Brilliant, logical, clear presentation in favor of enabling P2P as the savior rather than the destroyer of the entertainment industry by attorney Philip S. Corwin, as presented yesterday before the California Senate Select Committee on the Entertainment Industry – well worth the time to read if you want to understand what the debate is all about:
- Testimony of Philip S. Corwin
Partner, Butera and Andrews, Washington, D.C.
Regarding P2P: The Path to Prosperity for the Entertainment Industry Before
California Senate Select Committee on the Entertainment Industry
March 27, 2003
Senator Murray and members of the Committee, thank you for inviting me to share my views with you today regarding the impact of peer-to-peer (P2P) technology on the entertainment industry. We all now know that the acronym P2P stands for peer-to-peer. It is my belief that P2P also stands for path to prosperity. This powerful technology will transform the entertainment industry and deliver it, and the Nation’s artist and consumers, into a new age of cultural and economic abundance. I commend you for holding this hearing so that your Committee can better inform itself about the realities of this powerful new technology, since effective and relevant public policy must always be informed by the truth.
Like you and the members of the Committee, I have devoted my career to the shaping of public policy. It has been my privilege to participate in the public policy debate surrounding digital media since 1999, when I represented MP3.com on Capitol Hill. I currently serves as a legislative consultant to CenterSpan Communications, a Portland, Oregon-based provider of intermediated and digital rights management (DRM) protected P2P backbone technology for licensed content.
I also lobby on behalf of Sharman Networks, the Sydney, Australia-based distributor of the Kazaa Media desktop (KMD) software. Worldwide downloads of KMD just surpassed 200 million, and it appears that later this month it will surpass ICQ to become the most downloaded software in history. During the course of this afternoon, between lunch and dinner, about 100,000 more copies will be downloaded worldwide.
In addition to representing my clientele on copyright and technology issues, I also serve as the Washington liaison for the American Bar Association’s Section of Science and Technology, and as legislative reporter for the ABA’s Cyberspace Law Committee. Next Friday, at the ABA Business Law Section’s Spring Meeting in Los Angeles, I will participate in a panel discussion of “Internet Issues for the Entertainment Industry” sponsored by the Intellectual Property Subcommittee of the Cyberspace Law Committee.
The views I present to you today are solely my own and not those of any client I represent or organization I belong to.
* Like all technologies, digital technology has inherent positive and negative aspects. Its ability to make an infinite number of perfect reproductions of copyrighted media holds promise for society but peril for traditional copyright
* We are just nearing the halfway mark in the public Internet adoption cycle. The impact of exponential, transformational change upon the entertainment industry has a long way to go.
* P2P is but one of many digital technologies that can and are being used for copyright infringement, but that can also provide the infrastructure for new business models.
* The weight of objective studies is that P2P file sharing is not a significant cause of declines in CD sales and may, on a net basis, promote CD sales.
* P2P file sharing provides an important new means of gaining an audience for many musical artists who are not well served by the current major label and commercial radio systems.
* On the federal legislative front, the momentum has swung away from Hollywood interests and in favor of a broad coalition of technology firms, consumer electronics manufacturers, and public interest groups favoring explicit
demarcation and protection of consumer rights in the digital media they purchase.
* Several important cases making their way through the courts have important implications in such areas as Internet jurisdiction, application of the Betamax standard to digital technology, P2P user privacy and due process rights, and the application of copyright law prohibitions on circumvention of software access controls to non-entertainment manufactured goods. This litigation assault is suppressing investment and innovation in Silicon Valley and other U.S. technology centers.
The recording industry has missed numerous opportunities to embrace new technologies. Lawsuits are not a business strategy, and the industry’s legal assaults have driven consumers on to new technologies that are progressively more difficult to measure and monetize.
Online musical sharing utilizing P2P would provide many significant benefits to the recording industry. The Kazaa-Altnet partnership is already demonstrating that paid sharing can coexist and prosper with free content on an open P2P network.
A new compulsory license levied against the broad base of economic activity that benefits from the free availability of digital media could provide substantial new revenues to rights holders and creators. In return for this monetization, consumer burning and file sharing activities would be legitimized. Overall, the incentive ends of copyright law would be preserved in this new age of unfettered digital duplication.
New online music sharing and delivery services plus sales of qualitatively
superior hard goods can revive music industry revenues in the not distant
The movie industry is fundamentally different than the music sector from the
consumer use, revenue structure and technological perspectives. It has little
to fear from P2P, and much to gain from its exploitation.
While adult content can be exchanged with P2P software, this technology remains but a minor player in the distribution and access of such material. A new federal study determined that the adult content filtering capabilities of the KMD software are the most comprehensive and effective among all free P2P software applications.
Stronger digital rights management approaches are not only doomed to failure but may act as a disincentive for consumers to engage in legal commerce. The best means of competing with the “darknet” distribution network is on its own terms of convenience and low cost.
P2P is the path to prosperity for the entertainment industry – but only if it embraces it.
The Human Species and the Technological Imperative
Mr. Chairman, history informs us that the human species is not inclined to forego new technologies, regardless of their collateral effects. The only example I can cite of a society rejecting, at least temporarily, any advanced technology is the Japanese decision to give up the gun — to forego the use of firearms and gunpowder for a three-and-a-half century period stretching from 1543 to 1879. The event is remarkable for its rarity in human history.
Digital technology in general and the Internet in particular have been referred to as disruptive technologies. I prefer to use the term transformational technologies. The word disruptive implies a temporary pause, and then a return to normal. To the contrary, transformational technologies disrupt the old normal and abet the transition to a new and far different normality. Because we equate technology with progress, we are prone to forget that every technology has inherent negative aspects, and that every new order undermines the foundations of the old.
