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80–031 PDF 2002

CONSUMER BENEFITS OF TODAY’S DIGITAL

RIGHTS MANAGEMENT (DRM) SOLUTIONS

HEARING

BEFORE THE

SUBCOMMITTEE ON COURTS, THE INTERNET, 

AND INTELLECTUAL PROPERTY

OF THE

COMMITTEE ON THE JUDICIARY 

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

JUNE 5, 2002

Serial No. 72

Printed for the use of the Committee on the Judiciary

(

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

(II)

COMMITTEE ON THE JUDICIARY 

F. JAMES SENSENBRENNER, JR., WISCONSIN, Chairman 

HENRY J. HYDE, Illinois 

GEORGE W. GEKAS, Pennsylvania 

HOWARD COBLE, North Carolina 

LAMAR SMITH, Texas 

ELTON GALLEGLY, California 

BOB GOODLATTE, Virginia 

STEVE CHABOT, Ohio 

BOB BARR, Georgia 

WILLIAM L. JENKINS, Tennessee 

CHRIS CANNON, Utah 

LINDSEY O. GRAHAM, South Carolina 

SPENCER BACHUS, Alabama 

JOHN N. HOSTETTLER, Indiana 

MARK GREEN, Wisconsin 

RIC KELLER, Florida 

DARRELL E. ISSA, California 

MELISSA A. HART, Pennsylvania 

JEFF FLAKE, Arizona 

MIKE PENCE, Indiana 

J. RANDY FORBES, Virginia 

JOHN CONYERS, JR., Michigan 

BARNEY FRANK, Massachusetts 

HOWARD L. BERMAN, California 

RICK BOUCHER, Virginia 

JERROLD NADLER, New York 

ROBERT C. SCOTT, Virginia 

MELVIN L. WATT, North Carolina 

ZOE LOFGREN, California 

SHEILA JACKSON LEE, Texas 

MAXINE WATERS, California 

MARTIN T. MEEHAN, Massachusetts 

WILLIAM D. DELAHUNT, Massachusetts 

ROBERT WEXLER, Florida 

TAMMY BALDWIN, Wisconsin 

ANTHONY D. WEINER, New York 

ADAM B. SCHIFF, California

PHILIP G. KIKO, Chief of Staff-General Counsel 

PERRY H. APELBAUM, Minority Chief Counsel 

SUBCOMMITTEE ON COURTS, THE INTERNET, AND INTELLECTUAL PROPERTY

HOWARD COBLE, North Carolina, Chairman

HENRY J. HYDE, Illinois 

ELTON GALLEGLY, California 

BOB GOODLATTE, Virginia, Vice Chair

WILLIAM L. JENKINS, Tennessee 

CHRIS CANNON, Utah 

LINDSEY O. GRAHAM, South Carolina 

SPENCER BACHUS, Alabama 

JOHN N. HOSTETTLER, Indiana 

RIC KELLER, Florida 

DARRELL E. ISSA, California 

MELISSA A. HART, Pennsylvania 

HOWARD L. BERMAN, California 

JOHN CONYERS, JR., Michigan 

RICK BOUCHER, Virginia 

ZOE LOFGREN, California 

WILLIAM D. DELAHUNT, Massachusetts 

ROBERT WEXLER, Florida 

MAXINE WATERS, California 

MARTIN T. MEEHAN, Massachusetts 

TAMMY BALDWIN, Wisconsin 

ANTHONY D. WEINER, New York

BLAINE MERRITT, Chief Counsel 

DEBRA ROSE, Counsel 

CHRIS J. KATOPIS, Counsel 

MELISSA L. MCDONALD, Full Committee Counsel 

ALEC FRENCH, Minority Counsel 

(III)

C O N T E N T S 

JUNE 5, 2002

OPENING STATEMENT 

Page 

The Honorable Howard Coble, a Representative in Congress From the State 

of North Carolina, and Chairman, Subcommittee on Courts, the Internet, 

and Intellectual Property .................................................................................... 1

The Honorable Howard L. Berman, a Representative in Congress From the 

State of California, and Ranking Member, Subcommittee on Courts, the 

Internet, and Intellectual Property .................................................................... 2

The Honorable Rick Boucher, a Representative in Congress From the State 

of Virginia ............................................................................................................. 6

WITNESSES 

Mr. Will Poole, Vice President, Windows New Media Platforms Division, 

Microsoft Corporation 

Oral Testimony ..................................................................................................... 9

Prepared Statement ............................................................................................. 10

Mr. James Alexander, Director, eBooks Publishing Adobe Systems, Inc. 

Oral Testimony ..................................................................................................... 16

Prepared Statement ............................................................................................. 18

Mr. Peter Jacobs, Chief Executive Officer, SunnComm, Inc. 

Oral Testimony ..................................................................................................... 21

Prepared Statement ............................................................................................. 23

Mr. Frank Hausmann, Chief Executive Officer, CenterSpan Communications 

Corporation 

Oral Testimony ..................................................................................................... 26

Prepared Statement ............................................................................................. 28

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING 

Prepared statement of the Honorable Howard L. Berman, a Representative 

in Congress From the State of California, and Ranking Member, Subcommittee on Courts, the Internet, and Intellectual Property ......................... 3

Prepared statement of the Honorable Zoe Lofgren, a Representative in Congress From the State of California ..................................................................... 5

APPENDIX 

STATEMENTS SUBMITTED FOR THE HEARING RECORD

Prepared statement of William Krepick, President and CEO, Macrovision 

Corporation ........................................................................................................... 59

Prepared statement of Neil MacDonald, Vice President, Director of Research, 

GartnerG2 ............................................................................................................. 61

MATERIAL SUBMITTED FOR THE HEARING RECORD

Letter from Jonathan Zuck, President of Association for Competitive Technology .................................................................................................................... 64

Page

IV

Letter from Chris Hoofnagle, Legislative Counsel, Electronic Privacy Information Center, Jason Young, IPIOP Clerk, Electronic Privacy Information 

Center, and Fred von Lohmann, Senior IP Attorney, Electronic Frontier 

Foundation ............................................................................................................ 68

(1)

CONSUMER BENEFITS OF TODAY’S DIGITAL 

RIGHTS MANAGEMENT (DRM) SOLUTIONS 

WEDNESDAY, JUNE 5, 2002

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON COURTS, THE INTERNET, AND INTELLECTUAL PROPERTY, COMMITTEE ON THE JUDICIARY, Washington, DC. 

The Subcommittee met, pursuant to call, at 2:15 p.m., in Room 

2141, Rayburn House Office Building, Hon. Howard Coble [Chairman of the Subcommittee] presiding. 

Mr. COBLE. Good afternoon, ladies and gentlemen. The Subcommittee will come to order. In the interest of time, I am going 

to go ahead and make my opening statement, and by that time 

Howard Berman will probably be here. 

As it is well known, our Subcommittee has long been devoted to 

the progress of the arts and the rights of artists by fighting against 

all varieties of piracy. In the digital era, the problem of copyright 

piracy is more significant than ever. Today DRM, known as Digital 

Rights Management, is known as a solution. DRM actually refers 

to a variety of technologies designed to balance consumers’ rights 

in enjoying copyrighted works while concurrently preventing the piracy of those works. 

As part of the Digital Millennium Copyright Act, new legal protections were placed into the law, such as combating the anti-circumvention of copyright protection systems. The DMCA created a 

robust marketplace of DRM technology for consumers. 

In the 4 years since the DMCA became law, the results are clear. 

Consumers have benefited from the law, in my opinion, and there 

may be some people out there who will take issue with that, but 

in my opinion consumers have directly benefited from that law. 

There are more choices for consumers as a result of the protection 

it secures. 

There is no doubt that DVDs would not have been placed on the 

market if the producers or studios could not use a DRM technology 

such as C-S-S to protect against piracy. Today, there is an explosion in DVD titles. The explosive phenomenon of DVDs could be 

traced to two facts, consumer demand and the legal protection 

against piracy tools. Further, I am pleased to say that these legal 

protections have been validated as constitutional when reviewed by 

the courts. 

There are digital works online beyond audiovisual works in people’s homes, including eBooks, software, video games, needlepoint, 

and architectural patterns. Each have a different set of issues, conVerDate Jan 17 2002 12:39 Jul 09, 2002 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 G:\WORK\COURTS\060502\80031.000 HJUD1 PsN: DOUGA
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sumer demands and different business models in place. It is my 

hope that we can learn how the marketplace will continue to shape 

solutions so that the consumer can enjoy new works and new innovations, all in new ways. 

As the Subcommittee reviews this issue, we are fortunate to have 

an array of experts on DRM technology who not only can offer their 

views as business and technology leaders, but can offer their perspectives on how consumers benefit from the DRM technologies 

currently in use. 

Now, if anyone has a perfect solution to the digital piracy issue, 

I want you to meet Mr. Berman and me after the hearing, and we 

will turn a receptive ear to you. Realistically, however, it is my 

hope that today we can learn how the marketplace and current law 

are functioning and what, if any, additional Government action 

may be necessary. And if a modest bill such as one for a broadcast 

flag standard be deemed necessary by our Members to allow consumers to enjoy new digital copyrighted broadcasts and prevent piracy, it seems to me that our Subcommittee will be the home for 

the drafting and the review of same. 

I am now pleased to recognize the distinguished gentleman from 

California, Ranking Member, Mr. Berman. 

Mr. BERMAN. Well, thank you very much, Mr. Chairman, and on 

almost any issue within the jurisdiction of this Subcommittee you 

can speak for me quite safely, and there are probably some areas 

where I am not sure that that would be true, but in this Subcommittee it is definitely true. 

And I want to thank you for holding the hearing and for indulging me by delaying it a few minutes so I could be part of a meeting 

with Secretary Powell in my other Committee. 

Our purpose in this hearing is to learn about the plethora of new 

technologies that have been developed to provide consumers access 

to protected, copyrighted works. It is clear that consumer demand 

exists for digital copyrighted works. Unfortunately, in the absence 

of legitimate services the online demand is manifested largely 

through massive piracy. 

Legitimate services do exist for software, newspapers, and to a 

certain extent books. Legitimate services have started to emerge in 

the music space and are being developed for movies. While some 

of these services do not yet provide sufficient convenience and 

functionality to prove compelling to consumers, it is clear that the 

foundation of any legitimate service is digital rights management. 

The DVD format is an instructive success story. The first DVD 

players were sold in the United States in 1997. In less than 5 

years, over 30 million DVD players have been sold in the U.S., 

reaching this level of market penetration faster than any other consumer electronics product ever. A number of industry members 

were able to come together to develop a standard, license the technology and create a wildly popular format for consumers, creating 

products that consumers would not have had access to without the 

underlying content protection. 

The need for digital rights management has created an entirely 

new sector within the technology industry. Thus, while DRM is 

often portrayed as a battle between high-tech and Hollywood, in 

fact the two have a symbiotic relationship. Copyright owners are 

3

dependent upon the tech companies, including the ones before us 

today, for protection of their creations. Similarly, these tech companies have no reason for being, and thus no product to sell, without 

the copyright owners. 

DRM technologies can also be implemented to limit the behavior 

of consumers. Consumers are understandably concerned about how 

DRM solutions may restrict their expectation to be able to make 

fair uses of copyrighted works. Admittedly, some consumers tend to 

confuse their expectation of allowed behavior with what is permissible under fair use, and thus these concerns may sometimes be 

overwrought. We need to educate these consumers why the legal 

limitations on the use of copyrighted works benefit consumers in 

the long run by incentivizing new creation. 

However, we must also give serious consideration to how today’s 

DRM protected products and services affect the fair use expectations of consumers. DRM technologies can facilitate pay per use 

schemes where copyright owners can charge consumers for almost 

any amount of content usage. A recent Cato Institute report by 

noted economics professor Stan Liebowitz concludes that a pay per 

use world will benefit consumers. Liebowitz theorizes that consumers would accept a model in which they pay for each use they 

wish to make of a work, so long as the payments reflect the specific 

value of that use. 

I am curious to hear how new payment schemes may change traditional consumer expectations, and I hope our witnesses can address the relationship between their products, consumers’ expectations and fair use. 

But no DRM solution is 100 percent successful. Even the best 

DRM ultimately cannot stop a determined hacker. Unfortunately, 

DRM cannot protect content that is already available in the clear. 

That piracy, particularly the piracy taking place via file trading on 

peer-to-peer networks is an enormous problem, but it is separate 

from what we are discussing today. I hope, Mr. Chairman, that our 

Subcommittee can address the problems of peer-to-peer piracy in 

another hearing in the near future. 

Although DRM solutions are not impenetrable, a DRM solution 

does not have to be fail-safe to be effective. If the DRM deters the 

average user from widespread piracy such as illegally sharing content on a peer-to-peer network, then that DRM is a major step forward to the goal of flexible, widespread legitimate access to copyrighted content online. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Berman follows:]

PREPARED STATEMENT OF THE HONORABLE HOWARD L. BERMAN, A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF CALIFORNIA

Mr. Chairman, 

Thank you for holding this hearing on digital rights management (DRM). Our 

purpose today is to learn about the plethora of new technologies that have been developed to provide consumers with access to protected, copyrighted works in both 

old and new formats. Our four witnesses represent an array of technology companies, each bringing a unique product or business model to the copyright community. 

It is clear that consumer demand exists for digital copyrighted works, both online 

and off. Whether it is software applications, video games, photographs, needlepoint 

designs, television shows, movies, or music, it is apparent that consumers want digital copyrighted works. 

4

Unfortunately, in the absence of legitimate services, the online demand is manifested largely through massive piracy. A recent report by Viant estimates that 

400,000 to 600,000 pirate versions of movies are downloaded every day over the 

Internet. In April of 2002, 1.1 billion files were downloaded using just one of the 

peer-to-peer file trading services. 

Legitimate services exist for software, newspapers, and to a certain extent, books. 

Legitimate services have also started to emerge in the music space, and are being 

developed for movies. While some of these services do not yet provide sufficient convenience and functionality to prove compelling to consumers, it is clear that the 

foundation of any legitimate service is digital rights management. Without it, few 

copyright owners would be willing to make the leap to digital online delivery of their 

content. 

The DVD format is an instructive success story. The first DVD players were sold 

in the United States in 1997. In less than five years, over thirty million DVD players have been sold in the United States, reaching this level of market penetration 

faster than any other consumer electronics product ever. In 2001, consumers spent 

over six billion dollars on DVD rentals and sales. While the DVD is not digital 

rights management per se, it does represent a protected format for movie distribution. A number of industry members were able to come together to develop a standard, license the technology, and create a wildly popular format for consumers—cre- ating products that consumers would not have had access to without the underlying 

content protection. With DVD, technology companies answered the need of both the 

copyright community and consumers to provide entertainment in digital form. 

The internet provides another opportunity for copyright owners and technology 

companies to develop completely new products, business models, and methods of distributing content to the users who want it. There are a variety of delivery methods 

and payment models: downloads, streams, subscription services, time-limited ‘‘rentals,’’ peer-to-peer trading, as well as burning to traditional physical media. 

Our witnesses today are working to address needs in different content markets 

and with different delivery mechanisms. Their presence here is emblematic of an 

overarching point: the need for digital rights management has created an entirely 

new sector within the technology industry. Companies such as SunnComm, 

CenterSpan, Vidius, and ContentGuard did not exist a few years ago. Thus, while 

DRM is often portrayed as a battle between high-tech and Hollywood, in fact the 

two have a symbiotic relationship. Copyright owners are dependent upon the tech 

companies (including the ones before us today) for protection of their creations. 

Similarly, these tech companies have no reason for being—and thus no product to 

sell—without the copyright owners. I look forward to hearing about the diversity of 

DRM products that exist now and that are continuing to develop. 

Learning more about the DRM technologies that exist or are being developed will 

enable us to better evaluate the policy implications of these technologies. In particular, this hearing will help us evaluate the effect of these technologies on consumers. 

As a preliminary matter, it appears the effects of DRM technologies on consumers 

may be significant. Whether these effects are, on balance, beneficial or adverse is 

less clear. Furthermore, these DRM technologies cannot be analyzed in a void: their 

impact on consumers depends entirely on how they are implemented. 

DRM solutions clearly give copyright owners more comfort in making their works 

broadly available in digital formats. To the extent that DRM technologies mean that 

consumers will have access to copyrighted works in new formats, such as DVDs, 

consumers are clearly benefited. 

DRM technologies can also be implemented to limit the behavior of consumers. 

Consumers are understandably concerned about how DRM solutions may restrict 

their expectation to be able to make fair uses of copyrighted works. Admittedly, 

some consumers tend to confuse their expectation of allowed behavior with what is 

permissible under fair use, and thus these concerns may sometimes be overwrought. 

We need to educate these consumers as to the limits of fair use, and why the legal 

limitations on the use of copyrighted works benefit consumers in the long run by 

incentivizing new creation. 

However, we must also give serious consideration to how today’s DRM-protected 

products and services affect the fair use expectations of consumers. It has often been 

noted that DRM technologies facilitate pay-per-use schemes where copyright owners 

can charge consumers for almost any amount of content usage. There is no conclusive evidence as to whether such a ‘‘pay-per-use’’ world is good or bad for consumers. 

A recent Cato Institute report by noted economics professor Stan Liebowitz concludes that a pay-per-use world will benefit consumers. Liebowitz discusses the economic benefits of micropayments, theorizing that consumers would accept a model 

in which they pay for each use they wish to make of a work, so long as the payVerDate Jan 17 2002 12:39 Jul 09, 2002 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6621 G:\WORK\COURTS\060502\80031.000 HJUD1 PsN: DOUGA
5

ments reflected the specific value of that use. In many cases, such ‘‘perfect price discrimination’’ enabled by DRM technologies would significantly lower the cost to the 

consumer. 

I am curious to hear how new payment schemes may change traditional consumer 

expectations, and I hope our witnesses can address the relationship between their 

products, consumers’ expectations, and fair use. 

No DRM solution is one-hundred percent successful. Even the best DRM ultimately cannot stop a determined hacker. Unfortunately, DRM cannot protect content that is already available in the clear. That piracy—particularly the piracy taking place via file-trading on peer-to-peer networks—is an enormous problem, but is 

separate from what we are discussing today. I hope, Mr. Chairman, that our subcommittee can address the problems of peer-to-peer piracy in another hearing in the 

near future. 

Although DRM solutions are not impenetrable, many of today’s DRMs are dynamic systems that have the ability to be upgraded when compromised, making it 

more difficult for a hacker to make a serious impact. More importantly, however, 

a DRM solution does not have to be fail-safe to be effective. If the DRM deters the 

average user from widespread piracy, such as illegally sharing content on a peerto-peer network, then that DRM is a major step forward toward the goal of flexible, 

widespread, legitimate access to copyrighted content online.

Mr. COBLE. I thank the gentleman. 

Did the gentlelady from California have an opening statement? 

Ms. LOFGREN. I do, Mr. Chairman, and in the interest of time, 

I would ask unanimous consent to submit that statement for the 

record so that we can get to our witnesses. 

Mr. COBLE. So ordered. I thank you for that. 

[The prepared statement of Ms. Lofgren follows:]

PREPARED STATEMENT OF THE HONORABLE ZOE LOFGREN, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF CALIFORNIA

Despite some perceptions, digital piracy is not a threat limited to the movie and 

music industries. Software developers lose money from theft rates exceeding eighty 

percent in some countries. Local and national economies lose jobs and tax revenues 

and lawful consumers confront higher prices. Faced with these realities, preventing 

digital piracy is a righteous goal. 

But our national discussion must involve more than an examination of how to prevent illegal copying. As the title of this hearing indicates, consumers benefit from 

DRM solutions that secure content and encourage artists, publishers, record labels, 

studios and software developers to release their works in digital formats. But that 

is only part of the equation. Whether you call them rights or expectations, consumers have grown accustomed to certain uses. For example, since the advent of 

the VCR, consumers have been able to lawfully record their favorite television show. 

DRM technology will ultimately fail if it prevents this and other consumer expectations in the name of outdated business models. 

Put simply, the rights of the copyright owner to control their work must be balanced with the rights of the consumer. Traditionally, copyright law has aspired to 

do just that. The great challenge today is to maintain that balance in the digital 

world by finding ways to prevent and punish digital pirates without treating every 

consumer as one. 

Ultimately, it is the marketplace, not government, who will judge the best solution. Calls for government mandates are unrealistic amid the rapid pace of technological innovation. Nor is it realistic to expect one DRM solution to fit the multiple 

platforms and devices that exist. Instead of mandating regulations that will be outdated when published, government should encourage the marketplace to seek out 

DRM technologies that are strong enough to protect content and flexible enough to 

preserve the performance and functionality of underlying hardware and software. 

I look forward to hearing today about some of the DRM solutions that currently 

exist. I am especially interested in hearing how content providers have been utilizing existing DRM technologies. I am concerned that some in the content industry 

expect the weight of preventing digital piracy to be shouldered disproportionately 

by hardware and software manufacturers. While technological protections have a 

role to play, content providers must also lead by preventing piracy at its source. Indeed, pirates somehow obtained an illegal copy of Spiderman before selling it prior 

to its theatrical release. Finally, I am most interested in hearing how DRM soluVerDate Jan 17 2002 12:39 Jul 09, 2002 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6621 G:\WORK\COURTS\060502\80031.000 HJUD1 PsN: DOUGA
6

tions will respect the rights and expectations of consumers, who are the ultimate 

arbiters of DRM technology.

Mr. COBLE. The gentleman from Virginia. 

Mr. BOUCHER. Well, thank you very much, Mr. Chairman. I have 

a very brief statement. I want to begin by commending the Chairman and the Ranking Member of the Subcommittee for convening 

today’s hearing to learn about the state of the development of digital rights management technologies and to examine possible Federal policy implications that stem from that development. A balance in the law is necessary. It is perfectly appropriate, in my view, 

for content owners to use digital rights management solutions to 

prevent, for example, the wholesale unauthorized redistribution of 

material that is copyrighted across the Internet. 

At the same time, in my opinion, it is essential that consumers 

who lawfully acquire digital media continue to have both the right 

and the easy ability to make copies of that material for their own 

noncommercial use, convenience and enjoyment. They should also 

have the ability to transfer the content they have lawfully acquired 

among digital devices in the home and in the extended home environment, including the car and the office and perhaps the place 

where they go to spend the weekend. Consumers will understand 

and accept technologies that impose limits on the commercial use 

of material or on the mass distribution of material to others, but 

consumers, in my view, will not accept and will not respect access 

or copy controls that do not allow them to do in the digital world 

what they have been accustomed to doing under historically respected fair use rights and principles in the analog world. 

This is the balance which we have to strike. Getting to that balance I think is going to be a challenge, and I hope that the witnesses today will suggest to us possible avenues by which we might 

achieve it. 

Thank you very much, Mr. Chairman. 

Mr. COBLE. I thank the gentleman. We are pleased to have a 

very fine panel of witnesses today. Our first witness is Mr. Will 

Poole, who serves as Vice President at Microsoft and heads the 

company’s recently formed New Media Platforms Division. This division comprises three fast-moving areas of the company’s Windows 

operating system business, the Digital Media Division, the eHome 

Division and the Content Security and Business Unit. 

During the past 5 years, Mr. Poole has been instrumental in developing Microsoft’s platform strategy for new media, including 

streaming media and digital rights management. In this capacity, 

he worked to bring to the marketplace technology innovation with 

a solid consumer focus. 

Prior to joining Microsoft in 1996 with the acquisition of eShop 

Inc., which he cofounded, Mr. Poole spent 5 years in senior engineering and management roles at Sun Microsystems. Mr. Poole 

holds a Bachelor’s Degree in computer science from Brown University. 

And I am told that Mr. Alexander is a constituent of the 

gentlelady from California, and I would like to ask Zoe if she would 

introduce Mr. Alexander. 

Ms. LOFGREN. Thank you, Mr. Chairman. James Alexander 

serves as the Director of eBooks at Adobe Systems, where he is reVerDate Jan 17 2002 12:39 Jul 09, 2002 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6601 G:\WORK\COURTS\060502\80031.000 HJUD1 PsN: DOUGA
7

sponsible for the eBooks Business Unit. Prior to joining Adobe, he 

founded and worked for several start-up software companies, including Mibrary, a company intended to make eBooks and other 

digital content easier for consumers to use. He is a veteran software executive with more than 10 years experience in assembling 

and mobilizing world-class teams around technology-driven products. 

Prior to Mibrary, in 1994 he cofounded eWatch, an application 

service provider used by more than 800 blue chip companies to 

track what is being said about their brands online. 

