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| <title> - DIGITAL MUSIC INTEROPERABILITY AND AVAILABILITY</title> | |
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| [House Hearing, 109 Congress] | |
| [From the U.S. Government Publishing Office] | |
| DIGITAL MUSIC INTEROPERABILITY | |
| AND AVAILABILITY | |
| ======================================================================= | |
| HEARING | |
| BEFORE THE | |
| SUBCOMMITTEE ON COURTS, THE INTERNET, | |
| AND INTELLECTUAL PROPERTY | |
| OF THE | |
| COMMITTEE ON THE JUDICIARY | |
| HOUSE OF REPRESENTATIVES | |
| ONE HUNDRED NINTH CONGRESS | |
| FIRST SESSION | |
| __________ | |
| APRIL 6, 2005 | |
| __________ | |
| Serial No. 109-9 | |
| __________ | |
| Printed for the use of the Committee on the Judiciary | |
| Available via the World Wide Web: http://www.house.gov/judiciary | |
| ______ | |
| U.S. GOVERNMENT PRINTING OFFICE | |
| 20-389 WASHINGTON : 2005 | |
| _____________________________________________________________________________ | |
| For Sale by the Superintendent of Documents, U.S. Government Printing Office | |
| Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800 | |
| Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001 | |
| COMMITTEE ON THE JUDICIARY | |
| F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman | |
| HENRY J. HYDE, Illinois JOHN CONYERS, Jr., Michigan | |
| HOWARD COBLE, North Carolina HOWARD L. BERMAN, California | |
| LAMAR SMITH, Texas RICK BOUCHER, Virginia | |
| ELTON GALLEGLY, California JERROLD NADLER, New York | |
| BOB GOODLATTE, Virginia ROBERT C. SCOTT, Virginia | |
| STEVE CHABOT, Ohio MELVIN L. WATT, North Carolina | |
| DANIEL E. LUNGREN, California ZOE LOFGREN, California | |
| WILLIAM L. JENKINS, Tennessee SHEILA JACKSON LEE, Texas | |
| CHRIS CANNON, Utah MAXINE WATERS, California | |
| SPENCER BACHUS, Alabama MARTIN T. MEEHAN, Massachusetts | |
| BOB INGLIS, South Carolina WILLIAM D. DELAHUNT, Massachusetts | |
| JOHN N. HOSTETTLER, Indiana ROBERT WEXLER, Florida | |
| MARK GREEN, Wisconsin ANTHONY D. WEINER, New York | |
| RIC KELLER, Florida ADAM B. SCHIFF, California | |
| DARRELL ISSA, California LINDA T. SANCHEZ, California | |
| JEFF FLAKE, Arizona ADAM SMITH, Washington | |
| MIKE PENCE, Indiana CHRIS VAN HOLLEN, Maryland | |
| J. RANDY FORBES, Virginia | |
| STEVE KING, Iowa | |
| TOM FEENEY, Florida | |
| TRENT FRANKS, Arizona | |
| LOUIE GOHMERT, Texas | |
| Philip G. Kiko, Chief of Staff-General Counsel | |
| Perry H. Apelbaum, Minority Chief Counsel | |
| ------ | |
| Subcommittee on Courts, the Internet, and Intellectual Property | |
| LAMAR SMITH, Texas, Chairman | |
| HENRY J. HYDE, Illinois HOWARD L. BERMAN, California | |
| ELTON GALLEGLY, California JOHN CONYERS, Jr., Michigan | |
| BOB GOODLATTE, Virginia RICK BOUCHER, Virginia | |
| WILLIAM L. JENKINS, Tennessee ZOE LOFGREN, California | |
| SPENCER BACHUS, Alabama MAXINE WATERS, California | |
| BOB INGLIS, South Carolina MARTIN T. MEEHAN, Massachusetts | |
| RIC KELLER, Florida ROBERT WEXLER, Florida | |
| DARRELL ISSA, California ANTHONY D. WEINER, New York | |
| CHRIS CANNON, Utah ADAM B. SCHIFF, California | |
| MIKE PENCE, Indiana LINDA T. SANCHEZ, California | |
| J. RANDY FORBES, Virginia | |
| Blaine Merritt, Chief Counsel | |
| David Whitney, Counsel | |
| Joe Keeley, Counsel | |
| Alec French, Minority Counsel | |
| C O N T E N T S | |
| ---------- | |
| APRIL 6, 2005 | |
| OPENING STATEMENT | |
| Page | |
| The Honorable Lamar Smith, a Representative in Congress from the | |
| State of Texas, and Chairman, Subcommittee on Courts, the | |
| Internet, and Intellectual Property............................ 1 | |
| The Honorable Howard L. Berman, a Representative in Congress from | |
| the State of California, and Ranking Member, Subcommittee on | |
| Courts, the Internet, and Intellectual Property................ 2 | |
| The Honorable John Conyers, Jr., a Representative in Congress | |
| from the State of Michigan, and Ranking Member, Committee on | |
| the Judiciary.................................................. 4 | |
| WITNESSES | |
| Mr. Mark Cooper, PH.D., Director of Research, Consumer Federation | |
| of America, on behalf of the Consumer Federation of America and | |
| Consumer Union | |
| Oral Testimony................................................. 5 | |
| Prepared Statement............................................. 7 | |
| Mr. Raymond L. Gifford, President, The Progress & Freedom | |
| Foundation | |
| Oral Testimony................................................. 9 | |
| Prepared Statement............................................. 11 | |
| Mr. William E. Pence, Ph.D., Chief Technology Officer, Napster | |
| Oral Testimony................................................. 14 | |
| Prepared Statement............................................. 16 | |
| Mr. Michael Bracy, Policy Director, Future of Music Coalition | |
| Oral Testimony................................................. 18 | |
| Prepared Statement............................................. 20 | |
| APPENDIX | |
| Material Submitted for the Hearing Record | |
| Prepared Statement of the Honorable Howard L. Berman, a | |
| Representative in Congress from the State of California, and | |
| Ranking Member, Subcommittee on Courts, the Internet, and | |
| Intellectual Property.......................................... 27 | |
| Prepared Statement of the Honorable John Conyers, Jr., a | |
| Representative in Congress from the State of Michigan, and | |
| Ranking Member, Committee on the Judiciary..................... 28 | |
| DIGITAL MUSIC INTEROPERABILITY | |
| AND AVAILABILITY | |
| ---------- | |
| WEDNESDAY, APRIL 6, 2005 | |
| House of Representatives, | |
| Subcommittee on Courts, the Internet, | |
| and Intellectual Property, | |
| Committee on the Judiciary, | |
| Washington, DC. | |
| The Subcommittee met, pursuant to notice, at 10:37 a.m., in | |
| Room 2141, Rayburn House Office Building, the Honorable Lamar | |
| Smith, (Chairman of the Subcommittee) presiding. | |
| Mr. Smith. The Subcommittee on Courts, the Internet, and | |
| Intellectual Property will come to order. I am going to | |
| recognize myself for an opening statement, and then recognize | |
| other Members, and then we will proceed to introduce the | |
| witnesses, and we will look forward to hearing from them. | |
| Today, this Subcommittee continues its work to update music | |
| licensing for the digital era. New technologies are providing | |
| numerous and competing methods for delivering music content to | |
| consumers. Consumers can buy music on-line for immediate | |
| download, subscribe to unlimited amounts of music that can be | |
| downloaded to a portable device, listen to webcasts of their | |
| favorite radio stations on the Internet, and subscribe to music | |
| broadcasts from satellites in space. | |
| Each of these different types of music services is a new | |
| and unique business model that brings different values and | |
| opportunities for consumers. Consumers have multiple choices | |
| for how they can purchase and listen to legal music. | |
| Unfortunately, just as the number of legal options has | |
| increased, so has the number of illegal ones. | |
| Legitimate questions have been raised regarding the impact | |
| of digital interoperability on consumers. In the physical | |
| world, consumers didn't expect that music audio cassettes were | |
| interoperable with CD players. Consumers switching from music | |
| cassettes to CDs bought the same music for $10 to $20 per CD | |
| that they already owned. Consumers accepted this, since they | |
| felt they were getting something new with more value, a digital | |
| format that made every reproduction sound as good as the first | |
| playback. | |
| Music is quickly becoming an on-line business with no | |
| connection to the physical world, except for the Internet | |
| connection. Even that connection is increasingly becoming | |
| wireless. Some of the same interoperability issues that occur | |
| in the physical world are now appearing here. Consumers who | |
| want to switch from one digital music service to another must | |
| often purchase new music files and sometimes new music players. | |
| For example, music purchased from the iTunes Music Store will | |
| only work on Apple's iPod music player. Music purchased from | |
| RealNetworks cannot be accessed on the iPod. | |
| Last year, both companies became involved in a dispute over | |
| Real's attempt to offer software called ``Harmony,'' that would | |
| have allowed legal copies of music purchased from Real's on- | |
| line music store to be playable on Apple's iPod music player. | |
| Apple objected to this effort, calling it ``hacker-like,'' and | |
| invoking the DMCA. Apple blocked Real software from working a | |
| short time afterwards. | |
| This interoperability issue is of concern, since consumers | |
| who bought legal copies of music from Real could not play them | |
| on the iPod. I suppose this is a good thing for Apple, but | |
| perhaps not for consumers. Apple was invited to testify today, | |
| but they chose not to appear. Generally speaking, companies | |
| with 75-percent market share of any business, in this case, the | |
| digital download market, need to step up to the plate when it | |
| comes to testifying on policy issues that impact their | |
| industry. Failure to do so is a mistake. | |
| As a result of disputes like the one between Apple and | |
| Real, some have suggested that efforts to boost digital music | |
| interoperability should be encouraged by regulation or | |
| legislation. Others have urged Congress to leave the issue to | |
| the marketplace and let consumers decide what is best for them. | |
| Just last week, the Supreme Court heard a copyright case | |
| dealing with the 1984 decision in the Sony-Betamax case. | |
| Consumers ultimately chose the VHS format over their Betamax as | |
| their preferred technology in their homes without any | |
| intervention by Congress. At the same time, broadcasters chose | |
| the Betamax standard for their internal broadcast operations. | |
| If anything, this example demonstrates not only how consumers | |
| will decide for themselves what standard best meets their | |
| needs, but also that multiple standards can survive in the | |
| marketplace. | |
| The digital music interoperability issue is of interest to | |
| more than consumers. Performers and songwriters are affected by | |
| the decisions made about how their music is made available. | |
| Music that is made available on only one digital music service | |
| will limit the options for artists to earn royalties. Many of | |
| the licenses and rights in the music industry stem from | |
| compulsory licenses and exclusive contracts. Since one of these | |
| licenses, the compulsory section 115 mechanical license, is now | |
| being updated for the digital era, the time is appropriate for | |
| the Subcommittee to learn more about the impact of digital | |
| interoperability on consumers and artists. | |
| That concludes my opening statement, and the gentleman from | |
| California, the Ranking Member, Mr. Berman, is recognized for | |
| his. | |
| Mr. Berman. Thank you very much, Mr. Chairman, for | |
| scheduling this hearing on digital music interoperability. The | |
| explosion of technologies that enable consumers to digitally | |
| download music has provided many new opportunities to the music | |
| lover. The ultimate goal is to provide consumers with their | |
| choice of music any time, anywhere, in any format. However, | |
| this new environment has come at a great cost; that of rampant | |
| piracy on peer-to-peer networks. What is considered free music | |
| available on the Internet comes at the expense of numerous | |
| people involved in the development of the sound recording, the | |
| artists, songwriters, musicians, sound engineers and others. | |
| The consequences of piracy are felt throughout our economy, | |
| but they are especially harmful in my district, as well as | |
| several other Members on this Committee, where many jobs depend | |
| on the lawful sale of music. The proliferation of legitimate | |
| music distributors in the marketplace has helped stem the tide | |
| of piracy. The number of available digital music delivery | |
| alternatives has increased, enabling technology companies to | |
| help copyright owners make inroads against unauthorized | |
| downloading and sharing of music files. However, music | |
| companies will always have to compete with free music, and | |
| analysts claim that it will take a number of years before | |
| download services can provide a significant sales boost for the | |
| content creators. | |
| One of the major impediments to achieving a more level | |
| playing field according to analysis is the bewildering array of | |
| competing technologies. As with any nascent industry, the | |
| development of new business models have unintended results. In | |
| the case of digital music, there are concerns that | |
| interoperability barriers between the various suppliers could | |
| actually hinder growth in the market. | |
| Brandenburg, the father of the MP3, has warned that rival | |
| technologies will baffle consumer and risk alienating fans, | |
| driving them to unsanctioned file-sharing networks, where the | |
| songs are free and encoded in the unprotected MP3 format. | |
| The International Federation of Phonographic Industry has | |
| noted that ``one important problem that hinders growth of the | |
| on-line music business is the lack of interoperability between | |
| services and devices. The danger is of wide-scale consumer | |
| confusion and wasted opportunities in a market which has an | |
| extraordinary growth potential.'' They observe that there is no | |
| easy solution, that all players in the on-line market need to | |
| work harder to solve the interoperability difficulties in 2005. | |
| Yet the market continues to develop. The portable player market | |
| already presents consumers with an array of choices. | |
| Now, we see the convergence of music devices and mobile | |
| handsets. The goal of making music easier to buy than to steal | |
| is becoming a reality, and therefore these innovative services | |
| deserve our thanks. However, anti-piracy efforts must remain a | |
| focus for technology company industries as they develop their | |
| products. A legitimate distribution business model must be one | |
| that is based on payment and permission of the rights holder. | |