I believe that the Internet is the most powerful transformational technology since the internal combustion engine. As you hail from Los Angeles, Mr. Chairman, you’re undoubtedly aware of the inherent negative aspects of the automotive civilization that we take for granted now, but which barely existed a century ago. The automobile has given us incredible personal freedom. But mass adoption of the internal combustion engine also brings inherent and unavoidable side effects. These include highway deaths and injuries, urban sprawl, neighborhood disruption, the voracious consumption of nonrenewable resources, pollution, and global warming. We are well aware of all these negative byproducts of automotive civilization. Yet none of us is about to give up their car. Society mitigates the collateral effects of this technology through law, business models, and technology itself – but we can never eliminate them.
Likewise, those who already use the Internet regularly now take it for granted, rely on it heavily, and view its disappearance as unthinkable. Yet mass utilization of the Net is barely a decade old. Citizens will not readily give up the new freedoms of the Net regardless of the collateral damage inherent in our transition to a digital civilization.
Like any powerful technology, the Internet has inherent positive and negative aspects. The same ability to post e-mails and information anonymously that enhances freedom of expression in totalitarian nations also facilitates the surreptitious activities of terrorists and pedophiles. The same massive databases that facilitate global commerce and government efficiency are also vulnerable to assaults on security, and can erode personal privacy.
More relevant to our focus today, digital technology allows for the perfect reproduction of infinite number of copies of copyrighted media of all types, and their near-instantaneous distribution through the Internet to a global audience, at a marginal cost approaching zero. This aspect of digital technology promises tremendous potential cost savings for the entertainment industry, but also renders enforcement of traditional copyright law difficult to impossible. Copyright law may promise certain exclusive rights of reproduction and distribution to authors and owners, but digital technology severely undermines the ability to make good on that pledge.
The Power of Exponential Change
P2P is the natural and inevitable results of the evolution of the Internet. P2P is not some feature of or add-on to the Internet but is the inherent blueprint of this network of networks. It results from the intersection of personal computers with extremely fast processors and huge hard drives with wired and wireless broadband networks. Moore’s Law informs us that computing power and speed doubles roughly every 18 months. That is, every year and a half ratchets upward another notch on the digital Richter scale. Digital technology brings with it an exponential rate of change — and we are already well past the tipping point for the transformation of the traditional entertainment industry business model.
Let me cite a personal example: When I purchased my first home desktop computer in 1996 the largest hard drives I could obtain was 5 gigabytes (GB). Last year I purchased a Nomad Jukebox portable MP3 player so that I could take part of my personal collection of more than 1000 compact discs (CDs) with me on my many travels. That CD player-sized device has a 6 GB hard drive – bigger than my first desktop computer’s — capable of holding about 100 CD’s worth of music in MP3 compression format. Last month, I purchased the new Zen Jukebox, which is small and light enough to fit in my shirt pocket but has a 20 GB hard drive capable of holding 350 CD’s worth of music. Moore’s Law informs us that within three years I will be able to purchase, for the same $300, a still smaller device with an 80 GB hard drive capable of holding 1400 CD’s worth of music, or more than my entire collection.
And Sen. Murray, without any need for the Internet, I could bring it by your house and in the time it takes to have a cup of coffee we could transfer that 1400 CD’s worth of music to your personal computer through a firewire connection. That is what’s known as the “sneakernet” – the person-to-person physical transfer of digital media.
Meanwhile, in three years, the 20 GB shirt pocket MP3 player I have now will be available for about $75, a price point that will vastly expand the customer base for such devices.
The digital transformation of the entertainment industry is just in its infancy. In a recent interview Mark Andreessen, who launched the Mosaic World Wide Web (www) browser 10 years ago, founded Netscape, and gave rise to the Internet age, observed, “Any new technology tends to go through a 25-year adoption cycle…. With the Internet, we’re really 10 years into what will ultimately look like a 25-year cycle from invention to full implementation.”1
In other words Mr. Chairman, we ain’t seen nothin’ yet.
As you consider the implications of P2P technology for the entertainment industry, please remember two important things.
First, Hollywood is hardly the only industry that is seeing is traditional business model transformed at an exponential rate by new technology. Technology companies themselves are just as susceptible, and even the largest player can be quickly humbled. Just a few weeks ago Business Week featured a cover story detailing how the Linux open source operating system is challenging Microsoft’s business strategy to a far greater extent than the law, in the form of the Justice Department antitrust investigation, ever did or could.
Sun Microsystems, under the same assault as Microsoft, is actively considering striking up partnerships with mainstream Linux sellers and thereby become their ally, rather than their rival. Similarly, AOL, which grew to become the largest provider of Internet access dial-up services, is now seeing its business model undermined as cable providers entice its subscribers away with their high-speed broadband connections. And AOL is spending $millions to try to catch up to the growing broadband world with new and enhanced customer services. Unlike Hollywood, these technology companies understand that they cannot stop the digital revolution and must adapt their business strategies to new and
Second, P2P software is but one link in a long chain of digital technologies that can be used as tools for copyright infringement. Massive copyright infringement can and is taking place without any resort to P2P software. Virtually every personal computer sold today, even the lowest price model, comes equipped with a CD burner for the reproduction of digital media, an Ethernet port for broadband connectivity, and a large hard drive for storing vast amounts of data. Blank, burnable CD-R optical disks outsold prerecorded CDs by more than a 2-1 ratio in United States last year; these discs are the most likely cause of technological displacement of CD sales, since they facilitate, in combination with “ripping” software bundled with new computers, the quick and easy duplication of complete CDs in full audio format. Cable and DSL broadband services provide fast connectivity between PCs. And portable players provide a means by which consumers can take copyrighted media with them wherever they go.
Infringement is an almost unavoidable byproduct of the intuitive use of these products, in part because infringement is a legal term that has little practical meaning for most of the consumer population. Most people are not lawyers – thank goodness — much less lawyers steeped in the hazy complexities of copyright law. Often, infringement is not dependent on an act but on the intent accompanying that act, or on an additional subsequent act. For example, Mr. Chairman, burning a backup copy of my Norah Jones CD is not an infringing act, but that same act accompanied by an intent to give it to a third party turns it into infringement, and if I sell it to that third party it elevates it to commercial piracy.