He is an active member of several trade associations, including 

the Association of American Publishers, the Enabling Technologies 

Committee and he is also on the advisory committee of something 

important to all of us in San Jose, which is the One Book, One 

Community event that we are trying to put together. 

He received his Bachelor’s of Arts in political science from Rockefeller College, the University of Albany State, University of New 

York in 1991, and he is joined by a lot of other friends and some 

of my neighbors from Adobe here today. So I look toward to hearing his testimony, and I thank you, Mr. Chairman. 

Mr. COBLE. I thank the gentlelady. Mr. Alexander and Mr. Poole, 

good to have you both with us. 

Mr. Jacobs is our third witness. Mr. Peter H. Jacobs, who is 

President and Chief Executive Officer at SunnComm, Inc. He offers 

more than 20 years experience in the telecommunications and computer technology industries. Mr. Jacobs has guided the development of SunnComm’s digital content enhancement and security 

technology. As a result of his efforts, SunnComm has developed a 

software system and functions as a protective agent for digital 

media. 

Prior to joining SunnComm, Mr. Jacobs founded, owned and 

managed a variety of technology businesses. He served as President of Fone America, a nationwide telecommunications carrier for 

many years, where among other achievements he was instrumental 

for the conception and rollout of a then brand new concept in communications called prepaid calling card on telecard. In addition, he 

served at Stellar Vision International, which in 1981 pioneered pay 

per view movies, satellite television and movies in hotels. He has 

also been involved in a range of other businesses, including low 

power television stations in California and Oregon, and was the 

founder of Cigar America, an online cigar distributor. 

Mr. Jacobs has authored and published a book on satellite television for nontechnical readers, entitled Everything You Wanted to 

Know About Satellite Television. 

He spent his earlier years as an on-air radio personality and 

music director and has produced dozens of live concerts through his 

own production company. Mr. Jacobs studied sociology and political 

science at the University of Oregon. And Mr. Jacobs, you will be 

pleased to know that I am a consumer of cigars. I don’t inhale, 

however. 

Our final witness today is Mr. Frank G. Hausmann, chairman 

and chief executive officer of CenterSpan Communications Corporation. Before his current role as CenterSpan’s CEO, Mr. Hausmann 

served as an executive for a variety of high technology and comVerDate Jan 17 2002 12:39 Jul 09, 2002 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6601 G:\WORK\COURTS\060502\80031.000 HJUD1 PsN: DOUGA
8

puter media companies, including Atlas Telecom, Diamond Multimedia Systems and Supra Corporation. Prior to joining Supra, Mr. 

Hausmann had spent 10 years as a consultant with 

PriceWaterhouseCoopers and practiced law with Stoel Rives. 

Mr. Hausmann holds BS Degrees in economics and political 

science from Willamette University and a JD Degree from the University of Oregon. He is a member of the Oregon State Bar. The 

gentleman—I think it was just by happenstance that we have two 

members of the State of roses, rivers, rodeos and rain, where I 

spent some time with the Coast Guard many years ago. A very fine 

State. Good to have you all with us. 

We have been joined by the Ranking Member of the full Committee, Mr. Conyers of Michigan, who has asked to make an opening statement. 

Mr. CONYERS. Thank you, Chairman Coble, and Members of the 

Committee. We all welcome our witnesses. There is no doubt that 

this is an important hearing, because entertainment, the movies, 

music is all, or are all our most successful exported product. And 

for decades we have led the world in the production and enjoyment 

of so many of the American arts, but in the Internet age we have 

had a problem that Attorney Ted Kalo has called virtual shoplifting. You can write that down. It is a patented term. Virtual 

shoplifting, which is known as piracy. 

Consider what has happened. CD sales have fallen in the last 

year. The sale of blank CDs now exceeds the sale of recorded CDs, 

and the private ownership of CD burners have tripled and are now 

42 percent larger than their sales in 1999. The movies? Well, Star 

Wars II was on the Internet for free before it was in the theaters. 

So what we are saying is that the whole network of ownership 

rights, patents, trademarks, copyrights are being challenged by a 

cultural situation in which many people—and all of them are not 

young people—are beginning to think that anything that can be 

taken off the Internet is free. 

What is the problem, Congress? That is the way we have always 

done it. The new generation doesn’t know any other way. And so 

we come here today in the midst of several different kinds of proposals to examine what may be the best way to preserve and protect our intellectual property. 

We are delighted to have the witnesses. The Chairman of the full 

Committee, Jim Sensenbrenner, and I and Mr. Berman and Mr. 

Coble have held ourselves out to hold discussions with the various 

groups in hopes that we can get over the hurdles of differences to 

come to a conclusion as soon as we can, and I thank you for letting 

me make this intervention, Mr. Chairman. 

Mr. COBLE. You are indeed welcome, and we have been joined by 

the gentleman from the Roanoke Valley in Virginia, who I believe 

said has no opening statement. 

Mr. GOODLATTE. Not at this time, sir. 

Mr. COBLE. Good to have you with us, Bob. 

Gentleman, best laid plans of mice and men you know ofttimes 

go awry, and I am told that the scheduled floor vote will likely 

occur in about 20 minutes. If you all will try to comply with our 

5-minute rule. When you see that red light illuminate in your face, 

you will know that 5 minutes have elapsed. And we have your writVerDate Jan 17 2002 12:39 Jul 09, 2002 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6601 G:\WORK\COURTS\060502\80031.000 HJUD1 PsN: DOUGA
9

ten testimony, and we will go over it again, but we will start with 

Mr. Poole. 

STATEMENT OF WILL POOLE, VICE PRESIDENT, WINDOWS 

NEW MEDIA PLATFORMS DIVISION, MICROSOFT CORPORATION 

Mr. POOLE. Mr. Chairman, Members of the Subcommittee, I appreciate this opportunity to present Microsoft’s views on the consumer benefits of Digital Rights Management, or DRM. We all 

have a profound opportunity to shape and grow the digital economy. Part of Microsoft’s contribution is our commitment to developing DRM solutions that protect content and personal privacy 

while expanding consumer choice, creating new business opportunities and promoting innovation. 

Microsoft brings a balanced perspective on DRM technologies, because we are both a user of DRM solutions to protect our own content, our software, and we are also a developer of tools for our partners and customers. Microsoft’s flagship DRM technology is Windows Media Rights Manager, which lets content owners deliver 

music and video online in a cryptographically secure format. Rights 

Manager has been deployed on a worldwide basis for about 3 years 

as part of Windows and is an extremely flexible solution, one that 

supports a broad array of business models needed to manage our 

customers’ content assets. 

Hundreds of companies have partnered with Microsoft to deploy 

Windows Media Rights Manager. For example, Intertainer uses 

Windows Media technologies to offer a secure online video on demand service. Intertainer subscribers can use DSL or cable Internet connections to access premium content from Universal Pictures, 

MGM, Warner Brothers and other leading film studios. Likewise, 

CinemaNow uses a Windows Media-based solution to securely distribute nearly 2 million video streams per month from their library 

of licensed feature films. 

In working with our partners and customers, Microsoft has come 

to realize that the need to protect content, or more precisely digital 

assets, is one that extends far beyond movies and music. A diverse 

range of industries and users, such as banks, lawyers, doctors and 

many others, today generate additional assets and often have a 

compelling need to protect these assets against public disclosure, 

misuse or theft. 

For this reason, Microsoft takes into account three broad types 

of digital assets when we design our DRM technologies: First, personal information, such as medical and financial data; second, corporate information, such as legal and business documents; and, 

third, commercial content, such as movies, music and software. 

Each type of asset has its own unique security requirements. An 

attorney’s confidential memo, a home video and a studio’s new 

blockbuster film, each may require DRM protection. Yet the ways 

in which these assets are distributed and used and the types of 

misuse to which they are most susceptible will vary greatly. 

Fortunately, the private sector has made tremendous progress in 

improving the quality of DRM technologies, many of which have already garnered broad consumer acceptance. Microsoft alone has invested over $200 million in DRM research and development to 

10

date. Companies throughout the economy are investing hundreds of 

millions more in their own DRM technologies. 

As more people become creators of content for both personal and 

commercial purposes, the need for securing it becomes increasingly 

critical. Industry needs to work harder at informing consumers 

about the central role that intellectual property plays in their lives. 

We must ensure that consumers have the ability to easily manage 

their digital assets and to also make effective use of commercial 

content that is secured by DRM. 

To date, discussions around the need for DRM-related legislation 

have focused primarily on commercial content, specifically filmed 

entertainment. As we shift our focus to the future, we must pay attention to the DRM requirements of all three types of digital assets, and the needs of one industry do not overshadow the needs 

of other industries or, more importantly, the needs of consumers. 

Regulatory action, if any, will be most effective where it does not 

dampen private sector incentives for innovation. Broadly mandated 

use of specific DRM technologies in order to address the concerns 

of a single industry will be particularly inappropriate. Such mandates would prevent companies from developing new technologies 

that effectively respond to rapidly changing technologies and hacker attacks. 

Imposing broad technical measures simply to address a specific 

issue, such as seeking to protect analog video content that has been 

converted to digital formats, would stifle innovation and certainly 

result in higher consumer costs with few, if any, corresponding 

benefits. The ultimate victims of such regulatory mandates would 

be the American public, who would enjoy fewer options in new 

technologies and would be restricted in managing their own digital 

assets. 

In closing, Microsoft would like to thank this Subcommittee for 

its demonstrated interest in promoting consumer access to digitally 

distributed content through new technologies and for recognizing 

the important role DRM solutions will play in this area. We urge 

you to continue to promote progress by encouraging private sector 

solutions to the challenges ahead. 

[The prepared statement of Mr. Poole follows:]

PREPARED STATEMENT OF WILL POOLE

Mr. Chairman and members of the Subcommittee, my name is Will Poole, and I 

am Corporate Vice President in charge of Microsoft’s New Media Platforms Division. 

I am grateful for the opportunity to appear before you today to present Microsoft’s 

views on the consumer benefits of digital rights management (DRM) technologies. 

Microsoft is deeply committed to developing DRM solutions that protect content 

and personal privacy while expanding consumer choice, creating new opportunities 

for businesses, and promoting innovation. In designing our DRM technologies, we 

take into account three broad types of digital content—personal information (such 

as individual medical and financial data), corporate information (such as legal and 

business documents), and commercial content (such as movies and music)—each 

with its own unique requirements for secure distribution and management. To date, 

discussions around the need for DRM-related legislation have focused primarily on 

commercial content, and there specifically about filmed entertainment. As we shift 

our focus to the future, it is critical that we pay attention to the DRM requirements 

of all types of digital content and that the needs of one industry do not supercede 

or usurp the needs of others. 

Powerful, flexible DRM solutions are critical to maintaining the security and 

value of a wide variety of content through the digital ecosystem, not just movies and 

music. Without a broad range of DRM tools, digital piracy will flourish, users will 

11

1See International Planning and Research Corp., Sixth Annual BSA Global Software Piracy 

Study (2001), p. 1, at http://www.bsa.org/resources/2001–05–21.55.pdf (downloaded May 27, 

2002). 2 Id.

3See Business Software Alliance, Forecasting a Robust Future: An Economic Study of the U.S. 

Software Industry (1999), pp. 24–25, at http://www.bsa.org/usa/globallib/econ/us—econ—

study99f.pdf (downloaded May 27, 2002). 

be reluctant to distribute sensitive information digitally, and the creation of new 

business models based on digital distribution will falter. The ultimate victims of limited DRM options will be consumers, who will enjoy fewer opportunities to enjoy the 

many benefits of digitally distributed commercial content, or manage their own digital information securely, easily and inexpensively. 

In recent years, the private sector has devoted substantial resources to—and has 

made tremendous progress in—improving the quality and breadth of DRM technologies. Industry has strong incentives to develop innovative and flexible DRM 

technologies that can respond quickly to changing circumstances, and that can support diverse business models to satisfy varying consumer scenarios. Contrary to 

some claims, our industry has already been remarkably successful—through the actions of both individual firms and multi-industry initiatives—in developing effective, 

user-friendly DRM technologies, many of which have already garnered broad consumer acceptance. As these technologies mature, more and more businesses are discovering new applications for—and taking advantage of new business opportunities 

enabled with—DRM systems. 

The title of today’s hearing recognizes that DRM technologies can benefit consumers. Microsoft acknowledges, however, that industry needs to do a better job of 

educating the public about their benefits. The problems that arise from unprotected 

digital content extend well beyond pirated movies and music and negatively affect 

the entire digital economy. As more people become creators of digital goods and information for both personal and commercial purposes, the need for securing this IP 

becomes increasingly critical. We in industry need to work harder at informing consumers about the central role IP plays in their lives, the rights they have in their 

own works, and the value it may represent to them. 

Microsoft thanks the Subcommittee for its demonstrated interest in promoting 

consumer access to works through new technologies and for recognizing the important role DRM solutions will play in this area. We urge you to continue to promote 

progress toward a vibrant Internet marketplace by encouraging private-sector solutions to the challenges that achieving this goal may present. We also believe that 

regulatory action, if any, will be most effective where it does not dampen privatesector incentives for innovation, restrict competition, or make it more difficult or 

costly for industry to respond to DRM circumventions by hackers. Broad regulatory 

mandates prompted by industry-specific concerns are particularly ill suited to the 

growing diversity of digital content, as well as emerging and changing industry 

needs and consumer expectations in this area. 

The balance of this testimony explains these themes in greater detail and describes some of the ways in which Microsoft and our partners in the technology, consumer electronics, and entertainment industries are working to advance the development and deployment of state-of-the-art DRM solutions. 

I. MICROSOFT AND DRM TECHNOLOGIES

The phrase ‘‘digital rights management’’ commonly refers to technical measures 

that help companies and individuals manage their rights in digital content. In practice, the term is often applied broadly to almost any security measure that protects 

digital content, including access and copy control mechanisms. 

Microsoft is involved with DRM technologies in two distinct aspects of its business: As a user of DRM solutions to protect our own content; and as a developer 

of DRM tools for our partners and customers. 

As a leading software developer, Microsoft is also one of the world’s largest IPbased businesses. Simply put, we generate the bulk of our revenue by developing 

and licensing IP to our customers. Like most software developers, however, Microsoft suffers significant revenue losses from piracy. The worldwide software piracy 

rate currently stands at 37 percent, meaning that more than one in every three copies of software in use today is used without a legal license.1 The software industry 

loses more than $11 billion annually due to piracy.2 Software piracy also impacts 

the broader economy: According to the Business Software Alliance, software piracy 

in 1998 resulted in over 100,000 lost jobs and nearly a billion dollars in lost income 

tax revenues in the United States alone.3 If software piracy remains unabated, it 

12

4 Id.

will cost the U.S. economy over 175,000 jobs and $1.6 billion in lost income tax revenues by 2008.4

Microsoft has always believed that as a content owner, we bear primary responsibility for protecting our own products. Accordingly, we began experimenting with 

technical protections for our software as early as the mid-1980s. Some of our initial 

efforts at technical protection were judged by the marketplace to be too unwieldy, 

and they frankly alienated some of our customers. Microsoft responded by developing more user-friendly mechanisms that responded to consumer needs. As a result 

of these efforts, we have learned a great deal about the possibilities and limitations 

of DRM systems—both in terms of what is technically feasible, and in terms of consumer expectations. We have also learned that no DRM system, no matter how secure, will succeed in the marketplace unless it meets the needs of consumers in an 

un-intrusive, cost-effective manner. 

Microsoft is also a leading developer of DRM solutions for use by third parties. 

From the beginning, Microsoft’s core business has been developing software tools 

that help our partners and customers unlock the full power and potential of personal computers. These tools have sparked rapid innovations throughout the digital 

ecosystem while helping people become more productive and exploit new avenues for 

communication and recreation. 

In working to understand the specific DRM requirements of our partners and customers, Microsoft has come to realize that the need to protect content—or more precisely, ‘‘digital assets’’—is one that extends far beyond the film and recording industries. An extremely diverse range of industries and users—such as financial service 

providers, the medical and healthcare industries, legal service providers, various 

government agencies, as well as large and small businesses across countless other 

sectors of the economy—today generate digital assets as a core part of their business 

and often have a compelling need to protect these assets against public disclosure, 

misuse, or theft. 

And equally importantly, many consumers generate their own digital content—

ranging from financial records to photographs to their individual medical histories—

which they rightfully desire to ensure can be used only in accordance with their 

wishes. Safeguarding such private aspects of consumers’ lives is an increasingly vexing problem in a digitally connected world. DRM technologies offer the hope of protecting consumers’ privacy and opening new avenues for the securely managed use 

of personal information. 

At the same time, the specific digital assets to which DRM technologies may be 

applied differ tremendously in terms of their characteristics and use, the business 

models within which they are used and distributed, and the expectations with which 

consumers approach these assets. An attorney’s confidential client memo, a recording company’s master audio recording, a government’s tax records, an amateur photographer’s images, and a publisher’s new bestseller may each require DRM protection. At the same time, the ways in which these digital assets are distributed and 

used—and the types of misuse to which they are most susceptible—will vary enormously. To ensure that the efficiencies of digital distribution can be exploited 

throughout the economy, it is essential that users have access to sufficiently flexible 

DRM tools to meet their specific needs. 

II. DRM TECHNOLOGIES—THE PRIVATE SECTOR IN ACTION

The ultimate success of DRM systems within the broader digital environment will 

depend not only on the strength of their security, but also on their ease of use, applicability to multiple types of content, ability to integrate easily with existing industry systems, support for flexible business models, and their ability to recover 

from a hack or compromise. Despite occasional claims to the contrary, the private 

sector has made enormous progress in developing DRM solutions that meet these 

goals. Examples include Conditional Access systems used by hundreds of millions 

of cable and satellite customers worldwide, copy protection systems employed on 

every DVD player, and software DRM solutions that are available in hundreds of 

millions of computers. 

For its part, Microsoft strives to develop powerful, flexible and consumer-friendly 

DRM tools, and we work closely with a wide range of industry partners to deploy 

these DRM systems in valuable and innovative ways. We also actively participate 

in several cross-industry initiatives to develop broad-based DRM solutions. 

13

A. Microsoft DRM tools 

Microsoft’s flagship DRM technology is Windows Media Rights Manager, an endto-end DRM solution that lets content owners deliver music, video, and other media 

content online in a secure format. Rights Manager gives content owners the ability 

to determine a wide range of delivery options, including start and expiration times; 

the number of times a file can be played; whether a file can be burned onto a CD; 

and whether the file may be copied onto a portable player or other device. In this 

way, Rights Manager supports a broad array of content distribution business models, such as previews, rentals, subscription, purchase, try-before-you-buy, and other 

models—all of which are employed under the control of the content owner/distributor. 

Companies around the world have partnered with Microsoft to deploy Windows 

Media Rights Manager in their own businesses, making it the most widely used 

technology for securely distributing digital media online. First launched in 1999 and 

now in its second generation, Windows Media Rights Manager has been used in over 

11 million transactions for secure video and audio and is supported on over 350 million media players. Over 275 companies have licensed Rights Manager to create secure online distribution systems, more than 130 software developers have licensed 

Rights Manager to support playback of secure audio and video, and over 60 devices 

are currently on the market that support Windows Media. All of the major music 

labels have used Rights Manager to deliver digital music online, and Microsoft has 

partnered with several companies that now offer top-quality online audio and video 

subscription services based on Rights Manager. 

One of these Microsoft partners is Intertainer, which uses Windows Media technology to offer a secure online video-on-demand (VOD) service. The Intertainer service allows subscribers to access premium content from Universal Pictures, MGM, 

Warner Bros., and other leading film studios at VHS quality over common DSL and 

cable modem connections. Pressplay, the leading music subscription service created 

by Universal Music and Sony Music, uses Microsoft’s technologies to offer convenient and secure music downloads. Likewise, CinemaNow uses a customized Windows 

Media-based VOD content distribution and management system to securely deliver 

nearly 2 million video streams per month. These are just three of dozens of companies that are successfully using DRM technologies from Microsoft, IBM, and others 

to provide consumers with easy, inexpensive online access to the very best entertainment content. That said, the adoption of powerful and flexible DRM technologies 

already on the market has been surprisingly slow in some major content sectors— a factor that has arguably fueled the growth of digital piracy over some peer-to-peer 

networks and other channels. 

Microsoft also offers a DRM solution for the secure distribution of eBooks. 

Launched in August 2000, Microsoft’s eBooks DRM is used by more than 20 

eBookstores worldwide. Several leading publishers and online booksellers—including 

BarnesandNoble.com—have selected Microsoft’s eBooks DRM and Microsoft Reader 

as their preferred eBooks platform. 

In addition to music, film, and books, Microsoft also uses its DRM technologies 

to protect our own most valuable assets: Windows and Office. Both product lines 

now use ‘‘activation’’ technology to reduce piracy, which is particularly crucial in 

overseas markets where copyright laws are less well understood and enforced. Tens 

of millions of our customers have successfully installed and used the latest versions 

of Windows and Office, illustrating that DRM technologies can be applied to massmarket digital products in a way that reasonably balances the needs of copyright 

holders and end users. 

Despite our successes to date, we still have much work to do in this dynamic technology area. We have invested over $200 million to date in these areas, and have 

substantial ongoing efforts—possibly the most extensive DRM research and development investments in the industry. We are currently working on the next generation 

of DRM that will protect an extremely broad range of personal and commercial digital assets in a secure environment that provides a seamless and rich consumer experience. 

B. Cross-industry initiatives 

In addition to our in-house DRM development efforts and our collaborative work 

with partners, Microsoft actively participates in several standards organizations and 

other cross-industry initiatives. While some of these standards bodies—such as the 

World Wide Web Consortium (W3) and the Internet Engineering Task Force 

(IETF)—have not yet taken up the issue of DRM interoperability, a handful of crossindustry initiatives are making important contributions to this effort. 

One such organization is the Moving Picture Experts Group (MPEG), a working 

group of the International Standards Organization charged with developing standVerDate Jan 17 2002 12:39 Jul 09, 2002 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6621 G:\WORK\COURTS\060502\80031.000 HJUD1 PsN: DOUGA
14

5See XrML.org, About XrML, at http://www.xrml.org/About.asp (downloaded May 31, 2002). 6See XrML.org, Frequently Asked Questions, at http://www.xrml.org/faq.asp (downloaded 

May 31, 2002). 

ards for digital audio and video. Since its launch in 1988, MPEG has produced 

MPEG–1, the standard on which Video CD and MP3 are based, MPEG–2, the standard on which DVDs and digital TV set-top boxes are based, and several others. 

Among the technologies that MPEG is evaluating for standardization is XrML, a ‘‘meta-language’’ for specifying rights that will greatly enhance DRM interoperability. XrML, which was invented at Xerox Palo Alto Research Center (PARC) over 

ten years ago and submitted to MPEG by ContentGuard, provides a universal method for securely specifying and managing rights associated with all kinds of digital 

content and services.5 The goal of XrML is to provide a flexible, extensible, and 

interoperable standard that meets everyone’s needs regardless of industry, platform, 

format, media type, or business model.6 Microsoft is a strong proponent of interoperability standards for DRM, and we see great potential in XrML in particular. 

Microsoft is also a member of the Copy Protection Technical Working Group 

(CPTWG), a cross-industry group launched in 1996 that includes representatives 

from the PC industry, the consumer electronics industry, and the major film studios. 

In 1998, the CPTWG helped to facilitate creation of the Content Scramble System 

(CSS) technology that is now used by every major U.S. film studio to protect DVDs 

against unauthorized copying. 

C. DRM solutions—a diverse range of options 

All told, industry has invested hundreds of millions of dollars into developing an 

array of powerful, flexible and user-friendly DRM solutions. This broad range of options is both valuable and necessary, for no single technology or solution can possibly fulfill the remarkably diverse requirements of the digital marketplace. 

Each of the major DRM technologies in use today has its unique strengths and 

will be more or less useful depending on the context. For instance, some content 

owners favor hardware-based DRM systems because the protection mechanism is 

embedded within the hardware itself. Examples of hardware-based DRM solutions 

include DirectTV smartcards and many cable conditional access systems. The CSS 

technology used to protect DVDs, by comparison, is an example of a hybrid software/

hardware protection mechanism. With CSS, DVD players are programmed to inspect DVDs for an embedded code, which interacts with the hardware to determine 

whether the user may play or copy the DVD content. Although hardware-based and 

hybrid systems are widely used, once the protection mechanism is compromised, 

they are typically lost forever and cannot be renewed. Because any DRM system is 

vulnerable to attack at some level—as demonstrated by the widely publicized hacks 

of DVDs—this can be a significant drawback. 

