U.S. GOVERNMENT PRINTING OFFICE

68–958 CC WASHINGTON : 2000

COSTS OF INTERNET PIRACY FOR THE MUSIC

AND SOFTWARE INDUSTRIES

HEARING

BEFORE THE

SUBCOMMITTEE ON

INTERNATIONAL ECONOMIC POLICY AND TRADE

OF THE

COMMITTEE ON

INTERNATIONAL RELATIONS

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

JULY 19, 2000

Serial No. 106–174

Printed for the use of the Committee on International Relations

(

Available via the World Wide Web: http://www.house.gov/international—relations

(II)

COMMITTEE ON INTERNATIONAL RELATIONS

BENJAMIN A. GILMAN, New York, Chairman

WILLIAM F. GOODLING, Pennsylvania

JAMES A. LEACH, Iowa

HENRY J. HYDE, Illinois

DOUG BEREUTER, Nebraska

CHRISTOPHER H. SMITH, New Jersey

DAN BURTON, Indiana

ELTON GALLEGLY, California

ILEANA ROS-LEHTINEN, Florida

CASS BALLENGER, North Carolina

DANA ROHRABACHER, California

DONALD A. MANZULLO, Illinois

EDWARD R. ROYCE, California

PETER T. KING, New York

STEVEN J. CHABOT, Ohio

MARSHALL ‘‘MARK’’ SANFORD, South

Carolina

MATT SALMON, Arizona

AMO HOUGHTON, New York

TOM CAMPBELL, California

JOHN M. McHUGH, New York

KEVIN BRADY, Texas

RICHARD BURR, North Carolina

PAUL E. GILLMOR, Ohio

GEORGE RADAVANOVICH, Califorina

JOHN COOKSEY, Louisiana

THOMAS G. TANCREDO, Colorado

SAM GEJDENSON, Connecticut

TOM LANTOS, California

HOWARD L. BERMAN, California

GARY L. ACKERMAN, New York

ENI F.H. FALEOMAVAEGA, American

Samoa

MATTHEW G. MARTINEZ, California

DONALD M. PAYNE, New Jersey

ROBERT MENENDEZ, New Jersey

SHERROD BROWN, Ohio

CYNTHIA A. MCKINNEY, Georgia

ALCEE L. HASTINGS, Florida

PAT DANNER, Missouri

EARL F. HILLIARD, Alabama

BRAD SHERMAN, California

ROBERT WEXLER, Florida

STEVEN R. ROTHMAN, New Jersey

JIM DAVIS, Florida

EARL POMEROY, North Dakota

WILLIAM D. DELAHUNT, Massachusetts

GREGORY W. MEEKS, New York

BARBARA LEE, California

JOSEPH CROWLEY, New York

JOSEPH M. HOEFFEL, Pennsylvania

RICHARD J. GARON, Chief of Staff

KATHLEEN BERTELSEN MOAZED, Democratic Chief of Staff

JOHN P. MACKEY, Republican Investigative Counsel

SUBCOMMITTEE ON INTERNATIONAL ECONOMIC POLICY AND TRADE

ILEANA ROS-LEHTINEN, Florida, Chairman

DONALD A. MANZULLO, Illinois

STEVEN J. CHABOT, Ohio

KEVIN BRADY, Texas

GEORGE RADANOVICH, California

JOHN COOKSEY, Louisiana

DOUG BEREUTER, Nebraska

DANA ROHRABACHER, California

TOM CAMPBELL, California

RICHARD BURR, North Carolina

ROBERT MENENDEZ, New Jersey

PAT DANNER, Missouri

EARL F. HILLIARD, Alabama

BRAD SHERMAN, California

STEVEN R. ROTHMAN, New Jersey

WILLIAM D. DELAHUNT, Massachusetts

JOSEPH CROWLEY, New York

JOSEPH M. HOEFFEL, Pennsylvania

MAURICIO TAMARGO, Subcommittee Staff Director

JODI CHRISTIANSEN, Democratic Professional Staff Member

YLEEM POBLETE, Professional Staff Member

VICTOR MALDONADO, Staff Associate

(III)

C O N T E N T S

WITNESSES

Page

The Honorable Q. Todd Dickinson, Under Secretary for Intellectual Property, and Director, Patent and Trademark Office, U.S. Department of

Commerce ............................................................................................................. 6

Joseph Papovich, Assistant U.S. Trade Representative, Services, Investment

and Intellectual Property, Office of the U.S. Trade Representative ................ 8

Jack Krumholtz, Director, Federal Government Affairs, and Associate General

Counsel, Microsoft Corporation ........................................................................... 21

Thomas C. Tyrrell, Senior Vice President, General Counsel, and Secretary,

Sony Music Entertainment ................................................................................. 23

APPENDIX

Prepared statements:

The Honorable Ileana Ros-Lehtinen, a Representative in Congress from Florida and Chair, Subcommittee on International Economic Policy and Trade,

Committee on International Relations ............................................................... 36

The Honorable Q. Todd Dickinson ......................................................................... 41

Jack Krumholtz ........................................................................................................ 47

Thomas C. Tyrrell .................................................................................................... 72

(1)

COSTS OF INTERNET PIRACY FOR THE MUSIC

AND SOFTWARE INDUSTRIES

WEDNESDAY, JULY 19, 2000

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON INTERNATIONAL ECONOMIC

POLICY AND TRADE,

COMMITTEE ON INTERNATIONAL RELATIONS,

Washington, DC.

The Subcommittee met, pursuant to notice, at 2 p.m., in room

220, Rayburn House Office Building, Hon. Ileana Ros-Lehtinen

(Chairman of the Subcommittee) presiding.

Ms. ROS-LEHTINEN. The Subcommittee will come to order.

Thank you so much for being here this afternoon.

The great expression of talent, innovation and ingenuity which

Americans have exhibited since the early days of the republic have

endowed upon the United States the unenviable position, yet heavy

responsibility of global leadership.

This global leadership has also permitted the United States to

more easily adapt and build upon emerging technologies and social

transformations and herald in a new development and possibility

propelled by brain power industries and sectors built upon ingenuity and imagination, not railroads and petroleum.

These new ideas will redefine the landscape of not only our domestic economy but, indeed, that of the global marketplace. Yet as

more information and business is converted into code and

downloaded into the Internet, the ability for Internet pirates to inflict even greater damage upon legitimate trade only grows.

According to the International Intellectual Property Alliance, in

their recommendation to the Office of the U.S. Trade Representatives for the year 2000, the total losses attributed to so-called content industries top $8.5 billion in 1999, and the Business Software

Alliance, represented today by Mr. Eric Koenig of Microsoft, calculated a $7.3 billion loss in revenue by the year 2008 just for the

software industry alone.

The BSA further estimates that software piracy cost the United

States over 100,000 jobs in 1998 and by the year 2008 that number

could rise to more than 175,000 jobs lost.

While the accuracy of these numbers maybe open to debate, it is

difficult to dispute that by reducing revenues, Internet piracy will

reduce employment opportunities for Americans in the music and

software industries. The potential of the Internet is limitless. As

band width continues to grow and the ability to compress increasing amounts of information into smaller space continues to imVerDate 11-MAY-2000 09:38 Jan 24, 2001 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 68958.TXT HINTREL1 PsN: HINTREL1
2

prove, the Internet will evolve into a vital tool for business, education, entertainment, and unfortunately piracy.

The American advantages which make our industries the envy of

the global marketplace lead many around the world to emulate our

experiences through stealing, pirating, and counterfeiting, and we

must take immediate steps to insure that we are doing our best to

protect the unauthorized use of American products.

This is not to say that actions taken to combat the scourge of online piracy should be solely an American initiative. On the contrary, concern spans international borders, and it is, in fact, an end

epidemic problem far beyond the scores of our own country.

In nations such as Russia and China, the Interactive Digital

Software Alliance has suggested that some 90 percent of entertainment software is pirated. The United States must impress upon

our neighbors the seriousness of these crimes and advocate for the

greater enforcement of both local regulations and international

norms.

One positive example of such multilateral support can be found

in the Uruguay Round agreement on trade related aspects of intellectual property right, TRIPS, which took effect in 1996.

By pursuing international support for the increased security of

intellectual property rights, the United States not only develops forums for dispute resolution, but endorses the possibility of future

dialogues. It cannot be said often enough without allies in this battle, the United States stands to become the proverbial boy with his

finger in the dam, placing American interests before an ominous

trickle in a futile attempt to restrain the oncoming flood.

Yet this does not mean that the United States should stand idly

by waiting for the initiatives of others. Specific industry based solutions, such as digital watermarking and spider programs, must be

employed alongside increased vigilance, improved enforcement

measures in order to create an environment which is more hostile

to the efforts of Internet pirates.

However, attention must also be paid to the advice offered by the

National Research Council of the National Academies, which has

urged legislators to delay any overhauling of intellectual property

laws and public policy until markets have had ample time to adjust

to new models of doing business and until sufficient research on

the issues is conducted.

Finally, it is necessary to address certain commercial features

which some analysts suggest may precipitate the trafficking and

the use of printed materials. Pricing is foremost on this list.

For example, it has been estimated that a compact disk costs as

little as 60 cents to manufacture, and depending on where you live,

a new CD will cost you around $15. When CDs were first introduced in the early 1980’s manufacturing costs represented $3 to $5

per CD and retailed for $15 to $20. As the manufacturing price per

CD has fallen, there has not been a parallel drop in the retail price.

When compared to the prices offered for music and software by

Internet counterfeiters, there can be little doubt as to why many

ordinarily law abiding citizens are swayed into breaking the law.

This is not an excuse or a justification for on-line piracy, but merely one example of the need to look at all sides when approaching

a problem as insidious as piracy.

3

Real jobs, real company, and real lives ultimately depend on our

ability to protect ourselves from on-line piracy, and as our witnesses today will state, this is not only a global issue or a national

issue. It is also a local problem in our own communities.

And I would like to recognize Mr. Rothman. Mr. Menendez, our

Ranking Member, has a vote in the Transportation Committee, and

he will be right back to make his opening statement.

Mr. Rothman.

[The prepared statement of Mrs. Ros-Lehtinen appears in the appendix.]

Mr. ROTHMAN. I would like to thank Chairwoman Ros-Lehtinen

for holding this hearing. I do not have any questions at the moment, but I am glad to be here and ready to learn.

Ms. ROS-LEHTINEN. Thank you so much.

Mr. Manzullo.

Thank you, Mr. Delahunt.

Mr. DELAHUNT. Yes. Thank you, Madame Chair Lady.

I see many familiar faces in this audience since I serve on the

intellectual property subcommittee of the Judiciary Committee, and

I want to welcome Commissioner Dickinson.