If Hilary Rosen and Jack Valenti could wave a magic wand and make P2P disappear from the face of the earth, digital copyright infringement wouldn’t miss a beat. That wouldn’t even halt Internet infringement. P2P software is largely just a combination of two common digital technologies; a search engine and a file transfer capability. And it is hardly the only efficient means for
transmitting media files across the Net. As the New York Times later revealed, the 2002 Grammy Awards demonstration of “P2P piracy” was actually a demonstration of the highly efficient file transfer capabilities of AOL’s Instant Messenger software.
P2P and Creators: Promotion or Displacement?
Mr. Chairman, you are well known as an advocate for artist rights. Your courageous inquiries into unfair contract and labor practices affecting musical artists were a source of hope to the creative community last year.
The Internet has now delivered us into an era of unprecedented artistic abundance and the promise of direct connectivity between artists and their audience. If artists are able to realize the full possibilities of digital reproduction and distribution technologies they can translate this empowerment into greater freedom and enhanced economic rewards. In the potential new entertainment industry paradigm, traditional record companies as well as new market entrants will continue to provide such important functions as financing, production, and touring, but the balance of power between record labels and artists will shift toward the musician. On the other hand, if record labels succeed in stifling technological innovation and limiting new competition, and successfully transfer their physical goods business model to the virtual landscape of the Internet, then the future for most musical artists may be even bleaker than the present. In that unwelcome scenario, artists would have failed to realize the potential freedoms and riches of the digital era and find instead that the disadvantageous record club compensation model has become the standard for Internet remuneration.
A big question right now is whether P2P file sharing promotes or displaces sales of the primary record industry product, the compact disc (CD). While the record industry constantly tries to place almost the entire blame for modest recent declines in CD sales on P2P file sharing, they ignore a variety of other and far more plausible causes. These include massive consolidation of the major record labels and the significant financial debts that accompanied that merger wave, the end of the vinyl LP to CD conversion era, commercial radio consolidation, and a shift in consumer preferences from pure audio media towards the audiovisual. While CD sales have declined about ten percent in the last two years, DVD sales doubled in just the past year – leaving the corporate parents of the big record labels and movie studios better off overall. That consumer preference shift has been exacerbated by the record industry’s inflexible pricing practices. Many media observers have noted that today one can buy the DVD of an entire movie, with better quality audio and a host of additional features, for less than the CD of that movie’s soundtrack.
In any event, the weight of the third party objective studies of this question leans toward the answer that, on balance, P2P file sharing promotes CD sales more than it displaces them. For example, a May 2002 Jupiter Research Study2 found that file sharing boosted sales more than it displaces them and concluded that music sellers should devote their resources to online marketing and distribution, rather than trying to eradicate the phantom threat of file sharing. Similarly, an August 2002 Forrester Research report3 found that digital music lovers, those who downloaded the most, increased their CD purchases on a net basis as a result of exposure to new music. Similarly, a new TEMPO study4 reports that about 40 million Americans have downloaded a music file in the past month, and that the vast majority of this music-loving population (about three-quarters) reported that their motivation for downloading music files was to sample music before making a CD purchase. Even the most pessimistic study of P2P file sharing5, conducted by University of Texas at Dallas Professor Stan Liebowitz, reported that the evidence to date was inconclusive, and that at most P2P file sharing might displace about 20 percent of CD sales at some time in the future. As my testimony will later detail, that shortfall, if it indeed occurs, can be more than made up for by sales of a variety of new online services and physical products.
In any event, the impact of P2P file sharing on musical artists may well be differentiated. Internet network expert Tim O’Reilly has written that, “Piracy is a kind of progressive taxation, which may shave a few percentage points off the sales of well-known artists (and I say “may” because even that point is not proven) in exchange for massive benefits to the far greater number for whom exposure may lead to increased revenues…. Lowering the barriers to entry in distribution, and the continuous availability of the entire catalog rather than just the most popular works, is good for artists, since it gives them a chance to build their own reputation and visibility, working with entrepreneurs of the new medium who will be the publishers and distributors of tomorrow.”6
This perspective has significant support in the artists’ community. For example, in a February 2, 2003 Los Angeles Times Op-Ed singer-songwriter Janis Ian wrote, “The Internet is the only outlet for many artists to be heard by an audience bigger than whoever shows up at a local coffeehouse. The Internet allows people like me to gain new fans; if only 10 percent of those downloading my music buy my music or come to my shows, I’ve just gained enough fans to fill Carnegie Hall twice over.”7 And John Snyder, the President of Artist House
Records, a Board member of the National Academy of Recording Arts and Sciences (NARAS), and a 32-time Grammy nominee, recently wrote, ‘If your music is not being downloaded, then you’re in trouble. If you can’t give it away, you certainly can’t sell it…. I would argue that the future of music is multimedia, the future of multimedia is DVD, and the future of music companies is software. In five years, record labels will be software companies and I don’t think they know that yet. The music business will be saved by someone from the software business who can impose a new business model on music assets.”8 That business model is arriving in many forms. For example, the partnership formed between Cornerband.com and Sharman Networks is now using the Kazaa software as a means of promoting new bands from throughout the United States and distributing their music to software users.
