[Senate Hearing 108-275]
[From the U.S. Government Printing Office]



                                                        S. Hrg. 108-275

                   PRIVACY AND PIRACY: THE PARADOX OF
                  ILLEGAL FILE SHARING ON PEER-TO-PEER
                    NETWORKS AND THE IMPACT OF TECH-
                  NOLOGY ON THE ENTERTAINMENT INDUSTRY

=======================================================================

                                HEARING

                               before the

                PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

                                 of the

                              COMMITTEE ON
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE


                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 30, 2003

                               __________

      Printed for the use of the Committee on Governmental Affairs



90-239              U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 2003
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                   COMMITTEE ON GOVERNMENTAL AFFAIRS

                   SUSAN M. COLLINS, Maine, Chairman
TED STEVENS, Alaska                  JOSEPH I. LIEBERMAN, Connecticut
GEORGE V. VOINOVICH, Ohio            CARL LEVIN, Michigan
NORM COLEMAN, Minnesota              DANIEL K. AKAKA, Hawaii
ARLEN SPECTER, Pennsylvania          RICHARD J. DURBIN, Illinois
ROBERT F. BENNETT, Utah              THOMAS R. CARPER, Delaware
PETER G. FITZGERALD, Illinois        MARK DAYTON, Minnesota
JOHN E. SUNUNU, New Hampshire        FRANK LAUTENBERG, New Jersey
RICHARD C. SHELBY, Alabama           MARK PRYOR, Arkansas

           Michael D. Bopp, Staff Director and Chief Counsel
        Joyce Rechtschaffen, Minority Staff Director and Counsel
                      Amy B. Newhouse, Chief Clerk

                                 ------                                

                 PERMANENT COMMITTEE ON INVESTIGATIONS

                   NORM COLEMAN, Minnesota, Chairman
TED STEVENS, Alaska                  CARL LEVIN, Michigan
GEORGE V. VOINOVICH, Ohio            DANIEL K. AKAKA, Hawaii
ARLEN SPECTER, Pennsylvania          RICHARD J. DURBIN, Illinois
ROBERT F. BENNETT, Utah              THOMAS R. CARPER, Delaware
PETER G. FITZGERALD, Illinois        MARK DAYTON, Minnesota
JOHN E. SUNUNU, New Hampshire        FRANK LAUTENBERG, New Jersey
RICHARD C. SHELBY, Alabama           MARK PRYOR, Arkansas

       Raymond V. Shepherd, III, Staff Director and Chief Counsel
                   Joseph V. Kennedy, General Counsel
        Elise J. Bean, Minority Staff Director and Chief Counsel
                     Mary D. Robertson, Chief Clerk


                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Coleman..............................................     4
    Senator Levin................................................    10
    Senator Sununu...............................................    27
    Senator Pryor................................................    30
    Senator Collins..............................................    35
Prepared statements:
    Senator Coleman..............................................     7
    Senator Levin................................................    12
    Senator Pryor................................................    31
    Senator Collins..............................................    36
    Senator Carper...............................................    71
    Senator Lautenberg...........................................    72
    Senator Durbin...............................................    75

                               WITNESSES
                      Tuesday, September 30, 2003

Hon. Barbara Boxer, a U.S. Senator from the State of California..     1
Mitch Bainwol, Chairman and Chief Executive Officer, Recording 
  Industry Association of America, Washington, DC................    15
Jack Valenti, President and Chief Executive Officer, Motion 
  Picture Association of America, Washington, DC.................    17
L.L. Cool J, Recording Artist, New York, New York................    19
Mike Negra, President, Mike's Video, Inc., State College, 
  Pennsylvania...................................................    20
Alan Morris, Executive Vice President, Sharman Networks Limited, 
  Australia/England/Vanuatu......................................    43
Derek S. Broes, Executive Vice President of Worldwide Operations, 
  Altnet, Woodland Hills, California.............................    45
Chris Gladwin, Founder and Chief Operating Officer, FullAudio, 
  Inc., Chicago, Illinois........................................    47
Lorraine Sullivan, New York, New York............................    49
Chuck D, Record Artist, Author, Activist, Los Angeles, California    51
Jonathan D. Moreno, Director, Center for Biomedical Ethics, 
  University of Virginia, Charlottesville, Virginia..............    63
James V. DeLong, Senior Fellow and Director, Center for the Study 
  of Digital Property, The Progress and Freedom Foundation, 
  Washington, DC.................................................    65

                     Alphabetical List of Witnesses

Bainwol, Mitch:
    Testimony....................................................    15
    Prepared statement...........................................    78
Boxer, Hon. Barbara:
    Testimony....................................................     1
Broes, Derek S.:
    Testimony....................................................    45
    Prepared statement...........................................   115
Chuck D:
    Testimony....................................................    51
Cool J, L.L.:
    Testimony....................................................    19
DeLong, James V.:
    Testimony....................................................    65
    Prepared statement with an attachment........................   136
Gladwin, Chris:
    Testimony....................................................    47
    Prepared statement...........................................   123
Moreno, Jonathan D.:
    Testimony....................................................    63
    Prepared statement...........................................   134
Morris, Alan:
    Testimony....................................................    43
    Prepared statement...........................................   103
Negra, Mike:
    Testimony....................................................    20
    Prepared statement...........................................    99
Sullivan, Lorraine:
    Testimony....................................................    49
    Prepared statement...........................................   130
Valenti, Jack:
    Testimony....................................................    17
    Prepared statement...........................................    88

                                APPENDIX
                                Exhibits

1. Statement for the Record from Steve Wiley, President, 
  Hoodlums New and Used Music & DVDs.............................   145
2. Responses to supplemental questions and for the record 
  submitted to Mitch Bainwol, Chairman and CEO of the Recording 
  Industry Association of America (RIAA).........................   148
3. Responses to supplemental questions and for the record 
  submitted to Jack Valenti, President and CEO of the Motion 
  Picture Association (MPA)......................................   157
4. Responses to supplemental questions and for the record 
  submitted to Alan Morris, Executive Vice President, Sharman 
  Networks Limited (Parent Company of KaZaA).....................   158
5. Responses to supplemental questions and for the record 
  submitted to Chris Gladwin, Founder and Chief Operating Officer 
  of FullAudio Corporation.......................................   162
6. Charts submitted by Senator Barbara Boxer:
      a. ``Shared Folder'' chart................................   164
      b. ``Beatles'' search generates ``teen porn file'' chart..   165

 
                   PRIVACY AND PIRACY: THE PARADOX OF
                  ILLEGAL FILE SHARING ON PEER-TO-PEER
                  NETWORKS AND THE IMPACT OF TECHNOL-
                   OGY ON THE ENTERTAINMENT INDUSTRY

                              ----------                              


                      TUESDAY, SEPTEMBER 30, 2003

                                       U.S. Senate,
                Permanent Subcommittee on Investigations,  
                  of the Committee on Governmental Affairs,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10:08 a.m., in 
room SD-G50, Dirksen Senate Office Building, Hon. Norm Coleman, 
Chairman of the Subcommittee, presiding.
    Present: Senators Coleman, Levin, Collins, Sununu, Levin, 
Carper, and Pryor.
    Staff Present: Raymond V. Shepherd, III, Staff Director and 
Chief Counsel; Joseph V. Kennedy, General Counsel; Mary D. 
Robertson, Chief Clerk; Katherine English, Counsel; Mark 
Greenblatt, Counsel; Kristin Meyer, Staff Assistant; Elise J. 
Bean, Democratic Staff Director and Chief Counsel; Rob Owen 
(Senator Collins); Joe Bryan and Mike Kuiken (Senator Levin); 
John Kilvington (Senator Carper); Tate Heuer and Gita Uppal 
(Senator Pryor); Juria Jones (Senator Specter); Mark Keam 
(Senator Durbin); and Adam Sedgwick (Senator Lieberman).
    Senator Coleman. We are going to call to order this hearing 
of the Permanent Subcommittee on Investigations, ``Privacy and 
Privacy: The Paradox of Illegal File Sharing on Peer-to-Peer 
Networks and the Impact of Technology on the Entertainment 
Industry.''
    We have with us my colleague, the distinguished Senator 
from California, Barbara Boxer. Senator Boxer, I know you 
wanted to make an introductory statement. What I'm going to do, 
as an accomodation to your schedule, is give you an opportunity 
to make your statement now before we begin our formal 
statements.