As I am sure most are aware, or in the last session of Congress,

both the Digital Millennium Act was passed, as well as the socalled NEF Act. Hopefully that has had a salutary impact on the

issue that we are discussing here today, and I would be interested

in terms of your initial impressions of the effect and hopefully deterrence impact of those particular pieces of legislation.

And I yield back to the Chair.

Ms. ROS-LEHTINEN. Thank you so much.

I would like to take this opportunity to introduce the two Administration witnesses who will share their views on the impact of

Internet piracy on the music and software industries with us this

afternoon.

Let me begin with Mr. Todd Dickinson, the Under Secretary for

Intellectual Property and Director of Patent and Trademark Office

for the U.S. Department of Commerce, a former Assistant Secretary of Commerce and Commissioner of Patents and Trademarks.

Mr. Dickinson serves as principal policy advisor to the Administration and to Congress on all domestic and international intellectual property matters.

He will be followed by Mr. Joseph Papovich, the Assistant Trade

Representative for Services, Investment, and Intellectual Property

in the Office of the U.S. Trade Representative [USTR]. A former

employee at the Department of Labor, Mr. Papovich was the chief

U.S. negotiator on safeguards at the World Trade Organization’s

Uruguay Round on trade negotiations.

Thank you both for being with us today, and it looks like we

have some vote. So as soon as we get back, we will get right back

at it, and I will ask Mr. Manzullo if he would chair the remaining

time of this hearing because I have a bill coming up after this vote.

So thank you. We have suspended for just a little bit. Thank you.

[Recess.]

Mr. MANZULLO [presiding]. Before we get started, there are about

five or six students outside the door, and if there is any room in

4

here or if they want to sit on the floor, could somebody welcome

them in?

Mr. Menendez, did you have an opening statement?

Mr. MENENDEZ. Yes. Thank you, Mr. Chairman.

I regret that I had to go to a mark-up that had a roll call vote.

So I regret that I was delayed, and then of course, we had a vote.

I am looking forward to today’s hearing. Clearly the problem of

Internet piracy grows as fast as the computer and the Internet are

used itself, if not even faster. Today about 327 million people in the

world have access to the Internet. Of those, 130 million of them are

in the United States, where nearly 50 percent of citizens are Internet users.

When the rest of the world catches up to the United States, Finland, Norway, and a handful of other developed nations with the

highest per capita Internet use, the numbers will be staggering,

and it will not take long. When nearly 3 billion people have access

to the Internet, they will also have access to pirated music, software, and other copyrighted materials.

Pirates will increase the supply to meet the exploding demand.

Clearly the industry, trade associations, and some governments led

by our own recognize the need to work toward reducing both demand for and supply of pirated material. Public-private efforts

have succeeded in strengthening copyright protection and enforcement.

The Clinton-Gore Administration has worked diligently to implement the TRIPS agreement, and within the WTP and the WIPO,

push for the adoption of two WIPO treaties that respond to the rise

of cyber network based deliver of copyrighted materials.

Secretary Daley, before he left office, made ratification of these

as a top priority of his, and I understand we are halfway toward

getting the signatories we need to fully implement these.

Congress and the President worked during the 105th Congress to

pass the important Digital Millennium Copyright Act, which I was

glad to support. However, government is aided by an army of

acronymed industry associations fighting to protect intellectual

property rights. The IIPA, the International Intellectual Property

Association; the IIPI, the International Intellectual Property Institute; and the other IIPA, International Intellectual Property Alliance—and I would like everybody to say that five times——

[Laughter.]

Mr. MENENDEZ [continuing]. Alone could fill another panel today.

They and many others, the IFPI, the Business Software Alliance,

the Recording Industry Association of America, and the Interactive

Digital Software Association are some of the most prominent, are

testament to the amount of money that is at stake.

The IIPA and the BSA estimate that between eight billion and

15 billion a year of lost revenues from music and software hard

goods alone is a reality. It has been so far impossible to accurately

gauge losses from Internet piracy, and that, of course, is the subject of today’s hearing, and I look forward to hear from our expert

panelists about their work to measure the losses and combat the

problem.

But let me just highlight a few thoughts as the Ranking Democrat on the Subcommittee, and I would love to hear as you give

5

your responses, and possibly some of your answers may be in the

question and answer period.

Internet piracy will clearly get worse before it gets better as the

Internet use explodes, outpacing efforts to restrict unlawful infringement of intellectual property rights. The problem is probably

exacerbated by a feeling among individuals, societies, and even governments of the developing world that, quote, we are poor, they are

rich; we have a right to download this free.

We have got to impress upon our trading partners the importance of strengthening and adhering to the rule of law because that

is what works best for everyone in the long term for an investment

in their countries and overall trade relations will be adversely affected by lack of will , the judicial infrastructure, and the ability

to combat privacy.

I encourage and applaud efforts by the Patent and Trademark

Office and other U.S. Government agencies to provide technical assistance to developing nations in their effort to enforce intellectual

property rights, and I wonder if the associations are doing the

same.

We must work toward increased transparency of Internet commerce at the same time that we respect the privacy of Internet

users. The industry rightfully argues that the individual who in the

privacy of his own home and meaning no harm trades or shares

unauthorized music, video or software files is just as pernicious for

the producers of intellectual property.

But can we truly treat the individual who is not making money

through their actions the same way we treat the organized crime

syndicates that are involved in piracy in a massive and increasingly violent scale?

How do we seek to strike the balance in the freedom of Internet

commerce through the legitimate claim of protective rights of the

producers?

And I think one of the greatest difficulties in the government’s

efforts here is that someone, for example, in the creative genius of

performing, creating music, ultimately they wish to be heard. They

wish to share their creativity. So long as that is the burning desire

of the creative genius of an individual, to be heard, it is also one

of the great challenges in this process of assuring the rights that

they deserve as a result of their creativity as their burning desire

to be heard by an incredible number of people.

I am not sure how government does the best job of reconciling

those interests, and I look forward to seeing how the panel addresses it.

Thank you, Mr. Chairman.

Mr. MANZULLO. Does anybody else have an opening statement?

Mr. Delahunt.

Mr. DELAHUNT. I would just make one observation. When it

comes to the issue of piracy and the music industry, particularly,

and obviously software, it is clear that we have a substantial issue

to deal with when it comes to the burgeoning balance of trade deficit, and the one account that I think now exceeds any other account in terms of the positive side of that ledger is our intellectual

property account.

6

And I know I speak for many who are concerned about this piracy issue in that it is absolutely critical and essential that we take

every step possible to protect our commercial interests on a national security basis and our national economic interests to do what

we can to allay and assuage the problem of Internet piracy.

Mr. MANZULLO. Mr. Rothman.

Mr. ROTHMAN. Thank you.

I, for one, am at a little bit of a loss, and I look forward to the

panel addressing this: an elaboration of what fundamental American value we put in jeopardy if we do not enforce the private property rights of those artists who created the music and those who

supported the artists to enable them to create and market their

work.

I know my Republican colleagues passed the Private Property

Rights Act to streamline the ability of people to make claims about

the government taking their property without just compensation,

and I voted for that. As far as I am concerned, the overwhelming

burden of proof is on anyone who would compromise in any way

the private property rights of the artists who created the music and

those who supported them to enable them to market the music. So

each should hear what the other side has to say.

Mr. Dickinson.

STATEMENT OF THE HONORABLE Q. TODD DICKINSON,

UNDER SECRETARY FOR INTELLECTUAL PROPERTY AND DIRECTOR, PATENT AND TRADEMARK OFFICE, U.S. DEPARTMENT OF COMMERCE

Under Secretary DICKINSON. Thank you, Mr. Chairman.

Mr. MANZULLO. Could you put the mic a little bit closer to your

mouth?

Under Secretary DICKINSON. I sure will.

Mr. MANZULLO. Thank you.

Under Secretary DICKINSON. It is a pleasure to be back before

this Subcommittee again today to discuss, in particular, what the

U.S. Patent and Trademark Office and this Administration are

doing to help protect American intellectual property from piracy at

home and abroad, particularly on the Internet.

As was suggested, the Internet has exploded. The President likes

to say when he came into office that there were something like 100

Web sites, and now there are probably on the order of 100 million.

As the title of the hearing indicates, two of the U.S. copyright industries most intensely affected by piracy and the unauthorized

use of their works on the Internet are the software and the music

industries. The losses in these areas easily total in the tens of billions of dollars, translating into lost jobs, revenues, and foreign royalties for American workers and businesses.

Given the explosive growth of the Internet and the increasing

use of intellectual property on Web sites, the problems of piracy are

not going to go away on their own. That is why the Administration

has been tackling these problems head on.

Here at home we have worked with Congress to equip American

intellectual property owners and law enforcement authorities with

better legal tools to fight piracy through the passage of measures,

7

such as the Digital Millennium Copyright Act and the No Electronic Theft Act.

At the same time we have partnered with international associations, such as the World Intellectual Property Organization [WIPO]

and the World Trade Organization [WTO] to provide similar legal

norms at the international level. For example, we are working with

our colleagues at the U.S. Trade Representative and the Department of State to ensure that our trading partners implement the

protections provided in the 1996 WIPO Internet treaties, as well as

the Agreement on Trade Related Aspects of Intellectual Property

Rights or the TRIPS agreement.

Adopting these legal norms is not enough, however. Our trading

partners must also have the technical means and the political will

to put these legal tools into practice. In that regard, the USPTO

is receiving more requests than ever from our trading partners.

These requests are for technical assistant in reviewing IP legislation and developing an integrated enforcement system consisting of

civil, criminal, and administrative procedures and remedies, as well

as border measures.

Many of these requests are in response to the January 1, 2000

deadline for all developed and developing countries who are WTO

members to have domestic laws and enforcement mechanisms that

are TRIPS compliant.

Because of the growing problem of Internet piracy, many of these

countries are also seeking assistance in developing enforcement

mechanisms to deal with technological advances in IP protection

and enforcement.

They also need assistance in understanding and implementing

the WIPO Internet treaties to establish the legal framework to

combat these problems. Accordingly, the focus of our Internet oriented efforts has been to assist countries in adapting the enforcement models appropriated for conventional hard goods—CDs, cassettes, floppy disks, and the like—to the realities of cyberspace

transmission of copyrighted works.

In particular, we are targeting our enforcement training efforts

to focus on problems of Internet enforcement in areas where Internet usage is rapidly expanding, namely, Latin America, Africa, and

Asia.

This past May, the USPTO and WIPO provided a week long program on developing a TRIPS compliant and effective enforcement

regime for law enforcement and other government officials from a

number of developing countries. These included China, Hong Kong,

India, Thailand, the Philippines, Israel, Egypt, and Nigeria.

Next week we’re going to partner again with WIPO to provide a

similar training program in Senegal for government officials from

several African nations, which builds on a similar program we offered last year in Kenya.

