U.S. GOVERNMENT PRINTING OFFICE

72–613PS WASHINGTON : 2001

MUSIC ON THE INTERNET

HEARING

BEFORE THE

SUBCOMMITTEE ON COURTS, THE INTERNET,

AND INTELLECTUAL PROPERTY

OF THE

COMMITTEE ON THE JUDICIARY

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

MAY 17, 2001

Serial No. 12

Printed for the use of the Committee on the Judiciary

(

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

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: (202) 512–1800 Fax: (202) 512–2250

Mail: Stop SSOP, Washington, DC 20402–0001

(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

ASA HUTCHINSON, Arkansas

CHRIS CANNON, Utah

LINDSEY O. GRAHAM, South Carolina

SPENCER BACHUS, Alabama

JOE SCARBOROUGH, Florida

JOHN N. HOSTETTLER, Indiana

MARK GREEN, Wisconsin

RIC KELLER, Florida

DARRELL E. ISSA, California

MELISSA A. HART, Pennsylvania

JEFF FLAKE, Arizona

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

TODD R. SCHULTZ, Chief of Staff

PHILIP G. KIKO, General 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

ASA HURCHINSON, Arkansas

CHRIS CANNON, Utah

LINDSEY O. GRAHAM, South Carolina

SPENCER BACHUS, Alabama

JOE SCARBOROUGH, Florida

JOHN N. HOSTETTLER, Indiana

RIC KELLER, Florida

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

[VACANCY]

BLAINE MERRITT, Chief Counsel

DEBRA ROSE, Counsel

CHRIS J. KATOPIS, Counsel

ALEC FRENCH, Minority Counsel

(III)

C O N T E N T S

MAY 17, 2001

OPENING STATEMENT

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 Berman, a Representative in Congress From the

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

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

WITNESSES

Mr. Edgar Bronfman, Jr. Executive Vice Chairman, Vivendi Universal ............

Oral Testimony ..................................................................................................... 8

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

Mr. Michael Stoller, Songwriter and Publisher, on behalf of National Music

Publisher’s Association, Inc. ................................................................................

Oral Testimony ..................................................................................................... 12

Prepared Statement ............................................................................................. 15

Mr. Robin Richards, President, MP3.com ..............................................................

Oral Testimony ..................................................................................................... 18

Prepared Statement ............................................................................................. 21

Mr. Rob Glaser, Chairman and Chief Executive Officer, Realnetworks, Inc.: ...

Oral Testimony ..................................................................................................... 43

Prepared Statement ............................................................................................. 45

Mr. Lyle Lovett, American Society of Composers, Authors and Publishers .......

Oral Testimony ..................................................................................................... 47

Prepared Statement ............................................................................................. 50

APPENDIX

Prepared Statement of the Honorable John Conyers, Jr., a Representative

in Congress From the State of Michigan ........................................................... 79

Prepared Statement of the Honorable Howard Berman, A Representative

in Congress From the State of California .......................................................... 80

Prepared Statement of the Honorable Elton Gallegly, a Representative in

Congress From the State of California ............................................................... 83

Prepared Statement of Manus Cooney .................................................................. 84

Prepared Statement of Ann Chaitovitz .................................................................. 89

Prepared Statement if Sally Greenberg ................................................................. 91

Letter from Hilary B. Rosen and Cary H. Sherman of the RIAA ........................ 95

(1)

MUSIC ON THE INTERNET

THURSDAY, MAY 17, 2001

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON COURTS, THE INTERNET,

AND INTELLECTUAL PROPERTY,

COMMITTEE ON THE JUDICIARY,

Washington, DC.

The Subcommittee met, pursuant to call, at 1:02 p.m., in Room

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

Mr. COBLE. Good afternoon, ladies and gentlemen, and welcome

to our hearing here in the Judiciary hearing room. We are going

to be competing today with the House. The House is still in session,

and we will have a vote here, I am confident, within the next 30

to 45 minutes. In view of the time constraints today, I’m going to

reserve opening statements to Mr. Berman, the gentleman from

California, the Ranking Member, and my statement.

Now, Mr. Conyers, the Ranking Member for the full Judiciary

Committee, and Mr. Sensenbrenner, the Chairman of the full Committee, if they appear, of course, we will recognize them for opening

statements. And I will indicate to all Members that all opening

statements may be entered into and made a part of the record.

The Subcommittee on Courts, the Internet, and Intellectual Property will come to order. Today we are conducting an oversight hearing on music on the Internet. The technological advances in the

past few years have brought both incredible new opportunities and

serious challenges to the creators of intellectual property. While the

Internet opens up new markets for intellectual property owners to

exploit, digital piracy threatens these same markets.

The music industry’s experience in the digital environmental—in

the environment—highlights the situation best. Recent technological developments, such as MP3 digital compression, streaming,

and peer-to-peer file sharing have provided consumers with easy

access to music on the Internet and fueled their interest in using

the Internet as a primary way to enjoy music. Yet this win/win opportunity for both the music industry and consumers has been

hampered by services providing free access to unlicensed music.

Several lawsuits disputed interpretations of copyright law, difficulty in property licensing all the rights, and developing effective

means to thwart piracy.

The difficulties in providing legal access to music on the Internet

may be new but they are not novel. Through the years, emerging

technologies have improved the means of providing consumers with

entertainment. These same technologies have expedited legal batVerDate 11-MAY-2000 12:53 Sep 28, 2001 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 G:\WORK\COURTS\051701\72613.000 HJUD2 PsN: HJUD2
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tles and challenged intellectual property owners to develop and ultimately benefit from new commercial opportunities. Through marketplace negotiations, court decisions and legislation, usually disputes were resolved, intellectual property was protected, and the

American public benefited by access to more content through advance technologies.

As in the past, it is my belief that the parties involved in the difficult issues presented here today should first try to resolve their

differences through private negotiations.

And the issue, as each of you know, is incredibly complex. This

hearing will provide the Subcommittee with an opportunity to hear

from several of the major players in this industry. I look forward

to an informative hearing about the availability of music online

and the obstacles to offering a wide variety of protected, easy-toaccess, low-cost music on the Internet.

Mr. COBLE. I’m now pleased to recognize the gentleman from

California, the Ranking Member, Mr. Berman, for his opening

statement.

Mr. BERMAN. Well, thank you, Mr. Chairman. I think it’s a very

good idea that you scheduled this hearing, and I’d just like to make

some comments before we start the hearing. The myriad possibilities for online music are very exciting. Online delivery, promotion,

performance of music seems to be a true killer effort for the Internet. Certainly the demand for online music is there. Napster has

demonstrated that. Now it appears that the supply of online music

is beginning to catch up with the demand. While the music industry may have been slow to jump into the online music market, the

pace of online music dealmaking has been dizzying of late.

I’m sure that today we’ll hear a lot about the two biggest deals,

the creation of Duet and of MusicNet.

Certainly these two deals are remarkable, because they promise

to make a huge amount of new music instantly available online,

but it should be noted that a careless number of smaller deals have

also been cut for a mind-numbing array of online music services.

In fact, music is legally available in a variety of formats on literally

hundreds of Web sites today. Despite these deals, we continue to

hear criticism that the online music market has not evolved quickly

enough to satisfy consumer demand. We hear that consumers want

access to all the music ever published in an on-demand interactive

format and that copyright owners of sound recordings and musical

compositions have not made their works available to satisfy this

demand. I’m sure that consumers really do want such convenience.

I’m sure consumers would like all movies, software, books, photographs, recipes, needlepoint designs, and architectural drawings

available in such a format. We’d also probably like a guarantee of

gasoline under $2 a gallon, price caps on drug prices, free upgrades

of computer software, and Coca-Cola at the greatly reduced price

charge in most developing countries.

But my point is a serious one. Only in extraordinary circumstances, such as demonstrable market breakdowns caused by

antitrust violations, does our government require property owners

to make their property available to the public at government-established rates. Furthermore, copyrights—constitutionally sanctioned

property and music, despite its emotive power and cultural signifiVerDate 11-MAY-2000 12:53 Sep 28, 2001 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 G:\WORK\COURTS\051701\72613.000 HJUD2 PsN: HJUD2
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cance, is basically entertainment. One may credibly argue that

property rights sometimes need to be limited to address an energy

crisis or an epidemic, particularly an energy crisis, but convenience

of access to entertainment seems a particularly weak justification

for the abridgment of constitutionally sanctioned property rights.

It’s especially difficult to justify government interference with

property rights when the free market, however fitfully, appears to

be moving in the right direction. The online music space is booming, and interactive streaming services are beginning to spring up.

MP3.com, which is testifying today, operates MyMP3.com, a digital

music locker service that provides on-demand streaming of onezone music library. Myplay.com also provides such a service. When

they go online, Duet and MusicNet likewise plan to, as I understand it, nonexclusively license other companies to provide on-demand interactive streams.

Even if compelling justifications could be found for government

interference with the rights of copyright owners, I’m disturbed by

the implications of what might especially—essentially be new

Internet-specific regulation.

Congress has been told for years that it shouldn’t regulate the

Internet. The high-tech sector has argued that the government is

far too slow and out of it to effectively legislate industries that are

growing and changing at Internet speed. Any Internet legislation

we pass, it is argued, would be outdated before it was enacted and

might run the risk of freeing—freezing or stifling technological developments in the Internet sector.

It’s also argued that the incredible dynamism effort in the Internet was the direct result of minimal government regulation.

Recent history indicates the dynamic is exactly the same in the

online music space. Less than a year ago, we heard that the big

stumbling block to the success of online music companies was their

inability to secure licenses from the operator of sound recording

copyrights. Today that complaint is infrequently heard, and in fact

several online music business executives have told me that reasonable licenses are available from the owners of sound recordings.

As this hearing will show, the complaint is now about an inability to get licenses from the owners of musical composition copyrights.

I guess my—taking all of this into consideration, I guess tentatively have come to a conclusion that I’m not sure there is great

need at this particular moment, or good reason for sweeping legislation regarding online music. I don’t deny that several obstacles

seem to remain in the way of full-scale realization of online music

possibilities, and we’ll explore some of those today. Nor do I doubt

that some of these obstacles are created by an inability to secure

licenses from copyright owners’ confusion as to whether certain activities require licenses. And we’ll try and elaborate on some of

those issues today.

But it’s obvious that all parties, every party at this table, every

party involved in this business, has a strong pecuniary incentive to

resolve the problems that exist, and I think those incentives can be

a powerful motivator.

Thank you, Mr. Chairman.

4

Mr. COBLE. Thank you, Mr. Berman. And ladies and gentlemen,

I’m going to overrule myself. I said earlier the opening statement

is only for Mr. Berman and me, but we have with us our former

Chairman of the full Committee. We have the Ranking Member of

the full Committee, and Mr. Boucher has also asked to be heard,

so I will now recognize Chairman Hyde for his opening statement.

Mr. HYDE. I thank you very much, Mr. Chairman, for that welcome concession. Thank you. The present disagreement over the

ability of record companies and online services to make reproductions of musical compositions necessary to launch digital music

services is a troublesome obstacle to efforts to meet consumers’ demand for music on the Internet. I understand that record companies and online services have been negotiating with music publishers to find a business solution to this disagreement; and my

sincere hope is that the parties will come to a negotiated solution

quickly to resolve their differences and that the marketplace will

work to provide consumers with the music they desire.

However, it’s important to recognize that a voluntary agreement

is not necessary for the use of musical works and digital music

services. During my tenure as Chairman of this Committee, the

Committee worked with both the music publishers and the recording industry to enact the Digital Performance Right in Sound Recordings Act of 1995.

DPRA, DPRA. Among other things, the DPRA clarified that the

mechanical compulsory license found in section 115 of the Copyright Act applies to the digital world. We did so at the music publishers’ insistence and with the support of the recording industry.

At the time, I believe, and I still believe, that DPRA gave record

companies and online services whatever rights they may need to

make reproductions in the operation of digital music services. It’s

therefore very disappointing to me that some are now asserting

that the compulsory license we enacted in 1995 is insufficient to

grant the necessary rights to get digital music services up and running.

This is contrary to what I believe to have been one of the key

purposes of the DPRA, to allow legitimate operators to rely upon

the compulsory license to launch their services.

My hope is that the disagreement between the music publishers

and the recording industry and Internet music companies will be

resolved quickly through business negotiations. And I understand

that the Copyright Office is considering a rulemaking to clarify the

application of the mechanical compulsory license to certain specific

types of services. I support action by the Copyright Office to effectuate the intent of DPRA, to enable electronic music delivery, and

I hope that the Office will take such action quickly to help meet

the consumer demand for digital music that exists today.

Thank you, Mr. Chairman.

Mr. COBLE. I thank you, Mr. Hyde.

Mr. COBLE. The Chair recognizes the gentleman from Michigan,

the Ranking Member of the full Committee, Mr. Conyers.

Chairman CONYERS. Thank you, Chairman Coble, and Members.

I’m delighted to welcome all of our distinguished witnesses, and especially the songwriters and publishers who may be considered the

lowest on the musical food chain. Welcome all.

5

Well, briefly, should publishers be able to leverage their market

power the way the labels did with MP3 when it comes to negotiating royalties? Is there support for a uniform licensing scheme for

some recordings so that any Internet company that wants to

stream or download music to consumers can take advantage of one

license? Why has there been so much energy to clarify section 115

of the

mechanical—mechanical copyright license from the Copyright Office? Doesn’t the law already say that owners and users of copyrights on compositions should negotiate on terms and rates?

So I join you here because the Internet presents one of the most

profound paradoxes of the 21st century. Until recently, copyright

holders have gone from being the victims of large-scale Internet piracy to seeking to embrace the Internet to market their works. Essentially they’re trying to take advantage, perhaps, of the very

technology that once threatened their livelihood.

Despite this turnaround, though, music is still not widely available online, and we’re measuring—that is, we are hearing that it

is partly because of the difficulty in getting licenses from music

publishers over the compositions that underlie each song. Those

seeking licenses claim that procedures are outdated, and the law

is not clear on which online music systems require which licenses.

There are suggestions that the Congress should alter the licensing scheme into a blanket license so that the users of compositions

pay royalties into a pool and the Copyright Office divvies up the

money between publishers.

Well, I’d be concerned with proposals limiting the ability of songwriters and publishers to negotiate licenses for their compositions.

Despite the fact that they actually create and write the songs we

listen to, songwriters and publishers still receive the lowest royalties in the music industry. And so I look forward to your testimony,

gentlemen, and I return any time that may be remaining.

Mr. COBLE. Thank you, Mr. Conyers.

Mr. COBLE. Now, Mr. Cannon, the gentleman from Utah, and

Mr. Boucher, the gentleman from Virginia, have pledged to me that

they will keep their opening statements brief. So I will recognize

the gentleman from Utah.

Mr. CANNON. Thank you, Mr. Chairman. I thank you for holding

this hearing. Napster and other digital music companies have

raised important questions for the Judiciary Committee in terms of

jurisdiction over copyright. I also hope that we look at the issues

of online music through the prism of antitrust laws as well, to foster a vibrant marketplace, one that allows competition to lower information costs.

Now, Mr. Chairman, while the labels ignored using the Net as

a distribution mechanism, my constituents in Utah have not. I sincerely this year—we have been overwhelmed in my office by Utahans who support Napster, and by the way, most of them also say

that they would be happy to pay for music service, and I know for

the record that the people who are contacting me are folks who are

otherwise disinterested in the political process. I believe this issue

provides all of us with a rare opportunity to connect with our

grassroots. So as we look at all the issues surrounding Napster and

online music, I hope others recognize that the debate is not whethVerDate 11-MAY-2000 12:53 Sep 28, 2001 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 G:\WORK\COURTS\051701\72613.000 HJUD2 PsN: HJUD2
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er artists are compensated; rather, it is about how the money

should get to those who create the work.

Whether we are talking about a narrow fix for the so-called mechanical license or a broader change to the Copyright Act to provide one-stop shopping for copyright clearances, I look forward to

hearing from our witnesses this morning. Thank you, Mr. Chairman, and I yield back.

Mr. COBLE. I thank the gentleman.

Mr. COBLE. The gentleman from Virginia, Mr. Boucher.

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

today’s hearing which focuses on various aspects of music distribution over the Internet. Let me begin this afternoon by congratulating the major recording companies for creating Duet and

MusicNet, which will make available online approximately 80 percent of the inventory of recorded music. These projects represent a

step forward in the use of the power of the Internet as a distribution medium. Internet users will have the convenience of obtaining

the songs that they want to hear online, and the recording companies will experience a dramatic expansion in the market for their

music. They will also have the assurance that their intellectual

property rights will be protected and that the owners of the various

music copyrights are compensated.

I do have two basic questions about Duet and MusicNet. First,

will the customers of these services have the ability to download

for permanent retention on their hard drives single tracks for the

payment of a fee? This basic offering is essential, in my opinion,

if the label-operated sites are to be effective and attractive alternatives to the free peer-to-peer file sharing services.

Secondly, I have concerns about the potential ability of vertically

integrated companies that have both content origination and distribution businesses, to favor their distribution business by refusing to license on nondiscriminatory terms their music inventories

to their distribution competitors.

For today’s purposes, I’m interested in learning of the plans of

both Duet and MusicNet to cross-license each other, and their willingness to provide licenses on nondiscriminatory terms to other distribution services.

Over the longer term, this Committee may be called on to assure

in law the nondiscriminatory availability of such licenses generally.

It is also appropriate that we use the hearing this afternoon as a

means of urging the Copyright Office to put in place a temporary

safe harbor arrangement for the section 115 license until the Copyright Office completes its process for deciding the full scope of the

license and establishes a rate under the compulsory license which

would be associated with licensing of the music.

The safe harbor would give a needed umbrella of protection to

distribution companies from suits by publishers, which could result

in statutory minimum damages. In return, the distribution companies would agree to keep careful records of the music that they

store and distribute over the Web and would file notices of their

identity and their business models with the Copyright Office. Then

when the Copyright Office completes its work on the scope of section 115, the records could be used the make payments, if any are

7

then due, for distributions that occurred during the time that the

safe harbor was being used.

And I look forward to the testimony of today’s witnesses concerning this need.

Mr. Chairman, there are a range of other matters that I hope

this Subcommittee will have the opportunity to address, either during the hearing this afternoon or on future occasions, that are in

the category of assuring the effective functioning of the Internet.

And there are some changes in copyright law, from expanding the

in-store sampling exemption to retail stores that operate on the

Web, to providing a more definitive and useful ephemeral copyright, to declaring that buffer copies, which are essential to the operation of many consumer appliances are made unequivocally lawful.

I would welcome the testimony of witnesses this afternoon on

these very important matters, and I thank you, Mr. Chairman, for

assembling this interesting panel.

Mr. COBLE. I thank the gentleman.

Mr. COBLE. We have been joined on the majority side by the gentleman from—. Mr. CONYERS. Excuse me, Mr. Chairman. Could our colleague,

Karen McCarthy of Missouri, sit quietly and unnoticeably on the

panel?

Mr. COBLE. The gentleman is reading my mind. I was about to

do that. I was about to say—thank you, John. We’ve been joined,

ladies and gentlemen, on the majority side by the gentleman from

Tennessee, the gentlemen from South Carolina, Indiana and Florida; and on the minority side, the gentlelady from California and

the gentleman from California and the gentlelady from Missouri.

Although not a Member of the Committee, it’s good to have you.

Now, I don’t have a whip in my hand, so I’m not going to be able

to enforce this, but if anybody else wants an opening statement, I

will let you have it. I will—I appreciate that, but you may submit

your statements for the record. I didn’t intend to intimidate anyone. I said, John, I did not have the whip.

Our first witness this afternoon is Mr. Edgar Bronfman, Junior,

who is executive vice Chairman of Vivendi Universal. Prior to the

December 2000 formation of Vivendi Universal, Mr. Bronfman, was

executive and—chief executive officer of the Seagram Company, a

post he held since June 1994. He held the same title with Joseph

E. Seagram & Sons, the corporation’s United States subsidiary.

Our next witness is Mr. Mike Stoller. Mr. Stoller and his partner, Jerry Leiber, have written hundreds of popular songs, including Hound Dog, Smokey Joe’s Cafe, Stand By Me, On Broadway,

Love Potion No. 9, Charlie Brown, and Yakety Yak and a dozen

others. They also are principals in Music Publishing Entity. Now,

Mr. Stoller, for your information, The Coasters asked me to join

them in vocalizing lyrics of Charlie Brown

4 or 5 years ago, and after I did that, they advised me to retain

my day job. I did not impress anybody overwhelmingly.

Our next witness is Mr. Robin Richards, who joined MP3.com as

president after serving as managing director of Tickets.com. Prior

to working with Tickets.com, Mr. Richards was the founder, president and CEO of Lexi International, one of the Nation’s largest

8

teleservices companies. Mr. Richards graduated from the Michigan

State University, then attended the Whittier College School of Law.

Our first witness is Mr. Rob Glaser, who is the founder, Chairman and chief executive officer at RealNetworks, Inc. Prior to

founding RealNetworks, Mr. Glaser worked for Microsoft from 1983

to 1993 and then managed Microsoft World; then moved to the

company’s networking group prior to becoming vice president of

Multimedia and Consumer Systems. Mr. Glaser has a B.A. And

M.A. In economics and a B.S. In computer science from Yale University.

Our final witness is perhaps unknown to no one in the room, Mr.

Lyle Lovett, a songwriter and performer. For more than a decade,

Lyle Lovett and his Large Band have defied convention, resisted

any kind of pigeonholing and delighted both audience and critics

with his music that is amalgam of rock, country, folk and blues.

His hits include, She’s No Lady, If I Had a Boat, Nobody Would

Know Me, and I’ve Been to Memphis. And, Mr. Lovett, even though

these songs don’t appear on my script, I would be remiss if I did

not mention my favorite Lyle Lovett song, Farther Down the Line;

and The Waltzing Fool, God Will But I Won’t, and others. It’s good

to have all of you with us, folks.

I will ask you all to do me a favor, if you can. We—as I say, we’re

in competition with the floor. That bell inevitably will ring imminently. I would like for you all to stay within the 5-minute time

frame, if you can. Now, if you violate that, nobody will be

keelhauled, but when you see that red light appear, you will know

then that your time has expired. We appreciate, again, your willingness to be with us.

Mr. Bronfman, if you will kick it off.

STATEMENT OF EDGAR BRONFMAN, JR., EXECUTIVE VICE

CHAIRMAN, VIVENDI UNIVERSAL

Mr. BRONFMAN. Thank you, Chairman Coble, Congressman Berman, Members of the Subcommittee.

Mr. COBLE. If you will, pull that mike a little closer to you.

Mr. BRONFMAN. Is that better?

Mr. COBLE. Is it turned on? I don’t believe it’s—.

Mr. BRONFMAN. There we are.

Mr. COBLE. That’s good.

Mr. BRONFMAN. Chairman Coble, Congressman Berman, Members of the Subcommittee, my name is Edgar Bronfman, Junior,

and I’m pleased to be here to testify about the electronic distribution of music, a subject that is of great importance to my colleagues

at Vivendi Universal and to me and the Universal Music Group.

Let me begin by thanking the Committee for all of the work that

you’ve done over the years to find a balance between the rights of

creators and the needs of consumers. The solutions fashioned by

the Subcommittee—from the 1976 Copyright Act to the DMCA—

are part of the reason that our creators and copyright industries

are as successful as they are and the choices are as bountiful.

Let me also acknowledge my colleagues on this panel. I am proud

to say that Lyle Lovett is a recording artist on MCA Records, which

is part of Universal. His preference reminds us that without the geVerDate 11-MAY-2000 12:53 Sep 28, 2001 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 G:\WORK\COURTS\051701\72613.000 HJUD2 PsN: HJUD2
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nius of the singers and songwriters like the great Mike Stoller,

there is no music business.

The Universal Music Group is also a beneficiary of Mr. Glaser’s

expertise. We pursue several different initiatives with

RealNetworks. Universal Music Publishing is a member of the National Music Publishers’ Association, and Universal’s catalog of

sound recordings has been licensed to MP3.com.

I mention these relationships to highlight that there are many

players within the music industry, all with different but significant

roles. The Internet presents great opportunities for all of us: artists, songwriters, record labels and, most importantly, music fans.

We will disagree, we will argue, and we’ll negotiate. And at the end

of the day, I believe we will work through the complex issues that

the Internet presents.

The challenges to the secure digital distribution of music and

other intellectual property are significant, and resolving them is

sometimes frustrating and always time-consuming. However, the

opportunities are vast and our determination to achieve a robust

digital marketplace for music intensifies every day.

So why is it taking so long? Not for lack of effort. Universal has

invested many tens of millions of dollars in developing an environment for the digital enjoyment—the digital delivery and enjoyment

of music. But a rational long-term business plan has two prerequisites. First, we need a strong legal framework to protect our

copyrights; and second, we need technology solutions that work for

a global audience.

The legal framework appears to be in place. The DMCA has updated the Copyright Act for the digital age. Importantly, recent

court decisions have clearly held that our property rights must be

respected. While the industry still needs to work through the licensing issues that have arisen, concerns that are legitimate and

thorny, I believe that the requirements of the marketplace will dictate that they be resolved without additional legislation.

As for the technology, to be honest, to do it right has been harder

than we expected. But right, I mean creating a consumer-friendly

system that is fun and easy to use, a mechanism for identifying

which songs are downloaded or streamed so that the songwriters,

musicians and other rights-holders of each song are properly compensated each time; dynamic sites that reliably deliver great songs,

as well as cover art, lyrics, concert information, the ability to communicate with the band, chat with other fans and discover new favorites, and security for our copyrighted property.

While developing the technology has been labor intensive and

challenging, it is clear that we can build a secure system that respects the rights of artists and meets the needs of consumers.

It is also clear that although much time, money and effort has

been expended, many—we are not there yet. Nonetheless, thanks

to our efforts and those of my colleagues on the panel and others,

that day is coming ever closer. We have engaged in extensive R&D

to learn about the marketplace, tested several prototypes and

learned a great deal about consumer preferences. We know that

there is plenty of room in this marketplace for many different ventures, and we intend to license our catalog to every viable business

model, those that we create and those developed by others. I am

10

not revealing any secret formula. We plan to do it, because consumers want all their favorite music conveniently available in one

place.

While many people in this room are Lyle Lovett fans, including

myself, and many of you have spent hours enjoying songs from The

Road to Ensenada and I Love Everybody, none of you would think

to look for those songs on an MCA Records Web site. Until I mentioned that Universal was lucky enough to have Lyle in our family,

very few of you would have made that connection. That means for

us to effectively market and distribute Lyle’s albums, they are

going to have to be on as many different online music sites as possible, just as the physical copies are in Tower, Sam Goody’s, Best

Buy, Walmart and others.

From Motown to Verve, to Deutsche Grammophon, Universal’s

repertoire comes from all parts of world, and we want to make it

available to all parts of the world. Frankly, if we lock away our

catalog, we aren’t generating value for our artists or our shareholders or our fans. That is why we have already licensed works

within our catalog to Click Radio, Loudeye, Discovermusic, MTV,

eCast, Touchtunes, MP3.com, Digital On Demand, eGreetings,

ComedyContent, Starmedia and others. We’re in the process of finalizing other licensing deals, with the hope that each one of them

will find their niche in the marketplace.

Let me now take a moment to talk about Duet, an online digital

music subscription service that we created with Sony Music Entertainment. I know that Rob will be demonstrating MusicNet in a

few minutes. Many Members of this Committee have already seen

a demo of Duet, so we will not treat you to a game of dueling

demos today, but I will highlight that Rob’s demo is evidence that

consumers are about to be the beneficiaries of a vibrant competitive

Internet marketplace. Duet’s U.S. on-demand service will be available and marketed through a number of distribution alliances, the

first with Yahoo.

The on-demand Duet subscription service will offer consumers

the opportunity to access a broad range of quality music online,

with speed, ease of use, and reliability, while respecting artists’

rights. The Duet service is expected to launch with streaming

music and plans to add downloads as soon thereafter as is technologically feasible. We hope to license music from as many artists

and catalogs as possible.

At the Universal Music Group, we are enthusiastic about the digital delivery of music. At Vivendi Universal, we know that music

is just the first of what will be a long list of compelling and legitimate entertainment choices for consumers as part of a digital future we equally embrace.

Thank you, Mr. Chairman.

Mr. COBLE. Thank you, Mr. Bronfman.

[The prepared statement of Mr. Bronfman follows:]

PREPARED STATEMENT OF EDGAR BRONFMAN, JR.

Chairman Coble, Congressman Berman, members of the Subcommittee, my name

is Edgar Bronfman, Jr. and I am pleased to be here to testify about the electronic

distribution of music—a subject that is of great importance to me and my colleagues

at Vivendi Universal and the Universal Music Group.

