digital phonorecord delivery provides an added value to the consumer--
that is, with the advent of digital deliveries, the consumer no longer 
has to schlep down to a record store to buy a CD; he or she can just 
order it online and receive it in minutes. Consequently, that added 
value should be paid for. This argument, however, was first made before 
the success of companies like Amazon.com, from whom you can now order a 
CD and have it sent to you by overnight courier. What practical 
difference does it make whether the tracks constituting a record album 
come to you overnight or several minutes or hours after you have 
requested them to be downloaded?
    Moreover, it may be reasonable to assume that if Congress made 
digital phonorecord deliveries subject to a compulsory license under 
Section 115, and set the fee for such licenses at the statutory rate, 
then, arguably, it should be unnecessary for anyone to pay more than 
the statutory rate to effect the delivery, ``regardless of whether the 
digital transmission is also a public performance of * * * any musical 
work embodied therein.''
    Again, the quoted language is from the Act's definition of digital 
phonorecord delivery, and one could infer from it that Congress wanted 
to make certain that a digital download of a sound recording will be 
deemed a digital phonorecord delivery, subject to the compulsory 
license, with no one having to pay more than the statutory rate, even 
if the digital transmission happens also to constitute a public 
performance. Thus, once the statutory royalty is paid for a compulsory 
license, whether for digital phonorecord deliveries in general or 
incidental digital phonorecord deliveries, the payment of a performance 
royalty would not be necessary.

    C. An individual takes a downloaded track and e-mails it to a 
friend.
    Answer: When an individual takes a downloaded track and e-mails it 
to a friend, the copyrights in both the sound recording and the 
underlying musical work are being infringed, and, as a matter of 
policy, such activity should violate the copyright law.
    Discussion: The reproduction of a copyrighted work by means of an 
individual's e-mail is no different from any other form of 
reproduction, whether in the form of making tapes or posting files on a 
website, and the violation of the copyright owner's exclusive right of 
reproduction would constitute copyright infringement, unless some 
exemption applies.
     By using the term ``friend,'' the question raises the issue of how 
far should the currently recognized exemption for private non-
commercial home copying apply. In the legislative history of the Sound 
Recording Act of 1971, Congress recognized what is loosely called, the 
``home recording exemption'' which permits a consumer to make ``home'' 
recordings for their non-commercial use. The House Report stated,

          It is not the intention of the Committee to restrain the home 
        recording, from broadcasts or from tapes or records, of 
        recorded performances, where the home recording is for private 
        use and with no purpose of reproducing or otherwise 
        capitalizing commercially on it.

    An example of a home recording would be your making a cassette tape 
recording of a CD for use in your car tape player. The question arises: 
would this exemption permit your wife to use the tape in her car? The 
answer, in our view, is be yes, as ``home recording'' would include 
recording for use by members of your family. Since one is not likely to 
purchase a separate copy of a record for a spouse, child, sibling or 
other family member, record sales are not likely to be displaced 
significantly by such recording.
    Making a copy for a friend or neighbor, however, is a different 
matter. In these instances, making recordings for friends and neighbors 
would likely displacing sales that the copyright owner might otherwise 
have made. Since virtually everyone has friends to whom they can email 
a copyrighted work, extending the exemption to beyond the family could 
easily defeat the purposes of the copyright law.
    Moreover, by extending the permissible home-copying to ``friends'' 
would put the Federal Courts in the unenviable position of determining, 
``What is a friend?'' Does it include acquaintances or just close 
acquaintances? Because this is not practical by any means, a line 
should be drawn at the outskirts of family members. Incidentally, for 
political reasons, I think we would all be wise to include, for this 
purpose, mothers-in-law.