One of the primary advantages of software-based DRM such as Windows Media 

Rights Manager, by contrast, is its built-in renewability. Like most content protection technologies, Rights Manager uses encryption to prevent unauthorized access 

to digital content. In the event this protection is compromised, however, Rights 

Manager gives content owners the ability to isolate the intrusion by dynamically renewing the protections that apply to all other copies of that content. This feature 

of dynamic renewability enables content owners to respond quickly to security 

breaches and thereby to stay one step ahead of hackers. 

There has also been some discussion of the role of digital watermarks. Although 

watermarks can play a role in an end-to-end DRM solution (indeed, Microsoft is investing key research efforts in new watermark techniques), watermarks alone do 

not protect content and in Microsoft’s judgment cannot be used to solve the ‘‘analog 

hole’’ problem described further below. Moreover, watermarks vary in how and 

where they might be used—for instance, audio is different than video—and each has 

it own technical challenges. Watermarks could be useful in forensic investigations 

to help track down sources of piracy leaks, as watermarks can carry specific information identifying the means of content distribution. However, because watermarks 

by definition do not affect the appearance or sound of watermarked content, they 

are susceptible to removal by hackers without significant damage to the content. Attempts to build after-the-fact protection or enforcement schemes around video watermark detection have many problems and in our view are unlikely to succeed. 

We believe that renewable, robust DRM encryption provides the best mechanism 

for actually protecting digital content and reducing piracy while also securing digital 

privacy. Accordingly, all of Microsoft’s DRM tools are based upon a foundation of 

content security through encryption. 

At the end of the day, content owners themselves must determine what type of 

DRM is best suited for their particular needs. Fortunately, the marketplace already 

15

provides an array of flexible DRM solutions that meet a broad range of user requirements, cost constraints, and business models. Microsoft strongly supports this process and pledges to continue to do its part to promote innovation in the development 

and rapid deployment of DRM technologies. 

D. Additional areas in which DRM may play a role 

As the preceding overview illustrates, the private sector has actively responded 

to the market demand for powerful, flexible DRM technologies, and content owners 

can now choose from a broad range of innovative, consumer-friendly DRM solutions. 

The MPAA and several studios have highlighted three particular areas of importance to their specific businesses, discrete issues in which they believe DRM technologies may also play a role. These areas are unencrypted digital TV broadcasts, 

the so-called ‘‘analog hole,’’ and P2P piracy. Microsoft is actively engaged in working 

toward a solution in each of these areas. 

Unencrypted digital TV broadcasts. At present, available DRM technologies can 

protect four of the five channels through which digital content is most commonly 

distributed: cable, DSL, satellite, and physical media (such as CDs and DVDs). The 

only digital distribution channel that existing DRM technologies are not available 

to protect is that small fraction of digital content that enters the home through 

unencrypted over-the-air digital TV broadcasts. Because FCC regulations require 

this programming to be broadcast in the clear, viewers currently have the ability 

to make copies of this programming (using, for example, a VCR or DVD burner). 

The concern is that some viewers may then unlawfully redistribute these copies to 

the public at large. Because this programming can feasibly be made secure only 

after it reaches the consumer’s television but before it is redistributed, developing 

an easy-to-use, cost-effective DRM solution to such unlawful redistribution has proven to be challenging. 

This issue is currently being explored by the Broadcast Protection Discussion 

Group (BPDG), a subgroup of the CPTWG. Microsoft is actively involved in the 

BPDG and believes that discussions within the BPDG have been constructive in 

helping to clarify the requirements and needs of the various stakeholders. We however share the concerns expressed by many of those participating in the process 

about the rigor with which the process has been driven and by which technology 

is evaluated in this forum. Particularly, we believe all stakeholders are best served 

by a process that is transparent, that employs evaluation criteria that are fair, objective, and clearly stated, and that ensures that such criteria are openly published 

to enable any company that wishes to create products for receiving digital TV signals to obtain and study the applicable technical requirements. We do not believe 

any single technology should be ‘‘selected’’ or ‘‘mandated’’ by this process. We also 

look forward to advancing these discussions in a forum in which final decisions can 

be made and requirements defined and promulgated, as these are beyond the scope 

of the BPDG charter. Finally, we feel it would be regrettable if the multi-industry 

progress that has been made on this issue were prejudiced in favor of a process that 

did not reflect true industry-wide support. 

The ‘‘analog hole.’’ Virtually all DRM solutions can protect digital content only so 

long as that content remains in digital form. If the content is converted to analog 

form—or is originally broadcast in analog form—any protection that has been applied to that content is usually lost. Although the ability of digital devices to support 

analog conversion has legitimate, pro-consumer rationales, such as the playback of 

a digital camcorder tape on a standard television, the loss of content protection that 

this conversion entails means that such devices might also facilitate piracy. 

Achieving a balanced approach to the analog hole has no easy, short-term solution. Millions of consumers already own at least one, and often many, digital devices 

with analog inputs and outputs, and tens of thousands more of these devices are 

being sold every day around the world. Virtually any existing device can be used 

to create unprotected analog or digital copies of content. And given that current TVs 

are likely to last for another 10 years or longer, even if a watermark or other DRM 

technology were incorporated into new TVs, it would not address the analog hole 

for the hundreds of millions of TVs and camcorders already on store shelves and 

in consumers’ homes worldwide. Moreover, the use of watermarks may also present 

problems in terms of usability, product cost, battery life, etc. Perhaps most importantly, once a watermarking scheme is reverse-engineered, a non-compliant device 

or software can play content without heeding any information in watermarks. 

Nevertheless, Microsoft remains firmly committed to working with all relevant 

stakeholders in devising an effective means to protect future generations of content 

so that it can be distributed and displayed in secure digital formats all the way from 

Hollywood to consumers’ living rooms. 

16

P2P piracy. Peer-to-peer (P2P) networking offers tremendous potential for the future of an online digital economy. Beyond the many efficiencies that P2P architectures can provide for the distribution of digital goods, the self-selecting nature of 

many P2P networks offers immense opportunities for business to quickly and inexpensively identify and exploit discrete consumer markets with great precision. In essence, participants in a P2P network self-select around some common interest. Commercial entities, not-for-profit organizations, and many other types of organizations 

expend enormous resources trying to identify and communicate with people that 

share an interest in what they offer. P2P networks represent an opportunity to most 

efficiently bring these groups together. 

It is equally clear, however, that certain P2P networks can also be misused to facilitate piracy. Microsoft has first-hand experience of this unfortunate fact: Illegal 

copies of Microsoft products are commonplace on some P2P networks, and their 

number is likely to grow as broadband’s reach expands. The challenge for industry 

is to steer otherwise lawful consumers away from these pirate P2P networks and 

towards legitimate online services and distribution channels. 

DRM technologies may provide at least part of the answer to this challenge. For 

instance, this Subcommittee will hear today from CenterSpan Communications, 

which has successfully embedded the Windows Media DRM architecture onto its 

P2P-based Scour network. Scour’s DRM solution preserves the strengths of the basic 

P2P computing architecture while ensuring that content owners who offer their 

works on the Scour network can maintain the security and integrity of their works. 

Nevertheless, DRM technologies alone cannot solve the piracy problem. As Microsoft and others in the industry learned from their technical protection efforts in the 

1980s, using DRM protections as an anti-piracy club, without adequate regard for 

consumer convenience and expectations, risks alienating lawful consumers and impeding the growth of legitimate distribution channels. Instead, content owners must 

combine the effective use of DRM tools with new business models that give consumers realistic and attractive alternatives to piracy. Digital distribution mechanisms and P2P networks have tremendous operational cost advantages, which—if 

combined with high-volume availability, top-tier content and easy access for consumers at appropriate price points—are just as important to combating piracy as 

technological solutions. In short, if it is roughly as easy for people to buy something 

legitimately as to obtain it illegally, most people will opt for the legal alternative. 

III. CONCLUSION

DRM solutions will play an increasingly central role in securing all forms of digital assets, both those that are intended to be distributed to mass audiences and 

those that are intended to remain private with their creator. Microsoft is fully committed to developing powerful, flexible DRM technologies that protect both content 

and personal privacy while promoting innovation, opportunity, and consumer interests. The private sector has made great progress in providing a diverse array of 

highly effective DRM solutions—solutions that many companies already use to offer 

secure, high-quality content over digital distribution channels. The primary beneficiaries of these technologies, however, are consumers who receive more convenient 

options, a greater variety of high-quality content, and improved personal privacy. 

We at Microsoft recognize that industry needs to work harder at educating the 

public about the uses and benefits of DRM technologies, and about the importance 

of IP protection in their own lives. We appreciate the leadership this Subcommittee 

has demonstrated in this area and the value that its oversight provides in keeping 

industry focused on the broader social and economic importance of DRM technologies. We encourage this Subcommittee to continue its efforts to promote privatesector solutions. Finally, we believe that regulatory action, if any, will be most effective where it promotes continued market innovation and competition, and does not 

focus solely on the needs of any one of the increasingly interdependent technology, 

consumer electronics, and entertainment industries.

Mr. COBLE. Thank you, Mr. Poole. 

Mr. Alexander. 

STATEMENT OF JAMES ALEXANDER, DIRECTOR, eBOOKS 

PUBLISHING ADOBE SYSTEMS, INC. 

Mr. ALEXANDER. Good afternoon, Mr. Chairman. My name is 

James Alexander, and I am the Director of eBooks at Adobe Systems. I appreciate very much your gracious invitation——

17

Mr. COBLE. Pull that mike a little closer to you, Mr. Alexander. 

Thank you. 

Mr. ALEXANDER. Good afternoon, Mr. Chairman. My name is 

James Alexander, and I am the Director of eBooks at Adobe Systems, and we appreciate very much your gracious invitation to provide testimony today on Digital Rights Management and eBooks. 

An eBook is shorthand for an electronic book. Unlike traditional 

print books, eBooks can be purchased online and downloaded instantly to a variety of electronic reading devices. 

In the case of Adobe PDF eBooks, there are more than 300 retailers who sell eBooks in our format. In the case of eBooks publishers 

specify what value-added features they sell to consumers. For 

Adobe PDF eBooks today, I am talking about the ability to print, 

copy selections, expiring documents, lending, giving and text-tospeech. These rights are what Digital Rights Management is about, 

and that is why we are meeting today. 

Some seem to believe that there is an inevitable trade-off between strong protections for intellectual property and the ability 

for consumers to exercise their traditional rights when they purchase or license creative content. In the case of consumer eBooks, 

this is a false statement. Put another way, when a publisher puts 

their books in Adobe PDF eBook format, they are trusting our technology to protect their valuable content against piracy. When a consumer buys an eBook, they are buying rights from a publisher. 

What rights a consumer can buy and at what price depend on what 

the publisher is willing to sell and what the consumer is willing to 

pay. Only by delivering strong cyber armor will authors and publishers feel confident making their works available electronically 

using Adobe’s technologies, and only if publishers deliver a quality 

reading experience, which may mean including some of the uses 

consumers have grown to expect, will consumers embrace eBooks 

in a meaningful way. In either case we believe it is the market that 

should determine which eBooks technologies and which eBooks are 

successful. 

So first let me address the piracy issue. As a member of the leadership team of a software company, no one is more aware of the 

dangers of piracy than I am. If one applies the worldwide piracy 

rate to my company’s annual sales, software piracy costs Adobe 

more than $600 million annually. Publishers and authors are 

aware of this massive software piracy problem, not to mention the 

experiences of the recording and motion picture companies with 

peer-to-peer piracy. 

Book publishers are understandably united in the demand that 

Adobe be vigilant about its eBook security technology. By granting 

a legal shield to tactical measures that protect copyrighted works, 

Congress has encouraged technical innovation and the development 

of a brand new market called eBooks that would not exist without 

these protections granted by the DMCA. 

Let me be clear, Adobe believes that Congress struck the right 

balance in the DMCA. An eBook is a kind of vault for digital content, and Congress wisely chose to outlaw the digital lock picks 

that otherwise would have enabled piracy on a mass scale. 

So let us talk about what consumers want. First and foremost, 

consumers want high quality content. In case after case, these are 

18

the best selling eBooks, regardless of functionality. But 

functionality is also important, and our industry’s first efforts at 

electronic books frankly fell short of the mark. 

With that said, there is an important distinction between not 

having the functionality at all and having it but not selling the 

rights to it. More than a year ago, Adobe acquired a Boston-based 

eBook company called Glassbook. Glassbook brought robust consumer-oriented functionality to Adobe PDF eBooks, which is one of 

the reasons we bought the company. 

Again, we are talking about the ability to specify print rights, 

copying, lending and giving, document expiration, text to speech. 

Adobe continues to listen to the market and deliver innovative 

eBook technologies, and in fact I am pleased to report today that 

this month Adobe’s next release of Adobe’s eBook technology will 

enable libraries for the first time to lend Adobe PDF eBooks much 

the way they can physical books, although at a much lower operational cost and we believe with far greater efficiency. 

But only the publisher and consumer can ultimately decide the 

value of an eBook based on the content and what rights are sold 

or licensed to it. So I would like to wrap up with a quick story. 

In January of 2002, about 5 months ago, BarnesandNoble.com 

published a book of horoscopes through its publishing imprint 

called Barnes and Noble Digital. The book was by noted author 

Susan Miller. The book was sold in print and electronically as a 

Microsoft eBook and as an Adobe PDF eBook. BarnesandNoble.com 

made the PDF eBook printable, which is a feature unique to our 

format. This additional feature was clearly identified for consumers 

at the point of purchase on Barnes and Noble’s Web site. After its 

first week on sale, the Adobe PDF eBook of the year ahead by 

Susan Miller was the third most popular book sold on 

BarnesandNoble.com and in their stores, outselling the other two 

formats. The reason, according to BarnesandNoble.com, was because consumers could buy it, download it immediately and print 

out the pages that they wanted. 

The lesson to draw from this example is that ultimately the marketplace will determine if eBooks thrive. Let us face it, if publishes 

don’t trust Adobe PDF technology, they won’t put eBooks in our 

format and if readers think eBooks in our format are too expensive 

or don’t have the rights that they want, they are not going to buy 

Adobe PDF eBooks. Surely in a market economy we must trust 

that the consumer is the best person to say whether we have finally gotten eBooks right. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Alexander follows:]

PREPARED STATEMENT OF JAMES M. ALEXANDER

Good afternoon, Mr. Chairman, Ranking Member Berman, Members of the Subcommittee. My name is James Alexander, and I am Director of eBooks at Adobe 

Systems Incorporated. I appreciate very much your leadership, Mr. Chairman, in 

convening this hearing and your gracious invitation to provide testimony on digital 

rights management technologies. 

Founded in 1982, Adobe Systems builds award-winning software solutions for network publishing, including Web, print, video, wireless, and broadband applications. 

Adobe is headquartered in San Jose, California and employs more that 3,000 worldwide. It is one of the world’s largest personal computer software companies, with 

annual revenues exceeding one billion dollars. 

19

1 A study released on May 21, 2001 by the Business Software Alliance placed the average 

worldwide piracy rate for business software at 37%. 2Per Adobe’s FY 2001 Form 10–K, FY 2001 research and development expenses totaled $224.1 

million. 3Study by Ipsos Public Affairs for the Business Software Alliance, May 29, 2002. 

eBooks Explained 

For those unfamiliar with the term, an ‘‘eBook’’ is shorthand for an electronic 

book. Like its printed counterpart, an eBook can be of any length, subject matter, 

and may or may not be protected by copyright. Unlike traditional print books, 

eBooks can be purchased online and then downloaded to be read on a variety of electronic devices, from desktop computers to laptops to palm-size organizers to advanced mobile phones. eBooks very often also incorporate security measures to protect their content from piracy, and, in the case of Adobe PDF eBooks, additional 

publisher-enabled features, such as the ability to print, search and copy text, or loan 

to others. eBooks are available now from such online vendors as Barnes and 

Noble.com and Amazon.com. 

Most industry observers do not expect eBooks to make the printed book obsolete 

any time soon. eBook technology is nascent and is strongest in markets such as 

those for out-of-print or small-circulation titles, academic texts, journals, or publishing where speed is of the essence. eBooks also have great potential with travelers and mobile professionals, who can use them to carry a large virtual library 

in a very small space. Despite the early nature of the market, we estimate that 

more than one million eBooks will be sold in 2002. 

Strong IP Protection and Usability Are Not At Odds 

I would like to begin with an observation. If press accounts are to be believed, 

a growing number of wary consumers regard the word ‘‘management’’ in ‘‘digital 

rights management’’ as a euphemism for ‘‘confiscation’’ or a ‘‘roll back.’’ Or, to put 

this view in another way, some seem to believe that there is an inevitable trade off 

between strong protections for intellectual property (IP) and the ability of consumers 

to exercise their traditional use rights when they purchase or license creative content. 

Based on Adobe’s experience in the electronic book market, I believe this is a false 

dichotomy, and that it is not only possible but also absolutely necessary to deliver 

both intellectual property protection for authors and use rights for consumers. Only 

by delivering strong ‘‘cyber-armor’’ will authors and publishers feel confident making 

their works available electronically using Adobe’s technologies. And only if we deliver a quality reader experience, including many of the uses consumers have legitimately grown to expect from books in the physical world, will consumers embrace 

the ability to read content on a screen as opposed to on a printed page. 

The Piracy Threat 

Let me address the piracy issue first. As a member of the leadership team of a 

software company, no one is more aware of the dangers of piracy—that is to say 

the theft of intellectual property—than I. Indeed, if one applies the worldwide piracy 

rate to my company’s annual sales, software piracy costs Adobe more than $600 million annually.1 I am grateful that this Subcommittee already fully understands the 

broader macroeconomic effects of piracy: the sectoral U.S. trade surplus in IP is diminished, U.S. jobs are lost, and government misses out on tax revenue. Perhaps 

most insidiously, piracy directly affects the ability of software companies to invest 

in research and development, something Adobe did to the tune of more than $200 

million last year.2 This investment in R&D helps us innovate by building better 

products, which, in turn, enables our customers to be more productive. And productivity drives the U.S. economy. Break a link in the chain—for example, if we are 

forced to scale back R&D because of software piracy on the Internet—and the entire 

innovation ecosystem collapses, with injury to our customers and the economy as 

a whole. 

A survey released just last week by the Business Software Alliance illustrates the 

depth of the piracy problem. Of more than 1,000 Internet users polled, 57% of those 

who have downloaded software either seldom or never pay for it. Only a scant 18% 

say they would never intentionally engage in piracy.3

Publishers and authors are aware of this massive software piracy problem, not 

to mention the experiences of the recording and motion picture companies with 

peer-to-peer piracy. Book publishers are, therefore, united in their demand that 

Adobe be vigilant about the security of eBooks. This is not to say that print publishers are not excited about the possibility of reaching new audiences with new 

kinds of works on the Internet—they are. However, the livelihoods of thousands of 

20

4 ‘‘Why eBooks Suck,’’ James Alexander, Seybold Report on Internet Publishing Bulletin, April 

2001.

authors and others employed in publishing are on the line, so good security is a sine 

qua non for eBooks. 

eBooks and Fair Use 

I would like now to turn to the eBook reader experience, including the ability of 

consumers to exercise fair use. I will be candid: our industry’s first efforts with electronic books fell well short of the mark. Indeed, in April of last year (before I came 

to Adobe), I wrote an article highly critical of the first generation of eBooks.4 At that 

time, I posited, no one in the industry was addressing what the consumer actually 

wanted, or was living up to the publisher’s responsibility as the historical defender 

of the reader’s experience to ensure that downloaded books were as easy to use as 

their paper-based counterparts. I believe ease of use, in eBooks terms, boils down 

to: 

• Interoperability (accessing eBooks via different formats and/or devices);

• Durability (the promise that eBooks will always be readable in the future);

• Portability (allowing access to a digital library anytime, anywhere); and

• Transferability (the ability to permanently or temporarily transfer digital 

rights to another person).

When Adobe entered the eBook market in earnest more than a year ago with the 

acquisition of the Boston-based eBook company, Glassbook, we set out to design an 

eBook system that would address the shortcomings I identified in my article. 

First, we decided that our eBooks should be based on Adobe’s ISO/ANSI-standard 

PDF technology. Adobe PDF promises to allow users access to their digital libraries 

on different computer platforms and, as portable devices gain larger screens and 

more powerful processors, on non-computer devices as well. Second, we built capabilities into our eBooks that not only mimic the use characteristics readers have 

come to expect from physical books but, in some cases, add additional capability. 

For example, our current eBooks reader on the Windows platform enables lending 

of an eBook to another person, either permanently or for a limited time. The next 

release of Adobe Content Server, the back-end to Adobe PDF eBooks, will enable 

libraries to lend eBooks much as they can physical books, although at lower operational cost and with far greater efficiency. Publishers can also choose to give users 

the right to copy text from an eBook. And since our eBooks are based on Adobe 

PDF, publishers can allow end users to print their eBooks with the look and feel 

of the printed version maintained with high fidelity. Retailers of Adobe PDF eBooks, 

now numbering 300, can create digital libraries for their customers so they can 

download a purchased title to as many as four different devices. Adobe PDF eBooks 

are unique in the industry for including so many customer-oriented use features. 

Adobe is proud to work with the leading international trade and standards organization for the eBook Industry, the Open eBook Forum. We believe that this and 

similar industry groups are best placed to develop and promulgate digital rights 

management (DRM) standards in ways that are flexible, secure, and responsive to 

the needs of the marketplace. 

The DMCA As Foundation For The eBooks Market 

Before I close, I would like to say a brief word about the Digital Millennium Copyright Act (DMCA), a statute that seems to be even more relevant today than it was 

when enacted five years ago. There were in 1998 and certainly are today important 

issues at stake on all sides of the copyright debate. That said, Adobe believes that 

Congress struck the right balance in the DMCA. By granting a legal shield to technical measures that protect copyrighted works, Congress has encouraged technological innovation and the development of a brand new market—eBooks—that would 

not exist without the protections granted by the DMCA. An eBook is a kind of vault 

for digital content, and Congress wisely chose to outlaw the digital ‘‘lock picks’’ that 

have would otherwise have enabled piracy on a mass scale. 

The DMCA makes a wise and specific exception to protect the rights of computer 

scientists doing legitimate security research. We at Adobe do not believe the law in 

any way restricts, or was ever intended to restrict, the ability of researchers to do 

their work and present their results. Academic research of that kind is clearly different from trafficking in a lock-picking program, something that provides no information of a research nature. In short, the DMCA makes a perfectly clear distinction 

between free speech and the sale of burglar tools. 

21

In addition, and except in one narrow instance, Congress did not mandate specific 

technologies in the DMCA. It wisely left technological developments to the commercial marketplace, but promised the shield of Federal law over whatever safeguarding technology IP owners adopted. This approach has been the right one for 

the eBooks marketplace. 

The Elcomsoft case highlights both my points about the DMCA. First, the effectiveness of the government’s prosecution in deterring other eBook piracy shows why 

the DMCA is so crucial if digital content is to be made widely available online. Second, the fact that Adobe has been able to quickly update its eBooks security also 

shows off the DMCA’s flexibility in allowing private industry to change DRM technologies as frequently as necessary in order to stay one step ahead of pirates. If government were to mandate a particular DRM scheme and bureaucrats had to approve its every revision, companies like Adobe would be far less nimble in responding to future hackers. 

Conclusion: Trust the Marketplace 

Ultimately the marketplace will determine if eBooks will thrive. If publishers do 

not trust Adobe, they will not make their content available. And, equally important, 

if readers think our technology is clumsy, or if the price is too high for the use features provided, consumers will not buy eBooks. Surely, in a market economy we 

must trust that the consumer is the best person to say whether we finally have gotten the eBooks formula—including IP protections, use features, and pricing—right.

Mr. COBLE. Thank you, Mr. Alexander. 

Mr. Jacobs. 

STATEMENT OF PETER JACOBS, CHIEF EXECUTIVE OFFICER, 

SUNNCOMM, INC. 

Mr. JACOBS. Good afternoon, Chairman Coble, Representative 

Berman and Members of the Subcommittee. There is a battle raging of which you are all aware, a battle between the traditional 

music industry and the consumer, who is armed with the power 

and promise of technology advancing faster than any business 

model can keep up. 

Over the last 20 years consumers have developed expectations on 

what they can and cannot do with the music they buy. Consumer 

expectations at times can be diametrically opposed to one of our 

very first rights, copyright and invention protection. 

First, I feel a review of some SunnComm history is in order. 