In September we will sponsor two regional conferences to explore

the practical problems in developing and implementing effective IP

enforcement mechanisms in today’s rapidly changing digital and

technological environment. The first event, which is actually the

second Intellectual Property Symposium of the Americas, will be

held here in Washington on September 11 and 12. It will be attended by judiciary officials, public prosecutors, domestic enforceVerDate 11-MAY-2000 09:38 Jan 24, 2001 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 68958.TXT HINTREL1 PsN: HINTREL1
8

ment agents, and private rights holders from throughout North,

Central, and South America.

The second forum, an Asian-Pacific regional conference, will be

held in Thailand on September 18 and 19.

As you know, Mr. Chairman, the music software and other core

U.S. copyright industries are a key growth sector for our economy,

accounting for nearly $400 billion in value added to the U.S. economy and generating an estimated $67 billion in foreign sales and

exports in 1997 alone.

Accordingly, the USPTO and this Administration are dedicated

to ensuring strong protection and enforcement of these IP products

in the global economy. In fact, with Congress’ recent enactment of

the National Intellectual Property Law Enforcement Coordination

Council we now have a formal inter-agency coordination effort for

domestic and international IP law enforcement among Federal and

foreign entities. We believe the Council will help us partner with

industry to develop effective strategies for addressing Internet piracy, which is a key challenge for the 21st century.

Thank you very much, Mr. Chairman, and I am pleased to answer any questions which you or the Subcommittee might have.

[The prepared statement of Under Secretary Dickinson appears

in the appendix.]

Mr. MANZULLO. I appreciate that.

Mr. Papovich.

STATEMENT OF JOSEPH PAPOVICH, ASSISTANT U.S. TRADE

REPRESENTATIVE FOR SERVICES, INVESTMENT, AND INTELLECTUAL PROPERTY, OFFICE OF THE U.S. TRADE REPRESENTATIVE

Mr. PAPOVICH. Thank you, Mr. Chairman, Congressman Menendez, Ms. Chairwoman, and the other Members of the Subcommittee.

We appreciate the opportunity to speak to you about the cost of

Internet piracy for music and software and other industries in the

United States dependent on intellectual property and USTR’s role

in this.

We are a small agency. We have only four of us, including myself, who work directly or primarily on the implementation of our

intellectual property policy. Therefore, we very much appreciate

the support and interest received from Congress and from other

agencies, including the Patent and Trademark Office with whom

we work very closely.

Our main function or our main policy, as we see it, is to press

other governments. This is USTR’s main activity, to press other

governments to provide adequate and effective intellectual property

protection and enforcement, and we focus particularly on commercial levels of piracy.

That means we press countries to have modern laws and to enforce them by making available to U.S. right holders administrative, civil, and criminal sanctions. We use the tools provided to us

to obtain these results.

Our principal focus now, or at least one of our principal focuses,

is securing full implementation of the WTO’s so-called TRIPS

agreement, which is the intellectual property agreement in the

9

World Trade Organization. This agreement requires members to

enact and enforce copyright and other intellectual property protection.

Obligations for developing countries came into effect on January

1, 2000, after a 5-year transition period. We have achieved considerable success obtaining compliance with the substantive obligations of the agreement. However, compliance with the enforcement

provisions remain a problem in certain developed countries and in

many developing countries, and that has become increasingly the

focus of our attention.

First we focus on insuring the countries changed their laws to reflect modern intellectual property standards or the standards of the

TRIPS agreement.

Another aspect of our WTO strategy relates to the WTO work

program on electronic commerce. For example, we are seeking recognition by WTO members of the applicability of existing WTO

rules to electronic commerce. In the context of intellectual property,

this means recognition that the standards established in the TRIPS

agreement are as applicable on the Internet as they are in the

physical world.

We are actively consulting with industry to develop the best

strategy to address Internet piracy. An important first step in this,

of course, was achieved at the World Intellectual Property Organization when they concluded their two copyright treaties in 1996.

We are pursuing this in several ways. We are seeking to incorporate the highest standards of protection for intellectual property

into every bilateral and regional trade agreement that we negotiate. We are negotiating now with our trading partners in the

Western Hemisphere in an attempt to conclude a free trade area

for the Americas.

The United States is submitting proposals in this negotiation

that incorporate the substantive provisions of the WIPO copyright

treaties. So in this regional agreement we would seek to have

standards higher than those now in the TRIPS agreement.

Our proposals in the so-called FTAA would also update copyright

and enforcement obligations to reflect other technological developments.

More immediately, we are engaged in a bilateral negotiation of

a free trade agreement with Jordan. In this negotiation on the IPR

Chapter, the Intellectual Property Chapter, we are insisting that

the Jordanians agree to implement these WIPO copyright treaties

and put provisions in their law that allow the enforcement of those

provisions.

Finally, one of our longer term objectives is to bring the substantive obligations of the WIPO copyright treaties into the WTO

as obligations for all members under the TRIPS agreement. At that

time, we would intend to further update the TRIPS agreement to

insure that it provides adequate and effective protection for intellectual property in light of the latest technological developments.

We also have a fairly active bilateral program. One of the most

effective tools we have is the annual special 301 review mandated

by Congress under the 1988 Trade Act. This tool has vastly improved intellectual property standards around the world.

10

Each year at the end of April, we publish a list of countries that

we believe do not provide adequate and effective intellectual property protection. The mere publication of that list warns countries

of our concerns and warns investors that that country may not be

a safe place for them to put their investment money.

In many cases, our actions under special 301 leads to permanent

improvements. We have had some meaningful successes recently in

Bulgaria where there had been serious optical media CD piracy

that has largely been closed down; even more recently in Hong

Kong, which has taken significant steps legislatively and enforcement-wise to combat optical media.

Perhaps the biggest effort we have made in the second half of the

1990’s was with respect to China. In 1995 and 1996, persistence

tolerance of piracy there led us to threaten China with $1 billion

in trade sanctions. These sanctions helped us achieve the closure

of pirated optical media production in China.

Our followup work has been to insure that all relevant Chinese

agencies, including trade, customs, judiciary police, and senior political officials stay involved.

Enforcement of intellectual property rights now has become part

of China’s nationwide anti-crime campaign. During 2000, they are

conducting a coordinated anti-piracy campaign involving a number

of enforcement agencies.

As we begin to move our efforts into Internet related piracy

issues, we have been raising this issue increasingly with countries.

While most of our efforts remain with the problem of physical piracy, which still is very large, we have begun encountering countries’ Internet piracy issues.

My boss, Ambassador Charlene Barshefsky, recently wrote to one

of the Chinese Vice Premiers, urging him to insure that as China

amends its copyright law, which they are doing now, and in doing

so that they make amendments to address Internet piracy, including implementation of the WIPO copyright treaties.

In any case, Chinese courts have ruled in a number of recent

cases that unauthorized uses of sound recordings in the on-line environment are acts of infringement under their existing copyright

law.

Similarly, with Hong Kong, a number of U.S. agencies recently

provided for a training program for Hong Kong’s Department of

Customs and Excise. Hong Kong sent members of its Internet Antipiracy team to the U.S. Government’s Cyber Smuggling Center in

Virginia for a week-long training session on ways to curb Internet

piracy.

On June 22, just a month ago, after Hong Kong’s people returned, they smashed a syndicate there in Hong Kong which had

been soliciting orders for pirate CDs over the Internet. Those people are now training others in Hong Kong in how to conduct such

enforcement activities.

We need to do much, much more training, and that is something

that we will cooperate with other agencies to do, in terms of just

teaching other governments how to move from dealing with the

still very large physical piracy problem to trying to tackle the

Internet piracy problem.

11

Intellectual property protection remains one of our most important and challenging tasks. We protect U.S. intellectual property

rights to encourage research, investments, and ideas of some of

America’s leading artists, authors, private sector and academic researchers.

Congress, through passage of the special 301 law, the passage of

the Digital Millennium Copyright Act, implementing the WIPO

treaties and other actions, including hearings like this, deserves

great credit for bringing public focus to these issues. We look forward to continuing this effort together as we move forward.

Thank you very much.

Mr. MANZULLO. Thank you.

Mr. ROHRABACHER. Todd, good to see you again.

Under Secretary DICKINSON. Congressman, and you.

Mr. ROHRABACHER. You are doing a good job over there.

Under Secretary DICKINSON. Thank you.

Mr. ROHRABACHER. I would say you guys have got your job cut

out for you on this one. I do not know what the answer is, but it

is getting more complicated every day, and that is all I’ve got to

say.

[Laughter.]

Mr. MANZULLO. Congressman Menendez, can you follow that

one?

Mr. MENENDEZ. Well, that is the start. So, you know, to get a

compliment from Mr. Rohrabacher and just to say that is as little

as he has to say on the subject is historic. I do not know that I

can——

Mr. MANZULLO. You know, we do not have to ask questions. They

gave good testimony.

[Laughter.]

Mr. MENENDEZ. I do have some questions that did not get answered.

Mr. Papovich, let me ask you. You mentioned, I think, in your

testimony that only 4 of the nearly 200 employees at USTR are

dedicated to the implementation of intellectual property policy,

which is only about 2 percent. Is 2 percent the amount of—does

that represent USTR’s work overall on intellectual property right

issues? And do the trade losses of U.S. businesses represent only

2 percent of the overall issues that USTR faces?

Mr. PAPOVICH. Actually, my statement may have been a bit of a

misstatement in that sense. First, I included secretaries, support

staff in the 200, and that is some significant number.

But I said primarily involved, and, in fact, the way we organize

ourselves, at least half of our units at USTR are regional staffs. We

have an office for Japan, an office for China, an office for Europe,

and each of those people has as part of their portfolio the protection of American intellectual property interests in other countries.

In fact, I will share this with you. A few years ago as I was sitting with an OMB official talking about our budget proposal, this

person said, ‘‘You know, we ought to change the name of this institution from USTR to USIPR because you are spending entirely too

much time on intellectual property issues, or let’s put it this way.

You are spending an awful lot of time, not too much time, but an

awful lot of time on intellectual property issues.’’

12

We, the four of us, are responsible for overall policy. We then, if

you will, direct our regional officers to raise intellectual property

issues with the countries that they interact with on a daily basis.

So it is not just the four of us.

Mr. MENENDEZ. But the question still stands. Are you expending

the resources that are commensurate with the losses to American

industry in this regard? Is it something that should be reallocated

or that your department should be added to?

I mean obviously we all talked in your statements, as well as

ours, about the explosive nature that is going to take place as a result of greater Internet use, and therefore, the potential for piracy

is only going to grow. Getting the respect of countries to respond,

those who are on the 301 list, developing countries who have no excuse other than political will, and developed countries versus developing countries; it seems to me that you are not by design or desire, but it seems you are shortchanging what, in fact, we should

be doing in this regard.