The strained relationships between record labels and artists also influences artists’ views on P2P. Recording Artists’ Coalition founder and Eagles’ leader Don Henley reportedly told an October 2002 Atlanta concert crowd, “Download all you want. The record companies have been ripping off artists for years. Go ahead. I’d rather lose money to you than them. I don’t have a contract with you.”9
Some who represent artists in their negotiations with labels and studios also believe that file sharing is a net plus, and a large potential source of future revenues. In a Dec. 12th speech in Los Angeles, noted entertainment attorney Ken Hertz observed: “File sharing is NOT piracy…. File sharing is tens of millions of music fans swapping copies of things they wouldn’t otherwise buy. An ASCAP or BMI like pool of money allocated in an equitable way amongst copyright owners is the only solution that could be of benefit to creators, consumers and copyright owners. Compulsory blanket licensing for non-commercial file sharing is the equivalent of loosening a tourniquet tied around the entertainment industry’s neck. The problem is that we can’t give consumers what they want. The symptom is that they can get it without our help. We can either engage in futile attempts to eliminate their supply, or we can monetize their demand.”10
Mr. Chairman, P2P file sharing functions as a sampling service for musical singles in an era when the physical single has largely disappeared from the record shops of America – a deliberate withdrawal that began long before Napster showed up. Big Champagne CEO Eric Garland recently brought this point home. Big Champagne is a company which tracks P2P file sharing activities for the major record labels. It recently signed an agreement that will incorporate its P2P surveys into a service that will help radio stations determine which music is most popular for play list selection purposes. In an early March
interview, Mr. Garland stated, “Generally speaking, the biggest myth about music online is that people are stealing CDs on the Internet. The truth is, to me, more distressing. Statistically speaking, people almost never downloaded albums. They download singles. Think about that: we’re trying to sell a product for $17 that you can’t give away for free!”
The Legislative and Litigation Landscape
Mr. Chairman, while the federal legislative debate over digital media takes place in Washington, DC, it has a distinctly West Coast flavor – as it often resembles a civil war between Northern and Southern California, between Silicon Valley and Hollywood. The legislative initiative that sparked this conflict was the “Consumer Broadband and Digital Television Promotion Act”, introduced in 2002 by then Senate Commerce Committee Chairman Ernest Hollings. This bill, a high priority for the Motion Picture Association of America (MPAA), would authorize the Federal Communications Commission (FCC) to establish security system standards for all digital hardware and software capable of reproducing digital media in the event that the manufacturers of such equipment and copyright interests failed to reach agreement on such technical standards within one year following the bill’s enactment. This proposal would also require Internet Service Providers (ISPs) to store and transmit with integrity any such security measure used in conjunction with copyrighted material that passed through their networks. Upon introduction, the proposal was immediately and strongly opposed by computer hardware, software, and consumer electronic interests on the grounds that mandatory government standards were inappropriate for the fast-changing technological realm, and that the measure would result in hardware and software that would cost consumers more but function less well. This controversial measure was never reported from the Commerce Committee despite its Chairman’s authorship, and has not been reintroduced so far in the 108th Congress.
The only federal legislative proposal directly addressing the purported negative effects of P2P was the “P2P Piracy Prevention Act” introduced last year by Los Angeles area Representative Howard Berman. This proposal would excuse a copyright owner from any criminal or civil liability for impairing the unauthorized distribution, display, performance or reproduction of his work on a publicly accessible P2P network, subject to giving prior notice to the Department of Justice (DOJ) of his intent to use certain impairment technologies and provided that the actual out-of-pocket damages to any user of a P2P network or software did not exceed $50 per impairment. The bill also authorizes an aggrieved computer owner to bring an action for wrongful impairment against the copyright owner provided that prior notification of such intent to sue was provided to the Department of Justice, which would have a limited amount of time to investigate the complaint. Both copyright owner notices to the DOJ of their intent to use impairment technologies, and the notices triggering and results of the DOJ’s investigations of allegations of unlawful impairment actions made by an aggrieved P2P users, would have been exempted from public disclosure under the Freedom of Information Act. This proposal was strongly criticized by a variety of groups for undermining network and computer security, by potentially providing millions of entities with an overly broad and vaguely worded loophole through which they might engage in “hacking” activities that could wreak substantial economic and infrastructure damage. Last month, Rep. Berman indicated that he was leaning against reintroduction of this measure in the new Congress because of lack of support from entertainment industry interests. In particular, the MPAA was reportedly concerned that the bill would create worrisome new potential liabilities for copyright owners who engaged in any impermissible impairment activities.
The Hollings and Berman initiatives incited a counter reaction from a variety
of quarters. Separate bills that have been reintroduced in the new Congress by Representatives Rick Boucher of Virginia and Zoe Lofgren of California would, in particular, amend the Digital Millennium Copyright Act (DMCA) to allow circumvention of access control technologies to facilitate “fair use” of copyrighted materials, and make clear that consumers have a right to make a backup copy of digital media they have purchased. The Boucher proposal would also write the Supreme Court’s “Betamax standard” into copyright law by clarifying that it is not a violation to manufacture, distribute or make non-infringing use of any hardware or software product capable of making significant non-infringing use of a copyrighted work. These proposals are strongly opposed by entertainment industry interests wishing to defend every aspect of the controversial DMCA, but a broad coalition of computer and telecommunications firms, library associations, and cyber liberties and consumer organizations back them.
The near-term outlook for enactment of new copyright legislation is unclear, and the best guess is that gridlock will prevail. But, for the long-term, it is clear that Hollywood interests have stirred up a hornets’ nest and that they are now playing defense against legislative measures backed by the technology sector.
Turning to the litigation front, the most important and geographically proximate lawsuit of interest is the MGM v. Grokster case currently being heard in Federal District Court in Los Angeles. Motion picture and record label plaintiffs in that case are suing a number of distributors of second generation P2P software. Plaintiffs argue that the defendants are guilty of vicarious and contributory copyright infringement, as was held in the earlier Napster case. But defendants respond that the Napster court did not find P2P to be illegal per se, but held against that particular company because of its actual and direct knowledge of what copyrighted works were being shared over its network as well as its control over the central server directory that facilitated such activities. Second generation PTP software, to the contrary, connects end users without any intervening action or monitoring by a central server. Defendants therefore argue that they are no more liable than providers of other types of software, such as e-mail and instant messaging applications, which can facilitate the transmittal of copyrighted works over the Internet. They further contend that their software is capable of substantial non-infringing use and is thereby sheltered by the Supreme Court’s Betamax standard that determines whether new technologies can be held liable for facilitating copyright infringement.
On Jan. 10, 2003 the District Court held that my client, Sharman Networks, was subject to its jurisdiction despite its lack of employees or facilities in California. This decision seems to be at direct odds with the November 2002 decision of the California Supreme Court in the case of DVD Copy Control Association v. Pavlovich, where jurisdiction was denied in regard to a Texas resident who had made software capable of breaking DVD encryption available at his web site. The California Supreme Court reached that conclusion because Mr. Pavlovich had not intentionally targeted California for distribution of that software.