11

Let me begin by thanking the committee for all the work that you have done over

the years to find a balance between the rights of creators and the needs of consumers. The solutions fashioned by this Subcommittee—from the 1976 Copyright

Act to the DMCA—are part of the reason that our creators and copyright industries

are as successful as they are, and that choices are as bountiful.

Let me also acknowledge my friends and colleagues on this panel. I am proud to

say that Lyle Lovett is a recording artist on MCA Records—which is part of the Universal Music Group. His presence reminds us that without the genius of the singers,

songwriters and other artists we work with, there is no music business.

The Universal Music Group is also a beneficiary of Mr. Glaser’s expertise—we

pursue several different initiatives with Real Networks. Universal Music Publishing

is a member of the National Music Publishers Association. Universal’s catalog of

sound recordings has been licensed to MP3.com.

I mention these relationships to highlight that there are many players within the

music industry—all with different but significant roles. The Internet presents great

opportunities for us all—artists, songwriters, record labels and, most importantly,

music fans. We will disagree, we will squabble and we’ll negotiate, and at the end

of the day I believe we will work through the complex issues that this extraordinary

distribution mechanism presents.

The challenges to the secure digital distribution of music and other intellectual

property are significant. As such, the process of their resolution is sometimes frustrating and always time consuming. However, the opportunities are vast and our

determination to achieve a robust digital marketplace for music intensifies everyday. In that brave New World, we and our retail partners will be able to reach every

consumer that has an internet connection. Consumers in small towns will then have

the same access as those who now live near large retail outlets. Shelf space will not

be an issue, so back catalog will be right next to the recordings at the top of the

charts. Of course, the 8,000 movie titles in the Universal library will also benefit

from the music industry’s innovations.

So why is it taking so long for legitimate online music sites to become a reality?

Not for lack of effort—Universal has invested many tens of millions of dollars in

developing a environment for the delivery and enjoyment of digitized music. I do not

know of any music company that has invested more.

But a rational, dependable, long-term business plan has two prerequisites. First,

we need a strong legal framework to protect our copyrighted music. Second, we need

technology solutions that are ready for a global audience.

The legal framework appears to be in place. The DMCA has done a good job of

updating the Copyright Act for the digital age. Importantly, recent court decisions

have clearly held that our property rights must be respected. It is true that the industry still needs to work through some of the licensing issues that have arisen—

concerns that are legitimate and thorny—but I believe that the requirements of the

marketplace will dictate that they can and will be resolved without additional legislation.

As for the technology, to be honest, to do it right has been harder than we expected. By ‘‘right’’ I mean—

• consumer-friendly systems that are easy and fun to use

• a mechanism for identifying which songs are downloaded or streamed so that

the songwriters, musicians and other rights holders of each song are properly

compensated each time

• dynamic sites that reliably deliver great songs as well as cover art, lyrics, concert information, the ability to communicate with the band, chat with other

fans and discover new favorites; and

• security for our copyrighted property

While developing the technology has been labor intensive and challenging, it is

clear that we can build a secure system that respects the rights of artists and meets

the needs of consumers. It is also clear that although much time, money and effort

has been expended by many, we are not there yet. Nonetheless, thanks to our efforts

and those of my colleagues on the panel and others, that day is coming ever closer.

We have engaged in extensive R&D to learn about the marketplace. I have had

the chance to speak with several of you about some of Universal’s online projects,

including a download service known as Bluematter and a subscription model tested

within the Farmclub website. We have also closely followed ventures that others

have tried.

These initial prototypes taught us a great deal about consumer preferences. We

learned that there is plenty of room in this marketplace for many different ventures,

12

and we intend to license the Universal catalog to every viable business model—

those that we create and those developed by others.

Our business strategy is to license the Universal catalog to outside ventures, and

to license works from outside the Universal catalog for our own online ventures. I

am not revealing any secret formula. We plan to do it because consumers want all

their favorite music conveniently available in one place.

While many people in this room are Lyle Lovett fans, and many of you have spent

hours enjoying songs from ‘‘The Road to Ensenada’’ and ‘‘I Love Everybody,’’ none

of you would think to look for those songs on an MCA Records website. Until I mentioned that Universal was lucky enough to have Lyle within our family, very few

of you would have made that connection. That means that for us to effectively market and distribute Lyle’s albums, they are going to have to be on as many different

online music sites as possible—just as the physical copies are in Tower, Sam

Goody’s, Best Buy, Walmart and countless independent record stores across the

country.

From Motown to Verve to Deutsche Grammophon, Universal’s extensive repertoire comes from all parts of the world and we want to make it available to all

parts of the world. Frankly, if we lock away our catalog, we aren’t generating value

for our artists or shareholders, or fans. That is why we have already licensed works

within our catalog to Click Radio, Loudeye, Discovermusic, MTV, eCast, Touchtunes,

MP3.com, Digital On Demand, eGreetings, ComedyContent.com, Starmedia and others. We are in the process of finalizing other licensing deals, with the hope that each

one of them find their niche in the marketplace.

Let me take a moment to talk about Duet, an online digital music subscription

service that we created with Sony Music Entertainment. Duet’s U.S. on-demand

service will be available and marketed through a number of distribution alliances—

the first with Yahoo!

The on-demand Duet subscription service will offer consumers the opportunity to

access a broad range of quality music online with speed, ease of use, and reliability,

while respecting artists’ rights. The service will provide music enthusiasts with the

ability to compile personalized playlists and to share them with other Duet members. The Duet service is expected to launch with streaming music and plans to add

downloads as soon thereafter as is technologically feasible.

As many of you know, Vivendi Universal was formed in December 2000 as a strategic business combination among Universal Studios, Universal Music Group,

Canal+ and Vivendi. We came together to embrace e-commerce opportunities that

most consumers did not envision when Seagram acquired Universal Studios in 1995,

and Polygram in 1998. Vivendi Universal’s content, internet and telecommunications assets will give us unique opportunities to provide personalized information,

entertainment and services to consumers anywhere, anytime and across all distribution platforms.

As a result of our efforts, and others in the entertainment and technology industries, legitimate, secure and vibrant digital distribution will be a reality for consumers and creators around the globe. At Universal Music Group we are enthusiastic about the digital delivery of music. At Vivendi Universal, we know that music

is just the first of what will be a long list of compelling and legitimate entertainment choices for consumers, as part of a digital future we eagerly embrace.

Mr. COBLE. Mr. Stoller, I’ll give you his 40 seconds left. Mr.

Stoller.

STATEMENT OF MICHAEL STOLLER, SONGWRITER AND PUBLISHER, ON BEHALF OF NATIONAL MUSIC PUBLISHER’S ASSOCIATION, INC.

Mr. STOLLER. Can you hear me? Good afternoon, Mr. Chairman,

and Members of the Subcommittee. My name is Mike Stoller. I’m

a songwriter. I’m also a music publisher. I’m here today on behalf

of the NMPA, the National Music Publishers’ Association. I’m also

a member of the board of directors of The Songwriters Guild of

America.

I’m here to talk about the successful efforts of songwriters and

their representatives and administrators, the music publishers, in

licensing songs on the Internet. When I refer to songwriters in this

13

discussion, I’m including the songwriters, caretakers, music publishers.

My partner Jerry Leiber and I have been writing songs together

for over 50 years. Some of the songs we’ve written, forgive me for

being redundant, are Hound Dog, Jailhouse Rock, Stand By Me,

Kansas City, On Broadway, Yakety Yak, Love Potion No. 9, Charlie

Brown, I’m a Woman, Poison Ivy, and Is That All There Is? Many

of these songs were featured in a Broadway show called Smokey

Joe’s Cafe.

As music publishers, we publish not only our own songs but

songs written by hundreds of other writers. Not long ago when we

first became aware that the U.S. copyright law which protects our

property was being violated on a grand scale and our songs were

being pirated like never before, we, the songwriters and music publishers, stood shoulder to shoulder with the record companies, the

members of the RIAA, in opposition to the MP3.coms, the Napsters,

and their various clones who enable the unlawful downloading of

our property. After all, the record companies’ copyrights were being

violated as well.

In fact, the record companies asked the NMPA and the songwriters to join them in a lawsuit against Napster. Only a month

ago, the RIAA asked me to come to Washington testify on April 3rd

on their behalf.

It would seem we have prevailed in these cases, and at long last,

only after the Senate called the hearing last month, the record labels claim to have embraced the Internet as a faster, easier, and

less costly way to distribute their product. The labels plan to offer

consumers a monthly subscription to download their recordings. Of

course, none of these services is operational, but they will be.

Since the record labels will be distributing recordings of songs,

they would like Congress to dictate how much, or, I should say,

how little they would have to pay to compensate songwriters for

the use of their works when distributed via the Internet. So now

the record labels and Internet companies are calling for government regulation of songwriters.

The irony is that the Internet music companies and record labels

business is based entirely on the use of our songs. Where they have

staunchly fought against government regulation in their own industries, they now ask Congress to intercede on their behalf to get

the use of our songs cheaply.

The record labels don’t need any more legislation to get onto the

Internet. In fact, the record companies could have licensed the

Internet companies from the inception, but they didn’t. We’re still

waiting. With our mutual victories against Napster and MP3.com,

the record labels have now run out of excuses for not being on the

Internet. But before they start to offer music through pay services,

they want to make sure they won’t have to pay us a fair share of

the income. So they now try to justify further delay by blaming

songwriters and publishers. We’ve become the scapegoat.

Well, that isn’t the case. Songwriters and music publishers are

ready, willing, and able to license their songs on the Internet. We

have licensed more than 40 services through the Harry Fox Agency. This makes perfect sense. Licensing, after all, is how we earn

our livelihoods. We need the record companies, and they need us.

14

The question to be asked is: Who are the gatekeepers to offering

music on the Internet?

Songwriters are already subject to a compulsory license on the

Internet. We must issue licenses to virtually all comers at the current rate of 7-1/2 cents per download. The record labels thus far

have declined to obtain compulsory licenses for distributing our

music on the Internet. The Internet music companies, on the other

hand, do not have the same options as the record labels. Compulsory licenses are only available if an Internet music service first

gets a license from the owner of the sound recording. There’s no

compulsory license for sound recordings, and the record labels are

therefore not required to grant licenses. An imbalance, therefore,

exists between songwriters and record labels. Without sound recording rights, those new services cannot be launched. It is the

record labels, not the songwriters, that are the gatekeepers to the

Internet.

Congress has given songwriters and their music publishers the

flexibility to work with the new technologies and innovative business models that crop up on the Internet every day. It empowers

songwriters and record labels and Internet music services to negotiate reasonable rates through the Copyright Act for any manner

of music services.

Songwriters and music publishers are constrained from negotiating for more than the compulsory rate. We are not constrained

from negotiating for less.

A copyright is meaningless if you can’t enforce it. A blanket license is insufficient and unnecessary. They say they need a blanket

because it’s too hard to count the uses of our songs on the Internet.

I don’t get it. I may not be an expert on computers. I think we

can all agree that computers are good at counting. What the record

labels and Internet music services are really looking for is a subsidy from songwriters to put them into new businesses. Multinational record labels do not need any subsidies from songwriters.

In any event, songwriters and music publishers have been willing

to enter into licenses with Internet music services that have expressed a willingness to play by the rules.

Jerry and I, my partner Jerry and I, like hundreds of other

music publishers have licensed our entire catalogs to MP3.com to—

.

Mr. COBLE. Mr. Stoller, if you would—Mr. Stoller, if you—are

you about to wind down?

Mr. STOLLER. I will at this moment.

Mr. COBLE. Okay.

Mr. STOLLER. I respectfully suggest that if Congress is not going

to regulate record labels and the Internet music companies, which

I’m not suggesting that they should do, they should not regulate

the least powerful group, the songwriters. This entire controversy

is not about getting licenses. It’s about how little they wish to pay

for them.

Mr. COBLE. Thank you, Mr. Stoller. And I gave you an extra 3

minutes. So you other gentleman will have an extra 3 minutes as

well to be completely fair about this.

[The prepared statement of Mr. Stoller follows:]

15

PREPARED STATEMENT OF MICHAEL STOLLER

Mr. Chairman, and members of the subcommittee, thank you for the opportunity

to present the testimony of the National Music Publishers’ Association (‘‘NMPA’’) on

‘‘Music On The Internet.’’

Summary: NMPA believes that the rapid technological changes occasioned by the

Internet are creating exciting opportunities to expand and enhance the ability to deliver to music to the widest audience possible. Significant hard work is being done—

and some tension has arisen—in developing and implementing the appropriate business models to accommodate this new technology. NMPA’s licensing subsidiary (The

Harry Fox Agency) is actively modernizing its equipment and procedures to ensure

the fastest possible licensing of these new modes of distributing music and to date

has licensed over 30 music internet services.

Congress amended the copyright law in 1995 and again in 1998 to ensure that

its music-specific provisions are flexible enough to accommodate digital technology

and the Internet. These amendments—which in essence direct affected copyright

owners and users to negotiate appropriate licenses, and provide for arbitration of

the rates and terms that cannot be negotiated—created the appropriate legal framework in which new business models could be developed. There is no need to change

the law today; there is no legal or factual basis for doing so (despite the assertions

of some); and indeed a change in the law (or even its serious consideration) might

delay the launching of new Internet music services rather than promote progress.

Founded in 1917, NMPA is the principal trade association of music publishers in

the United States. NMPA’s members—over 800 today—own or control the overwhelming majority of musical compositions available for licensing in the United

States. NMPA’s wholly owned subsidiary, The Harry Fox Agency, Inc. (‘‘HFA’’) is an

industry service organization that represents over 27,000 publisher-principals,

which collectively own more than 2.5 million copyrighted musical works. Established

in 1927, HFA serves as agent on behalf of its publisher-principals in licensing copyrighted musical compositions for reproduction and distribution as physical

phonorecords (CDs, cassette tapes and phonograph records) and over the Internet

as digital phonorecord deliveries (‘‘DPDs’’). HFA is also responsible for royalty collection and distribution and auditing licensee compliance.

CURRENT LAW IS WORKING AND SHOULD NOT BE CHANGED.

In enacting the Digital Performance Rights in Sound Recordings Act in 1995, Congress extended the existing ‘‘mechanical’’ compulsory license in section 115, which

covers the making and distribution of phonorecords of protected musical compositions, to certain Internet uses.

In enacting these important changes into law, Congress did not attempt to anticipate every possible business model for making music available to Internet users.

Nor, as we discussed in our recent response to a Notice of Inquiry from the Copyright Office, did Congress assign that burden to the Copyright Office. Rather, it provided general definitions establishing the principle that songwriters and music copyright owners—like record companies—should be compensated fairly and in a manner that reflects the economic significance of those business models for current as

well as new sources of publisher and writer income.

Section 115 already contains a mechanism for dealing with the new services

(website downloads and Internet streaming) discussed in the recent Copyright Office

petition by the RIAA—or any others that might arise in the future. Congress established its clear preference that the licensing of new music services be dealt with in

private, voluntary negotiations and, if those negotiations are ultimately unsuccessful, by arbitration before a Copyright Arbitration Royalty Panel. This decision by

Congress was the appropriate one in 1995, was reaffirmed in 1998 amendments to

a parallel regime in section 114, and remains so today. To have chosen otherwise—

or to choose otherwise now—would invite every new entrant into the online music

market to bring what should remain private business matters to Congress or to the

Copyright Office. Others might simply be tempted to use Congressional or regulatory pressure on rights owners and creators in an attempt to exact a more favorable deal. This is hardly a prescription for rapid introduction of legitimate services

for the distribution of music or any other form of creative content.

We believe the model Congress has adopted can work for the benefit of songwriters, music publishers, record companies and companies seeking to offer innovative music services—and should be permitted to do so. Music publishers, through

HFA, have already issued licenses to more than 30 music service providers covering

downloads as well as interactive streaming services, and we are prepared to license

others.

16

1 Congress explicitly endorsed this concept in section 114 by giving record companies exclusive

rights in connection with all interactive digital services.

MUSIC PUBLISHERS LICENSE INTERNET MUSIC SERVICES AT REASONABLE RATES

Music publishers and songwriters have every incentive to license their works in

the digital environment—and indeed are required to do so under the terms of the

compulsory license contained in section 115. Some digital music services imply that

music copyright owners are deliberately impeding the issuance of licenses for online

music services. This suggestion is both inaccurate and illogical. Music publishers

only get paid when their work is used; if it is not used, no revenue is generated.

NMPA members are eager (and economically motivated) to license their works in

the new digital environment.

As noted above, music publishers (through HFA) have already issued licenses to

more than 30 Internet music service providers. The charge that HFA is technologically incapable of licensing the large volume of works that the Internet requires

is simply factually inaccurate, as we explain below in the discussion of our relationship with MP3.com.

The implication that songwriters and music publishers enjoy dual income streams

that inordinately enrich them is preposterous. Owners of copyright in the underlying musical work in a sound recording receive—at most—7.55 cents per song sold.

(The retail cost of a CD is up to $18.95.) Congress has determined that digital transmissions which effectively substitute for the sale of phonorecords should be subject

to the same copyright royalties as the physical sale of such records.1 Failure to adhere to this concept could decimate the vibrant, diverse songwriter and music publisher community. The concept was codified for songwriters and music publishers in

the ‘‘digital phonorecord delivery’’ definition and related amendments to section 115

of the Copyright Act.

Some webcasters claim that their transmissions are identical to over-the-air radio

broadcasts, are performances only, and should be subject only to the public performance royalties collected by the performing rights societies (including ASCAP and

BMI). The radio/Internet analogy is fallacious on its face and should be rejected.

Traditional radio broadcasts experience sound degradation and do not require any

copies on the listener’s equipment in order to facilitate the performance. In contrast,

‘‘streaming’’ Internet transmissions require the creation of perfect digital copies of

the sound recording on the transmitter’s computer, and perfect digital copies on the

recipient’s computer.

Moreover, users can now preserve and access the receiving computer’s copy

through use of the Total Recorder software—a generally available, easy to use product. (We are not talking about ‘‘hacking.’’ Total Recorder is a generally available

software product that takes no special knowledge or computer ‘‘tinkering’’ to use and

is available over the Internet for as little as $11.95.) In other words, with today’s

technology, a ‘‘listener’’ can select a particular song or request a particular subgenre of music from a webcaster, ‘‘listen’’ to the songs, and then instruct the Total

Recorder software to copy the songs the listener wants to keep onto a permanent,

separate file in MP3 format. The ‘‘listener’’ now has a perfect, permanent digital

copy of a song, displacing any need for its subsequent purchase and effectively turning a streaming service into a source of countless free downloads. In this case, the

sale of a phonorecord has either occurred or been displaced and a ‘‘mechanical’’ royalty is appropriately due to the music copyright owner. For parties such as

webcasters to assert that they should never pay a ‘‘mechanical’’ royalty for their

streaming activities is disingenuous—pure and simple.

MP3.COM AND THE HARRY FOX AGENCY.

HFA represents 27,000 music publisher principles in licensing (and other) transactions with major and independent record companies and over 30 Internet distributors. HFA is not only capable of licensing large volumes of titles in the Internet

era—it is well-positioned to do so. This issue arises most often in the context of our

settlement agreement with MP3.com, and the facts of the HFA-MP3 relationship

prove our point.

Presently, HFA and MP3 are working under the terms of an interim license under

which the MyMP3 service may operate while permanent licenses are issued. This

is a critical fact that many do not hear: HFA has given MP3.com an interim license

as to all of the titles it wishes to use commercially while individual permanent licenses are obtained.

HFA can and is processing permanent license requests from MP3.com. HFA and

MP3.com technical staff to date have resolved 236,676 licensing requests (172,194

17

titles were licensed, another 64,482 requests were determined to be duplicates of

other MP3.com license requests).

HFA has reviewed the entire file of 914,914 titles for which MP3.com has requested licenses, has provided a detailed report on these requests to MP3.com, and

has determined that a substantial number of the outstanding requests cannot currently be processed due to incomplete information submitted by MP3.com.

MP3.com’s incomplete database likely arises because it improperly disassembled

lawfully purchased CDs (which contain the necessary licensing information) and neglected to retain crucial data in the process. Other requests could not be processed

because MP3.com adopted ‘‘default’’ entries and submitted erroneous entries where

it lacked the requested information. To help MP3.com bring its MyMP3.service to

subscribers, HFA has (1) arranged daily communication with MP3.com personnel to

correct and clarify license requests and expedite the issuance of licenses; (2) provided MP3.com with written assurance that it will not support litigation against the

company while licensing requests are processed; and (3) provided substantial technical assistance to MP3.com (including providing it with HFA’s songfile database)

in order that it may enhance its own database and submit its license requests in

a format that will ensure prompt licensing.

In other words, the outstanding licensing requests are largely due to MP3’s incomplete database. HFA is helping MP3.com improve this database, but the responsibility for the problem lies with MP3.

In recent testimony before the Senate Judiciary Committee, MP3.com asserted

that HFA licenses are not reliable when more than one party owns the copyright

in the music and HFA fails to represent each party. This is a plain misreading of

the copyright law. HFA can issue a license if it merely represents one owner of a

jointly held copyright, because of section 201(a) of the Copyright Act and the case

law interpreting it. The law—and the leading copyright treatise—are clear on this

point: one joint copyright owner may license a work without the consent of the other

joint owners, and a licensed party is immune from infringement actions by other

owners of a copyright when any one owner of the work grants a license to a user.

NIMMER ON COPYRIGHT, § 6.10.

In recent years, HFA has routinely issued licenses for approximately 250,000 titles annually. Everyone at HFA is aware, however, that the digital economy is

changing the licensing paradigm from individual licenses to ‘‘bulk’’ licenses, and

HFA is adapting to this new reality promptly: it has invested millions of dollars in

improving its technology, and the resolution of over 236,000 license requests from

to MP3.com alone to date is a good example of recent improvements. HFA’s infrastructure transformation has not been without its challenges, but HFA has made

rapid progress, is dealing with users that have their own database problems, and

is performing as well as or better than any comparable digital music licensing entity.

‘‘BLANKET’’ LICENSING PROPOSALS SHOULD BE REJECTED.

NMPA would like to register its opposition to the suggestion of some that a new

‘‘blanket’’ statutory license be created for digital music distribution. These proposals

are neither necessary nor appropriate.

Music website operators (including MP3.com in its Senate testimony) often propose that digital music distribution be governed by a ‘‘blanket license’’ scheme without further elaborating on the complexities of current blanket licensing. NMPA believes that blanket licensing is inappropriate for the licensing of digital phonorecord

deliveries, for the following reasons.

Blanket licensing is a process that the performing rights societies (e.g. ASCAP,

BMI and SESAC) use to license and collect performance royalties from radio and

television stations for performances of songs on radio and television. Created during

the World War I era to address the practicalities of keeping track of the public performance of musical works on radio and in live performances, the blanket license

is premised on the impracticality of reviewing every radio or television station’s play

log or programming for every minute the station is on the air or every location

where the music is played. Instead, statistical sampling of a smaller number of

radio and television stations is employed to estimate how many times a particular

work is performed.

Sections 111 and 119 of the Copyright Act establish limited compulsory licenses

for the retransmission of certain broadcast signals under modified blanket licensing.

Royalties deposited pursuant to the terms of these compulsory licenses are subject

to a complex, two-phase distribution proceeding. In phase one, groups of eligible

rights holders demonstrate how much of the overall royalty pool should be allocated

to each group. In phase two, disputes regarding the allocation of royalties among

18

claimants within each group are resolved. Such a system may be appropriate in the

context of the transmission of copyrighted material employing technologies that, at

least for now, do not provide a ready means for identifying individual rights holders.

It is not appropriate, however, to impose by law a licensing regime developed for

the specific facts of the cable or satellite industries where (as in the case of certain

Internet music services) the transmitter is the originator of the transmission and

has control over the material being made available to subscribers, and where technology is available to facilitate accurate licensing on behalf of the affected rights

owners. It is inaccurate for music website operators to state that blanket licensing resolves

technical licensing problems in the digital era. First, the compulsory license of section 115 is available to any entity wishing to distribute music over the Internet. Second, website operators routinely collect information on millions of visits to their

websites which they use in marketing their products and attracting advertising revenue. It is disingenuous for the same website operators to claim that it is impractical for them to account for each use of the works that they are licensing (as a justification for blanket licensing) when they already have that detailed information in

digital form in their databases. In other words, website operators are ideally

equipped—both technologically and structurally—for this kind of accounting task.

The principal reason for advocacy of a blanket license by web-based music services

is that it transfers all of the burden of obtaining licenses and accounting for royalty

payments to copyright owners in a manner that costs the creators of the work significantly more than per-use accounting. Digital and computer technologies are particularly well suited, however, to performing the accounting tasks associated with

licensing uses of works in a networked environment and ensuring accurate payments to the appropriate rights owners and creators. Congress recognized this fact

when it enacted section 1202 of the Copyright Act to protect copyright management

information from intentional interference. There is no factual, legal or policy basis

for creating a new ‘‘blanket’’ statutory license.

CONCLUSION.

In summary, an appropriate statutory regime is in place to let the market place

develop the various business models and licensing agreements required in order to

deliver music through the Internet. There is no need for Congress to change the

copyright law on this point.

Thank you for this opportunity to present our views.

Mr. COBLE. Mr. Richards.

STATEMENT OF ROBIN RICHARDS, PRESIDENT, MP3.COM

Mr. RICHARDS. Good afternoon, Mr. Chairman, and I appreciate

the opportunity to testify before the Subcommittee. I am Robin

Richards, and I’m President of MP3.com, and I’m here to request

your help in resolving the copyright quagmire that is preventing

millions of Americans who have purchased CDs from using the

Internet to access those CDs for their own personal use.

Last year, MP3.com introduced an innovative music storage and

playback service that enables consumers to use the Internet to listen to the CDs that they buy from their local record stores or from

online retail establishments. Although our service is not a file-sharing service like Napster, and imposes no threat to the sale of recorded music, we were sued for copyright infringement by record

labels and music publishers. Those lawsuits forced us to shut down

our service and to pay over $150 million to copyright owners and

their representatives. Yet even after paying out all this money, we

not only have been unable to get our service fully up and running,

but we also continue to face new lawsuits.

We have developed a technology that will make it possible for

your children to leave their CD collections safely at home when

they go off to college or for you to listen to any of your CDs in your

car or on a hand-held device without toting around suitcases full

of silver disks. But because Congress never anticipated this type of

19

service, we are forced to deal with an arcane set of licensing requirements that are not merely cumbersome, they are broken.

And these requirements need to be fixed if we and others like us,

my colleagues here at the table, are going to offer the services that

are now possible and that are being developed. Congress needs to

bring rationality back into the Copyright Act. As the chart we have

prepared right over here indicates, there’s different types—different types of music transmission services are subject to a hodgepodge of licensing and payment obligations that are unrelated to

the relative economic impact on the record labels or music publishers. Some services only have to make one payment. Others, including ours, have to make at least five separate payments—this

doesn’t seem right.

Congress also needs to clarify what consumers can do with their

music—with their digital music purchases, not just what they can’t

do. We don’t think that consumers who buy CDs should be subjected to additional fees when they store and pay back their purchases online. You bought it. People have been paid for it.

We look forward to working with Congress to develop a legislative proposal to properly balance the interest of copyright users,

copyright owners, and, most importantly, consumers. However, we

recognize that enacting copyright reform can take time. And time

is something none of us have. We have a dedicated base of customers, and we have millions and millions of dollars’ worth of licensing agreements. Yet we still can’t give consumers access to all

of their music. And this is a problem that will be faced by every

Internet music provider, including Mr. Glaser, including Mr.

Bronfman, because right now there is no practical way to contact

all the music publishers with copyright ownership claims in the

more than 900,000 and songs in our digital library.

Harry Fox Agency says that they want to work with us to overcome the practical problems in obtaining licenses for the hundreds

of thousands of songs that we need to make available to our customers. I don’t dispute their sincerity, but the fact is that HFA

does not represent all of the publishers of all of the songs which

we need clearance for.

They can’t give me a safe harbor against litigation. Indeed, just

last week, Randy Newman, Tom Waits and Nancy Wilson of the

band ‘‘Heart’’ sued MP3.com for a staggering amount of money.

These singer/songwriters apparently aren’t represented by Harry

Fox, although we have licenses for some of the songs that says,

Harry Fox has already given us a license. We don’t know where to

turn.

While HFA suggests to you that we don’t have anything to worry

about, I suggest to you that’s pretty easy to say when I’m the one

getting sued, when MP3.com is the one getting sued all the time.