Do you think you have all of the capacity to deal with this?

Mr. PAPOVICH. It is a tough question for me to answer because

the 200 of us, or the 120 or so who do the substance of the work,

have to cover our entire trade policy for the United States. Our job

is to coordinate trade policy, including international intellectual

property enforcement policy, with those in our building.

We then have to rely heavily on other agencies to make that happen, and that is the way the system is set up. So we rely on PTO,

State Department——

Mr. MENENDEZ. By way of example, let’s look at China. You

spoke of the huge problem of piracy in China, and the government’s

efforts beginning in 1995 and 1996 to curb those activities.

The question is: when are we going to see a drop-off in piracy?

Because if you look at the IIPA and BSA statistics, they show little

positive change from 1998 to 1999. So, you know, that is by way

of example, one example, of what I am concerned about in this regard.

When do you see some positive changes moving in the context of

China?

Mr. PAPOVICH. I do not know when we will see that. I hope we

see——

Mr. MENENDEZ. I can understand, sir.

Mr. PAPOVICH. I hope we see it this year, but it is not easy. It

is not easy.

Mr. MENENDEZ. What do the 301—I mean, I know what they are

supposed to do. What do we actually do when we have the 301 list

that we promulgate? I mean, what do we do to move countries?

I mean, developed countries in my mind have even less reason

to be in the midst of not enforcing and providing the rule of law,

enforcing the rule of law, and creating the infrastructure that they

have committed themselves to in international agreements.

Developing countries might have some arguments about their

technical abilities. Developed countries do not. What are we doing

with, for example, developing countries that are not meeting their

responsibilities?

Mr. PAPOVICH. Well, we are using the WTO dispute settlement

system. We have brought disputes against Sweden, Denmark,

13

Greece, and Ireland over parts of their IPR system that are in noncompliance with the TRIPS agreement.

In the case of Denmark and Sweden, the problem was that they

did not permit ex parte searches of otherwise legitimate business

operations that are using pirated software. This is very important

to the software industry to be able to have these surprise searches.

In both instances Sweden already changed its law after we challenged them to comply. Denmark is in the process. In the case of— I did not mention Portugal—Portugal was in noncompliance. We

challenged them in the WTO. We started the formal dispute settlement process, and then they complied. One of the biggest problems

we have is in the enforcement side where countries have less stringent penalties than the United States might have.

A good example is Greece and Italy where crimes of very severe

magnitude committed there do not receive the punishments that

would be allocated here. For economic crimes, like intellectual

property, penalties are also considerably less than what we would

consider appropriate to deter, and we have been putting pressure

on these countries, and it has been a challenge because they have

a hard time seeing that the economic crime of intellectual property

piracy rises to the level that deserves the punishments we deserve.

But we have used a variety of pressures to get them to change

this, but it is not easy. The Italian government has legislation, an

anti-piracy law, that we hope they will pass this summer, but we

have been working on it for about 4 years now using different pressures to get that done.

But it is often just a case of perception. The countries, even developed countries, do not always see intellectual property as a form

of private property even though their own citizens create a lot of

intellectual property. They still are learning the importance of it as

a form of property that needs to be protected.

Sorry for the long answer, but I wanted to elaborate.

Mr. MENENDEZ. I have other questions that I will submit for the

record. I hope you will answer them.

Mr. MANZULLO. I was going to ask you a question about Macau.

I was over there in December 1997 just before the turnover. Your

mentioning of Portugal explains how Macau’s transition from Portugal to the PRC, reminds me of just a wonderful hand-off to people who do a great job of preserving intellectual property rights.

But my understanding is that one of the biggest areas of CD

pirating in the world taking place in Macau. Is that still going on?

Mr. PAPOVICH. Yes. It has begun to improve, and I am not sure

quite what to make of it, but I——

Mr. MANZULLO. I will not ask the question to what extent is it

improving because it cannot go anywhere but improve, I understand.

Mr. PAPOVICH. I have made several trips to Macau on this problem, and in one meeting I had with one of the chief prosecutors,

I had the impression he was afraid for his life; that if he prosecuted

these people, he would put his life in danger. This was a Portuguese origin person.

The last time I was there I met with one of the Chinese prosecutors who did not look very frightened to me, and he talked about

how he was going to clean this up, and I hope he does. I worry a

14

little bit about insuring the rule of law. I do not know what tactics

he is going to use, but I have noticed in the past few months that

the Macanese police have become more aggressive about attacking

pirates than they were before.

So I see some improvement, and I do not know how much to attribute that to the hand-over, but I just will note that I have seen

some improvements in recent months.

Mr. MANZULLO. There is supposed to be a 5-year period of time

during which developing countries were supposed to phase in

agreements or statutes that would be in compliance with TRIPS.

What is going on there?

Mr. PAPOVICH. As I said in my testimony, there has been fairly

good performance by developing countries in changing their substantive standards, in modifying their copyright, patent, trademark

laws to make them TRIPS compliant. It is not perfect by any

stretch of the imagination, but pretty good, and we have a long list

that I would be happy to submit if you would like to have it for

all the countries, developing countries that have amended their intellectual property laws in the last year in an attempt to comply.

The bigger problem is going to be on the enforcement side. If a

country has a poor judicial enforcement system generally or a corrupt judicial enforcement system generally, it is going to be an uphill battle for us to get them to adequately enforce the intellectual

property components of their law.

Mr. MANZULLO. Are we mostly talking about piracy here in terms

of reproducing CDs?

Mr. PAPOVICH. That is a big part of it.

Mr. MANZULLO. What other aspects are there besides that?

Mr. PAPOVICH. Well, software piracy is often called corporate end

user piracy, where an otherwise legitimate corporation will buy one

piece of software, get no licenses, or licenses for 1 or 2 machines,

and then copy it onto 500 machines.

Mr. MANZULLO. Well, that is done in this country.

Mr. PAPOVICH. That is against the law, and that is a priority for

BSA.

Mr. MANZULLO. That was a good answer.

Mr. PAPOVICH. I will let them speak to that, but we put a lot of

pressure on countries to act against this.

In the trademark area, of course, counterfeiting is just a gigantic

problem, whether it is footwear or blue jeans or whatever. That is

a problem, too.

Mr. MANZULLO. Well, you have both been very candid here. Is

there any hope? All it takes is one country to be a pirate, and that

is enough to destroy intellectual property rights around the world.

Mr. PAPOVICH. Well, I am an eternal optimist, and I believe we

have been making progress. My bigger fear, despite my eternal optimism, is that we chase this problem, particularly this optical

media one. We chased it out of China. China was the central production center for optical media piracy.

Mr. MANZULLO. Explain what you mean by that.

Mr. PAPOVICH. Optical media, these are CDs, CD–ROMs, VCDs,

DVDs, all of those, the optical things that go on disks.

We put enormous pressure on the Chinese to stop this in the

mid-1990’s. They did shut down the production of these products.

15

They fled to Macau and Hong Kong first and Taiwan. We put pressure on all three of them, and we are seeing progress, particularly

in Hong Kong.

The Hong Kong and Macanese police have raided factories where

the machinery was boxed up with addresses like Malaysia, Thailand, where the product, the machinery was being shipped because

the police pressure was getting too hot on them.

So then I have been traveling to Thailand and Malaysia doing

the same thing and hopefully will see progress, but two problems

loom out there. One is these pirates could move to places I do not

have very easy access to, some place like Burma, let’s say, or it

goes to the Internet, which is going to become much more difficult

for everyone to police. It is one thing for people to have a factory

that the police can raid. It is another thing to have a computer in

their house, when they are facilitating the transfer of all of these

CDs.

Mr. MANZULLO. Thank you.

Steve, I think it is your turn.

Mr. ROTHMAN. Thank you, Mr. Chairman.

I have a couple of questions. How big is this problem? What is

it costing the American industry? And what does it cost the American consumer? Do we have any numbers on that?

Mr. PAPOVICH. The only numbers we have are ones that industry

has provided to us. We do not have any capability ourselves to estimate this, but our annual special 301 review, each spring the IIPA,

the alliance of copyright alliances, submits a very comprehensive

set of estimates to us of the losses they suffer and the piracy rates

and the number of countries, not every single country, but in many

countries so that we have a feeling for that.

I do not remember the numbers off the top of my head, but it is something like $4 billion. It was in your testimony.

Mr. PAPOVICH. Yes, we are getting around $4 billion.

Mr. ROTHMAN. And it would be interesting to know $4 billion out

of how many.

Under Secretary DICKINSON. Well, the same estimate from the

same entity of how much the contribution to the GDP that the

copyright industry makes is somewhere around $530 billion. Probably a little over 6 percent of our GDP is dependent on copyright

industries.

Mr. ROTHMAN. $4 billion out of $5 billion?

Under Secretary DICKINSON. $530 billion.

Mr. ROTHMAN. $530 billion; $4 billion out of $530 billion. I do not

need to do the calculation. I just want the raw number.

Under Secretary DICKINSON. Now, there is about $66 billion of

foreign sales that are generated, as well. That is all in the number

of domestic and foreign.

Mr. ROTHMAN. OK. I have another question. Do you have sufficient legislation from us to help you? Do you need anything from

us?

Mr. PAPOVICH. No. The special, from my side—— Under Secretary DICKINSON. Let me make a correction, by the

way. That 4 billion represents industry estimates from just one industry, the recording industry. Software industry estimates are

somewhere on the order of $12 billion in just their industry.

16

Mr. ROTHMAN. Well, each of those is——

Under Secretary DICKINSON. The $530 billion is all copyright industries all together.

Mr. ROTHMAN. OK. So now we have got recording is $4 billion,

and the other one is what?

Under Secretary DICKINSON. Software is, according again to BSA,

the Business Software Alliance, and the Software Industry Association, $12 billion.

Mr. ROTHMAN. Twelve. So we are up to $16 billion out of $530

billion. I am not saying whether that is big or small.

Under Secretary DICKINSON. And the estimate, and I apologize

for looking down a little further here, the IIPA estimates the U.S.

copyright industries worldwide losses are $22 billion total.

Mr. ROTHMAN. $22 billion on top of the $16 billion?

Under Secretary DICKINSON. I think the total is the $22 billion.

Mr. ROTHMAN. Is the 22. So it is $22 billion out of $530 billion.

Under Secretary DICKINSON. Yes.

Mr. ROTHMAN. OK.

Under Secretary DICKINSON. Out of $67 billion.

Mr. ROTHMAN. $22 billion out of $67 billion?

Under Secretary DICKINSON. Let me just check.

Mr. ROTHMAN. No, because if 16 is the domestic out of 530—well,

you know what? We can get those if you have them.