Based in Phoenix, Arizona, SunnComm is a publicly traded small 

technology firm focused on the development of technology design to 

limit the unauthorized copying of music compact disks, CDs, while 

providing the CD buyers the ability to create authorized copies of 

the music contained on the CD for their personal use. 

The DRM and interface technology, which has been codesigned 

by several major record labels, is intended to provide consumers 

with a sizable portion of their fair use expectations, while protecting the rights held by artists, record companies and publishing 

companies. 

In January 2000, when I first arrived at SunnComm, there was 

nary a whisper about digital duplication dangers lurking in the waters ahead. Peer-to-peer file sharing was brand new. The promise 

of faster downloads through broadband access was in its infancy. 

CD burners were still more than $300. No one spent a lot of time 

thinking about the consequences inherent in the CD’s digital ability to reproduce exact clones of themselves, except for the audio 

and hardware manufacturers who knew that protected music content on audio cassette tapes or digital CDs would allow them to 

create a very vibrant and very profitable music copying business. 

22

SunnComm was formed by a cross-section of business and technology-oriented people who had experience in the entertainment 

sector. As SunnComm set about creating this first solution, we discovered a method of altering the CD so that it would play on most 

CD players but not in the computer’s CD-ROM. Not allowing play 

on PCs, it was thought, would reduce the amount of music transfers from those computers onto the Internet, which by March of 

2000 began to emerge along with peer-to-peer file sharing, such as 

Napster. 

SunnComm felt that in order for the CD music protection technology to be accepted by the public, the company must also find a 

way for music buyers to transfer their favorite music recordings 

from the legally purchased CD to their computers. So SunnComm 

developed what is called CD-3 technology, an additional section 

electronically carved out of the CD that contained features only 

playable on a personal computer. Included in the CD user interface 

was the capability to move the selected recordings from the CD to 

the personal computer under a special license grant by the record 

company with the technology being provided by SunnComm and 

Microsoft. Every time the songs residing on the computer were 

accessed and played, a license on the computer itself was verified. 

Once found on the computer, the song would play. 

In March 2001, the battle lines were drawn with America’s first 

copy-protected CD, Charlie Pride - A Tribute to Jim Reeves. That 

is this CD here. It was released with SunnComm’s MediaCloQ and 

Digital Rights Management technology. A second specially encoded 

set of the album’s songs could then be downloaded by the buyer 

from the Internet to reside on the buyer’s computer or laptop at no 

additional charge to the CD purchaser. Mr. Pride’s album, released 

by Music City Records, hit the stands and was clearly marked as 

both protected and enhanced. Even so, it quickly became a lightning rod for the debate that ensued, copyright protection versus 

fair use. 

Along with the introduction of this first copy-protected CD came 

the controversy, and significant progress on behalf of all concerned 

copyright owners, creators and CD buyers have been made since 

the Charlie Pride days. SunnComm, Microsoft and several major 

record companies with whom we are working have evolved into a 

new protection reality. That reality involves creating protection and 

authenticating software on the CD itself that allows consumers in 

a legal and licensed way to make limited copies for their personal 

use or even to send licensed copies to friends and family. 

For those reasons and many others, as I have included in my testimony but I don’t have time to enumerate now, I believe that technology and open-minded cooperation, not managed by electronic 

lobbies, can provide a solution to all players in the music industry. 

I recommend to the Committee that imposing regulations at this 

juncture is premature. Instead, I encourage the parties in each segment to come together, informally at first, to discuss what it would 

take to create a very viable business solution to the turf battle over 

Internet and CD music delivery. 

Thank you very much. 

[The prepared statement of Mr. Jacobs follows:]

23

PREPARED STATEMENT OF PETER H. JACOBS

Good afternoon Chairman Coble, Representative Berman, and members of the 

Subcommittee. There is a battle raging of which you are all aware . . . a battle between the traditional music industry, and the consumer who is armed with the 

power and promise of technology advancing faster than any business model can 

keep up. Over the last twenty years, consumers have developed expectations on 

what they can and cannot do with the music they buy. Consumer expectations can 

be diametrically opposed to one of our country’s very first rights—copyright and invention protection. 

First, I feel a review of some SunnComm history is in order. Based in Phoenix, 

Arizona, SunnComm is a publicly traded software technology firm focused on the 

development of technology designed to limit the unauthorized copying of music compact discs (CDs) while providing CD buyers the ability to create ‘‘authorized’’ copies 

of the music contained on the CD for their own personal use. 

The DRM and interface technology, which has been ‘‘co-designed’’ by several of the 

major record labels, is intended to provide consumers with a sizable portion of their 

‘‘fair use’’ expectations while protecting the rights held by artists, record companies, 

and publishing companies. 

In January 2000, when I first arrived at SunnComm, there was nary a whisper 

about digital duplication dangers lurking in the waters ahead. Peer-to-peer file sharing was brand new, the promise of faster downloads through broadband access was 

in its infancy. CD burners were still $300. No one spent a lot of time thinking about 

the consequences inherent in the CD’s digital ability to re-produce exact clones of 

themselves except for the audio hardware manufacturers who knew that unprotected music content on audio cassette tape’s or digital CD’s would allow them to 

create a vibrant and very profitable home music copying business. 

SunnComm was formed by a cross-section of business and technology-oriented 

people who had experience in the entertainment sector. Our staff was quick to recognize the peril awaiting recording artists, record companies, songwriters and music 

publishers in the form of unauthorized music CD duplication. 

When first polled, record companies were almost unanimous in their CD protection requirements: They wanted software technology applied to the CD master that 

would totally lock up the music on the CD. 

As SunnComm set about creating this first ‘‘solution,’’ we discovered a method of 

altering the CD so that it would play on most CD players, but not in a computer’s 

CD-Rom drive. Not allowing play on PCs, it was thought, would reduce the amount 

of music transfers from those computers onto the Internet, which by March of 2000 

began to emerge do to the rising popularity of Peer-to-Peer (P2P) file sharing technology such as Napster. 

SunnComm felt that in order for the CD music protection technology to be accepted by the public, the company must also find a way for music buyers to transfer 

their favorite music recordings from their legally purchased CD to their computers. 

So SunnComm developed what is called CD–3 technology—an additional section 

electronically carved out of the CD that contained features only playable on a PC. 

Included in the CD–3 user interface was the capability to move the selected recordings from the CD to the personal computer under a special license granted by the 

record company with the technology being provided by Sunncomm and Microsoft. 

Every time the songs residing on the computer were accessed and played, a license 

on the computer, itself, was verified. Once found on the computer, the song would 

play. 

Because the solution, to some extent, restricted a consumer’s unlimited ability to 

copy the CD music anywhere, it was viewed by a segment of the public as an attack 

on ‘‘fair use’’ and the consumer’s construed right to make unlimited personal copies. 

The record and music publishing industries never intended for the consumer to be 

make unlimited copies, but to have just enough copying ability to provide for all of 

the legal CD buyers’ various playback systems. 

SUNNCOMM INTRODUCES FIRST COPY PROTECTED CD IN AMERICA

In March of 2001, the battle lines were drawn when America’s first copy-protected 

CD, Charley Pride—A Tribute to Jim Reeves—was released with SunnComm’s 

MediaCloQ and Digital Rights Management (DRM) technology. A second, specially 

‘‘encoded’’ set of the album’s songs could be downloaded from the Internet to reside 

on the buyers’ computer or laptop at no additional charge to the CD purchaser. Mr. 

Prides’ album, released by Music City Records, hit the stands and was clearly 

marked as both, protected and enhanced. Even so, it quickly became a lightening 

rod for the debate that ensued. Copyright protection versus fair use. 

24

Along with the introduction of the first copy-protected CD in the US came controversy. In order to play the songs in a PC, the user would be directed to a website 

enabling them to first download special DRM-encoded files. Since the digital original 

CD tracks could not be directly playable when placed in the CD-Rom of a PC, (to 

defeat various disc copying programs) the CDs also did not play in DVD players. 

Playability on standard CD players and auto CD players was very high. 

Significant progress on behalf of all concerned copyright owners, creators and CD 

buyers has been made since the Charley Pride days. SunnComm, Microsoft and several major record companies with whom we are working have evolved into a new 

protection reality. That reality involves creating protection and authentication software on the CD, itself, that allows consumers, in a legal and licensed way, to make 

limited copies for their personal use and to send licensed copies to their friends and 

family. We call this product ‘‘Promo-Play’’ and we feel that if given a choice, consumers will opt to utilize this creator-endorsed method of CD buyer’s rights of copying or sharing a song. Sunncomm’s Promo Play tracks sent to friends are playable 

on the friend’s computer for a pre-set period of time or number of plays or time period; then the playback license expires at which time the user is (if online) in directed to a record company website where a discount offer is made to the user to 

purchase the CD. This DRM copy of the music is embedded into the user interface 

and resides on the CD alongside the original digital audio recording tracks. 

SunnComm has found that by incorporating DRM solutions onto the music CD, 

it is possible to combine technology that locks down the digital audio content while 

providing important capabilities such as licensed copying, file transfer, and pc 

playability to the consumer. I believe near-universal playability can be achieved as 

we continue to move toward perfecting copy protection and DRM solutions in the 

remaining years of product life left for the standard audio CD. 

THE OTHER HALF THE PUZZLE

Even if SunnComm or others are successful in striking a balance between consumer and music industry as it relates to the copy-protected music CD, we need to 

rise to the challenge of finding ways to apply our DRM-based technology in a consumer-acceptable fashion to P2P file-sharing on the Internet. SunnComm and its 

partners may be in a unique position to ‘‘broker the peace between consumer, record 

company, song writer, music publisher and artist. . . . The protection and authorized copying solutions for audio CDs and Internet file swapping can be fashioned 

out of the same cloth using Sunncomm protection and Microsoft DRM solutions and 

extensive and sensitive public relations efforts. . 

NOT A ‘‘NEW’’ CHALLENGE

Historically, emerging ‘‘new’’ technologies have faced similar challenges. Almost 

100 years ago, as broadcast radio first came on the scene, artists and publishers, 

the predecessors of today’s record labels, were up in arms that their work was being 

radio-broadcasted to thousands, then millions of people, without compensation to 

them for their effort. 

It was as serious an issue then as P2P file sharing is to us now. Over time, systems were put in place to compensate artists and their representatives through 

ASCAP & BMI royalties. First came the distribution invention, then the fearful 

business uproar of the content providers, then a fair, realistic solution that was sensitive to all parties concerns. 

Flash forward decades later. A well-known entertainment industry leader who 

many of you know, held up a videotape and declared that, if left unregulated, the 

VCR would spell the end of the movie business. 

These historic events may apply to this modern dilemma we find ourselves in 

today. We can predict a tendency for the status quo to react sharply during the shift 

in the technology paradigm. So too can we expect that the new technology, P2P file 

sharing, will eventually be adapted. 

THE GENIE IS OUT OF THE BOTTLE

The Internet isn’t going away. Broadband and its promise of faster download 

times is a reality. Hard disc storage space is getting cheaper by the week, CD-rom 

burners are $90, and the most empowering and seductive technology to come so 

far—P2P file sharing is not going to get ‘‘un-invented’’ or handcuffed anytime soon. 

Another reality—locking music up so that it is delivered over the Internet available only to paying customers it is a myth. In an age when genome experimentation 

is occurring in graduate students’ basements with computers and processors pieced 

together from the local electronics store, it is a fact that those with the talent and 

inclination will always be able to ‘‘crack’’ our codes . . . any codes. The race to deVerDate Jan 17 2002 12:39 Jul 09, 2002 Jkt 000000 PO 00000 Frm 00028 Fmt 6633 Sfmt 6621 G:\WORK\COURTS\060502\80031.000 HJUD1 PsN: DOUGA
25

vise an ‘‘uncrackable’’ protection wrapper around music delivered on the Internet, 

in my opinion, is a fool’s game. Instead, security must be likened to locks we put 

on our houses. A determined thief will be able to break in. Honest people and most 

others will be deterred. Also, as far as music on the Internet is concerned, we need 

to remember that even a legitimately acquired song can be copied by digital or analog methods when it is played (and heard). Once copied and subsequently swapped 

within a file-sharing service, the game is over . . . a million copies of a popular song 

could be propagated in a single day through peer-to-peer networking. 

This incredibly robust P2P technology isn’t going away. Quite the opposite. P2P 

file sharing is a ‘‘killer application.’’ People love it. Just like email was to the initial 

growth of the Internet, so to is P2P music file-sharing to this country’s and the 

world’s broadband growth. 

In my opinion, what the record industry must now do is re-position their public 

stance that file-sharing services are criminals and work in earnest with those P2P 

companies who have captured and maintained an enormous user base and devise 

a business model capable of exploiting this incredible technology and their millions 

of faithful users. We, at SunnComm, feel that Morpheus or Grokster-type P2P file 

sharing services and the record companies, artists, songwriters and music publishers can find common ground using the promise of DRM to secure, account and 

pay for freely distributed music files to their P2P members. The file-sharing services 

then pay all concerned parties, recording artists, songwriters, music publishers and 

music retailers a fair price for the use of their copyrights. 

REVENUES FROM ‘‘FREE’’ DOWNLOADED MUSIC?

Absolutely. Your favorite network programs on radio or television are ‘‘free’’ to 

you. Less-than-CD-quality music over the Internet can be free as well. The cost of 

producing a television show can and does cost millions of dollars per program. Yet, 

networks manage to deliver it to us for ‘‘free.’’ P2P files sharing networks are just 

that . . . a network with an established and faithful audience. Because of the free 

broadcast of these programs, the networks or local stations can generate huge revenues from those advertisers. And there are a lot of them. I understand that one file 

sharing service has a hundreds of million of dollars set aside for the record companies, artists and publishers and the fund is growing daily. 

The file sharing services may actually have more people online at one time than 

any of the TV & Cable networks. There are some very big numbers out there. Some 

of the P2P technology is able to launch directed advertising to their users much 

more effectively than any TV or radio station can. The advertising directed to a P2P 

member will prove more effective (and therefore more valuable) per viewer to the 

advertiser because it is possible to personalize the advertising and direct the message. 

Once the downloading of free music on the Internet is de-stigmatized and artistendorsed like its counterparts in Radio, MTV and CD to CD copying hardware, I 

believe that new music revenues will be discovered. As this revenue source continues to grow, it will continue to give its participants who choose to go online—

free, less-than-CD quality access to the music they love. 

Remember, this is not an ‘‘all or nothing’’ proposition. Most music buyers don’t 

download ANY music at all. They wouldn’t know the first thing about how to go 

about downloading a song. They would continue to buy music utilizing all of the current traditional outlets as well as blank CD’s to burn copies on their CD copiers. 

And, of course, buying CDs produced by the content provider will always uniquely 

give the listener a much higher quality copy and valuable packaging. Conversely, 

many who download music also opt to buy the better-quality CD. 

Through DRM solutions similar to SunnComm’s PromoPlay, P2P-accessed and delivered music can be electronically ‘‘encoded’’ during its delivery to consumers to 

protect its quality and provide real business accountability and virus protection for 

all concerned parties. I believe the ultimate solution is to ‘‘de-stigmatize’’ the 

downloading of mp3-type music on the Internet for millions of applauding user-citizens by incorporating a responsible, reliable, and accountable DRM-driven P2P delivery system. We believe this strategy will adequately and fairly compensate the 

artists, the record companies and the publishers. This model will work if we build 

it. Since I believe stopping P2P music sharing is impossible, free sponsored, inferior 

quality MP3 music is a solution that will work today. 

PIRACY CAUSES MAJOR FINANCIAL LOSSES TO AMERICA’S ECONOMY

When a legal CD is sold it was manufactured by a company contributing to the 

local, state and federal revenues employing tax-paying Americans who spend their 

wages on buying goods from the American retail community. Further the wholesale 

26

distributor and retailers who would have sold those legal CD’s are out of the income 

and tax paying loop and their reduced revenues puts more Americans out of work 

and onto the unemployment rolls. This is a result that has to do with legalized 

audio CD burners as well as Internet downloading and I believe the best way to 

stop this major income reduction to the American economy is creating copy-protected CD’s and legalizing P2P services that pay the copyright owners. Imagine a 

day when music file sharing services exist to the benefit of consumers and providers 

alike, rewarding and extending the reach of the artists and record company marketing efforts while providing those so inclined to enjoy protected music from the 

Internet to do so at no direct expense to them. Same as radio. Same as television. 

FOR MUSIC AT LEAST, A BUSINESS AND PROTECTION SOLUTION IS AT HAND

SunnComm’s own music CD experience coupled with our relationships with major 

record companies, several major file-sharing services, as well as a technology partnership with Microsoft and others, leads me to believe that a financial and technological solution can be realized between these new P2P-based companies and the 

record companies, artists and publishers. 

I believe there exists the revenue potential to support this free-access-to-music 

model. As far as music is concerned, I don’t believe the courts or Congress will be 

able to solve this dilemma. Every time a file-sharing service gets sued, another two 

pop up. I believe this business model will succeed because it is the only solution that 

will serve the music lover, the P2P file sharing services, record companies, the artists, music publishers and the American economy. 

For those reasons, I believe technology and open-minded cooperation not managed 

by electronic hardware lobbies can provide a solution to all players in the music industry. I recommend to the committee that imposing regulations at this juncture is 

premature. Instead, I encourage the parties in each segment to come together, informally at first, to discuss what it would take to create a very viable business solution 

to the turf battle over Internet music delivery as well as to protected CD’s. 

At the request of the Committee, SunnComm will cooperate within its means with 

all parties involved to achieve what it believes to be a very ‘‘do-able’’ technology solution for music. 

Thank you all for allowing SunnComm to provide this input from the front lines 

of this battle.

Mr. COBLE. And since I am a fan, Mr. Jacobs, did you say that 

that was a tribute to Jim Reeves, that Charlie Pride was a tribute 

to Jim Reeves? 

Mr. JACOBS. Yes. 

Mr. COBLE. I like both of them. Thank you, Mr. Jacobs. 

Mr. Hausmann. 

STATEMENT OF FRANK HAUSMANN, CHIEF EXECUTIVE 

OFFICER, CENTERSPAN COMMUNICATIONS CORPORATION 

Mr. HAUSMANN. Thank you, Chairman Coble, Congressman Berman and other Members of the Subcommittee. My name is Frank 

Hausmann, and I serve as Chairman and Chief Executive Officer 

of CenterSpan Communications Corporation. CenterSpan is a 

NASDAQ-listed company headquartered in Portland, Oregon, and 

has developed and commercially launched a next generation software-based Content Delivery Network, or CDN, capable of supporting ultra low-cost delivery of DRM-protected rich media on a 

worldwide basis. Our new CDN service is called C-StarOne. 

Mr. Chairman, CenterSpan is totally committed to the protection 

of intellectual property rights, including our own 19 separate CStarOne patent applications. While today’s C-StarOne actively supports Microsoft’s Windows Media DRM, our C-StarOne service is 

DRM agnostic and is capable of supporting a variety of DRM solutions. In fact, C-StarOne not only supports a variety of DRM solutions but augments them by adding an additional six layers of network security. So placed in the context of this hearing and my disVerDate Jan 17 2002 12:39 Jul 09, 2002 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6601 G:\WORK\COURTS\060502\80031.000 HJUD1 PsN: DOUGA
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tinguished colleagues here today, C-StarOne is a highly secure content delivery network, an intelligent distribution channel if you 

will, not a DRM technology per se. 

I commend the Subcommittee for holding this important inquiry 

into DRM solutions with the objective of facilitating a win-win 

value proposition for both the owners and providers of copyrighted 

rich media content and the millions of consumers who wish to access high quality content via their home on portable computers, set 

top boxes and other portable home and computer electronic devices. 

The consumer benefits of DRM protected digitally distributed content can and will include broad access to high quality media entertainment at the lowest feasible cost. 

Today’s hearing will help to further educate both the public and 

the industry about the unprecedented opportunity that we collectively have to meet the large demonstrated consumer demand for 

digitally distributed media and entertainment content. 

Let us quickly review the needs and desires of each member of 

this new digital distribution channel. Content owners need effective 

Digital Rights Management security and economics. Wholesalers 

and distributors need cost effective content delivery networks. Consumers want affordable access to high quality digitally distributed 

media entertainment with an easy to use user interface. 

Mr. Chairman, the common denominator of need between content owners and providers, wholesalers and distributors, and the 

consumer is basic economics. The entire industry has needed a lowcost, highly secure distribution channel capable of profitably preparing, protecting and delivering rich media entertainment to the 

consumer. The lower the costs incurred by the entire industry in 

the distribution channel, the lower the consumer price point can 

be, while still supporting compelling economics for the entire industry. 

CenterSpan provides a unique suite of content delivery network 

services capable of supporting compelling economics for all three of 

these constituencies. Our recently announced business partnerships 

with major media companies are clear testimony that Hollywood is 

embracing cutting-edge cost-effective digital distribution and security solutions as it strives to meet consumer demand. Any reluctance to fully engage in online media distribution will be swept 

aside by the realization that cost effective technological answers to 

valid business concerns are available today and do provide new and 

significant economic incentives for all members of this new distribution channel. 

On February 28th of this year we announced an agreement 

whereby Sony Music Entertainment will make recordings available 

from its catalog of worldwide famous music for CenterSpan to 

digitally distribute as a wholesaler via its secure C-StarOne content delivery network. On May 21st, Vivendi Universal Net USA, 

the U.S. arm of Vivendi Universal’s Paris-based Internet and technology unit, announced that it intends to launch a new online entertainment service using CenterSpan’s C-StarOne content delivery 

network. The new service will debut later this year on one of 

VUNet USA’s entertainment properties. 

Clearly these two announcements are evidence that major content providers are recognizing the tremendous economic potential 

28

of promoting and selling legitimate DRM-supported content via a 

low-cost distribution channel such as C-StarOne. 

The C-StarOne intelligent distributed network supports compelling bandwidth savings, provides content owners with robust security, and provides consumers with better speed and reliability. The 

entire industry is discovering that software-based intelligent distributed content networking offers the most compelling viable 

means of delivering digital content to a large audience today. 

Thank you very much. 

[The prepared statement of Mr. Hausmann follows:]

PREPARED STATEMENT OF FRANK G. HAUSMANN

Chairman Coble, Congressman Berman, and other members of the Subcommittee, 

my name is Frank G. Hausmann. I serve as CEO and Chairman of the Board of 

CenterSpan Communications Corporation, headquartered in Portland, Oregon. 

CenterSpan is a NASDAQ-listed (stock symbol: CSCC). CenterSpan develops and 

markets a dynamically scaleable, intelligent distributed network capable of supporting the low cost storage and delivery of rich media worldwide. My professional 

background includes extensive computer industry experience in both legal and management roles. 

First, I wish to commend the Subcommittee for holding this important inquiry 

into the digital rights management (DRM) solutions that are available today to create a win-win value proposition for both the providers of copyrighted rich media content and the millions of consumers who wish to access high-quality content on their 

computers and other electronic devices. The consumer benefits of DRM-protected 

digitally distributed content include broad access to high quality media at the lowest 

feasible cost. 

Today’s hearing will help to further educate both the public and industry about 

this dynamic sector and the unprecedented opportunity we now have to meet the 

large, demonstrated consumer demand for digital audio and video delivery. I also 

wish to compliment Chairman Sensenbrenner, Congressman Conyers, and other 

Committee members for their continued dedication to this subject, as evidenced by 

the Committee’s recent solicitation of input from industry and the public regarding 

consensus copyright legislation that could help spur the further development of the 

online media marketplace. 

TECHNOLOGY AND THE ONLINE MEDIA MARKETPLACE

Mr. Chairman, this Subcommittee is acquainted more than most with the breakneck changes resulting from the worldwide deployment of digital technology, the tremendous challenges it presents to traditional businesses models, as well as to copyright law and policy. You strove to get ahead of the curve with enactment of the 

Digital Millennium Copyright Act (DMCA) in 1998. And you are actively engaged 

now in considering whether additional statutory change is needed. 

But you also know more than most that the slow and difficult pace of the legislative process lags behind a rapidly evolving digital marketplace. You also understand 

that, while law and policy can create a supportive framework for a thriving online 

media marketplace, they cannot create it. That is a job for those who engage in business and technology. 

From the point of view of a business person leading a technology enterprise, I can 

tell you that the tools required to build that marketplace are here today and do not 

require additional legislative support. Our company has had a long and in-depth 

dialogue with all the essential parties comprising that marketplace—the providers 

of content, online distributors, as well as consumers—and we have a keen understanding of the needs and desires of each member of this new channel:

• Content owners need effective DRM security.

• Distributors need cost-effective storage and delivery technologies.