The Federal District Court based its jurisdiction decision primarily on two factors — that California is a big state with a large population and that Sharman should therefore have known that some substantial number of California residents might download its software, and that many copyright owners reside in California. This standard seems essentially useless in helping to determine how the laws applicable to specific Internet activities can be confined to key
jurisdictions. Regardless of how U.S. courts rule on the legality of distributing P2P software within the U.S., such distribution may well remain legal in other nations. For example, in spring 2002 the Amsterdam Court of Appeals held that distribution by KaZaA BV, the former owner of the KMD software, did not create copyright liability. In addition, a number of U.S. courts have refused to uphold judgments entered by foreign courts against U.S. residents for their activities on the Internet, and the reverse could certainly occur.
On this very important matter of jurisdiction, Mr. Chairman, the Internet appears to constitute the greatest challenge to the power and autonomy of individual nation-states since the invention of the legal entity known as the corporation. Corporations challenge the state by facilitating aggregations of private economic power sufficient to confer political power; and multinational corporations compound that by straddling national borders with their activities and facilities. The technology of the Internet challenges sovereignty in an altogether different manner, by raising difficult questions about where jurisdiction is located and how enforcement can be accomplished. This dilution of nation-state autonomy has its benefits. For example, it undermines the censorship powers of authoritarian states by facilitating the transmission of uncensored data to populations yearning for the truth, and by providing a means by which they can communicate with the outside world.
Having said that, the imprecise and all-encompassing jurisdictional principles articulated by the District Court in the Grokster case would, if applied on a worldwide basis, be a disaster for U.S. companies precisely because they are most active in their presence on, and utilization of, the Internet. Dow Jones, the parent company of the Wall Street Journal, is currently challenging the jurisdictional validity of a libel suit brought in Australia, brought under standards less protective than our First Amendment, because of a news item made available from a U.S. server to a handful of online subscribers “down under”. U.S. firms can hardly expect to escape unpredictable liability under legal standards at variance with our own merely because their websites can be viewed abroad if a small, Australia-based software distributor like Sharman Networks, with no employees or facilities in the United States, can be dragged into federal court here. Ultimately, the resolution of the Internet jurisdiction challenge cannot be accomplished by any one nation but will require multilateral negotiations and agreements.
It must also be noted that plaintiffs in the Grokster case are seeking to accomplish by judicial fiat what they have not been able to accomplish with the Hollings bill. Their court filings take the position that the Betamax standard applies only to single purpose analog devices, and has no application to multi-function digital technology. If they succeed – if any provider of digital hardware or software can be convicted of contributory copyright infringement even where their products have substantial non-infringing uses – the practical effect will be to oblige them to adopt copy control technologies designated by major copyright holders as an obligatory legal defense, regardless of their cost to or impact on their own customers. Such a result would be a disaster for Silicon Valley’s worldwide technology leadership. But the reality is that fear of entertainment sector litigation is already stifling innovation and investment in the Valley. Just last week, the bankruptcy of Sonicblue provided a sobering object lesson. That company, which successfully defended its Rio MP3 player in the late 1990s against an RIAA attempt to bar its manufacture and sale, fell victim to the substantial and ongoing litigation costs incurred in defense of its ReplayTV personal video recorder (PVR) against the movie studios.
Another major case being watched is that of RIAA v. Verizon. On Jan. 21, 2003 the U.S. District Court for the District of Columbia ruled that section 512(h) of the DMCA required Verizon to comply with a subpoena demanding that it reveal the identity of the user of its Internet services who the RIAA alleged had made about 600 copyrighted song files available to other users of Kazaa P2P software. Section 512(h) provides a means by which a copyright holder can obtain a subpoena simply by filing infringement allegations with the clerk of the court, absent any judicial review. Verizon contends that this expedited procedure is only available where infringing material is stored on its own servers, and that the RIAA should proceed by filing a “John Doe” subpoena request for review by a judge. However, the court ruled that this expedited process for obtaining a subpoena was available against any subscriber connected to an Internet service provider (ISP), raising the prospect that major
copyright holders using automated “bots” to seek out the Internet protocol addresses of P2P software users could deluge ISPs with hundreds or even thousands of user identification subpoenas. This has raised major concerns among ISPs regarding potentially crushing administrative costs and damaged customer relations over breach of privacy. Verizon has appealed the District Court ruling, and asked that the order to reveal the subscriber identity be stayed painting its outcome. Meanwhile, the RIAA has issued two more such subpoenas to Verizon, which Verizon has moved to quash. Regardless of the outcome of this case, and the next hearing is scheduled for April 1st, Verizon and other telecommunications firms and ISPs will reportedly seek Congressional clarification of the scope of this section 512(h) subpoena power. The RIAA has also stated that it may seek legislative redress if the case goes against it on appeal.
The Verizon case is hardly the only instance in which entertainment industry tactics are raising serious digital privacy concerns. It is well known that the MPAA and RIAA have sent letters to thousands of U.S. corporations and universities warning them to patrol their internal computer networks for copyright infringement – or else. This entertainment industry push to assert the principle that all business and academic entities have an affirmative duty to proactively adopt employee prohibitions and utilize all available technical measures to avoid potential copyright infringement liability is very much akin to their position, embodied in the Hollings bill, that computer and consumer electronics manufacturers should have an affirmative legal obligation to build available copy control protection into every device. Sometimes it seems that Hollywood’s business model for the future is to force other industries to protect its business model of the past.