The good news is that a statutory compulsory license for reproduction and distribution rights that the publishers insist digital

music services need, already exists in section 115 of the Copyright

Act, as was pointed out by Mr. Boucher. The bad news is that this

statutory licensing mechanism, which dates back nearly 100 years,

is badly out of date. Although section 115 was amended in 1995 to

extend it to certain online activities, the Copyright Office has deferred establishing the rates and terms for services like ours.

20

How come yours didn’t ring?

Mr. BRONFMAN. It rang for you.

Mr. RICHARDS. Mr. Chairman, the procedures that the Copyright

Office has used in granting statutory license, are cumbersome,

time-consuming and expensive. Using this antiquated system for

obtaining licenses in the digital era would completely overwhelm

the Copyright Office which typically only handles a few hundred

statutory licensings and filings in a single year, and I want to do

a million on Tuesday.

In short, our problem in getting licenses isn’t contractual in nature. Our problem is that licensing mechanisms that were developed in the predigital era simply cannot handle the demands of the

Internet-fueled digital music environment. People don’t want to use

the Internet to store and listen to some of their music purchases.

They want to use the Internet to listen to all of their music purchases: I bought them; I want to play them back to myself on the

Internet.

The Copyright Office, at the request of the recording industry

and with MP3.com support, currently is considering whether to

conduct a rulemaking to clarify the application of the 115 compulsory license to streaming audio services, such as MP3.com. In our

comments in that proceeding, we have urged the Office to look to

the model with satellite and cable compulsory licenses, a model

which gives the users of copyright works assurances that they have

the protection of a compulsory license, even if they cannot identify

in advance every person who might claim an ownership interest in

the works being used. Even more importantly, the Copyright Office

can and should immediately act to establish interim licensing procedures that would create a safe harbor for companies like ours.

RIA and MP3.com have endorsed this interim license safe harbor

concept, and I hope your colleagues will join us in urging the Copyright Office to take this step as a means to dealing with an untenable situation that now exists.

To summarize, there are several steps that must be taken to put

digital music back on track.

First, the Copyright Office should immediately establish interim

licensing procedures to allow digital music services to operate

under the protection of section 115.

Second, the Office also should adopt updated section 115 procedures addressing the failure of the existing marketplace and statutory licensing mechanisms.

Third, Congress must begin the process of clarifying consumer

rights and rationalizing the variant payment obligations currently

imposed on the different services.

I am grateful to this Subcommittee for scheduling this hearing

and offering me an opportunity to describe the difficulties that we

have, and others have, facing us as we go forward in the digital

music area. We stand ready to work with you and strike the appropriate balance. Thank you.

Mr. COBLE. Thank you, Mr. Richards.

[The prepared statement of Mr. Richards follows:]

21

PREPARED STATEMENT OF ROBIN RICHARDS

Thank you for the opportunity to testify at this important hearing on Online

Music and the Internet.

EXECUTIVE SUMMARY

I am here representing not only MP3.com, but also the millions of people who

wish to store their CD collections on the Internet for their own personal use, but

currently are unable to do so. The reason that they are unable to take advantage

of this technology is that it was never anticipated by Congress and is currently

forced to operate under a patchwork quilt of arcane laws that not only are cumbersome, but are broken in many respects.

Last year, MP3.com introduced an innovative music storage and playback service

that enables consumers to use the Internet to store and listen to the CDs that they

buy from their local record stores or from online retail establishments. Although our

service is not a file sharing service like Napster and poses no threat to the sale of

recorded music, we were sued for copyright infringement by the major record labels

and music publishers. Those lawsuits forced us to shut down our service and to pay

over 150 million dollars to copyright owners and their representatives; yet, even

after paying out all of that money, we not only are unable to get our service fully

up and running, but we also continue to face new lawsuits!

The fundamental problem is that the Congress never anticipated many of the

services that online technology is now making possible. The My.MP3.com technology

allows people to take advantage of the Internet in order to get added value from

their music purchases. The service that we provide—and similar services being developed by other innovators—can make it possible for your children to leave their

CD collections safely at home when they go off to college or for you to listen any

of your CDs in your car or on a hand-held device without toting around suitcases

full of silver discs. But to do these things, we are going to need Congress’ help.

In order to fully address the problems faced by MP3.com and other online music

providers, Congress will have to act to bring rationality back into the Copyright Act.

As illustrated by Exhibit A, different types of music transmission services are subject to a hodge-podge of licensing and payment obligations that are unrelated to

their relative economic impact on the record labels and music publishers. Some services only have to make one payment; others, including ours, have to make FIVE separate payments. This isn’t right.

Congress also will need to clarify what consumers can do with their digital music

purchases, not just what they can’t do. Consumers who buy CDs shouldn’t be subject to additional fees when they store and playback their purchases on-line. If you

buy a Ford, you expect to drive it anywhere without having to pay Ford more

money. And if you buy a paperback book, you would be shocked to be charged different amounts depending on where you chose to read it. Yet, this seems to be

where we are heading with CDs if Congress doesn’t step in.

MP3.com looks forward to working with Congress to develop a legislative proposal

that rationally balances the interests of copyright users, copyright owners, and—

most importantly—consumers. However, we recognize that enacting copyright reform could take time. And time is one thing that Internet-based technologies don’t

have in unlimited quantity. For example, MP3.com has a loyal following of music

lovers who have purchased CDs and who want to use our service as a convenient

way of listening to the songs on those CDs. We have millions and millions of dollars

worth of licensing agreements with the record labels. But we still can’t give consumers access to all of their music—and this is a problem that will be faced by

every Internet music provider—because right now there is no practical way to contact all of the music publishers with copyright ownership claims in the more than

900,000 songs in our digital library.

The Harry Fox Agency, which represents over 25,000 music publishers says that

they want to work with us to overcome the practical problems in clearing the hundreds of thousands of songs in their inventory and that they won’t participate in

legal action against MP3.com for using those songs. We don’t dispute their sincerity.

But the fact is that HFA doesn’t represent all of the publishers of all of the songs

for which we need clearance and that means that we remain vulnerable to lawsuits,

even with respect to songs that HFA claims to have given us a license.

Indeed, just last week Randy Newman, Tom Waits and Ann and Nancy Wilson

of the band ‘‘Heart’’ sued MP3.com for 40 million dollars. This suit makes real many

of the issues that MP3.com has been discussing over the last several months. The

complaint in this lawsuit cites song titles that we haven’t been able to clear because

the publishers aren’t represented by HFA as well as song titles that were previously

settled and licensed to MP3.com via HFA-represented publishers.

22

The good news is that the reproduction and distribution rights that the publishers

insist that we need already are subject to a statutory compulsory license under Section 115 of the Copyright Act. The bad news is that this statutory licensing mechanism, which dates back nearly 100 years, is badly out of date.

Although Section 115 was amended in 1995 to extend it to certain on-line activities, the Copyright Office has ‘‘deferred’’ establishing the rates and terms for the ‘‘incidental’’ reproduction of songs that occurs as a necessary part of technologies such

as ours. Moreover, the procedures that traditionally have been imposed on statutory

licensees under Section 115 are cumbersome, time-consuming and expensive. For example, those procedures not only would require MP3.com to manually search the

Copyright Office’s records for the names and addresses of the copyright owners of

each of the hundreds of thousands of song titles on the CDs that our consumers

have purchased and stored on-line, but also would require us to submit a separate

application to the Copyright Office for each song whose current owners couldn’t be

located. Using this antiquated system for obtaining licenses in the digital era would

completely overwhelm the Copyright Office, which typically handles only a few hundred statutory license applications in a single year.

In short, the problem that MP3.com faces in getting the licenses that the publishers insist we get isn’t contractual in nature. The problem is that the marketplace

and statutory licensing mechanisms that were developed in the pre-digital era simply cannot handle the demands of the Internet-fueled, digital music environment.

People don’t want to use the Internet to store and listen to some of their music purchases—they want all of the music they own to be available to them on-line.

Fortunately, there is a way that the practical obstacles to licensing can be addressed quickly and, hopefully, without Congressional action. The Copyright Office,

at the request of the recording industry and with MP3.com’s support, currently is

considering whether to conduct a rulemaking to clarify the application of Section

115 to streaming audio services such as MP3.com. In our comments in that proceeding, we have urged the Office to look to the model of the satellite and cable compulsory licenses, which permit copyright users to submit periodic royalty payments

into a pool that is then distributed among copyright owner claimants. This model

gives the users of copyrighted works assurance that they have the protection of a

compulsory license even if they cannot identify in advance every person who might

claim an ownership interest in the works being used.

Even more importantly, the Copyright Office can and should immediately act to

establish ‘‘interim’’ Section 115 licensing procedures for online services that engage

in ‘‘incidental’’ copying. Adoption of such ‘‘interim’’ licensing procedures will create

a ‘‘safe harbor’’ against infringement actions while the Office and, if necessary, a

CARP, decide on the appropriate substantive and procedural rules governing application of the Section 115 license to ‘‘incidental’’ copying. Both RIAA and MP3.com

have endorsed the interim licensing procedures concept and we hope that the members of this Committee will join us in urging the Copyright Office to take this clarifying action as a means of dealing with the untenable situation that now exists.

In sum, MP3.com has agreed to pay one fee after another in an effort to get our

service back up and running. But the new technology we have developed is still

being held hostage and millions of consumers are still blocked from storing their CD

collections on the Internet for their own personal use. The reason is that Congress

never anticipated a service like My.MP3.com and we are forced to operate under a

patchwork quilt of arcane laws that not only are cumbersome, but that are broken

in many respects.

Time is running out. We believe that the Copyright Act needs to be amended to

rationalize on-line music’s licensing obligations and to clarify the rights of the music

lovers who seek to use our service to enjoy the music that they buy. Moreover, we

need Congress’ immediate assistance in overcoming the inadequacies of the existing

marketplace and statutory mechanisms for obtaining licenses so that American consumers are not denied the opportunity to take advantage of the technological innovations that the Internet is making possible.

THE MY.MP3.COM STORY

Who is MP3.com? MP3.com, Inc. has created a unique and robust technology infrastructure designed to facilitate the storage, management, promotion and delivery

of digital music. As the Internet’s premier Music Service Provider (MSP), the company is dedicated to providing consumers with access to music when they want it,

where they want it, using any web-enabled device. The company’s web site hosts

what MP3.com believes is the largest collection of digital music available on the

Internet, with more than 967,000 songs and audio files posted from over 150,000

digital artists and record labels. Dedicated to growing the digital music space, the

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company’s products and services include on-demand Subscription Music Channels,

an innovative Business Music Services program, a Syndicated Radio program and

others. Additionally, through the company’s MSP technology initiative and its music

InterOperating System, MP3.com is partnering with a variety of forward-looking

businesses to expand its digital music strategy. MP3.com’s common stock is listed

for trading on the Nasdaq National Market under the ticker symbol MPPP. The

company is based in San Diego, California. For more information on MP3.com, visit

www.mp3.com.

My.MP3.com—An Online Tool For Storing and Listening To Purchased Music. In

January 2000, MP3.com launched a new service called My.MP3.com. My.MP3.com

is a digital music storage ‘‘locker’’ service that uses MP3 compression technology to

enable people to use Internet connected devices to listen to the CDs that they purchase at their local record store or from on-line retailers such as junglejeff.com and,

in the near future, towerrecords.com. Today, the primary playback device for

My.MP3.com users is their personal computer. But in the not too distant future,

consumers will be able to use My.MP3.com to access their purchased CD collections

using hand-held Internet-enabled devices and Internet-connected devices installed

in their cars.

The way the My.MP3.com service works is as follows: with respect to a CD that

a consumer already has purchased, the consumer takes the CD and places it in the

CD-ROM tray of his or her computer; our ‘‘Beam-It’’ software then ‘‘reads’’ the CD

and, having established that it is a real, legitimate CD release, adds the CD to a

secure, personalized ‘‘locker’’ which can be accessed by that consumer—and only by

that consumer. With respect to CDs purchased on-line from one of our retail partners, the consumer can use our ‘‘Instant Listening’’ software to add a CD in MP3

format to his or her personal locker at the same time the consumer pays one of our

on-line retail partners for the CD, thereby allowing access to the songs on the CD

even before the disc is physically delivered.

I want to emphasize that My.MP3.com differs from music file-sharing or ‘‘swapping’’ services that allow users to download, save, and trade music that they have

not purchased. CDs can be accessed on My.MP3.com only for a real-time listening

experience, not for downloading and copying. And before any CD can be accessed

on our service that CD will have been purchased twice: once by the listener and,

as discussed below, once by us.

Litigation, Shutdown, and Settlement. Not long after launching the My.MP3.com

service, we were sued for copyright infringement both by the major record labels

and by certain music publishers. The problem that we faced in trying to defend ourselves against these lawsuits is that the Copyright Act never anticipated the development of a technology such as My.MP3.com. While Congress has made certain

changes to the Copyright Act in effort to address the use of digital transmission

technology to deliver music to consumers, these changes rightfully focused on concerns that ‘‘on-demand’’ services that allowed consumers to choose what music they

received over the Internet could lead to the widespread production and distribution

of perfect ‘‘pirate’’ copies of sound recordings. Congress never foresaw—or addressed—the development of an ‘‘on-demand’’ service such as My.MP3.com—a service that poses no piracy threat since users can only ‘‘demand’’ music that they already have purchased and only for the purpose of receiving what essentially is a

‘‘private’’ performance via real-time, streaming audio, without the ability to duplicate, save, or share the transmissions.

Because Congress never foresaw the development of a personal purchased music

‘‘locker’’ service like My.MP3.com, the door was left open for record labels and music

publishers to argue that My.MP3.com was infringing their copyrights by allowing

consumers to access their purchased CDs in MP3 format. In particular, the copyright owners cited the fact that instead of developing a system that requires consumers to convert their own CDs into the MP3 format, My.MP3.com went out into

the marketplace and bought those same CDs and converted them for the consumer.

According to the record labels and music publishers, the act of converting these CDs

to MP3 format, so that consumers who had separately purchased those same CDs

could listen them to in that format, constituted an act of infringement. In addition,

the music publishers took note of the fact that when a consumer listens to a song

from his or her My.MP3.com locker, that song is delivered to the consumer by

means of a ‘‘streaming’’ audio technology that automatically makes a temporary or

‘‘buffer’’ copy of a portion of the song as a necessary and integral part of the transmission process. Although this buffer copy lasts only a few seconds and is eliminated once the playback of the song begins, the music publishers asserted that, in

order to use this technology to playback a CD to a consumer who has purchased

that CD, My.MP3.com needed a separate license to make and distribute copies of

the song.

24

In response to these lawsuits, we ‘‘shut down’’ the My.MP3.com service and entered into settlement negotiations with various copyright owners and their representatives. Shutting down our service deprived consumers of the ability to access

the music that they had purchased and stored in their on-line lockers. There is a

certain irony in the fact that when our site was shut down, many of our customers

were driven to services such as Napster, where they not only could find and play

the CDs that they already had bought, but also could (and probably did) obtain access to a vast array of music selections without ever having to purchase them.

In any event, although we disagreed with the interpretation of the copyright law

put forward by the record labels and publishers, our desire to get our service back

up and running led us to enter into very costly agreements covering all of their

claims. We have agreed to pay for converting the CDs that we purchase into MP3

format. We have agreed to pay for performing both the sound recordings and the

songs contained on those CDs. And we even have agreed to pay the publishers for

the temporary, momentary ‘‘buffer’’ copy that automatically is made (and deleted)

each time someone listens to their own music out of their My.MP3.com locker. Yet,

today, nearly six months after signing the last of these agreements, we haven’t been

able to effectively process any of the licenses that the copyright owners insist we

must have before we can fully relaunch the My.MP3.com service because of the

overly-burdensome process required to locate and get agreement from every rightsholder.

Why My.MP3.com Still Can’t Fully Relaunch. Despite what you may hear from

some of the copyright owners, our inability to obtain the necessary licenses is not

merely a contractual problem that can and will be solved by the marketplace. Rather, it is a reflection of the fact that the existing marketplace and statutory music

licensing mechanisms—mechanisms that developed nearly 100 years ago—simply do

not work in the digital environment. As a matter of public policy, it is incumbent

on government to address the failure of these marketplace and statutory mechanisms, both through immediate remedial action and through a comprehensive reassessment of the application of the copyright law to digital music technologies.

The particular marketplace and statutory failure that is currently frustrating our

ability to provide the My.MP3.com service to consumers involves the licensing of the

right to reproduce and distribute musical compositions, by means of streaming MP3

transmissions, to consumers who have bought the CDs on which those compositions

appear. As I have indicated, we do not agree that the essentially ‘‘private’’ performances facilitated by our technology should trigger any additional copyright payments

(over and above the compensation received by copyright owners as a result of the

purchase of their works by us and by users of our service).

Nonetheless, faced with a threatened onslaught of litigation, we agreed to pay the

music publishers for making an ‘‘incidental digital phonorecord delivery’’ each time

someone uses the My.MP3.com service to listen to one of their own CDs.

Incidental digital phonorecord deliveries—IDPDs for short—are a type of ‘‘mechanical’’ reproduction and distribution requiring licenses from the owners of the

publishing rights in the songs contained on a CD. Our licensing agreement was

made with the Harry Fox Agency (‘‘HFA’’), an arm of the National Music Publishers

Association that, for nearly 75 years, has served as the music publishing industry’s

principal clearinghouse for the administration of mechanical rights licenses. According to its website, HFA issues licenses, collects and distributes royalty payments,

and audits the books and records of licensees on behalf of more than 25,000 music

publishers who, in turn, represent the interests of over 150,000 songwriters.

When MP3.com and HFA announced their licensing agreement last October, the

joint press release proclaimed that the deal was intended to give us licenses for over

a million songs. And, in fact, we immediately provided HFA with a list of over

900,000 song titles, along with information identifying the CD on which each song

appeared and the name of the artist performing the song. More than six months

later, however, HFA still has not been able to issue licenses to us for over two-thirds

of these songs.

We are not suggesting that HFA hasn’t tried to clear the rights to more songs.

Rather, the problem appears to be that HFA’s system for issuing mechanical rights

licenses for its publisher members simply cannot handle the demands of the digital

marketplace. In order for us to obtain a license for a particular song from HFA, we

not only have to provide them with the song title, CD and artist, but we also have

to know who owns the publishing rights for the song. This information, which may

change several times over the life of a song, is not readily available to the public.

An Example of the Problem: Licensing and New Releases. Nor are the problems

that we have encountered in trying to obtain the licenses that the music publishers

demand limited to songs on ‘‘older’’ CDs. Making newly released CDs available to

consumers through the ‘‘Instant Listening’’ option is one of the key attractions of

25

the My.MP3.com service—and is something that helps promote the sale of music.

(For example, before we shut down the My.MP3.com service, participating retailers

who offered their customers our Instant Listening option saw their sales of new releases as much as double.) But even after settling with the labels and publishers,

we have been stymied in obtaining licenses for the songs on newly issued CDs.

A good illustration (reflected in the attached Exhibit B) is our experience with the

new Jennifer Lopez CD, ‘‘J-Lo.’’ Shortly after Epic/Sony records released this CD,

we attempted to make it available on My.MP3.com. We had obtained the necessary

rights from the record labels with respect to the sound recording copyright and we

had agreements with the appropriate Performance Rights Organizations (i.e.

ASCAP and BMI) giving us the right to ‘‘publicly perform’’ the songs on the CD.

However, we couldn’t get HFA to give us the required (by them) license for any of

the songs. When we asked HFA why the songs on this new CD were not in their

database and, thus, licensable, we were told that HFA would be able to issue licenses covering some—but not necessarily all—of the songs, but that it would take

6–8 weeks after receipt of a license request for HFA to locate the publishers associated with each song and get clearance. That’s 6 to 8 weeks for just one CD. Consequently, we have been unable to offer consumers who buy the J-Lo CD the ability

to add this CD to their locker.

Finding ‘‘Non-HFA’’ Publishers. Apart from the problem of obtaining information

matching up the songs we want to play with the songs owned by the publishers represented by HFA, the difficulties we face in getting the My.MP3.com service back

up and running are exacerbated by the fact that HFA does not represent every publisher and by the fact that the publishing rights in many, if not most song titles

are held by multiple owners in varying percentages. For example, if you look at the

liner notes of a ‘‘rap’’ CD—one of the most popular genres of music on-line, you will

see as many as ten publishers on any given song. Many of these publishers may

be impossible to locate or are otherwise unreachable.

Thus, even if HFA granted us licenses to the song catalogs of all of the publishers

that they represent, there will be songs in My.MP3.com lockers for which we do not

have clearance, or for which we have only a partial clearance. For example, we have

repeatedly encountered the situation where, after activating a song in reliance on

an HFA-issued license, we received notice from a non-HFA affiliated publisher

claiming a partial ownership interest in the song and objecting to its being made

available on our service. While HFA claims that we don’t have to worry about these

joint owners, that’s easy for them to say. They aren’t the ones facing infringement

actions.

In short, there is no marketplace mechanism that will allow us to fully relaunch

My.MP3.com—thereby giving consumers access to all of the songs on all of the CDs

that they have purchased and stored on their My.MP3.com lockers—without running a significant risk that we will be sued by publishers or songwriters claiming

ownership rights in some of those songs. And this is exactly what has recently happened with the new suits from Randy Newman, Tom Waits, and Ann and Nancy

Wilson of the band ‘‘Heart.’’

SOLVING THE LICENSING DILEMMA

Making Section 115 Work in the Digital Environment. Given the potential unavailability of marketplace licenses for any number of songs, the obvious solution is the

establishment of a statutory licensing mechanism. And, in fact, nearly a hundred

years ago, Congress addressed concerns that the withholding of music licenses could

lead to the emergence of ‘‘a great music monopoly’’ by establishing a statutory compulsory copyright license for anyone who wants to reproduce and distribute copies

of a previously published song. Unfortunately, however, while Congress has updated

this compulsory license—which originally applied to the reproduction and distribution of songs in mechanical formats such as piano rolls—to cover the digital delivery

of reproductions of songs (including IDPDs), neither the statutory procedures for invoking the compulsory license, nor the Copyright Office’s implementing regulations,

have been adapted to meet the demands of the on-line music environment.

A more detailed synopsis of the workings of the statutory mechanical copyright

license (currently codified in Section 115 of the Copyright Act) is attached as Exhibit

C to this testimony. Suffice it to say here that before MP3.com could claim protection under the statutory license, we would have to manually search the Copyright

Office’s records for the names and addresses of the copyright owners of every one

of the nearly one million songs on the My.MP3.com service—a task that in and of

itself is economically and practically infeasible. Moreover, for any song that does not

have current ownership information on file, MP3.com (or any other on-line music

provider seeking a compulsory license to a wide spectrum of musical works) would

26

have to file a separate compulsory license application. This means that if current

information is not available for merely a third of the million songs searched—a not

improbable result given that songwriters and publishers are not required to notify

the Copyright Office about changes in the ownership of a song’s publishing rights,

or even to register the copyright in the song in the first place—over 300,000 separate filings would have to be made at the Copyright Office. To put the burden that

this would create in some perspective, last year the Copyright Office processed

roughly 350 Section 115 license applications.

One mechanism for reforming the Section 115 procedures to account for the realities of the digital marketplace is for the Copyright Office to adopt revised substantive and procedural rules governing the application of Section 115 to streaming

audio services. The Office, in response to petitions submitted by RIAA and

MP3.com, is considering whether to undertake such a rulemaking proceeding. Assuming that the Office goes forward, we believe that it can and should consider the

adoption of rules implementing revised procedures modeled on the satellite and

cable compulsory licenses, which permit copyright users to submit periodic royalty

payments into a pool that is then distributed amongst copyright owning claimants.

This model gives the users of copyrighted works assurance that they have the protection of a compulsory license even if they cannot identify and locate every person

who might claim a copyright interest in the works being used.

Interim Copyright Office Rules Creating a ‘‘Safe Harbor.’’ While we believe that

it may be possible for the Copyright Office to bring Section 115 into the digital age

without waiting for Congress to act, an even more immediate (albeit temporary) solution is needed in order to protect My.MP3.com and other similar on-line digital

music providers from infringement claims during the pendency of the Office’s Section 115 rulemaking. The Office’s rules currently state that the establishment of

rates and terms for ‘‘incidental’’ copying covered by Section 115 are ‘‘deferred.’’ However, it simply is not right for the benefits of Congress’ 1995 amendment extending

the Section 115 licenses to incidental copying to be denied to on-line music services

because rules implementing that amendment have not yet been adopted.

Both RIAA and MPAA have proposed that the Office immediately issue interim

licensing procedures whereby on-line music services can, by filing informational

statements at the Copyright Office, obtain the protection from liability that compulsory licensing is intended to give. These statements would include the names of the

songs for which protection is sought, together with information regarding the name

of the CD on which the song appears, the artist performing the song, and the number of times that the song has been ‘‘delivered’’ to consumers. Once rates and terms

have been established, royalty payments covering the activities described can be

made.

This ‘‘safe harbor’’ approach, if implemented, will immediately solve the problem

faced by My.MP3.com and other on-line music providers: the risk of being sued for

using songs owned by publishers who cannot be identified through the existing marketplace and statutory licensing mechanisms. More importantly, it will allow consumers to take advantage of innovative technologies that increase the value of their

purchased CDs through on-line storage and playback. Put simply, as soon as this

safe harbor approach is implemented, we will provide the required information and

by the next day we will be in a position to ‘‘unlock’’ all of the purchased music that

users of the My.MP3.com service have stored on-line.

Legislative Reform of the Copyright Act. Modernizing Section 115 and adopting interim licensing procedures are important and necessary actions. However, in the

long run, Congress must reform the underlying statutory provisions that have led

to the current licensing dilemma. In particular, Congress must address the rights

of music purchasers. The public, quite frankly, is confused. At every turn the courts,

applying statutory provisions that never contemplated the services to which they

are being addressed, are telling consumers what they cannot do. It is time for government to step in and clarify what someone who purchases a CD can do. Specifically, Congress needs to address the following questions:

1) Can and should consumers be able to listen to their own purchased CDs on any

digital device? In 1992, Congress enacted the Audio Home Recording Act, which

gave consumers the right to copy CDs to tapes. Now questions abound about consumers’ use of the next generation of technology, such as personal computers and

MP3 players. Each new device or format raises anew the issue of what the law allows consumers to do with the music that they purchase.

It shouldn’t take a separate act of Congress to permit consumers to use a new

gadget to listen to their music. Let’s clarify copyright law once and for all and give

consumers the explicit right to convert their music CDs into other digital formats

for the purpose of enjoying their purchases on any Internet-enabled device.

27

2) Can and should music buyers be allowed to store their music in places where

they can most easily access it? One of the benefits offered by digital technology is

that it can make music fully portable. No more lugging around CDs in order to have

your music collection at your fingertips. Imagine being able to access all of your

music purchases from your PDA, phone, car or wherever you happen to be. This is

becoming more of a reality every day as the world around us goes on-line.

Unfortunately, the drafters of the Copyright Act never contemplated this situation

so it’s subject to extensive legal debate. Music buyers should be rewarded with the

maximum use of the music that they purchase with their hard-earned dollars. Let’s

ensure that they have the rights to house their music purchases in places where

they can best access it. And let’s encourage companies that build technologies to

help them to do this faster or better.

3) Should CD buyers be subject to additional fees when they store and playback

their purchased music collections? If you buy a Ford, do you expect you can drive

it anywhere without having to pay Ford more money? If you buy a paperback best

seller, would you be surprised to be billed more money based on where you read

it? Can you think of any product you purchase outright, only to be surprised with

additional charges in the future? In some instances, there could be fraud charges

for selling something and then hitting the unsuspecting purchaser with more

charges.

Yet this seems to be where we are headed with music CDs. Consumers believe

they are buying CDs, but copyright owners argue that, under current law, payments

can be imposed on a consumer’s use of on-line technologies that allow them to store

and playback the music that they have already bought. Is a consumer truly buying

a CD or is it just a lease they’ll have to continue paying on forever? Music buyers

have the right to demand clarity in this area. Either CDs should be properly labeled

as a lease and future payments defined in advance, or consumers should be only

charged once no matter how or where they listen to their music. This is essential

for them to make informed buying choices.

Last year, MP3.com supported a bill, the Music Owners’ Listening Rights Act,

which addressed many of the questions posed above. We believe that the approach

taken in that legislation offered an appropriate resolution of the rights of consumers

with respect to the on-line storage and playback of their purchased CDs. However,

we are not wedded to a single approach and look forward to working with Congress,

the Copyright Office, and the music industry to clarify and confirm the rights of

music consumers in the digital environment.