    D. An individual or company creates a searchable file-transfer 
program to make it easier for all of his friends to find and transfer 
each other's musical films among themselves.
    Answer: When an individual or company engages in activity, such as 
developing and maintaining a software program, that facilitates the 
activity in Question E above, such individual or company should be 
liable for contributory copyright infringement, and, as a matter of 
policy, such activity should violate the copyright law.
    Discussion: It will be recalled that we started with the assumption 
that a valid copyright subsists in both the sound recording and the 
musical works contained in the files being transferred and no 
permission to effect the transmissions have been granted by the owners 
of the copyrighted works. The problem in that many of the files 
transferred among friends may constitute files that are either not 
subject to copyright protection, or permission was otherwise granted by 
the copyright owners to effect the transfers. How do you stop the 
transfer of copyrighted files while permitting the transfer of other 
files?
    We believe that Congress reached an adequate compromise in Section 
512(d) of the Copyright Act.
    (d) Information Location Tools.--A service provider shall not be 
liable for monetary relief, or, except as provided in subsection (j), 
for injunctive or other equitable relief, for infringement of copyright 
by reason of the provider referring or linking users to an online 
location containing infringing material or infringing activity, by 
using information location tools, including a directory, index, 
reference, pointer, or hypertext link, if the service provider--
    (1)(A) does not have actual knowledge that the material or activity 
is infringing;
    (B) in the absence of such actual knowledge, is not aware of facts 
or circumstances from which infringing activity is apparent; or
    (c) upon obtaining such knowledge or awareness, acts expeditiously 
to remove, or disable access to, the material;
    (2) does not receive a financial benefit directly attributable to 
the infringing activity, in a case in which the service provider has 
the right and ability to control such activity; and
    (3) upon notification of claimed infringement as described in 
subsection (c)(3), responds expeditiously to remove, or disable access 
to, the material that is claimed to be infringing or to be the subject 
of infringing activity, except that, for purposes of this paragraph, 
the information described in subsection (c)(3)(A)(iii) shall be 
identification of the reference or link, to material or activity 
claimed to be infringing, that is to be removed or access to which is 
to be disabled, and information reasonably sufficient to permit the 
service provider or locate that reference or link.
    Whether a particular file transfer program, or information location 
tool, adequately complies with section 512(d) depends upon the findings 
of the District Court. Where a District Court has difficulty 
determining the extent to which the individual or company operating the 
location tool ``acts expeditiously to remove, or disable access to, the 
[infringing] material,'' the Court could appoint an impartial, special 
master to oversee compliance while the Court retains jurisdiction of 
the case. In any event, the courts would appear well equipped to apply 
the law in applicable cases.

    E. An individual or company creates a searchable file-transfer 
program and allows the general public to use it to download and 
transfer music files to others, intending to derive profits from the 
program.
    Answer: Same as the answer to D above.

    F. An individual or company creates a searchable file-transfer 
program, intending to derive profits from the program, and allows the 
general public to use it to find and listen to one another's music 
files--without the user's actually downloading the music files onto 
their individual hard drives.
    Answer: Same as the answer to D and E above. Whether the resulting 
transmission is a stream or a download, a violation of the copyright 
owner's exclusive right of performance or reproduction is involved.
    We hope this has been a useful explanation of the law and policy 
with respect to the very difficult questions raised by the advent of 
digital transmissions copyrighted works over the Internet.
            Respectfully submitted,
                                            Robert H. Kohn,
                                                          Chairman.

      Responses of Lars Ulrich to Questions From Senator Thurmond

    Question: Mr. Ulrich, you have stated that you do not believe 
current laws are adequate to protect musicians' property rights on the 
internet. What law or laws would you propose that the Congress should 
adopt to solve the problem of the intellectual property theft on the 
internet?
    Answer: Perhaps my testimony on this issue was not as articulate as 
it could have been. I trust and believe that the courts will interpret 
existing law so as to provide musicians and songwriters the same level 
of protection on the Internet as they have historically enjoyed in the 
off-line world. Obviously, I feel that current U.S. Copyright laws will 
not support enterprises like Napster that is why my band and I sued 
them. In the unlikely event that this proves not to be the case, we 
would welcome the opportunity to work with Congress to craft a 
solution. Our goal is to ensure that U.S. Copyright law continues to 
encourage the creation of intellectual property, which, as you are 
aware, is America's largest export.
    Question: Mr. Ulrich, while it is possible to shut down web sites 
such as Napster that collect and distribute music files, it appears 
unlikely that all unauthorized downloading over the internet could be 
stopped. Do you believe that musicians will eventually have to enforce 
their rights against end-users, even if only on an occasional basis?
    Answer: The recording industry has never entirely eliminated 
bootlegging, just as the retail trade will never entirely eliminate 
shoplifting. All we can ask is that the law clearly and strongly define 
our property rights as owners and creators of intellectual property. It 
will then be incumbent on us to take whatever measures are appropriate 
under the circumstances to combat violations of those rights. I believe 
that this is what the recording industry has historically done.
                              ----------                              