| With digital music moving into the mainstream of consumer | |
| life, I believe it will be helpful to further this conversation | |
| by just guessing what, if any, impediments are facing companies | |
| that are now distributing digital music and how they are | |
| addressing consumers' needs for legitimate music. In an ideal | |
| world, we would all have the major players in the digital music | |
| market at the table to hear their opinions about this issue. | |
| The Chairman made reference to at least one party not at the | |
| table, but I do look forward from hearing these witnesses to | |
| help define some of the issues. | |
| Thank you very much, Mr. Chairman. | |
| Mr. Smith. Thank you, Mr. Berman. | |
| I understand that the Ranking Member of the Judiciary | |
| Committee, Mr. Conyers, you have a statement? | |
| Mr. Conyers. Only a comment or two, sir. | |
| Mr. Smith. The gentleman is recognized. | |
| Mr. Conyers. I will ask unanimous consent that my statement | |
| be put in the record. | |
| Mr. Smith. Without objection. | |
| Mr. Conyers. First of all, I welcome this panel, and I | |
| think this is an important discussion. I want to say that I | |
| commend the Ranking Member, Mr. Berman, on his very thoughtful | |
| presentation, which leads me to put mine in the record and let | |
| it go at that. | |
| A couple of things have been said by witnesses that I just | |
| want to repeat; that market forces will continue to drive | |
| innovation and new ways to enjoy music and pricing and will | |
| eventually resolve the interoperability problem and that | |
| Government intervention can probably inhibit innovation. | |
| Finally, I join with those who believe that consumers will | |
| ultimately choose the interoperable systems over closed | |
| platforms. | |
| With that, I would return my time and thank the Chairman | |
| for his courtesy. | |
| Mr. Smith. Thank you, Mr. Conyers. | |
| I would, also, like to thank the gentlewoman from | |
| California, Ms. Lofgren, and the gentleman from California, Mr. | |
| Schiff, for their attendance here today as well. | |
| Before I introduce the witnesses, I would like you all to | |
| stand so I can swear you in. | |
| [Witnesses sworn en masse.] | |
| Mr. Smith. Thank you. Please be seated. | |
| Our first witness is Mark Cooper--oh, excuse me, in | |
| recognizing other Members who are present, I didn't look far | |
| enough or long enough to my right to see Bob English, the | |
| gentleman from South Carolina. We appreciate his presence as | |
| well. | |
| Our first witness is Mark Cooper, the director of Research | |
| at the Consumer Federation of America, where he has | |
| responsibility for energy, telecommunications and economic | |
| policy analysis. Dr. Cooper is a fellow of both the Stanford | |
| Law School Center for Internet and Society and the Donald | |
| McGannon Communications Center at Fordham University. He is the | |
| author of five books and has published numerous chapters and | |
| edited works and journal articles focusing on digital society | |
| issues. Dr. Cooper holds a Ph.D. from Yale University and is a | |
| former Yale University and Fulbright Fellow. | |
| Our next witness is Ray Gifford, president of the Progress | |
| & Freedom Foundation and a member of its board. Before joining | |
| the foundation in 2003, Mr. Gifford served as chairman of the | |
| Colorado Public Utilities Commission for 4 years. Mr. Gifford | |
| earned his law degree from the University of Chicago, where he | |
| served as president of the Federalist Society and chairman of | |
| the Edmund Burke Society. He earned a bachelor's degree in | |
| philosophy from St. John's College in Annapolis, Maryland. | |
| Later on, you can tell us the difference between the | |
| Federalist Society and the Edmund Burke Society, if you will. | |
| Our next witness is Dr. William Pence, chief technology | |
| officer of Napster. In 2000, Dr. Pence joined Universal Music | |
| Group as lead technologist for its on-line music initiative. In | |
| 2001, he became chief technology officer of Pressplay, a joint | |
| venture between Sony and Vivendi Universal, designed to offer | |
| an on-line music subscription service. In 2002, Roxio acquired | |
| Pressplay and rebranded that service with the Napster name. Dr. | |
| Pence led the effort to build a legitimate service on the | |
| Pressplay technology infrastructure, culminating in the | |
| relaunch of Napster in October 2003. Most recently, he led the | |
| effort which resulted in the world's first portable music | |
| subscription service--Napster To Go. | |
| Dr. Pence holds several U.S. patents, he received a B.S. | |
| degree in physics from the University of Virginia in 1984 and a | |
| Ph.D. degree in electrical engineering from Cornell University. | |
| Our final witness is Michael Bracy, co-founder of the | |
| Future of Music Coalition, where he currently serves as a board | |
| member and its policy director. He, also, co-owns Misra, an | |
| independent record label based in Austin, Texas, which, as one | |
| would expect, is a city I have a particular interest in. | |
| The Future of Music Coalition is a not-for-profit | |
| collaboration between members of the music, technology, public | |
| policy and intellectual property law communities. The Coalition | |
| seeks to educate about music technology issues and to bring | |
| together diverse voices in an effort to come up with creative | |
| solutions. The Coalition, also, aims to identify and promote | |
| innovative business models that will help musicians and | |
| citizens to benefit from new technologies. Mr. Bracy graduated | |
| from Georgetown University. | |
| By unanimous consent, as I think you all know, your | |
| complete testimonies will be made a part of the record, and we | |
| look forward to hearing your testimony now. | |
| Dr. Cooper, we will begin with you. | |
| TESTIMONY OF MARK COOPER, PH.D., DIRECTOR OF RESEARCH, CONSUMER | |
| FEDERATION OF AMERICA, ON BEHALF OF THE CONSUMER FEDERATION OF | |
| AMERICA AND CONSUMER UNION | |
| Mr. Cooper. Thank you, Mr. Chairman. | |
| Interoperability is an extremely valuable and important | |
| trait in the digital economy. Digital products are inherently | |
| networked, which means that they are made up of complimentary | |
| components or the current terminology is they are layers of a | |
| platform. These layers must interoperate if the product is to | |
| function properly. | |
| Over the past three decades, we have learned what I call | |
| the Internet lesson. The more open the interfaces within the | |
| platform, the more dynamic the development. Open platforms | |
| create large network effects and an innovation-friendly | |
| environment. Economists call them positive externalities | |
| created by these open platforms. | |
| However, it is extremely important to recognize that | |
| interoperability plays different roles and needs different | |
| policies at different points in this platform. The | |
| communications network at the core of the digital economy must | |
| be open and interoperable as a matter of obligation. Closed | |
| proprietary platforms in the core destroy the vast array of | |
| positive externalities that can develop above. Refusals to | |
| deal, discrimination in functionalities, foreclosure, | |
| anticompetitive bundling simply cannot be tolerated at the core | |
| of the communications network, and that is why the | |
| Communications Act requires just, reasonable, and | |
| nondiscriminatory terms for interconnection and carriage. | |
| But as we move above from that core or from the lower | |
| layers to the upper layers, the basis for interoperability | |
| changes. At the periphery of the digital platform, at the | |
| applications layer it is called, interoperability is very | |
| consumer friendly, but it needs to be enforced or created by | |
| market forces. Applications are the widgets of the digital age, | |
| the things that people make and sell directly to the public. In | |
| the digital content and distribution of applications, like | |
| music formats, the failure to interoperate affects the direct | |
| consumer. It hurts the music consumer if you don't | |
| interoperate, but only the music consumer. It doesn't damage | |
| the rest of the economy. | |
| If an applications developer fails to interoperate, we | |
| believe that developer will ultimately pay the price because | |
| consumers will migrate to interoperable offerings. We believe | |
| consumers demand interoperability, will pick interoperability | |
| if they have information, and they have a fair choice. | |
| Disclosure and expectations play a key role. Consumers must | |
| be aware that if they buy a certain product that will not | |
| interoperate, they will be locked in and cut off. Once they | |
| know that, they will exercise, they will vote with their feet. | |
| Similarly, a refusal to interoperate should not be a lever | |
| for anticompetitive strategies. If we see lots of exclusive | |
| deals and only a very few widget manufacturers, antitrust | |
| authorities should become concerned because we expect the | |
| applications layer, the widget manufacturers, to be plentiful | |
| and competitive. If they don't behave in that fashion, if there | |
| aren't a lot of choices, then there is a legitimate antitrust | |
| concern. | |
| As several Members have noted, last year, the recording | |
| industry finally accepted the inevitability of digital | |
| distribution of music. They sold more singles last year than | |
| any time in the previous 20 years, and consumers saved a great | |
| deal of money. The transition to digital distribution is | |
| inevitable because it reduces the cost of production marketing | |
| and distribution and may transform promotion as well. The cost | |
| of delivering music to the public will decline, and the nature | |
| of sales will shift from CDs and bundles to singles, and that | |
| is a good thing for consumers and artists who can make more | |
| money by selling lots of singles. | |
| Now, those who had the foresight to see this digital | |
| transformation coming and to put digital distribution in the | |
| world, they have got a lead. They have, one, a first-mover | |
| advantage. But as the entirety of the industry moves toward | |
| digital distribution, there are no guarantees that that | |
| advantage will persist, especially if they make a mistake on | |
| interoperability. | |
| It is not surprising to find that the very company that has | |
| a lead today also had a lead 25 years ago in the PC market. | |
| They were the dominant PC provider about a quarter of a century | |
| ago. They refused to interoperate. They refused to open their | |
| platform, and they were blown away. They are a niche market | |
| player today, with a market share around 5 or 6 percent of the | |
| market. Interoperability is consumer friendly, and it will | |
| prevail in the marketplace. | |
| I thank the Committee for giving me this opportunity, for | |
| recognizing how important interoperability is in the digital | |
| industries, and I look forward to working with the Committee to | |
| find the right mix of public obligations at the core of the | |
| digital economy and private incentives at the periphery and in | |
| the widget manufacturers so that we can create competitive, | |
| dynamic platforms that serve consumers, the economy and | |
| artists. | |
| Thank you. | |
| [The prepared statement of Mr. Cooper follows:] | |
| Prepared Statement of Dr. Mark Cooper | |
| Mr. Chairman and Members of the Committee, | |
| My name is Dr. Mark Cooper. I am Director of Research at the | |
| Consumer Federation of America. I appreciate the opportunity to testify | |
| on the subject of interoperability and commend the Committee for having | |
| the foresight to hold hearings to explore the implications of this | |
| important topic. | |
| Interoperability is a critically important issue, not only for | |
| consumers, but also for producers and the economy. However, it is | |
| important for the Committee to appreciate that the role of | |
| interoperability and public policies to promote it vary greatly | |
| depending on the nature of the economic activity that is being | |
| analyzed. | |
| INTEROPERABILITY SHOULD BE REQUIRED AS A MATTER OF | |
| PUBLIC POLICY IN CORE NETWORKS | |
| Ensuring interoperability is a critical and pressing public policy | |
| concern when it affects the critical functions of a vital network in | |
| our economy. For example, we demand interoperability in the | |
| communications network, as a public obligation, because it is a vital | |
| infrastructure at the core of our economy.\1\ Telephone networks have | |
| interoperated for almost 100 years. The advent of the Internet has | |
| brought with it amazing new opportunities for communication-WiFi- | |
| enabled telephones can connect with computers. E-mail users can connect | |
| to Blackberries. Macintosh users can send and receive files to and from | |
| Windows users. Interoperability supports a vast array of other | |
| activities and the failure to interoperate would chill innovation and | |
| distort economic activity. | |
| --------------------------------------------------------------------------- | |
| \1\ Mark Cooper, Open Architecture as Communications Policy | |
| (Stanford Law School Center for Internet and Society, 2004), available | |
| for download under a Creative Commons License at http:// | |
| Cyberlaw.Stanford,edu/blogs.cooper/openarchitecture.pdf. | |
| --------------------------------------------------------------------------- | |
| Over the past quarter of a century, as the digital economy has | |
| grown and influenced the broader economy, the importance of | |
| interoperability has grown because ``platforms'' play an increasingly | |
| important role. ``A platform is a common arrangement of components and | |
| activities, usually unified by a set of technical standards and | |
| procedural norms round which users organize their activities. Platforms | |
| have a known interface with respect to particular technologies and are | |
| usually 'open' in some sense.'' \2\ | |
| --------------------------------------------------------------------------- | |
| \2\ Shane Greenstein, ``The Evolving Structure of the Internet | |
| Market'' in Understanding the Digital Economy (Erik Brynjolfson and | |
| Brian Kahin (Eds) (2000), p. 155. | |
| --------------------------------------------------------------------------- | |