TESTIMONY OF HON. BARBARA BOXER, A U.S. SENATOR FROM THE STATE 
                         OF CALIFORNIA

    Senator Boxer. Senator, thank you so much, Senator Coleman, 
Senator Carper, and others who will come, for giving me this 
opportunity. We had a hearing on this subject at which you 
testified, my friend, Senator Coleman, so this is my second 
round in putting out some of my thoughts, and I will try to 
keep this as closely knit as I can.
    First of all, I have four points to make. The first point 
is that downloading copyrighted works is theft, and I think if 
there is anything else coming out of this hearing other than 
that, it is a real problem.
    Senator Levin, I was just saying that I have four points to 
make that I hope you will keep in mind. First, that downloading 
copyrighted works is theft, plain and simple. Second, it is not 
a victimless crime, as you will find out today. Third, the 
file-sharing networks themselves constitute a threat to 
privacy. And fourth, these networks are no place for children. 
Those are the four points and I will go quickly through them.
    First, the issue of theft. Peer-to-peer sharing is fine, 
but not if they are copyrighted works. That is just the fact. 
You can't have a law without being able to enforce it or no one 
will pay any attention to it.
    We know it is legal, again, to share non-copyrighted work, 
but if it is copyrighted, it is stealing, and whether you are 
stealing it from the store or on the Internet, there has to be 
consequences, I believe. Otherwise, it will continue.
    Now, we all know about the 1998 Digital Millennium 
Copyright Act. A lot of us were involved in putting it 
together. And in the course of that, the Internet service 
providers said, look, we don't want to be responsible for this 
illegal downloading. So we will support turning over the 
records to--I don't mean--I should say, turning over the 
information to the record companies as an exchange for us not 
being liable.
    So I think that for them now to say that they won't 
cooperate is just going against what they agreed to do. That is 
not right. The one thing I have learned about this business 
that we are in is that you give a handshake, you give your 
word, and you stick with it. That is important.
    Now, the second point. Stealing copyrighted work is not a 
victimless crime. It threatens our creative industries and our 
artists, and there is an artist here today, and I assume a lot 
of people are here because of that. I thought it was us---- 
[Laughter.]
    But then I realized, my staff said, no. So the fact is, we 
have victims.
    As visual proof, there is a chart that shows photographs 
taken by the Nashville Song Writers Association of a series of 
buildings now for lease that once housed music publishing 
companies on Nashville's famous Music Row. Each of these closed 
businesses represents jobs lost, and Mr. Chairman, regardless 
of our party, we are in it to fight for jobs for our people. We 
are losing jobs.
    Two song writers who have written for famous artists, Kerry 
Chader and his wife, Lynn Gillespie Chader--I hope I said it 
right--wrote to me last week, and they wrote, ``Our income fell 
over 60 percent from 2000 to 2002. In 2001, we were forced to 
declare bankruptcy. After more than 100 songs recorded between 
my husband and myself, we were forced to seek outside 
employment. In 2002, we were expecting a check for royalties in 
the neighborhood of $5,000. When the check came and we opened 
it up, it was $17.53,'' she writes. What a shock. And they 
attribute their losses to illegal downloading, which they refer 
to as ``downlooting.''
    So according to the Record Association, the industry has 
lost 25 percent in sales over the last 3 years. It has gone 
from a worldwide $40 billion industry in 2000 to a $26 billion 
industry in 2002.
    My third point is that file-sharing networks themselves 
pose a great threat to privacy. Most users have no idea that 
they are frequently sharing their private documents with 
everyone else on the network, and you can see this, and since 
my time is running short, I hope you will take a look at this.
    This is a chart \1\ that essentially says--it highlights 
that you will share files that are in your, ``shared folder.'' 
It allows you to add any other folder you wish. Users often 
make sensitive files available unwittingly to everyone on the 
network by putting those files in the wrong folder. In a search 
of one peer-to-peer network, a House committee report found 
2,500 Microsoft Money backup files. Each of these files stores 
a user's personal financial records and all were readily 
available for download.
---------------------------------------------------------------------------
    \1\ See Exhibit 6a. which appears in the Appendix on page 164.
---------------------------------------------------------------------------
    I will complete this in less than a minute, if I might.
    So here we have a situation where we are worried about the 
privacy of the people who are illegally downloading, although I 
have to say, and no one likes these lawsuits, it is awful, but 
if someone came in and had a mask on, as they have done, they 
still do, to a store and they were anonymous, they are still a 
thief, even though you have got to find out who they are.
    So the fact of the matter is, let us not just say we are 
trying to protect--hopefully, we are not saying we are trying 
to protect privacy of people who are stealing. As unpleasant as 
it is, believe me, it is very unpleasant.
    The fourth issue, we must address how these networks expose 
children to pornography. Children don't belong on these 
networks. According to the General Accounting Office, 
``Juvenile users of peer-to-peer networks are at significant 
risk of inadvertent exposure to pornography, including child 
pornography,'' and this is another chart \2\ from Kazaa. You 
can see on this chart the user has put in a search for the 
Beatles. That search then generates a series of files, and 
highlighted on the chart, you see when the user selects 
Beatles, a title that says ``Drunk Teen Sex 2,'' which is a 
teen porn file. So this means your child could think she is 
downloading a Beatles song and be downloading pornography, and 
I think parents need to know about this. There are other 
unintended consequences of this.
---------------------------------------------------------------------------
    \2\ See Exhibit 6b. which appears in the Appendix on page 165.
---------------------------------------------------------------------------
    In conclusion, I believe--and you can play a major role in 
this--that coming out of this hearing as well as the Commerce 
hearing, we should bring out these points. Clearly, it is 
wrong, what is happening. This is a crime. There are real 
victims. Inadvertently, people are losing their privacy, and 
inadvertently, youngsters are being exposed to pornography.
    So for all those reasons, I hope that the message out of 
this hearing will be, let us find ways we can all work together 
so that we can solve this problem. Instead of just saying, let 
us open up the Digital Millennium Copyright Act, rewrite it and 
stop what I think is the first thing that is making an impact, 
which is enforcing this law. It is actually making an impact. 
Teens are saying, gee, maybe this was wrong. I never saw it 
before as stealing.
    I thank you so much for giving me this privilege to open up 
this hearing. As you know, this is very important to my State 
of California and the millions of people who live there and, I 
think, to people all over the country. Thank you.
    Senator Coleman. Thank you, Senator Boxer. I appreciate 
your passion and perspective on this issue and I look forward 
to working with you on it.
    Do my colleagues have anything that they would like to ask 
Senator Boxer?
    Senator Levin. Just to thank Senator Boxer. Thank you, 
Senator Boxer. Thank you for your total commitment to the State 
of California and to the jobs that are impacted by what is 
going on through this downloading process. We thank you for 
your very strong statement.
    Senator Boxer. I appreciate it.
    Senator Coleman. Thank you.