                       Submission for the Record

 Prepared Statement of Marilyn Bergman, President and Chairman of the 
  Board, On Behalf of the American Society of Composers, Authors and 
                               Publishers

    Mr. Chairman and Members of the Committee: My name is Marilyn 
Bergman. I am a songwriter and also the Chairman and President of the 
Board of Directors of ASCAP--the American Society of Composers, Authors 
and Publishers. I am pleased to submit this statement on behalf of 
ASCAP's more than 100,000 songwriter and publisher members. We deeply 
appreicate this Committee's continuing interest in and sensitivity to 
copyright issues. The era of the internet has made the need for your 
understanding of our concerns greater than ever. We at ASCAP are aware 
of the deep commitment that you, Mr. Chairman, the Ranking Democratic 
Member Senator Leahy and the other members of this committee have in 
protecting and nurturing copyright. With all of our colleagues in the 
copyright community, we know that we will always receive a full and 
fair hearing before this Committee.
    First, let me relate some information about ASCAP. As most of you 
know, ASCAP is the largest and oldest of three performing rights 
licensing organization in the United States, the others being Broadcast 
Music, Inc. and SESAC, Inc. today, ASCAP has over 100,000 writer and 
publisher members and a repetory in excess of four million copyrighted 
works. ASCAP licenses on their behalf, the non-dramatic performing 
rights in their music.
    The right of public performance, granted to copyright owners by 
Section 106(4) of the Copyright Law, is one of the most important of 
all the copyright rights. It is the largest single source of income for 
songwriters, most of whom are not performers and do not benefit from 
concerts and recording contracts. From the time ASCAP was founded in 
1914 by the leading songwriters, composers and music publishers of that 
era, including Victor Herbert, John Philip Sousa, Iring Berlin and 
Jerome Kern, our main objective has been to find those who are 
performing music publicly and to offer them licenses, at reasonable and 
fair fees, to perform our members' music. Our principal licensing tool 
is the blanket license--a license to perform any or all of the works in 
the ASCAP repertory for which the user pays a license fee calculated on 
a mutually agreed upon basis.
    One constant in our business has been technological change. With 
the advent of radio and commercial phonograph recordings in the 1920's, 
then background music services in the 1930's, television in the 1940's, 
cable and satellite television in the 1960's and 1970's, and now the 
Internet, ASCAP has faced the challenge of licensing new and ever-
expanding industries which rely on music--the ``raw material'' that we 
create and own--as a principal source of entertainment to generate 
their revenues. When each new technology using copyrighted music 
developed, there was, of course, a period of marketplace give and take 
before the parties ultimately and inevitably reached a settled and 
mutually acceptable licensing regime.
    I would be less than candid if I told you that all music users obey 
the Copyright Law or even cheerfully pay license fees for the property 
they use. Songwriters and publishers have been forced to fight 
courtroom battles with the background music, radio, television and 
cable industries, among others. While this has not been the course that 
we wished to follow, this history has produced a framework within which 
most license fees are negotiated between ASCAP and representatives of 
user industries, or sometimes determined by a federal court. This model 
for license fee dispute resolution is established by a consent decree, 
the Amended Final Judgment entered in United States v. ASCAP. Under the 
ASCAP Consent Decree, any user may obtain a license to perform the 
works in the ASCAP repertory merely by written request to ASCAP, and 
ASCAP can never say ``no,'' as long as the user is willing to pay a 
reasonable license fee. If ASCAP and the user cannot agree on a license 
fee, the user may apply to the court for a determination of the 
reasonable license fee.
    The fact is that each new technology using copyrighted music has 
presented not merely challenges, but opportunities both for those who 
develop the technology and those whose copyright property made the 
technology profitable. We must always keep in mind that, without the 
music which my writer and publisher colleagues at ASCAP create and own, 
and without all the other creative works such as movies, sporting 
events, computer programs, and books, technological marvels would be 
empty and unprofitable shells. Our creativity, our property, fuels 
their engines. The public--the audience--wants to enjoy what we create. 
When a technological development comes along which can provide our 
works to the public in a new way, we applaud it, and we want it to grow 
and prosper. Please understand that the last thing in the world we want 
is to shut down new uses of music; to the contrary, from our 
perspective, the more music that is performed for the public, the 
better. We simply want to be paid a fair fee for the use of our musical 
property, because, after all, our creative property is what makes these 
new technologies succeed. Therefore, we must all prosper, or none of us 
will.