In addition to suggesting that these companies and universities erect a firewall to prevent access to particular networks or limit the use of certain software, the letter recommends that three particular companies developing technical censorship and monitoring tools be contacted and that their software be utilized. While about one-third of employees in U.S. businesses currently have their Web surfing and e-mail monitored to some extent by employers, the new types of software being advocated by the entertainment industry go much further in their intrusive capabilities. These software applications are designed to be loaded on every employee’s and student’s computer to periodically index the entire content of their hard drive and report back to a central server. Such technological Big Brotherism is the digital equivalent of having one’s phone calls monitored, with a comprehensive report regarding the content and destination of those calls being submitted to an employer or university administrator on a regular basis. Its not quite “Enemy of the State” yet, but it’s sure a disquieting move in that direction. It is regrettable that an industry so dependent on First Amendment speech protections cares so little for the privacy rights of its customers.
Finally, although not directly related to P2P, two other cases are of particular note because of the eventual legislative fallout they may engender. The cases of Lexmark International v. Static Control Components Inc., as well as that of Chamberlain Group v. Skylink Technologies, are similar. The former involves a manufacturer of printer ink cartridges suing an aftermarket company that refills those cartridges, while the latter involves a garage door manufacturer suing a rival producer of universal remote control devices. Both plaintiffs contend that the anti-circumvention provision of the DMCA prohibits their competitors from circumventing software controls that allow only the original manufacturer’s equipment to be utilized as replacement parts. Should the courts uphold these novel claims – and Lexmark has already obtained an injunction in its lawsuit — it is quite possible that this attempted use of software to limit aftermarket competition will spread rapidly. If that occurs, a sharp outcry from small business and a Congressional response is virtually assured, and that could open the door to a far broader revisitation and revision of the DMCA.
Another Missed Opportunity — or Monetization?
Mr. Chairman, to date the music industry has missed many opportunities to get ahead of the digital curve and realize the tremendous opportunities to create and monetize new digital business models.
Nearly a decade ago, they ignored attempts by the head of their own national trade association, the RIAA, to apprise them of the coming tsunami. As recounted in a recent article:
In fact, [Hilary] Rosen tried to steer the labels toward the online future long before they saw it coming. In the mid-90s, Rosen brought [technology guru Esther] Dyson to a conference of music executives to brief them on how technology would transform their business. Dyson described for them the inevitability of digital delivery, an eventuality Rosen says she had begun to understand but wanted her bosses to hear from an outsider. But as Dyson spoke, the label executives became defensive, them furious. By all accounts, the meeting devolved into a shouting match.11
When the digital future began to arrive, this head-in-the-sand attitude was replaced by a series of legal assaults on the very online services and technologies that the industry should have embraced and extended:
* In early 2000 MP3.com launched the mymp3.com online locker service. It employed software that, when a user put a music CD into their computer’s CD drive, could immediately determine what CD had been inserted and could also confirm that it was an original and authentic product and not a burned duplicate. It then made a streamed copy of that CD available to be heard by the user at any location from which they connected to the Internet. While the CD database created to provide the service was a technical infringement of copyright law, it merely made more convenient an activity that CD owners could engage in legally – the space-shifting of CDs they already owned to an online locker. The mymp3.com service provided convenience as it relieved users of the tedious task of “ripping” and uploading their own music. This was a service the labels should surely have embraced as it enhanced the value of their primary product, the CD, and promoted ephemeral music streams rather than permanent downloads. But they sued, and won, and drove MP3.com into a choice between bankruptcy or acquisition. Universal Vivendi swallowed them up, and little’s been heard from them since.
* Even as the lawsuit against MP3.com was proceeding, the Napster phenomenon was gaining steam. Seldom has a new technology so captured the public’s enthusiasm, as overnight a software application opened the eyes of the world to the possibilities of immediate and intuitive access to any sound recording ever made anywhere in the world any time of day. Despite clear evidence that this online sampling service was inciting tremendous excitement for all genre of music, and despite a $billion dollar licensing offer from Napster, the labels again sued, and again won. And again, in the aftermath, a major label stepped in, this time BMG. Napster combined the cost and content efficiencies of P2P with a centralized directory that provided total knowledge and control, an ideal model for monetization. BMG appealed to its brethren to license their content to Napster and thereby create for the recording industry what Orbitz is for the airlines. Sadly but predictably, they refused. Napster languished and, just recently, and somewhat ironically, its brand name was just sold off to Roxio, a company best known for its CD-ripping software.
Even as the lawsuit against Napster proceeded word of a new type of P2P software began to spread. First in the form of open source Gnutella, and later as the more scalable and efficient Kazaa, this software propagated and connected end users without any need for a central server. Again, the labels have sued. As I mentioned earlier, the first lawsuit involving KMD software resulted in a Dutch court holding that its distribution is legal. The current U.S. case has a long way to go to finality. Meanwhile, the KMD user base grows by three million per week – a tremendous audience of music fans and potential customers. The great irony, Mr. Chairman, is that even should the distributor of Kazaa software be shuttered by legal action, a result I think most unlikely, the software would continue to function! This shouldn’t be much of a surprise – after all, the Internet Explorer web browser would continue to work even were Microsoft to disappear tomorrow; software has a life far beyond that of its creator or distributor. In any event, the unlikely closure of Sharman Networks would simply mean the end of streamed banner ads to online users of the software, not an end to its utility for file-sharing.
And if the current generation of self-distributing and decentralized P2P could be brought to heel, what next? That’s an easy question to answer. “Stealth” P2P software is already becoming available that disguises IP addresses, encrypts files, and disperses content more comprehensively. If Kazaa and similar P2P software could be shut down, this is the next generation that file sharers would migrate to. Music swapping activity would also shift more toward online chat rooms, instant messaging software, and a physical “sneakernet” of optical, flash media, and hard drive storage. (The three major instant messaging software applications all have ties to the entertainment industry, so perhaps that is why it turns a blind eye to the more than one billion IMs that traverse the Internet each day, each of which can carry one or more media files using their ubiquitous file attachment feature.) All such activity would be far more difficult to measure or monetize than presently popular P2P software applications.