             OPENING STATEMENT OF CHAIRMAN COLEMAN

    Senator Coleman. Before I begin with the first full panel, 
I will deliver my opening statement. I am pleased to be joined 
with my colleague and distinguished Ranking Member, Senator 
Levin.
    On September 8, the Recording Industry Association of 
America (RIAA) fired its first volley of copyright infringement 
lawsuits in its battle against illegal downloading. The 
industry promised to ``approach these suits in a fair and 
equitable manner,'' and that it is initially focusing on 
``egregious offenders who are engaging in substantial amounts 
of illegal activity.''
    I am grateful that the documents provided to this 
Subcommittee substantiate that claim. However, there is nothing 
under current law that requires the RIAA to target only 
``egregious'' offenders in the future. There is nothing in the 
current law that restricts the scope of the RIAA's use of 
subpoenas to ferret out unlawful downloaders.
    It has been these developments that led to my concern about 
the use of subpoenas to combat the illegal taking of 
copyrighted music files online--and the potential for abuse of 
the legal process. However, I am also troubled by the use of 
the DMCA subpoena procedure and lawsuits to spear the 
registered owner of the computer rather than perhaps the actual 
user of a P2P operation like Kazaa. The Subcommittee has been 
in contact with numerous individuals whose family members, 
friends, or roommates use the Kazaa service. Unfortunately, 
these unsuspecting individuals are now the targets of subpoenas 
and lawsuits.
    Recently, I had the honor of providing a brief statement to 
Senator Brownback's hearing before the Commerce Committee on 
``Cyber Identity, Privacy, and Copyright Protection.'' It was 
the hearing in which Senator Boxer participated. There, I 
stated the principles that are the basis for our hearing today.
    On the matter of subpoenas, I am concerned about the scope 
and the impact of the broad powers extended to the RIAA and 
other copyright holders to issue these subpoenas. Is it 
possible for innocent people to get caught in the legal web 
that the RIAA is trying to create to stop illegal piracy?
    I believe we must review the potential civil and criminal 
penalties needed to ward off the theft of copyrighted 
materials, and determine if such measures will work.
    As it relates to the use of technology in general, I am 
troubled by the growing use of systems and devices to reach 
into our online lives and pluck out information about us with 
or without our knowledge. This is particularly relevant here, 
since technology is being used not only to steal the work of 
artists--but to prove that someone has, indeed, stolen it.
    In addition, part of our continuing inquiry will address 
why P2P networks do not proactively prevent this illegal 
activity from occurring initially and how P2P networks like 
Kazaa envision moving from a business model predicated upon 
illegally trading songs to a legitimate business model that 
derives revenues from licensed copyrighted intellectual 
property.
    There is more at issue here than just subpoenas--and the 
impact of the use of the power of subpoena and threat of legal 
action to compel consumers to cease and desist.
    I believe the very future of the American music and motion 
picture industry is at stake--and, with it, a major contributor 
to our Nation's economic stability.
    I am pleased to have two leaders of the entertainment 
industry here with us today--Mitch Bainwol, CEO and Chairman of 
the Recording Industry Association of America, and Jack 
Valenti, President and CEO of the Motion Picture Industry 
Association of America.
    As Mr. Valenti has previously noted, the movie industry 
alone accounts for 5 percent of our Nation's economic output. 
And, as both Mr. Bainwol and Mr. Valenti have made clear, the 
act of downloading the work of their members without their 
permission is illegal--and, is contributing to a significant 
economic decline in their respective industries.
    I think we can all agree that the growth of current, and 
future, technologies bodes well for improving the quality of 
our lives and productivity, . . . but, we must also accept that 
it also could spell economic doom for the entertainment 
industry.
    In just a short time, it will be possible to download a 
full-length motion picture movie in minutes, and to distribute 
that movie across the world before it makes its cinematic 
debut.
    I believe we have the capacity to preserve the economic, 
artistic, and cultural integrity of our arts and entertainment 
industry in America. It will take a concerted, cooperative 
effort among all involved to make it work.
    With us today are others who are impacted by those changes 
in technology--those who own the brick-and-mortar retail 
outlets that are suffering from a decrease in the over-the-
counter sales of CDs and other music products.
    And, I want to thank another witness, Lorraine Sullivan, 
who is the recipient of one of the subpoenas issued by the 
RIAA. Her testimony will help our broader understanding and 
discussion today about the impact of such suits against music 
lovers--and what the potential ramifications may be for future 
customers of the industry.
    We have other issues that must be addressed today.
    Those who facilitate illegal file-sharing are also here 
with us this morning to present their side of the story.
    Kazaa has over 60 million individuals who download. Yet, 
they have been accused of aiding and abetting those who 
willfully violate copyright laws. There are a number of 
compelling issues that must be addressed. Kazaa asserts they do 
not condone illegal file-sharing and that they want to move 
toward a legitimate business model. This raises some important 
questions. Such as, if the financial viability of the Kazaas of 
the world is based upon illegally trading files, what 
incentives do they or consumers have to change their behavior? 
What prevents them from more boldly and openly informing their 
users about illegal activity?
    We also have with us today two artists, L.L. Cool J and 
Chuck D, who I hope can shed some light from an artist's 
perspective, on what they see to be the changing nature of the 
music industry--and for them what has been the solution to the 
intricate balance between artistic integrity--and, quite 
frankly, making a living.
    Finally, we will end our hearing today with a discussion of 
the ethics of downloading and the potential need for new 
business models. Have we inadvertently created a culture today 
that encourages the very behavior that today we feel needs to 
be corrected? Let me be clear. Downloading someone else's 
property without their permission is illegal, period. Yet 
today, there are 60 to 90 million people who use P2P networks, 
and I believe that is just in the United States, who use P2P 
networks to illegally trade copyrighted material.
    Many of these users are teenagers or younger. This 
generation of kids needs to be made aware that they are 
engaging in illegal behavior. I do not believe, however, that 
aggressively suing egregious offenders will be sufficient to 
deter the conduct of an entire generation of kids.
    As a former prosecutor, I am troubled by a strategy that 
uses law to threaten people into submission. Yet, as a former 
prosecutor, I am also troubled by a prevailing attitude that 
says because technology makes it free and easy, it is OK to do.
    I believe solving this problem will require a way of 
thinking that allows the industry to protect its rights, but to 
do it in a way that creates new consumers by intellectually and 
financially investing in creative methods of delivering of 
music to fans.
    Technology and the Internet offer great hope for a brighter 
future, but with it comes with great concern over how they are 
used and how property rights are protected. It is clear today 
that the law, technology, and ethics are out of sync. They are 
woefully out of step with one another. Hopefully, the dialogue 
that we engage in here today will be the factual and 
intellectual foundation upon which we can engineer some 
thoughtful and practical solutions for the future.
    The prepared opening statement of Senator Coleman follows:

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    [GRAPHIC] [TIFF OMITTED] T0239.003
    
    Senator Coleman. With that, I would like to turn the podium 
over to my distinguished Ranking Member, the Senator from 
Michigan, Senator Levin.

               OPENING STATEMENT OF SENATOR LEVIN

    Senator Levin. Thank you, Mr. Chairman. Thank you very much 
for calling this hearing. It is a very critically important 
hearing for the reasons that you gave and Senator Boxer gave 
and your leadership is going to be critically important in 
trying to find a resolution to the issues which you describe.
    Today, we face a collision of two worlds. One is the world 
of copyright law. The other is the real world, where new 
Internet technologies like file sharing are enabling hundreds 
of millions of people to instantly exchange movies, music, and 
other copyrighted works online for free. In the world of 
copyright law, taking someone's intellectual property is a 
serious offense, punishable by large fines. In the real world, 
violations of copyright law over the Internet are so widespread 
and easy to accomplish that many participants seem to consider 
it equivalent to jaywalking--illegal but no big deal.
    But it is a big deal. Under U.S. law, stealing intellectual 
property is just that--stealing. It hurts artists, the music 
industry, the movie industry, and others involved in creative 
work. And it is unfortunate that the software being used--
called ``file sharing,'' as if it were simply enabling friends 
to share recipes, is helping create a generation of Americans 
who don't see the harm.
    The Internet and related technologies, if used properly, 
have the potential to expose millions of people to creative 
work that would otherwise not be seen or heard. The question is 
whether their potential will be realized at the expense of 
artists, authors, software developers, scientists, and others 
who rely on copyright protection to earn a living.
    The issue we will be struggling with today is what to do 
about what I hope is acknowledged to be a problem. How do we 
instill in people that downloading a song or a movie off the 
Internet, without permission, is like stealing a CD from a 
store? If the recording industry's approach--filing lawsuits 
against alleged infringers--is not the right answer, what is 
the right answer? Is it technologically feasible for software 
developers to take steps to prevent their software from being 
misused to steal copyright works? If so, are they willing to 
take these steps voluntarily or must we require them to do so?
    Our copyright laws were designed to protect a person's 
intellectual property--a song, an invention, a work of art, a 
novel. But the use of new file-sharing software is growing so 
rapidly that the law has badly lagged behind.
    The Subcommittee obtained copies of more than 1,000 RIAA 
subpoena requests and subjected them to a general review as 
well as subjecting 42 randomly selected requests to a more 
detailed investigation. The Subcommittee's detailed review of 
the 42 subpoenas found that the Internet user with the fewest 
number of songs had made available about 600 songs for others 
to copy, while the Internet user with the highest number 
exceeded 2,100 songs. Many had made over 1,000 songs available 
for copying on the Internet. There was no evidence, in this 
survey at least, of subpoenas directed to users who had made 
available only a few songs.
    Software providers will play a key role in determining 
whether their file-sharing technologies evolve into tools that 
promote respect for creative work or instead promote copyright 
infringement. Certain developments so far have not inspired 
confidence.
    With regard to protecting copyrights, the largest software 
provider apparently failed to incorporate some elements that 
could help fight infringement and that company has taken steps 
that hinder rather than facilitate timely reminders from 
copyright holders to file sharers that the unauthorized sharing 
of copyrighted materials violates U.S. law. While people who 
download copyrighted works and make them available for others 
to copy should be held accountable for their actions, those 
providing the underlying software should also take reasonably 
available steps to protect copyrights.
    Internet technologies are changing how many Americans find, 
listen to, and buy music and movies. Trips to record stores are 
giving way to sessions on the Internet. Movie videos are 
increasingly online and available to those with Internet know-
how. We must search for ways to accommodate the reasonable and 
appropriate use of these new technologies while also 
maintaining the integrity of copyright laws critical to 
protecting and encouraging creative work.
    Again, I thank you, Mr. Chairman, for calling this hearing 
and for your leadership in this area.
    The prepared opening statement of Senator Levin follows:

    [GRAPHIC] [TIFF OMITTED] T0239.004
    
    [GRAPHIC] [TIFF OMITTED] T0239.005
    
    [GRAPHIC] [TIFF OMITTED] T0239.006
    
    Senator Coleman. Thank you, Senator Levin.
    With that, I would now like to welcome the first panel of 
witnesses at today's important hearing. Mitch Bainwol is the 
Chairman and CEO of the Recording Industry Association of 
America. Jack Valenti is the President and CEO of the Motion 
Picture Association of America. L.L. Cool J is a renowned 
recording artist. And finally, Mike Negra, President of Mike's 
Video.
    I thank you all for your attendance at today's hearing and 
look forward to hearing from each of you.
    Before we begin, pursuant to Rule VI, all witnesses who 
testify before this Subcommittee are required to be sworn in. 
At this time, I would ask you to please stand and raise your 
right hand.
    Do you swear the testimony you will give before this 
Subcommittee will be the truth, the whole truth, and nothing 
but the truth, so help you, God?
    Mr. Bainwol. I do.
    Mr. Valenti. I do.
    Mr. Cool J. I do.
    Mr. Negra. I do.
    Senator Coleman. Thank you very much.
    With that, Mr. Bainwol, we will go first with your 
testimony. We will hear then from Mr. Valenti, followed by L.L. 
Cool J, and finish up with Mr. Negra. Gentlemen, I would like 
you to keep your oral testimony to 5 minutes. There may be 
written testimony and we will, at your request, enter that into 
the permanent record. But if we do 5 minutes, and I will hold 
you to that, that will then give an opportunity for my 
colleagues to be able to submit questions.
    With that, Mr. Bainwol, you may begin.

  TESTIMONY OF MITCH BAINWOL,\1\ CHAIRMAN AND CHIEF EXECUTIVE 
OFFICER, RECORDING INDUSTRY ASSOCIATION OF AMERICA, WASHINGTON, 
                               DC

    Mr. Bainwol. Thank you, Senator Coleman. I appreciate that. 
Chairman Coleman, Senator Levin, and Members of the 
Subcommittee, my name is Mitch Bainwol. I am Chairman and CEO 
of the RIAA. Having spent much of the last 15 years working for 
this institution and for Members of the Senate, it is a special 
privilege for me to be here today, but I have got to say, I am 
more comfortable on the other side of the dais. [Laughter.]
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Bainwol appears in the Appendix 
on page 78.
---------------------------------------------------------------------------
    It is also an honor to share this witness table with Jack 
Valenti, who has done this a time or two, and with Mike Negra 
and the incomparable L.L. Cool J.
    Over these last 4 years, domestic revenues in the music 
industry have plummeted from $15 billion to $11 billion. The 
slide on the global side has been even worse. The primary 
cause: Piracy. The consequence: Lost American jobs, about 4,000 
jobs directly in the previous 2 years alone. That does not 
include the enormous retail losses that Mr. Negra will address 
shortly. He is the human face of piracy. Everyone in the 
magical chain that brings music to consumers is affected. They 
are the human toll--song writers, artists, backup musicians, 
clerks, truck drivers, everyone.
    The scope of the piracy problem is made clear when you note 
that the number one downloaded site in America is Kazaa 
software, which has been on the top 50 list for 74 weeks. At 
least four other P2P systems are also on the top 50 list. There 
are tens of millions of Americans, as you have noted, Mr. 
Chairman, who download music for free, most of it illegally. At 
any given point, three to five million people are on the 
Internet downloading music, violating U.S. copyright law.
    Any individual downloader may feel pretty innocent taking 
intellectual property off the Internet, presuming a victimless 
crime. But when you aggregate the universe of downloaders, you 
find a piracy problem of enormous dimension, and that produces 
an unacceptable human toll, victims in the creative community.
    The law is clear, yet the understanding of the law is not 
clear. Why? In large part, it is because the file-sharing 
networks like Kazaa deliberately induce people to break the 
law. A recent independent study by Palisades suggests that 99 
percent of all the audio files on the Internet were 
copyrighted, and 97 percent of all files were either 
copyrighted or pornographic. These networks, the Kazaas of the 
world, functionally are illegitimate platforms. They are 
cannibalizing a great American industry.
    The RIAA embarked on a campaign to get the message out 
years ago--paid print, broadcast ad, op-eds, websites, instant 
messages to P2P users until Kazaa turned off the IM function. 
But we found that P2P activity continued, so we took the next 
step, enforcement. It has been painful and it has been 
difficult. It was a last resort, but it is building awareness 
rapidly.
    From December of last year through early June of this year, 
public opinion on the legality of trading held constant. About 
a third said it was illegal. After announcing our intent to 
enforce our rights, but before the lawsuits were actually 
filed, that number soared to about 60 percent, and about 15 
percent say it is now illegal. We are building awareness 
rapidly and it is a function of enforcement.
    Our legal actions have, in fact, triggered a national 
debate. That is a good thing. This is a matter that will be 
settled over the kitchen table, not in the courtroom. Yet we do 
recognize that legal action is not a panacea. While we will 
vigilantly defend our property rights--we have no choice but to 
do so--we also intend to do so in a fashion that is consistent 
with common sense, decency, and fairness. We would much rather 
make music in the studio than arguments in the courtroom.
    A brighter future is evolving--that is the good news--and 
there are three legs to the stool. First, the foundation must 
be a broad societal understanding of the law and what is right 
and wrong. That is being accomplished.
    Second, the current market for legal downloads must become 
even more vibrant and competitive. We are watching that 
marketplace explode right now--Apple iTunes, Rhapsody, 
BuyMusic.com, MusicMatch, to name a few. Technology giants 
Amazon, Dell, Microsoft are all getting into this in the next 
few weeks and months.
    Finally, the file-sharing business must become responsible 
corporate citizens, moving beyond rhetoric and beyond excuses. 
The systems can no longer induce music fans to break the law, 
to diminish their computer privacy, disregard privacy, or to 
compromise integrity of content.
    This brighter future is just around the corner if the 
Kazaas of the world voluntarily implement three common sense 
reforms. If they do so, losses can be avoided, the record 
industry will be healthier, there will be more jobs, consumers 
will get the music how they want it, and they will respect 
property rights. Here is what it takes.
    One, Kazaa and the other file-sharing systems must change 
the default systems--the default settings for the users so that 
American kids, teenagers, and others, are automatically and 
unwittingly uploading the music from the hard drive.
    Two, these systems must institute meaningful disclosure. 
Clearly notifying the users that uploading and downloading 
music, copyrighted materials, without permission is, in fact, 
illegal. Disclosure needs to be made perfectly clear.
    And third, most importantly, the P2P systems must filter 
out copyrighted protected works. Again, 99 percent of the 
materials, the audio files on Kazaa under Palisades were 
copyrighted materials. That stuff should be filtered out. No 
more excuses.
    Mr. Chairman, Members of the Subcommittee, I thank you for 
this opportunity. We have a bright future ahead of us with 
technology. The answer is technology, but there is a right way 
to do it, there is an American way to do it, and that is you 
pay for what you get. Thank you very much.
    Senator Coleman. Thank you, Mr. Bainwol. Mr. Valenti.