• Consumers want affordable access to a high-quality interactive media experience.

While there may well be other viable solutions, CenterSpan has developed and 

can provide a unique suite of content delivery network services that balances the 

demands, and optimizes the sometimes conflicting objectives, of these key constituencies. Our recent business partnerships with major media companies are clear testimony that ‘‘Hollywood’’ is embracing cutting edge and cost-effective technology as 

29

it strives to meet consumer demand. I think we are all aware that there may not 

be enough time left this year to enact any major amendments to our copyright law. 

Indeed, Mr. Chairman, it is quite likely that when you return to start the new Congress next January you will see that very significant and positive changes have occurred in the marketplace. This will occur as any residual reluctance to fully engage 

in online media distribution is swept aside by the realization that effective technological answers to valid concerns are available today and provide significant economic incentives for all members of this new distribution channel. 

COMPANY BACKGROUND AND ACTIVITIES

CenterSpan’s mission is to create the lowest cost, most highly secure digital distribution network—and we have. By definition, this means that we are committed 

to the protection of intellectual property (IP). Our proprietary, software-based distributed streaming and downloading technologies are protected by 19 separate patent applications. Our C-StarOneTM service is capable of supporting a variety of DRM 

technologies that enable content owners to set their own ‘‘usage rules’’ for copyrighted materials. 

We have developed and deployed next generation network technology for the low 

cost delivery of digital rich media and entertainment. Our goal is to develop a secure digital content distribution channel and business model that will provide great 

economic incentive and benefit to all without policy disagreements and litigation. 

In December 2000 we purchased the 4.5 million-customer list and other assets of 

Scour Exchange at a bankruptcy auction for $9 million in cash and stock. Scour was 

a pioneering P2P system for the delivery of audio and video, but its failure to comply with copyright law resulted in a barrage of litigation and subsequent bankruptcy. 

In the spring of 2001 we launched the consumer trial of a new legal Scour Exchange, Scour.com, which today is a technology and marketing showcase for our CStarOne network. Tens of thousands of users are participating in the free trial. CStarOne supports the secure and licensed distribution of digital content including 

music, music videos, broadcast television catalog, full motion video, e-books, documents, as well as digital photos, images and graphics. Our proprietary market research, as well as extensive conversations with all segments of the digital entertainment world, convinces us that there is substantial consumer demand for such digital 

content services—provided they offer the right value equation which includes ease 

of use, content, and price. 

In February 2001, CenterSpan established a Digital Media and Entertainment 

Group. The joint executive team of Michael Kassan and Howard Weitzman runs this 

Los Angeles-based unit. Mr. Kassan formerly served as President and Chief Operating Officer of Western Initiative Media Worldwide, now a division of the Interpublic Group. In 1997, Mr. Kassan was named by Advertising Age as one of the top 

media executives in the United States. Mr. Weitzman was formerly Executive Vice 

President of Universal Studios and has been a well-respected entertainment attorney for over 30 years. Both of these accomplished executives came to CenterSpan 

from Massive Media Group, a developer of DRM based applications and services for 

the entertainment and advertising markets. Together, they brought to CenterSpan 

an understanding of DRM technologies, and the entertainment, media, and advertising sectors that is invaluable to our future growth. 

RECENT CONTENT DISTRIBUTION DEALS

I am proud that CenterSpan’s superior technology enabled us to become the first 

and, so far, only distributed content delivery network to be licensed to distribute 

copyrighted digital content from major media companies. On February 28th of this 

year we announced an agreement with Sony Music Entertainment whereby Sony 

will make recordings available from its catalog of world-famous music performances 

for CenterSpan to digitally distribute via its secure C-StarOne content delivery network. This non-exclusive agreement marks the first time Sony Music Entertainment 

has made its artists’ music available to a digital distributor for use on a secure distributed content delivery network. 

The agreement lets CenterSpan provide music from Sony Music Entertainment 

artists to a wide variety of online service providers seeking to offer their subscribers 

streaming and downloadable music. Using C-StarOne, service providers have the 

flexibility to cost effectively scale their offerings to fit a variety of business models, 

including pay-per-use, downloadable or streaming content. 

At the time of the announcement, Fred Ehrlich, President of New Technology and 

Business Development at Sony Music Entertainment stated, ‘‘Sony Music Entertainment has always supported new technological innovations that help us bring our 

30

artists’ music to their fans. We are interested in working with peer-to-peer networks 

that respect copyright, and CenterSpan’s C-StarOne network does just that.’’

The agreement with Sony Music Entertainment is a tremendous validation of CStarOne as a trustworthy delivery network for a media company’s top content. CStarOne creates a cost-effective distribution channel for worldwide delivery of rich 

digital media that will enable digital distribution to move from an emerging stage 

to a growth stage with solid economics. Our relationship with Sony Music Entertainment is based on a common vision of the future of secure digital distribution. CStarOne will provide a wide variety of Internet service providers and portals with 

quick and secure access to top digital media and entertainment content for their 

Internet subscription or pay-per-use services. This will substantially broaden the 

availability of digitally distributed music worldwide. 

On May 14th, this partnership was taken to a new level when Sony Music Entertainment launched a promotion of songs from five of its artists using Scour.com, 

CenterSpan’s showcase for C-StarOneTM, CenterSpan’s content delivery network for 

securely delivering rich media over the Internet. Scour users are able to listen to 

these Sony Music Entertainment artists’ tracks on their computers as many times 

as they wish for 30 days after downloading. At the time of this announcement, Jim 

McDermott, Senior Vice President, Operations and Label Relations, Sony Music Entertainment, said, ‘‘Sony Music Entertainment has always embraced new technology 

that furthers our artists’ reach, and CenterSpan’s C-StarOne One delivery network 

will allow music fans to share the music that they love with their friends, legitimately. Working with Scour.com gives us great promotional opportunities like this 

for our artists. This promotion will kick off Sony Music’s relationship with 

CenterSpan on a high note.’’

On May 21st of this year, Vivendi Universal Net USA (VUNet USA), the U.S. arm 

of Vivendi Universal’s Paris-based Internet and technology unit, announced a letter 

of intent for VUNet USA to launch a new digital entertainment service using 

CenterSpan’s C-StarOneTM content delivery network. The new service is expected to 

debut later this year on one of VUNet USA’s entertainment properties. In conjunction with the announcement, Steve Sheiner, Chief Revenue Officer of VUNet USA 

stated, ‘‘We look forward to working with CenterSpan to launch an innovative entertainment service that offers premier content to millions of online fans.’’ This new 

venture will provide a value-added service unique to the media and entertainment 

market. The suite of value-added services to be utilized includes content aggregation, content hosting and delivery, digital rights management, license clearing, royalty administration and network reporting. 

Clearly, these two announcements prove that major content owners and their 

Washington advocates are recognizing the tremendous potential of legitimate, DRM 

supported intelligent distributed networks. In remarks delivered on November 6, 

2001 before the O’Reilly Peer to Peer Conference here in Washington D.C., Recording Industry Association of America (RIAA) head Hilary Rosen noted: 

The problem with peer to peer is not the technology but how it is used. The multiple exciting applications of P to P that are being discussed over these few days show 

the limitless potential of the technology in multiple ways. The ability to achieve cost 

savings on storage and bandwidth, the web tools, the meeting applications, the communications applications, the customer service applications are all extremely exciting. 

COST EFFICIENCIES OF DISTRIBUTED NETWORKS

CenterSpan embraced the software-based content delivery marketplace out of our 

belief that distributed networks and applications are both the origin and the future 

of the Internet. The Internet’s fundamental support of a widely dispersed and virtually limitless number of participants, coupled with the transmission of digital information through packet switching that breaks up messages and content and sends 

it between users via multiple routes, was chosen to assure communication regardless of attacks on any single component of the system. The result is the most robust, 

resilient, and useful communications system in history. Within this fundamental architecture, pushing content to the edge is the best means for providing high quality, 

on-demand delivery of any content in the most cost-effective manner. 

The C-StarOne intelligent distributed network supports compelling bandwidth 

savings, provides content owners with robust security, and provides subscribers with 

better speed and reliability. From the user’s perspective, the network ‘‘looks and 

feels’’ like a central server network. But from a content service provider’s perspective, content is cut into thousands of ‘‘segments’’ and hosted and distributed from 

points or ‘‘peers’’ in the network. 

All files in the C-StarOne network are encrypted, signed with a digital signature, 

and encased in a DRM wrapper before being introduced into the system. The conVerDate Jan 17 2002 12:39 Jul 09, 2002 Jkt 000000 PO 00000 Frm 00034 Fmt 6633 Sfmt 6621 G:\WORK\COURTS\060502\80031.000 HJUD1 PsN: DOUGA
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tent is centrally controlled, indexed and tracked through the network. User machines must be authenticated before content can be downloaded or streamed. This 

revolutionary network scales easily and naturally because points or ‘‘peers’’ provide 

additional network redundancy while keeping a tight lid on bandwidth costs. I have 

no doubt, based on our ongoing business conversations, that content owners and 

telecommunications providers understand that a software-based, intelligent distributed content delivery network is the only economically viable means of delivering 

digital content to a large audience. 

APPLICATIONS FOR WEBCASTERS

The very substantial cost savings that can be achieved through an intelligent distributed network were again documented on April 3rd of this year, when we announced the results of a pilot with RadioCentral to stream Internet radio content 

using C-StarOne. The results of the initial pilot indicate that RadioCentral realized 

a more than a 90 percent bandwidth savings over its central server streaming delivery system. 

Jim House, Chief Executive Officer at RadioCentral, had this to say: ‘‘The relatively high cost of bandwidth has been a barrier for Internet broadcasters and has 

pushed a number of players out of the market. The critical success factor of this 

business is centered on growing an audience and getting them to increase their listening time, which correspondingly increases bandwidth costs. CenterSpan’s CStarOne CDN Services reduces bandwidth costs so significantly that it can truly be 

called an industry-enabling technology. It is good news for both the provider and 

the audience because it lowers costs and delivers a better listening experience.’’

C-StarOne provides the Internet radio industry with an economically compelling 

alternative for content delivery, allowing it to accommodate a growing audience 

while keeping a lid on their infrastructure costs. The results of this pilot further 

validates the security and economics of the C-StarOne distributed network for 

downloading and streaming rich media. Your Subcommittee has of course been 

closely monitoring the continuing controversy regarding the recommendations of the 

CARP regarding the proper royalty rate for the compulsory webcasting license established in the Digital Millennium Copyright Act (DMCA). Regardless of the ultimate disposition of that rate, much of the discussion has neglected to note that a 

central server-based webcasting model is of very dubious economic viability, given 

that cost efficiencies do not accrue when larger audience and longer listening time 

translate into expensive additional requirements for bandwidth. The use of software-based content distribution, as demonstrated by the Radio Central pilot, provides webcasters with a technology that allows their business to grow in a cost-efficient way. 

In addition, the integral network reporting function incorporated within CStarOne provides a means of generating and aggregating content and usage data 

that must be a part of any royalty payments system. This aspect of our technology 

works equally well for the compulsory license of non-interactive Webcasting established by the Digital Millennium Copyright Act and for individual content licenses 

negotiated between copyright owners and Internet distributors. 

DRM, FAIR USE, AND PUBLIC POLICY

Since enactment of the DMCA, Congress has engaged in a dual enterprise. Your 

first objective has been to determine the current state and anticipated evolution of 

digital entertainment technology and applicable law. Today’s hearing is a valuable 

addition to that data gathering process. 

Your second task has been to determine whether additional legislative intervention is required to preserve the goals of copyright law and the rights of copyright 

holders, while promoting the further development of digital distribution of music, 

movies, and other rich cultural media. Once again, Congress must balance traditional legal values with new technology that, depending on its use or misuse, may 

promote or undermine the progress of science and the useful arts. CenterSpan believes that what we have already learned in developing the first licensed and secure 

software-based content delivery network, from Scour’s consumer trial, and from our 

ongoing and precedent-setting joint ventures with major media companies, can be 

of substantial value to those ongoing Congressional deliberations. 

We take strong exception with those who argue that the utilization of DRM is inherently at odds with the fair use rights reserved to individual users of copyrighted 

material. Depending on whether a consumer is renting or buying digital content, 

content owners have a need to establish reasonable time and usage restrictions on 

digital media in order to have the assurance that Internet distribution will not be 

the equivalent of commercial suicide. However, the marketplace will penalize excesVerDate Jan 17 2002 12:39 Jul 09, 2002 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6621 G:\WORK\COURTS\060502\80031.000 HJUD1 PsN: DOUGA
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sive DRM restrictions because the digital media distribution business, like the traditional brick and mortar channel, is a consumer service business, and failing to meet 

the legitimate expectations of consumers will inevitably lead to the failure of digital 

media ventures. 

Although primary reliance should be placed upon market forces, some legislative 

intervention may be desirable to establish a ‘‘middle way’’ that steers between the 

conflicting views and agendas of copyright anarchists versus copyright maximalists. 

This middle way should be firmly grounded in clarifying consumer rights in the digital age. The notion of a new and affirmative basis for assuring the goals of ‘‘fair 

use’’ was laid forth in the pioneering 2000 National Research Council report, ‘‘The 

Digital Dilemma: Intellectual Property in the Information Age’’. After concluding 

that ‘‘fair use and other exceptions to copyright law should continue to play a role 

in the digital environment’’, and that ‘‘the fair use doctrine may also prove useful 

as a flexible mechanism for adapting copyright to the digital environment’’, it issued 

this policy advice:

Recommendation: The committee suggests exploring whether or not the notion of 

copy is an appropriate foundation for copyright law, and whether a new foundation can be constructed for copyright, based on the goal set forth in the Constitution (‘‘promote the progress of science and the useful arts’’) and a tactic by which 

it is achieved, namely, providing incentive to authors and publishers. In this 

framework, the question would not be whether a copy had been made, but whether a use of a work was consistent with the goal and tactic (i.e., did it contribute 

to the desired ‘‘progress’’ and was it destructive, when taken alone or aggregated 

with other similar copies, of an author’s incentive?). This concept is similar to 

fair use but broader in scope, as it requires considering the range of factors by 

which to measure the impact of the activity on authors, publishers, and others.

CenterSpan believes it may be useful to consider Federal legislation that carves 

out a digital fair use ‘‘safe harbor’’ to preserve this key protection of informed discussion, criticism, and debate, as well as to affirmatively delineate consumer rights. 

We have always maintained that the marketplace can best determine the reuse limitations supported by DRM technologies and is most likely to set the optimal balance between the desires of consumers and the legitimate concerns of content owners. However, experience has also led us to conclude that the best means to stabilize 

the digital media marketplace, reduce disruptive and expensive litigation, and encourage consumers to utilize legitimate services may be the enactment of Federal 

legislation stating, as clearly as possible, what reasonable and legitimate uses consumers may make of lawfully acquired digital media. Such legislation must recognize and be in harmony with the statutory rights of copyright holders. But it should 

also be affirmative in nature, going beyond the existing concept of ‘‘fair use’’ which 

is but a defense to allegations of copyright infringement. Such legislation should be 

as explicit as possible in laying out how consumers may legally use their copyrighted digital materials. Since it may be impossible to envision all types of usage 

supported by future technologies, the legislation should provide clear principles to 

guide the courts. We are under no illusions that it will be easy to write, much less 

enact, such legislation. But we do think that it may be the single most important 

and useful initiative Congress could do to spur the development of licensed online 

media services. 

CONCLUSION

CenterSpan appreciates this opportunity to share its views, market experience, 

and vision for DRM-protected content delivery. We look forward to working with the 

Subcommittee and all others who are striving to assure that the legal and policy 

structure for digital media in the twenty-first century is fully relevant, and strikes 

the proper balance between the rights and interests of all stakeholders, in this exciting and rapidly evolving marketplace. 

Thank you for letting me share these thoughts with you today. I would be pleased 

to answer any questions.

Mr. COBLE. Thank you, Mr. Hausmann, and thank you, gentlemen. 

We have been joined by the gentlelady from Pennsylvania, Ms. 

Hart, the gentleman from Utah, Mr. Cannon, and although not a 

member of this Subcommittee, Mr. Schiff from California and Mr. 

Jenkins from Tennessee was with us, but he had to depart. HopeVerDate Jan 17 2002 12:39 Jul 09, 2002 Jkt 000000 PO 00000 Frm 00036 Fmt 6633 Sfmt 6601 G:\WORK\COURTS\060502\80031.000 HJUD1 PsN: DOUGA
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fully he will return. Well, the voting bell has not yet sounded. So 

we will commence with questioning. 

Now, we apply the 5-minute rule to us as well. So, gentlemen, 

in the interest of time, if you can give me a yes or no to this. Do 

you believe that the Federal Government should impose a single 

DRM standard or some other anti-piracy regulation on an annual 

basis? 

Mr. Poole. 

Mr. POOLE. Microsoft does not believe that the Federal Government should mandate any single technology, ours or anybody else’s. 

We believe that protection of intellectual property is paramount 

and that interoperability among the innovative solutions that we 

and other members of the industry are producing is also critical. 

But that is our position. 

Mr. COBLE. Mr. Alexander. 

Mr. ALEXANDER. Adobe believes that a legislated DRM standard 

will kill the market and would be bad and is not supportive of that 

legislation. 

Mr. COBLE. So do you answer no? 

Mr. ALEXANDER. No. 

Mr. COBLE. Yeah. Okay. 

Mr. Jacobs. 

Mr. JACOBS. In the interest of time, SunnComm believes essentially what Mr. Poole just said at Microsoft. So we will take 

Microsoft’s position in the interest of time and say no. 

Mr. COBLE. I don’t want to put you all in a straitjacket. 

Mr. JACOBS. No. That is fine. 

Mr. COBLE. If you want to elaborate on this. 

Mr. JACOBS. No. I believe that the interest of creating solutions 

would be best created by the private sector, and we believe that. 

Mr. COBLE. Thank you, sir. 

Mr. Hausmann. 

Mr. HAUSMANN. CenterSpan’s answer is no, sir, and for two very 

simple reasons. The first is that the content owners need to decide 

what DRM technology they are comfortable with, and there is not 

a uniform opinion on that. And secondly, and probably even more 

importantly for this Committee, is the fact that consumers need to 

be offered a very easy, no-brainer user friendly DRM interface, and 

all of them are very different and provide different levels of consumer usability. 

Mr. COBLE. Thank you, gentlemen. I am sorry. For you, Mr. 

Poole. My good friend and fellow bluegrass aficionado Richard 

Bates of Disney—I am not sure whether Richard is still with us or 

not, but Richard sent me an e-mail——

Pardon? Is he here? I knew he was here earlier. A little notoriety 

for you, Richard. But Richard sent me an e-mail recently describing 

the piracy of some of this summer’s biggest theatrical movies, even 

prior to their release to the public. Now, is there any way that 

DRM technology that either your company, Mr. Poole, or another 

vendor offer would prevent or limit this type of piracy? 

Mr. POOLE. Well, if that content was pirated before it was released to the public, that means that it probably was intercepted 

maybe during the production process or manufacturing process 

while still under Disney’s control, and this is a significant problem 

34

for Hollywood and the software industry as well. We have the same 

problem with manufacturing of new copies of Office or Windows, 

showing up and being part of the same way. 

So I think the only way that technology can protect that is to ensure obviously security of the physical property, the content, while 

it is in production and making sure it doesn’t fall off the back of 

any trucks, digital or otherwise, number one. And number two is 

then to protect the content when it is released, using a DRM technology such as that made by us and others. 

But there will always be leaks in the system, and our position 

is very clear that we can’t stop piracy, nor can anybody else. If we 

develop a legitimate marketplace for people to get the content they 

want and it is easy and it is affordable and it is convenient and 

meets needs, consumers will go there. 

Mr. COBLE. Anyone else want to weigh in on this? Mr. Jacobs? 

Mr. JACOBS. There is no DRM solution that will stop piracy. That 

is SunnComm’s position, because all it takes is the escape of the 

original material just one time to be loaded on to a peer-to-peer file 

sharing network, and have a hundred million—have a million copies available by the next morning to people who are——

Mr. COBLE. Mr. Alexander—Hausmann. 

Mr. HAUSMANN. Yes. I agree with my colleagues that there is no 

DRM today that any of us believe that eventually—and I emphasize eventually—could not be hacked. I think what we ought to be 

focusing on in conjunction with DRM technology is a legitimate entertainment service offering to the consumer, because if there is a 

very low-cost highly valuable consumer entertainment service 

where lots of content is available, I think all of us in this room 

would agree that most people would try to do the right thing, who 

try to do their best, would probably choose to buy legitimate content as opposed to buy pirated content. 

Mr. COBLE. I see my red light appears. Mr. Alexander, I will get 

you the next round. Hold your thought. I think, folks, we are going 

to try to do a second round here. I think that this warrants a second round. So I am now pleased to recognize Mr. Berman for 5 

minutes. 

Mr. BERMAN. Well, thank you very much, Mr. Chairman, and 

your questions of this panel appeared—their answers have thrown 

me sort of off track. So instead of getting into areas which maybe 

I will try to get into them the second round, I would like to just 

pursue a little bit your responses. Because there is one way to deal 

with the problems of information, pirated information that is sold 

without the DRM protection, and it would be, or at least in concept 

could be a tech mandate. In other words, if—to be the devil’s advocate, and if siding with Richard Bates is—if he is the devil, then— for purposes just of this issue, because I am certainly uncertain on 

the wisdom of going that approach—but given that something has 

come into the market without DRM, given what I understand to be 

the law regarding over the air television broadcasts, where 

encryption is prohibited, given some of these problems of piracy, of 

videos shot in theaters or things stolen from exhibitors or inside 

guys getting paid off to take it outside, at least in theory, why 

wouldn’t a tech mandate plug up those holes in the system without 

in any way trying to discourage you from doing what you are 

35

doing? In other words, in dealing with the computer or consumer 

electronics equipment that is utilized to ultimately exhibit them. 

Any of you. 

Mr. POOLE. If I may address your question, I believe the software 

industry, as you probably are aware, is a significant victim of piracy as well, the BSA figures quoted being larger than $12 billion 

per year, and some believe that is grossly underestimated. If there 

were a silver bullet to stop digital piracy, we would have used it. 

I don’t think that any of us in the software or frankly in the tech 

industry believe that there is anything that can be mandated given 

the technology as we know it or where we see it going in the foreseeable future to, as you say, you know, plug the hole, to solve the 

problem after the content has been released or pirated, whether it 

is via a Handycam in a movie theater or a CD master being stolen 

out of a CD printing plant in China. 

Mr. BERMAN. So what you are saying really is we could pass that 

Senate legislation, seek to implement it, and in the end it will still 

go on; it will be—apart from whether it is wise, it won’t be effective? 

Mr. POOLE. I believe that ultimately relative to the technology 

that we understand today and from reading the academic literature 

in the field, speaking with colleagues in our research organization 

and other places, I believe that there is no known practical means 

for trying to stop the playback of what is deemed to be pirated content from a technical perspective. 

Mr. BERMAN. Then how come the DVD standard seems to have 

worked to prevent the rampant copying of DVDs? 

Mr. POOLE. So I think we are talking about two separate things. 

In the DVD protection, we are 100 percent believers in that. 

Mr. BERMAN. No, we are not talking about two different things. 

We are talking about the same thing. One is voluntary and one is 

sort of Government mandated, but somewhere for 5 years a whole 

industry complying with a standard has developed, sold 30 million 

machines, that has a standard which has allowed no copying. We 

can get into issues about fair use and some of the—in the next 

round, but so far that has been a fairly effective encryption mechanism. 

Mr. POOLE. Well, let me address again—I think there are two 

separate points to look at. The DVD system has been hacked. That 

has been widely publicized. And thanks to the DMCA, the hacks 

that are applied to DVD can actually be subdued and attacked by, 

you know, lawful means. So that is number one. The DVD system 

can be broken. However, it does, as you state, protect content while 

it is in the secure format of the DVD and while no hacking technologies apply. 

The issue of content coming off of a Handycam in a theater or 

falling off the back of a truck in Hollywood, that stuff has never 

been protected. So it is let out into the wild, as they say, in an unsecure format. It is not in a DVD secure format, and trying to capture it is hard. 

Mr. BERMAN. Well, no. Again, I have got reservations about—I 

don’t know about the wisdom of this approach, but I am just trying 

to deal with at least the theoretical argument here. If you had a 

law which said every computer and every consumer electronic deVerDate Jan 17 2002 12:39 Jul 09, 2002 Jkt 000000 PO 00000 Frm 00039 Fmt 6633 Sfmt 6601 G:\WORK\COURTS\060502\80031.000 HJUD1 PsN: DOUGA
36

vice sold in the United States had a gismo on it that said don’t 

take it, why wouldn’t that stolen item be blocked? 