In other words, Mr. Chairman, each label legal assault against new technology has driven the online audience to a newer technology that is even more difficult to control and monetize. Yet the labels don’t seem to understand yet that Moore’s Law is more powerful than copyright law. They don’t seem to understand that this intuitive consumer utilization of technology should be monetized, not criminalized. They don’t seem to understand that lawsuits are no substitute for business strategies. And they don’t seem to understand that the best means of regaining control is to concede that the control they once enjoyed is gone forever. Instead, they mimic Mickey Mouse in the “Sorcerer’s Apprentice” segment of the classic animated film “Fantasia”. If I may make a fair use reference to that copyrighted Disney work, you will recall that in that cartoon Mickey conjures up a walking broomstick to draw water from the castle well. But Mickey hasn’t learned the magic spell to make it stop, and a flood begins to ensue. So Mickey grabs an ax and begins to chop away – and each swing of the ax just doubles the number of uncontrollable broomsticks and accelerates the pace of the flooding.
P2P as the Path to Prosperity
Mr. Chairman, a recent study12 of investment opportunities in digital media lists the following benefits that would accompany a shift of sound recording distribution from physical to virtual:
1. No manufacturing costs.
2. No minimum economical production run, an astonishing benefit for a record industry that claims to lose money on ninety percent of its releases.
3. A sharp reduction in distribution costs, with savings further increased through P2P adaptation because ‘the P2P network basically turns the PCs of participating consumers into storage units of tracks for sale”.
No inventory costs.
No costs for returns of unsold merchandise, another astounding change for an industry that now sees twenty to forty percent of all releases returned from CD retailers.
Better opportunities for new artists, especially due to the elimination of minimum production runs to facilitate distribution or CD sales to turn a profit.
A sharp reduction in transaction costs with customers and greatly enhanced ability for the labels to engage in direct marketing and data gathering.
As point 3 of the above listing of benefits indicates, utilization of P2P distribution models provides additional and very substantial costs savings over central server models. When consumers enter into a paying relationship with services that use P2P for commercial distribution, they basically bargain to share a portion of their bandwidth for Internet connectivity and their hard drive for content storage in exchange for a substantially lower cost of service. A series of white papers available at the CenterSpan website13 documents the magnitude of these savings over central server distribution models – bandwidth distribution costs savings of about two-thirds for file downloads and ninety percent for streaming media (webcasts). P2P also pushes content out to the edges of the Internet where it can be assembled and transmitted quickly, an especially important feature for large media files like games and video. While a number of webcasters have begun to switch to P2P business models, the major labels and studios have largely chosen to ignore these potential benefits. One can only guess that they’ve been drinking too much of their own kool-aid and automatically associate P2P with piracy rather than prosperity. Placing content, especially DRM-protected content, on a P2P network does not lead to loss of control over that content but to regaining control over consumer wants and expectations by adopting the economic model that can satisfy market demand for a breadth of quality-assured and conveniently accessible media at the lowest feasible price point – regardless of whether the pricing relationship is charge per unit, limited subscription, or “all you can eat”.
Brilliant Digital Entertainment, Inc., a Los Angeles-based business partner of Sharman Networks, announced just ten days ago that it had surpassed the 75 million license mark for content downloaded across the music, game/software and video categories. These copyright protected and secure files were downloaded via their Altnet TopSearch technology by users of the Kazaa Media Desktop software. For example, more than 25,000 secure games and software had been sold even when the same version is available for free in an un-secure format, indicating that you certainly can “compete with free”. Last fall, Microsoft used Altnet to distribute copies of its new Windows Media 9 audio and video software to Kazaa users, in a demonstration of both improved reproduction capabilities and anti-piracy features. Commenting on the experiment, the Director of Microsoft’s Windows Media division said, “We’re really interested in how peer-to-peer networks can be used for the legitimate distribution of content…. the number of [authorized] downloads has been pretty promising and actually has been surprisingly high”.14
P2P can also provide the platform for new entertainment ventures. Digital broadcaster Pseudo.com has just started releasing an advertiser-supported weekly TV show starring rap star Ice-T to Kazaa’s 60 million registered users. Pseudo President Edward Salzano urged his colleagues to embrace this new distribution mode, saying, “The entertainment industry has to get it together and use the technology to their advantage”.15
The economic and technological benefits of P2P are so compelling that it will surely play a major and probably dominant role in digital media distribution. As wired and wireless broadband becomes ubiquitous and storage becomes ever denser and cheaper, content will reside on all manner of devices beyond the PC. Nor is P2P limited to the Internet. Indeed, cable and satellite TV set top
boxes equipped with large hard drives may well become the primary platform for digital media storage and retransmission within closed, proprietary networks.
The Logic of Compulsory Licensing to Benefit Artists
As I noted earlier, such artist representatives as Ken Hertz have advocated that compulsory blanket licensing for non-commercial file sharing should be legislated as a means of monetizing consumer demand. The revenues generated from such a license would supplement revenues collected through various paid digital media services. And these revenues could be substantial – a $1 per month supplemental levy on ISP subscribers in the U.S. and Canada alone would generate upwards of $2 billion per year. Given the broad range of devices and activities that it could apply to, even an extremely modest levy could generate large new income streams.
Such a compulsory license has ample precedent in prior public sector responses to new media technologies as diverse as the piano roll, radio, cable and satellite television, and the digital audio tape recorder. Blank music CD-Rs are already subject to a U.S. levy meant to compensate rights holders and creators, just as hard drive storage is in Canada and optical disc “burners” are in Germany.
Sharman Networks began advocating just such an approach to Congress last year, advising the House Judiciary Committee:
Sharman’s primary recommendation is that the Committee should give serious consideration to the concept of an Intellectual Property Use Fee (IPUF) that would recognize, legitimize and monetize the reality of the unprotected and irretrievable digital media files that consumers are sharing and storing using a wide variety of software and hardware, in order to best serve the incentive ends of copyright law.16
The IPUF concept is grounded in the belief that all parties who facilitate and derive economic benefit from consumers’ non-commercial reproduction and distribution of copyrighted media should be considered as potential contributors to the compulsory revenue pool. That pool should be distributed directly and proportionately to rights holders and creators based on statistical sampling surveys that measure such utilization through means respectful of individual privacy. IPUF furthers the Constitutional directive to promote the progress of science and the useful arts through the provision of economic incentives, while recognizing that enforcement of the exclusive rights to control reproduction and distribution of copyrighted works is problematic in the digital era.