  TESTIMONY OF JACK VALENTI,\1\ PRESIDENT AND CHIEF EXECUTIVE 
 OFFICER, MOTION PICTURE ASSOCIATION OF AMERICA, WASHINGTON, DC

    Mr. Valenti. Thank you, Mr. Chairman. I must say, before I 
begin, I heartily endorse what Mr. Bainwol has said. These 
Kazaas and Neutellas and Morpheus and the rest of them are 
outlaw sites who do nothing but offer illegal music and movies 
and the most sordid pornography that your mind can ever 
comprehend.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Valenti appears in the Appendix 
on page 88.
---------------------------------------------------------------------------
    But I am very glad to be here. Let me start with a story. 
It is said in World War I, Marshall Foach, who was a French 
General, later to become the Supreme Allied Commander, was in a 
furious battle with the Germans and he wired back to military 
headquarters, ``My left is falling back. My right is 
collapsing. My center cannot hold. I shall attack.''
    Some people say this is an apocryphal story, but I want to 
believe it is true because that is precisely the way I feel in 
confronting the assault on American movies and these file-
stealing groups all over the country whose mantra is, as you 
pointed out earlier, Mr. Chairman, ``I have the technological 
power to do as I see fit and I will use that power to upload 
and download movies that I don't own, but I don't care who owns 
them because I don't care about ownership.'' And that is what 
is going on.
    I think that this Subcommittee has to understand that we 
are under attack, and I think this Subcommittee understands 
that we have to use all the resolve and imagination we can 
summon to battle this piracy.
    Now, this is not a peculiar Hollywood problem. This is a 
national issue, Mr. Chairman, because intellectual property, 
which consists of movies and home video and TV programs and 
books and music and computer software--that is the family of 
intellectual property--is America's greatest trade export and 
an awesome engine of economic growth. We comprise more than 5 
percent of the GDP of this country. We are creating new jobs, 
not minimum-wage jobs, new jobs at three times the rate of the 
rest of the economy. We bring in more international revenues 
than agriculture, than aircraft, than automobiles and auto 
parts. And the movie industry alone has a surplus balance of 
trade with every single country in the world. I don't believe 
any other American enterprise can make that statement at a 
time, all of you Senators know, when this Nation is 
hemorrhaging from a $400 billion deficit balance of trade.
    And, by the way, we have almost one million men and women 
who work in some aspect of the movie industry. These are 
ordinary people with families to feed and kids to send to 
colleges and mortgages to pay and their livelihoods are put to 
peril by the onslaught of this piracy.
    Now, let me go to my second thing. If we just stopped right 
now, if the world just stopped, we would be doing fine because 
we could survive it. But to stand mute and inert and casually 
attend the ascending piracy that is ahead of us would be a 
blunder of the dumbest kind.
    On October 2, I am going to Cal Tech to deliver the Lee 
DeBridge Lecture and I am going to visit their lab. Their lab 
several months ago announced a new experiment called FAST. FAST 
can download a DVD high-quality movie in five seconds. Internet 
II, which is a consortium of scientists in this country headed 
by Dr. Molly Broad, the President of the University of North 
Carolina, had an experiment several months ago in which they 
sent 6.7 gigabytes--6.7 billion bytes, which is about two-
thirds larger than a movie--halfway around the world, 12,500 
miles, in 1 minute. Now I am told that Internet II has another 
experiment going which will make the previous triumph seem like 
a slow freight train.
    So what are we doing? We are trying, Mr. Chairman, to fight 
this in the best way we can. First, we have embarked upon a 
public persuasion and education campaign with TV, public 
service announcements, trailers in theaters, and an alliance 
with Junior Achievement with one million kids in grades five 
through nine studying what copyright means and how it is of 
benefit to this country, and to take something that doesn't 
belong to you is wrong, and that no Nation long endures unless 
it sits on a rostrum of a moral imperative, and that is being 
shattered, as you pointed out. There is a whole generation of 
people growing up that think there is nothing wrong with that.
    Now, we are also intensifying a new program of law 
enforcement, working with the FBI and also constabularies all 
over the world. We are doing technological research we hope 
will have some benefit to us in the future.
    And I might add, Mr. Chairman, that we believe that it is 
important to use every tool at our disposal, because if we 
don't, we are not going to beat this.
    I am quite fascinated with what I am saying up here---- 
[Laughter.]
    But I think I will stop right now and thank you for letting 
me deliver this sermon.
    Senator Coleman. Thank you very much, Mr. Valenti. Mr. Cool 
J.

 TESTIMONY OF L.L. COOL J, RECORDING ARTIST, NEW YORK, NEW YORK

    Mr. Cool J. Beautiful. First of all, let me say that I am 
very honored to be here. It is a very special moment in my 
life.
    Do people in the entertainment industry have the same 
rights as other Americans to fair pay for fair work? When you 
do something, should you be compensated for it?
    My question is, if a contractor builds a building, should 
people be allowed to move into it for free just because he is 
successful? Should they be able to live in this building for 
free? That is how I feel when I create an album or if I make a 
film and it is shooting around the planet for free.
    Just because, if I go to Tiffany's and steal a diamond 
necklace and put a picture of it on the Internet and promote 
it, does that mean I didn't steal, because Tiffany's became 
more well known after I stole their necklace? See, some of the 
arguments make no sense.
    I don't want to attack fans because, obviously, the fans 
are what make us. I mean, the reason I am able to sit here 
right now and speak to you guys, you gentlemen, is because of 
the fans and the love and the support that they have shown me.
    I know that coming from where I come from and seeing the 
things that I have seen, as an African American in America, the 
entertainment industry has provided an opportunity for me that 
I probably would have never gotten if the same climate that 
exists now existed when I first started. I have seen a gradual 
decline of my record sales, even though I have had some of the 
largest hits of my career recently.
    People say, well, L.L., are you going to sue the fans? A 
journalist asked me that, and I am not trying to take a shot at 
journalists. I am just saying a journalist asked me. L.L., are 
you going to sue the fans? My question to him is, when you use 
your creativity and you interview people, do you write for your 
paper for free? Do you do what you do for free?
    Do the farmers in our country--can you just go down to the 
farm and grab a bushel of corn and just walk away? Can you just 
grab up some wheat and say, bye. It is OK, because they have 
these new airplanes that fly around and they go by the farms 
and scoop up the wheat, so because they exist, these model 
airplanes that scoop up the wheat exist, I can just have your 
wheat, because it is possible.
    A lot of things are possible. It doesn't make it right. If 
they left all of the money in the bank sitting out in the open, 
is L.L. Cool J able to go in and scoop up a half-a-million 
dollars because it is there and it is possible?
    I don't want to attack children. We have to protect the 
kids. I don't want to attack fans who love the music. I know 
there are issues, yes. Some of the CDs, maybe they were 
expensive. In business, sometimes things have to be adjusted 
and you have to make adjustments and make things right on 
certain levels. But at the same time, now I understand that 
there are sites available where you can download music for 99 
cents. Some of the artists may only see a nickel out of the 99 
cents. Can we at least see that? Is it all right for us to make 
a living as Americans?
    Should Steven Spielberg not have the right to get 
compensated when he does a movie like ``Schindler's List'' or 
he does a movie like ``Jurassic Park''? Should I not have the 
right? Should Elvis Presley's estate not be compensated for the 
work that he did as an entertainer? Should the Beatles' estate 
and the Beatles' catalog not be worth anything anymore after 
all of the work that they did in entertainment?
    Artists are a huge, an extremely important part of American 
culture. We are the dreamers. We don't write the laws like you 
guys. We don't necessarily have the power on certain levels 
that you guys have, but we are the dreamers. This is like we 
are the guys who make the movies and create the scenarios where 
the American guy goes in and wins and the rest of the world 
sees it and says, hmm, America is not so bad.
    We need protection. We need help. A lot of people will say, 
well, I will take care of myself. Don't worry about me. And 
there are other artists who feel differently and I understand 
that. I don't feel like anyone shouldn't have the right to 
their own opinion. I just know that when you have producers, 
you have the drummer who is just a session drummer, he is not 
L.L. He is not getting the big check and doing the movie thing 
and all the talk show stuff that I do, but he is on the drums. 
He is making a living. Or if you have a producer, a 
keyboardist, a song writer, these people can't live.
    The entertainment industry, are we just going to give it 
away? We are just going to say, OK, now it is free. It is OK. 
And that is it?
    In my opinion, I just think it is anti-American. I think 
the thing that makes America great is that we can make money 
and create jobs in all of these different ways. I am not 
against the Internet.
    Senator Coleman. Mr. Cool J, I am going to ask you if you 
can just sum up.
    Mr. Cool J. Yes. I will just say that I am not against 
technology. I am not against the Internet. I just wish that 
these things could be done--music could be downloaded 
legitimately. Thank you.
    Senator Coleman. Thank you, Mr. Cool J. Mr. Negra.