Mr. ALEXANDER. Congressman, I am pleased to let the honorable 

gentleman from Microsoft continue to take bullets, but I will jump 

in from an eBook perspective. There is an estimated 8,000 pirated 

eBooks online today. The vast majority of these were taken from 

a print copy of the original book; in other words, just as someone 

sits in a movie theater with a Handycam and records a movie, 

someone is busting the spine, scanning it in, taking the time to 

clean it up and then make it available. 

I think what we are talking about here are two important distinctions. One is sort of process; in other words, before it is commercially made available in a protected format. And the other is 

prerelease of that content. With respect to the prerelease, which 

was the Chairman’s premise, I think that those get back to the security measures that any company needs to take to protect its intellectual property. I know Adobe has very rigorous methods internally to protect its software from being prereleased. 

[3:15 p.m.] 

Mr. ALEXANDER. I think what we need to focus on here and what 

this discussion is about is digital rights management applied to 

content that is intentionally released into the market to be sold as 

digital products or digital works. And so I think that is where we 

need to focus the conversation on, not on the circumvention that is 

going to happen of an analog product or the analog hole. 

Mr. COBLE. The gentleman’s time has expired. The gentleman 

from Virginia, Mr. Goodlatte. 

Mr. GOODLATTE. Thank you, Mr. Chairman. I want to thank you 

for holding this hearing on this very important subject that I have 

a very strong interest in. As I understand it, there are cooperative 

talks underway among the information technology, consumer electronics, and movie industry to create a so-called broadcast flag and 

a plug, the plug that is known as the analog hole. We understand 

that these meetings have been bearing some fruit; at least that was 

reported widely in the media today, and that is a credit to all of 

the companies involved. 

And I direct this question to you, Mr. Poole, because that includes Microsoft. But let me ask you this: To my mind, the most 

serious problem we have is the avalanche of copyrighted works that 

are disseminated without authorization over the Internet on peerto-peer or related networks. Indeed, the Los Angeles Times reported, and I think the Ranking Member Mr. Conyers noted, that 

over 1 million bootleg copies of Star Wars were downloaded even 

before the film had opened. I think that is wrong and it is unacceptable. And I wonder from your standpoint, if your company is 

involved in discussions along these lines and what is your sense of 

when meetings could start on peer-to-peer piracy? 

Mr. POOLE. Let me start by saying that the peer-to-peer problem 

can be looked at from either a half-empty or half-full perspective, 

and I think the half-empty part is pretty clear. Piracy on peer-topeer networks is not a good thing. 

Let me step to the half-full side for a moment. What you see 

there is incredible consumer excitement about participating in a 

digital economy and getting the convenience in value of having a 

37

movie they can download or stream over the Internet on demand, 

watch on their laptop computer on the airplane, music they can 

take jogging with them. That is indicative of the American and, in 

fact, the worldwide public being very excited about these technologies and demanding to get their content in this digital form. 

And I think Mr. Berman looked at the importance of us making 

sure we do not preclude consumers from doing really what they legitimately should be able to do with this content. 

So relative to the peer-to-peer problem, what I see is that we 

need to offer technologies in the marketplace, which we and many 

others in the industry have been and will continue to do, to help 

the content industry fulfill this demand such that the pirate market that gets developed around peer-to-peer nets can be reasonably 

replaced by a legitimate market, one that offers them movies over 

Entertainer.com or CinemaNow.com that they can get without having to drive down to Blockbuster, and lets them get that catalog of 

music that they are very interested in from their college days and 

maybe they can’t buy in a record store. 

So the systems are there in place. And in fact, the CenterSpan 

Network uses peer-to-peer technologies, and I think they should 

speak to this some more, to help meet that consumer demand and 

do it using a legitimate DRM-protected, secured, distribution technology. 

Mr. GOODLATTE. Mr. Alexander, or anybody else want to comment on that? 

Mr. JACOBS. Well, I think speaking for SunnComm, I think that 

there has become a technology sophistication in the marketplace 

among users where it is not just the domain of business to invent 

the technology and the users to use the technology. And I think 

when you talk about altering computers in order to accommodate 

protection models, I think there would immediately be a ground 

swell of sentiment that would look to defeat those models based on 

the access of technology that everyone has nowadays. That would 

be my concern with altering—when you mentioned altering the 

computer to not play—to play nothing except licensed. 

Mr. GOODLATTE. My time is running out. What would you offer 

as an alternative to that? 

Mr. JACOBS. Well, it depends. We weren’t going to talk about 

peer-to-peer networking in this session. I wanted to a little bit, because I thought there existed a model for at least music peer-topeer networking, which is something that is incredibly seductive 

for the millions of citizens who are using it, and that is to create 

a TV or radio model out of peer-to-peer music. So likewise you 

would—people would continue to have free access to music through 

peer-to-peer technology, but it would be the sponsors and advertisers who are directing messages to those consumers who would 

end up paying for that music in an equitable and fair way to the 

artist. 

Mr. GOODLATTE. Would this be downloadable or streamed? 

Mr. JACOBS. This would all be downloadable. 

Mr. GOODLATTE. There is a difference between that and broadcast, because those things aren’t as easily replicable. Certainly in 

the past, you haven’t produced perfect copies that could then be 

38

distributed to an unlimited number of other people, and the advertising isn’t going to flow with the download. 

Mr. JACOBS. The advertising would flow in the form of banner 

advertising that would be broadcast individually to each and every 

person using that service. And that banner advertising would be 

very lucrative because their numbers are very large, would be directed toward the needs of each one of those consumers, as opposed 

to a shotgun kind of advertising we see on television or radio. 

Therefore, the amount per user that would be gotten from the advertiser in revenue would far exceed that of a—for instance, a television viewer. 

Mr. GOODLATTE. What happens to the product once it is in the 

possession of a consumer? 

Mr. JACOBS. The product is a MP3 product or WMA product. It 

is compressed and therefore less of a quality than a CD quality. 

And it would reside in the computer of the user, who would be able 

to either play it for a limited period of time, according to a DRM 

solution, or forever. 

Mr. GOODLATTE. You are not opposed to a DRM solution. 

Mr. JACOBS. Absolutely not. I think a DRM solution could account to the record companies, publishers, and artists the exact 

number of downloads that were exhibited on a day-to-day, hour-byhour basis, and they could gain a confidence in those numbers so 

much so that advertisers would be willing, through the effectiveness of pinpoint advertising to millions of users. I think that model 

works. It worked for TV, it worked for radio, and I think it would 

work for music. 

It won’t work for movies. Movies are staged-release product, and 

there are a million other reasons why it won’t work for movies. But 

for music you don’t need to turn millions of people into digital 

shoplifters in order to solve this problem. You can give them the 

music they want and find a way to pay for it, and I think the model 

is right there. And I would be willing to talk to anybody about that. 

Mr. GOODLATTE. My time is expired. 

Mr. COBLE. We will have a second round. The gentlelady from 

California, Ms. Lofgren. 

Ms. LOFGREN. Thank you, Mr. Chairman, and thank you for this 

hearing. I had mentioned to both the Chairman and Ranking Member that I hoped we would have consumer advocates on the panel, 

but I understand the full Committee rules limit us to only four witnesses. These have been excellent witnesses, and I would hope we 

could have another set of hearings that would broaden the perspective to those who could not be present here today, because I think 

this is an enormously important subject and I think we will learn 

much by listening to the many voices on the subject, including 

voices I might not agree with. 

I do think that there are some truths that are going to occur no 

matter what the Government does. And one of those is that there 

will be file sharing. There will be digital distribution of content. 

The Internet will not go away. And if there is a technology mandate, it will quickly be circumvented by smart techies. 

So, having said those truths, the question is, you know, what can 

we do to protect the legitimate right of developers of content to be 

compensated? Because if we do not succeed in that, we will do 

39

great damage to our economy and to fairness for those who have 

put in effort and deserve to be paid for their effort and have that 

right that has been recognized for many, many years. 

Thinking back—and Mr. Berman and I had a chance to gossip 

and do a trip down memory row on the hearings we have had on 

the DMCA a number of years ago, and he reminded me of something that I had forgotten: that during those hearings and markup 

I pointed out we would have technology, and that technology would 

be defeated, and then there would be a new set of technology protections, and that would be defeated, and it would be a constant 

chase. And I think, in fact, that is what has occurred. 

And the fact that we have different technologies displayed here—

and there are many more—really does show that the marketplace 

is fully capable of coming up with protection schemes and systems. 

The question is whether those schemes and systems are going to 

work in the marketplace and also whether they are going to be respectful to the first amendment. And I think those are two separate issues. Certainly the underlying basis of fair use is the first 

amendment, and we can never delegate respect for the first amendment to the marketplace alone. And I am questioning what further 

efforts we might need to make to protect those rights. 

And then there is a second issue, which is what consumers expect. And I remember in DMCA asking one time, shouldn’t we establish what it is that people bought? And people looked at me as 

kind of a crazy question, but what do people buy when they buy 

digital content? Do they buy 20 minutes? Do they buy it like a CD? 

What is the expectation of what people get? 

And I think that is very much the problem we are facing here. 

If we don’t get it right—and by ‘‘we’’ I don’t mean the Congress, 

but we as a society—we will end up with a massive problem. When 

the pirates have the only business model that works, then the legitimate providers will be disadvantaged and that will be wrong for 

all of us. 

So if I could, I was very taken, Mr. Hausmann, by the suggestions in your testimony on page 9 where you really outline the need 

for balance between protection of the copyright owners, but also to 

deal with the users, and suggest that we might have a role—we, 

being the Congress, to state what reasonable and legitimate uses 

consumers may make of lawfully acquired digital media. And it is 

my sense if we did that, certainly the private sector is capable of 

creating any technology to make sure that those rights and only 

those rights are protected. 

What would you suggest are some of the affirmative rights or expectations that consumers should have in the area of digital content, be it software or entertainment? 

Mr. HAUSMANN. Well, I think it is different depending upon the 

content. And first of all, let me say this is a hearing focused on 

DRM technology. It is CenterSpan’s humble opinion that today, 

both in Windows Media as well as the other DRMs, the leading 

DRMs that are out there for not just rich media but nonrich media 

as well, are in fact capable of supporting exactly what you have 

pointed out and that is to define a set of rules for consumer—their 

use. 

40

And I guess the way we look at it is, I think the Congress would 

be better off focusing on finally providing a statutory and affirmative definition of what fair use is in order for online subscription 

and pay per services, to be able to know up front what value they 

really can offer the consumer on a permanent pay per download; 

for example, how many portable devices or no limitation to portable 

devices that it should be allowed to move to. 

We have all been conditioned for quite awhile. In fact the entertainment industry has spent the better part of the last 50 years 

conditioning us all as consumers that on a quid pro quo, we are 

paying value, and in return we are getting content, and we are allowed to use that within certain parameters. Again with respect to 

DRMs, those parameters could be programmed into those DRMs 

today. And we think if there was better visibility into that, then 

the entire industry would know what the value proposition would 

be to consumers. 

Ms. LOFGREN. My time has expired and we will have a second 

round, and I thank you very much. 

Mr. COBLE. The gentleman from Utah. 

Mr. CANNON. Thank you, Mr. Chairman, and I want to thank the 

panelists for being here today. We heard a few moments ago about 

a million copies of Star Wars had been bootlegged before the release. Are any of you aware of any studies that have been done on 

that as to whether that helped or hurt the revenues of Star Wars? 

Glad to hear a little chuckle from the audience, because I suspect 

it may have helped. 

Mr. POOLE. Entirely possible. 

Mr. CANNON. My kids are coming home and saying, you know, ‘‘Hey, Dad, we can download Spider Man.’’ and before I could give 

an answer and give them a lecture on the propriety of that, another kid said, ‘‘Yeah, but it just comes up in a little tiny screen 

and it is jerky.’’ I actually suspect that there may have been some 

improved revenue when you got the real thing. 

Today, in USA Today, there is a cover story article, ‘‘Any Way 

You Spin It, the Music Biz is in Trouble.’’ and for the first time in 

10 years, there has been an actual decline in sales of music. Has 

four topic headings: Piracy, Digital Duplication, has Become a 

Burning Issue; Radio and the Request Line, the Big Challenge, 

Keeping Boomers Listening; The Thrill is Gone, Just Where is the 

Good Original Music These Days; Money for Nothing, 16, $18 for 

a CD, sticker shock sets in. 

My kids and everybody now—sort of becoming an article of faith 

with people who care about music that you pay 16, $18, $12 for a 

CD, and you get one song that you like and the rest of them you 

really don’t, and then you find out you got one of those 20 million 

CDs out there that have already been protected—fortunately, I 

guess, we got a solution to that protection with the felt tip pen. But 

there is a lot of frustration. 

Is that a solution? Frankly, you know, when people don’t have 

the opportunity to know in advance what they are buying and then 

they get caught by surprise when they are trying to burn or rip or 

whatever else, it is tough. It seems to me we have talked about, 

you have with DVDs a DRM process that protects, and that creates 

sort of a threshold. And I am going to ask opinions of the panel 

41

members on this question when I get to it. You have the DMCA 

which penalizes people for violating the law. And it seems to me 

that those two things are sort of helpful in the process of actually 

getting value to people who produce content. 

We talked about peer-to-peer systems and music in particular. 

And it seems to me that Napster has a point, and who knows 

where we are headed from here, but in their peer-to-peer system 

they have the ability to do what I would call ‘‘microbeam.’’ It is a 

very small beam. So instead of just paying for content with advertising which is pinpointed, based upon the knowledge of the user, 

you have the ability to deduct a small amount from a deposited 

sum and, therefore, a serious possibility of micropayments. 

Is it possible that between being clear on the law and creating 

penalties for people and increasing—will technology increase such 

that people will have an opportunity to pay, especially if the price 

comes down to reflect the value that goes to the artists and the creators and the other people who put value in the system, a system 

whereby we can make information available, all kinds of information, TV, videos, music, medical records, that sort of thing, available worldwide? 

Let me point out that about a year-and-a-half ago we were sitting around in my office in the afternoon. It was about 2 o’clock in 

the morning in Afghanistan. This is long before 9/11, and you used 

to be able to go to Napster and figure out who was on line. So we 

pulled up Afghanistan, and 2 o’clock in the morning Afghanistan 

time, they had 278 people online downloading music. So I see this 

sort of as a worldwide opportunity where America can take the 

lead. 

I am little concerned about what—that the wrong legislative solution would do. What is the possibility for systems that rely on 

prohibition punishment and opportunity to pay perhaps a reasonable fee? 

And, Mr. Poole, we will start with you. 

Mr. POOLE. I think you touched on many of the problems that 

the music industry has faced here. And I believe that the systems 

are in place that, as you say, offer the ability to both distribute the 

content that have prohibitions, that can be put in place for people 

that circumvent the security mechanisms, and can actually bring 

the content in a reasonable price and a reasonable form that consumers want. 

And to illustrate this, I want to tell a quick tale of two music 

services. One is called Music net and one called pressplay. And this 

touches on the consumer rights question because one of those services, I think they got smart and they said we are going to let our 

customers burn a certain number of songs to a CD so they can play 

them in their car or while at the health club. The other service did 

not. If you are going to read all the press articles about these, what 

you find out is that the guys that respected what they thought the 

consumer usage scenario would be—let me download a bunch of 

music, collect it on my machine and I pay a reasonable price per 

month, and I can burn some of that to a CD and take it with me—

those guys are doing pretty well in the press. And I think that the 

guys that do not have that offered to the customers are doing less 

well. 

42

So that is a case where I think the market is helping to define—

the technologies are there, the customer and the demands are 

there, we have determined, and the market is now going to help 

them figure out how to line up the rights, the value, and the price 

and make it a product that works. And I think it is entirely possible and it can thrive. 

Mr. CANNON. Mr. Chairman, since we are going to have another 

round, I will let the rest of the panel go. Let me point out the really 

nice thing about pressplay is the price that music has plummeted, 

so we are not getting into an unreasonable price per track. I yield 

back. 

Mr. COBLE. Thank you, Mr. Cannon, and let us hear from Mr. 

Boucher from Virginia before we go vote. 

Mr. BOUCHER. Thank you very much, Mr. Chairman. I want to 

join in the call that was made by my colleague from California, Ms. 

Lofgren, that we continue our conversation on this subject through 

at least one additional hearing, and that at that additional hearing 

we invite representatives of the consumer interest to be present 

and express their views.I think that is a valuable part of this conversation which has not been entirely reflected during the course 

of our hearing today. 

I want to return in a slightly different manner to the subject that 

was opened by the Chairman in his first question, and that is what 

the role of Government is with respect to DRM technology. Under 

the DMCA of 1998, DRM technologies enjoyed kind of a first stage 

of legal protection. It becomes a crime under Federal law to circumvent a technological protection measure which guards access to 

a copyrighted work. Doesn’t matter why you circumvent, but just 

the act of circumvention is a crime. 

It is also a crime under that statute to track in a circumvention 

device. So if you publish information about how to circumvent a 

technological protection measure, you are also committing a crime, 

as Professor Felton found out. 

Now, many people are concerned that these provisions of the 

1998 law are complicit in the erosion of fair use rights, because 

they enable the content owner, through the application of technology that then enjoys legal protection, to make impossible doing 

what consumers have historically done in making copies at home, 

for example, which the copy protection technology on CDs would 

prevent by being able to transfer material that they have lawfully 

acquired among the various digital devices that they have in their 

home environment. Depending on what the DRM itself specifies, a 

lot of limits can be placed on that transferability. 

I really have two questions of this panel. The first one is do you 

have any of those concerns about the DMCA? I would welcome your 

comments about the validity of those complaints or, if it is your 

view, the lack of validity of those complaints. And my second question to you is whether you think there are ever any circumstances 

under which Congress should then take the next step, and some 

may think I am going to say amend the DMCA. The next step 

would be moving in the other direction, and that is actually adding 

another level of protection for a DRM. The next level of protection 

would be to require that technologies such as receivers or players 

43

or recorders recognize DRM, digital rights management technologies, and respond to them. 

Now such a provision would, in effect, reverse the no mandate 

language that is contained in the DMCA. This is essentially what 

the bill introduced by Senator Hollings would do. I have heard you 

say you don’t support that, and I was pleased to hear that answer. 

But falling short of the broad panoply of new requirements that 

would be contained in a Hollings kind of bill, do you ever see any 

circumstances under which the Government should take the step 

of requiring that devices respond to digital rights management 

technology? 

For example, I suspect the Congress is going to be presented 

pretty shortly with a legislative proposal to implement what we 

call the 5(c) agreement, where the major recording companies and 

the motion picture studios have now come to an agreement for 

plugging the analog hole and inserting a broadcast flag. This is 

kind of a lesser level of next level of protection than what Senator 

Hollings recommends, but it is another level nonetheless; it is another role for Government. 

And I think this is really the overarching question that we need 

to be focusing on: What is the role of Government? What should we 

be doing in terms of the level that has already been provided for 

DRM and potentially future levels of Government protection? I 

know it is a broad question and it has a couple of components and 

I would welcome your responses. 

Mr. ALEXANDER. Adobe believes that Congress should find the 

right balance in the DMCA, and doesn’t believe that any additional 

legislation is necessary. But I will also tell you that Adobe actively 

supports this concept of a white hat security expert to expose flaws 

in our security system. We think that has value, even if it embarrasses our company, because it gives us the ability to fix those 

problems; and that wasn’t done last summer. 

Mr. BOUCHER. Would you support amending the DMCA to really 

make that available? 

Mr. ALEXANDER. Sir, I am not a lawyer, but I believe that Adobe 

believes that DMCA covers that provision. 

Mr. BOUCHER. Well, it really didn’t, or Professor Felton would 

have never had this problem. Well, this is a debate for another 

time. 

Mr. ALEXANDER. I would like to leave off there to answer your 

first question. 

Mr. COBLE. If the gentleman from Virginia would suspend, why 

don’t we break and go vote and then we have—we have two votes. 

But I say there has been some concern about the consumer not 

being represented here. I think you all speak for the honest consumers anyway. And I say to my colleagues on this panel, the 

record will stay open for a week. So anyone—you don’t need a special visa to submit records or statements for our record. So I urge 

you all, if you have anyone who happens not to be here today and 

you want him or her to be heard—now we may have a subsequent 

hearing, we may not, because even though we are in June, time is 

elapsing very quickly. 

44

So having said that, why don’t you all rest easy and we will go 

vote and return imminently. I am thinking probably within 20-25 

minutes. 

[Recess.] 

Mr. COBLE. We will resume our hearing. The gentleman from 

Virginia put his question to the panel prior to the recess. I think, 

Mr. Alexander, were you finished with your response to Mr. Boucher’s question? If not, finish. And the rest of you all can respond 

accordingly. 

Mr. ALEXANDER. The additional point I just wanted to make was 

that we are focused on the sort of an implied understanding that 

DRM equates to restrictions. And I want to make the point I think 

we are talking about DRM is the tremendous opportunity that 

DRM creates in the marketplace. 

Comment was made about the ability to buy a CD and having 

to buy 8 or 9 or 10 songs to get the one that you want. I think 

there are plenty of examples in the eBook industry where DRM has 

created new models for consumers to buy partial rights to a book 

at more favorable prices. Case in point is an example from 

RosettaBooks last year that made an Agatha Christie title available in two forms, both as a WPFE book. One was available for 

$3.95 and you could use it for 10 hours, and the other was the full 

version of the book which you could buy for $15. 

Here is an example where a consumer can buy exactly what they 

want. If they just want to read the book and discard it, they can 

buy it for a much lower price. If they want to buy the book and 

own it and keep it forever on a digital bookshelf, they can pay a 

little extra to do that. 

But these new business models are created by digital rights management, and that is what we are so excited about as a market opportunity. 

Mr. POOLE. I think I will try to address two of the points you 

made. One, I think, is the question of should Congress revisit the 

DMCA, and is it the right time and are there things that were either overlooked or not addressed properly from a consumer rights 

perspective? 

I think overall our view, as I said earlier, the DMCA was a very 

good piece of legislation. We think it is still rather early to tell 

whether it is time to revisit that or not. I think there is clear evidence of it doing some very good and productive and procompetitive 

things in the marketplace that are helping consumers. And, again, 

an example of that is the DVD and the success of the DVD, with 

the DVD being one of the fastest growing, if not the fastest growing, ever, consumer electronic devices in homes, and sales of DVD 

disks representing substantial portions of many motion picture studio revenues. You can see there is a device that is DMCA sanctioned, that is protected, and that is meeting the needs of consumers, clearly, because they are voting with their wallets. So that 

is one point there. 

The other question is about is it appropriate to mandate technology in this case? And I think you alluded to things coming 

along. And I think we stand by a view that it is not the right time 

to mandate a single technology for solving any of the problems that 

have been identified and discussed today. The mandate of a single 

45

technology would paint a bullseye on the technology, and it would 

be targeted world over for hacking an attack. And it would probably be hacked and disabled or rendered obsolete before it even got 

to marketplace. And that means then those who carry that technology would carry the burden and the cost of it, and it would not 

accomplish the goals for which it was intended. 

Mr. BOUCHER. I assume these comments are relevant to the proposal that the 5(c) studio agreement which will be coming forward 

perhaps would be characterized this way? 

Mr. POOLE. That could be one possibility, and that one has been 

proposed as a technology that could be used to implement some of 

the broadcast flag-triggered protection within the BPDG discussion. 

So that is our view on those two areas. 

Mr. BOUCHER. Thank you, Mr. Poole. Briefly Mr. Jacobs, Mr. 

Hausmann. 

Mr. JACOBS. Just briefly, SunnComm would be in favor of the 

formation of a white hat security panel, as you brought up earlier. 

I think that would uncover—do well to uncover a lot of the weaknesses in the system and extend a flavor of neutrality to the whole 

process. I think that would be a really good idea. 

Mr. BOUCHER. Are you concerned about the possible erosion of 

fair use rights through the application of the DMCAs that existed? 

Mr. JACOBS. Absolutely. Our company has always been trying to 

balance fair use with content protection. And as you can see, the 

history of SunnComm has started from let us lock down the tracks 

of the CD and let no one make any copies, ala pre-Charlie Pride, 

to where now we include digitially managed files on the CD copy—

the hard CD copy itself, so that people can lift the music off onto 

their PCs and make copies—make a limited amount of copies according to the wishes of the recording industry or the record company. 