| Interoperability to maximize the availability of functionality has | |
| been the hallmark of digital platforms for a simple reason. By keeping | |
| interfaces open and making the functionality available, the entire | |
| platform is driven forward, expanding the opportunities for all who | |
| build to and take from (use) the platform. ``Interfaces exist to entice | |
| other firms to use them to build product that conform to the defined | |
| standards and therefore work efficiently with the platform.'' \3\ | |
| --------------------------------------------------------------------------- | |
| \3\ Anabelle Gawer and Michael A. Cusumano, Platform Leadership | |
| (2002), p. 56. | |
| --------------------------------------------------------------------------- | |
| The superior value of interoperability of critical networks through | |
| open interfaces was recognized by the National Research Council of the | |
| National Academy of Sciences in a 1994 analysis of the Internet, just | |
| before it exploded into wide popular use in America. ``The telephone | |
| system is an example of an open network, and it is clear to most people | |
| that this kind of system is vastly more useful than a system in which | |
| the users are portioned into closed groups based, for example, on | |
| service provider or the user's employer.'' \4\ | |
| --------------------------------------------------------------------------- | |
| \4\ National Research Council, Realizing the Information Age | |
| (1994), p. 43. | |
| --------------------------------------------------------------------------- | |
| In contrast, interoperability in the digital content and consumer | |
| goods industries, like video games or music formats, is a consumer- | |
| friendly way to do business. The failure of interoperability in the | |
| music industry affects the music industry and the consumers who | |
| purchase digital music. The failure of interoperability in the | |
| communications industry affects the entire economy. | |
| INTEROPERABILITY SHOULD BE PROMOTED IN CONSUMER APPLICATIONS | |
| We believe that interoperability best serves the interest of | |
| consumers and producers throughout the digital platform, but as the | |
| question moves from the interoperability of the network, to how that | |
| network is used for music it becomes important for the marketplace to | |
| provide better clarity. If an application developer refuses to | |
| interoperate, we believe that developer will ultimately pay the price, | |
| because consumers will migrate to interoperable offerings. Applications | |
| developers should be allowed to discover the consequences of their bad | |
| decisions in the marketplace. | |
| We believe consumers demand interoperability, and will pick it when | |
| given the choice. However, the development of converged or open | |
| platforms takes time, and it requires that consumers understand their | |
| options. Disclosure and consumer expectations should be taken into | |
| consideration. Sellers of closed platforms need to better inform | |
| consumers that their platforms are closed, and that consumers might be | |
| locking themselves into future hardware and software purchases in that | |
| platform. | |
| Consumers have certain expectations that they could pop a record | |
| onto a turntable or a compact disc into a CD player and music would | |
| come out. If digital formats are not going to replicate that | |
| interoperability, retailers of digital music and digital music players | |
| have a special obligation to inform consumers who have built up | |
| expectations of interoperability over years, even decades of | |
| experience. Given good information-such as where and how things will | |
| work, and where it won't--we are confident consumers will choose the | |
| interoperable systems over closed platforms, | |
| WHEN THE FAILURE TO INTEROPERATE RAISES CONCERNS | |
| An industry's refusal to interoperate should also not become a | |
| lever for anticompetitive strategies. This is a special concern in | |
| platform industries where a company may come to dominate one critically | |
| important component (layer) of a platform and seeks to use that | |
| dominance to frustrate competition in other components.\5\ This is a | |
| problem of vertical leverage in antitrust analysis and it grows in | |
| significance in platform industries precisely because of the heightened | |
| importance of interfaces between components (layers) in these | |
| platforms. Closing interfaces takes on special importance. | |
| Unfortunately, antitrust practice has drifted away from concerns about | |
| vertical leverage, at precisely the moment it demands greater scrutiny | |
| and attention. | |
| --------------------------------------------------------------------------- | |
| \5\ Mark Cooper, ``Antitrust as Consumer Protection in the New | |
| Economy: Lessons from the Microsoft Case,'' Hastings Law Journal, 52:4, | |
| 2001. Available at http://www.consumerfed.org/cooper--hastings--law-- | |
| review--200106.pdf | |
| --------------------------------------------------------------------------- | |
| We believe that music, movies and other digital content could | |
| quickly grow to become that anti-competitive lever, if it is not | |
| already. For the consumer who purchased any digital music player other | |
| than an iPod, there's no simple recourse when R.E.M. releases a series | |
| of songs exclusively on iTunes Music Store.\6\ Nor is there any | |
| recourse at all for a Mariah Carey fan with an iPod on a Macintosh when | |
| she releases an exclusive song on MSN Music--a platform that simply | |
| won't work with Macintosh or iPods.\7\ | |
| --------------------------------------------------------------------------- | |
| \6\ While iTunes allows consumers to burn purchased protected | |
| digital music to a CD--n open platform--it must be pointed out that a | |
| consumer would need to install a new program, purchase the song, burn | |
| the song to CD, rip the burned CD into a format their current player | |
| will understand and then enter all the song information manually--a | |
| cumbersome process digital music stores were supposed to make | |
| automatic. | |
| \7\ A consumer with an iPod and Windows might have more luck if | |
| they followed the steps in Footnote 6, but users with a Mac are out of | |
| luck--and won't be able to download that song legally. | |
| --------------------------------------------------------------------------- | |
| Consumers who run up against these problems with music, movies or | |
| other digital content will increasingly turn to methods that | |
| potentially infringe copyright to get the song they want, including | |
| searching the Internet for a copy of the song converted to an open | |
| format. This is a less-than-adequate solution, and one that all parties | |
| should be wary of inadvertently promoting. Both the content and device | |
| industries surely recognize that every time they drive a consumer to | |
| infringe copyright because of their support for a closed platform, they | |
| create new incentive to create and deliver an open platform. | |
| DIGITAL DISTRIBUTION OF MUSIC HAS JUST BEGUN: | |
| INTEROPERABILITY WILL LIKELY PREVAIL | |
| Last year, when the recording industry finally accepted the | |
| inevitability of digital distribution of music, the industry sold more | |
| singles than at any time in the past two decades. The transition to | |
| digital distribution has begun in earnest. This transition is | |
| inevitable. Digital distribution reduces the costs of production, | |
| marketing, and distribution. It may also radically alter the approach | |
| to promotion. The cost of delivering music to the public will decline | |
| by 50 percent or more and the selling of music will shift from bundles | |
| of songs to singles. | |
| Major record labels--whose artists account for over 80% of the | |
| music purchased in America--are belatedly considering alternative | |
| business models for digital distribution. This lead to subscription | |
| services like Real Rhapsody and Napster 2.0 or a la carte services like | |
| those two companies offer, iTunes Music Store, and others. | |
| The music industry is not facing a format war, like the battle they | |
| are currently fighting over high-definition music--where some labels | |
| exclusively sell content on SuperAudio CD while others only release | |
| premium music on the DVD-Audio format. A format war clearly would have | |
| impeded the adoption of digital music. But as the amount music | |
| exclusively available on one format increases, and as consumers | |
| discover they've purchased thousands of dollars of music to fill up | |
| their digital music devices, locking themselves to one type of player | |
| forever, they are more likely to get confused and frustrated. To | |
| alleviate both, record labels and device manufacturers should | |
| proactively inform consumers about the limitations of their closed | |
| systems, and work to develop open standards. | |
| Those who had foresight and created a digital music platform with | |
| portable digital music players and digital music download stores now | |
| have a lead, winning a first-mover advantage. But as the entirety of | |
| the music industry makes the inevitable transition to digital | |
| distribution, there are no guarantees that the initial advantage will | |
| persist, especially if mistakes are made with regard to | |
| interoperability. A quarter of a century ago a closed platform | |
| dominated the computer desktop market. A more open platform quickly | |
| replaced it, forcing all platforms to improve compatibility. Given a | |
| choice that is not distorted by anticompetitive practices and good | |
| information consumers will prefer and migrate to the interoperable | |
| platforms. | |
| CONCLUSION | |
| Last week oral argument in two critical cases (National Cable and | |
| Telecommunications Association et al. v. Brand X Internet Services et. | |
| al and Metro-Goldwyn Mayer Studios Inc. et al v. Grokster) that will | |
| determine the future of the Internet made it clear that technology | |
| policy requires a careful balance between the public and private | |
| interests. Interoperability in core infrastructure industries has been | |
| a key ingredient in this nation's economic success since the railroad | |
| track was standardized and the telecommunications network was obligated | |
| to provide interconnection and carriage on just, reasonable and | |
| nondiscriminatory rates, terms and conditions. | |
| I thank the Committee for recognizing that in the digital economy | |
| interoperability has even broader implications and I look forward to | |
| working with the committee to find the right mix of public obligations | |
| and private incentives to achieve open, competitive platforms that | |
| provide a dynamic, consumer-friendly economy. | |
| Mr. Smith. Thank you, Dr. Cooper. | |
| Mr. Gifford? | |
| TESTIMONY OF RAYMOND L. GIFFORD, PRESIDENT, | |
| THE PROGRESS & FREEDOM FOUNDATION | |
| Mr. Gifford. Thank you, Mr. Chairman. | |
| When I begin to agree with my friend, and sometimes | |
| nemesis, Mark Cooper I start to doubt myself, but I appreciate | |
| the opportunity to speak with you today and the Members of the | |
| Subcommittee. | |
| In seizing on this topic, the Committee has hit upon one of | |
| the key conundrums of the digital age, namely, the role of | |
| standard-setting and the subsidiary goal of interoperability. | |
| Interoperability is a key challenge to firms and network | |
| industries. The success of a given platform depends on its | |
| attractiveness to consumers, and a key value for consumers is | |
| the platform's ability to interoperate with a variety of | |
| applications. Interoperability, to be sure, is a value to | |
| consumers and firms, but it is not an absolute value. | |
| The Progress and Freedom Foundation recently hosted a | |
| series of events in Europe on standard-setting and | |
| interoperability. My conclusions from those events will serve | |
| as my introduction here. | |
| First, standard-setting is hard. We do not know, before the | |
| fact, the optimal method or amount of standards or | |
| interoperability. For public policy, this should inspire a | |
| great deal of caution from mandating any given outcome or | |
| particular standard. Because there are undeniable tradeoffs | |
| from any standard-setting or interoperability decision | |
| Governments should be wary of thinking they have sufficient | |
| foresight to make proper interoperability decisions and | |
| deferential to private attempts to achieve interoperability. | |
| Finally, for public policymakers, we can never forget the | |
| lessons of public choice theory, which predict that firms and | |
| interest groups will seek Government favor in promoting their | |
| interoperability solution and in handicapping their rivals. | |
| I have three specific theses: | |
| First, protect the Schumpeterian incentives to innovate and | |
| compete for not just in the market; | |
| Second, allow open and closed platform business models to | |
| compete; | |
| And, third, permit the freedom to use digital rights | |
| management. | |
| First, much of the brow-furrowing over interoperability and | |
| digital music stems from the success of the Apple iPod | |
| platform. I urge this Subcommittee not to give into the | |
| politics of platform envy. Joseph Schumpeter, you may recall, | |
| was the economist who described capitalism as a process of | |
| creative destruction, with new firms and new products spurring | |
| innovation and creating new markets. Digital music is a new | |
| market, and the iPod platform and its remarkable success is the | |
| harbinger of those types of markets and what they can be. The | |
| law, intellectual property and antitrust law, specifically, | |
| should encourage this dynamism. | |
| Second, a related question to the types of competition that | |
| is occurring in this market is the platform models that firms | |
| choose to compete in the market. This gets to the heart of | |
| interoperability as different firms opt for platforms of | |
| varying degrees of openness on the one hand or closed | |
| integration on the other. | |
| From a business standpoint, you can see the tradeoffs and | |
| strategic decisions the companies are making. By opting for a | |
| more open platform, the firm hopes to attract more users to its | |