THE FUTURE OF DIGITAL MUSIC

Congress cannot stand idly by and simply hope that the gridlock currently frustrating the relaunch of My.MP3.com (which will frustrate the introduction of other

services as well) will resolve itself. Many of you probably have seen the ad on television in which a weary traveler stops at a remote establishment and is offered a

choice of every song ever recorded in every format. We are supposed to be shocked

at this unimaginable concept. But, given the advances in digital technology, the idea

that every piece of recorded music could be available at the click of a mouse is not

unimaginable at all. What does remain unimaginable, however, is that anyone could

ever track down all of the copyright owners in every single song and get them to

agree to license terms. If the ‘‘science fiction’’ depicted in that ad is to become

‘‘science fact,’’ government must deal decisively—and quickly—with the fundamental

questions regarding the on-line use of music addressed in this testimony.

If these fundamental questions are not addressed in the very near future, the real

losers will be the American public, who will be denied competitive choices they have

every right to expect. Also lost to them will be the spirit of innovation, invention

and entrepreneurship that brought them this new technology and new services in

the first place.

As I have outlined in this testimony, there are several steps that must be taken

to put digital music back on track:

• The failure of existing marketplace and statutory licensing mechanisms in the

context of on-line streaming audio services can and should be addressed by

the Copyright Office through the adoption of updated Section 115 procedures

that apply the cable and satellite compulsory license model to the ‘‘incidental’’

copying that is integral to Internet transmissions.

• The Copyright Office should immediately establish interim licensing procedures that allow digital music services to operate under the protection of the

Section 115 license while the Office and, if necessary, a CARP, work on new

Section 115 procedures and rates.

28

• Most importantly, Congress must begin the process of reforming the Copyright Act to bring a measure of rationality to the licensing obligations imposed on the different services that engage in transmissions of recorded music

and to recognize and clarify the rights of consumers to use the Internet to

store the music that they have purchased and to receive transmissions of ‘‘private performances’’ of that music.

I am grateful to the Committee for scheduling this hearing and offering me the

opportunity to describe the difficulties that we face in bringing the benefits and

value of on-line digital music storage and playback to the purchasers of recorded

music. We stand ready to work with you to find the necessary balance between the

rights of copyright owners and the rights of consumers.

Thank you.

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Mr. COBLE. We have been joined by the gentleman from Alabama, the gentleman from Florida, the gentleman from Arkansas

on the majority side, the distinguished gentleman from Massachusetts, both gentlemen—Mr. Meehan is gone—the gentleman from

Florida and the gentlelady from Wisconsin.

Gentleman, we have a vote, as predicted. This will be our final

vote of the day. So we will stand in recess to vote, and I urge all

Members to return immediately, and we will resume the testimony

for Mr. Glaser and Mr. Lovett.

[Recess.]

43

Mr. COBLE. Ladies and gentlemen, I apologize for the recess, but

I can assure you we will not be interrupted by additional whistles

and bells from the floor. So we will now direct our attention to Mr.

Glaser.

STATEMENT OF ROB GLASER, CHAIRMAN AND CHIEF

EXECUTIVE OFFICER, REALNETWORKS, INC.

Mr. GLASER. Thank you, Mr. Chairman, and Members of the

Committee. I’m Rob Glaser, founder, Chairman and CEO of

RealNetworks. I’m also Chairman and acting CEO of MusicNet, a

new company formed by RealNetworks, AOL Time Warner, EMI

and Bertelsmann. I also was lucky enough to go to summer camp

with Mr. Stoller’s son and to high school with his partner, Mr.

Leiber. Thank you for inviting me to testify today.

Over the past 6 years, RealNetworks has been a catalyst in the

digital distribution of music and video. Indeed, over 200 million

people around the world use our RealPlayer and RealJukebox products to listen to and watch audio and video programming on their

PCs, and soon through their mobile phones and their game consoles.

The past 6 months have clarified the legal landscape for the online distribution of music substantially. The lawsuits by the music

publishing and record industries against MP3.com, Napster, and

other innovative companies have established that basic copyright

law must be applied to the Internet. While the court decisions have

not yet resolved important issues regarding personal fair use and

specific responsibilities of ISPs to police their services, the basic

rules of the road are plainly visible.

Once the courts ruled, it became clear to us that we could build

on our core platforms for streaming and downloading to deliver a

great new consumer subscription service. And that would be exciting. That’s why we formed alliances with AOL Time Warner, BMG,

and EMI to create MusicNet. This was the first time a majority of

the major record labels have supported such a venture. MusicNet

will combine the world’s most popular music, a software framework

that compensates and preserves the rights of artists and music

companies and the ease of use and flexibility that consumers have

demonstrated that they want.

A key element of the MusicNet service is that it will require consumers to pay a subscription fee, generally a monthly fee, just like

cable TV or a magazine subscription. We believe the consumers

will pay a reasonable fee for choice, convenience, and a combination

of interactive features. In fact, we’ve demonstrated that this is

true. RealNetworks introduced a media subscription service called

Gold Pass about 9 months ago, and we already have over 200,000

paid subscribers, and that’s before the general availability of music.

In order to get the greatest possible consumer reach, MusicNet

will license its platform to as many retailers and distributors as

possible. So far we’ve announced that both AOL and RealNetworks

will be among the initial consumer distributors of the MusicNet

platform. Now, if I may, let me show you what MusicNet service

will look like. And this, by the way, is the first public demonstration of the MusicNet platform.

44

What you see here is we’ve got a PC with MusicNet software on

it that’s not connected to the Internet. So we’ve simulated that

today, and what I’ll first do is I’ll just do a basic search, and this

will be familiar to many of the folks in the room that I’m sure have

used services like Napster. And I’ll search for a key word. A common key word in many music products is, of course, the word

‘‘love.’’ and we get more than a screen full, as you might imagine,

including great songs like The Greatest Love Of All, How Sweet It

Is to Be Loved By You, I Will Always Love You, and many, many

others.

Let’s pick a different way to search. Let’s search for artists, and

search for one recording artist named Poe who’s got a hit climbing

up the charts. And what we see here is we’ve got now songs from

Poe’s—not only just her new album but her first album as well,

both of which are on Warner Atlantic, one of our partners.

And so what I’ll do here is I’ll pick one of those songs, Hello,

which was the title track of her first album, and I’ll download it.

And so the downloading—again, it’s simulated here, but it will just

take a few seconds if people have a fast connection. It will take

longer if they’ve got a dial-up connection. We also support streaming of that content which will be much faster, especially for people

with modems, and then once the song is available, literally the consumer just clicks on it and plays.

That gives you a sense of that. That demonstration today has

looked very similar to what might have—somebody had seen if

Napster had been demonstrated or a service like that.

Now I’ll show you something that you wouldn’t see with the current product like Napster. I’ll click on one of the other songs that

previously I downloaded so it’s been in my library, and instead of— I’ll just—I’ll hit the play button on that, but something interesting

happens: I get a message that says your license to the song has expired. Please press play to renew the license.

The underlying premise here is that consumers license songs

when they download them for a particular period of time, probably

generally it will be a month, although different license—different

affiliates will have different ways of doing that. And then once they

have that, then if they want to listen to them again after that initial license period is done, they have to renew the license. Now, it’s

very easy to renew the license, but what that allows us to do is allows us to track and compensate the rights-holders up all the way

the food chain, including both the performing rights-holders and

the publishing rights-holders, for the expense of this product. So

that gives you kind of just a general overview of what MusicNet

is, and I thank you for the opportunity to do that.

Mr. Chairman, MusicNet’s upcoming launch underscores the

technology is there, the content is being assembled, and the subscription business model is being proven every day. So what’s missing? In our view, music publishing issues stand out as the most significant potential impediment to launching great subscription service. Music publishing rights are based on a very simple principle:

that the author of the song has the right to be compensated. We

are 100 percent in support of this principle.

The issue in front of us relates to how this principle gets applied

in the new world of digital distribution. Unfortunately, music pubVerDate 11-MAY-2000 12:53 Sep 28, 2001 Jkt 000000 PO 00000 Frm 00048 Fmt 6633 Sfmt 6601 G:\WORK\COURTS\051701\72613.000 HJUD2 PsN: HJUD2
45

lishing rights is one of the most tangled areas of our copyright system. While some music publishing rights can be efficiently licensed

today, others cannot. Simple logic dictates that we set up a licensing system that allows for one-stop shopping and that the license

required of all rights for digital distribution can be made available.

To accomplish this, we’ll need the cooperation of music publishers who we believe must offer more flexible licenses than they

have historically that reflect the function of these new digital distribution services. We hope and trust that there’s a strong willingness on the part of all parties involved to work on these simple licensing mechanisms so that together we can launch compelling

new music services with the necessary levels of economic and legal

certainty.

But, Mr. Chairman, if we’re not able to quickly resolve these

issues and get these licenses done around the negotiating table,

then I believe it will be necessary for Congress and the Copyright

Office to step in and streamline music licensing. For instance, Congress has already established compulsory licenses. It could now

simply clarify that additional licenses are not required if all a company wants to do is utilize the existing compulsory licenses they

have.

Moreover, the Copyright Office has already studied the legal status of ephemeral and temporary copies, and if necessary it could

now establish clear rules to facilitate digital distribution.

Ultimately, of course, I hope that the bully pulpit of today’s hearing will encourage everyone to sit down and resolve these issues

without further legislative or administrative intervention. But I’d

urge the Committee to track these issues closely and set a very

near-term deadline in which parties need to either report back on

progress or expect further action from you all.

Mr. Chairman, I’m confident with the right rules in place,

RealNetworks and other companies can create incredible worldwide

marketplaces for American companies and creators of content and

great products for consumers. I’d welcome the opportunity to continue working with you toward this end. Thank you very much.

Mr. COBLE. Thank you, Mr. Glaser.

[The prepared statement of Mr. Glaser follows:]

PREPARED STATEMENT OF ROB GLASER

My name is Rob Glaser, and I am the founder, chairman and CEO of

RealNetworks, Inc. I’m also chairman and acting CEO of MusicNet, a new company

formed by RealNetworks, AOL Time Warner, EMI, and Bertelsmann. I greatly appreciate the opportunity to come before you today, because RealNetworks is a leader

in Internet media delivery and is a founding member of the Digital Media Association.

Mr. Chairman, you and the other members of this committee are undoubtedly

aware that the music industry is at a pivotal point in its evolution, as it confronts

issues of great importance to artists, consumers, technology companies, record labels, music publishers, retailers and media companies. The Internet represents a

revolutionary opportunity for consumers to experience music in new ways-to personalize the music they hear and to access it from a growing array of convenient devices—and for companies to develop profitable new business models based on these

new technologies. If handled properly, this digital music revolution should result in

great new experiences for consumers and a bigger economic pie for rightsholders to

share.

Over the past six years, RealNetworks has been a catalyst in the digital distribution of music and video. Our RealPlayer technology now enables more than 200 million unique registered users around the world to access a rich variety of audio and

46

video content that is streamed from computers called ’servers’ to the user’s personal

computer. Our RealJukebox product has made it possible for more than 60 million

consumers to download music from the Internet and to manage their personal music

collections. And just last month, we announced the formation of MusicNet, a subscription service that will allow consumers to download and stream music, in conjunction with EMI, BMG and AOL Time-Warner. In a few minutes, I will demonstrate the planned MusicNet service publicly for the first time. But before I do,

I want to share my perspective on the ’state of play’’ on digital distribution and the

core public policy issues facing the industry.

The past six months have dramatically clarified the legal landscape for the online

distribution of music. The lawsuits by the music publishing and record industries

against MP3.com, Napster and other innovative companies have established that

basic copyright law must be applied to the distribution of music over the Internet.

The principle that artists must be paid for the digital distribution of their copyrighted works has been reaffirmed. While the court decisions have not yet resolved

important questions regarding personal fair use and the responsibility of ISP’s to

police their services for questionable content, the basic rules of the road are plainly

visible.

Once the courts ruled, it became clear to us that we could build on our core platforms for streaming and downloading of music to deliver a great new consumer subscription service. The goal of this new service, which we decided to call MusicNet,

is to combine three essential elements—the popular music that consumers want, a

software framework that compensates and preserves the rights of artists and music

companies, and the ease of use and flexibility that consumers have demonstrated

they want.

A key element of the MusicNet service is that it will require consumers to pay

a subscription fee—generally a monthly fee, just like cable TV or a magazine subscription. We believe that consumers will pay a reasonable fee for choice, convenience and a combination of interactive features. Indeed, our own media subscription

service, GoldPass, has attained over 200,000 paid subscribers after only eight

months—and this early success convinced us that Internet users would subscribe to

premium content delivered directly to their personal computers.

In order to implement MusicNet, we decided to forge alliances with the major

record labels. Our goal was to license a critical mass of great music for digital distribution, which we believed would catalyze the rest of the industry. On April 2nd,

we announced just that. Specifically, we’re working with AOL-Time Warner, BMG

and EMI who are both licensors to and minority investors in MusicNet. This was

the first time a majority of the major record labels have joined such a venture. And

since MusicNet is designed to accommodate millions of songs from a wide universe

of licensors, our hope is to bring as many labels on as possible; and discussions between MusicNet and other major and independent labels are ongoing.

In order to get the greatest possible consumer reach, MusicNet will not be a retailer itself. Instead, it will license its ‘‘private-label’’ platform to retailers and distributors who will brand, package, and sell it directly to consumers. Our intent is

to distribute the MusicNet service through as many partners as possible. To date,

we’ve announced that both AOL and RealNetworks will be among the initial consumer distributors of the MusicNet platform. Additionally, we expect online retailers such as Tower Records to join us, and potentially even including Napster, provided they satisfy legal, copyright and security concerns. Let me give you a taste

of what MusicNet’s service will look like. This, by the way, is the first public demonstration of the platform:

Mr. Chairman, what MusicNet’s launch underscores is that the technology is

there, the content is being assembled, and the subscription business model is being

proven every day. So what is missing? In our view, music publishing issues stand

out as the most significant potential impediment to launching great subscription

services.

Music publishing rights are based on a very simple principle—that the author of

a song has the right to be compensated. We are in 100% support of this principle.

The issue in front of us relates to how this principle gets applied in the new world

of digital distribution.

Artists and songwriters have been speaking out about the need to distribute their

works to their fans online-and to be paid for that distribution. The presence today

of the National Music Publishers Association and acclaimed artist Lyle Lovett underlines the importance of properly compensating songwriters for the digital distribution of their works.

Unfortunately, music publishing rights are one of the most tangled areas of our

copyright system. My legal team advises me that up to eight claimed rights arguably are needed to clear a single song to be placed on a computer server and delivVerDate 11-MAY-2000 12:53 Sep 28, 2001 Jkt 000000 PO 00000 Frm 00050 Fmt 6633 Sfmt 6621 G:\WORK\COURTS\051701\72613.000 HJUD2 PsN: HJUD2
47

ered to a consumer via downloading and streaming. While some of these rights can

be efficiently licensed today, others cannot. Simple logic dictates that we set up a

licensing system that allows for one-stop shopping and the license of all required

rights for digital delivery. To accomplish this, we will need the cooperation of music

publishers, who we believe must offer more flexible licenses that reflect the function

of these new digital distribution systems.

Songwriters must be compensated when their songs are streamed or digitally

downloaded to end users. Yet these licenses should not tax a single delivery of a

song multiple times along the chain of delivery across the computer networks that

form the Internet. This would be akin to requiring a broadcast royalty toll every

time a song is boosted across transmission towers on the way to a consumer’s radio.

Similarly, these licenses should not tax RAM-buffer copies that exist only for fragments of time in a RealPlayer.

In the end, songwriters will benefit greatly from a simplified licensing regime, because individual songs will be more easily accounted for and transparently tracked;

and payment to songwriters for the performance of their works will be rapidly accelerated.

We hope and trust that there is a strong willingness on the part of all parties

involved to work out these simpler licensing mechanisms, so that together we can

launch compelling new music services with the necessary levels of economic and

legal certainty. If the parties involved can establish this framework quickly, I believe a vibrant new market for music will develop.

But Mr. Chairman, if we are not able to quickly resolve these licenses around the

negotiating table, then I believe it will be necessary for Congress and the Copyright

Office to step in and streamline music licensing. For instance, Congress has already

established compulsory licenses; it could now clarify that additional licenses for

server copies are not required simply for a company to utilize the existing compulsory license. Moreover, the Copyright Office has already studied the legal status of

ephemeral and temporary copies; and if necessary, it could now establish clear rules

that facilitate digital distribution.

As you and other policy-makers work to help create a stable and robust marketplace for the distribution of digital content, I suggest that the following fundamental

principles guide your efforts:

First, content creators must be fairly compensated for the distribution of their

copyrighted works in new markets;

Second, the legal personal-use rights of consumers should not be eroded in the

process of ensuring copy protection;

Third, there should be maximum transparency for artists and others whose

rights are implicated in the reproduction and distribution of digital versions of

audiovisual works;

Fourth, the new distribution channels must be open to fair competition;

Fifth, Congress should eliminate barriers to new methods of digital distribution,

such as web radio, that do not exist for traditional media.

Ultimately, of course, I hope that the ‘‘bully pulpit’’ of today’s hearing will encourage everyone to sit down and resolve these issues without further legislative or administrative intervention. But I would urge the committee to track these issues

closely and set a very near-term deadline by which the parties need to report back

on progress. If an agreement is not reached quickly, it may well be appropriate for

Congress or the Copyright office to step in directly—guided by the principles I have

just laid out.

Mr. Chairman, RealNetworks embarked on a journey six years ago—a journey to

bring digital music and content to consumers everywhere—and we are excited that

with the launch of MusicNet and other recent developments, that vision is coming

more fully into fruition. I am confident that with the right rules in place, we can

create incredible worldwide marketplaces for American companies and creators of

content. I welcome the opportunity to continue working with you toward this end.

I’d be happy to answer any questions you might have.

Mr. COBLE. Mr. Lovett.

STATEMENT OF LYLE LOVETT, AMERICAN SOCIETY OF

COMPOSERS, AUTHORS AND PUBLISHERS

Mr. LOVETT. Thank you, Chairman Coble, Members of the Subcommittee. My name is Lyle Lovett, and I’m proud to be both a

48

songwriter and a performing artist. I’m also proud to say that I am

here today on behalf of over 117,000 songwriter and copyright

owner/mmbers of ASCAP, the American Society of Composers, Authors and Publishers.

I appreciate the opportunity to present our views to the Subcommittee, and thank Chairman Coble, Ranking Member Berman,

Vice Chairman Goodlatte, and the entire Subcommittee for their

support of intellectual property rights in the United States and

throughout the world.

We at ASCAP know that important legislation like copyright

term extension and the Digital Millennium Copyright Act became

law largely through your efforts, and for that I express the deep

gratitude of all of ASCAP’s members.

I’m a songwriter, not an economist. But I can tell you from firsthand experience how valuable the songs, the intellectual property

that my fellow songwriters and I create, are to the American economy. We are proud of the positive impact our creative work has for

so many people. The artists and musicians who perform our songs,

the technicians who work to record them, the retailers, both traditional and online, who legally sell them, the folks who work our

concert tours, those in theatres and arenas employed when we appear, the workers who manufacture instruments and electronic

equipment. This chain of economic benefits is enormous, and it all

begins with our songs.

In addition to the economics, songs provide enjoyment. In fact,

when you consider how much of the usage of the Internet is related

to people’s desires to enjoy music by listening or downloading, it

would be fair to say that our efforts are one of the main reasons

for the growth of the Internet. The Internet without music would

be like radio without music, just imagine that.

Mr. Chairman, it is also true that copyright is one of the few

bright spots in America’s balance of trade. Given the far greater

popularity of American musical works overseas compared to the

performance of foreign works in the United States, ASCAP was

able to collect about four times the amount of royalties from abroad

as it paid out last year.

Just think if we had that kind of surplus in manufactured goods.

But what it also tells you is the extent to which American copyrighted intellectual property is serving as an ambassador to our

way of life to the rest of the world, and I think it is safe to say

that in any village or town or city in virtually any place on Earth,

you will hear American songs. Our music is the new lingua franca

of international culture.

Mr. Chairman, I would like to offer a performing songwriter’s

perspective on technology. There isn’t a songwriter I know who opposes new technological ways to perform music. Technology always

has been the friend of the songwriter. From piano rolls, to phonographs, to radios developed from early crystal sets, to what we hear

and enjoy today, through television in its various incarnations and

now the Internet, we have looked upon each of these revolutions

in communications as new ways to enjoy our music and new ways

for us to earn a living by doing what we love, which is a tremendous privilege to everybody, a living by doing something you love.

49

And as long as we are being compensated fairly for that listening

pleasure, we are able to feed our families, pay our bills and sustain

careers as songwriters. The songs I create mean many things to

me. Foremost, the goal of every artist is to connect with and to

communicate his or her thoughts, emotions and beliefs to his or her

audience.

My songs, therefore, are truly my creations, extensions of who I

am and what I believe. But my songs also are my livelihood. If I

can’t earn a living from them and if every songwriter is unable to

earn a living from creating music, who then will write the songs

of America and the world?

I love what I do, but this is a tough business. And to illustrate

that, I would ask each of you on this distinguished Committee to

think about this question: Have you ever seen in the classified section of any newspaper an ad which reads: Songwriter wanted, good

salary, paid vacations, health benefits and many other perspectives? I’m sure you haven’t.

Most songwriters are entrepreneurs, trying again and again for

that hit which will help keep them writing in the hopes of another

hit, so that songwriting can be more than a part-time unpaid struggle.

I have no objection to songwriters or performers agreeing that

their work be free on the Internet or anywhere else if they want.

Some have made that choice. But for me and for the overwhelming

majority of my songwriter and performer colleagues, our choice is

that we be compensated for the use of our creative work which is

our property.

Mr. Chairman, there are two aspects to ASCAP’s licensing of musical performances on the Internet which I think will be of great

interest to the Committee.

First, ASCAP has never turned down an Internet user who requested a license, nor has ASCAP sued any Internet user in an attempt to shut down the Web site rather than to license it.

Second, through the mechanism of the ASCAP license, every licensed Internet user has the right to perform all the many millions

of works in the ASCAP property. ASCAP is an Internet licensing

success story. Its Web site licenses have grown exponentially from

a mere 150 sites in 1996 to the 2,200 Web sites ASCAP licenses

today.

In fact, there is no need for Internet users to worry about whether they may operate lawfully if they perform ASCAP music or to

wonder when a usable licensing mechanism will come about. It has

been here, it is here, and thousands of Web sites are using it.

Mr. Chairman, there are some who believe a compulsory license

is the answer to the current controversies regarding usage of copyrighted works on the Internet. Those arguing for a compulsory license have given some supposed justifications for this sort of interference in the free marketplace. They said it was justified because

they couldn’t engage in individual negotiations with copyright owners, but ASCAP’s license means that the entire repertoire of music,

millions and millions of compositions written and owned by 117,000

members, is licensed in one transaction. They said that it was justified because no workable licensing mechanism exists, but ASCAP

has successfully licensed thousands of Internet users. They said it

50

was justified because copyright owners refused to license them, but

ASCAP will license any user who wants a license.

Mr. Chairman, there is no justification for a compulsory license.

Compulsory licensing, which is another way of saying government

price setting, should be repugnant to those who believe in a free

market and the sanctity of private property, which includes intellectual property.

Mr. Chairman and distinguished Committee Members, the entire

world wants and enjoys America’s music. The decisions you and

your colleagues make about protecting copyright may well determine whether that continues to be the case.

A compulsory license would be a blow aimed at the ability of

those who create America’s music to continue to flourish. I am honored to have been able to appear before you. On behalf of my

117,000 ASCAP colleagues, I thank you for this opportunity to

present our views. Thank you very much.

Mr. COBLE. Thank you, Mr. Lovett.

[The prepared statement of Mr. Lovett follows:]

PREPARED STATEMENT OF LYLE LOVETT

Mr. Chairman and members of the Subcommittee, my name is Lyle Lovett, and

I am a songwriter and performing artist. I am proud to say that I am here today

on behalf of over 117,000 songwriter and copyright owner members of ASCAP, the

American Society of Composers, Authors and Publishers. I appreciate the opportunity to present our views to the Subcommittee, and thank Chairman Coble, Ranking Member Berman, Vice-Chairman Goodlatte, and the entire Subcommittee for

their support of intellectual property rights in the United States and throughout the

world. We at ASCAP know that important legislation like copyright term extension

and the Digital Millennium Copyright Act became law largely through your efforts,

and for that I express the deep gratitude of all ASCAP’s members.

ABOUT ASCAP

ASCAP is an unincorporated membership association of composers, lyricists, songwriters and music publishers. It is governed by a board of Directors consisting of

12 writers and 12 publishers, elected by the writer and publisher members respectively. The Board is responsible for setting policy. ASCAP licenses only the right of

nondramatic public performance of its members’ copyrighted musical compositions,

through the mechanism of licenses which give users the right to perform any and

all of the many millions of musical works in the ASCAP repertory.

The ASCAP royalty distribution system is a model of fairness to all parties.

Through their membership in ASCAP, songwriters and music publishers divide all

royalties 50–50. The writer’s share is paid to the writer, and the publisher’s share

to the publishers.

THE IMPORTANCE OF MUSIC TO THE UNITED STATES ECONOMY

I’m a songwriter, not an economist. But I can tell you from first-hand experience

how valuable the songs—the intellectual property my fellow songwriters and I create—are to the American economy. Beside the economic value in the song itself, we

are proud of the positive impact our creative work has for so many people: the artists and musicians who perform our songs, the technicians who work to record them,

the retailers, both traditional and on-line who legally sell them, the folks who work

our concert tours, those in theaters and arenas employed when we appear, the

workers who manufacture instruments and electronic equipment. Mr. Chairman and

distinguished committee Members, this chain of economic benefits is enormous, and

this chain all begins with our songs.

In addition to the economics songs also provide a whole lot of enjoyment. In fact,

when you consider how much of the usage of the Internet is related to people’s desires to enjoy music by listening or downloading, it would be fair to say that our

efforts are one of the main reasons for the growth of the Internet. The Internet

without music would be like radio without music: quite empty except perhaps for

weather reports, business news, and other non-entertainment information.

51

Mr. Chairman, it also is true that copyright is one of the few bright spots in

America’s balance of trade. Music, and in particular the performing rights in our

music which ASCAP licenses, are an important element of that intellectual property

trade surplus. Given the far greater popularity of American musical works overseas

compared to the performance of foreign works in the United States, ASCAP was

able to collect about four times the amount of royalties from abroad as it pays out.

That tells you a whole lot about the value of copyrighted intellectual property to the

American economy. Just think if we had that kind of surplus in manufactured

goods! But what it also tells you is the extent to which American copyrighted intellectual property is serving as an Ambassador for our way of life to the rest of the

world. I have traveled abroad as I know many of you have. And I think it is safe

to say that in any village or town or city in virtually any place on the globe you

will hear American songs. Our music is virtually the new lingua franca of international culture. I think we should all want to keep it that way.

A SONGWRITER’S PERSPECTIVE

Mr. Chairman, not only am I not an economist, but I also am not a lawyer, so

I cannot explain the legal details of Internet uses of music. But I can give you a

songwriter’s perspective on a few things.

First, let me say as clearly as I can that there isn’t a songwriter I know who opposes new technological ways to perform music. Technology always has been the

friend of the songwriter: from piano rolls, to phonographs, to radio’s development

from early crystal sets to what we hear and enjoy today, through television in its

various incarnations, and now to the Internet, we have looked upon each of these

revolutions in communications as new ways to enjoy our music; and, new ways for

us to earn a living by doing what we love—creating America’s music. Every new

way to bring performances to the public is a new way to bring them enjoyment. And

as long as we are being compensated fairly for that listening pleasure, we are better

able to feed our families, pay our bills, and sustain careers as songwriters.

The Internet has broadened the enjoyment of our music to include the far corners

of the world. We love that; and we must all remember that Internet usage is traceable far more to people enjoying our songs than it is to scholars researching on the

web sites of distant museums, or investors following stock quotes. Insuring that our

music remains popular and profitable is another way to insure the growth of the

Internet.

From ASCAP’s point of view, another reason for its support of the new technology

is its positive impact on reducing our costs. Globalization of the music business has

led to ASCAP taking the lead in forming a joint venture with our sister societies

in the United Kingdom, the Netherlands and Canada to reduce our back office expenses. We expect this joint venture to expand, and it has been made possible by

the revolution in communications.

The songs I create mean many things to me. Foremost among them is my goal,

and I think the goal of every artist, to connect with and communicate my thoughts,

emotions and beliefs to my audience. My songs therefore are truly my creations—

extensions of who I am and what I believe. But, my songs also are my livelihood.

If I can’t earn a living from them, I’ll have to do something else. And if every songwriter is unable to earn a living from creating music, if every songwriter has to do

something else to make ends meet, who will write the songs of America and the

world? I love what I do. But this is a tough business. And to illustrate that, I would

ask each of you on this distinguished committee to think about this question: Have

you ever seen in the classified section of any newspaper an ad which reads: ‘‘ Songwriter wanted. Good salary. Paid vacation. Health benefits and many other perks.’’