Under Secretary DICKINSON. We can get those numbers back for

you, Congressman. It is a lot of money. Let’s put it that way.

[Laughter.]

Mr. ROTHMAN. It is a lot of money, but you know, we can to get

a sense of the scale of the problem.

Under Secretary DICKINSON. We do.

Mr. ROTHMAN. What do cigarettes cost us? What do car accidents

cost us? What does alcohol cost us? It runs into the billions as well.

Under Secretary DICKINSON. Indeed.

Mr. ROTHMAN. Again, I do not mean to minimize the extent of

the danger of this particular bill, and it is a big one, and it bothers

me greatly, but what bothers me is the sense I get, and I hope I

am wrong that the Internet being free, that everything is for free,

and I am not sure all Americans yet have a feeling for the value

of intellectual property, and I think they should because what is a

capitalist society, aside from general fairness, sense of fairness that

one owns, you know, the product of one’s own labor; people have

made a great deal of investments in these intellectual property

items, and they want to be able to be assured of whatever return

is due to them and that some of the proceeds will not be stolen

from them.

So what can we tell the average American young person or average citizen about what their role should be in a world where they

may have a great exposure, greater exposure to these ill-gotten

gains, this stolen property? Should there be some national campaign or is there one already from the industry?

I think I have seen some of those saying, you know, there is no

such thing as a free lunch or something like that, and I have had

young people say, ‘‘Oh, it is just for free.’’

17

And I said, ‘‘When you go into the candy store and steal something, that is shoplifting. There is no difference if you steal someone else’s property.’’ Do you have any thoughts on that?

Under Secretary DICKINSON. Congressman, I think you have

stated the case very well. I think one of the challenges we face is

that intellectual property is an intangible thing, and being so easy

to copy, it is often perceived as something which is fair game, and

if you can get away with it, it is OK. And so that creates some obvious problems.

We have also seen that problem enormously enhanced by the rise

of the Internet and technologies which have been developed on the

Internet that have allowed for the copying, in some cases fair use,

but in many cases not, of copyrighted works. That has become a

major problem.

And there has been hearings both here and on the other side of

the Hill to deal with this recently and to deal with this question.

Mr. ROTHMAN. Well, maybe it’s up to the people whose goods are

being stolen to do that, and they may very well have programs to

talk about, but I would be interested in that. You know, as a father, as a member of the community, it is our job to educate our

young people about what is right and what is wrong.

Under Secretary DICKINSON. There is no free lunch. Sometimes

this is perceived, for example, as very wealthy individuals in the

recording industry losing a little bit of their wealth. What that fails

to overlook is the number of people who are genuinely in that industry at all levels, from the people who run the pressing machines

to the people who run the recording studios, the people who just

have regular jobs in those industries that are not glamorous and

exciting as the stars might be. Those are real jobs that are lost and

real wages that are affected.

Mr. MANZULLO. Mr. Delahunt.

Mr. DELAHUNT. Thank you, Mr. Chairman.

To attempt to quote Everett Dirksen, I think, it was a bit in

here, a bit in there, and after a while you are starting to talk about

some serious money.

Mr. MANZULLO. He is a good Republican.

Mr. DELAHUNT. I understand that. I know that there are some

good Republicans, Mr. Chairman.

[Laughter.]

In fact, some of my best friends are Republicans.

Mr. MANZULLO. Not enough. Well, your time is up.

[Laughter.]

Mr. ROTHMAN. Mr. Chairman, he includes you among them.

Mr. DELAHUNT. Just let me pursue a little bit because I really

think it is important to underscore that in terms of our economy

and its relationship to the global economy, how significant the intellectual property account is in terms of the trade deficit.

Are we talking about a $4 billion loss or a $22 billion loss, in

terms of exports? I think we can agree, you know, that we have a

balance on the export side of some $67 billion, and what is the best

estimate you have in terms of domestic piracy overseas as opposed

to domestic piracy because they really do present, you know, different problems, if you have it.

18

Under Secretary DICKINSON. I do not happen to have it. Do you

have it, Joe, in terms of the—— Mr. PAPOVICH. No.

Under Secretary DICKINSON. I have worldwide estimates by some

of the entities who make these estimates. We can try to get the

breakdown for you.

Mr. DELAHUNT. OK.

Mr. PAPOVICH. But there is a further complicating factor. It is

not all lost exports. Some of this work would have been produced

in the markets that it is intended to serve. You know, not every

CD that is sold in Asia that is legitimate is not made—that has,

as we say in America, a recording artist on it—the CD itself is not

made in the United States. The CD may be made in a country

where the market is. So it is lost revenue opportunities, but it is

not necessarily exports.

Mr. DELAHUNT. In terms of the legislation that we passed last

session, the so-called Net Act and the Digital Millennium Act

which dealt with the issue of these anti-circumvention devices, the

prohibition thereof, if you will, and I am sure that maybe our next

panel can respond to it and maybe they have some experience,

have we been able to determine or make any evaluation as to the

effectiveness of what we did last session?

Under Secretary DICKINSON. My understanding, Congressman, is

that both of these acts have only recently begun to be used. We

have not had extensive experience with them yet, but my understanding, for example, is that some parts of them have been used

extensively so far. Under the DMCA, for example, the notice and

take-down provisions that the ISPs and the OSPs use to bring

down Web sites which are inappropriate have been used rather extensively. Some of the defenses in the DMCA, I understand, have

also been used.

So we will have to wait and see what the ultimate result is, and

some of the other witnesses may have some insights.

Mr. DELAHUNT. OK.

Mr. PAPOVICH. There is an indirect value, too, and that is the example that we set for other countries. If we were to delay, if we

had delayed in implementing our requirements under the WIPO

copyright treaties, it would have made it all the harder for a person

like me to go to another country and say, ‘‘You need to do something to implement those WIPO treaties.’’ Mr. DELAHUNT. Right.

Mr. PAPOVICH. The same with the Net Act.

Mr. DELAHUNT. Well, I think we have got to do that to be in compliance with the EU and with the TRIPS Act.

Mr. PAPOVICH. Right.

Under Secretary DICKINSON. Well, actually the contrary is the

case, Congressman. We have taken the lead internationally. We

were one of the earliest nations to ratify those treaties and pass

the implementing legislation. The EU and European countries have

not yet ratified the treaties, and one of our biggest jobs is trying

to convince our colleagues and friends in Europe that they need to

move forward in a timely way.

Mr. DELAHUNT. Right. I think you responded, you know, in terms

of what we can do, in terms of legislation and substantive law. You

19

have the books that we have just alluded to at your disposal, and

again, I think maybe it was Mr. Menendez that was talking about,

you know, there are four of you in the USTR that are working in

terms of intellectual property, but I think your coordinating role or

mission, if you will, is really the key here, and maybe you can list

for us the agencies that are dealing with this particular issue.

I think, if my memory does not fail me, I think the Attorney General, Ms. Reno, has established a task force in terms of dealing

with the issue of piracy and intellectual property.

But I guess the bottom line, after you look at that, is: are we

spending enough resources at this point in time in your judgments,

and not, again, just simply from your agency perspective, but in

terms of what we need to do to protect American intellectual property in the global marketplace?

Under Secretary DICKINSON. Congressman, let me start off.

Among the agencies that are involved, and these are the ones

which are members of the National Intellectual Property Law Enforcement Coordination Council that we mentioned, the Assistant

Attorney General for Criminal Enforcement, the Under Secretary

of State for Economic Affairs, the Deputy USTR, the Commissioner

of Customs, the Under Secretary of Commerce for International

Trade, and the Register of Copyrights.

Mr. DELAHUNT. Commissioner, I think it is important to enumerate them, but I guess what I am saying is what kind of resources, for example, is the Department of Justice allocating to this

particular initiative. I mean, how many FBI agents are dealing

with this issue? Do we have enough personnel from whatever Federal agency is involved to really do this job and to start to make

a difference in terms of sending out a deterrence message?

Under Secretary DICKINSON. I think we do not do enough yet. We

do not have enough resources. I think that you would have to ask

the Justice Department the magnitude of their——

Mr. DELAHUNT. I am not just picking on the Justice Department.

Under Secretary DICKINSON. No.

Mr. DELAHUNT. But I am talking about all of these, whether it

is Commerce or Customs or whatever.

Under Secretary DICKINSON. Well, as you know, one of our biggest issues this year is gaining access to the fees that are paid to

our office to make sure we have the resources to do the job.

Mr. DELAHUNT. I do, and you know that you have a strong advocate in me in that particular undertaking.

Under Secretary DICKINSON. Yes.

Mr. DELAHUNT. If I can just have one additional question, in the

end in terms of Internet piracy, I was very pleased to see that the

Administration has issued some new guidelines in terms of the export of encryption technologies, and I would be eager to hear from

the next panel in terms of what the industry is doing in terms of

incorporating into our intellectual property products the necessary

technologies so as to prevent, if you will, piracy, and maybe either

one of you can comment on that.

Mr. PAPOVICH. I am sorry. I cannot.

Under Secretary DICKINSON. I cannot comment directly, but I

think you have obviously hit on a key issue. Besides traditional law

20

enforcement activities and training activities that we work on,

there are certainly technological mechanisms for dealing with this.

Mr. DELAHUNT. I think this is really, really critical, and I am

sure there is a role for government there somewhere in terms of

assisting the private sector because this is about law enforcement,

which I suggest is a government role, and we ought to be, you

know, really working with the private sector to develop the kind of

technologies that they need.

Mr. MANZULLO. Mr. Chabot.

Mr. CHABOT. Thank you.

I will be brief so that we can get to the next panel, but would

you address the wisdom of going against pirating either through

criminal law, whether it is international agreements, etc., versus

just allowing those that have been harmed, the private sector, the

companies or whomever, to go civilly against the folks that are involved in this either in other countries, and I assume you are going

to say we need to do it criminally and here is why, but I would just

like to hear the philosophical and efficacies of going one way versus

the other.

Under Secretary DICKINSON. Well, I think one of the challenges

on the criminal side that Mr. Papovich mentioned is making sure

that the law enforcement actors who were responsible for it raised

the priority up high enough. They have to deal with violent crime

and other major criminal issues. That is a concern here both in the

United States and overseas.

On the civil side, it is often in the United States, for example,

a matter of a very long, often dragged out enforcement proceeding

which does not always get the same priority in the court system.

So I think there is some room there.

Another activity which we also engage in, which I think should

not be overlooked, we do it when we do our training, is to cause

developing countries, in particular, to understand how important

intellectual property can become in their own economies.

As the very large and growing component of our economy demonstrates, reminding and assuring and educating developing countries on how important IP can be to their own country, I think also

as an economic incentive will go a long way toward helping, too.