| platform and increase the number of applications compatible | |
| with its platform. The tradeoff involves sharing more of the | |
| profits from that platform and, also, perhaps some of the | |
| quality control over the whole consumer experience. In | |
| contrast, a more closed platform rather audaciously attempts to | |
| gather all of the rents from production, but perhaps at a cost | |
| of interoperability. | |
| Should public policy be concerned with these business | |
| decisions? Probably not. If you start looking for standards to | |
| scrutinize, you will see them everywhere, from razors and | |
| blades, to PSPs and disk drives, to MP3 Players and iPods. | |
| Because we cannot know in advance what consumers will prefer or | |
| what is truly superior, we should forbear from interfering. | |
| A final value of public policy should be to ratify the | |
| acceptability and use of digital rights management or DRM | |
| technologies. DRM allows content providers a reasonable degree | |
| of confidence in bringing digital music to market and consumers | |
| the ability to purchase digital music. DRM will be integral to | |
| consumers' access to digital content and, hence, must be | |
| allowed its place as a valid market mechanism. | |
| Standards are hard. Interoperability is a good thing, but | |
| not an absolutely good thing. Consumers' tastes for the most | |
| part will drive toward interoperable platforms, but not | |
| necessarily. Intellectual property law, antitrust and | |
| administrative regulation point in slightly different | |
| directions on these issues, but are up to the task of | |
| confronting the policy challenges presented by digital | |
| technologies. From Congress's point of view, the best course | |
| would be to resist calls for mandates or technology limitations | |
| in this dynamic space. | |
| I thank the Committee for the opportunity to testify today | |
| and look forward to your questions. | |
| [The prepared statement of Mr. Gifford follows:] | |
| Prepared Statement of Raymond Gifford | |
| Good morning, Mr. Chairman, Mr. Berman and members of the | |
| subcommittee. Thank you for the opportunity to speak to you today on | |
| digital music interoperability and availability. In seizing on this | |
| topic, the Committee has hit upon one of the key conundrums of the | |
| digital age; namely, the role of standard setting and the subsidiary | |
| goal of interoperability. As you know, markets for digital music are | |
| nascent and emerging. Different platforms, different file formats and | |
| different digital rights management systems are competing for | |
| dominance. Indeed, even different business models are duking it out, | |
| with Napster To Go's subscription model taking on iTunes and Wal Mart's | |
| (among others) pay-per-song model. All of this indicates a competitive, | |
| functioning market working within the bounds of copyright and patent | |
| law, with a backstop of antitrust should unlawful monopoly concerns | |
| arise. | |
| Interoperability is a key challenge to firms in network industries. | |
| The success of a given platform depends on its attractiveness to | |
| consumers, and a key value for consumers is the platform's ability to | |
| interoperate with a variety of applications. Interoperability, to be | |
| sure, is a value to consumers and firms, but it is not an absolute | |
| value. Standards and interoperability can be achieved through a variety | |
| of institutions: within single firms, within private consortia, with | |
| government blessing and with government mandate. Standards can be open | |
| and non-propriety, or closed and proprietary, and gradations in between | |
| these extremes. In digital music markets we see all of these models, to | |
| varying degrees. There is the relatively more closed and integrated | |
| iPod platform; there are the relatively more open MP3 platforms. There | |
| are different file formats; there are different DRM solutions. | |
| I appreciate the opportunity to speak to you on this topic because | |
| I have been thinking about it so much myself. The Progress & Freedom | |
| Foundation recently hosted a series of events in Europe. My conclusions | |
| from those events serve as my introduction here: | |
| First, standard setting is hard. We do not know ex ante the | |
| optimal method for standard setting, or the optimal model. Are | |
| open standards preferable? In some cases, yes; in others, no-- | |
| you are making a trade-off. Are proprietary or non-proprietary | |
| standards going to give the greatest amount of innovation? We | |
| cannot be sure. Do we prefer competition for a standard or | |
| competition within a standard? Depends on the quality of the | |
| standard you start with, and also requires recognition of the | |
| (unknown and unknowable) costs of the standard foregone. | |
| For public policy, all this should inspire a great deal of | |
| caution for mandating any given outcome or specific standard. | |
| Because there are undeniable trade-offs from any standard- | |
| setting decision, governments should be: a) wary of thinking | |
| they have sufficient foresight to make proper standard-setting | |
| decisions; and b) deferential to private attempts at standard | |
| setting. Different business models will emerge, different | |
| appetites for risk will be revealed--some firms will hedge risk | |
| and cooperate with others in standard setting; others will | |
| audaciously seek to ``win'' the standard with a fully closed, | |
| vertically integrated model (large parts of the iPod business | |
| model come to mind here). Only where the collective action | |
| problem seems overwhelming should government deign to enter the | |
| standard setting sphere. | |
| Finally, for public policy makers, we can never forget the | |
| lessons of public choice theory, which predicts that firms and | |
| interest groups will seek government favor in promoting their | |
| standards solution and handicapping their rivals. Any call for | |
| government to prefer one standard or model over another must be | |
| subject to the most exacting skepticism given what we know | |
| about the propensity for the public policy process to be | |
| perverted toward private ends. | |
| With that, let me address three issues relating to digital music | |
| interoperability that occasioned this hearing today. I have three | |
| specific theses: first, protect the Schumpeterian incentives to | |
| innovate and compete for, not just in, the market; second, allow open | |
| and closed platform business models to compete; and, third, permit the | |
| freedom to use digital rights management technology so digital music | |
| will be brought to market. | |
| PROTECT THE SCHUMPETERIAN INCENTIVE TO INNOVATE AND CREATE NEW | |
| PLATFORMS | |
| Much of the brow-furrowing over interoperability in digital music | |
| stems from the success of Apple's iPod platform. I urge this | |
| Subcommittee not to give in to the politics of platform envy, however. | |
| Instead of being concerned with the business decisions of a firm, and | |
| the preferences of consumers, the Committee should celebrate the | |
| triumph of the iPod platform as Schumpeterian competition at its best. | |
| Joseph Schumpeter, you may recall, was the economist who described | |
| capitalism as a process of ``creative destruction,'' with new firms and | |
| new products spurring innovation and creating new markets. Digital | |
| music is a new market, and the iPod platform and its remarkable success | |
| is the harbinger of that market and what it can be. In turn, this | |
| competition for the market has spurred other innovation, other | |
| platforms and other business models to emerge to challenge the iPod | |
| platform. This is a type of competition that benefits consumers | |
| immeasurably. It is the type of dynamic competition that is making | |
| digital music a reality to millions of American consumers. The law-- | |
| intellectual property and antitrust law, specifically--should encourage | |
| this dynamism. | |
| There are at least three benefits to this Schumpeterian | |
| competition: firms compete to build a valuable customer base, firms | |
| bring new products to market more quickly for fear of being displaced, | |
| and companies are driven to develop superior technologies. All of these | |
| are benefits we are now seeing from inter-platform competition for | |
| digital music markets. To be sure, this competition may create some | |
| hiccups and difficulties for interoperability as it goes on, but the | |
| innovation benefits are worth it. Furthermore, these markets usually | |
| trend toward interoperability, as that is usually where consumer | |
| preference directs them. | |
| By contrast, government-mandated interoperability sacrifices the | |
| dynamic competition for the standard for competition within the | |
| standard. This mandate would appropriate the value that the platform | |
| innovator has created, and allow others to interoperate on the | |
| platform. Long-term, such mandated unbundling of digital music | |
| platforms in the name of interoperability will quell innovation and | |
| investment in the platform. Furthermore, this call for mandated | |
| interoperability is, by definition, going to be opportunistic. No one | |
| calls for access to failed platforms, say the Betamax, the Commodore | |
| 64, or the Digital Audio Tape. | |
| One of the questions here is how law will treat cases of reverse | |
| engineering, such as Real Networks has attempted to do with the iPod, | |
| and various hackers have done with the Fairplay DRM system and the | |
| Napster To Go DRM. Interestingly, copyright law tends to be more | |
| solicitous of reverse engineering, while patent law tends to be hostile | |
| toward reverse engineering attempts. On balance, it seems to me that IP | |
| law should encourage this inter-platform competition such as we see | |
| happening in digital music, and thus be suspicious of attempts to | |
| reverse engineer and de facto ``unbundle'' the successful platform. | |
| So, my first advice is: don't give into platform envy and mandate | |
| some sort of interoperability. Antitrust law and the common law-like | |
| doctrines of intellectual property law are adequately suited to address | |
| the challenges from new digital music platforms. | |
| (RELATIVELY) MORE OPEN AND MORE CLOSED PLATFORM MODELS | |
| WILL COMPETE FOR DOMINANCE | |
| A related question to the type of competition that is occurring in | |
| this market is the platform models that firms choose to compete in the | |
| market. This gets to the heart of interoperability, as different firms | |
| opt for platforms of varying degrees of ``openness,'' on the one hand, | |
| or closed integration, on the other. For Congress, I do not think this | |
| should be of particular concern because the market will sort out what | |
| is superior, or at the very least make a better judgment about the | |
| inevitable trade-offs involved. | |
| From a business standpoint, you can see the trade-offs and | |
| strategic decisions that companies are making. By opting for a more | |
| ``open'' platform, the firm hopes to attract more users to its platform | |
| and increase the number of applications compatible with its platform. | |
| The trade-off involves sharing more of the profits from that platform, | |
| and also perhaps some of the quality control over the whole consumer | |
| experience. In contrast, a more closed platform rather audaciously | |
| attempts to garner all of the ``rents'' from production, but at a cost | |
| (perhaps) of interoperability. We saw this very dynamic in the | |
| competition for the personal computer standard with the lower-cost, | |
| modular Wintel platform competing with the higher-cost, more tightly | |
| integrated Apple MacIntosh platform. We see reflections of that same | |
| business strategy difference now with digital music players. | |
| Recently, The Wall Street Journal had a story about a new trend | |
| toward ``closed'' non-interoperable platforms--in coffee makers. Yes, | |
| coffee makers, which have traditionally been ``open-architectured'' | |
| devices with standard filter basket design and open to any brand or | |
| grind of coffee. Now, companies such as Nestle with a Nespresso, Sara | |
| Lee with Senseo and Kraft with a Tassimo, are making closed-platformed | |
| coffee makers that use special fiters and coffees that work just with | |
| the specific maker. And just last week a new, relatively closed | |
| standard emerged on the consumer electronics scene, the Sony PSP. I | |
| know this because my 10 year old son is bugging me for one. The PSP | |
| uses a disk size that is proprietary to Sony. As a consumer, I may fear | |
| ``lock in'' on these closed platforms, but I can make the decisions | |
| whether to buy or not. | |
| Should public policy be concerned with this turn in the annals of | |
| coffee maker platform design or video game devices? Probably not. If | |
| you start looking for standards to scrutinize, you will see them | |
| everywhere--from razors and blades, to PSPs and disk drives, to MP3 | |
| Players and iPods. Because we cannot know in advance what consumers | |
| will prefer or what is truly superior, we should forbear from | |
| interfering. | |
| FREEDOM TO USE DIGITAL RIGHTS MANAGEMENT | |
| A final value for public policy should be to ratify the | |
| acceptability and use of digital rights management or DRM technologies. | |
| DRM allows content providers a reasonable degree of confidence in | |
| bringing digital music to market, and consumers the ability to purchase | |
| digital music. DRM will be integral to consumers' access to digital | |
| content and hence must be allowed its place as a valid market mechanism | |
| to bring digital music to market. | |
| Some argue that DRM is a limitation on consumers' freedom and its | |
| used should be circumscribed. This is wrong on two fronts. First, the | |
| price system in a functioning market takes this into account and | |
| reduces consumers' costs correspondingly. If I purchase a song with DRM | |
| attached that limits its platform compatibility, those limits are in | |
| the price I pay. Because the nature of digital technologies allows | |
| perfect, costless copying, my consent as a consumer to purchase a DRM- | |
| restricted song may be the only way I can enjoy digital music. If the | |
| choice is between digital music with DRM and no digital music, I will | |