  TESTIMONY OF MIKE NEGRA,\1\ PRESIDENT, MIKE'S VIDEO, INC., 
                  STATE COLLEGE, PENNSYLVANIA

    Mr. Negra. Chairman Coleman and Senator Levin, 
distinguished Senators, I am the President and founder of 
Mike's Video, Inc., a small chain of four movie rental and 
music software stores in State College, Pennsylvania. I would 
like to thank you for allowing me the opportunity to tell my 
story, which has been mirrored all over the country these past 
3 years.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Negra appears in the Appendix on 
page 99.
---------------------------------------------------------------------------
    I am here to support the RIAA's efforts and here is why. In 
1999, our business was fantastic. That year, with five 
locations in two college towns, we eclipsed $3 million in music 
sales, ranking us in the top 50 accounts with some major 
suppliers. We were experiencing a rapid growth, due in large 
part to the market we were serving, college students.
    That all changed abruptly in August 2000 when Penn State 
and Virginia Tech students returned for their fall semester. In 
both locations, sales fell dramatically. In State College, our 
downtown student-oriented store saw sales drop 29 percent, 
while in Blacksburg, Virginia, sales decreased by 25 percent. 
The slide continued for the rest of 2000, decreasing by 23 
percent company-wide.
    As you know, 2000 was the year of Napster, and college 
students with access to broadband Internet connections provided 
by the universities were among the first heavy users of P2P 
software. As a result, college town record stores like mine 
were the first to feel the brunt of lost sales. Underground 
retail stores sprung up in dorms and apartment buildings. 
Students were downloading new music before it was available in 
my stores and selling illegal copies to friends.
    The downslide has continued ever since. In 2001, sales fell 
24 percent in State College and we were forced to sell our 
store in Blacksburg, Virginia, due to disappointing sales. Last 
year, as Kazaa and other P2P services expanded, our sales 
continued to decline, falling another 22 percent. Finally this 
year, we consolidated our inventory, leaving only one music 
store left in our chain. What was once the cornerstone of the 
music buying public, college students, has now almost 
completely disappeared. We just couldn't compete with free.
    Mike's Movies and Music will sell $1.8 million less music 
this year versus 3 years ago, a 70 percent reduction in sales. 
The trickle-down effect is enormous. For example, the State of 
Pennsylvania has lost $108,000 in potential sales tax revenue 
from my store alone. Music-related jobs and community-wide 
benefits, from a general manager to buyers to store managers 
and clerks have been eliminated at Mike's. Wages were frozen 
throughout the company as we struggled to overcome the revenue 
loss. We were forced to sell our corporate offices and relocate 
to makeshift offices in various stores. Major capital 
expenditures have been delayed. Advertising has been cut back, 
travel and organizational dues eliminated, and on and on.
    P2P services that exist for the purpose of stealing music 
and movies have decimated small businesses around the country 
like mine, small businesses that make America work. Only 3 
years after the first sign of the effects of online thievery 
appeared, hundreds of stores just like mine are gone and are 
still struggling to stay alive, while at the same time 
struggling with the public's suggestion that file stealing is 
OK and no victims lie in its wake.
    I can't tell you the amount of frustration we feel as we 
watch our business being stolen from us. In fact, the future 
looks even bleaker, as another mainstay of my business, movie 
rentals and sales, becomes the next battleground. We have 
conversations with customers who comment proudly about their 
``ownership'' of downloaded movies. Our student-oriented store 
in downtown State College has seen revenue decrease by double 
digits, while stores outside the student influence increase.
    Finally this year, because of enforcement and deterrence 
efforts, I can say people are starting to get it. The Category 
5 level of destruction left upon the landscape of the music 
industry and approaching the movie industry has people like 
yourselves and organizations like the RIAA and Penn State at 
least searching for answers. It has been allowed to continue 
without fear of repercussion for too long.
    The lawsuits recently filed by the RIAA are timely, and 
unfortunately, are a required addition to the educational 
approach used for the last couple of years. Without that 
deterrent, as has been proven in my little corner of the world, 
things will only get worse.
    People have no more right, no more entitlement to steal 
music or movies or any other copyrighted product in a digital 
form than they do in a physical world. The same rules apply. 
The RIAA is just enforcing them.
    I prosecute shoplifters in my store. If I didn't and word 
got out, I would have no inventory. Online shoplifting will 
only be stopped by aggressive enforcement that creates a 
deterrent effect. Please help the copyright owners protect 
their property. Our industries depend upon it. My fellow 
retailers depend upon it. Our employees and their families 
depend upon it. Thank you.
    Senator Coleman. Thank you, Mr. Negra.
    I know that some of my colleagues have opening statements, 
but in the interest of time, I wanted to forgo that and hear 
from the witnesses. What we will do is 7-minute rounds of 
questions and hopefully that will give my colleagues a chance 
to do a preliminary statement. Of course, the full statements 
will be entered for the record.
    Let me begin. Mr. Bainwol, are you concerned that the 
decision to sue hundreds of music lovers could have a negative 
effect on fan loyalty and could harden consumer resistance to 
legitimate online sites?
    Mr. Bainwol. Concern? You can't take a decision like this 
lightly. The decision to move forward with the legal action was 
a last resort. We simply had no choice. It is the end product 
of a campaign that involved paid advertising plus lots and lots 
of free media interviews. We have tried to get the message out. 
The market has just fallen apart when you are competing against 
free, and this was the last thing we had in our quiver.
    So we had to do it, and the good news is that it stimulated 
a national debate. Parents are going home, having that 
conversation with their kids over the dining room table. That 
is exactly what we hope to stimulate. The answer isn't 
lawsuits. The answer is kids learning the difference between 
right and wrong and technology that offers a legal way to get 
the music fans want.
    Senator Coleman. There are those who are involved on the 
P2P side that say that the recording industry is a tough 
industry to deal with. They are tough to negotiate with, and if 
we could just sit down, we could sort this out. Do you think 
there is a possibility of figuring out a way to sort this out 
where, in fact, you can protect copyright interests and others 
can engage in the business of legal file sharing?
    Mr. Bainwol. Until the P2P folks get legitimate, it is an 
awfully tough thing to do. The reality is, 99 percent of the 
traffic on those networks is illegal downloading. Maybe it is 
90 percent, maybe it is 95. One study said 99. It is a totally 
illegitimate platform. It is Jesse James wanting to be hired at 
the bank. It is just silly.
    Senator Coleman. But if we were to do something that would 
somehow force those involved in illegal file sharing today, 
they might say yes, we have changed our ways, and we now 
installed the filtering technology. We are doing all the things 
you are talking about. But, what would stop someone else from 
doing it? What stops somebody else from just setting up a 
similar operation? How do you get your arms around something 
that is global in nature and is subject to the flow of 
technology?
    Mr. Bainwol. Nobody says it is going to be easy. This is 
tough. But what we have to do is we have the leaders and 
parents send a message that taking copyrighted materials is 
wrong. There is an education piece to it, and we have got to 
find a way to foster the technology. There is no magic wand 
that you can wave and solve this problem. It is education. It 
is conversations at home. It is legal alternatives. And it is 
putting pressure on the P2P guys to conform to basic common 
decency and corporate governance standards.
    Senator Coleman. Mr. Valenti, I know you have looked at 
this problem for a while, and perhaps the movie industry is in 
the somewhat enviable position of being able to kind of watch 
as this technology develops. The fast stuff isn't here yet, but 
it is coming. The Internet II stuff isn't here yet, but it is 
coming.
    Can you help us a little bit in terms of what you think 
could be done from a software and hardware side that could have 
some impact? Is there something? We don't have the Dells and 
the Microsofts and others at the table today, and that may be 
another hearing. Can you tell me, do you have a vision as to 
what can be done on the software and hardware side that can 
help us solve this problem?
    Mr. Valenti. Mr. Chairman, I think that one of the aspects 
of a possible solution, because there is no single silver 
bullet, has to be technological research. Technology is what 
brought on this problem and technology may be the salvaging of 
this problem.
    We are working hard on that right now. I am going to be 
attending a meeting in 2 days where the member companies of the 
association, the studios, are looking at technological research 
to begin that. We are already in conversation, deep 
conversations with the Microsofts of the world and the IBMs to 
see what can be done. There are a number of independent fine 
minds in the high-tech industry working on this.
    But there has to be something else, too. There has to be an 
awareness on the part of the American public that this kind of 
scramble, taking things for free that belong to somebody else, 
has to be stopped. We are squandering in this country a whole 
moral platform that has been built, and I worry about that. I 
would think that this Senate and you and the rest of your 
Subcommittee would be worried about that. It is a larger 
problem. But it is inherent in the solutions that we are 
looking for.
    Senator Coleman. Mr. Cool J, first of all, you talked about 
fans' love and support. I do want you to know that you have 
that in this building. On the way over, I heard the folks who 
run the elevators in the Senate and the Capitol really want you 
to come by and say hello, so there is a lot of love and support 