Mr. PAPOVICH. Civil remedies are almost always inadequate in

many developing countries. So from my perspective, which is just

an international one, far too often the outcome, first of all, can be

many, many years, but then the outcome is some very modest sanction, a slap on the wrist.

Mr. CHABOT. OK. Thank you very much. I yield back the balance

of my time.

Mr. MANZULLO. Well, thank you. We appreciate your coming this

afternoon.

If we could get our second panel seated as soon as possible before

some more votes come off that would be appreciated. I see someone

is handing out some CDs. I presume those were made legally.

[Laughter.]

Did not even catch it, did he?

OK. To complement the expertise of our first panel, I would like

to introduce two gentlemen who are quite sensitive to the implicaVerDate 11-MAY-2000 09:38 Jan 24, 2001 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 68958.TXT HINTREL1 PsN: HINTREL1
21

tions of Internet piracy and know first hand the problems and prospects which face the music and software industries.

First, I would like to introduce Mr. Jack Krumholtz, Director of

Federal Government Affairs and Associate General Counsel in the

Law and Corporate Affairs Department at Microsoft Corporation.

Jack is a graduate of Georgetown University School of Foreign

Service and the University of Pennsylvania Law School.

He is Vice Chairman of the Microsoft Political Action Committee—these are not my notes—and also serves on the Advisory

Council to the Congressional Internet Caucus.

Finally, I would like to introduce Mr. Tom Tyrrell, a Senior Vice

President and General Counsel and Secretary for Sony Music Entertainment. He is a former head of CBS Records’ Law Department. Mr. Tyrrell served as Senior VP of Administration in North

American Operations for Sony Music International until 1991.

You know, I was talking to a friend several years ago. He said

at one time knowledge was discovered, but today it is invented,

which leads to this incredible technological revolution that continues.

Mr. Krumholtz, do you want to lead off, please?

STATEMENT OF JACK KRUMHOLTZ, DIRECTOR OF FEDERAL

GOVERNMENT AFFAIRS AND ASSOCIATE GENERAL COUNSEL, MICROSOFT

Mr. KRUMHOLTZ. Thank you, Mr. Chairman.

Good afternoon, Mr. Chairman and Congressmen Menendez and

Members of the Subcommittee. On behalf of Microsoft and the

other members of the Business Software Alliance, including Auto

Desk and Lotus, I appreciate the opportunity to appear before you

today to speak about the challenges confronting software publishers in protecting their intellectual property against theft in this

age of electronic commerce.

I want to thank Ambassador Barshefsky, Secretary Dickinson,

and Assistant USTR Papovich for their leadership in protecting

copyright protection on a global scale. Software publishers and

technology companies not only are among the chief architects of

electronic commerce. They recognize the tremendous potential of offering their own physical intellectual property based products electronically.

Forester Research estimates that E-commerce among businesses

will reach $1.3 trillion worldwide by the year 2003. The software

industry is one of the fastest growing sectors of the U.S. economy,

each year creating thousands of new jobs and unlimited opportunities for entrepreneurs and small businesses.

I would like to submit for the record a copy of a report that outlines the industry’s contributions to the global economy. In the 61

countries covered by this report, the packaged software market

reached $133 billion in 1997. In non-U.S. countries, the industry

provided 740,000 jobs. In the United States in 1998, the industry

employed over 800,000 workers.

In addition, the industry contributes significantly to tax revenues, in the billions of dollars to governments around the world.

Despite its significant economy contributions, the U.S. software

industry has not reached its potential due, in part, to global piracy.

22

Software theft cost the industry an estimates $12 billion on a global basis in 1999. This translates into thousands of lost jobs and billions of dollars in lost tax revenues.

The Internet creates tremendous opportunities. However, it

makes no distinction between legitimate businesses and criminals

who want to exploit E-commerce to market their stolen products.

You will hear today about the latest tools Napster and Nutella

from Mr. Tyrrell.

Recently BSA member companies’ software has been found on

Napster. We anticipate that this trend will only continue as broad

band technologies become more readily available. Today I would

like to just highlight two types of theft on the Internet, Web sites

and counterfeit goods.

Many thieves today simply set up brazenly illegal Web sites on

any given day by typing in ‘‘wares,’’ which is the pirate slang for

stolen software. You can find 2 million Web pages offering illicit

software. These sites are easy to find and are in every language.

I think you have before you a copy of a site that actually appears

in Spanish, and we would like to submit that for the record as well.

Hard statistics on the financial losses via the Internet are not

readily available. We estimate that the losses can be in the billions

of dollars.

In terms of the second for of theft on the Internet, counterfeit,

the Internet is used by pirates to advertise, market, and coordinate

the distribution of pirated software CDs. I have got an example

here. These are two of Microsoft’s more popular products, Office

2000. This is a genuine Office 2000 and this is a counterfeit product. I think you would agree that it would be very hard for a consumer to know what the difference is, but there are some very important differences.

On the pirated CD there will not be any product or technical support, any warranties or any discounted or free upgrades, and in addition, the pirated product is often plagued by viruses.

After the sale is complete on the Internet, CDs like the one I just

held up are delivered by mail. Developments in CD replicating

technology have made it possible to manufacture very large volumes of near perfect copies. Here is another example of Office ’97,

which is also a counterfeit product.

There are many other types of Internet theft which are highlighted in my testimony. For example, these include bulletin

boards, news groups, Internet relay chat channels. To appreciate

the Internet’s potential impact, one need only to contrast the number of people who can crowd around a flea market card table that

offers pirated software and the number who can simultaneously access a pirated Web site.

What can government do? Worldwide governments can help promote legitimate electronic commerce and fight Internet piracy by

doing a number of things.

First, by insuring that they fulfill their obligations under the

WTO TRIPS agreement by adopting and implementing laws that

provide for effective enforcement.

Second, by ratifying and implementing the WIPO treaties that

insure copyright protection in the digital age.

Third, by putting strong software management policies in place.

23

And finally, by dedicating resources to the investigation and

prosecution of Internet piracy.

In closing, Mr. Chairman, electronic commerce promises a new

revolution in development, distribution, and use of products and

services protected by intellectual property. I appreciate the Subcommittee’s interest in these critical issues and for holding this

hearing today. I would be happy to respond to any questions.

Thank you.

[The prepared statement of Mr. Krumholtz appears in the appendix.]

Mr. MANZULLO. Mr. Krumholtz, the two documents to which you

referenced will be made part of the complete record without objection.

Mr. Tyrrell.

STATEMENT OF THOMAS C. TYRRELL, SENIOR VICE PRESIDENT, GENERAL COUNSEL, AND SECRETARY, SONY MUSIC

ENTERTAINMENT

Mr. TYRRELL. Thank you.

I would like to thank Madame Chairwoman in absentia and her

fellow Subcommittee Members.

I want to begin by describing Sony Music. Sony Music is the lead

global producer, manufacturer and marketer of recorded music,

video, music publishing. We are headquartered in New York.

We employ approximately 7,000 people in the United States in

our many record labels, including Columbia and Epic, in our disk

manufacturing plants and our state-of-the-art recording facilities in

New York, and we generate significant U.S. revenues from our

record music publishing business worldwide.

I am here before you today representing the Recording Industry

Association of America, the trade association of America’s record

companies, large and small.

The United States is the greatest single source for copyrighted

music exported worldwide. The music business is very much a U.S.

driven business. Whether you are a large record company like Sony

Music or a small, independent company, all record companies share

a common thread, a fragile existence wholly dependent upon the

protection of our intellectual property.

It is copyright protection upon which so much creativity, ingenuity and commerce rests, and this protection is under constant attack. You have before you an unparalleled opportunity to strengthen this protection by leading the global fight against piracy. In

every instance, whether on the Net or in the physical marketplace,

defeating piracy means the creation of market opportunities and

the expansion of our cultural and economic well-being.

Given the tremendous stakes for our country, none of us can afford to permit ourselves to be daunted by the natures of the obstacles that we confront. The record industry and other copyright industries currently confront a piracy phenomenon with two faces, or

should I say at least two faces?

For the record industry, I have submitted to the Subcommittee

our current report on worldwide state of piracy, which I think will

address many of the statistical questions and country-by-country

breakdowns referred to earlier.

24

One face of piracy is in the physical marketplace, which we confront increasingly organized and multinational criminal enterprises

involved in massive production and trafficking of pirated CDs and

other optical media.

Long gone are the days when piracy music was either accomplished by die hard fans devoted to recording and distributing

every conceivable bootlegged product of their favorite band or by

some small, underground Mom and Pop operations making a few

dollars from the production and sale of poorly reproduced pirate

cassettes.

Today’s pirates operate through multinational criminal syndicates simultaneously involved in trafficking around the globe. For

example, in today’s environment a pirate CD found in the streets

of Sao Palo, Brazil is likely to have been mastered in Singapore,

manufactured in Taiwan, shipped on spindles, meaning that it has

not even been placed into jewel boxes yet, by air to Uruguay, transshipped to Paraguay where the product is finally assembled and

then literally trucked over the bridge into Brazil, where it goes to

central distribution centers, and then sub-distribution throughout

the country, and all of this is with little worry about anyone facing

criminal charges.

With the advent of the CD, the pirate has gained access to the

equivalent of a master recording. It does not degrade no matter

how many times he copies it. The pirate now has a new tool for

his trade, CDRs, recordable CDs.

With CDRs the pirate now has the ability to tailor his pirating

according to demand. No need to worry about inventory. As much

as we have improved the quality of our product over the years,

these same improvements have been accompanied by new risks.

Today’s pirates also rely on traditional means of avoiding punishment, such as bribery and other forms of corruption, but they also

have new tools in their arsenal relating to their increased stature:

force and threats of violence, the ability to rapidly change the location of various components of their enterprises when confronted

with governments prepared to tackle the piracy issues.

Pirates actively seek out jurisdictions in which either the law

lacks enforcement or for relative safety for their operations. Our job

is to decrease, if we can’t entirely eliminate, these zones of safety.

The second face of piracy could not look for different. It involves

not criminal syndicates, but generally law abiding citizens that

mean in some sense no harm and who, in the privacy of their own

homes, are now actively involved in anonymously unauthorized

trading of massive numbers of recorded music files.

Appearances aside, the impact of this activity on the copyright

owner is no less prejudicial than the other more obvious forms of

unauthorized activities.

The response to these two forms of piracies may be quite different, but the need for forceful response is no less pressing. The

fight against piracy has been increasingly more complex with developments in technology that permit the instantaneous and global

reproduction and distribution of materials with the touch of a button.

In a global information network, protection of the creative materials that are such a critical part of our country’s economic backVerDate 11-MAY-2000 09:38 Jan 24, 2001 Jkt 000000 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 68958.TXT HINTREL1 PsN: HINTREL1
25

bone is only as strong as the weakest link in the information communication exchange.