| take the former. | |
| The argument that DRM--and its associated technological arms races | |
| to break it--is socially wasteful proves too much. By this logic, my | |
| investment of locks on my home is socially wasteful because a | |
| determined burglar will be able to break in anyway. DRM does, as we | |
| see, inspire a hack and counter-hack arms race, and this is indeed not | |
| salutary for the mass of consumers who want to properly use licensed | |
| digital music. And indeed, DRM can be overrestrictive to consumers' | |
| desires for interoperability. But right now, I do not have a better | |
| idea. More important, the market opportunity for more-tailored DRM | |
| should provide the opportunity for it to become better and more | |
| accommodating of consumers' wishes. | |
| Indeed, HR 1201, pending in another committee, would in effect | |
| remove DRM as a marketplace option. By permitting consumers to | |
| circumvent copy-protection mechanisms, currently a violation of the | |
| Digital Millennium Copyright Act, any contract between a consumer and a | |
| content provider involving a fixed payment for a fixed set of rights | |
| could be unilaterally voided by the consumer. | |
| We are constantly hearing calls for more flexible business models | |
| in digital content. If HR 1201 were to pass, I could approach the | |
| existing smorgasbord of digital music offerings, for example, and | |
| purchase the most affordable option, which likely involves limitations | |
| on platforms and devices, enforced through DRM technology. I could then | |
| legally hack through those protections and use the content however I | |
| may see fit, gaining the same flexibility of use as a consumer who paid | |
| full price for that use. It's not hard to imagine that in a world where | |
| DRM hacking is legal, there would be little incentive for content | |
| providers to compete with various rights models, as we see now with | |
| Napster To Go. That would mean less content with fewer price options, | |
| and thus a loss for consumers. | |
| CONCLUSION | |
| Standards are hard. Interoperability is a good thing, but not an | |
| absolutely good thing. Consumers' tastes, for the most part, will drive | |
| toward interoperable platforms, but not necessarily. | |
| Intellectual property law, antitrust and administrative regulation | |
| point in slightly different directions on these issues, but are up to | |
| the task of confronting the policy challenges presented by digital | |
| technologies. From Congress' point of view, the best course would be to | |
| resist calls for mandates or technology limitations in this dynamic | |
| space. | |
| I thank the Committee for this opportunity and ask that my written | |
| remarks be made part of the record. I am happy to answer any questions | |
| you may have. | |
| Mr. Smith. Thank you, Mr. Gifford. | |
| Dr. Pence. | |
| TESTIMONY OF WILLIAM E. PENCE, PH.D., | |
| CHIEF TECHNOLOGY OFFICER, NAPSTER | |
| Mr. Pence. Thank you, Mr. Chairman, Mr. Berman, Members of | |
| the Subcommittee for inviting me here today. Thank you, also, | |
| for the leadership that you have exercised in the fight against | |
| piracy and for recognizing the importance of the legitimate on- | |
| line music marketplace. | |
| Like our colleagues in the on-line music industry, Napster | |
| has a vision for what consumers want in a service: great music, | |
| deep catalog, easy-to-use technology, high-quality files | |
| without spyware, pornography or viruses, and flexibility and | |
| portability all at a fair price. | |
| Recently, as you may be aware, Napster introduced the first | |
| portable music subscription service, Napster To Go, that allows | |
| consumers to enjoy our large catalog of music on a variety of | |
| portable devices for a plat price of only $15 a month. Combined | |
| with unlimited downloading and streaming, we believe this | |
| service provides consumers with all of the key elements they | |
| want in a digital music service: freedom to discover music on | |
| an unlimited basis and the ability to take that music with them | |
| wherever they go. | |
| For many users, this is a more attractive option than | |
| buying individual tracks for 99 cents. We support an ala | |
| carte download store as well, and we strive to offer as | |
| many choices to consumers as possible. All of these choices, | |
| and more to come, are enabled through our underlying digital | |
| rights management platform which is based on Microsoft software | |
| components. | |
| I have been asked to testify today specifically about | |
| digital music interoperability, about the value of | |
| interoperability to consumers, creators, and legitimate on-line | |
| music marketplace and about when full digital music | |
| interoperability may be available. In particular, some have | |
| asked whether Congress should help jump-start the legitimate | |
| marketplace by mandating digital music interoperability so that | |
| consumers will no longer be confused, so that they will know | |
| for sure that every digital song they acquire lawfully will | |
| play on any portable music player and on any PC. | |
| We have been asked whether digital interoperability might | |
| be the magic bullet that enables legitimate on-line music to | |
| win the battle against piracy and black-market networks. | |
| As a technologist, it seems important to appreciate that | |
| each digital song file has two essential components, the audio | |
| compression software and the digital rights management software | |
| and that each can be a source of interoperability confusion. | |
| You may be familiar with audio compression software or codecs | |
| that have been developed by Real Networks and Microsoft, as | |
| well as the MP3 format developed by Fraunhofer and the AAC | |
| format utilized by Apple. But there were literally dozens of | |
| audio codecs offered in the late 1990's. | |
| Historically, codecs were incompatible, and if one | |
| downloaded a song in the MP3 format, it would not play if your | |
| PC utilized a different format. Today, however, this is less of | |
| an issue, generally, because audio codecs have been in the | |
| marketplace for several years, and traditional marketplace | |
| forces have evaluated the qualities and sustainability of each. | |
| As a result, only two or three codecs are relevant in the on- | |
| line marketplace today, and interoperability is considered | |
| essential and made possible by licenses that are easily | |
| available and economically reasonable. | |
| For consumers, the generally successful outcome is that PCs | |
| and portable music devices today support more than one of the | |
| surviving codecs, minimizing, although not eliminating, | |
| dysfunction for end users. Today, for example, users can copy | |
| their CD collection onto their PC in the MP3 format and combine | |
| those music files with songs purchased from Napster in the | |
| Microsoft WMA format and seamlessly transfer all to portable | |
| devices without ever knowing that two separate formats were | |
| involved. | |
| In contrast, DRM interoperability has remained at the | |
| center of debate in the on-line music industry. In the last | |
| several years, high-quality DRM technologies have been | |
| developed and offered by dozens of companies. While the market | |
| has narrowed the field from dozens of DRM technologies to less | |
| than a handful today that are commercially meaningful, the DRM | |
| market is still significantly less mature than the codec | |
| market, and the competing offerings are not fully rationalized | |
| or stabilized. | |
| More importantly, DRM technology is still in a stage of | |
| rapid innovation. This is best demonstrated by the pace of new | |
| business models being introduced in the market, including our | |
| own Napster To Go service. As consumers' on-line services and | |
| copyright owners have become more sophisticated, technology | |
| innovators have responded rapidly and brought improved products | |
| to market, but DRMs are still being developed, tested, | |
| challenged and upgraded, and I encourage Congress to welcome | |
| and promote this innovation and the improved music offerings | |
| that result. | |
| It is my belief, and the essential point of my | |
| participation today, that marketplace forces will continue to | |
| drive innovation in the DRM arena with the tenant consumer | |
| benefits, new ways to enjoy digital music at a variety of | |
| different price points, while also gradually solving the | |
| interoperability problem. | |
| The solutions will be evident through a combination of | |
| consumer devices that support multiple DRM formats and services | |
| that will translate from one DRM format to another, as content | |
| flows legitimately between devices, always maintaining the user | |
| rules as defined by the service that originally makes the | |
| content available. Already we see evidence of DRM market forces | |
| in action, as companies coalesce around platforms. | |
| Historically, the Government has not been a participant in | |
| competition between early-stage consumer technologies. | |
| Government intervention in the innovation business can lead to | |
| politicizing and inhibiting such innovations rather than | |
| allowing the marketplace, based on actual demand, to select | |
| winners that must continue to provide viable solutions. | |
| In contrast, Napster wholeheartedly endorses the | |
| conclusions of Chairman Smith and Representative Berman that | |
| were offered in a recent Subcommittee hearing about our music | |
| licensing laws. Congress has a critical role to play in | |
| facilitating the legitimate on-line music marketplace by | |
| modernizing the Copyright Act. | |
| Thank you, again, for providing the opportunity for Napster | |
| to address the issues that continue to hamper industry and for | |
| your continuing support in helping royalty-paying, on-line | |
| music services defeat piracy. | |
| [The prepared statement of Mr. Pence follows:] | |
| Prepared Statement of William E. Pence | |
| Mr. Chairman, Mr. Berman, and Members of the Subcommittee: | |
| Thank you for inviting me, on behalf of Napster, to testify at | |
| today's hearing at which the Subcommittee is considering the importance | |
| of digital music interoperability. Thank you also for the leadership | |
| that you and the Members of the Subcommittee have exercised in the | |
| fight against piracy, and for recognizing the importance of the | |
| legitimate online music marketplace, both for its independent value as | |
| an opportunity for creators and consumers to distribute and enjoy more | |
| and different types of music, and for the value of royalty-paying | |
| online music as the marketplace solution to piracy. | |
| Napster is also particularly appreciative of the Subcommittee's | |
| leadership with regard to the education and youth market. Napster, as | |
| you know, is working closely with the recording industry and a number | |
| of universities to bring legal music to the campuses of America in a | |
| manner that encourages this important consumer group to respect the | |
| legitimate marketplace while recognizing its hunger for a full-featured | |
| digital music service at a reasonable price. | |
| Like our colleagues in the online music industry Napster has a | |
| vision of what consumers want in an online music service: great music, | |
| deep catalog, easy-to-use technology, high-quality files without | |
| spyware, pornography, or viruses, and flexibility and portability, all | |
| at a fair price. Moreover, our company story demonstrates that | |
| consumers are willing to pay for this: from a standing start four years | |
| ago as PressPlay to today's Napster, we now have more than 400,000 | |
| paying subscribers worldwide, including more than 50,000 subscribers on | |
| college campuses. | |
| Recently, as you may be aware, Napster introduced the first | |
| portable music subscription service, Napster-to-Go, that allows | |
| consumers to enjoy our large catalog of music on a variety of portable | |
| devices for a flat price of only $15 a month. Combined with unlimited | |
| downloading and streaming, we believe this service provides consumers | |
| with all the key elements they want in a digital music service--freedom | |
| to discover music on an unlimited basis, and the ability to take that | |
| music with them wherever they go. For many users, this is a more | |
| attractive value than buying individual tracks for $0.99, though we | |
| support an a la carte download store as well, and we strive to offer as | |
| many choices to consumers as possible. All of these choices, and more | |
| to come, are enabled through our underlying digital rights management | |
| platform, which is based on Microsoft software components. | |
| I have been asked to testify today specifically about digital music | |
| interoperability--about the value of interoperability to consumers, | |
| creators, and the legitimate online music marketplace--and about when | |
| full digital music interoperability may be available. In particular, | |
| some have asked whether Congress should help jump-start the legitimate | |
| marketplace by mandating digital music interoperability so that | |
| consumers will no longer be confused, and rather they will know for | |
| sure that every digital song they acquire lawfully will play on any | |
| portable music player, on any PC, and if burned to a compact disc that | |
| it will play on every CD player. We have been asked whether digital | |
| interoperability might be the magic bullet that enables legitimate | |
| online music to win the battle against black market networks that | |
| enable music theft and generate no royalties to artists. | |
| As a technologist, it seems important to appreciate that each | |
| digital song file has two essential components--the audio format | |
| software and the digital rights management software--that can each be a | |
| source of incompatibility. You may be familiar with audio format | |
| softwares, or codecs, that have been developed by RealNetworks and | |
| Microsoft, as well as the MP3 format developed by Fraunhofer and the | |
| AAC format utilized by Apple. But there were literally dozens of audio | |
| codecs offered in the late 1990s, including software developed by AT&T | |
| Labs and Universal Music. | |
| Historically codecs were incompatible, and if one downloaded a song | |