I’m sure you haven’t. Most songwriters are lonely entrepreneurs trying again and

again for that hit which will help them take care of their families and keep them

writing in the hopes of another hit down the road so that songwriting can be a career, not a part-time unpaid struggle. In my case, it took many years and many

songs before I had that first hit. However, success would be meaningless without

strong copyright laws and a vigorous and vigilant ASCAP. For it is only through

the protection of the copyright law, and through ASCAP and similar groups, that

our right to earn a living from our creative work is assured.

Please let me be clear: I have no objection to songwriters or performers agreeing

that their work be free on the Internet or anywhere else if they want. Some have

made that choice. But for me, and for the overwhelming majority of my songwriter

and performer colleagues, our choice is that we be compensated for the use of our

creative work, which is our property.

Now let me make just a few points based on my understanding of ASCAP’s approach to Internet uses of music.

52

ASCAP’S LICENSING OF INTERNET PERFORMANCES OF MUSIC

There are two aspects to ASCAP’s licensing of musical performances on the Internet which I think will be of great interest to you.

1. ASCAP has licensed every Internet user who has requested a license to perform ASCAP music. ASCAP has never turned down an Internet user who requested a license and was willing to pay a reasonable license fee. ASCAP has

not sued any Internet user in an attempt to shut the website down rather

than license it. And, through the mechanism of the ASCAP license, every licensed Internet user has the right to perform all the many millions of works

in the ASCAP repertory. If, there are any difficulties that Internet users

have in licensing works piece-by-piece, those difficulties are solved by an

ASCAP license.

2. ASCAP is an Internet licensing success story, right now. There has been

much discussion about when various licensing systems would be put into

place. ASCAP’s is already in place, and has been since 1995. I am told that

ASCAP currently has about 2200 websites licensed to perform music. Yearby-year, the approximate number of Internet websites licensed is:

Indeed, ASCAP tells me that, of the 66 members of DiMA, ASCAP has licensed

28, and is in negotiations with another 17.

Therefore, there is no need for Internet users to worry about whether they may

operate lawfully if they perform ASCAP music, or to wonder when a usable licensing

mechanism will come about. It has been here, it is here, and thousands of websites

are using it.

THERE IS NO NEED OR JUSTIFICATION FOR A COMPULSORY LICENSE

There are a few conclusions from these facts which go to the heart of several

issues of interest to the Subcommittee:

There is no justification for a compulsory license for Internet uses of ASCAP music.

Those arguing for a compulsory license have given some supposed justifications for

this sort of interference in the free marketplace. They said that it was justified because, for whatever claimed reason, they couldn’t engage in individual negotiations

with copyright owners. But ASCAP’s license means that the entire repertory of

music—millions and millions of compositions written and owned by 117,000 members—is licensed in one transaction. They said that it was justified because no workable licensing mechanism exits. But ASCAP has successfully licensed thousands of

Internet users since 1996. They said that it was justified because copyright owners

refused to license them. But ASCAP will license any user who wants a license, at

a reasonable fee, and the user will be licensed simply by virtue of requesting a license. Compulsory licenses should be repugnant to those who believe in the free

market and the sanctity of private property, including intellectual property. The undisputed facts of ASCAP’s Internet licensing demonstrate that a compulsory license

is not justified.

Mr. Chairman and distinguished committee Members, the entire world wants and

enjoys America’s music. The decisions you and your colleagues make about protecting copyright may well determine whether that continues to be the case. A compulsory license would be a blow aimed at the ability of those who create America’s

music to continue to flourish.

I am honored to have been able to appear before you, on behalf of my 117,000

ASCAP colleagues, and thank you for this opportunity to present our views.

Mr. COBLE. Before I start my questioning, I want to make a comment or two. I was talking to one of my constituents, Mr. Lovett,

4 or 5 weeks ago. You said something that triggered that memory.

He was talking about a job that he had had for 10 or 12 years and

his wife wanted him to change jobs. And I asked him if he regretVerDate 11-MAY-2000 12:53 Sep 28, 2001 Jkt 000000 PO 00000 Frm 00056 Fmt 6633 Sfmt 6601 G:\WORK\COURTS\051701\72613.000 HJUD2 PsN: HJUD2
53

ted they left the first job. And he said to me, with his voice generously laced with emotion, he said, It was the only time in my life

that I had a job at which I was good and I loved it.

And you said yourself, people who earn their living by doing

what they love to do are indeed fortunate people.

Someone asked me if I could describe the purpose of today’s hearing in one word. I thought for a moment. I said, well, that can be

done with several words. ‘‘compensation’’ hits me between the eyes,

and ‘‘marketplace-driven economy.’’ I think when people produce a

product or deliver a service, they expect to be paid for it and they

should be paid for it. I don’t think that writers and publishers and

composers and performers and artists ought to be exempt from

this. I think they should be paid for it as well, because you folks

contribute very significantly to the well-being of our society. And

I thank you for it.

Now you can start the clock on me. We have the red light that

applies to us, too, folks.

Mr. Bronfman, in your testimony, you mentioned that Vivendi

and Universal is in the process of finalizing other licensing deals.

Would any of these deals be with any third-party distributors?

Mr. BRONFMAN. Chairman Coble, the licenses to which I refer in

my testimony are with third-party distributors, not with affiliated

companies, and we expect to continue to license our music to other

third-party affiliates as well. As I mentioned, it’s most important

to us that our music be broadly and widely available on a global

basis to as many consumers as possible, with any online service

that can demonstrate a secure system and the ability to properly

compensate the property holders.

Mr. COBLE. Mr. Stoller, do you believe that all Internet streaming transmissions require a mechanical license?

Mr. STOLLER. I believe that under the copyright law, anything

that requires a copy or that makes a copy of our work should be

under the control of the creator and his or her protector, so to

speak, in the form of a music publisher. And it is my understanding that this involves copying. I’m certain that it is a subject

for negotiation.

Mr. COBLE. I didn’t hear the last thing you said.

Mr. STOLLER. I said I’m certain this is one subject for negotiation.

Mr. COBLE. Oh. Thank you, sir.

Mr. Richards, are Webcasters currently paying royalties for

RAM, random access memory, copies of musical works created during digital transmission?

Mr. RICHARDS. I can’t be certain what all other companies are

doing, but we are. We pay royalties whenever there’s a transmission. We pay multiple royalties, in fact five different sets of royalties, as I showed earlier, three of which are to the publishers

today, and two of which are to the record companies today.

We deal with music that people already have purchased, and

they’re trying to put it into a secure locker to play it back to themselves. So theoretically they bought a copy, we bought a copy, so

that we can make sure that that copy was the same copy. We pay

ASCAP, as we have—ASCAP, by the way, I agree with Mr. Lovett.

ASCAP’s system has been working fine for us. And we paid four

54

other license fees for the various copies that occur as a result of

the incident of technology for a consumer to listen to their own

music.

Mr. COBLE. Mr. Glaser, DIVA argues that RAM and buffer copies

are valueless copies and should be exempt from the scope of the

copyright owners’ exclusive rights. However, music publishers and

songwriters point out that it’s possible for consumers to access

these temporary copies, convert them into MP3 files and download

them to their computer for free with a software product such as

Total Recorder.

What say ye to that?

Mr. GLASER. Well, I think that we have a lot of very good secure

systems for protecting the interest of copyright. In fact, going back

6 years to the first RealAudio product, we’ve always allowed rightsholders to characterize their intention in terms of the copying of

their songs, and we successfully sued under the DMCA in the first

case against a company called StreamBox that attempted to circumvent that activity. So we are strong protectors of intellectual

property rights in our systems, both technologically and, more necessarily, legally.

The particular issue you described, as I understand it, is that

there are cases where there are transient or ephemeral copies of

pieces of material made along the way to transfer something.

That’s just like when you have music going over from one transmission tower to another, there might be—the signals might get

boosted or propagated, and we don’t consider that a copy. We consider it part of the broadcasting process. And that—I think it would

be a very dangerous precedent to start differentiating between different technical methods of broadcasting, as long as they all—they

in fact do offer the rights-holders the intended protections, and

ours certainly do.

Mr. COBLE. Well, the ominous red light illuminates. I have two

questions I want to put to Mr. Lovett, but I’ll do that after we

make our rounds.

Mr. Berman.

Mr. BERMAN. Thank you, Mr. Chairman. On the theory that two

times isn’t enough and why not do it three times, Mr. Boucher

asked the question of you, Mr. Bronfman—your testimony responded to it. The Chairman asked you. But I think it’s very important to establish this point. You’re appropriately getting, I

think, a lot of accolades for knocking down this belief that many

had a while ago that the recording industry—the record companies

do not want to put their music online. Your company and the other

ones also are making major investments in ventures into online

music, but several issues are raised. One is, is this going to end

up as some kind of monopoly control, where companies you own

and partner with are the only ones who will be able to do this? And

the second one is for those artists who want to find alternative avenues for distribution, will they be blocked somehow from ever getting access to the consumer?

I’m curious, one more time, if you could just address that issue.

Mr. BRONFMAN. Congressman, I think, just to step back for a

minute, I think two things are important to remember here. We

really are at Day One in the life of the Internet as a distribution

55

channel for the distribution of intellectual property, and it’s difficult to say exactly how it will play out and what the economic

models will or won’t be. Certainly the economic models that we believed existed 2 years ago no longer exist today for the Internet.

I think it’s also important to point out—even though I found

much of Mr. Stoller’s testimony to be at the least misleading and

in that sense disappointing—particularly one of the things I would

say is that music companies have not been reluctant to license

their music to the Internet. Quite to the contrary. We’ve been reluctant to do so in the absence of a technology which could protect

the rights-holders, and it has been the time that it has taken in

a very complex technological world to create technologies, which is

at the dawn of arriving.

And Rob has been, in RealNetworks, a great proponent. Thank

you, Rob, for your steadfast support of rights-holders as you’ve

built a secure system. And Duet will go out with its own secure

system. And it has really been the building of those that has delayed the advent of music on the Internet, not a reluctance to license.

Mr. BERMAN. This is to Rob, not to Robin.

Mr. BRONFMAN. This is to Rob, yes, not to Robin. But I would

also say that as far as Universal is concerned, we intend to license

our music broadly. We intend to license it to third-party distributors. We intend to license it as broadly and as widely as we can.

We—it is not our intention to license only to ourselves or to create

a polygopoly or some kind of oligopoly of online distribution. Nor

do we want to see that created by others.

We want to see music where music is ubiquitous, where our

music is ubiquitous wherever music is found and where consumers

can find it easily, reasonably, in a secure fashion. And we want to

propagate that kind of business model. And it is to that end that

we intend to be licensing as broadly as possible, again with the criteria that there be a secure system to protect our copyrights and

the ability to compensate our rights-holders.

Mr. BERMAN. Mr. Glaser, you testified that you believe it’s appropriate for Congress to step in and streamline music licensing. Either in this round or the next round, I want to get to that. But

there is a sort of irony here. RealNetworks has, as I understand

it, at least 10 patents, one for audio on-demand communication system—I think RealPlayer, which is the most widely used media

player on the Internet. It is based on a patent for a Universal compressed audiomaker.

What would be your reaction if Congress came in and sort of

mandated licensing of your developments so that other companies

can now manufacture and distribute the items that you’ve patented

through your creativity and ingenuity?

Mr. GLASER. Well, I think my personal view is that the entire

patent software system needs to be overhauled. That’s probably a

set of views that go beyond the scope of today’s hearings. We have

a set of patents for some very innovative technology we’ve created,

and we tend to use those patents pretty much as a shield so that

bigger—other bigger companies won’t engage us in patent fights,

rather than initiating patent fights ourselves.

56

Mr. BERMAN. I guess I would have liked you to have raised your

hands and conceded, which you don’t seem to be willing to, is that

in other words you have something of value that’s protected, and

you want to be able to negotiate who’s going to manufacture

RealPlayer and who’s going to use your technology and who you’re

going to license to and for what price you’re going to license. And

I think there is an underlying philosophy there that I think is legitimate and.

Mr. GLASER. We absolutely support the interest of rights-holders

to not only get compensated for their works but to have the ability

to determine sort of the economics of that. The issue here is simply

making sure that the fact that the music publishing industry is not

organized in a way that lends itself to these broad-based kinds of

subscription services doesn’t create chaos so we’re not able to move

forward. Certainly we’d love nothing more than to have all these

issues resolved through business-to-business negotiation, just as

we’ve done in setting up MusicNet itself.

My comments were meant to say that in the event that that

process breaks down or doesn’t converge in a fairly rapid time

frame, I think the only thing to do, if we actually want to have a

rational marketplace, is to have either the Copyright Office or Congress clarify existing sets of rules that have allowed previous kinds

of distribution systems to flourish.

Mr. COBLE. The gentleman from Utah, Mr. Cannon.

Mr. CANNON. Thank you, Mr. Chairman. Gentlemen, I appreciate

you attendance today. This is a difficult and complex issue, and I

have several questions, so I’d appreciate it if we could have relatively short answers. And I’ll try and frame my questions such

that they are deserving of short answers.

Mr. Bronfman, if I could start with you first. Can you tell me

how many licenses of the whole Universal catalog, song catalog,

have been granted to online music distributors, not counting those

companies either involved in litigation or with you or affiliated

with your corporation?

Mr. BRONFMAN. I don’t think I have an accurate answer for you,

Congressman, off the top of my head; but it would be somewhere,

I think, more than a dozen, and probably less than 20. But I can

get you an accurate number.

Mr. CANNON. That’s songs, not companies. What is the total

number of songs out of your catalog or percentage—.

Mr. BRONFMAN. Oh, excuse me.

Mr. CANNON [continuing]. Of your catalog?

Mr. BRONFMAN. I honestly don’t know the answer to that, Congressman. I’d have to come back to you on that.

[The information referred to follows:]

EDGAR BRONFMAN, JR., ANSWER TO REPRESENTATIVE CHRIS CANNON

I am advised that when the Universal Music Group licenses its catalog to an online service, including companies such as MP3.com, MTV/RadioSonicnet, ClickRadio,

Musicbank, Ecast, Touchtunes, and eGreetings, we license the entire catalog. That

includes all of our collection of Motown hits, the Elton John and Jimmy Buffett

songs within our catalog, everything within our extraordinary jazz catalog and the

classics from Deutsche Grammophone. Everything from ABBA and Andre Boccelli

to country artists like Shania Twain and George Strait.

Universal Music Group has also provided catalog licenses for audio clips to companies such as MusicMusicMusic, Discover Music and Loudeye for sampling services.

57

Both Discover Music and Loudeye were given the ability to sub license the catalog

of Universal audio clips in order to provide Business to Business sampling services

to online retailers such as Amazon, CDNow, barnesandnobles.com, and many others.

Discover Music was recently acquired by Loudeye and the combined company currently offers Universal content to dozens of its customers as a part of its music services.

Additionally, we have licensed only portions of our catalog to other sites, at the

request of the site. For example, many sites are genre-specific and only need a subsection of the catalog such as Universal’s comedy or jazz albums. As I stated earlier,

we want to make our music broadly and widely available on a global basis to as

many customers as possible, with any online service that we can demonstrate a secure system and the ability to properly compensate the copyright holders and creators of the music.

Mr. CANNON. It would be fine if you could make that available

to the Committee, I’d appreciate that. The reason I asked the question is that a lot of online music companies have talked about this

issue, and they all say the same thing: The labels refuse to give

us enough content.

How do you respond to their allegation that the labels are dragging their feet so that Duet and MusicNet can establish themselves?

Mr. BRONFMAN. Well, first of all, I would say that I think that— as I said, we are Day One of the Internet. I think that the Committee ought to see how this plays out and see—and see whether

or not it’s—the fear that you suggest that somehow MusicNet and

Duet are going to control the market actually appears to be the

case, in which case the Committee can react. I don’t think that is

going to be the case.

In fact, what I think most of these companies who complain lack

is the—are the kinds of systems that are necessary in order for us

to grant a complete license. The kinds of security systems and the

technology that’s related to them and to the proper compensation

is a very complex thing. There are many companies that will sit

and tell you they have them. I’m here to tell you they don’t, and

until they—. Mr. CANNON. May I just ask another question? My understanding is that Duet has yet to secure the necessary licenses from

the music publishers. We’ve heard a little bit about that already,

and the Vivendi and RIAA support applying the compulsory mechanical license to online music to circumvent this problem.

Doesn’t it seem rather hypocritical that you’re seeking to use a

compulsory license on the one hand, but you vigorously object to

any mention of compulsory licenses for companies like Napster,

Listen.com, MP3—or MP3 to market your products?

Mr. BRONFMAN. Congressman Cannon, it is difficult to respond

to a question like that, which has as its very premise such a fundamental inaccuracy. If I can—if I can be straightforward with you

to say that the sound recording industry is an industry which has

been based for its entire history on the—its ability to exclusively

contract with artists for their songs; whereas, the music publishing

industry has been an industry which has been based for its entire

life and time on a compulsory license, almost 100 years. And in

fact, at the behest of the music publishers, that compulsory license

was extended in 1995 to include digital distribution. It’s therefore

impossible to try and consider the two industries as the same kind

of industry.

58

Mr. CANNON. I don’t think that that was actually the presumption. They’re not the same. We understand, I think most on the

Committee, the historical differences.

Mr. BRONFMAN. But we have not sought, sir, a compulsory license for sound recordings, nor have we sought to extend the compulsory license for musical publishing. What we have sought to do

is have the Copyright Office clarify the rate at which we should be

paying the music publishers, because we believe that the mechanical licenses that we have, the Congress has granted us the license

to bring those songs online.

Mr. CANNON. Thank you very much, Mr. Bronfman. I appreciate

that.

Mr. Glaser, would you support a provision similar to that in the

Digital Performance Right and Sound Recordings Act that would

require recording companies to provide licenses to competitors on

the same terms and conditions as they do to affiliated companies?

And just before you answer that, let me raise one other point, because I think my time will disappear with this questioning round.

Mr. Glaser, Real Web sites include links to quite a large number

of pornography sites, including something called BarelyLegal.com

and another called TeenFilth. Mr. Glaser, I am more than a little

disappointed that you’re making money off a site called TeenFilth.

But the question is, do you plan on any joint activities between

MusicNet and your pornography copromotion deals? So those are

the two questions. Thank you.

Mr. GLASER. Well, the first question, the answer is yes in terms

of compulsory licensing. From the standpoint of—our view is that

major music companies should certainly provide the same kinds of

licenses that they did to MusicNet. And MusicNet is a company

that RealNetworks is one shareholder and music companies are

shareholders in, but it’s a new-banded company, and four of the

seven board seats are held by other than music companies. So

whether it passes your test as being an arm’s-length transaction or

not, those were the ways we negotiated those.

And the second part of your question, I must honestly say that

I don’t know what you’re referring to at all, so I would need to get

back to you on that.

Mr. CANNON. Pardon me. You’re not aware of the pornography

sites that you can get to from Real.com?

Mr. GLASER. I’m certainly aware that the nature of the Internet

is that you can link from anything to anything, but—.

Mr. CANNON. No. These are on Real.com.

Mr. GLASER. I do not believe that’s correct, but I will certainly

be happy to—.

Mr. CANNON. I will tell you the path you go—well, I don’t know

if I want to tell the world the path. But you just click on your sites,

and it is part of your—I would appreciate it if you would look at

that and let us know. But I take it your intent would not—would

be—if you’re distancing yourself from those sites, that you would

try and—. Mr. GLASER. That’s correct.

Mr. CANNON [continuing]. Keep yourself separate from kids who

are looking for music—. Mr. GLASER. Absolutely correct.

59

Mr. CANNON. Thank you.

Mr. COBLE. I thank the gentleman. Folks, I think that this is important enough that we probably will have a second round of questions.

The Chair recognizes the gentleman from Virginia for 5 minutes.

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

to compliment all of these witnesses on their superb testimony here

this afternoon. You have enlightened us, and we appreciate the

time you’ve spent in preparing and presenting your statements

today.

Mr. Bronfman, I would like to return with you for a moment to

the business plan that Duet is preparing and get your sense of

what level of service is going to be made available under Duet, to

Duet’s customers. I personally think that what the Internet-using

public wants is the opportunity to download, on a permanent basis,

to the hard drive a single track and to pay a fee, which is reasonable, for that privilege.

And my simple question to you is: Will Duet offer that service,

the ability to download on a permanent basis a single track from

your site in exchange for the payment of a fee?

Mr. BRONFMAN. Congressman, I think the—your suppositions of

what the consumer wants and our suppositions of what the consumer wants are interesting. They are—they are—no doubt probably yours may be more accurate even than ours, but it’s only the

marketplace that will ultimately tell us what consumers want,

what they’re willing to pay for, and therefore what we need to

offer. Initially I believe the MusicNet service and the Duet service

will be quite similar, in that they will be offering streams and what

we’re calling tether downloads. I’m not sure—. Mr. BOUCHER. Would you like to define what a tether download

is?

Mr. BRONFMAN. Well, it simply—it simply—it simply means that

the consumer does not have the ability to take that song off of the

computer to portable devices at this time. But I think—. Mr. BOUCHER. Will the music reside on the computer permanently?

Mr. BRONFMAN. Well, it depends on the conditions on the

download. It’s very—. Mr. BOUCHER. Well, the word ‘‘tether’’ just seems to suggest that

you’re going to pull it back at some point or that it’s going to evaporate and that it will not be a permanent download.

Well, I know the technology exists that allows the download to

be temporary in nature, and my simple question is: Do you intend

for the customer to have access to a permanent download, or will

it be in fact a download of a temporary variety?

Mr. BRONFMAN. Well, again, I think that is in the nature of the

consumer offer. If the consumer is buying a 30-day subscription

and paying for a 30-day subscription, the price of that subscription

will limit their ownership for 30 days. There may be—. Mr. BOUCHER. But there will be a permanent version.

Mr. BRONFMAN. There no doubt would be a permanent version if

there is a call for a permanent version.

Mr. BOUCHER. I think I have your answer, which is you don’t

have an immediate plan to offer the permanent version.

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Let me suggest to you that not only would the permanent version

dramatically expand the market for your music, I think you would

find your sales soaring if you harness the power of the Internet and

make that available. But in my humble opinion, that is your best

defense to Napster-like peer-to-peer file sharing services.

The new version of file sharing services, unlike Napster, have no

central servers. There is no company to sue. The industry has been

effective in addressing its concern with regard to Napster by going

to court, and you had the convenient mechanism of a company to

sue. That will not be the case with the next generation of peer-topeer file sharing services.

And let me just suggest to you in the little time I have here, that

I think your best defense to that new generation of peer-to-peer

technology is to make available over your site, for a reasonable fee,

for a permanent download individual tracks.

I’m going to pass on and give Mr. Richards an opportunity to

comment on what I know is an important matter to him, and that

is the need to have a mechanism to license incidental copies in a

way that can permit your business model to come into existence

and start serving customers in a very broad way.

You’ve heard Mr. Stoller talk about the fact that the license debate is not about the ability to get a license, but about how much

the license costs. And I think you have an example of where the

debate really is about the ability to get the license. And would you

care to emphasize to this Committee the factual situation that

gives rise to that concern and suggest why the Copyright Office

needs to put in place a temporary safe harbor arrangement that

enables the assured licensing of the mechanical rights that you

need to get?

Mr. RICHARDS. Yes. Thank you, Congressman. It is absolute and

without question that nobody at this table will any time soon have

any of their locker services up and running and available to consumers, if the publishing question—and what do I mean by ‘‘the

publishing question?’’ 115 exists today. We’re not asking for a new

law. It’s the difficulty in accessing that law that, on the one hand

and on the other hand, in trying to negotiate with publishers—and

I’m certainly a free market person. We’ve made probably more

deals with more record companies and more publishers than anybody, but the fact of the matter is the Harry Fox Agency only represents 70 percent of all of the publishers in America. I think they

claim about 25- or 30,000 publishers.

That leaves 6-, 7-, 8,000 publishers to find, to negotiate with, to

come to resolution with. And I—I think this is virtually impossible.

And I think since you need both a master recording and a publishing license today, that if we do not create a safe harbor under

115, you will not see locker services for consumers.

Mr. BOUCHER. So your point is that it’s virtually impossible to

identify the owners of the various rights so as to have a discussion

with them about the terms under which they would license those

rights to you?

Mr. RICHARDS. That’s correct. I don’t even know where to go

about it; 6-, 7,000 folks to go find them, where do they live, bring

them in my office, try and negotiate with them. I don’t—I don’t

even know how to do it.

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Mr. BOUCHER. And would you describe just briefly the kind of

temporary safe harbor arrangement that you would like for the

Copyright Office to put into effect that would enable you to get

those license rights cleared?

Mr. COBLE. Mr. Richards, if you’ll suspend. The gentleman’s time

has expired. Can you do this quickly? If not, we’ll take it to the second round. Can you do this quickly?

Mr. RICHARDS. I’ll do it in a very—we’ll take a lesson from the

cable industry and satellite industry. We’ll create a safe harbor.

Those of us that can track—as Mr. Bronfman talked about, those

of us who can track the plays will track them, keep them in order,

wait for the claimants to come as the rates and different things are

set in 115, and we’ll get this show on the road with regard to digital music available to consumers.

Mr. BOUCHER. Thank you, Mr. Richards. Thank you, Mr. Chairman.

Mr. COBLE. The gentleman’s time has expired. The gentleman

from Alabama is recognized for 5 minutes.

Mr. BACHUS. Mr. Richards, you talked about the need to update

section 115. Is that right?

Mr. RICHARDS. I talked—I talked about the need to have 115

function as the lawmakers intended it to function.

Mr. BACHUS. Which would require update—. Mr. RICHARDS. It’s part of a rulemaking thing. The Copyright Office has a—really can’t take all of the—all of the volume that a digital company is required—or needs to create an online locker service. And the rules that are necessary for us to give the data that

the Copyright Office needs for us to apply for a license to get a

publisher to, you know, allow for 115 to work for us require us to

know who that publisher is, require us to put down the address of

that publisher, require us to put down the songs of that publisher.

There’s no possible way that—without dealing with one body like

a Harry Fox, and that is even difficult at times—but there’s no possible way that we can go out to 6- or 7- or 8,000 other unknown

publishers to create an online system, and that’s why a safe harbor

under 115—.

Mr. BACHUS. Well, that would—. Mr. RICHARDS [continuing]. Would work.

Mr. BACHUS [continuing]. Require a change of the law, wouldn’t

it?

Mr. RICHARDS. My understanding is that the law exists under

115, that it is compulsory. A rate has not been set, and a safe harbor under that—I’m not sure if that changes the law or if it facilitates the actual intent of the law.

Mr. BOUCHER. Would the gentleman yield to me for just a moment on that point, for clarity, because it is so important? What

is being proposed is that the Copyright Office, on its own authority,

create this safe harbor. So it would not require a change in the

statutory law.

Mr. RICHARDS. The Copyright Office also—oh, excuse me.

Mr. BACHUS. You all were held to have violated a copyright

law—.

Mr. RICHARDS. Yes, we were.

Mr. BACHUS [continuing]. Because of section 115.

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Mr. RICHARDS. Because of section 115?

Mr. BACHUS. Is that—is that the section you violated?

Mr. RICHARDS. I do not think so, no.

Mr. BACHUS. What—it was a clear and indefensible copyright infringement. What was that about?

Mr. RICHARDS. What were we sued for?

Mr. BACHUS. You were actually found—you were adjudicated to

have violated the copyright—.

Mr. RICHARDS. I think that’s true, and I think the—well, the

laws are out of date. They weren’t ready to handle the Internet.

We’ve paid our licenses—.

Mr. BACHUS. Well now, didn’t other services follow the law? Was

it not your business model that violated the law? Could you not—

.

Mr. RICHARDS. I think my business model violated the law under

the fair use issue. We believe that if you purchased a CD and we

could prove that you had it in your possession, that we would allow

you to play it back to yourself, and that was ruled by a judge not

to be the case.

Mr. BACHUS. Had you cleared the licensing rights before launching your service, you wouldn’t have been in violation.

Mr. RICHARDS. That’s true.

Mr. BACHUS. Okay. So what—you’re basically—your business

model and the way you’re functioning actually anticipated to

change the law to be legal.

Mr. RICHARDS. Are we going back to the lawsuits, or are we talking about where we are today after we’ve licensed from every major

record company and 25,000 publishers? Would you like to discuss

the lawsuit?

Mr. BACHUS. Well, you have gotten—you’ve gotten 200 license—

you’ve actually cleared the rights to over 200,000 licensing requests

today, right?