    Let me now turn to ASCAP and the Internet. In 1995, ASCAP set out 
to license the performances of our member's music in that new and 
evolving medium. We did so by creating a Department of New Media and 
Technology and formulating an Experimental License Agreement for 
Internet Sites on the World Wide Web. In its earliest form, the ASCAP 
Website License was a blanket license, granting the operator of a 
website that employed music access to the entire ASCAP repertory. The 
fee for the license was calculated as a small percentage of either 
revenues or operating expenses. In addition, for websites that could 
track and account for their transmissions of music, or ASCAP music, 
there were alternative fee rates that could result in reduced license 
fees.
    As I have said, ASCAP began its efforts to license Internet 
performances of its members' music in 1995. By the end of 1997, we had 
only 125 websites license, By December 1999, the number of licensed 
website's had grown to over 1,500. These include some of the largest 
entertainment websites, as well as the most popular aggregators of 
streamed music sites. Last year, for the first time, collections from 
Internet licensees reached almost one million dollars. And, 
importantly, ASCAP is the only performing rights society in the world 
that makes regular distribution of royalties to it members for Internet 
performances.
    This past December, ASCAP began offering a new form of license 
agreement for website operators. Based on comments from many licensees 
and prospective licensees, we made a major modification in the new 
license, eliminating the operating expense-based fee calculation and 
replacing it with a fee that is based on website traffic. The new 
license also provides for simplified music use reporting, which we use 
in distributing royalties to our writer and publisher members for 
Internet performances of their music.
    As part of our licensing efforts, ASCAP sought early on to make use 
of the new technologies. For example, the Website License was made 
available on the ASCAP website, www.ascap.com, where the potential 
licensee can also find ``ASCAP RateCalc,'' an online, interactive 
program that calculates the license fee based on information provided 
by the licensee. In additional, we employ ``ASCAP EZ-Eagle,'' a program 
that search the Internet for Web sites that are transmitting music 
files and, therefore, are potential licensees.
    The important message from these facts is that the free marketplace 
is working exactly as it should. ASCAP's licensing team is meeting 
continually with industry groups, Including the operators of major 
music-using websites, to discuss the issues and, perhaps, an 
industrywide license agreement, just as we have industrywide agreements 
with other user groups. We've had what we believe are some promising 
meetings, and we hope they will bear fruit. It is certainly our desire 
to continue in this vein, for this is how markets work.
    In addition, many Web site operators, including radio stations and 
they bulk of the country's commercial television broadcasters, have 
requested ASCAP licenses for their Internet performances. We will use 
our best efforts to agree on license fees for their uses; if we cannot 
agree, the court will set reasonable fees under the contract decree. 
ASCAP has also entered into a number of partnership arrangements with 
leading players in the Internet world, designed to benefit our members 
by increasing exposure to their music and providing them with 
reciprocal services such as advertising and web pages.
    What lies ahead both for the near term and the future for ASCAP's 
members and the Internet? Certainly, we watch with great interest and 
some trepidation the battles being fought today between our colleagues 
in the record and motion picture industries and their adversaries. 
These are the types of growing pains with which we are familiar from 
our own past experiences, which I mentioned earlier. But, more 
importantly, our experience reflects the ability of reasonable people 
to work out negotiated solutions to difficult business problems. 
Compulsory license legislation is neither necessary nor desirable. The 
marketplace works.
    ASCAP's Board of Directors, its management and its members do not 
fear the new technology--we welcome the challenges it brings to us as 
the world's leading performing rights organization, to continue our 
efforts to protect the rights of creators and to ensure that they are 
fairly compensated for the use of their copyrighted works, and to 
benefit the public by ensuring the availability of the world's greatest 
music.
    In conclusion, Mr. Chairman and members of the Committee, I urge 
you to proceed with caution in considering whether to enact more 
legislation with respect to Copyright and the Internet. Certainly from 
the point of view of creators and copyright owners, I believe that in 
this arena, which changes from minute to minute, less is more. I remain 
confident that, as has been ASCAP's experience in the past, reasonable 
men and women can agree in the free market, a free market which is at 
the very core of America's values, on arrangements that will produce 
fair prices for valuable property--fair license fees for performances 
of copyrighted music on the Internet.

                                
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