out there. [Laughter.]
    Mr. Cool J. Thank you.
    Senator Coleman. There are those who suggest that the honor 
of online record and music distribution gives more power to the 
artist, and somehow takes it away from the record executives 
and gives you more power. Can you respond to that?
    Mr. Cool J. I understand what you are saying. I think it is 
two separate issues. I think that the deal that you negotiate 
with your record company and your music being given away for 
free are two separate issues.
    Yes, OK, maybe if you don't have a contract and you just 
started and you put your record on the Internet and people like 
it, you can get attention. But that was your choice. You made 
that choice. If another artist decides to come here today and 
say, hey, I choose to upload my music for free and the rest of 
the world can have access to it for free, that is their choice. 
That is their right.
    But I think that from my relationship and the friends that 
I have in the entertainment industry, on both sides, music and 
film, I know that the majority of artists--the majority--want 
to be compensated for what they do. And ultimately, like I said 
before, because you are exposed, because you gain more 
notoriety by being shot throughout cyberspace does not make up 
for the crime. It doesn't change the fact that it was stolen.
    Senator Coleman. You have already had a very successful 
career and I suspect there is a lot more to come. What advice--
talking about choice--what advice would you give to an up-and-
coming artist as to how to navigate their way through this 
system where you have technology offering all this opportunity.
    Mr. Cool J. I think that, obviously, America is a country 
where the entrepreneurial spirit is everywhere, in every 
corner. Having your own business is always a wonderful option. 
Having your own label, having your own things, these are all 
wonderful options, but ultimately, it is great to have a great 
partner who can invest in you and help you to expose your 
product to more people all around the planet.
    My advice would be to make great work, choose and figure 
out the business model that you want to utilize to get that 
work, to disseminate that work to the public, to get it out 
there to the public, but ultimately, either you want to be 
compensated or you don't. You understand what I am saying? It 
is whether you are anti-big industry or anti-big label and you 
feel you should be on a small label or you should be 
independent and you don't want to be associated with any of the 
larger companies, that is your choice. But the real question is 
should you be compensated for your work or not? I, for one, 
believe that in America, when people work, they like to be 
compensated.
    Senator Coleman. Thank you. Thank you, Mr. Cool J.
    My time is up, but Mr. Negra, I have one question and may 
come back on a second round. Do the universities have any 
responsibility to step out in front, and have you as an 
individual entrepreneur been involved in discussions with them 
about this problem?
    Mr. Negra. My discussions with Penn State go back to 2001 
about it. I think that they were limited in their ability of, I 
guess, controlling what was happening on their servers back in 
2001. I think that they have some responsibility, yes, and I 
continue to have discussions with the university.
    Mr. Valenti. Mr. Chairman, can I break in a moment on that 
very subject?
    Senator Coleman. Very briefly, because I know that my 
colleague, the Ranking Member, has another commitment and I do 
want to get to him.
    Mr. Valenti. Let me withhold that question.
    Senator Coleman. Thank you. With that, I will turn to 
Senator Levin.
    Senator Levin. Thank you, Mr. Chairman. I would ask that my 
entire opening statement be made part of the record, also.
    Senator Coleman. Without objection.
    Senator Levin. First, let me thank each member of this 
panel. I just wish everybody could have heard this testimony, 
everybody who thinks that it is OK to download or upload 
copyrighted material. I wish they could have heard the clarity, 
the moral clarity with which you speak.
    The question that I have is whether or not the message 
which you have provided and which we are attempting to provide 
needs to be reinforced by any changes in law. Are there things 
that we should do that would require, for instance, 
technological capabilities to be inserted in this software 
which would notify people that they are downloading or 
uploading copyrighted material? I think that is technologically 
feasible now. It is not incorporated in some of these 
companies' software. Should we require that it be incorporated? 
I am just throwing out one possibility.
    But my question is, I think the message is so compelling, 
does it need to be reinforced by any changes in law, in your 
judgment? Now, you may not be in a position where you are able 
to answer that, but if you are, I would welcome your comments.
    Mr. Bainwol. I would make two quick comments. The first is 
that our natural inclination would not be to support mandates 
on technologies. What we need to do is have an opportunity to 
enforce the law and to send signals that the law matters.
    We are a Nation of laws. We are in a situation where an 
industry is being ravaged. And what we need to do is send 
signals that, in fact, it is appropriate to enforce, and when 
people get that message, the education campaign will be 
complete and we are on the way to a solution.
    Senator Levin. Mr. Valenti, I understand, and I am not a 
technology expert, that it is technologically feasible to 
require file-sharing software to include features that would 
discourage copyright violations, pop-up warnings, for instance. 
Now, if that is technologically feasible, which I understand it 
is, should we mandate that?
    Mr. Valenti. Senator, the movie industry has been in long 
years' conversation with the high-tech industry, the IT and 
consumer electronics industries, the computer makers, chip 
makers, and the consumer people. We have been meeting with 
them, trying to find some middle ground, some concord that then 
we could come to Congress and mandate.
    I lament the fact that we have not been able to make the 
kind of progress that I hope for, but one of the solutions, one 
of the bullets--not all--will, in my judgment, be at some point 
some kind of a mandate that would be technologically feasible, 
possible, easy, and inexpensive, because in the long run, it is 
the American consumer, Senator Levin, that is going to be 
denied high-value programming. We want to put thousands and 
thousands of titles on the Internet, deploy those, dispatch 
them to homes all over the world at fair and reasonable prices, 
which is a definition to be defined by the consumer and not by 
the distributor. That is our aim.
    Mr. Negra. You are insinuating that people don't know that 
it is wrong and that it is copyrighted material, and I 
believe----
    Senator Levin. No, I am suggesting that they need to be 
reminded every time they do it.
    Mr. Negra. Well, I think that Penn State students, for 
example, are relatively intelligent and they know that it is 
not--that it is wrong to do and that it is copyrighted 
material, and yes, I guess another line of defense per se 
wouldn't hurt, but I think they know it ahead of time. I just 
don't think they care and I think that they have this 
entitlement feeling, that if it is on the Internet, it must be 
OK. It is mine.
    Mr. Bainwol. If I could just add one thought, the folks 
from the P2P community will be here. Ask them if they would 
voluntarily have these pop-ups that tell you that you are 
violating the U.S. law----
    Senator Levin. I intend to do that if I can get back here. 
If they say that they are not going to do it voluntarily, the 
question is whether it should be mandated or not.
    Mr. Cool J. Yes.
    Mr. Valenti. The answer is, at some point, we probably have 
to do that.
    Mr. Cool J. Ultimately, sir, I think that people are well 
aware, the general public is well aware, and the only thing 
that will really be a true deterrent are laws that are fairly 
strict and deter you from wanting to engage in this type of 
activity. I mean, it is like anything else. If you guys with 
the power don't say, hey, you can't do this, it is wrong and if 
you do it, this is what happens----
    Senator Levin. We have already said that.
    Mr. Cool J. Yes, sir.
    Senator Levin. It is already against the law to do it. The 
question is, does the law need to be in some way strengthened 
to use new technologies in some way to fight this pirating. We 
fight the piracy when it occurs in other countries. We 
negotiate trade agreements with other countries trying to 
protect our intellectual property. Some of them continue that 
piracy unabated, despite those efforts. But here, if there is a 
technology which could be effective, should we mandate its use? 
That is the question which I think we need to struggle with, if 
it is not voluntarily used.
    Mr. Bainwol. If, in fact, the P2P community does not 
respond voluntarily, then they should be subject to mandates.
    Senator Levin. The last question for this panel, and that 
has to do with this subpoena question. The current law does not 
require notice to the person whose identification information 
is being subpoenaed, and the question that I have is, isn't it 
to your advantage that person be notified that there is a 
subpoena that has been issued or requested, because you may be 
able to achieve voluntary compliance.
    In other words, there is a change in law which it seems to 
me might be consistent with fairness that is to notify somebody 
that, hey, there is a subpoena out now for information relative 
to you. This isn't like notifying somebody who is engaged in 
money laundering that there is a subpoena issued, because that 
person might then run and try to hide the money or move the 
money. This is a different issue. That person is not going 
anywhere. Wouldn't notice of the issuance of a subpoena be 
consistent with fairness, but from your perspective, also lead 
perhaps to quick and voluntary compliance? That is my question. 
Mr. Cool J.
    Mr. Cool J. I agree. I think that is very fair and I think 
it sounds very smart and it is a really creative idea and I 
think it is the right way to go. I definitely think it is the 
right direction.
    Senator Levin. I really welcome that endorsement. I hope 
you will also endorse my records, by the way. [Laughter.]
    Thank you all. You have been a great panel.
    Mr. Cool J. Thank you very much, sir.
    Senator Coleman. Thank you. I would note the presence of 
the distinguished Chairman of the Committee on Governmental 
Affairs. That is Senator Collins. Welcome. With that, Senator 
Sununu.