Mr. RICHARDS. Yeah. We—in 6 months we’ve cleared, through

just the Harry Fox Agency, 200,000 of the 900,000 we request.

Mr. BACHUS. But now they say the remaining requests are

flawed. What—how do you respond to that?

Mr. RICHARDS. I’m sorry, I didn’t hear you.

Mr. BACHUS. They say that the other requests are flawed. How

do you respond to that?

Mr. RICHARDS. That the other requests that we make with—you

know, I’m not—I’m not sure I have a squabble with the Harry Fox

Agency that’s a matter here. I think Harry Fox Agency and I will

work things out. We’ve paid $30 million. I think it’s clear that it’s

in our best interest to work that out as quickly as possible—.

Mr. BACHUS. Okay.

Mr. RICHARDS [continuing]. And so we’re doing everything we

can—.

Mr. BACHUS. So you think that is—.

Mr. RICHARDS. I think it’s the other 30 percent that causes everybody here a whole bunch of problem.

Mr. BACHUS. Okay. All right.

Mr. Stoller, what’s the status of your negotiations with the recording industry concerning, you know, just Internet licensing?

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Mr. STOLLER. We’re very happy to license the Internet music

companies and the—if they turn out to be the record companies

themselves delivering music over the Internet. We’re very happy to

license them. We have issued many licenses already to many Internet companies. The fact that the music publishers must—the

music—excuse me, that the record companies must first grant a license either to themselves as an Internet company or to an independent Internet company before we can license them may have

held up the process.

Mr. BACHUS. So that’s what you think maybe has held up the

agreement in most cases?

Mr. STOLLER. That is my understanding of what has occurred.

Mr. BACHUS. Do you think the marketplace can work this out, or

do you believe—. Mr. STOLLER. Yes. I think it should work it out. I would like to

point out that the only one under a compulsory license are the

songwriters and music publishers. We are limited in how much we

can request under the 1995 Copyright Act, and I believe that 2

years ago there was an agreement between the RIAA, the National

Music Publishers’ Association and the Internet that 7-1/2 cents was

an agreed-to rate for downloading.

It’s my feeling that the record companies, who are now proposing

to be the Internet companies, feel that that might be too high. We

cannot ask for more. We are constrained in that way. They are not

constrained to any compulsory fee or license for their products; only

we are. But we’re willing to negotiate.

Mr. BACHUS. Thank you.

Mr. COBLE. The gentleman’s time—. Mr. BACHUS. My time has expired. In fairness, maybe someone

else can ask, let the other side respond.

Mr. COBLE. The gentleman’s time has expired. We will have a

second round, I say, Mr. Bachus.

The gentleman from Florida, Mr. Wexler.

Mr. WEXLER. Thank you, Mr. Chairman. If I could follow Mr.

Bachus’ comments to Mr. Richards, I’m trying to understand the

public policy urgency for Congress to step into what I think is an

admittedly infancy scenario in term of technology and impose its

will on a marketplace that hasn’t even yet really had an opportunity to develop or operate.

If we take Mr. Bronfman at his word, which to my knowledge is

no reason to think otherwise—and I don’t know that he represents

the entire industry, maybe he just represents his particular company. But he says here today that in response to Mr. Berman’s

question, that he intends—his company intends to license as broadly as possible, no monopolistic approach. I think, quite candidly, he

says if that turns out not to be the case—if I understood Mr.

Bronfman’s testimony—well, then do something then, Congress.

But if we take Mr. Bronfman at his word—and let’s assume that

is characteristic of the industry, and if licensing occurs as broadly

as possible as the technology becomes available, then what public

policy imperative is there for Congress, before the marketplace

even gets an opportunity to test itself, to mandate it? And when

I say mandate it, it’s mandating a license; mandating, in effect, a

price or wage control.

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Mr. RICHARDS. I think that it’s—has to be extraordinary when

that time occurs. I think Mr. Bronfman and I think all the other

major music companies and independents that are visible have

been quite willing to license their sound recordings. We’ve licensed

them. I think the society—the right societies and the collection societies, like Harry Fox, they were quite willing to license the publishing, so that I could match up the publishing with the sound recordings, so that I could then allow consumers to listen to their

own albums.

What happens is we fall short by thousands and thousands and

thousands of folks that we need to contact or this marketplace can’t

occur. We’re not saying we don’t want to pay them. We’ve proven

we want to pay them and license everything. We’re saying we can’t

find them, and neither can anybody at this table find them.

So if you want to listen to an album and make as much music

available as possible on the Internet so that other kinds of technologies don’t bypass rights-holders and bypass payment systems,

then we have to move with great speed and care to ensure that all

of the publishers are covered, protected through section 115, because I don’t know of anybody here that is going to get up any kind

of a digital locker service if they’ve got to go locate, negotiate, and

find 6,000 people, 7,000 publishers that are not represented by the

Harry Fox Agency.

Mr. WEXLER. But with all due respect—and I understand how

important music is both in terms of a marketable item and to individual people, but we’re not talking about medicine here for a deadly disease. We’re not talking about electricity. We’re not talking

about gasoline. We’re talking about music. And knowing as little as

I do, I would imagine that the music most people most often listen

to is in fact represented by people like the company that Mr.

Bronfman is a part of, or The Harry Fox Agency, and so forth. So

these publishers that you’re talking about that can’t be found, by

and large are probably—you know, you’re asking us to do the extraordinary. Congress should step into a private sector, regulate

the Internet now, tell them how to do it, so that publishers that

can’t be found, that arguably can’t be found, we will now impose

a public policy regulation. That’s what you’re telling us we should

do. Right?

Mr. RICHARDS. No. I’m telling you to make the existing law you

wrote work. It exists. It’s here. All I want it to do is work so that

we can access it.

Mr. WEXLER. But if I understand your comments, it does work,

or it is working as to all the people represented by The Harry Fox

Agency. It will work as to everything related to Universal. It will

work as to every significant recording company, record company,

that in fact licenses as broadly as possible. It will work, right, the

current law?

Mr. RICHARDS. No, 115 doesn’t work; 115 is a law that was written by Congress that I’d like to access that I cannot access because

of—they handled what, 100, 150 requests last year? I think that’s

about the number. And I want them to handle 1 million requests.

They don’t have computers. I can’t give it to them on disk. I have

to fill out pieces of paper. You take a look at—it just doesn’t work.

I just want the law, that the lawmakers that we respect wrote, to

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function as intended. And because of the pure mass of the requests

that occur on the Internet, it can’t function that way unless you

guys step in and help us out.

Mr. WEXLER. My time is up, Mr. Chairman. Thank you very

much.

Mr. COBLE. I recognize the gentleman from Florida, Mr. Scarborough, for 5 minutes.

Mr. SCARBOROUGH. Thank you, Mr. Chairman. And as I—I must

admit I’m ashamed to be a user of Napster. I—I’m trying to get

past that awful habit. But I do want to say, Mr. Bronfman, that

I was able to see Duet being used, I guess it was about a month

or so ago,and I am very, very impressed by the possibilities of Duet

and believe that that really, even more than court challenges and

all the other legal maneuvering that’s going on—what you’re doing

with Duet and what other record companies are starting to do, I

think it moves us down the road in a way where we resolve this— this dilemma in the marketplace, instead of in courtrooms or instead of in congressional hearings. So I just wanted to tell you for

the record, I was impressed with that.

And Mr. Stoller, it’s certainly an honor to be here in front of you,

a man that—I’m going to say some nice things about you before I

ask you some tough questions. You really did—you know, I don’t

know if everybody understands just how your songs not only

changed popular music, but they helped change pop culture. And

Mr. Lovett talked about how—as far as songs changing the American economy and have influence across the world.

I was touched by the fact during the China spy plane dispute

that what actually brought the American hostages and the Chinese

prisoners together was the fact that at night the American hostages sang Hotel California, and the Chinese soldiers actually came

to them, whispering, asking them for the lyrics to Hotel California.

So I guess Don Henley is an ambassador to China now, in a sense.

So I don’t think you—I don’t think you can understate the importance of music and of songwriting. As a songwriter myself—certainly Elvis has never covered any of my songs, Mr. Stoller, but as

a songwriter myself, I understand that that property is more important to me, whether anybody else ever hears it or not, than any

other property I’ll ever hear or any other property I’ll ever purchase. It’s a very personal thing.

However—and this is the ‘‘however′′—I don’t understand one

thing. Okay. Let’s say, for instance, I buy an Elvis anthology in

Pensacola, Florida, the area I represent, and instead of having to

cart it back and forth from Pensacola to Washington, Pensacola to

Washington every week, what’s wrong with me accessing that on

Duet or MP3 if I’ve already purchased an Elvis anthology and

you’re already getting—and, again, this isn’t a leading question. I

want you to explain it to me. I thought when I purchased that, you

would have gotten your royalties for Heartbreak Hotel and Hound

Dog and any other songs that—.

Mr. STOLLER. I didn’t write Heartbreak Hotel. I’m sorry to interrupt you.

Mr. SCARBOROUGH. Oh, I’m sorry. I thought they said that. Was

that Hoyt Axton? Or whoever—whoever it was—. Mr. STOLLER. Mae Axton.

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Mr. SCARBOROUGH. Whoever. Whatever Elvis songs you wrote,

didn’t you already get your royalties when I purchased that? So instead of me having to put that in my suitcase, why couldn’t I just

download it in a streaming format. I guess ‘‘downloading’’ is the

wrong technical term. But let’s say I go to Duet or MP3. Haven’t

you already gotten your royalties from me? And how is that different for me also listening to your Elvis songs, or Big Bopper

songs, or whatever songs, on the radio, which is already covered

under, I guess, 115?

Mr. STOLLER. Well, first of all, I have to explain to you that I’m

not a techie in any way, and I don’t even pretend to understand

how streaming and downloads, et cetera, et cetera, work. But I

know that they are being done, and I know that my songs and the

songs of Lyle Lovett and every other songwriter have been

downloaded in the past few years, numerous times. When I say

‘‘numerous,’’ I mean maybe a billion times altogether, with no one

getting paid. And when these were downloaded in most cases, or

in many cases—and I can’t cite to you how many out of the billion

or so downloads that took place, how many of them replaced the

sale of a CD, other—what you’re talking about is buying a CD and

storing it in some method, which I don’t understand.

So I can’t really answer that question, because it’s my understanding that most downloads are—rather than being after the

purchase of a record, are in place of the purchase of a record, which

deprives us of the royalty. In your particular case, you bought it.

I don’t know what happens to it after that. I don’t personally understand it.

Mr. SCARBOROUGH. But isn’t that your agreement with MP3, that

if people have already purchased it and want to download—or want

to get it from these personal lockers, which I guess—and Mr.

Bronfman, it’s also a streaming—a streaming format with Duet.

Isn’t that correct?

Mr. BRONFMAN. It will be both streaming and downloading with

Duet.

Mr. SCARBOROUGH. Okay.

Mr. LOVETT. May I add to that—. Mr. SCARBOROUGH. Yes, sir.

Mr. LOVETT [continuing]. To what Mr. Stoller was saying? The

purchase—it is true, in fact. You purchased the CD. You own the

CD. But purchasing the CD—by purchasing the CD, it doesn’t

mean you own the music. You own the CD and certainly can play

that anywhere you like. Involving a service that allows you to

upload and then to listen through streaming or downloading, you’re

involving a service that is a business which uses our music to function, to operate. All we’re saying—I think it’s a wonderful use of

technology, convenient for the consumer, it’s a wonderful thing. We

are just asking to be compensated for the use—once again, the separate use of our music in that case.

Mr. SCARBOROUGH. Beyond the sound recording itself, right? Beyond the—you’re saying the CD is one thing that I purchase—. Mr. LOVETT. Yes.

Mr. SCARBOROUGH [continuing]. And you would say that my use

of that music is limited to this—that disk. Correct?

Mr. LOVETT. Your ownership—.

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Mr. SCARBOROUGH. Ownership. Right.

Mr. LOVETT [continuing]. Is limited to that disk, yes.

Mr. COBLE. The gentleman’s time has expired. We’ll have a second round momentarily. Mr. Schiff, the gentleman from California,

does not sit as a Member of the Subcommittee, but he’s asked permission to ask one question, and I will grant that request.

Mr. SCHIFF. Mr. Chairman, thank you very much for that courtesy.

If I could direct this question to Mr. Lovett and Mr. Bronfman.

I’ve heard from the various witnesses today a variety of explanations offered for the amount of time it’s taken to bring music online in a legal way, and I wonder if you could comment on what

you think the greatest obstacles are.

I’ve heard testimony that technology doesn’t sufficiently exist to

protect the rights-holder, that there’s legal uncertainty over what

the licensing rights or rates ought to be, that there’s a simple unwillingness on behalf of some of the parties to adequately compensate others, that there’s an antiquated system or bundle of

rights that, in light of new technology, is simply unworkable.

And I wonder if you could comment on that whole range of issues

that had been raised: what you think the most pointed obstacles

are, and what you think this body ought to do, if anything, to deal

with that.

Mr. BRONFMAN. Okay, let me give a short—since, Lyle, you look

so eager to answer that question. Congressman, I think the answer

can be divided into what has been obstacles and what obstacles remain. I think the greatest obstacles frankly have been technological

in nature. It is an extraordinary task for a system to understand

which rights are held by whom on each and every song. To track

the number of times that song has been streamed or downloaded

and to compensate those rights holders each and every time and

also know what rights the person who has either downloaded or

streamed those songs has purchased in connection with their purchase, and to do that millions or tens of millions of times a day.

That technological challenge is close to being resolved. That has

been a very large impediment to a secure—to a secure system.

The impediment that remains quite frankly I hope we can resolve amongst ourselves, and that is that we need the music publishers to license in the way that sound recording companies have

to allow music to be—to be used in the way the consumers want.

It’s something that ought to be worked out amongst the parties.

We do believe that rule 115, however, does cover these issues. It

does require clarification and we have asked the Copyright Office

to clarify that. With that clarification, we feel that we can get off

and running, and we have indicated, frankly, that we would prefer

to get the service up and running and track the uses that are used

and whatever rate is applied, we will pay retroactively so that everybody is properly compensated.

I happen to be a songwriter as well, one of the 117,000 that Lyle

is representing here today as a proud member of ASCAP. So I am

both a songwriter myself and I am proud to say that I have received some nice checks from ASCAP. I represent a very large

music publishing company, Universal Music Publishing, and obviVerDate 11-MAY-2000 12:53 Sep 28, 2001 Jkt 000000 PO 00000 Frm 00071 Fmt 6633 Sfmt 6601 G:\WORK\COURTS\051701\72613.000 HJUD2 PsN: HJUD2
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ously the largest recording company in the world at Universal

Music.

These are complex issues; however, there is a way forward. We

are not advocating congressional intervention. We are asking those

for the Copyright Office, if we were not able to agree amongst ourselves, to at least apply a rate so that consumers can get what they

receive and everyone can be properly compensated. That is the

largest hurdle, I think, that remains to a vibrant digital music

marketplace.

Mr. LOVETT. As Mr. Bronfman said, the questions about the

Internet speak to the newness of the Internet. All of this, to my

way of thinking, listening to everyone speak, everyone has the

same goal here. We—we are enthusiastic and overwhelmingly excited about how we can all enjoy music by using the Internet. All

of us are seeking simply fair compensation for our—our part. It

seems to me that these kinds of discussions, how to decide how to

handle how people are paid, would be a natural part of any new

application, which the Internet is. The Internet is a new application.

In discussions that I see on television and that I read in the

paper, I sometimes get the feeling that the Internet is viewed as

a whole new world. The Internet to my way of thinking is an extension. The digital world is an extension of the analog world. Business principles that are now working in the analog world need simply be applied, adjusted perhaps, applied to this new digital world.

For example, a transmission, a radio broadcast being a transmission, an Internet transmission is a transmission and should be

treated as a performance. A performance royalty would apply to

that. A download, to my way of thinking, seems like a record sale.

Whether it is one track as in selling a single or whether it is an

entire album or a portion of an album, a download seems to me to

be a record sale.

These issues seem—sound more complicated than they seem to

me. Resolving these issues by the marketplace, I think, is quite

possible. The Internet—the Internet will serve us all. The process

by which we eventually agree on how things will work is exactly

what we are going through.

Mr. COBLE. The gentleman’s time has expired.

Mr. SCHIFF. Thank you, Mr. Chairman.

Mr. COBLE. Folks, we’re going to go quickly into a second round

and I will ask the Members to adhere to the 5-minute rule because

I don’t want to keep you here all night. I want to put two questions

to Mr. Lovett.

Mr. Lovett, some would ask why should an Internet service provider be required to secure licenses from so many different sources

just to play music? Should not one license suffice, they would ask?

What would you say in response to that?

Mr. LOVETT. Well, Mr. Chairman, a song that you would hear on

the Internet or that you would play, has, in fact, different elements

of ownership. There are different entities that own that song. First,

there’s the songwriter who has ownership. Second, there’s the

record company who has produced that sound recording, paid for

that sound recording and is hoping to make money from that sound

recording. And there is the publisher who has ownership in that

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song. And then there’s also the artist, the recording artist, who has

ownership.

So to be able to address the payment, and just to one source

there, would be analogous to a business owner having the expectation of not having to write separate checks, for example, to his

landlord, to his electric company, to his insurance company to be

able to cover his costs that way. There are different owners who

have to be paid separately.

Mr. COBLE. Let me extend that question, Mr. Lovett, in a little

more detail. Let me give you a hypothetical. Most folks don’t like

hypotheticals, but let’s assume that you write a song and record it

for your record label. Is it your belief that you are entitled to royalties for the incidental copies, A; B, the performance of your musical

composition; and C, the performer percentage from the sound recording performance all from a single digital transmission of that

song?

Mr. LOVETT. Once again, Mr. Chairman, as a songwriter I would

be entitled to a songwriting performance royalty from that. If that

transmission were downloaded, I would be entitled to my part of

that record sale.

Mr. COBLE. You know, I’ve had people in my office this week

from Nashville, and this is a cruel joke, but he told me, and I’ll

share it with you all. He said the joke going around Nashville is

how do you get a Nashville songwriter off your front porch? You

pay for the pizza. Now that’s just a sordid laughing ‘‘ha ha,’’ but

I guess it is true. Many songwriters are having second and third

jobs to make a go waiting for the big hit.

Mr. STOLLER. I would just like to mention something that came

to mind in terms of the discussion about paying for a mechanical

royalty and a performance royalty, which in the past was always

delivered separately, because it was a tangible record that was

sold, and it was the sound broadcast over radio or television. And

people seem to be objecting to these two royalties. Well, on the

Internet they can be delivered simultaneously.

I went to the theater the other night in New York. I saw a great

show called The Producers, and it was wonderful. They did not give

me the CD, but they have advertised in the Playbill that you can

buy the cast album in stores or over the Internet.

Now, when you go to a movie, you don’t get a free DVD of the

film. You see a performance of the film. Then if you want to see

it again in your home, you have to go buy it.

Mr. COBLE. Yeah. Folks, let me make it clear, when I told my

joke, I’m by no means laughing at pizza dealers because there is

nothing wrong with dealing pizzas. But I tell you that to let it be

known the gentleman from Nashville wanted to make it clear that

everyone thinks he or she is a songwriter so they are living in opulence and oftentimes they are not.

Mr. Berman, the gentleman from California.

Mr. BERMAN. It’s funny, Mr. Stoller, you would mention The Producers, because my guess is at least in talking with them, MP3 and

RealNetworks think that if they end up having to pay for the

sound recording and the performance and the server copy and the

router copies and the cache copies and the proxy server copy and

70

the local machine copy, that they are going to have to buy 1,000

percent of the recording.

Mr. STOLLER. I don’t think so.

Mr. BERMAN. But it leads to my broader question. Some say it’s

about process. Some say it’s about money. And there is that joke

about when they say it’s not about money, it’s about money.

Let’s take a world where by and large the publishers association

and the publishers that drive that association are happy with the

compensation. I mean, they and the songwriters think this is a fair

rate of return for this new way of delivering music, which recognizes, you know, all the different interests of all, and allows a commercially viable business to survive and deliver music this new

way and enhance the consumers’ ability to get music.

Tell us how you would envision, when we’ve reached that point,

that the process could work to clear the rights and let it all go forward without anybody being worried about a lawsuit. Am I making

myself clear? If you want your counsel or anybody else to get into

that answer, I would be happy because—in other words, at the

point where—.

Mr. STOLLER. I do have—let me begin—.

Mr. BERMAN. How would the process problem get solved once

money was not the issue?

Mr. STOLLER. Well, I don’t know what the problem would be.

Mr. BERMAN. Well, they talk about thousands of publishers and

Harry Fox Agency, they talk about written forms for each streaming—maybe not each streaming, but all the songs, not being able

to electronically file. I mean they’ve raised a lot of issues about

process.

Mr. STOLLER. Congressman Berman, I don’t think I can answer

all of those questions instantly.

Mr. BERMAN. Yeah, but you guys have thought somewhere about

when—when the money’s right, here’s how it could work.

Mr. STOLLER. Yeah, and in terms of licensing, for example, when

an Internet music company licenses a sound recording, that

sound—the owner of that sound recording must have a license from

somebody and will know who that somebody is who owns that composition and they can provide that information to the Internet

music company.

So, I don’t think it’s really that difficult to locate the owners of

these rights, because the sound recording is owned by a company

that has a mechanical license for that work in the first place.

As far as paying all the various parties—.

Mr. BERMAN. In other words, just to make sure I understand, so

MP3 or RealNetworks will go to the sound—the record company

that got the license to make the sound recording originally—.

Mr. STOLLER. In the first place.

Mr. BERMAN [continuing]. In the first place, and get the name,

and what?

Mr. STOLLER. I don’t see why that should be difficult.

Mr. BERMAN. How would the money get distributed? Who is

going to distribute this money? What do they do? It’s one thing you

are making a sound recording. You have got 10 different songs. Different—.

71

Mr. STOLLER. Theoretically, the record company is licensing

themselves or a third party. And it would seem to me that if they

are licensing a third party or if they are behaving as if they, themselves, are a third party, that the Internet distributor has to pay

the various parties, including the record company.

Mr. GLASER. If I may, Congressman, my sense is that the issue

here is that it is not simply a matter of negotiating with a relatively small number of entities, as what we did with setting up

MusicNet, where we put a relationship in place with Warner’s,

AMI and Bertelsman. It is matter of the fact that a given album

might have songs from 30 different songwriters. So literally you

have to hand negotiate with each of those songwriters because

there’s not a standard framework in place.

Mr. BERMAN. Mr. Stoller, I think this is your counsel behind you?

He—. Mr. COBLE. If you will suspend, Counsel. The Chairman of the

full Committee has asked that only the panelists are allowed to

speak. So convey to your client, then he will speak.

Mr. RICHARDS. And if I may while that is going on, the songwriter is the songwriter for all of time. The publisher changes and

moves with fluidity. When the Beatles album was released by Capitol Records, there’s a substantially—there was a different publisher than from today on that.

Publishing is bought and sold. The songwriter remains constant.

Everybody doesn’t keep track of the database, all the record companies don’t keep track of the database of all of the publishing movement after they have put out their record. That publishing ownership could have transferred hundreds of times in a couple of decades, and does.

Mr. COBLE. Mr. Stoller, if you will make it quickly. Time is running out here.

Mr. STOLLER. My counsel advises me that the phono record business, the record companies have survived for many, many years

with all of these rights that have to be paid out, including their

artists, including the music publishers who then pay the writers.

And in this case, if they are licensing in bulk to a sound recording

which contains all these rights, they can easily be handled by an

Internet music provider. The record companies have been doing it

for years.

Mr. BERMAN. Mr. Chairman, just on that point, I realize my time

has expired, so—but as I understand the way it works in the record

company world, even for doing one sound recording, they end up

on the mechanical sometimes finding out after that sound recording is already out in the store exactly who the publisher is, because

there’s a statutory thing, they pay them. In other words, they

aren’t even getting all the rights personally guaranteed before they

actually issue the sound recording. In other words, there is a custom in the business that works it so that it is months afterwards.

Well, my time is expired but the real issue is how to make a reasonable process once we’ve gotten the issue of fair compensation

out of the way.

Mr. COBLE. And, Mr. Stoller, we can exchange that subsequently

all by mail if you like.

I recognize the gentleman from Utah for 5 minutes.

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Mr. CANNON. Thank you, Mr. Chairman. Let me say this has

been a remarkably enlightening panel. I apologize for the periods

I had to be away, but it has been very interesting to hear your take

on these issues and it’s helped me quite a bit so far.

Mr. Glaser, if I could direct a question to you. The MusicNet

demonstration was impressive. I was told it was impressive. I was

not here to see it, unfortunately, but it was just a demonstration.

Let me read from the New York Times: ‘‘by playing show and tell

with their nascent services in front of the congressional panel,

record company representatives are in part seeking to preempt any

congressional effort to induce them to offer ongoing catalogs more

quickly or completely than they might otherwise like.’’.

This concerns me. Can you respond to the Times’ charge that

MusicNet is merely using a delaying tactic in the form of a slide

show and not ready for prime time? And when will it be actually

up and running?

Mr. GLASER. Just in the end, we have made the first public announcement of MusicNet today as part to show how far along we

are. We started the development of MusicNet—′′we’’ being

RealNetworks—probably a year and a half ago in order to get the

technology ready. We’ve been trying to license the kinds of licenses

we have now succeeded in getting with Warner, AMI, and

Bertelsman for probably about 6 years, to be honest with you. So

it was a very protracted and at times frustrating process. And what

we were able to announce on April 2nd from a licensing standpoint

and a distribution standpoint with the major labels was a huge

break throughout and it was not just sort of a show and tell kind

of thing.

Certainly, the hearings here and the Senate hearings have been

very helpful to focus the attention of the industry on solving problems and we are grateful for those. And—but I think in terms of

when this stuff gets to the market commercially, AOL and

RealNetworks have both said they expect to have consumer products in the market in late August or early September, and I believe

quite honestly literally the only impediment to that, in addition to

fixing bugs in software which we always do very energetically, is

to make sure these publishing issues don’t get in the way. We are

very, very serious about bringing these kinds of products to the

market in the next couple of months.

Mr. CANNON. Great, thank you. And let me direct a question to

anyone on the panel who is interested in responding. It seems to

me that the true power of the medium is that individuals are able

to communicate and exchange information. That is the Internet

that we’re talking about. In the Napster case, it is MP3 files so

that people can exchange those with one another without having to

go through an aggregator of content to get the information.

This is powerful, it is revolutionary, and that is what people love

about Napster, frankly. So as interesting and compelling as your

products are, including Duet and others, MusicNet and so forth, I

think we can agree that it is not a Napster-like peer-to-peer service. I believe the public wants to see the peer-to-peer nature of

Napster preserved even if in a pay-for-play environment. As interesting as the music component of this debate is, I am most interVerDate 11-MAY-2000 12:53 Sep 28, 2001 Jkt 000000 PO 00000 Frm 00076 Fmt 6633 Sfmt 6601 G:\WORK\COURTS\051701\72613.000 HJUD2 PsN: HJUD2
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ested in ensuring that the peer-to-peer technology of Napster is

preserved. Do any of you care to comment on that?

Mr. GLASER. If I might, yes. Because our demonstration was only

2-1/2 minutes rather than 5 minutes, I did not show you the peerto-peer capabilities in the MusicNet client. There is the ability for

people to designate which of their songs they want other people to

see, and that would allow other MusicNet members to upload directly from their system as well. So we have set up MusicNet to

be a secure downloading system and streaming system and also a

peer-to-peer system. So we will have all three of those capabilities

when we launch it.

Mr. CANNON. Thank you. Anyone else care to comment? Mr.

Bronfman, you have been giving us a high level perspective on

these issues. Have you considered peer-to-peer and the importance

of that to the Internet as a whole and the American people and the

rest of the world as a whole?

Mr. BRONFMAN. Yes, and I think it is absolutely vital that we

recognize the difference between what’s possible and what is legal

and what is right. But clearly what is possible is a technology. And

even the lawsuit against Napster was never against the technology,

it was simply against the application of the technology. We think

the peer-to-peer technology is a very powerful technology that if

properly applied will be extremely beneficial to the music industry.

Improperly applied of course can have dire consequences. So yes,

I think you will see both in the MusicNet system, in the Duet system and in other systems to come a peer-to-peer aspect of the technology as well.

Mr. CANNON. Thank you, very much, Mr. Chairman. I yield back.

Mr. COBLE. Thank you. The gentleman from Alabama, 5 minutes.

Mr. BACHUS. Mr. Lovett, you are a performer and a songwriter.

Can you explain to us how the interests and concerns of the performers and songwriters differ?