| in the MP3 format it would not play if your PC utilized Liquid Audio | |
| software, and vice-versa. Today, however, this is less of an issue, | |
| generally because audio codecs have been in the marketplace for several | |
| years and traditional marketplace forces have evaluated the qualities | |
| and sustainability of each. As a result only two or three codecs are | |
| relevant in the online music industry today, and interoperability is | |
| considered essential and is made possible by licenses that are easily | |
| available and economically reasonable. And for consumers, the generally | |
| successful outcome is that PCs and portable music devices today support | |
| more than one of the surviving codecs, minimizing (although not | |
| eliminating) dysfunction for end users. Today, for example, users can | |
| copy their CD collection onto their PC in the MP3 format and combine | |
| those music files with songs purchased from Napster in the Microsoft | |
| WMA format, and seamlessly transfer all to portable devices without | |
| ever knowing that two separate formats were being integrated. | |
| In contrast, DRM interoperability has emerged recently as the | |
| center of debate in the online music industry. In the last several | |
| years high-quality DRM technologies have been developed and offered by | |
| dozens of companies, including Liquid Audio, AT&T Labs, Universal | |
| Music, RealNetworks, IBM, Microsoft, Contentguard, Intertrust, Verance | |
| and Macrovision. While the market has narrowed the field from dozens of | |
| DRM softwares to less than a handful today that are commercially | |
| meaningful, the DRM market is significantly less mature than the codec | |
| market, so the competing offerings are not fully rationalized or | |
| stabilized. | |
| Importantly, the market's immaturity is driven by the technology's | |
| immaturity, as DRM technology is still in a stage of rapid innovation. | |
| This is best demonstrated by the pace of new business models being | |
| introduced in the market, including our own Napster to Go service, | |
| based on the just released DRM10 technology from Microsoft. As | |
| consumers, online services and copyright owners have become more | |
| sophisticated, technology innovators have responded rapidly and brought | |
| improved products to market, but DRMs are still being developed, | |
| tested, challenged, and upgraded--and I encourage Congress to welcome | |
| and promote this innovation and the improved music offerings that | |
| result. | |
| It is my belief, and the essential point of my participation today, | |
| that marketplace forces will continue to drive innovation in the DRM | |
| arena with attendant consumer benefits--new ways to enjoy digital music | |
| at a variety of different price points--while also gradually | |
| ``solving'' the interoperability problem. The solutions will be evident | |
| through a combination of consumer devices that support multiple DRM | |
| formats, and services that will translate from one DRM format to | |
| another as content flows legitimately between devices, always | |
| maintaining the user rules as defined by the service that originally | |
| makes the content available. | |
| Already we see evidence of DRM market forces in action as companies | |
| coalesce around platforms. A good example of this is the many online | |
| services and device manufacturers that have licensed and deployed the | |
| Microsoft DRM. Others, such as Apple, have chosen not to license their | |
| technology platform under any terms to services and manufacturers eager | |
| to offer innovative business models to consumers. Perhaps Apple is | |
| confident that its market-leading position is best maintained by | |
| promoting a closed environment, and that is a legitimate business | |
| decision that some endorse and others may question. Napster believes | |
| that allowing the iPod to work with multiple service offerings would | |
| benefit consumers. Nevertheless, I do not see Government intervention | |
| as the solution, as it would stifle competition and innovation that | |
| will benefit consumers and copyright owners at a very early stage of | |
| the market's development. | |
| Historically the Government has not been a participant in | |
| competition between early-stage consumer technologies, such as between | |
| the VHS and the Betamax, the cassette and the 8-track tape, USB and | |
| Firewire, or the current competition between DVD Audio and Super Audio | |
| CD. Similarly, it does not seem prudent for Government to pick a winner | |
| in the continuing (but still quite early-stage) marketplace battle | |
| between Apple's Fairplay DRM and its competitors. Government | |
| intervention in the innovation business can lead to politicizing and | |
| inhibiting such innovation, rather than allowing the marketplace, based | |
| on actual demand, to select ``winners'' that must continue to provide | |
| viable solutions or lose their market--deservedly--to the next great | |
| offering that someone develops in his or her garage or corporate lab. | |
| In contrast, Napster wholeheartedly endorses the conclusions of | |
| Chairman Smith and Representative Berman that were offered in the | |
| recent Subcommittee hearing about our music licensing laws. Congress | |
| has a critical role to play in facilitating the legitimate online music | |
| marketplace, by modernizing the Copyright Act--in particular, Sections | |
| 115 and 112 as they relate to music publishing rights and royalties. | |
| Napster and our legitimate online music competitors compete with pirate | |
| services, and it is critical to creators and all who support them that | |
| royalty-paying services win the day. | |
| If this Subcommittee helps legal services to secure blanket | |
| licenses for music publishing rights, we will offer the full catalog of | |
| music that, ironically, only the black market networks players can | |
| currently provide to consumers. Once we are actually functioning on an | |
| equal music playing field, Napster believes that our then-significantly | |
| larger number of consumers who realize that our features and | |
| functionality are so much more robust and appealing than the virus- | |
| ridden free option, will speak out on the subject of interoperability | |
| and encourage the market to adapt. | |
| Thank you again for providing the opportunity for Napster to | |
| address the issues that continue to hamper our industry, and for your | |
| continuing support in helping royalty-paying online services defeat | |
| piracy. | |
| Mr. Smith. Thank you, Dr. Pence. | |
| Mr. Bracy? | |
| TESTIMONY OF MICHAEL BRACY, POLICY DIRECTOR, | |
| FUTURE OF MUSIC COALITION | |
| Mr. Bracy. Thank you, Mr. Chairman, Mr. Berman, Mr. | |
| Conyers, for being here today, and the rest of the | |
| Subcommittee. We appreciate the opportunity to present some | |
| testimony, some thoughts. | |
| You have our written statement, so I am just going to kind | |
| of give some reflections off that if that is okay with the | |
| Committee. | |
| As we are preparing for this hearing, it occurred to us | |
| that this is actually the 5-year anniversary of the formation | |
| of Future Music Coalition, and it gave us an opportunity to | |
| reflect on sort of what we have seen over the last 5 years and | |
| some kind of larger themes. | |
| I think one of the things that is important to recognize is | |
| that a lot of what we are dealing with in the music community | |
| is the idea that new technologies have dropped the cost of | |
| actually getting involved in the music community, that | |
| technology creates more musicians because more people have | |
| access to capital to create music and to distribute music, to | |
| promote themselves, and to build that one-on-one relationship | |
| with friends. | |
| The challenge that you see, as more and more people come | |
| into the community, is that the existing music structures, the | |
| historic music structures don't really support the amount of | |
| content that comes into the marketplace, and, frankly, didn't | |
| support in the traditional models the way and the ability for | |
| consumers to then to access that content. | |
| And while there is a lot of disagreement and a lot of | |
| different sort of visions as far as how you get to the end | |
| game, as far as the legitimate digital marketplace for music, | |
| there are some themes that we think cut across all aspects of | |
| the music community of musicians an songwriters; the first | |
| being that whenever possible artists need to maintain control | |
| over their copyright and their career decisions. | |
| Second is that artists, as independent entrepreneurs, need | |
| the ability to compete in the marketplace, meaning they need | |
| access to the basic networks, they need the ability to be | |
| compensated for their work, and they need the ability to access | |
| consumers. | |
| The third is something that you have done a great job | |
| throughout this process with the Committee is that artists need | |
| to be seen by policymakers as valued participants in this | |
| process, that is, the new systems are designed, new structures | |
| are designed that artists need to be at the table, and we | |
| certainly appreciate your leadership. | |
| Now, this transition, as we said, is necessary and it is | |
| welcome, and it is important, and that as more people get into | |
| this marketplace, you are starting to see the type of | |
| experimentation that really leads to this development of a | |
| legitimate marketplace. Five years ago, we said the only way to | |
| compete with Napster, an unlicensed Napster, was with a legal | |
| Napster, that you have to really try to create incentives in | |
| the marketplace to grow the market, to create legitimate | |
| models. | |
| And in the music community and among musicians, you really | |
| see an embracing of those technologies. We recently published a | |
| study with the Pew Internet and American Life project that | |
| really had two major conclusions: | |
| The first is that, on a universal basis, artists are | |
| embracing the Internet. They are embracing technology. They are | |
| trying to integrate that into their careers as a way to reach | |
| their fans directly and to promote their work. | |
| Of course, at the same time, there is this wide diversity | |
| of opinions as far as where we are today. There are a lot of | |
| different opinions in terms of peer-to-peer. You see that | |
| emerging artists embrace peer-to-peer, to a certain degree, | |
| because it gives them exposure. It is a way to get their name | |
| out there. Existing artists, established artists, they are | |
| concerned about what is happening to their revenue streams. | |
| They are skeptical about what is happening with the new models, | |
| and they are eager to see revenue flow into them directly. They | |
| see what is going on with their checks. | |
| Now, as the other witnesses have talked about, you are | |
| starting to really see this digital marketplace emerging. It is | |
| remarkable, 5 years on, to think about the growth of satellite | |
| radio, digital subscription services, music blogs, e-zines, | |
| Internet radio, webcasting, podcasting, iTunes. | |
| Consumers are demonstrating their willingness to adopt | |
| legitimate digital services. The marketplace is beginning to | |
| take hold. The question is can we continue to see a legitimate | |
| marketplace that really will benefit musicians and music fans. | |
| In fact, the point is not that this industry is perfect or that | |
| there even is a ``solution'' in place. It is a complicated | |
| process. It includes multiple competing markets which are | |
| dependent on evolving, technological innovation and regulatory | |
| policy decisions. The future music marketplace will be driven, | |
| to a large degree, by consumer adoption of broadband and high- | |
| speed services to the home, which has its own regulatory and | |
| technological uncertainty. Spectrum policy and the transition | |
| to digital radio are going to play a big part of this as well. | |
| So vigilant congressional oversight to date has been | |
| critical to this process. We are making a lot of inroads. We | |
| are seeing the growth of the market. Now, there are a lot of | |
| other sort of issues that are involved here that some don't | |
| have the jurisdiction of this Committee, some do, but that help | |
| sort of inform the growth of this digital marketplace. | |
| They include looking at issues of consolidation of the | |
| existing commercial radio industry, accusations of structural | |
| payola that limit the amount of songs or the type of songs they | |
| can get on the public airwaves, expanding community-based low- | |
| power radio networks into urban markets, looking at the digital | |
| audio broadcasting question to make sure that DAB is | |
| implemented in a way that addresses the fundamental concerns | |
| about localism, competition and diversity that we have raised | |
| as far as what is happening in the commercial radio | |
| marketplace, and bringing digital radio in line with other | |
| noninteractive digital transmission services that are required | |
| to pay an additional performance royalty to performers for the | |
| use of the music. | |
| Finally, I want to echo Mark Cooper's point, which is that, | |
| as independent entrepreneurs, it is absolutely critical that | |
| musicians and artists have access to the underlying networks, | |
| that they can't be blocked off of the main channels. | |
| So, again, we appreciate the opportunity to testify. We | |
| look forward to answering any questions and thank the Committee | |
| for their leadership. | |
| [The prepared statement of Mr. Bracy follows:] | |
| Prepared Statement of Michael Bracy | |
| My name is Michael Bracy. As a founder and the Policy Director of | |
| the Future of Music Coalition, I appreciate the opportunity to speak | |
| with you today. | |
| FMC was founded on the belief that the terrestrial music industry | |
| is fundamentally broken. By that we mean that the structures that | |
| dominate the marketplace underserve the majority of creators and music | |
| fans. We did not form FMC simply to complain, but to effect substantive | |
| change in the music community by injecting the critical voices of | |
| artists and creators in the midst of this transition from analog to | |
| digital. By including these often absent voices at this critical | |