Thus, there is an absolute need to eliminate existing gaps in

international legal structure that undermine the protection enjoyed

by copyright holders in national and international channels of commerce. The WIPO treaties adopted in 1996 set the stage for fair

international digital distribution of music. These treaties represent

significant and necessary improvements in the international legal

structure and contain necessary provisions relating to the ability to

effectively enforce rights in the digital age.

These global improvements are critical to the ability of record

companies and other copyright owners to do business in a global

information society. These treaties accomplished a number of extremely important economic objectives.

First, the treaties make it absolutely clear that copyright holders

are granted exclusive rights to control the electronic delivery of

their works to individual members of the public. This both anticipates and responds to the realities of the electronic marketplace

where copyright owners are likely to rely increasingly on the communication of signals rather than the delivery of physical products

to meet consumer demand.

This level of copyright protection in conjunction with technical

protections also dealt with in these treaties is indispensable to the

willingness of copyright owners to make their works available

through these new media.

Second, the treaties confirm that existing national copyright laws

and the international copyright system apply in a generalized manner to all technologies and media and not in a technology specific

manner.

Third, the treaties require countries to effectively prevent the circumvention of technical measures in interference with rights management information used by copyright holders to protect or identify their works. Such technical measures and rights management

information will play an increasingly important role in the protection and licensing of copyright in the digital age.

Technology must play a critical role in solving some of the same

problems created by technological developments. These technological solutions which simultaneously protect intellectual property

and foster technological innovation in the expansion of commerce

must be protected.

A great deal of work is being conducted around the globe to develop technical systems of protection and viable information systems to facilitate the administration of rights. These systems of

protections and rights management information will be meaningless unless countries effectively deter and punish circumvention or

interference.

These WIPO treaties will require countries to do this, thus establishing key elements of security for global electronic commerce. The

treaties represent an essential building block for the development

of E-commerce and the cultural and economic development that

will ensue if we create the right conditions for promoting local creativity and its global distribution.

Mr. MANZULLO. Could you summarize?

Mr. TYRRELL. Sure. I am almost done.

26

Mr. MANZULLO. You are a fascinating reader. I would love to

have you read to my kids.

Mr. TYRRELL. OK. The position we are in right now is one where

if we look from here backward, I think we have a certain level of

comfort and support, and we believe that in the executive agencies,

such as the USTR, have been wonderful partners. We believe the

WIPO law, this treaty, will provide us with the protections we

need.

But we are not looking backward. We are looking forward, and

in looking forward, we see the whole world changing and at an accelerating pace, and we feel that we are going to be facing technological challenges that we did not anticipate even a few years ago.

And traditional thoughts of what piracy means to us are not a

road map for the future.

[The prepared statement of Mr. Tyrrell appears in the appendix.]

Mr. MANZULLO. So you come to us for a solution.

Mr. TYRRELL. Maybe we come to you at this point to say we are

not an industry that likes to cry ‘‘wolf,’’ but we see wolves on the

horizon, yes.

Mr. MANZULLO. We appreciate your testimony.

Mr. TYRRELL. Thank you.

Mr. MANZULLO. I have a couple of questions. There was a statement made by the prior panel that all copyright revenue or market

is about $530 billion a year. Does that include written material,

books, etc.? Does anybody want to jump in with an answer?

I do not know how you can possibly quantify the amount of piracy unless the people put out disks like that that have—could you

hold that up again? The other one—yes, that has ‘‘counterfeit’’ stamped on it. I guess that is the only way you would know.

Mr. KRUMHOLTZ. We added that.

Mr. MANZULLO. Presumably.

[Laughter.]

How can you possibly know how much junk is out there that is

counterfeited? How do you measure it?

Mr. KRUMHOLTZ. Well, speaking for the software industry and

the Business Software Alliance, what we do, we take what we

think is a very conservative approach to estimating the rate of piracy in various countries where we have operations, and we look

at the number of computers, the hardware that is shipped, and

then we take an average. For each computer we assume that there

are five software programs that are located on that computer,

which is very conservative if you have ever purchased a computer,

increasingly conservative, and through that then we compare that

number with the number of software programs sold, and that is

how we reach our estimate for piracy rates.

Mr. MANZULLO. That is pretty good. What about music CDs?

How would you possibly estimate the impact?

He sounded pretty scientific.

Mr. TYRRELL. Right.

[Laughter.]

In the case of music, starting in some countries, it is fairly simple. We are not operating there, and all of the markets and all of

the stores are selling our products.

[Laughter.]

27

Moving up the food chain, we do monitor the more mature markets. We go into stores, and we buy and we sample and we do AB

tests. We typically find that in the more mature markets the sales

are not taking place in the legitimate stores, but they will be taking place right next door or right on the corner.

We do keep track of the factories that are out there. I must

admit we are now starting to lose track because with the introduction of the CDR, it is not—and as I speak of the future—it is not

these big factories that are fairly easy to locate that are going to

represent our future. It may be little operations in the back of

someone’s garage where he has 15 or 20 CDR machines set up and

he can custom pirate to order.

But to spot a pirate CD is not that hard.

Mr. MANZULLO. Let me ask you a question.

Mr. TYRRELL. Yes.

Mr. MANZULLO. If someone is found, say, in this country with a

music CD or a business application CD that goes on your computer

and you determine that the person who has that is carrying around

or using it illegally, what do you do? What do you enforce? What

laws are there?

Mr. TYRRELL. We try to go after the source, not somebody with

one or two CDs.

Mr. MANZULLO. The same with somebody dealing drugs. It is

wrong in both cases, but you want to get the dealer out. Then how

do you go about tracing it?

Whatever you would like to share with us. I understand this is

very sensitive when it comes to——

Mr. TYRRELL. Well, traditionally we have tried to locate the factory and shut that down. And also, if somebody has CDs, they have

bought them. So you go after the person who is selling them.

In the United States right now CD piracy is something that is

relatively under control compared to other countries of the world.

Mr. MANZULLO. Piracy under control.

Mr. TYRRELL. Relatively.

Mr. MANZULLO. Relatively.

Mr. TYRRELL. Relatively. It is a constant threat, as I said in my

remarks.

Mr. MANZULLO. With the next technological breakthrough where

you may be a business application or a music on something that

is the size of a fingernail, no one knows how this is going to be controlled.

Mr. TYRRELL. We have it on something smaller than the size of

a fingernail now, on Napster.

Mr. MANZULLO. OK. Mr. Menendez.

Mr. MENENDEZ. Thank you both for your testimony.

Let me start off by saying we support your interests and seek to

work with you on your concerns. I think that intellectual property

is incredibly important to use as a country. It is important to those

who create whatever the medium is to create and whether it is

here in this country or anywhere else in the world, and it needs

to be rewarded.

So I start off with that, but I do want to ask you some questions

in terms of public policy. What is our ability, and I have a greater

28

focus, Mr. Tyrrell, in the industry you represent, not because I am

not interested in the software industry——

Mr. TYRRELL. Sure.

Mr. MENENDEZ [continuing]. But some of the questions really

posed are in part generational, in part questions of understanding

whether or not the industry in some respects is over reacting.

For example, in my statement I quoted what you said, that the

private citizen in their home is as, in fact, dangerous and damaging

to the industry as organized criminal piracy, and in principal you

are right, but practically and even politically speaking, how do you

expect the Congress to address that?

Also, there are those analysts of the industry who say, for example, that the industry needs to figure out a way to work with

Napster and others like it on new bands and albums. They say that

the record labels might be, quote, a little too busy retaliating right

now instead of thinking how they could use it, in reference to

Napster in this case, to their advantage. There obviously has been

a real lack of understanding the value and marketing potential of

this type of software.

And many artists seem to also welcome the increased exposure

of the Internet. On the RIA Web site, for instance, Thomas Dolby

writes about his own experience and that of other musicals from

David Bowie to an amateur folk singer-song writer with regard to

increased creativity and sales as a result of Internet use.

So in that total, I have given you a lot there, but it is also the

things that we hear from a lot of our constituencies and also questions about what is the role of the government in this regard in trying to help you, but in balancing what is clearly a continuously

evolving set of technological challenges that I am sure even your

industry has been looking at and saying, ‘‘Well, how do we deal

with it?’’

But is the analyst wrong? Should you be looking at ways of turning what is a negative into a possibly a powerful force for yourself,

or is it just protective to do so now and say, ‘‘Well, we are getting

hurt badly, and let’s go after them’’?

Mr. TYRRELL. Well, first of all, I think one thing that Sony Music

and Sony cannot be faulted for is being technological leaders. We

were the original Columbia company that introduced the cylinder,

the LP, the CD. So we are always more than interested. We can

to be technological leaders in finding new technologies that will

allow us to combine new technology and our products.

In terms of—I may not be heeding these questions in order—in

terms of the Internet’s ability to create a wider environment for

artists who want a wider exposure, we have no disagreement with

that at all. That is a wonderful feature of the Internet.

An artist who wants his product to be on a Web site or on

Napster, he has got our complete support. Where we start to encounter problems, and this is not negativism on our part, but a

business model that is built on the assumption that if you do not

secure any of the rights from the artist or from the song writer, you

pay nothing for the recording, you pay nothing for the marketing,

and then you make it available for free; why aren’t you more open

to that business model?

29

It starts to sound like, well, if there is a pirate duplicating CDs,

why don’t you find more of a way to deal with them?

When I got on the plane to testify today, I have not even read

the article myself. ‘‘Mac World. MP–3, say goodbye to your CD collection. Napster lets you steal your songs. Free music, CD–RIP.’’

Now, maybe Mac World is a little extreme, but——

Mr. MANZULLO. Did you want that made part of the record?

Mr. TYRRELL. Yes, yes.

Mr. MANZULLO. Or just the article?

Mr. TYRRELL. It is on all the newsstands.

Mr. MENENDEZ. Can you explain to me then your answers in the

context of the USA Today article of this past May.

Mr. MANZULLO. Just 1 minute. It will be just the article.

Mr. TYRRELL. Yes, yes.

Mr. MANZULLO. Do you have that?

[The magazine article appears in the appendix.]

Mr. MENENDEZ. USA Today on May 15 had an article that said

that despite the recording industry’s ‘‘concern that digital music

would kill the business, music sales rose 8 percent in 1999, the

first full year of the boom in the MP3 digital music format used

by Napster, from $13.7 billion to $14.6 billion.’’

Mr. TYRRELL. That is a classic case of apples and oranges. I am

sure you can find very popular department stores who, as their

year to year performance increases, have had shoplifting, I mean,

or thefts. It has been our experience, in fact, that in areas where

Napster has been most prevalent, such as college campuses, it is

almost like a black hole. You will see increased sales, and the closer you get to Napster users.