Mr. LOVETT. Certainly, Mr. Bachus. There are performers who

are not songwriters. I’m very lucky that I’ve gotten to perform a

lot of the songs that I write.

Songwriters have a concern with looking after their song, have

an ownership in the song. Performers—performers, when a performer gets a song on the radio, the transmission on the radio

serves to—as a promotional aid for the performer. Now, if that performer has written the song as well, he benefits as a songwriter.

The benefit to the performer in that case is the sale of his records,

his increased popularity, increased attendance at his shows, so he

benefits in that way.

With—with regard to the Internet, this has given an opportunity

for performers to speak and my being here simply shows that performers are given the opportunity to speak, as Mr. Henley in the

last hearings asked that performers simply be given a voice in

this—in this process.

It’s—this discussion about how to apply the way monies are collected and figure out how the Internet works, it’s given performers

an opportunity to speak up and say, hey, give us a chance to say

how we fit in.

74

Mr. BACHUS. Thank you. Mr. Bronfman, can you ever foresee— and this may be without regard to music publishing rights—can

you ever see an instance or a point in time when Congress would

need to intervene to assure that consumers have the right to obtain

recordings over the Internet?

Mr. BRONFMAN. Well, again it’s difficult to respond to a hypothetical situation. Let me say I think it’s in all of our interests on

this side of the table, sir, to make sure that that day doesn’t come.

I don’t think that this is an area where Congress—where regulation and legislation ought to be required. I think the role that Congress has quite properly and I might say quite intelligently played

is to set a legal framework which has allowed us to pursue a legal

business. It’s now up to us to negotiate.

There are laws on the books such as 115 that may need clarification in order for that to move forward. But beyond the simple clarification of laws already on the books, I don’t believe further regulation or legislation is either necessary or appropriate at this time,

and I hope if we all do our jobs and focus on getting this business

in front of consumers as quickly as possible, it won’t be necessary

for some time to come.

Mr. BACHUS. There does appear to be a consensus that everybody

wants the affected parties to work together to arrange business relationships and licensing agreements that serve their varied interest and I think everyone is mildly optimistic that can be done. Is

that correct?

Mr. GLASER. Well, I’m mildly optimistic it can be done and I am

only a little bit concerned that it can be done in a time frame that

won’t delay what I think will be a very, very, very exciting set of

services to consumers. We have entered a period now where

Napster is being narrowed in terms of what it offers to make sure

that it complies with the court’s ruling. So there is a vacuum out

there and there are, you know, tens of millions of users, a high percentage who have indicated they would pay for those services. So

there is a great opportunity for us to satisfy those consumer needs

and I think even a delay—an unnecessary delay just of a couple of

months because of these issues would be unfortunate and frankly

could hurt the industry, because it might move the consumer base

much more toward these new teletype services that are not only illegal but much, much harder to track down and stop.

Mr. COBLE. The gentleman’s time has expired. The gentleman

from Virginia is recognized for 5 minutes.

Mr. GOODLATTE. Thank you, Mr. Chairman, and thank you for

holding this hearing. I apologize for not being here for much of it.

But this is an area in which I have a great deal of interest, and

I’d like to particularly ask the panel about where we go from here.

I’m encouraged to hear of some of the technological developments

and the changes in the business models that are occurring in the

music industry. I think that you are going to make your products

available to consumers in a way that still recognizes and protects

copyright but also gets them to them in a more inexpensive and usable fashion. But I know that those are not the only obstacles and

I know that Universal, Mr. Bronfman, has been sued by the music

publishers with regard to the launch of Farm Club. And while I’m

not going to ask you about that pending litigation, I would like to

75

know about what you think the Copyright Office should do to use

their authority to make it possible for services to enter the market

before all the details of payment under the compulsory license are

worked out. We are talking about an initial period of time in which

hundreds of thousands of works are going to be coming under new

licensing agreements all at the same time, and I’m wondering if

there is some way to assure that publishers and songwriters will

be paid for their works without delaying the consumers’ access to

the music while this gets worked out. And I think Mr. Bronfman

and Mr. Stoller certainly have opinions on that. Maybe other panelists do as well. Start with Mr. Bronfman.

Mr. BRONFMAN. Congressman, thank you. First of all, I would

say I can’t comment on pending litigation, but I think I would start

by remarking that Congressman Wexler quite properly said we are

talking here about music, not about medicine or gasoline or energy.

On the other hand, I can tell you that Mr. Glaser’s perspective is,

I think, very correct, which is that there is real urgency for this

industry to have a legitimate service. And in the context of the

court decisions and the resulting narrow—narrowed Napster service, there is a window of opportunity for the industry to launch legitimate services and to avoid a second or a third or a fourth

Napster from rearing its head and creating the impossibility for— . Mr. GOODLATTE. Tough to compete with free, in other words?

Mr. BRONFMAN. Very tough to compete with free. And I would

suggest that it is not only on the music industry’s behalf that this

be protected, but in the interest of the United States to protect its

intellectual property.

Therefore, I think there is some urgency here that we move forward. And essentially what we have asked the Copyright Office to

do is to essentially grant a safe harbor so that we can go forward

with these services and pay retroactively whatever the decision is,

whether it is freely negotiated between the parties or ultimately arbitrated through the Copyright Office. We will pay the songwriters,

the publishers and any other copyright holder on a retroactive

basis, but we would like not to be delayed by the sheer size and

complexity of the task ahead in terms of the licensing of the publishing rights to be prevented some getting into the marketplace

and giving consumers what they want. We think doing so would be

very short-sighted because it could ultimately harm the industry irreparably, an industry which has already suffered 18 months of a

very difficult circumstance given the Napster effect. If we were to

go through that again, I’m not sure the strength of this industry

would ever be the same again.

Mr. GOODLATTE. Thank you. Mr. Stoller?

Mr. STOLLER. Well, I think we are all hoping for the same thing.

But the element of safe harbor is, in effect, making the copyright

meaningless. Because if we cannot protect our rights under the

copyright law, then we have no protection whatsoever. We are willing to meet. We are willing to discuss. We are willing to talk.

Mr. GOODLATTE. But do you think it’s in the interest of songwriters and producers of music to delay those entities in the market that are going to generate a return for your clients, while at

the same time—.

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Mr. STOLLER. No, we’re willing to start talking—. Mr. GOODLATTE. Well, let me finish and I’ll let you finish.

Mr. STOLLER. I beg your pardon.

Mr. COBLE. The gentleman from Virginia will suspend. I will ask

you, my good friend, to do it quickly because we have been here

almost 3 hours.

Mr. GOODLATTE. I will. The issue is whether we are going to experience a loss of opportunity to generate a new business model because we wait too long and then the successor to Napster and other

such entities, that in my opinion were in violation of copyright law,

cause a further erosion of the value of copyright in our society.

Mr. STOLLER. Well, I understand what you are saying. But there

is already a compulsory rate in 115, and a compulsory rate that

was agreed to 2 years ago by all the parties here. And it is my

opinion that, with due respect, Mr. Bronfman would like to pay less

than what was agreed to 2 years ago. He would like to get it for

less. And I’m saying maybe we should come to terms. But why— why should we hold it up? Why not pay us what we are supposed

to get now and we’ll negotiate?

Mr. GOODLATTE. Mr. Chairman, if we could give Mr. Richards

the final word and I will cease and desist after that.

Mr. COBLE. If Mr. Richards could accelerate his delivery.

Mr. RICHARD. I will accelerate, sir. Thank you, Mr. Chairman.

I think it is clear that everybody, certainly the software producer, Mr. Glazer, an Internet service provider, and Mr. Bronfman,

who owns copyrights both in the publishing arena and in the master recording arena, are all saying the same thing to Congress:

Help. Please urge the Copyright Office under 115(b) to help us access this unique window of opportunity to get these services up and

robust.

And I’ll let everybody else discuss how much should be paid for

it. There is no rate in 115. But we need to get up and we need to

get up now while we have this chance. And everybody on this panel

agrees. And all we ask the Congress to do is urge the Copyright

Office to make the procedures and a safe harbor for 115.

Mr. COBLE. I thank you, Mr. Richards. I thank the gentleman

from Virginia. Folks, let me think aloud a minute prior to adjourning. I thank all of you for being here. I thank the panelists in particular. This has been a very worthwhile hearing.

It is my belief, folks, that when parties to an issue are in disagreement, the best of all worlds results when those parties can get

together—be it at the woodshed, at the dining room, or wherever— and resolve those differences, because when third parties come in

and begin to stir the broth, that may end up with a less favorable

result. I’m not telling you all what to do, but I’m at least suggesting that.

And I think Mr. Berman wanted to weigh in similarly, did you

not, Howard?

Mr. BERMAN. Yes, Mr. Chairman, just in closing I guess and

Mr.—I mean, the point has been made, but the songwriters, publishers and record companies have gotten some good judicial rulings that reaffirm our copyright laws and the right of songwriters

and, you know, the people associated with them, to be compensated

for this new way of using music. I just want all parties to come toVerDate 11-MAY-2000 12:53 Sep 28, 2001 Jkt 000000 PO 00000 Frm 00080 Fmt 6633 Sfmt 6601 G:\WORK\COURTS\051701\72613.000 HJUD2 PsN: HJUD2
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gether because I do believe you can work that process out. I don’t

know whether the law presently lets the Copyright Office do that— do what we want or not. Maybe it does. We’ll take a look at that.

But I know everything will go easier if you guys can work together in the understanding of the right of the songwriters and

publishers to get an appropriate level of compensation for this that

doesn’t destroy the business model. And then we

can—the other things will start falling into place somehow, I

really do believe.

Mr. COBLE. Now, when I suggested the woodshed, that was not

a good suggestion. Woodshed usually smacks of punishment. Do it

on the patio or the bar.

Mr. BERMAN. And, Mr. Chairman—. Mr. COBLE. Go ahead.

Mr. BERMAN. Just the last—the only thing I do fear, it would be

terrible if we—if we kill the goose that lays the golden egg because

in the end some of these things that technology can’t track, and the

courts can’t effectively find a remedy for, end up springing up in

place of what the courts have now said were illegal infringements

of copyright, and that is a concern here.

Mr. COBLE. Gentlemen, let me revisit this issue before we adjourn. Much has been said about the proceeding in the Copyright

Office regarding the questions surrounding section 115 license. I

understand that the Copyright Office has not determined if, in fact,

it has the authority to resolve these questions. And I say very

frankly to you all, I don’t know with certainty whether the Copyright Office does or not.

Now, our Subcommittee and our staffs have very good rapport

with the Copyright Office, with Marybeth Peters, the Registrar, in

particular. And we will continue to plow this field very fervently

and very diligently and hopefully come up with a good answer.

This concludes the oversight hearing on music on the Internet.

The record will remain open for 1 week. I thank you again, and the

Subcommittee stands adjourned.

[Whereupon, at 3:55 p.m., the Subcommittee was adjourned.]

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A P P E N D I X

MATERIAL SUBMITTED FOR THE HEARING RECORD

PREPARED STATEMENT OF THE HONORABLE JOHN CONYERS, JR., A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF MICHIGAN

The Internet presents one of the most profound paradoxes of the 21st Century.

In just the past year, copyright holders have gone from being the victims of largescale Internet piracy to seeking to embrace the Internet to market their works. In

essence, they are trying to take advantage of the very technology that once threatened their livelihood.

Despite this turnaround, though, music is still not widely available online, and

we are hearing that is partly because of the difficulty in getting licenses from music

publishers over the compositions that underlie each song. Those seeking licenses

claim the procedures are outdated and the law is not clear on which online music

systems require which licenses. There are even suggestions that Congress should

alter the licensing scheme into a ‘‘blanket’’ license so that users of compositions pay

royalties into a pool and the Copyright Office divvies up the money between the

publishers.

Let me state that I am one Member who would be concerned with proposals limiting the ability of songwriters and publishers to negotiate licenses for their compositions. Despite the fact that they actually create and write the songs we listen

to, songwriters and publishers receive the lowest royalties in the music industry.

For that reason, publishers should not be penalized for protecting their property

rights in the same way the music labels have done—especially when negotiating

with Internet companies over online music royalties. Besides, the market shows the

publishers have not abused their power and have licensed their works to over 30

Internet companies; this actually makes sense because the publishers only make

money when they license compositions. They have no incentive to keep music off the

Internet.

In short, I hope we can let the market work before we introduce more regulations

into an already heavily-regulated content industry. The last thing we want to do is

create further obstacles to creativity.

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

IN CONGRESS FROM THE STATE OF CALIFORNIA

Thank you for calling this hearing on online music. You have put together a fine

panel of witnesses who should give us relevant and timely testimony. I want to

thank you for expanding the panel to five witnesses in order to accommodate the

variety of voices that seek to be heard on this contentious issue.

I am excited about the myriad possibilities for online music. If there is a better

‘‘killer app’’ for the Internet than delivery, promotion, and performance of music, it

hasn’t shown itself. Think about the possibilities:

• By doing away with ‘‘shelf space’’ constraints and virtually eliminating reproduction and distribution costs, the Internet enables obscure titles from back

catalogues long out of print to be made available online alongside recent Billboard chart-toppers.

• The Internet enables music retailers to offer consumers exactly the two songs

they want at a customized price, rather than requiring consumers to purchase

a whole CD at an unattractive price to get those two songs.

• The Internet enables consumers to access their complete music library or a

‘‘celestial jukebox’’ any time and from any Internet-enabled device—whether

car stereo, PC, Palm Pilot, or cell phone.

• The Internet enables consumers to sample a nearly endless supply of music

from the comfort of their own home and in a variety of formats—whether onetime plays, 45 second sound bites, or degraded quality listens—before making

a purchase decision.

• The Internet enables millions of audio broadcasts to occur simultaneously,

each accessible to listeners around the globe, and each tailored for lovers of

a particular genre or sub-genre.

• The Internet enables even the smallest artist or independent record label to

sell and communicate directly to music consumers, and enables consumers

who don’t know a song’s web address, label, title, or even artist to easily find

the music through search engines, browsers, and other information location

tools.

• The Internet enables the near costless reproduction and distribution of music,

and so should bring down the cost of music when made available online.

The music possibilities enabled by the Internet seem on the verge of realization.

Certainly, the demand for online music is there—if nothing else, Napster has demonstrated that.

Now it appears that the supply of online music is beginning to catch up with the

demand. While the music industry may have been slow to jump into the online

music market, lately the pace of online music deal-making has been dizzying.

I am sure that today we will hear a lot about the two biggest deals—the creation

of Duet by Vivendi Universal and Sony, and the creation of MusicNet by EMI, BMG,

AOL Time Warner and RealNetworks. Certainly these two deals are remarkable because they promise to make a huge amount of new music instantly available online.

But it should be noted that a countless number of smaller deals have also been cut

for a mind-numbing array of online music services. For example, EMI licensed and

invested in Giga to sell downloadable music to the Taiwanese market; Sony licensed

Loudeye to offer samples of Sony songs and thumbnails of album covers; Universal

Music purchased GetMusic.com, which will continue to carry music from other labels like BMG; RIAA members licensed Kickworks to use their music for its free,

ad-based Internet radio service; Capitol Records is promoting its music through

Aimster; and BMG has invested in Napster with the goal of making its music legally downloadable through Napster. In fact, music is legally available in a variety

of formats on literally hundreds of websites today.

Despite these deals, we continue to hear criticism that the online music market

has not evolved quickly enough to satisfy consumer demand. Specifically, we hear

that consumers want access to all the music ever published in an on-demand, interactive format, and that copyright owners of sound recordings and musical compositions have not made their works available to satisfy this demand.

I am sure that consumers really do want such convenience. I am also sure that

consumers would like all movies, software, books, photographs, recipes, needlepoint

designs, and architectural drawings available in such a format. They would probably

also like a guarantee of gasoline at under $2 a gallon, price caps on drug prices,

free upgrades of computer software, and Coca-Cola at the greatly reduced price

charged in most developing countries.

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My point is a serious one. Only in extraordinary circumstances, such as demonstrable market breakdowns caused by antitrust violations, does our government require property owners to make their property available to the public at governmentestablished rates.

Furthermore, copyrights are Constitutionally-sanctioned property, and music, despite its emotive power and cultural significance, is basically entertainment. One

may credibly argue that property rights sometimes need to be limited to address an

energy crisis or epidemic, but convenience of access to entertainment seems a particularly weak justification for the abridgement of Constitutionally-sanctioned property rights.

It is especially difficult to justify government interference with property rights

when the free market, however fitfully, appears to be moving in the right direction.

MP3.com, which is testifying today, operates my.mp3.com, a digital music locker

service that provides on-demand streaming of one’s music library. As I understand

it, when they go online, Duet and MusicNet likewise plan to non-exclusively license

other companies to provide on demand, interactive streams.

I don’t think government intervention is justified just because interactive streaming services won’t immediately be able to provide consumer access to ALL the music

out there. Why is it so essential that all music be available right now on a variety

of individual websites? This certainly isn’t the case with the offline world. Wal-Mart,

Best Buy, and other mass merchants are responsible for a substantial percentage

of all retail music sold, and yet carry only about 4000 titles each. Tower Records,

the ‘‘superstore’’ of all music retailers, carries approximately 80,000 titles in each

store. These retailers appear to be perfectly successful carrying only a small percentage of the quarter-million titles currently on the market and a tiny percentage

of the millions of albums recorded.

If music buyers are willing to shop in record store that carries a mere fraction

of published music, why can’t online, interactive streaming services find success initially carrying only 70%, or 50%, or 25% of the music out there? Even if any one

interactive streaming service can only stream 25% of published music, it still provides consumers with exponentially greater musical choice than any existing record

store, broadcaster, or music subscription service. If interactive services go online, as

many have, with the music for which they can secure all necessary licenses, owners

of the copyrighted music not yet licensed will come flocking to tap into that market.

Basic principles of market economics operate online as well: owners of sound recording and musical composition copyrights will not act irrationally by passing up a new

revenue stream.

Even if compelling justifications could be found for government interference with

rights of copyright owners, I am disturbed by the implications of what would essentially be Internet-specific government regulation.

For years, Congress has been told that government should not regulate the Internet. The high-tech sector has persuasively argued that government is far too slow

and ‘‘out of it’’ to effectively legislate industries that are growing and changing at

Internet speed. Any Internet legislation we pass, it is argued, would be outdated before it was enacted, and might run the risk of freezing or stifling technological developments in the Internet sector. It was further argued that the incredible dynamism evident in the Internet was the direct result of the minimal government regulation covering it.

I don’t understand why the dynamic is any different in the online music space.

In fact, an objective analysis indicates the dynamic is exactly the same. Less than

a year ago, we heard that the big stumbling block to the success of online music

companies was their inability to secure licenses from the owners of sound recording

copyrights. Today, that complaint is infrequently heard, and in fact several online

music business executives have told me that reasonable licenses are available from

the owners of sound recordings. As this hearing will show, the complaint now is

about an inability to get licenses from owners of musical composition copyrights.

As my colleagues can attest, there is no way we would have legislated on the

sound recording license issue more quickly than the market solved it. In fact, if we

had sought to legislate last year on the sound recording licensing issue, we would

likely still be at it this year despite the fact that the market has made such legislation largely irrelevant.

Once the legislative process is set in motion, it is very difficult to control. Legislation to mandate access to licenses for online use of sound recordings or musical compositions might end up containing mandates for the use of certain security technologies, onerous accounting and auditing requirements, caps on the prices consumers can be charged, and ostensibly unrelated quid pro quos. That is just the nature of the legislative process, and anyone who want the Internet to remain unreguVerDate 11-MAY-2000 12:53 Sep 28, 2001 Jkt 000000 PO 00000 Frm 00085 Fmt 6601 Sfmt 6621 G:\WORK\COURTS\051701\72613.000 HJUD2 PsN: HJUD2
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lated should understand that the risks of inviting regulation may greatly outweigh

the apparent immediate benefits.

With this philosophical grounding, it should come as no surprise that I see no

need or good reason for sweeping legislation regarding online music. I do not deny

that several obstacles seem to remain in the way of full-scale realization of online

music possibilities. Nor do I deny that some of these obstacles are created by an

inability to secure licenses from copyright owners or confusion as to whether certain

activities require licenses. However, it is obvious that all parties have strong pecuniary incentives to resolve these problems, and I have observed that such incentives

are a powerful motivator.

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PREPARED STATEMENT OF ELTON GALLEGLY, A MEMBER OF CONGRESS FROM THE

STATE OF CALIFORNIA

Mr. Chairman, members of the subcommittee, and panel members, we are here

today to discuss the increasingly relevant topic of online music. Brought to the forefront by the advent of and ensuing litigation surrounding Napster, this issue has

now grown to encompass many more services and business models, such as

MP3.com, farmclub.com, and Sony Duet. This growth, which shows no signs of decline, forces us to visit this issue of music on the Internet, and I applaud the chairman for calling this hearing.

I am a champion of protecting intellectual property rights. Whether it is the patent that protects a biotechnology pharmaceutical, the trademark that protects a

company slogan, or the copyright that protects a song, I consider these rights to be

as important and tangible as an individual’s property rights in his/her automobile

or home. They are all property rights that should not be infringed.

I am also a champion of new technology that benefits consumers, including that

before us today—the ability to access, listen to, and purchase music over the Internet.

Listening to music over the Internet has now become ‘‘old hat’’ to millions of citizens. I would like to find a way to ensure that individuals can listen to music over

the Internet, without infringing upon the rights of intellectual property holders, and

I hope that today’s hearing will give us more insight into the different means by

which we can accomplish this. Thank you.

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PREPARED STATEMENT OF MANUS COONEY, VICE PRESIDENT FOR CORPORATE &

PUBLIC POLICY DEVELOPMENT NAPSTER, INC

ITRODUCTION

Mr. Chairman and distinguished members of the Committee on the Judiciary, I

appreciate your willingness to examine the issue of onlinemusic. I believe the fundamental question this hearing will require you to ask is: What does it take to make

music on the Internet a fair and profitable business? Napster believes the Congress

needs to consider all options including legislative options such as an industry-wide

license in its search for an answer to this question. The Internet needs a simple,

objective, and comprehensive solution, similar to the sort of solution that allowed

radio to succeed. The Internet does not need another decade of litigation. Congress

needs to clarify the law so that all distributive media can compete on an equal footing.

This is a very complex area of the law and I know many of you have worked for

years to develop a legal environment that will advance, rather than retard, the development of the online music marketplace. The challenge for Congress has been difficult but you have taken repeated steps to facilitate the growth of this nascent marketplace. Indeed, since 1995, Congress has passed several bills that contained provisions aimed at updating our copyright laws to adjust to the unique challenges of

the Internet. However, the complex and uncertain legal environment has stimulated

litigation rather then innovation. Indeed, most of today’s panelists have recently

been - or still are - a party to online music-related litigation involving another panelist. Even copyright owners have sued one another over their respective rights in

the online music marketplace.

NAPSTER BACKGROUND

Before we explore these issues, I would like to summarize for the Committee the

history of Napster. As you know, Napster has been the subject of considerable attention. Shawn Fanning, then an 18-yearold freshman at Northeastern University, invented the Napster software

in 1999 and, in doing so, unleashed the fastest growing application in the history

of the Internet. The Napster application has been installed more than 80 million

times. The service has experienced peak use of more than 1.8 million people simultaneously and approximately 10 million unique IP addresses in one day.

The Napster software is a revolutionary technology based on person-to-person,

non-commercial file sharing. The Napster application enables computer users to locate and share music files from one convenient, easy-to-use interface. The files are

not stored on a central computer like most Internet music services. Rather, the

music is stored on the hard drives of each of the millions of Napster users.

So who are Napster’s users? They are people of all races, income levels, and ages

who really love music. In fact, 86% have purchased CDs in the past six months and,

on average, they have bought nine CDs in the past six months. Fully two-thirds

(67%) say they use Napster to try out music before buying and they have a wide

range of musical interests including jazz, pop, inspirational, gospel, R&B, and many,

many more.

The Napster application allows users to share their music files. If they choose to

share files - and they are not required to -the application makes a list of the files

designated by the users to share and incorporates that users’ list into the central

Napster directory. The Napster directory is a list of all the files that members of

the community are willing to share. Music files are shared by Napster users - person to person. It is the peer-to-peer nature of Napster that is so revolutionary and

so powerful. This is what Intel’s Andy Grove was referring to when he said that

Napster could Irrearchitecture’’ the Internet. It is a service that is easy to use, reliable, scalable, ubiquitous, and with limitless reach.

NAPSTER LITIGATION

On December 6, 1999, the 18 affiliates of the 5 major recording labels - Warner

Music Group (Warner), Universal Music Group Universal), EMI, BMG, and Sony

Music - filed a federal copyright lawsuit (A&M Records et al. v. Napster) seeking

damages and injunctive relief against Napster, Inc. Warner is part of AOL-Time

Warner, Universal is part of Vivendi Universal, and Sony Music is a division of the

Sony Corporation. These companies allege that Napster’s users all are violating

copyrights and that the Napster peer-to-peer file sharing technology and Internet

directory service made Napster contributorily and vicariously liable for its users’ alleged copyright infringement. on January 7, 2000, songwriter/publisher Jerry Leiber

and others filed a second action alleging similar claims. Five additional lawsuits

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were filed later against Napster by various recording ndustry entities, one of which,

filed by TVT, has been resolved by agreement to license Napster and its users.

It is worth noting that it never has been alleged that Napster itself directly infringed a single copyrighted work. Rather, the labels allege the user-public is engaging in infringement and that Napster has enabled and/or could control the acts of

infringement. Contributory infringement and vicarious infringement are not expressly recognized in the 1976 Copyright Act. Rather, they are court-made theories

of legal liability which have been derived from the Act.

On June 12, 2000, the plaintiffs in the A&M Records and Leiber actions moved

for a preliminary injunction (pre-trial order) and, on July 26, 2000, the District

Court granted the plaintiff’s motion. The District Court, in a broadly worded and

then amended order, enjoined Napster from ‘‘engaging in, or facilitating others in

copying downloading, uploading, transmitting, or distributing’’ copyrighted works

‘‘without express permission of the rights owner.’’ On July 28, 2000, an emergency

panel of the U.S. Court of Appeals for the Ninth Circuit granted Napster’s motion

to stay the District Court’s pre-trial order pending an expedited appeal. The Ninth

Circuit’s stay order cited the ‘‘substantial questions of first impression ’going to both

the merits and the form of the injunction’’ that Napster had raised. Oral arguments

before the Court of Appeals took place on October 2, 2000, and the court issued its

ruling on February 12, 2001.

The Ninth Circuit Court of Appeals affirmed the District Court’s preliminary injunction against Napster, subject to a narrowing of the injunction’s scope. The 3

judge Ninth Circuit Court panel ruled on the basis of what it recognized was an

incomplete factual record established during the District Court proceeding, and thus

void of the many developments that have taken place since the lower court proceedings (e.g., the Bertelsmann alliance and the TVT and Edel agreements).

Napster disagrees with the Ninth Circuit Court’s ruling and has appealed the

court’s decision.

The District Court’s revised preliminary injunction requires copyright holders (in

most cases, record companies and music publishers) who want music excluded from

file-sharing to give Napster explicit notice about each recording they want to be excluded. That notice must include the following information: the work’s title; the

name of the featured recording artist performing it; the name(s) of one or more files

containing the work available through Napster’s filesharing service; and certification that the rightsholder owns or controls the rights to the work they want excluded.

After receiving an appropriate notice, the injunction requires Napster to filter the

specified work from the Napster index. Napster also shares the burden with the

rightsholder of identifying variations of file names in order to exclude as many differently-named versions of the file as possible, within the limits of the Napster system.

Napster has designed and implemented a file-filtering system and is complying

with the District Court’s injunction. More specifically, Napster has taken numerous

steps to ensure that it complies with the District Court’s preliminary injunction.

First, Napster engineers have instituted an advanced three-step filtering system

that blocks infringing files. Second, approximately 30% of Napster’s workforce is

tasked with manually searching for and entering into the filtering database file

name variations. Napster also recently entered into agreements with Gracenote, Relatable, and Gigabeat, three music service companies that will enhance Napster’s

ability to filter noticed files and identify file name variations. Further, Napster

amended its terms of service to provide that the company will deny users that attempt to circumvent Napster’s filtering system access to the service. As a result of

these compliance efforts, Napster’s filtering system is, if anything, over-inclusive in

that it blocks many non-infringing files.

MARKET BASED SOLUTIONS ARE NOT AVAILABLE

Today, Napster is free. But Napster believes that the Napster service is compelling and attractive enough that consumers are willing to pay for it so that artists,

songwriters, the record labels, and other rights holders can get paid. In fact, 70%

of Napster’s users have said they will pay for continued access to the Napster service.