| juncture, we work to build more equitable and responsive models. By | |
| that we mean: | |
| 1. Whenever possible, artists must maintain control over | |
| copyright and career decisions. | |
| 2. Artists must be able to compete fairly in the marketplace, | |
| meaning they must be able to receive compensation for their | |
| work and have access to consumers. | |
| 3. Artists must be seen by the policymaking community as | |
| valued stakeholders in policy debates | |
| The music community is in the midst of a necessary and welcome | |
| transition to a digital business model. Major labels and commercial | |
| radio stations have became integrated into huge corporations focused | |
| less on music and culture but on maximizing revenues. The fundamental | |
| basics of the major label structure--the need for huge capital | |
| investment and scarcity of promotion and retail outlets--have been | |
| overrun by technological innovation. | |
| This innovation has reshaped the way that music is recorded, | |
| manufactured, promoted and distributed. Digital studios and software | |
| programs dramatically reduce production costs. The Internet vastly | |
| increases promotional and sales opportunities. The marketplace for | |
| independent music has exploded, as indie labels proliferate to serve | |
| the expanding artist community. While much of this music is simply not | |
| aimed at the kinds of mass audiences of interest to major labels or | |
| commercial radio, there clearly is a market for this music, and | |
| alternate and Internet-based economies have begun to take shape. | |
| As these digital models take flight, many musicians are embracing | |
| new business models that allow greater independence, direct contact | |
| with their fans and more control over their careers. Others point out | |
| the uncertainty of these times, and express skepticism that legitimate | |
| digital distribution structures can be monetized at a level that would | |
| replicate their revenue streams they are used to receiving from | |
| previous models. | |
| In this context, the results of a recent study conducted by FMC and | |
| the Pew Internet and American Life Project should not be surprising, or | |
| controversial. This study found that musicians fully embrace the | |
| Internet to promote and sell their work but remain divided over the | |
| question of file-sharing. | |
| To a large degree, we found that these results could be tracked | |
| according to demographic factors--emerging artists were more likely to | |
| embrace file sharing services as a way to promote and distribute their | |
| work, while established artists who made a majority of their income | |
| from being a musician or songwriter raised more concerns. | |
| From our standpoint, it is important to recognize that we are still | |
| in the early days of a significant marketplace transition. While peer- | |
| to-peer remains extraordinarily popular, a legitimate digital | |
| marketplace is emerging. Consumers are exploring new, licensed ways of | |
| accessing and enjoying music, including satellite radio, digital | |
| subscription services like Rhapsody, Emusic and Napster, music blogs | |
| and ezines, the growth of Internet radio, webcasting, podcasting and | |
| digital download stores like iTunes. This trend demonstrates consumers' | |
| willingness to adopt legitimate digital services, and reinforces the | |
| critical notion that the combination of technical innovation, access to | |
| the underlying delivery mechanisms and reasonable licensing terms can | |
| create a revitalized industry that serves both musicians and music | |
| fans. | |
| The point is not that this industry is now perfect, or that we even | |
| can see the ``solution''. Rather, we all should acknowledge that the | |
| digital transition is complicated. It includes multiple competing | |
| markets, dependent on evolving technological innovation and regulatory | |
| policy decisions. The future music marketplace will be driven by | |
| consumer adoption of broadband to the home, an area full of regulatory | |
| and technological uncertainty of its own. Spectrum policy and the | |
| transition to digital terrestrial radio will play a significant role in | |
| determining how consumers are able to access digital content, and how | |
| performers will be compensated in the future. | |
| Vigilant Congressional oversight of the transition of the music | |
| marketplace has played a critical role in its success to date. At the | |
| same time FMC sees a number of potential opportunities for action | |
| today. Will Congress listen to the concerns of the music community by | |
| addressing consolidation of the commercial radio industry and | |
| accusations of structural payola that limit the songs that appear on | |
| the public airwaves? Will the FCC be permitted by Congress to expand | |
| the wildly popular non-commercial Low Power Radio licenses to urban | |
| markets? Will Digital Audio Broadcasting be implemented in a way that | |
| addresses the fundamental concerns about localism, competition and | |
| diversity in the radio marketplace? And will digital radio be brought | |
| in line with other non-interactive digital transmission platforms that | |
| are required to pay an additional performance royalty to performers? | |
| Most importantly, will Congress be able to defend the ability of | |
| musicians and songwriters to compete in the marketplace by ensuring | |
| access to high speed networks? As independent entrepreneurs, musicians | |
| and songwriters require that the fundamental open structures of the | |
| Internet remain in place and that innovation is allowed to continue. | |
| Over the past five years, the Future of Music Coalition has been | |
| fortunate to collaborate with dozens of organizations, representing | |
| hundreds of thousands of musicians, songwriters, retailers, promoters, | |
| community broadcasters and fans. The transition to a digital economy | |
| represents real threats and real opportunities to these communities. | |
| That being said, there are core themes that cut across all aspects of | |
| the music community. These shared values of artists' control over their | |
| copyright and career decision, ability to compete in the marketplace by | |
| receiving compensation for their work and accessing consumers, and | |
| being active participants in the policy process can serve us going | |
| forward. | |
| Thank you again for the opportunity to participate in this hearing, | |
| and I look forward to answering your questions. | |
| Mr. Smith. Thank you, Mr. Bracy. | |
| Dr. Cooper, in your testimony you said sellers of closed | |
| platforms need to better inform consumers that their platforms | |
| are closed. How would you suggest that they do that? Are you | |
| just talking about a warning label or something else? And if | |
| there's anyone who disagrees with that, I'd like to know that | |
| as well. | |
| Mr. Cooper. You know, we could hypothesize a labeling | |
| program which would be an obligation, but I don't necessarily | |
| want to get there because that creates a process of gaming that | |
| Mr. Gifford talked about. | |
| But the simple fact of the matter is, imagine if we had--if | |
| iPods had to be labeled that said, ``This music won't play on | |
| anything else,'' or vice versa. That would actually, people | |
| would then start to think. And as people build up libraries and | |
| they discover that they can't move their music from one device | |
| to another, although if that continues what you'll get is | |
| hackers who will start making it possible because innovation is | |
| hard to quell in this marketplace. | |
| So the point is that policymakers need to engage in a | |
| little bit of jawboning here, as maybe instead of a regulatory | |
| position. | |
| Mr. Smith. So maybe not a Government mandate, but still | |
| full disclosure. | |
| Mr. Cooper. Sure. Full disclosure, and attorneys general | |
| ought to be asking these questions, this Committee, et cetera. | |
| Jawboning can frequently get you a lot of help in the | |
| marketplace rather than having a formal process about is this | |
| labeled. | |
| Mr. Smith. Is there anyone who disagrees with the idea of | |
| full disclosure and labeling for the consumers? | |
| [No response.] | |
| Mr. Smith. Okay. Mr. Gifford, I'm tempted to ask you if you | |
| think Schumpeter should be the patron saint of Congress, but | |
| let me ask you a more colloquial question, which is, do you see | |
| any role for Government at all in the process? | |
| And that's a question I'd like the other members to address | |
| as well. | |
| Mr. Gifford. Not at this time, Congressman. You have an | |
| emerging nascent market. I think Dr. Pence spoke well, that you | |
| have DRM technologies that are less mature than file format | |
| technologies, and there's a lot of foment going on right now in | |
| this marketplace, a lot of business models that are being | |
| tried, a lot of reliance interests that are just taking root, | |
| and I don't know how Government can do anything but upset that | |
| very tentative equilibrium we're seeing. | |
| Mr. Smith. Dr. Pence and Mr. Bracy, what do you think about | |
| any role for Government? | |
| Mr. Pence. Well, I mentioned the 115 issue in my opening | |
| remarks. Short of that I don't think there is much of a role to | |
| play at this time. We think the market is very dynamic. We've | |
| been introducing new business models as some of our competitors | |
| have been, and we think the market is in the early stages where | |
| it should be allowed to evolve and offer more choices to | |
| consumers. So we don't--I don't see any additional role at this | |
| time. | |
| Mr. Smith. Okay. Mr. Bracy? | |
| Mr. Bracy. Mr. Chairman, I think one of the challenges is | |
| that to a certain extent it's important that Congress look at | |
| ways of demonstrating that there is this broader marketplace | |
| for local and independent music. I mean one of the realities of | |
| the music community is that it is local, it's independent. The | |
| music community has very little to do as far as the mass | |
| marketing of music that you see in terms of major, you know, | |
| huge platinum selling artists. And there are little things that | |
| I mentioned in our testimony that can be done tangentially, | |
| less on technology mandates or DRM discussions or things like | |
| that, but more on looking at the existing ways that most | |
| consumers access music and making sure they have access to | |
| independent voices. | |
| Mr. Smith. Okay. Thank you, Mr. Bracy. | |
| Mr. Bracy, let me ask you and Dr. Pence to go beyond your | |
| testimony. And you don't have to answer this question if you | |
| don't want to, but I want to ask you about the Apple business | |
| model, whether you think limiting the interoperability to | |
| iTunes and the iPod is going to be a successful business model | |
| or not, just your opinion? | |
| Mr. Bracy. You know, with the understanding that this is | |
| really we have very limited expertise, but as a personal on the | |
| specific concept, you know, business people do business and we | |
| do different things, but, you know, that we are glad to see the | |
| market evolving and obviously they have first mover advantage, | |
| but you know, the challenge is will the market speak? And the | |
| question is will the market speak or not? And I don't really | |
| have an opinion on that. | |
| Mr. Smith. Dr. Pence, do you have a---- | |
| Mr. Pence. I do have an opinion. I think it is a business | |
| model that has clearly had some success. It's actually--the ala | |
| carte model is one that we offer as well. However, we have | |
| offered other business models and we expect to offer additional | |
| models in the future, so we think choice is very, very | |
| critical, and that's the path we've embraced, choice not only | |
| in business models but an open approach to devices and support | |
| on different platforms. The choice Apple has made about | |
| retaining a closed environment is a legitimate business choice | |
| they have made and time will tell whether the marketplace will | |
| reward that or not. | |
| Mr. Smith. And I think as the market evolves you're | |
| probably going to have consumers want more choice, but that's | |
| also just my opinion as well. | |
| Mr. Gifford, anything to add to that? | |
| Mr. Gifford. Well, actually, I think, and I mentioned---- | |
| Mr. Smith. Well, actually, Dr. Cooper. I called on Mr. | |
| Gifford, but then I'll ask you for your response in a minute | |
| too. | |
| Mr. Cooper. I think this history of the last 25 years | |
| really, I started from that one example of--I'm sure Mac thinks | |
| they had a very successful business model, and they have 5 | |
| percent of the market now, and that may make them happy. But we | |
| can go back and find other examples. | |
| One really interesting example has to do with the World | |
| Wide Web, and the predecessor to World Wide Web was a service | |
| known as Gopher. It was an application, and some people in this | |
| room may remember that. And there was a key moment where the | |
| owners of Gopher, the creators of Gopher had said, hey, we're | |
| going to start charging people royalties and reorganizing this, | |
| and folks dropped it like a rock. And the World Wide Web came | |
| along, which is a magnificently open system. And I could give | |
| you other examples. | |
| So what happens here is that business people can make | |
| decisions about what serves their interest, and they'll be | |
| happy with a nice little niche market, but our society is much | |
| better served by the drive toward open platform. | |
| Mr. Smith. Thank you, Dr. Cooper. | |
| Anything to add, Mr. Gifford? | |
| Mr. Gifford. First of all, Mr. Chairman, I've been on | |
| enough panels with Dr. Cooper to know that he can't help | |
| himself. [Laughter.] | |
| I don't think I have anything to add. I think you could, | |
| you can recognize a general trend, that digital markets tend | |
| toward interoperability, but not necessarily. | |
| Mr. Smith. Agreed. And despite the sort of divergent | |
| backgrounds of the four panelists today, it's interesting that | |
| almost everybody seems to agree on the issue at hand. | |
| So I thank you all for your testimony, and the gentleman | |
| from California, Mr. Berman, is recognized. | |
| Mr. Berman. Thank you very much, Mr. Chairman. | |