Mr. BOUCHER. Thank you, Mr. Jacobs. Mr. Hausmann. 

Mr. HAUSMANN. Thank you, Congressman. I really don’t have 

anything else to add. I think my colleagues have made adequate 

statement on that. 

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

your indulgence. 

Mr. COBLE. Thank you, Mr. Boucher. We are still on our first 

round, and we have been joined by the gentleman from California, 

Mr. Issa. Do you have any questions at this juncture? 

Mr. ISSA. Just a quick one. Knowing that most of the questions 

that could possibly be asked have already been asked, but germane 

to the direction we are trying to go as a body here, the industry 

is trying to go in getting to solutions that allow for reasonable fair 

use and at the same time, if you will, respect the intellectual property holder, probably most of you are aware that those who were 

involved in the DVD design have been sued for antitrust violation 

for the pure matter of everything it took to come up with multiple 

zones in the protection process. Do you believe that either through 

this Subcommittee, or the Committee as a whole on antitrust, 

needs to consider or look into carving out specific ability for industries and companies to work together to try to solve some of these 

problems, without being in the same kind of jeopardy as those who 

46

worked on DVD, or generally would that be a good thing for us to 

look into as a Committee? 

Mr. HAUSMANN. Congressman, I will take a stab at that. I think 

that is an interesting question, and that is the first time I heard 

it raised by anyone. And if I understand your question, it is whether there ought to be a specific carve-out in the antitrust rules with 

respect to certain members of an industry group trying to work together to develop and promote some type of technology or capability in order to move the entire industry further ahead from both 

the industry side as well as the consumer side. Is that your question? 

Mr. ISSA. Exactly. And my question wouldn’t have happened before the reality of litigation of people who did exactly that; because 

obviously when you do that, you are also balancing profitability, 

protection of a profit source, and that easily falls astray of the 

question of was there big corporate collusion that somehow made 

more money for some group. And I didn’t have the sensitivity to 

the level a few months ago that I do today. 

Mr. HAUSMANN. I am not an antitrust lawyer, but I will tell you 

from front line experience in talking with and negotiating with the 

five major studios, specifically showing them the CenterSpan CStar-One technology and having them explain to us what their 

plans are, they will not even sit in the same room together to have 

a discussion, and their lawyers are present at all time. 

And I guess what I would suggest is from a practical perspective, 

it makes it almost impossible to try to reach a consensus on a specific technology or a distribution channel like C-Star-One. So I 

guess in theory, yes, a carve-out would be helpful. 

That said, I think everyone in this room clearly understands 

what the risks of that may or may not be, and those risks would 

have to be weighed and balanced against such a carve-out. 

Mr. POOLE. I don’t think Microsoft is in a position to make any 

particular comments about antitrust laws at this moment, but I 

can——

Mr. ISSA. Does Microsoft have some experience that would cause 

them to believe that when you negotiate or discuss things with 

other companies in an industry and it is for the public good, that 

there should be some reasonable protection for your company? 

Mr. POOLE. What I can say is we do work with a variety of content companies, technology companies, on standards-related activity, whether they be ad hoc or formally sanctioned. And I believe 

it is vital to the success of the technology industry, the content industry, and to delivering what clearly consumers demand: that 

these activities be able to happen effectively with some level of certainty and expediently. And if the antitrust laws get in the way of 

that, maybe that is something you should look into. But we think 

it going to be increasingly important. 

And the work in the broadcast protection discussion group that 

just transpired over the past 6 months is an example of a good effort across the industry to try to understand issues and work toward common solutions. We need to do more of this, not less. 

Mr. ISSA. Thank you, . Chairman. That was my only original 

question left. 

47

Mr. COBLE. We will start our second round now. And ladies and 

gentlemen, fore—in the event that I forget to mention it to you, I 

want to advise you that a statement on digital piracy, jointly submitted by Chairman Sensenbrenner and Ranking Member Conyers, 

will be available at the press table as you all leave. 

Let us start our second round now. Mr. Alexander, you are the 

only one who didn’t get to insert your oars into the water when I 

put the question to Mr. Poole about whether or not there is any 

DRM technology that could have prevented what occurred to Mr. 

Bates. Did you want to weigh in on that? Richard Bates e-mailed 

me that piracy had been committed, and I think you all agreed that 

there is no foolproof system. Do you concur with that? 

Mr. ALEXANDER. I thought I weighed in on that. I agree there is 

no foolproof system, and will be both reactionary and proactive as 

we go forward in trying to plug holes that are discovered as we try 

to roll out new technologies that create new opportunities. 

Mr. COBLE. Mr. Poole, let me come out at you from a secure and 

a copyright angle. Last year, I think you all at Microsoft announced 

that it was making computer security a top priority at the company. It was explained if the situation arose where the operating 

system was opened and the source code revealed to the public, it 

would make it easier for hackers to jeopardize security, on the one 

hand. Would not the same be true of hacking and piracy if the 

source code was revealed to those who wanted to simply undermine 

DRM security and engage in hacking and piracy? 

Mr. POOLE. What you state is absolutely correct. And it is vitally 

important in this cloak-and-dagger game that we all play with the 

hackers and pirates of the world, that you be able to retain under 

trade secret protection the technological measures that are used to 

secure the digital assets, whether that is, again, a film studio, a 

lawyer, or a consumer. And if the blueprints for how those assets 

are secured were printed and available to the public, obviously it 

would be much easier for people to break in and take them, and 

that is something we would certainly oppose and would find to be 

a great loss to both consumers’ privacy as well as the intellectual 

property assets that we all strive to protect. 

Mr. COBLE. You know, gentlemen, I will conclude my questioning 

with a statement. A colleague of mine recently came to me and expressed concern that he was very anxious and uneasy because he 

feared that the public acceptance of the antipiracy provision of 

DMCA had not been well received by the public, and he was all 

ginned up and antsy about that. And I am not convinced, folks, 

that it has been that ill received. There is a segment of society who 

rejects it, and they are very vocal and that squeaky wheel is the 

one you hear. But on balance, I think the public has pretty well 

embraced for the most part DMCA. 

I have been told there are some prosecutors who fear, or may be 

reluctant to initiate prosecution because they fear it has not been 

well accepted. But I don’t think we in the Congress should be tentative and avoid pursuing antipiracy legislation just because there 

may be some people out there who don’t like DMCA. There is a lot 

of legislation folks don’t like, and I don’t think that that should 

deter us from doing our job. And I will admit I am subjectively involved, because Mr. Berman and I worked very hard on this, as did 

48

the others. And I think on balance, it is a good piece of legislation 

that I think will serve us well. 

I am pleased to recognize the gentleman from California. 

Mr. BERMAN. Thank you, Mr. Chairman, and I agree with you. 

In the context of what the purpose of this hearing is supposed to 

be, which is to learn about—and I think it has been very helpful 

to do so—about these digital rights management technologies and 

different formats, I mean there are two points that I think should 

be made. One is as a result of the existence of these technologies, 

content owners have been willing to provide content digitally and 

online in a fashion that, without these technologies, they might 

well not have done. 

So, one, that the consumer is better off because of what you are 

doing, not worse off because of what you are doing. Secondly, that 

there is—I mean, the story of AdobeBooks and your eBooks—Adobe 

and your eBooks and the changes you made to try and meet marketplace problems with your original distribution mechanisms are 

an example of how, in the end, consumers are further served by 

virtue of their market power and peoples’ desire to get interested 

in what you have to sell and your efforts to try and find out how 

those work. 

I mean, this whole notion of the constitutional relationship to— I mean, there is—this connection between first amendment and 

fair use is important. I am not sure that the Founding Fathers contemplated a copy for every beach house, but I do want to ask about 

Mr. Hausmann’s suggestion with regard to legislating in this area 

of fair use. I almost shudder to think of the markup of such a piece 

of legislation. My guess is that Mr. Poole might have a very different notion of how many copies of a $1,500 piece of business software the consumer should have a right to copy than the most recent CD version of a record. 

I mean, this gets exceedingly complicated. And I am wondering, 

by setting—I wonder if you won’t find out that we will be further 

limiting fair use by virtue of trying to codify it than we might be 

getting through the case-by-case process that has stood up over a 

long period of time in terms of figuring out that right. 

Are you suggesting we somehow eliminate the existing fair use 

statute? Tell us why you are proposing this as a solution here. 

Mr. HAUSMANN. Well, I want to make clear that we are not here 

stating that Congress should in fact pass legislation to do this. We 

are here to suggest that it would be helpful, perhaps, if you take 

a look at it, because what we are hearing in the marketplace is as 

follows: When we have been in discussions and negotiations with 

the major labels and the independent labels, the major studios, the 

independent studios, everybody has a different idea or notion of 

what fair use is. In fact, some of them won’t even state that there 

is such a thing as fair use. Not that they say there isn’t a right, 

but they will never use the words ‘‘fair use,’’ which I found fairly 

interesting. And that is not a value judgment one way or the other 

on them. 

The point is when a company such as CenterSpan, that is trying 

to aggregate content to create a virtual warehouse, low-cost distribution channel, and you have 10 majors on both sides of the 

video and the music side of the aisle as well as the independents, 

49

all having a different notion of what fair use is, somebody has to 

be able to write source code to support in a DRM all these different 

potential possible rights. And without uniformity, how can you 

serve up a uniform value proposition to the consumer? 

So if what you are looking at is trying to figure out a way to help 

all of us as an industry clear gates—I am not saying this is the answer, but it is certainly a consideration. If everyone in the industry, especially the entertainment industry as opposed to perhaps 

business software—because I think you can certainly make a distinction there—if we all have the same understanding of what 

those rights are, then we are all in the position to create a uniform 

value proposition to the consumer. 

Mr. BERMAN. Any other reactions to the suggestion? 

Mr. POOLE. I would add, as we just discussed, there are different 

rights appropriate for different types of content. So even, for example, within Microsoft’s own software, our license grants vary from 

product to product. 

Mr. POOLE. And a good example is Office, which we license for 

use on a desktop computer and on a notebook. Well, that is because 

our business customers fly around a lot. They travel. It makes 

sense that that is how the license works. However, that may not 

be an appropriate license for AutoDesk, who sells software that 

goes to professional engineers who really don’t work on notebooks, 

so they want to license it for use on one’s desktop. 

So I think the concept of fair use—or really what the concept is 

here is how do you address what your customer needs, and the customer has an unbelievable power in this equation because they 

vote with their checkbook. 

Mr. BERMAN. And if music—if one online music service allows 

burning and the other one doesn’t and it is more successful than 

the other one——

Mr. POOLE. Market forces prevail. 

Mr. BERMAN [continuing]. Somebody may think again in the 

other service about whether or not to allow burning? 

Mr. POOLE. Precisely. 

Mr. HAUSMANN. Congressman, that is fair and that is also well 

said, but the reality of the market is that if you look solely at 

music subscription services, which Mr. Poole brought up in his 

analogy today, for example, I should say with PressPlay and 

MusicNet, there are those of us in the industry that don’t believe 

that a music service in and of itself will be successful without aggregating a tremendous amount of music content, and I think everyone in this room can shake their head yes as a basic consumer 

and agree with that. 

That said, Vivendi Universal wants to launch an entertainment 

service that is a mix of music, music video, TV broadcast catalog, 

as well as full motion video. That is a different value proposition. 

But, again, across the entire industry between film studios, television broadcasts, music, everybody has a different notion of what 

fair use is. So I agree with you completely. One company may say, 

well, they will allow a consumer to burn three CDs. Others will say 

they don’t want any burning whatsoever, but that assumes that 

each label would offer their own service. I am talking about trying 

to create a mirror image today in the digital distribution channel 

50

of the current traditional channel, where you have content owner 

and provider, you have wholesaler, you have retailer and you have 

consumer. It is the poor wholesaler and the retailers who are 

caught in the middle, because they don’t know what—there is no 

uniformity to serve up to a consumer. I think there is uniformity, 

it seems to most consumers, as to what we want because we all 

know what that has been for the last 4 years but there isn’t uniformity by the content owners or providers and that leads to a complete problem for the wholesalers and the retailers. 

So I am not here to tell you I have an answer. I am here to tell 

you what the problem is we are seeing out in the market, and I 

think at least considering some type of clarification of what those 

fair right uses are with respect to entertainment that is within 

more or less the public domain as opposed to what Mr. Poole has 

just pointed out, business software that is focused on a single desktop and single use, is appropriate. 

Mr. BERMAN. Thank you, Mr. Chairman. 

Mr. COBLE. I thank the gentleman. The gentleman from Virginia, 

Mr. Goodlatte. 

Mr. GOODLATTE. Thank you, Mr. Chairman. This has indeed 

been a fascinating hearing. I want to follow up on the comments 

of the gentleman from California. 

We have some who want the Congress to step in and define how 

digital rights management will unfold, what the technology—legislation that could lead to dictating what the technology is, what 

timetable it will be pursued, and I think that is a very unwise 

track to follow. We have others—Mr. Hausmann has seemed to 

lend some support—who would want us to define what fair use 

rights are, other than the fact that they are already defined in case 

law, and I am not sure that is the correct route to go either. 

I understand your frustration in wanting to offer a product in a 

uniform fashion and certainly the desire of the consumer to have 

the maximum amount of flexibility with that, but that is not how 

most other businesses work. We don’t dictate to various industries 

and say you have got to sell your product or make your product 

available in certain fashions on one side or the other of that equation, and that is what concerns me about both sides of this debate. 

It seems to me some consumer groups seem to take the position 

that digital rights management as a technique is anti-consumer, 

because DRM necessarily limits consumer choice, but I think that 

is absolutely backwards. If you do not have flexibility in the marketplace, if you do not have the opportunity for owners of content 

to find different ways, some of which will be very successful, some 

of which will fall flat on their face—we have already seen that in 

the world of music—if you do not have that kind of flexibility, you 

are going to leave folks with some stark alternatives. They are either going to see their works copied in unlimited fashions, or you 

are going to see very, very strict restraints on how it is made available in the marketplace, things like encryption, which allows for essentially no digital copying. 

I think that the common ground should be found by the various 

forces in industry working this out, and that is going to lead to a 

whole variety of different options for consumers, benefits for consumers, that will lead to a variety of ways they can access copyVerDate Jan 17 2002 12:39 Jul 09, 2002 Jkt 000000 PO 00000 Frm 00054 Fmt 6633 Sfmt 6601 G:\WORK\COURTS\060502\80031.000 HJUD1 PsN: DOUGA
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righted material, with time limits, with a ceiling on the number of 

copies that can be made, with the opportunity to buy additional 

features, and so on, kind of like an a la carte menu, and that may 

not be the most flexible way for you to offer your consumers their 

product but I think it may well be the best way for this market to 

sort itself out, and I would welcome all of you commenting on that. 

Go ahead. 

Mr. ALEXANDER. I would just make the observation that I, too, 

found this to be a helpful hearing. I actually didn’t know that I 

could put XP on two machines, so I appreciate having that explained to me. And that just leads into a more serious point, which 

is that I agree there is no silver bullet here, but I wonder if a lot 

of this just couldn’t be resolved if we tell the consumer what they 

can and can’t do with digital media in a way that is clear and concise, and I think about, you know, the long standard, you know, 

end user license agreements they are called, in the software business and Adobe is guilty of these long documents as well, and I 

think about how clear the Barnes and Noble story is when they 

told consumers that if you bought the Adobe PDF eBook version of 

The Year ahead, you could print it and it was clear and we saw 

the market respond to that in the face of having a print version, 

an alternative eBook version. They migrated to the Adobe eBook 

version because they——

Mr. GOODLATTE. Absolutely, but you can do that in the marketplace right now. I don’t think Congress needs to change the law. 

Mr. ALEXANDER. I am supporting your point to accomplish that. 

And just to further that, and I will stop, there is a tremendous financial incentive by online retailers to solve this problem. Depending on what customer relationship management statistics you read, 

it costs Barnes and Noble, Amazon, any online retailer, $13 a telephone call to pick that up and solve that problem for the consumer. 

So there is an enormous financial incentive to make these clear disclosures to their consumers so that they in essence don’t have to 

take these kind of calls and cause these bad kinds of customer experiences. 

Mr. POOLE. So if I can second the comments, I also wholeheartedly agree with your assessment of the situation, that the 

technologies are there, the flexibility is there, and the demand of 

the customers will dictate how the policies are set by the copyright 

owners, by the copyright distributors such that it is a profit-maximizing product at the end. And I think Mr. Alexander here has 

rubbed my nose a couple times now that his software did something that ours didn’t and worked more successfully in the marketplace and, boy, that is going to make us go out there and add a 

feature. So I think this will apply throughout all digitally distributed products in the economy that really is just at the beginning 

and that anything that tries to lock down and define a single way, 

a single method of applying digital rights to digital content would 

be a mistake. 

Mr. GOODLATTE. Mr. Chairman, I didn’t direct my comments in 

response to Mr. Hausmann, so if he could have an opportunity to 

respond, too, if he chooses to. 

Mr. COBLE. Very quickly, Mr. Hausmann, if you will. 

52

Mr. HAUSMANN. Yes. Thank you, sir. I guess I would just close 

by making sure that we all understand that there is a big difference between a Government-mandated point DRM technology 

and defining in a statutory fashion what the courts have already 

defined in a defensive fashion of what fair use means. If fair use 

is defined, then the question is what DRMs are capable of supporting that, and I think certainly I agree with all of my colleagues, the Government should not mandate any point DRM technology, but, again, I think those of us in the industry, and Lord 

knows I have been a free marketer my whole life, you know, would 

to some extent welcome some clarification on the fair use. 

Mr. GOODLATTE. Thank you. Mr. Chairman, if I just might add, 

I don’t disagree with that, except to say that fair use is defined in 

the law today, and the question, to me, before all of us is how we 

are going to enforce that law and deal with this issue of piracy and 

allow the marketplace to evolve new methods to deliver products 

to consumers. 

Mr. BERMAN. Would the gentleman just yield on that? 

Mr. GOODLATTE. If the Chairman will allow me. 

Mr. COBLE. Very well. 

Mr. BERMAN. When you say fair use, I mean, we have a law 

which describes factors which courts look to to determine whether 

to apply fair use. I mean, we don’t define it in terms of the consumer’s right to make X copies or—— Mr. GOODLATTE. No, and I don’t think we should. 

Mr. COBLE. The gentleman’s time is expired. The gentlelady from 

California. 

Ms. LOFGREN. Thank you, Mr. Chairman. This has, I think, been 

a useful hearing, and there are so many issues that are at play 

here. There are technology issues. There are issues about rights, 

the rights of copyright holders, as well as the rights for fair use for 

users, but I think this is also—and we haven’t talked about this 

as much as the other issues. This is also about business models 

and what is happening in the business models, and that is of interest to us in the Congress, not because we are in business but because if the business models don’t work the economy suffers, and 

I think we have seen that happen in the music arena. 

A couple of people have talked about DVDs. You can hack DVDs. 

You can copy DVDs. I don’t know that that has been a large issue 

yet, because how many copies do you need of, you know, Saturday 

Night Live. I mean, if you buy right now a DVD, you can copy it, 

but most people, unless you are a pirate, a commercial pirate, there 

is not a lot of incentive to do that. And what has really deterred 

the copy of course of DVDs in my judgment is bandwidth. It takes 

too long to do it, and so other than 13-year-olds, you know, most 

people aren’t doing that yet, but that is just a matter of time until 

the bandwidth is there. We are going to have the same issue that 

we have seen in files that are much smaller and easier to transport. 

And so I am wondering, it is true that the marketplace can resolve many of these issues, but I am concerned that they have not 

been defined in the numbers of years since the DMCA has been 

adopted. And I was interested, Mr. Hausmann, on your—again, 

your recommendation that we think about copyright, not necVerDate Jan 17 2002 12:39 Jul 09, 2002 Jkt 000000 PO 00000 Frm 00056 Fmt 6633 Sfmt 6601 G:\WORK\COURTS\060502\80031.000 HJUD1 PsN: DOUGA
53

essarily we do the law, but to think about the incentives for publishers as opposed to just copyright and copies. And I think really 

that is the issue. I mean, if you have got Adobe software that costs 

a fortune to make, the pirate element is higher than if you have 

got, you know, almost—if you have got share ware that didn’t take 

that much to make. And so the differential on the fear level is quite 

different and your willingness to put it out there may be different, 

and so you don’t see—and if you don’t have digital, legal digital 

content available, then you are going to have piracy, because that 

is the only way to get content, and we have seen that very much 

in the music industry, and we will see it also in the other forms 

of entertainment industry if the model is not formulated. 

And so I guess the question I have is, is it your view, each of you, 

that getting at least some definition of what it is people have a 

right to do with the stuff they buy might invigorate your digital 

rights management technology, number one, and also encourage 

the content owners to move forward more vigorously into the digital distribution marketplace? 

And whoever wants to start with that answer would be fine. 

Mr. HAUSMANN. Well, again very briefly, I would differentiate 

point DRM technology from your point of fair use and business 

models, because they are two completely different things. DRM 

today can support virtually any type of fair use parameters that a 

content owner, publisher wishes to provide. That said, it is the 

business model side of the world that is all mixed up, because as 

I just stated, with all the different content owners, they all have 

a different idea of what they want consumers to be able to do with 

their content, what limitations they want on the content, and all 

of those variables turn into pricing variables within your business 

model equation. 

So to Mr. Poole’s point, I agree with him. Will the industry eventually get there? Absolutely. The question is how long is it going 

to take, and how much risk is there that because there is not aggregated content offered at a very fair and compelling consumer 

price point, what is the probability that the lack of that drives consumers to the pirate networks? Is that—— Ms. LOFGREN. Which is exactly what happened with music. 

Mr. HAUSMANN. Correct. 

Mr. JACOBS. And to music, we can talk with some experience. We 

know that while there may be a definition of fair use that everybody can quote, that people don’t have that definition of what fair 

use is to them. They want to know what is fair to them, and just 

like all people are different, that answer is different no matter 

whom you ask. 

Ms. LOFGREN. If I could, I just—I think there is different expectations and not everybody in the world has the same expectation, 

but I think—and they are not all fair use issues either. I mean, 

most people think you should have a right to have a backup copy 

of your software, and that doesn’t mean that you have to allow it 

to be copied. It could mean that you allow—you register it and you 

go to the Web site, and if you have lost your disk or whatever, and 

get another copy. Most people—this is a first amendment—for expressive speech, that you should be able to quote and criticize ideas 

that have been expressed. I mean, that is fair use, and then there 

54

are other things where do I have to watch it at 9 p.m. or can I 

watch it, you know, tomorrow morning at 10 a.m. that I think we 

can define. This would be—Mr. Berman is correct, this would be a 

nightmare of a markup, but I think that, you know, as we sort 

through this unless we take a proposal whole cloth, I think in the 

end we will encourage content holders to trust the protection once 

the consumers are satisfied that their rights have been respected, 

and I think most people don’t want to steal stuff. I mean, that is 

the assumption. Most people are not thieves. Otherwise, you know, 

you would have CDs walking out the door in backpacks a lot more 

than you do. 

I think we need to make this work, and either the market needs 

to make it work, or maybe we need to have some role in defining 

rights and responsibilities to help the market to make it work. But 

I think this hearing has helped move us forward in that effort, and 

I do thank you all for your wisdom. 

Mr. HAUSMANN. Let me if I may at least acknowledge to Mr. Berman’s point, it would be a nightmare of a markup. I am not suggesting it wouldn’t. You asked the question and I gave you the answer. 

Mr. COBLE. I thank the gentlelady. The gentleman from Virginia. 

Mr. BOUCHER. Well, thank you very much, Mr. Chairman. I want 

to thank these witnesses, who I think have done a terrific job today 

and they have responded to our questions and we are better informed by virtue of their presence here. So thank you for what you 

have done today. Let me just say whether you support legislating 

in order to enhance fair use protection or restore lost fair use protection or perhaps define fair use, and I think that some legislation 

in this general area is appropriate and something we should consider, what really pleases me today is to hear everybody at the witness table and also among the Members singing the praises of fair 

use. 

Now, this is something that is fairly new. This is a new leaf. It 

is a new chapter, and I am very pleased to see it, and I think it 

speaks a new sensitivity that is highly appropriate and perhaps at 

some point will be reflected in proper legislation. 

I want to take the time with these questions to focus on one very 

precise issue, and that is the question of copy protected CDs, because I am a little bit perplexed about the need for this, what it 

really achieves. It comes at a very high cost in terms of angering 

millions of Americans who have historically exercised their fair use 

rights to make copies at home of the music they have lawfully acquired so that they can rearrange the tracks or perhaps blend in 

music from other CDs they have also lawfully acquired and then 

have a play list on their homemade CD that contains exactly the 

music they want in the order in which they want it. This is a classic fair use right. It is space shifting, and it has been exercised now 

by millions of Americans. They are going to be pretty angry when 

copy protected CDs come flooding into the market. 