But, no, we are in the business of being interested in marketing

our music. We are not adverse to things that help our music, and

people who steal our music, while our business may be up, to see

the cause and effect there is something we have missed.

Mr. MANZULLO. OK. Mr. Rothman.

Mr. ROTHMAN. Thank you.

Thank you for your testimony, Mr. Tyrrell.

I do not know. Maybe I am too old for this. Maybe I am a fuddyduddy about this, but there is just something fundamentally wrong

with the notion that you can take someone else’s property and not

pay for it, and I cannot it has anything but a horribly chilling effect

on business people, those who want to invest their capital in computer software or in the record or in the careers of budding young

artists. It can only be a bad thing.

And the other part, the fuddy-duddy part is the moralistic side

of it. I do not think this helps the country in terms of our sense

of right and wrong if we do not send a clear message to young people and old people, whoever is participating in this activity, that

this is wrong; that there is no positive spinoff.

And in my opening remarks I asked somebody to give me the

other side. What is good about people stealing someone else’s work

and not paying for it? And I think I would look to you folks to help

us help you or get the message out to the people of our country

that this is stealing. This is wrong, No. 1. And it has a bad effect

on the economy.

30

So I welcome that, and again, I welcome your own public service

announcements, self-interested as they may be, in helping educate

our young people about this. You know, it just takes my breath

away when people say, ‘‘Work with the people who are stealing

your goods.’’ Somebody breaks into your house and steals your most valuable

possessions, and the cops say, ‘‘We are not going to arrest him.

Why don’t you make a deal with him?’’ I mean it just blows my mind.

Mr. TYRRELL. The truth is in between.

Mr. ROTHMAN. So any thoughts about these things?

Mr. KRUMHOLTZ. No, I absolutely agree. I think there is tremendous potential in this new channel distribution, but at the end of

the day, a fundamental cornerstone of electronic commerce has got

to be copyright protection, protection for intellectual property. It

has been, you know, a foundation in our legal system since the

country was founded over 200 years ago.

You know, that does not change in an electronic environment. I

think we, speaking for the software industry, we certainly have embraces this channel of distribution, and as Mr. Tyrrell mentioned,

I think, you know, the other copyright industries are as well, but

you need to do that within the ambit or within the parameters of

the existing laws.

At the end of the day it is stealing.

Mr. ROTHMAN. OK. Well, I think what everybody is saying is we

think it is a bad thing, too. We are worried about it, but to some

degree we are going to look to you, the most interested in this, arguably, for some ideas as to how we can help you, how we can do

our job enforcing the laws that are so important to our nation. So

we will look to you and look to law enforcement as well.

But, you know, we are just mostly lawyers up here, and so we’re

going to look for some ideas from you. I think we get it. It is a big

problem, and I am not romanced by the notion of steal this video.

Abbie Hoffman used to say, ‘‘Steal this book.’’ He used to be

somebody——

Mr. MANZULLO. Would the gentleman yield?

It occurred to me that people videotape TV shows to show back

later on. What is the difference between videotaping the TV show

and copying the CD?

Mr. TYRRELL. A perfect example.

Mr. MANZULLO. I did not mean to preempt you.

Mr. ROTHMAN. No, that is OK.

Mr. MANZULLO. I will give you more time if you want.

Mr. TYRRELL. I hope I have a great answer.

The motion picture company, when they make the movie, know

that, first, there is going to be a front worldwide premier in the top

theaters for top dollars, and they do not have to worry about somebody taping off the air.

Then it goes to the neighborhood theaters. Then maybe it comes

out on DVD. Then it goes to video rental. Then maybe it is pay per

view, and maybe at that point somebody makes a copy and watches

it later in the day, there are all of these multiple opportunities, and

for one thing, the decision to put that product on the air where it

can be taped and watched later in the day is 100 percent in the

31

control of the movie company. They know even the day it is going

to be shown and the time because they can contract.

Nobody is coming in and doing this to them.

Mr. ROTHMAN. To reclaim the last 30 seconds that I have.

Mr. TYRRELL. Yes.

Mr. ROTHMAN. And I am repeating myself, but I am concerned

about the detrimental effect on the young people who believe you

can get something for nothing. I mean our Republican colleagues

will say that——

Mr. TYRRELL. I agree.

Mr. ROTHMAN [continuing]. About society in general. Years ago

the Democrats, we got it. We get it. It would be a real step backward if people excused the theft of intellectual property as some

kind of a cool, romantic way of living.

It is pure and simple theft, and we have got to get that message

out there, not just for the economic well-being of the country—I

sound like a 47-year-old fuddy-duddy—but for the moral well-being

of the country.

Mr. MANZULLO. Mr. Delahunt.

Mr. DELAHUNT. I guess I would, you know, obviously concur with

the sentiments expressed by Mr. Rothman and others.

What I find very fascinating is that there is an argument that

I guess it was Mr. Menendez who was reading from USA Today

that would appear to be a credible position, and when you pause

and think that this is a fine newspapers, but putting that opinion

out there, again, really does go to an erosion, if you will, of, for lack

of a better term, values.

Gee, you know, it is really not stealing because look what the

benefit is. It is enhancing, if you will, creativity and an increase,

if you will, in terms of commerce.

But, you know, this is only a piece of a larger picture, and I

think I would make this observation, I think, more to Mr.

Krumholtz because he represents the software, if you will, the Software Alliance, and what has happened is that we have become, and

it is picked up in sound bytes, you know. Do not regulate the Internet. Freedom, freedom on the Internet, unbridled freedom.

Well, this is part of the public debate today. We are having a debate in Congress, and it is interesting because some interesting alliances have occurred between very conservative and very liberal

members in terms of not taxation of the Internet, but how do in

America today the brick and mortar stores that we are accustomed

to deal in a commercial world where they have to pay a sales tax

and remote sellers are free from that particular burden, putting

them at a competitive disadvantage.

And those of us who have no interest in taxing access to the

Internet say, ‘‘Gee, we ought to do something about it.’’

Do no regulate the Internet. You know, do not interfere with the

Internet, and I really think that the high tech. community really

has to pause and think about what makes sense and what is balanced and what is right in terms of public policy because this is

feeding into exactly that mindset, if you will, of value system that

Mr. Rothman, myself, and others have alluded to.

So it is a real problem.

32

Mr. KRUMHOLTZ. Mr. Delahunt, if I could just comment and perhaps some of my colleagues in the high tech. community might disagree with me on this, but I absolutely think there is a role for government in this space, and I think perhaps side stepping the issue

of taxation and focusing on intellectual property, I think the Congress has done a tremendous job in providing the authority and

raising the threshold in terms of copyright protection in a digital

environment through the WIPO implementing legislation, the Net

Act.

And I think one thing that Congress could do now is make sure

that the various enforcement agencies have the funding, the resources that they need to really adequately enforce those statutes.

Mr. DELAHUNT. I think one thing that you can do in terms of

your constituency and whom you represent here today is really, you

know, go out and lobby and advocate because we are not spending

the kind of resources that are necessary to do the job, and we cannot continue to cut government, on one hand, in these agencies and

expect and anticipate that we are going to enforce or insure compliance with the statutes that we pass.

On the one hand, we talk about doing something, and then on

the next, where it is most critical, which is in the enforcement end,

we said, you know, ‘‘That is government fat.’’

Well, we cannot have it both ways, and it is really the business

community and the high tech. community that has to step up and

say, ‘‘You know, it has got to happen. It is a good investment. Let’s

not be penny wise and pound foolish,’’ because with the additional

tax dollars that go into providing these resources, we will reap a

good return in terms of America’s investment in the global economy.

Got to do it.

Mr. MANZULLO. I appreciate that.

You know, I took a quick look at this article.

Mr. TYRRELL. Yes.

Mr. MANZULLO. And I find something that is just absolutely astounding. It says, ‘‘Tell me why you support Napster.’’

Answer—I do not know. Chuck D, front man for Public Enemy.

I do not even know who these people are.

Mr. TYRRELL. Right.

[Laughter.]

Mr. MANZULLO. You talk about pirates.

Mr. ROTHMAN. You are a fuddy-duddy.

Mr. MANZULLO. Evidently.

[Laughter.]

But the Napster is the radio of the 21st century. That is not true

because radio stations determine what goes on and they pay royalties for it and get licensing from the FCC.

Mr. DELAHUNT. The public, the people own the airways in that

case.

Mr. MANZULLO. But, Bill, what you and Steve were talking about

is exactly what Jefferson studied at William & Mary. He read

Coke. Coke was a revolutionary because that was at the time when

property went from estate tail to absolute fee. In other words, the

king owned everything, and people would have an opportunity to

participate in it, but everything was owned for the public good.

33

And then along came Blackstone with his commentaries that

really settled the issue that private property is an absolute right,

including intellectual property. What the mind could think was

also subject to copyright protection.

And the whole idea of copyright protection is only about 250

years old. The fact that what man can think has a right to be copyrighted and protected. I find the greatest assault on private property occurring in people simply making the assumption that just

because it is for the public good, it overrides private property.

That sends us back to Marxism, and that wipes out 250 years of

legal history.

Mr. DELAHUNT. If you would yield, Mr. Manzullo, I do not think

that. The public good here, OK, is to protect copyright laws so that

creativity, the genius, if you will, of the American people continues

to flourish and, at the same time, allow us to benefit from that creativity in terms of our role in the global economy.

There is no conflict between public good here and copyright law.

Copyright law and protection is about the public good.

Mr. MANZULLO. Perhaps I could have used the word ‘‘public.’’

Mr. DELAHUNT. I mean, what Napster is doing in my judgment

here is absolutely outrageous.

Mr. MANZULLO. Well, this is very interesting. I do not know if

we have resolved anything.

Mr. TYRRELL. And Chuck D, part of his image is that he is always out. I mean, the group he performs for is Public Enemy.

Mr. MANZULLO. I used to play in a rock and roll band when I was

in high school. It was called the Vantrells.

[Laughter.]

We had a very small—this is true. We had a very small speaker

with a Gibson electric guitar. It was one of the first Gibson electric

basses ever made. It was cherry red. It was back in 1960, and we

did not—— Mr. DELAHUNT. What was it like that far back, Mr. Manzullo?

[Laughter.]

Mr. MANZULLO. This was a very interesting hearing. I really

want to take this opportunity to thank you for a very enlightening

hearing. I do not know if we accomplished anything except to show

how bad the problem is and to bring it to public view, but again,

I thank you for coming here.

I will look forward to working with you. We are obviously extremely open to anything that you would have Members of the U.S.

Congress do to protect the right of private property, including those

industries that you represent.

This Subcommittee is adjourned.

[Whereupon, at 4:13 p.m., the Subcommittee was adjourned.]

(35)

A P P E N D I X

JULY 19, 2000

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