On February 20, 2001, Napster unveiled to the public the business model for its

new membership-based service. The New Napster Service, which the company plans

to launch this summer, will charge users a reasonable subscription fee so that

Napster can pay all rights holders.

The New Napster Service will also integrate features that stress the promotional

nature of the service, so as to insure that Napster continues to enhance CD purVerDate 11-MAY-2000 12:53 Sep 28, 2001 Jkt 000000 PO 00000 Frm 00089 Fmt 6601 Sfmt 6621 G:\WORK\COURTS\051701\72613.000 HJUD2 PsN: HJUD2
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chasing rather than supplant it. For example, the New Napster Service will: (1)

allow Napster to limit our users ability to transfer a file to another device, in essence tethering the file to the user’s computer; and (2) limit the sound quality

through fidelity limitations of 128 kbps and lower.

Unfortunately, it does not appear as though the Courts will resolve the legal

issues any time soon. And it is clear that the marketplace is not resolving these

issues either. It should be emphasized that, notwithstanding our legal arguments

in court, it has been Napster’s persistent and unwavering focus to obtain licenses

from the major record labels. Hank Barry, our Interim CEO, has tried for the last

year to make an agreement under which Napster can get a license from the record

companies and the music publishers in order that we all might coexist peacefully

and guarantee payments to artists, songwriters and other rights holders. In fact,

Hank Barry has spoken and met with the heads of each of the major labels on several occasions. In those discussions, he articulated the New Napster Service: one

that is secure, tethered to the desktop, and which charges users a fair subscription

fee. Napster believed that any such agreement with the labels would serve as a

precedent for other agreements and could serve as the basis for payments by the

people using Napster to recording artists and songwriters. We were able to reach

an agreement with Bertelsmann on a business model for a new service and license

terms for the sound recordings and the musical compositions they control. Yet, I

cannot today report that any other such agreement has been reached with a major

label.

Moreover, music distribution over the Internet is hampered by the incredibly complex and inefficient music licensing procedures that often involve multiple licensors

for one particular song. Each song on a CD actually constitutes two copyrights. The

first copyright is the sound recording, or the artist’s performance, that the recording

company (usually) owns. The second copyright, known as the musical composition,

is the underlying musical work being performed. The complexity arises from the fact

that the musical composition and the sound recording almost always are owned by

separate companies or individuals. With approximately 3,000 recording companies

and over 25,000 independent music publishers in the United States alone, the prospect of negotiating the sound recording and musical composition rights for every

song for online distribution is virtually an impossible task. This situation has led

to endless private negotiations and litigation. So what should Congress do? Congress

should seriously consider enactment of an industry-wide license for music, commonly referred to as a compulsory license.

COMPULSORY LICENSE

Copyright is a tool of public policy that requires a constant balance between the

public’s interest in promoting creative expression and the public’s interest in having

access to works. And in its effort to strike a balance, Congress has consistently

turned to the so-called compulsory (or industry-wide) license.

A compulsory license acts as a means to compel a copyright holder to license its

programming to a distributor in return for the distributor paying a fee that is either

statutorily or administratively prescribed. Congressional use of compulsory licenses

generally occurs as the result of a desire to advance specific public policy goals within the framework of an inefficient marketplace. More specifically, compulsory licenses are used to: (1) allow for the implementation of a new technology while ensuring that rights holders are compensated; (2) encourage the widespread dissemination of information to the public through these new technologies; and (3) combat

an inefficient marketplace (e.g., inability to obtain licenses from all relevant copyright holders, monopolistic environment, etc.) that otherwise would hinder the development of these new technologies. There are numerous examples in the last hundred years where Congress implemented a compulsory license system in response

to these specific policy goals and market characteristics.

In 1909, Congress created a right against the reproduction of musical compositions in mechanical forms (i.e., piano rolls), but limited this right through the creation of a mechanical compulsory license for musical works. The legislative history

behind the mechanical compulsory license reveals that Congress enacted this provision, not only to compensate composers, but to prevent one company - which had

acquired mechanical reproduction rights from all of the nation’s leading music publishers - from limiting the dissemination of the music to the public through the creation of a monopolistic environment.

Years later, Congress again enacted several additional compulsory licenses, this

time related to consumers’ ability to access broadcast transmissions via cable and

satellite systems. In 1976, Congress passed a compulsory license for cable television

systems that retransmit copyrighted works. Pursuant to the compulsory license proVerDate 11-MAY-2000 12:53 Sep 28, 2001 Jkt 000000 PO 00000 Frm 00090 Fmt 6601 Sfmt 6621 G:\WORK\COURTS\051701\72613.000 HJUD2 PsN: HJUD2
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vision, copyright owners are entitled to be paid prescribed royalty fees for a cable

television company’s secondary transmission of the copyrighted work embodied in

television and radio broadcasts.

Then, in 1988, Congress passed the Satellite Home Viewer Act of 1988 (SHVA),

which created a compulsory license system for satellite carriers that retransmit television broadcasts that operates similar to the cable compulsory license. Congress

acted again in 1999 when it expanded the SHVA’s scope to include local-into-local

retransmission.

Congress recognized the ability of these then cutting edge technologies to further

disseminate to the public television and radio content, and the need to ensure that

rights holders remained adequately compensated. Congress also understood, however, the inefficiencies inherent in forcing cable or satellite providers to negotiate

individual licensing agreements, thereby resulting in the use of a compulsory license

system.

Interestingly enough, considering the current controversy, Congress’ next foray

into compulsory licenses applied specifically to music. The Digital Performance

Rights in Sound Recordings Act of 1995 created a limited performance right for

sound recordings, subject to a compulsory license for certain digital audio deliveries

of sound recordings. The compulsory license originally applied, in general, to noninteractive satellite and cable audio digital deliveries. The Digital Millennium Copyright Act amended the original law to explicitly include non-interactive webcasting

of sound recordings within the compulsory license’s scope.

At the time, Congress reasoned that these new technologies promised to encourage the widespread dissemination of this music to the public. Once again, Congress

enacted the compulsory license mechanism as a means to ensure that artists and

other rights holders were compensated, while not hindering the continued development and deployment of these digital delivery systems.

Finally, it should also be noted that performing rights societies, such as ASCAP

and BMI, enforce songwriters’ and music publishers’ performance rights through a

court created process that operates, in effect, like a compulsory license by removing

the need to negotiate with individual rights holders. While Congress did not create

this procedure, it has implicitly endorsed it by recognizing these performing rights

societies in recent legislation. Further, Congress repeatedly has refused requests to

outlaw the use of these blanket licenses.

LICENSING PROBLEMS ARE NOT UNIQUE TO NAPSTER

As I mentioned a moment ago, the licensing problems are not necessarily unique

to Napster. Indeed, much of the testimony at today’s hearing is expected to focus

attention on those circumstances under which the publishing compulsory license

should apply to the Internet. Ironically, some of those who oppose Napster’s suggestion that Congress consider an industry-wide compulsory license are supportive of

compulsory licenses - so long as their copyright is not the subject of one.

One of the record labels represented at today’s hearing recently made musical

compositions available online without getting the publishers permission. The RIAA

has gone to the copyright office after the fact arguing for a compulsory license for

the publishers musical works. As part of the record labels consistent attack on nascent, nonproprietary media technology companies who have called for legislative action (i.e. MP3.com and Napster), the record labels have urged Congress to refrain

from legislating and, instead, allow the market to resolve these issues. Indeed, Mr.

Parsons criticized the ‘‘logical absurdity of trying to write regulations for an industry that doesn’t even exist yet.’’ Yet, it is possible that the record labels will directly,

or indirectly, urge Congress and/or the Copyright office to do just that: conform the

law or pressure the industry to accommodate their own proprietary business models

but to not take action to accommodate other business models such as Napster’s.

I believe the Committee should reject this clearly self-serving, double standard.

If compulsory licensing is appropriate for radio, cable, television and satellite television and for publishing rights to sound recording, I believe it is fair to ask: why

not here on the Internet? If the record labels currently benefit from a compulsory

license and if they are looking to expand this license to give their respective business models an advantage, why shouldn’t Congress consider covering them with the

same licenses?

Mr. Chairman, Congress should not be picking winners and losers in the online

music marketplace. Through legislation or other means, Congress should not be

blessing one business model for the distribution of music online. Consider where our

consumer electronics industry and motion picture industry would be today had Congress directed through legislation or pressure those technologies that had to be used

in a vcr. Consider where we would be today if Congress sanctioned a Hollywood stuVerDate 11-MAY-2000 12:53 Sep 28, 2001 Jkt 000000 PO 00000 Frm 00091 Fmt 6601 Sfmt 6621 G:\WORK\COURTS\051701\72613.000 HJUD2 PsN: HJUD2
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dio business model for the sale of vcrs - one that empowered the studios to prevent

the sale of vcrs by companies it chose not to do business with. Fast forward more

than twenty years and that is what some are suggesting that Congress facilitate

today.

This is a moment of tremendous opportunity. And the question before this Committee is how to make the world of Internet music work -work simply, work objectively, and work fairly across business models. I submit that the Congress has a

record of effectively promoting new technologies in a neutral way while ensuring

that creators benefit and are paid. And I believe it is essential that Congress do so

again today.

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PREPARED STATEMENT OF STATEMENT OF ANN CHAITOVITZ, DIRECTOR OF SOUND

RECORDINGS AMERICAN FEDERATION OF TELEVISION AND RADIO ARTISTS

INTRODUCTION

My name is Ann Chaitovitz, and I am the Director of Sound Recordings for the

American Federation of Television and Radio Artists (AFTRA). On behalf of the over

80, 000 performers and newspersons in AFTRA, I appreciate the opportunity to submit this testimony on behalf of performers. These hearings are extremely important

to our members because new technology presents many challenges, as well as many

opportunities, for performers. As a result of our country’s intellectual property laws,

developed under the leadership of this Committee, America creates the pre-eminent

entertainment in the world and entertainment product is our leading export. In

order to continue producing the finest and most sought after artistic creations in

the world, the U.S. must ensure that artist incentives to create are nurtured, artists

are fairly compensated for the exploitation of their work and that present and future streams of income are shared with the creators.

Music is marketed to the world by major American industries. But individual artists—singers, musicians and songwriters—are at the heart of the success of these

major industries. It is the training, dedication, talent and creative verve of these

individuals that make the original works of art upon which our successful industries

are based. The artistic community, however, now faces a most serious challenge.

New technological services enable people to obtain their artistic creations in new

ways, often without payment of any sort to the creators and owners of those products. Should this trend continue, the incentive to create will decrease, sales will decrease and the direct income earned by artists will be reduced significantly. That

reduction in earnings will also decrease or even eliminate performers’ health and

pension benefits.

Please understand that AFTRA wholeheartedly supports the development of new

technologies. Technology will allow our members’ creative talents to be easily disseminated to an ever-increasing audience and that, we believe, benefits everyone.

However, the new technologies should work for the benefit of creative talent, provide compensation to copyright owners and creators of sound recordings and, certainly, should not result in detriment to performers.

AMERICAN FEDERATION OF TELEVISION AND RADIO ARTISTS

AFTRA is a national labor union representing over 80,000 performers and

newspersons that are employed in the news, entertainment, advertising and sound

recording industries. Our membership includes television and radio performers and

approximately 15,000 singers, rap artists, narrators and other vocalists on sound recordings (‘‘Singers’’), including roughly 4,000 Singers who receive payments for the

sale/distribution of each recording pursuant to a royalty contract (‘‘Royalty Artists’’)

and 11,000 singers who are not signed to a royalty contract (‘‘Background Singers’’).

On

behalf of the 15,000 Singers that it represents, AFTRA negotiates the AFTRA National Code of Fair Practice for Sound Recordings (the ‘‘Sound Recordings Code’’).

The Sound Recordings Code has been signed by an approximately 1200 record labels, including all of the major labels. Under the Sound Recordings Code, signatory

record companies are required to contribute amounts to the AFTRA Health and Retirement Funds on behalf of the Singers who perform on a recording. Those contributions are based upon a percentage of each individual Singer’s earnings. The

AFTRA Health Fund provides health benefits to Singers who reach certain threshold levels of earnings (which include royalties) upon which contributions are made

by the record labels. The AFTRA Retirement Fund provides pension benefits to

Singers based upon the amount of the individual Singer’s earnings throughout his/

her career. In short, the health and pension benefits that each Singer receives are

dependent upon the amount of earnings on which employer contributions are made.

In addition to bargaining and administering the Sound Recordings Code, AFTRA

also actively participates in all facets of public policy development affecting our

membership, frequently pursuing national and international legislation and treaties

that protect Singers’ rights, as well as joining issues in litigation that are critical

to our memberships’ interests.

SINGER COMPENSATION

Many people harbor misconceptions about the music industry and performers and

how performers are paid. Basically, as the name implies, in addition to the small

session fee required by the Sound Recordings Code, Royalty Artists receive a royalty

for the sale or distribution of each recording and do not receive a fee for making

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an album. In fact, the Royalty Artist must pay for all of the production costs of the

album, and typically pay 50% of the independent promotion costs, 50% of the costs

of videos and 50–100% of the

tour costs, Artists often pay these costs with the help of an advance from the

record company. However, artists must pay back their advances before they receive

any royalty shares earned by their albums. This is called ‘‘recoupment.’’ Taking into

account all the deductions, royalty artists generally receive between $0.80 and $2.40

for each recording sold, depending on the level of success of the artist when the royalty contract is signed. What often is not understood is that the artist does not receive any of this royalty money until the recording company has recouped these

costs. It usually takes two or three years before even a successful artist receives his

or her first royalty payment. As Sheryl Crow stated in a response to a question from

Congresswoman Bono at a May 2000 House Judiciary Committee hearing, she did

not receive any money until after her record had sold ‘‘three or four million copies.’’

And, very few records ever sell this many units. As an example, in 1999, nearly

39,000 recordings were released, but only 3 singles and 135 albums - 0.35%—were

certified as selling three million units, and notably, many of these records had been

selling over a number of years before finally reaching the three million unit sales

mark in 1999.

To ensure that Congressional intent to share new revenues with the performers

is realized and not thwarted, all compensation designated to be paid to featured performers should flow to them directly and not pass through any middlemen such as

the record companies or their affiliates. If the money were to pass through the

record companies, they would have the opportunity to recoup from these revenues,

even if such recoupment is not pennitted. Moreover, there would be a delay in the

performers’ payment, and it would be impossible for the performers to ensure that

they are actually paid the amount mandated by Congress without conducting a costly, time-consuming and burdensome audit.

Under the Sound Recordings Code, background singers receive a session fee for

their work in the recording studios and also additional payments if the records on

which they perform reach certain sales plateaus. However, most records never meet

any of these plateaus.

Thus, all Singers are compensated based on the sales of their recordings, and any

decrease in record sales volume would directly and adversely impact both Royalty

Artists and Background Singers. The decrease in earnings that would result from

any decrease in recording sales volume will result in a corresponding decrease in

the pension that a Singer would receive upon retirement and, further, may jeopardize a Singer’s eligibility for individual and family health coverage altogether.

THE FUTURE

In a society that treasures creative work, the artists’ incentives to create should

not be thwarted by the advent of new technologies. Congress must ensure that artists are compensated for their work and should not assume others will ‘‘do the right

thing.’’

Because performers’ relationships with the record companies are very different

than songwriters’ relationships with publishers, performers are not yet prepared to

take,a position either opposing or supporting compulsory licenses for interactive web

performances of sound recordings. However, if Congress creates a new compulsory

license for sound recordings, performers should share in the license fees collected.

Moreover, as discussed above, the performers’ share must be paid to them directly

and not recoupable by the record companies.

Many professional singers struggle to earn a living from their recorded performances. Even for those relatively few singers who have successful careers, almost all

spent years struggling economically while they were honing their craft, building

their careers and trying to obtain a recording contract. These singers deserve to

have their work protected and be compensated whenever anyone exploits it by whatever means, analog or digital, new technology or old. Digital technology, however,

presents a more serious threat to creators’ livelihood because millions of people may

freely access high quality versions of a work. If Congress permits access without

payment, American artists will suffer, and our country risks not only our ability to

continue creating worldrenowned masterpieces but also our balance of trade.

Again, we appreciate the opportunity to submit this testimony on behalf of recording singers and look forward to working with the Committee and its staff as it addresses these copyright issues that are fundamental to our membership.

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PREPARED STATEMENT SALLY GREENBERG, SENIOR PRODUCT SAFETY

COUNSEL,CONSUMER REPORTS

Consumers Union, a publisher of both Consumer Reports-a print magazine with

4.5 million paid subscribers-and a Web site with one of the Internet’s largest paid

subscriber bases, understands the importance and value of copyright protections. In

our role as advocates for consumer and public interests, we also understand that

copyright law is a delicate balance between the rights of those who create, compile,

and distribute information and the ability of the public to get access to that information. We are, in a word, pro-consumer and pro-copyright. As Senator Hatch said last

July at hearings on this same subject, we must protect the rights of the creator but

we cannot in the name of copyright unduly burden consumers.

New technologies historically have challenged our system of protecting creative

works through copyright, and required a balancing between the public’s right to

know and the limited monopoly rights of authors. Whether it was the printing press,

the jukebox, the photocopier, cable television, or the Internet, these technologies

have forced us to continually revisit the balance between the rights of authors and

rights of users to have access to information and creative works. Promoting and fostering innovation is clearly the goal of intellectual property law, but with changing

technology we will continue to debate what will best accomplish that goal.

When the VCR was introduced in the early 1980s, Jack Valenti, lobbying for the

Motion Picture Industry Association of America, made the famous statement, or in

retrospect, perhaps, overstatement that ‘‘the VCR is to the motion picture industry

and the American public what the Boston strangler is to the woman alone.’’ Of

course, we now know the real end to the VCR story-videocassette sales and rentals

are now one of the most lucrative slices of the industry’s copyright pie. Had it not

been for judicious policyinakers and judges, the story of VCRs might have had a

very different ending—consumers could just as easily have been denied the benefits

of the VCR if the industry’s ‘‘Chicken Little’’ approach had prevailed. We are concerned that the recording industry’s opposition to Napster and other peer-to-peer online systems may be more of the same.

While it is almost a clich6 to speak of the Internet and infori-nation technologies

as revolutionary, it is nonetheless accurate to say that the Internet has completely

changed the way we gather and distribute information. I don’t think anyone here

would disagree that Internet and information technologies have been responsible for

tremendous gains in productivity and an unrivaled period of economic expansion.

As the Internet has developed, several milestones were responsible for huge increases in users on the network: the creation of HTML, the programming language

of the World Wide Web, enabling users of the network to exchange information in

a common format, and the creation of Mosaic, the world’s first generally accessible

Web browser. And we believe that peer to peer networking is a milestone on par

with these other developments.

Irrespective of the merits or legality of Napster’s service, Napster has popularized

the power of peer to peer networking. The first Web browser introduced to users

the idea that they could instantly get access to information anywhere on the planetwhat Napster has done is introduce millions of users to the idea that they can find

information by connecting directly with other users.

We believe peer to peer networking, which allows individual users to share files

with other users without going through a central location, has the potential to revolutionize the way we communicate and learn, but it is a model in its infancy. Actions that we take today can have the effect of facilitating the development of peer

to peer networking, or chilling its development.

CU understands the concern of the recording industry that Napster users enjoy

creative works without having to pay the artist or the recording company. This is

a valid issue. We firmly believe that creators of artistic works, be they musicians,

artists, authors, or others, must have financial incentives to continue their creative

endeavors and should be fairly compensated for their work. Those who add value

to their work, like recording studios, have a right to fair compensation, as well. Unfortunately, we believe the Napster debate has been reduced to the question of

whether music should be free, and we believe that is the wrong question. Of course

music should not be free.

But there is an important point we should not lose sight of- in a very short period

of time, over 72 million people have installed Napster’s online service and manifested a previously unimaginable demand for music distribution online. At the same

time, that public demonstrated a previously unparalled appetite for peer to peer information delivery.

We are concerned that shutting down Napster, and thereby sending a chilling

message to other peer-to-peer online systems, will stifle the kind of innovation that,

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1Weber, Thomas. ‘‘Why Gutting Napster Won’t Cure the Blues of the Music Industry.’’ Wall

Street Joumal, March 26,2001.

brought us the Internet in the first place. The direction taken in response to

Napster-like online music services will be instructive to every fledgling peer to peer

service, and their network architecture will be directly influenced by legislative actions taken-or not taken-by this panel.

In the aftermath of the Federal court’s preliminary injunction ordering Napster

to cease providing free downloads of copyrighted music, where do we go? Despite

the recording industry protestations that it has made and is making efforts to provide music online, it appears to us that at this moment, the recording companies

that control the music business aren’t giving consumers what they want. If ever

there were a crystal clear indicator that the consumer demand is there, Napster is

it. So why have the major labels not stepped up and given consumers what they

are asking for?

To boil it down in even simpler terms, we have new technology and we have great

consumer demand for that technology. But we have an inefficient marketplace and

that prevents the new technology from operating in a way that appropriately balances the competing needs of copyright owners and the public’s right to receive information.

We suspect that the recording industry is resistant to changing the status quo

and adapting to consumer demand for getting music online to protect current profit

margins. According to columnist Thomas Weber writing in the Wall Street Journal

last week, $1.50 or less of a CD priced at $15, goes to the artist. 1 Add in composer’s royalties, manufacturing, packaging, and distribution costs and you’re only talking about $5 of the total price. $5 goes to the retailer, and the record company gets $5

for marketing costs and profit. But the record company also gets a portion of the

manufacturing, packaging and distribution costs through its subsidiaries, so each

66cost item’’ in that chain also may generate profit for them.

Therein lies the problem for consumers. The public demand for online music cries

out for a transformation of the way music is delivered, but the recording industry

has strong disincentives from transforming their current distribution and marketing

system. With the courts ordering Napster to stop providing free downloads of copyrighted music, the recording industry failing to respond to Napster’s offers to set

up a subscriber service, for which they have offered to pay the recording industry

a lump sum of one billion dollars over five years, and the industry’s failure to offer

the same Napster-style service to consumers themselves, we appear to be at an impasse. And so consumers turn to Congress to properly balance the interests at stake.

We believe the recording industry also fears that online distribution of music

could result in total disintermediation. In other words, what if consumers have the

means to bypass the label entirely, connecting directly to an artist’s Web site and

cutting the recording company out of the transaction entirely?

Indeed, the recording industry has demonstrated through its actions that it is entirely aware of this possibility by waging a war on the technologies of online music

distribution, rather than going after uses of those technologies. Over the last few

years, Congress has already passed the No Electronic Theft Act of 1997 and the Digital Millennium Copyright Act in 1998, both of which would allow the Recording Industry Association of America (RIAA) to go after individuals who are illegally copying. But the recording industry seems not to be going after individual violators;

their real interest seems to be in going after the technology. They realize that with

72 million people installing Napster, they cannot all be made criminals. Regrettably,

the recording industry appears to be attacking innovation more than it is attacking

piracy.

Consumers are paying the price doubly: they are faced with fewer choices and are

paying higher prices for those choices. It also appears that the recording industry

may be using litigation as a strong-arm business tactic to freeze the status quo and

protect its profits. For instance, the Recording Industry Association of America

(RIAA) sued MP3.com, a service that merely allowed users to take a CD that they

legitimately bought and access it from any location through the Internet. As Michael

Robinson of MP3.com testified here last summer, when MP3.com attempted to abide

by a court order and get its system licensed, the company ran into a hornet’s nest

of different licensing agreements and spent large sums of money in the process. This

for a service that simply gave users the ability to get online access to music they

legitimately purchased and owned. MP3.com’s experience is hardly incentive for

other Internet innovations.

We have another concern that may contribute to the diminishment of rights consumers now have. In the offline world, once an individual purchases a copy of music,

that individual is allowed to give or sell that copy to anyone he or she pleases, othVerDate 11-MAY-2000 12:53 Sep 28, 2001 Jkt 000000 PO 00000 Frm 00096 Fmt 6601 Sfmt 6621 G:\WORK\COURTS\051701\72613.000 HJUD2 PsN: HJUD2
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2The first sale doctrine was incorporated into the 1909 Act in 17 U.S.C. Section 27 (1909 Act).

erwise known as the first sale doctrine. 2 Yet in the online world, first sale is rapidly

disappearing. CU acknowledges that when the first sale doctrine was first contemplated, peer-to-peer online capability didn’t exist. That is why we think Congress

should take a look at this issue as well.

Congress has a model for addressing and balancing interests to arrive at a fair

and equitable balance between copyright owners, creative artists, and the public.

Last July, when this panel last held hearings on this issue, Senator Leahy expressed hope that the parties might work together toward some mutual agreement,

otherwise there will be pressure on Congress to create statutory compulsory licenses. That hearing happened before the preliminary injunction against Napster

was in place, and before Napster had offered to pay the recording industry $1 billion

to license Napster to offer its users paid subscriptions. To our knowledge, the industry, with the exception of Bertelsmann, has flatly rejected that offer and has made

no counteroffer. We have neither heard of nor seen any signs of progress. Meanwhile, consumers continue to be deprived of access, for a reasonable fee, to the kind

of online service that Napster was providing. We believe the need for Congressional

action is even more urgent today than it was last July. In that vein, Consumers

Union believes the best approach would be one that has been tested and proved successful for other new technologies. We propose the establishment of a compulsory

licensing mechanism through which Napster and other online music providers

would have a legal avenue for the 72 million people who have installed Napster.

The compulsory licensing system supercedes the normal marketing mechanism for

distributing copyrighted works and allows the prospective user the right to obtain

a compulsory license under which he or she can use the work without the copyright

owner’s permission. In this way, we believe that Congress would help peer to peer

networking to realize its full potential.

Congress has set up compulsory licensing systems in several instances (one repealed pertaining to jukebox licensing), each outlined below.

• The Mechanical License, Congress in 1909 created a right against the reproduction of musical compositions in mechanical forms (piano rolls). Congress limited

this right however, through the creation of a mechanical compulsory license for

musical works.

• The Cable License of Section 111 establishes a compulsory license for secondary

transmissions by cable television systems.

• The Satellite Retransmission License establishes a compulsory license for satellite retransmissions to the public for private viewing.

• The Audio Home Recording Act, establishes compulsory licensing-like system by

proving immunity from liability for copyright infringement by manufacturers

and importers of digital recording devices, but imposes a levy on these devices,

the proceeds from which are to be distributed to copyright owners.

We urge this Committee use these models to authorize a Copyright Arbitration

Royalty Panel, or CARP, to resolve the disputes over the issue of music royalties

between Napster and other peer-to-peer online service, and the recording industry.

We also urge the panel to set a time limit in the law to finalize royalties, so that

the parties are not debating the issue 3 years down the road, with consumers still

left out in the cold.

While we realize fully that rights holders tend to dislike compulsory

licensingsystems, these systems are products of political compromise; they serve

both owners and users by reducing the transaction costs involved in licensing works

through the private market system. Compulsory licensing has worked well in other

contexts where we have supported it. For instance, CU is on record supporting compulsory licensing for both cable and satellite transmission entities. CU’s Gene

Kimmelman told the Senate Commerce Committee in 1998 and 1999 that by ‘‘eliminating the transaction costs associated with thousands of copyright clearing negotiations, the compulsory license ensures fair compensation to copyright holders while

also providing consumers greater opportunity to receive multichannel video programming from a variety of vendors.’’ Those principles apply to music, as they do

to cable and satellite. Indeed, without compulsory licensing mechanisms for satellite

or cable systems, consumers would not have had access to a broad range of programming and we don’t believe these technologies could have flourished. Compulsory licensing provides a fair profit to owners of the copyright while ensuring that

the public has access to creative works.

Compulsory licensing has not only provided consumers with greater choice, it also

spurred competition. Imagine if Congress had not acted to provide a compulsory license in the case of satellite retransmission of broadcast signals. The only truly viaVerDate 11-MAY-2000 12:53 Sep 28, 2001 Jkt 000000 PO 00000 Frm 00097 Fmt 6601 Sfmt 6621 G:\WORK\COURTS\051701\72613.000 HJUD2 PsN: HJUD2
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ble potential competitor to cable monopolies—direct broadcast satellite-would not be

in a position to offer consumers an alternative to cable.

We support compulsory licensing because we believe that ‘‘killer applications’’ like

Napster will encourage the rollout of broadband Internet services, just as email and

instant messaging were responsible for huge growth in the narrowband Internet.

Congressional action will be instrumental in greasing the wheels to facilitate this

process, thereby bringing users of Napster and other peer-to-peer technologies into

the sanctioned marketplace.

Consumers Union is concerned that unless,Congress provides for compulsory licensing, a tried-and-true system that has worked in the past to provide the consumers with access to emerging technologies, we will see a chilling of innovation

and competition, and consumers will be the losers.

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