And I have got a couple of questions. First of all, at a minimum 

it seems to me that copy protected CDs ought to be adequately labeled so that the consumer knows exactly what he is buying. Now, 

I have taken a look at More Fast and Furious and the Charlie 

Pride CD and, yes, if you examine it with an eye toward seeing 

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whether or not it is copy protected, you might run across that information, but it doesn’t exactly stand out. It is not the first thing you 

see, and it is on the reverse side, and it is in very small print, and 

I actually had to tilt my glasses like this, which increases the index 

a little bit and I am able to read better, in order to see it. I just 

think at a minimum that information ought to be right out there 

and available for the public. 

Now, some of these copy protected CDs also come with reduced 

functionality in terms of your ability to play that CD in a CD-ROM 

in a DVD drive or even in some portable CD players I am told. 

Now, Mr. Jacobs, I don’t know that those problems are inherent in 

your particular technology, but they are in some of the ones that 

are being used. I have already mentioned the fact that I think this 

may not be a particularly effective way to strike at a real problem. 

What the music industry has said to us is that the major problem 

with regard to music piracy today is free peer-to-peer Internetbased file sharing. Copy protected CDs, if you think about it, really 

don’t do very much to guard against that. Why? Because somebody 

is going to use the felt-tipped pen, which I hope never gets to be 

declared a circumvention device, but somebody is going to use the 

felt-tipped pen, or they will find another way to crack another copy 

protection technology very rapidly, within a matter of weeks of 

each technology being introduced into the market. When that happens, that music is then going to be uploaded to the Internet in the 

clear, and once it is up there, it is going to stay there. It is going 

to make its way into the file sharing services, and so the copy protection really doesn’t do anything to address what the record industry has told us is their primary concern. What it appears to do is 

make more difficult the kind of casual copying and the giving of a 

CD to a friend, which is a kind of a low-level misuse of copyright 

that the industry has heretofore simply accepted. 

Now the industry will have some protection against that, but the 

cost of that is angering millions of their best customers, I mean, 

making those customers very, very angry. And so I have got to ask 

why we have to do this. I think it is a mistake, and I have told 

the industry this. We have had some in-depth discussions about it, 

but I just believe it is a kind of a rush to judgment based upon a 

wrong conclusion. 

Let me ask you one precise question, Mr. Jacobs, and you can 

comment on any of this that you like, but I am a little bit curious 

about your specific copy protection technology, which I understand 

is based on the difference in error recognition capabilities between 

the CD player on the one hand and the CD-ROM drive in the computer on the other hand. Now, what is going to happen when somebody introduces into the market a CD-ROM drive that mimics the 

characteristics of the CD player, so that the error recognition differences are eliminated? Now, your technology is defeated. Would 

you at that point say that that new drive is a circumvention device 

and therefore unlawful, or do you think some of the people who 

have utilized your technologies might say that? I am really curious 

about what your reaction will be when that eventuality arises. 

Mr. JACOBS. Well, thank you. My reaction would be and is that 

every 2 or 3 weeks, we begin thinking about exactly what we are 

doing today and trying to figure out how to do it better. We don’t 

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have 30 days to stand still in our design and redesign of formats 

that we think will broaden fair use and at the same time thwart 

the latest copy protection, anti-copy protection schemes. When the 

record companies first asked us to look into a specific design, it was 

with the intent to create a legal way for people to make copies from 

their CD rather than use ripping programs, because they felt that 

using the ripping programs was not a licensed method of making 

copies, and so what we did was we combined DRM files on top of 

the CD files with which people could then migrate those files over 

to their computers and with some restrictions make copies for 

themselves, make a copy, burn a copy, send a copy to a friend via 

either e-mail or a licensed server that we operate. 

So in answer to your question, that technology that you are describing where we modify a specific channel on a CD, that has already been changed, and in answer to the question of what happens when a CD-ROM player comes out and ignores what we have 

done and plays the disk anyway, then the answer is that protection 

won’t do any good anymore for that particular CD. 

And lastly, and I think this is a very important consideration, is 

that unless we deal face to face with peer-to-peer networking that 

none of this makes any sense, that unless—with regard to music. 

With regard to music, if we found a model that delivered MP3 or 

WMA files directly into people’s homes free on an advertiser-based 

basis or some other revenue generating basis, then the combined 

technologies, if that were implemented, would make all the sense 

in the world, because the CD quality piece of music is much more 

higher quality than an MP3 piece of music. 

And let us lastly remember that most people, for me I try to remember this, that most people don’t download music out there. 

Most people buy their music at a CD store, a record store still, and 

that many of the people who do download, download specifically to 

get music quickly, into their hands quickly, and aren’t satisfied 

with the quality of the music that they receive, and oftentimes find 

themselves buying the CD, because it is a real pain in the neck to 

go and try to download 12 songs or 10 songs or 8 songs from a particular album. Not all albums have only one hit that you want to 

hear. There is a lot of good music out there, I think, that is a 

multi-track kind of situation. 

So for those reasons we are moving toward more versatility in 

the marketplace, because, goodness knows, everybody wants fair 

use. Everybody knows that the customer will dictate what fair use 

is at the end of the day, and I think our company was both a pioneer in that, and we are trying to evolve toward an end that is acceptable to the public. But like I said before, what fair use is to 

the public and what fair use is as defined by law are two completely different things. They think they have a right—people have 

a right to copy—make unlimited copies in any venue because——

Mr. BOUCHER. Well, Mr. Jacobs, we are going well beyond the 

scope of the question here. 

Mr. JACOBS. Oh, I am sorry. 

Mr. BOUCHER. Let me thank you for your answer. There is food 

for thought in all of that that could keep us here for another couple 

of hours, and I would personally like to do it. The Chairman would 

not hear of it, I am confident. So I am going to say thank you, Mr. 

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Chairman, for your indulgence in permitting this very lengthy 

hearing which I think has been very useful. Thank you to all of the 

witnesses. 

Mr. COBLE. I thank the gentleman from Virginia, and I want to 

reiterate what has already been said at expressing thanks and appreciation to the panelists and to the attendees. The interest of the 

attendee is apparent by the fact that you are still here. 

Now, there will not be a third round, but since the Ranking 

Member from California is an amiable sort of a fellow, he would 

like to make one final statement and I am pleased to recognize him 

now. 

Mr. BERMAN. Thank you, Mr. Chairman. I just want to make just 

a couple of observations. One is in the context of Mr. Hausmann’s 

comments. My staff handed me a note. It points out that in the old 

brick and mortar world, if you go to Wal-Mart, which is the biggest 

retail distributor of music, they are carrying about 2,000 labels in 

the store. These online services, which have—with whatever problems they have, each have 50,000 titles or more of music. The potential for the consumer to more readily and more easily get copy 

protected music of an incredible variety online than ever they were 

able to deal with in the old world, which is still the real world for 

many of the music buyers, is enormous. 

So the notion there are millions of consumers screaming about 

the outrage of the present situation may well be true. They are not 

so much screaming in my ear, but I have no doubt that there are 

people around who could get them to scream in my ear very quickly. But I think, at least in my own mind, this notion of the consumer or the right to have certain copies on the list of priorities 

of consumer needs is still somewhere below finding health insurance at an affordable price, having an adequate amount of affordable housing. I mean, when we talk about some of the outrages, 

that there are things I could get even more outraged about than 

the present situation with online music, and as to the desire just 

to make a couple of copies, the person who believes that is the 

prevalent desire in all of this hasn’t spoken to my daughter about 

the use of peer-to-peer and file swapping in terms of getting music. 

And I think at least at a certain age level, it may not reflect the 

desires of a certain group of consumers of music. 

Thank you, Mr. Chairman. 

Mr. COBLE. I thank you, sir, and I have not yet done so, but at 

this time I want to thank the staff. Both Democrat and Republican 

staff members worked very diligently in getting this to where we 

are. This has been a very good hearing, folks, and I thank you all. 

I remind you again of the availability of the digital piracy statement at the press desk in the rear of the hearing room, and I 

thank the witnesses again for your testimony. This Subcommittee 

very much appreciates your contribution. 

This concludes the oversight hearing on Digital Rights Management, DRM. The record will remain open for 1 week. The Subcommittee stands adjourned. 

[The information referred to follows:]

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[Whereupon, at 5:10 p.m., the Subcommittee was adjourned.] 


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A P P E N D I X 

STATEMENTS SUBMITTED FOR THE HEARING RECORD

PREPARED STATEMENT OF WILLIAM KREPICK

Thank you for considering Macrovision Corporation’s input for the Subcommittee 

Hearing. As a leading intellectual property protection and digital rights management technology company, Macrovision is in a unique position in the ‘‘neutral’’ zone between the hardware companies and the content companies. There is no question 

that debate over digital rights management (DRM) and copy protection technologies 

between these two industry groups and consumer activists is spirited. However, at 

the end of the day, one must evaluate proposed intellectual property rights management solutions based on ease of use by consumers, security, flexibility, low cost, and 

transparency to both installed and new hardware. 

At Macrovision, since 1985 we have pioneered copy protection and rights management solutions for video, pay-per-view, DVD, consumer and enterprise software and 

music CDs. We have been working co-operatively with industry groups such as the 

Copy Protection Technical Working Group (CPTWG), the Broadcast Protection Discussion Group (BPDG), the DVD Copy Control Association (DVD CCA) and the 

Video Watermarking Companies (VWM) to design solutions to address the intellectual property protection challenges posed in both digital and analog environments. 

The Digital Millennium Copyright Act effectively demonstrated that positive government legislation and enforcement actions can effectively balance the diverse interests of consumers, the consumer electronics and PC industry and the copyright (content) industry. 

Macrovision (Nasdaq: MVSN) (www.macrovision.com) has copy protected over 3.5 

billion VHS videocassettes and, in the last four years, one billion DVDs. Our copy 

protection technology is embedded in virtually all DVD players and over 75 million 

digital set-top-boxes, including over 90% of those used in the UK, North America 

and Japan. We have copy protected over 200 million CD ROMs containing PC 

games. These statistics and our company’s extensive copy protection customer base, 

which includes all the major Hollywood studios, hardware suppliers to the satellite 

and cable TV industry, the major PC games publishers and the optical media manufacturing infrastructure, have resulted from a sustained 15 year focus on developing 

effective copy protection and DRM technologies. DRM technologies comprise various 

software-based electronic and security solutions that are designed to enable copyright owners to license and market their copyrighted content across a variety of mediums—whether that be physical goods such as CDs and DVDs, wired or wireless 

electronic transmissions, or the Internet. Copy protection is a critical element of 

most digital rights management technologies. 

In the past few years the world has changed dramatically from one in which most 

intellectual property and copyright theft occurred when people would make Xerox 

copies or simply shoplift physical items. In today’s digital world, we are facing widespread electronic content shoplifting. Today’s shoplifters can achieve this with their 

PCs in the privacy of their own home where they are immune from arrest by police 

and enforcement agencies. In the physical world many retailers estimate that they 

lose about 2% of their revenues to shoplifters. In the digital world, the pilferage is 

far higher. National consumer surveys have revealed that between 10–20% of the 

population routinely engages in some type of unauthorized copying—whether using 

CD burners, videocassette recorders, or file sharing services. The percentage is of 

course much higher among young, technically agile PC users. 

With the advent of mass consumer broadband access, the requirement for enhanced content protection and secure DRM solutions has become paramount if owners of premium content are going to use this medium. The issues surrounding digital content delivery have become more critical—how do we safeguard digital content delivery and access? How do we protect the rights of the content owners once 

60

the content has been accessed? How do we enable flexible usage model or re-distribution models, so the content owners and their distribution and consumer channels can optimize the advantages offered by the digital age? Without a secure solution, content owners are unlikely to authorise the transmission of their premium 

content, thereby limiting growth in the digital marketplace. 

The solution to these problems is effective content protection and DRM infrastructure, and a legal structure that protects copyright holders but also technologists and 

consumer electronic manufacturers. One of the most dubious phrases used in the 

current inter-industry debates is that of copying for ‘‘fair use’’ or non-commercial 

benefit. If someone makes a copy of a DVD or TV program and puts it on the web, 

it may well have been done for non-commercial benefit. However, it is unlikely that 

rights owner (and the entire supply chain) who may lose tens of thousand of displaced sales opportunities as a result, will feel that they have not suffered a significant commercial loss and infringement on their copyright. ‘‘Fair Use’’ is often used as a smokescreen to deride copy protection and DRM 

technologies. Consumer rights activists may state that they have a right to make 

unlimited copies once they have purchased the first article. In fact, fair use laws 

were intended to provide the consumer with the right to do what they wanted with 

the original article, but that never included making unlimited additional copies. In 

the digital world, this fair use concept must be redefined in such a way to protect 

the intellectual property owner. Copy protection and DRM technologies can in fact 

support the fair use concept and can allow time shifting (use the purchased product 

or program at a later date) and space shifting (use the purchased product or program in one or more playback devices). 

Many consumer rights activists have warned that copy protection and DRM technologies will impose an unfair cost burden on all consumers—because hardware and 

content prices will carry an intellectual property protection surcharge. Fortunately 

most DRM and copy protection technologies can be implemented at a cost of pennies 

for each software unit (CD, DVD, or pay-per-view program) and nickels and dimes 

for each hardware device. The actual cost of these technologies (including all royalties and implementation costs) is on the order of a small fraction of one percent of 

the retail prices. This means that the DRM and copy protection costs are well under 

10 cents per disc or per program, and in the range of 25–50 cents per hardware device. This is way under the 1–2% hidden tax that we as consumers have historically 

paid for physical goods—due to the fact that retailers gross up their prices in order 

to recoop the shoplifting losses. 

Effective copy protection and DRM technologies actually expand new business opportunities. Many articles written about copyright reform legislation point out that 

the Hollywood studios were able to grow a substantial video business, even though 

the studios themselves predicted the obliteration of the movie industry once the 

VCR installed base became significant. Of course we all know that the VCR actually 

stimulated the growth of a ‘‘new’’ $16 billion prerecorded media business. One fact 

is often overlooked in this growth story is that the studios had access early on to 

a fundamental rights management technology—electronic copy protection on videocassettes—which meant they were not at risk to wholesale unauthorized copying. 

With the introduction of DVDs, a new encryption technology and a new version of 

Macrovision’s copy protection technology helped provide the copy protection security 

that was required by the studios before they would release their valuable movies 

on the new optical disc format. Unfortunately the same cannot be said for the music 

industry—which has been without effective copy protection since the advent of the 

CD—and which last year suffered a decline in revenues due in large part to unauthorized CD copying and Internet file sharing. 

Macrovision and other vendors are hard at work developing effective copy protection, rights management and authentication solutions for music CDs that will allow 

the intellectual property owner to receive proper compensation for his/her works. 

The music industry recognizes that consumers have historically made copies and 

compilations of CD albums. A copy protected and DRM-managed CD can allow this 

and it can also add to the consumers’ music experience. A new category of ‘‘multisession’’ copy protected and DRM-managed CDs will provide consumers with new 

features via computers and the Internet, enhanced packaging, and additional entertainment, information and added value that had not previously been made available 

on non-copy protected, non-DRM-enabled CDs. 

In the video market we are working to establish an effective digital video copyright protection ‘‘ecosystem’’ which includes bilateral solutions comprised of matching hardware and content based watermark technologies. The video watermarking 

solution has been proposed by the DVD CCA industry trade group. Macrovision, 

Digimarc, Hitachi, NEC, Philips, Pioneer and Sony have formed the Video 

Watermarking (VWM) Companies to offer a best-of-breed video watermarking soluVerDate Jan 17 2002 12:39 Jul 09, 2002 Jkt 000000 PO 00000 Frm 00064 Fmt 6601 Sfmt 6621 G:\WORK\COURTS\060502\80031.000 HJUD1 PsN: DOUGA
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tion for digital video applications. The combined engineering talent, intellectual 

property, product performance, marketing and support infrastructure of our seven 

companies is unparalleled in the field of video watermarking. This watermarking 

technology protects video content on DVDs, videocassettes, cable or satellite transmissions, and the Internet from unauthorized copying to recordable DVDs, DVHS, 

personal digital video recorders (PVRs) and multimedia personal computers. The 

digital watermarking system complements Macrovision’s analog copy protection 

technology and will serve to plug the ‘‘analog hole.’’ The video, music and software industries need more secure and more versatile intellectual property safeguards. At Macrovision, we believe that unless there is implementation of broadly adopted technology-based copy protection and DRM solutions, content holders will be reluctant to release premium digital content through 

the Internet, which is essential for stimulating broadband and the consumer electronics sales. We believe the private sector is able to take the lead role, in conjunction with supportive government legislation and follow-through in essential copyright areas as well as compliance and enforcement. 

This paper has attempted to describe how technology for content protection and 

DRM can provide for and support consumer friendly, robust, secure, and cost-effective solutions that can enable content owners to navigate the digital highway with 

confidence and optimize the new opportunities offered by the Broadband Economy. 

In closing I would emphasize three important points for the Committee to consider:

(1) Copyright protection and DRM technologies are essential tools for the U.S. 

intellectual property and copyright industries—which are the largest and 

most innovative in the world. They must be nurtured and protected by copyright laws—and that includes outlawing any circumvention devices, techniques, or Internet ‘‘hacks’’ that might be promoted in the name of ‘‘fair 

use.’’

(2) Copy protection and DRM technologies are proven, cost effective, and 

unburdensome to the consumer. The free market economy is doing a good 

job at sorting out which competitors’ products will win in the marketplace. 

However, in certain situations, as in video watermarking, where it would be 

costly to force the hardware manufacturers to implement multiple solutions, 

industry standards make sense, and in these situations the government 

needs to recognize that consortiums of companies should be allowed to come 

together to offer a single solution under fair and non-discriminatory terms.

(3) If industry groups cannot resolve their differences in a timely fashion, the 

government should be ready, willing, and able to establish standards and 

if necessary select certain technology solutions in order to promote the adoption and deployment of copy protection and DRM technologies in order to 

spur the distribution of digital content in the future.

PREPARED STATEMENT OF NEIL MACDONALD

Mr. Chairman and members of the Subcommittee, my name is Neil MacDonald 

and I am a vice president and director of research for GartnerG2, a technology market research firm. I thank you in advance for the opportunity to submit a written 

statement to present GartnerG2’s view on digital rights management, consumer expectations and the media industry. 

With last week’s committee hearings on digital rights management serving as a 

backdrop, here are the basic tenets in GartnerG2’s view:

1. GartnerG2 is in full support of updating copyright law for a digital age.

2. GartnerG2 believes that digital rights management technologies are not, and 

can never realistically be expected to be, impervious protectors of copyrighted 

content. Digital distribution business models must be built with that reality 

recognized.

3. GartnerG2 believes digital distribution will only succeed if consumers’ attitudes, behaviors, expectations and responsibilities evolve concurrently with 

business models.

4. GartnerG2 believes that consumers need to be better educated about copyright law, rights and responsibilities in the digital age. 

1. GartnerG2 is in full support of updating copyright law for a digital age. 

Regardless of how the content is formatted and delivered—whether through a 

physical device such as a CD, or as a digital file—artists and content creators need 

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to be compensated for their work. This is especially true as file-sharing services and 

networks flourish and piracy grows. 

The transition from the analog age to the digital age has not been smooth. The 

technology industry is designing products and services that allow any content to be 

distributed over any network to any device and to be consumed in a personalized 

manner. 

In contrast, the media industry, acting as content gatekeepers, is reluctant to embrace digital distribution in any form until the technology supports revocable content rights and secure delivery over networks. The media industry envisions a world 

where content is locked to the device, with no provision for copying or moving the 

content. Their hope is to eliminate piracy. 

Finally, law-abiding consumers want more control over their media consumption 

and demand full portability over assets they believe they own after paying a fair 

price. 

These opposing forces are disrupting media industry business models, pulling 

apart potential consumer audiences, and stifling demand due to uncertainties over 

competing content standards and consumption platforms. In short, these forces are 

slowing the transition into the digital age. 

2. GartnerG2 believes that digital rights technologies are not, and can never realistically be expected to be, impervious protectors of copyrighted content. Digital distribution business models must be built with that reality recognized. 

There is a misperception, fed at times by the trade press, that digital rights management solutions can rid the Internet and the world of piracy, and that t a ‘‘magic 

bullet’’ exists that will make technologies such as peer-to-peer file-sharing go away. 

This is false. Digital rights management products cannot provide an absolute solution. They will always be a work-in-progress. 

Digital content today is easily available and pirated. Tomorrow, it will exist as 

protected content that is leveraged to create new business models and new business 

opportunities. Digital rights management solutions can help make future business 

models secure, but cannot change the past. 

There is no argument that a lack of a standard for digital rights management has 

hindered the market. Usage rights for digital content vary with both individual 

service providers as well as individual record labels, each offering rights and permissions that are confusing at best. The lack of technical standards for the digital 

rights management, as well as the business model rules put the onus on both the 

technology companies and music labels to come to a consensus. This must be a market-driven consensus, not a government mandate. 

Any digital rights management standard should be reviewed periodically—annually or semi-annually—because it will be subject to ongoing attempts by hackers to 

crack the protection enabled by digital rights management solutions. It is the nature 

of hackers to go after high-profile security solutions, and market-driven standards 

are big targets. The goal of the review would be to ensure that the bar for digital 

rights management has been pushed high enough to prevent casual piracy. The byproduct of a market-driven standard will be to keep piracy of new digital content 

to a minimum level, well below today’s level where tens of millions of people access 

pirated content for free. 

3. GartnerG2 believes digital distribution will only succeed if consumers’ attitudes, 

behaviors, expectations and responsibilities evolve concurrently with business 

models. 

GartnerG2 refers to the current generation of teenagers as the ‘‘Generation of 

Thieves.’’ Recent GartnerG2 researchi shows that not only are online U.S. teenagers 

heavy users of file-sharing services, but their attitudes regarding copyright laws are 

poor. 

When asked if they downloaded music using file-sharing software, 55% said they 

already had. Another 34% said they hadn’t yet, but were very or somewhat interested in the software. Only 11% answered that they did not use file-sharing software and had no interest. 

Asked whether they downloaded music from legal, paid-for sites, only 6% said 

they did. Of those who didn’t use legal sites, 36% were very or somewhat interested 

in using the sites. The bad news is that 60% said that they didn’t download from 

the legal sites and had no interest in doing so. 

Teenagers find piracy to be easy. They have no fear of being caught, and the existing business models for legal music distribution are not compelling to them. This 

lack of interest is more indicative of business model issues than the lack of proper 

digital rights management. 

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The same online teenage group was asked how strongly they agreed or disagreed 

with the statement that ‘‘Internet file-sharing Web sites violate copyright laws:’’

25% did not feel strongly either way, 25% agreed. But, most importantly, 50% disagreed. This group is the most important, because it indicates the lack of understanding by teenagers—the consumers of tomorrow—of copyright law. 

The alternative to piracy, for few users, is to pay a subscription fee for compelling 

download services. It sounds simple, but, in the case of the music industry, current 

services are interesting but not compelling for a majority of consumers. To compete 

against the free file-sharing sites, music services must be both reasonably priced 

and support a modest amount of portability for users’ time and location shifting. But 

because of limited distribution licenses issued by the music labels, the services can 

only offer limited selections. 

Consumers expect to buy music only once and have some portability with that 

music within their home, portable music player or car. These fair-use practices of 

time and location shifting have yet to be allowed by the music labels on a widespread basis, as there are very few services today that offer any portability. Until 

the music labels embrace digital distribution and move their own business models 

beyond CD sales, consumer uptake of digital distribution will be slow and piracy 

will thrive. 

4. GartnerG2 believes that consumers need to be better educated about copyright law, 

rights and responsibilities in the digital age. 

As a matter of public policy, this Subcommittee could help develop the path for 

better education of teenagers on copyright law in general and on its continuing importance in the digital age. While some of the onus of educating consumers of their 

rights and responsibilities in the digital age falls on those who sell products and 

services, a fundamental understanding needs to be instilled at the high school and 

collegiate levels. 

GartnerG2 submits that this Subcommittee should strongly consider mandating 

digital copyright law into the curriculum at middle, high school and colleges, especially those that provide Internet access via the school’s infrastructure. This education could help turn around the lawless attitudes of the 10 million online teenagers in the country.

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