| So, Dr. Pence, even though my daughter complains about not | |
| being able to get the Napster service on her iPod, you don't | |
| think Congress should make iPod get the Napster service? | |
| Mr. Pence. Well, Congressman, we have a very active | |
| community in the Napster service, as I'm sure your daughter | |
| knows, and we have very active message boards, and so the issue | |
| of iPod compatibility is raised all the time to our customer | |
| care group, to us directly. And there's no question that we | |
| would benefit with interoperability with iPod. | |
| However, having said that, I think to take that into a | |
| Government mandate for some sort of interoperability solution | |
| is not the right answer. The Apple service has been very | |
| successful. We announced 2 days ago very, very strong growth in | |
| our own business, as you may have heard. So we feel very | |
| confident that over time by offering choice and using every | |
| legitimate means to license the various platforms to take the | |
| Napster service to all devices and all platforms, we think that | |
| is the best way for us to proceed, and we think it's in the | |
| best interest of consumers in the market. | |
| Mr. Berman. All right. I'm going to tell her to quit | |
| bothering me and go to your message board. [Laughter.] | |
| Dr. Cooper, you make a differentiation in your testimony | |
| about when it's okay to demand interoperability, and you cite | |
| as an example the music industry is limited in that it affects | |
| only the music business, while the railroad industry affects | |
| the entire economy. Ignoring the fact that you brush over the | |
| role of music and the productivity of the workforce, I want to | |
| carry out your assertion, take the logic of your assertion and | |
| apply it to something else here. When you say the marketplace | |
| and not Government intervention or legislation should and will | |
| resolve the interoperability question for technology, why | |
| doesn't this analysis work for the copyright owners who use too | |
| restrictive DRM? Won't they also pay the price, consumers will | |
| choose formats more convenient for them? Isn't that the most | |
| efficient way for consumers to let it be known to the copyright | |
| owner instead of through legislation? What is the difference | |
| between the developer and the content owner in this particular | |
| area? | |
| Mr. Cooper. No. I agree. I think that DRM, once we have | |
| choices out there, different people will choose the level of | |
| use that they're allowing to their customers. And you've heard | |
| examples of different kinds of models. And the marketplace will | |
| decide that. I do also think that a too restrictive DRM is | |
| going to be a form of failure of interoperability and consumers | |
| will--we will get competition for DRM as well. And so I do | |
| think because--but that's still the widgets part, and we think | |
| that that marketplace will actually also address that problem. | |
| So I accept your challenge. And we consistently will argue and | |
| have argued that give consumers choices about the level of | |
| functionality and they will make their choice and it will drive | |
| the marketplace. | |
| Mr. Berman. Good answer. Not consistent with the Consumer | |
| Federation's position on some legislation that's come to | |
| Congress, but a good answer. | |
| Mr. Cooper. Well, I think it went too far but---- | |
| Mr. Berman. The legislation the Consumer Federation | |
| endorsed or the ones it opposed? | |
| Mr. Cooper. No, no. We endorse a reasonable definition of | |
| ``fair use'' for consumer and oppose the legislation that we | |
| think---- | |
| Mr. Berman. And a mandate on labeling requirements, okay. | |
| You state that the retailers of digital music--well, actually | |
| what I'd like to--the French Consumer Federation, in effect, | |
| which is a better way for you to hear about this than me trying | |
| to pronounce the French name, has launched a legal action over | |
| the two companies' proprietary music formats, claiming that the | |
| respective digital rights management used by both Sony and | |
| Apple which prevents songs brought from their online music | |
| shops from being played on other manufacturers' media players | |
| is limiting consumers' choice. The total absence of | |
| interoperability between DRM removes not only consumers' power | |
| to independently choose their purchase and where they buy it, | |
| but also constitutes a significant restraint on the free | |
| circulation of creative works, that group said. | |
| It's interesting how the French perspective on this is | |
| different than the Consumer Federation's. Could you develop | |
| that? | |
| Mr. Cooper. Well, look, our testimony is clear. When we get | |
| to widgets, and in my opinion applications of widgets in the | |
| digital age, we believe market forces will solve these | |
| problems. I've identified the situation in which as the market | |
| matures if we have lots of exclusive deals and not lots of | |
| competition widgets, then we would get some antitrust concerns. | |
| But at this stage of this game, especially with the recording | |
| industry, the established recording industry just getting into | |
| this business--last year was our watershed year--we think that | |
| this is not the time or the place to impose mandates. We think | |
| we still have platform competition going on at the level of | |
| widgets, and we think that we are going to be much better | |
| served with the industry now adopting a digital distribution | |
| and allowing innovators to continue to innovate, including all | |
| forms of distribution. | |
| Mr. Berman. The only thing I'll say in closing because my | |
| time has expired is I understand this position and it makes a | |
| lot of sense to me. What I don't understand is supporting my | |
| friend's bill in the context of why won't the same market | |
| forces end up creating music that individuals be able to pass | |
| to their friends and take in other formats in their home and do | |
| all those things because it will serve a need that consumers | |
| want? Why are we getting into trying to draft the exact | |
| contours of that? | |
| Mr. Cooper. Well, the--one of the central concerns about | |
| DRM is that it is taking away some of my rights that I thought | |
| I had in terms of my fair use rights, and that's a source of | |
| concern to us. So that we used to be able to listen to music in | |
| a variety of ways, to make copies to share, and those were fair | |
| uses, and maybe unregulated uses that were not bones of | |
| contention. And our concern is that we don't want to lose a lot | |
| of functionality and flexibility in this transition, which is | |
| supposed to be increasing my functionality and flexibility. And | |
| so we'll be glad to come back and testify on that legislation | |
| too, if I can wangle an invite. | |
| Mr. Smith. Thank you, Mr. Berman. | |
| The gentlewoman from California, Ms. Lofgren, is recognized | |
| for questions. | |
| Ms. Lofgren. I'll be brief because our joint session of | |
| Congress is about to begin. But I'll just say that this has | |
| been interesting to hear such unanimity actually from all of | |
| the witnesses, that this is a situation where Congress doesn't | |
| have to get involved. I mean there are some interoperability | |
| issues that demand congressional attention in fire services and | |
| the like, but this is not one of them. So I appreciate the | |
| intelligent commentary and the pitch to get a hearing on my | |
| bill, which would be great. | |
| I yield back. Thank you. | |
| Mr. Smith. Thank you, Ms. Lofgren. | |
| There are no other Members here, no other questions, so we | |
| thank you for your expert testimony today. It's been very, very | |
| helpful and very, very conducive to our being able to move | |
| forward with the process. So thank you all very much. | |
| And we stand adjourned. | |
| [Whereupon, at 10:52 a.m., the Subcommittee was adjourned.] | |
| A P P E N D I X | |
| ---------- | |
| Material Submitted for the Hearing Record | |
| Prepared Statement of the Honorable Howard L. Berman, a Representative | |
| in Congress from the State of California, and Ranking Member, | |
| Subcommittee on Courts, the Internet, and Intellectual Property | |
| Mr. Chairman, | |
| Thank you for scheduling this hearing on digital music | |
| interoperability. I hope the testimony will be helpful in our | |
| continuing discussion of issues concerning the availability of | |
| legitimate distribution mechanisms for digital music. | |
| The explosion of technologies that enable consumers to digitally | |
| download music has provided many new opportunities to the music lover. | |
| The ultimate goal is to provide consumers with their choice of music | |
| anytime, anywhere, in any format. However, this new environment has | |
| come at a great cost, that of rampant piracy on Peer to Peer Networks. | |
| What is considered ``free'' music available on the internet comes at | |
| the expense of the numerous people involved in the development of the | |
| sound recording: the artists, songwriters, musicians, sound engineers, | |
| and others. The consequences of piracy are felt throughout our economy, | |
| but they are especially harmful in my district where many jobs depend | |
| on the lawful sale of music. | |
| The proliferation of legitimate music distributors in the | |
| marketplace has helped stem the tide of piracy. The number of available | |
| digital music delivery alternatives has increased enabling technology | |
| companies to help copyright owners make inroads against unauthorized | |
| downloading and sharing of music files. However, music companies will | |
| always have to compete with free music and analysts claim it will take | |
| a number of years before download services can provide a significant | |
| sales boost for the content creators. One of the major impediments to | |
| achieving a more level playing field, according to analysts, is the | |
| bewildering array of competing technologies. | |
| As with any nascent industry, the development of new business | |
| models can lead to unintended results. In the case of digital music, | |
| there are concerns that interoperability barriers between the various | |
| suppliers could actually hinder growth in the market. Brandenburg, the | |
| father of the MP3, has warned that rival technologies will baffle | |
| consumers and risk alienating fans, driving them to unsanctioned file | |
| sharing networks where the songs are ``free'' and encoded in the | |
| unprotected MP3 format. | |
| The International Federation of the Phonographic Industry (IPFI) | |
| has noted that ``one important problem that hinders growth of the | |
| online music business is the lack of interoperability between services | |
| and devices. The danger is of wide-scale consumer confusion and wasted | |
| opportunities in a market which has extraordinary growth potential.'' | |
| They observe that there is no easy solution, but that all the players | |
| in the online market need to work harder to solve the interoperability | |
| difficulties in 2005. | |
| Yet the market continues to develop. The portable player market | |
| already presents consumers with an array of choices. Now we see the | |
| convergence of music devices and mobile handsets. The goal of making | |
| music easier to buy then to steal is becoming a reality, and therefore | |
| these innovative services deserve our thanks. | |
| However, anti-piracy efforts must remain a focus for technology | |
| companies industries as they develop their products. A legitimate | |
| distribution business model must be one that is based on payment and | |
| permission of the rights holder. | |
| With digital music moving into the mainstream of consumer life, I | |
| believe it will be helpful to further this conversation by discussing | |
| what, if any, impediments are facing companies that are now | |
| distributing digital music and how they are addressing consumers' needs | |
| for legitimate music. | |
| In an ideal world, we would have all the major players in the | |
| digital music market at the table to hear their opinions about the | |
| issue--but I look forward to hearing from these witnesses to help | |
| define some of the issues. | |
| ---------- | |
| Prepared Statement of the Honorable John Conyers, Jr., a Representative | |
| in Congress from the State of Michigan, and Ranking Member, Committee | |
| on the Judiciary | |
| Content owners and the high-tech industry should be commended for | |
| responding to consumer demand for digital music. For years, consumers | |
| have been clamoring for access to digital content. Because content | |
| protection technology and content owners had not caught up with the | |
| Internet, music lovers turned to illegal download sites like Napster | |
| and Kazaa for digital content. | |
| We had heard that, if the content industry would just create a | |
| legal avenue for obtaining digital music, consumers would embrace it. | |
| The premonition was largely true. The record industry and high-tech | |
| worked together to develop digital content protection, to clear the | |
| rights needed to get music online, and to get music on the Internet. | |
| According to the Pew Internet and American Life Project, the response | |
| to legitimate digital content has been overwhelming: in 2004, only | |
| twenty-four percent of music downloaders had tried legitimate download | |
| sites; in 2005 to date, the number jumped to forty-three percent. | |
| It is probably safe to say that the reason for this overwhelming | |
| response is the late 2003 launch of Apple iTunes. In business for a | |
| little over a year, iTunes has sold a record-breaking 300 million songs | |
| through its online store. Other download sites, like Napster and | |
| Rhapsody, are gaining speed by offering alternatives such as monthly | |
| subscription services instead of just downloads and allowing transfers | |
| to numerous digital music players. No matter how you view it, the | |
| marketplace is working. | |
| Digital piracy existed long before legitimate services like iTunes | |
| came onto the market and, unfortunately, it likely will continue no | |
| matter how much easier the songwriters, recording artists, and record | |
| labels make it to obtain music digitally. | |
| <all> | |
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