Professor Neil Netanel of the University of Texas School of Law advocated a similar approach at a conference held at American University’s Washington College of Law last October. There, he proposed, “allowing untrammeled noncommercial P2P file swapping in return for imposing a levy on certain P2P-related services and products”.17 This levy, which he dubbed a “Noncommercial Use Levy” (NUL), would be imposed on such parties as ISPs, manufacturers of computers and a variety of burning devices and consumer electronics products, manufacturers of storage media, and commercial providers of P2P software. In return, individuals’ copying, distribution, and noncommercial adaptations and modifications of such shared digital content would be granted clear legal protection from charges of copyright infringement.
By emphasizing monetization over criminalization, a compulsory license approach seeks to adapt to rather than suppress consumers’ intuitive use of their new hardware and software tools for media storage and transmission. Additional compulsory license initiatives could also remove many of the obstacles that have frustrated the offering of broad content offerings on paid digital services. For example, despite the corporate affiliations between the largest music publishers and the record labels, obtaining online publishing rights for paid services has been a constant roadblock that a new and appropriately
designed compulsory license could remove.
A Mixed Use Business Model
By compelling the diversification of music sector revenues beyond primary dependence on the twenty year old technology of the CD, and by providing new revenue streams through both compulsory licensing and paid online services, the digital upheaval will greatly benefit the recording industry over the long
term. This is by no means to say that the sale of hard goods will end – just that the hard goods sold will be new and improved.
One of the greatest mistakes the recording industry has made is to repeat the mantra in service to their myopic anti-piracy campaign that a digital download using P2P software is equivalent to a CD. It is most certainly not the same thing. As I’ve already described, P2P is primarily a singles sampling and not a CD replacement service. In addition, there are inherent qualitative differences between a full audio file and one that has undergone dramatic compression to facilitate its transfer over the Internet. Whether MP3, Windows Media, or any other compression format, the file is shrunk by tossing out three-quarters or more of the data contained in a WAV file on a CD. Such files are more like FM than CD quality. They sound OK through a portable player’s headphones or small computer speakers, but their reduced audio quality is apparent on any good quality stereo.
Rather than telling consumers that MP3s are equivalent to a CD and that they are “pirates” for downloading them, the industry would do much better to adopt a marketing campaign that recognizes their sampling function and the limits of audio compression – say something along the lines of “You’ve heard the MP3, now buy the full quality CD”.
But the CD itself may be an endangered species. Not because of downloads, but because the industry is moving quickly away from that aging format and toward higher quality multimedia optical discs that can restore the perception of value to music purchasers. Both Super Audio CD (SACD) and DVD-Audio discs provide substantially higher and “warmer” sound quality than traditional CDs, have multi-channel capabilities that can be exploited both on home theater systems and new players being installed in automobiles, plus the capacity to carry additional content such as lyrics, photos, band interviews and music videos. And, unlike CDs, they also are protected by DRM technologies – although compressing their very large files for Internet distribution would defeat their entire qualitative purpose for existence. As consumers are educated as to the capabilities of these new hard goods the industry can expect to benefit from a long-term product conversion wave similar to that which accompanies the transition from vinyl to CD. In this context, Internet file sharing of compressed audio becomes the perfect, low cost promotional medium for stimulating the sale of high quality recordings.
A Brief Aside Concerning Movies
Mr. Chairman, my testimony has focused on P2P’s relationship to the recording industry. That is because it is the only segment of the entertainment industry that can make even a debatable claim that it has been harmed by P2P file sharing. While I believe that P2P has little to nothing to do with that industry’s declining sales, at least it has a downward trend to point to. The same cannot be said of the movie industry, which enjoyed record profits in 2002, part of which can be ascribed to a near-doubling of DVD sales.
Despite the complete lack of evidence of contemporary harm, the movie industry has been in the vanguard of those favoring legislation and litigation to
constrain technology lest it be “Napsterized” at some point in the future. It has adopted a three-part program that consists of:
1. Having the government mandate a “broadcast flag” to control consumer reuse of digitally broadcast TV signals. This goal has been vociferously opposed by most of the technology and consumer electronics industry.
2. Closing the “analog hole” through watermarking technologies that can survive digital to analog and back to digital conversion. Many experts question the technical feasibility of this quest.
Shutting down open P2P networks. They have no technical suggestions to offer in this regard, but have been quick to sue.
This of course is an industry that predicted that the VCR would be its Boston Strangler, sued to prevent its manufacture and distribution, and escaped this self-destructive wish by a single Supreme Court vote. Rather than being a tool for piracy, the VCR became the means by which the industry built a new source of revenue that eclipsed box office receipts within a decade.
Movies are a media form fundamentally different from music. We don’t run five miles or drive while watching a film, and we do care very much about the quality of the movie viewing experience. Movies available today on P2P networks are also an altogether different animal from a technological perspective. These audiovisual files are simply huge, and even in compressed from take a long time to download. These downloaded files are of clearly inferior quality compared to the original, and are hardly something that one would want to watch on a TV, much less a home theater system. In short, any assertions regarding P2P harm to the movie industry are pure speculation about the future.
The industry’s economics are also completely different than those of the recording sector. Rather than being dependent on a single physical product it derives revenues from theatrical box office, syndication to premium and broadcast TV, and sales of videotapes and DVDs. It has aggressively decreased the pricing and expanded the features of DVDs to enhance their perceived value among consumers, and has been appropriately rewarded for that initiative.
The one area in which the industry needs to focus its attention is building licensed online services, including the utilization of P2P technology for efficient distribution. Such online services will supplement, not displace, current revenue streams. The movie studios should relax and enjoy their present good fortune. They also should stop trying to put digital technology in a straitjacket and instead put their energies into exploiting its unfettered possibilities….