              OPENING STATEMENT OF SENATOR SUNUNU

    Senator Sununu. Thank you, Mr. Chairman. I have no records. 
I have no intention of producing records. Everyone can breathe 
a sigh of relief. [Laughter.]
    I appreciate, Mr. Chairman, you holding this hearing. This 
is, obviously, an extremely important subject and one in which 
I take great interest. I appreciate all of the panelists, their 
statements, and want to reiterate the statement by Senator 
Levin.
    The degree to which this is an important issue hinges on 
our respect for private property rights. I think you will find 
everyone on the panel committed to supporting individual 
property rights and sharing the belief that copyrights are part 
of that individual property right history that, in many ways, 
makes our country unique. It drives commerce. It drives 
business. It drives industry, whether you are in the 
entertainment industry or writing or producing any kind of 
intellectual property.
    Second, I think it is important to acknowledge the right of 
those who are engaged in business, whether you are a recording 
artist or you own a business, your right to use the legal tools 
at your disposal to protect your property rights, your 
copyright. I think that is legitimate, that is fair, and has to 
be acknowledged, because if we don't acknowledge that, we are 
sending the wrong message.
    There are a number of concerns here, though, and when we 
talk about technology and we talk about the text of the laws we 
write, we begin getting into slightly grayer areas. Concerns 
for me are, one, the very nature of the subpoena power that has 
been written into the MCA, the Millennium Copyright Act, and 
specifically the 5(12)(h) subpoena. This is a new kind of 
subpoena power. We need to acknowledge that. Whether we think 
it is a good idea or a bad idea, we have given unique new 
subpoena powers to copyright holders, a type of subpoena power 
that no other individual or entity that I know of is given, and 
we want to make sure it is used in an appropriate way. We want 
to examine the question of whether or not it is used in a way 
that intrudes on privacy.
    And certainly a second concern is probably much greater on 
that side of the dais, is the way in which these technologies 
are going to change, one, the business models that you 
incorporate; two, the way these technologies are going to 
facilitate ever-greater volumes and ease of file sharing, and 
Mr. Valenti, as usual, addressed that in a very eloquent way; 
and finally, the way in which these new technologies, 
technologies that are going to come around in 5 years or 10 
years, are going to make enforcement even more challenging. We 
can certainly hold out the hope that we will identify some 
technologies that make enforcement easier, but I think the 
history, the evolution of the Internet and processing 
capability and distributed networking, show that it makes 
enforcement, in many cases, much more challenging.
    So those are the concerns that I have and I hope to explore 
with this panel and the next panel.
    Let me begin with Mr. Bainwol, welcome. In the material we 
have, it noted that there were 2.6 billion downloads a month. 
Try as you may, you can't sue them all. I don't think that is 
your goal. We could probably find some lawyers that would be 
more than willing to try to sue them all---- [Laughter.]
    But I don't think that is realistic. So in that light, can 
you talk a little bit about the goals of your legal strategy, 
the subpoenas and the lawsuits that you have pressed forward. 
What are the goals, and as quantitatively as possible, how will 
you know when you have achieved your goal?
    Mr. Bainwol. Our objective, again, is not to file lawsuits. 
Our objective is to create an environment in which legal 
alternatives can flourish. If there is a free competitor, that 
makes it awfully difficult to establish an economic model that 
can work.
    But we are engaged in lawsuits. Again, it is done as a last 
resort. We will do it as long as necessary to get the message 
out and to establish the proper deterrent. Laws are there in 
order to defend property and we have got to enforce that law to 
get the message out and we will continue to do so.
    Senator Sununu. How do you know when the message is out, 
though? How do you know when you have sort of achieved the 
goals of this legal strategy?
    Mr. Bainwol. We will know it when we see these legal 
offerings flourishing. We are not operating in a situation 
where we expect a zero tolerance on downloading. What we are 
looking to do is to create a marketplace that can operate, that 
can take hold, and my hope is, in 6 months from now, we are 
going to be talking about the whiz-bang offerings that are 
already out there that are getting better and better and 
better. Kids, as a result of conversations with their parents, 
know that instead of going to Kazaa, they are going to go to 
BuyMusic.com, they are going to go to iTunes, they are going to 
go to MusicMatch, and they are going to find a legal way to get 
done what they want, which is to enjoy music.
    Senator Sununu. Do you think the poor performance of legal 
options that are out there has been driven solely by the 
existence of peer-to-peer?
    Mr. Bainwol. One, I would not accept the premise that the 
performance is not good. I think if you go on some of these 
sites, they are outstanding. Go on MusicMatch. They opened up 
yesterday. I went last night. Go on iTunes. It is amazing.
    But, I will say this. P2P makes it much tougher. If you are 
a kid and you can go out there and get it for free, why would 
you go to iTunes? And unless this Congress enforces our right 
and enforces the law and--we are going to have a tough time 
making that sell.
    Senator Sununu. Mr. Valenti, you had wanted to make a 
comment earlier. Let me ask you a question, and if you want to 
stick in the comment you had missed, by all means, and that is 
sort of the second concern and you began to touch on it in your 
testimony.
    How will the new technologies or emerging technologies or 
even existing technologies today change business models used by 
the entertainment industry and the motion picture industry?
    Mr. Valenti. Let me answer that by saying President Kennedy 
used to tell a story about a French General in Algeria who told 
his gardener that he wanted to plant a certain species of trees 
along his pebble drive to his chateau, and the gardener said, 
but General, this tree takes 50 years to really bloom. And the 
General says, my God, we don't have a moment to lose. Plant it 
today.
    We are trying to put in place right now, Senator Sununu, 
Bathel plates to the future. We have been sort of relieved 
right now because it takes so long to bring down a movie, but I 
told you what is going on in Cal Tech and Internet II, what is 
experiment today will be in the marketplace 3 to 4 years. So we 
are looking 3 to 4 years in advance.
    I believe that technology is going to play a large role in 
dealing with this, but along with that there has to be an 
understanding by the public that this is wrong.
    What I was going to say earlier to the Chairman was, we 
have been working very closely with a group of universities, 
Rick Levin, the President of Yale, Graham Spanier, the 
President of Penn State, John Hennessy, the President of 
Stanford, Charles Phelps, the Provost of Rochester, and Molly 
Broad, the President of the University of North Carolina. As 
these students came back this year, a lot of universities gave 
them a code of conduct saying this is wrong and if you persist 
in doing this, there are penalties. They vary in substance and 
in heft. But they are trying to explain to students that there 
is a price to pay.
    What the RIAA, and I am not speaking for them because I 
don't know their overall strategy, is trying to say is ``it is 
wrong and this is not risk-free. There is a penalty to be 
paid.'' If we did not have the IRS auditing at least 2 percent 
of the income taxes in this country, who would pay income 
taxes? Nobody, because it is risk-free.
    And so what we are trying to do is to point out that there 
is a risk for this. On the other side, we are going to try to 
use technology to see if that will also be one of the silver 
bullets that we can use.
    Senator Sununu. Thank you very much, Mr. Chairman.
    Senator Coleman. Thank you. Senator Pryor.

               OPENING STATEMENT OF SENATOR PRYOR

    Senator Pryor. Thank you, Mr. Chairman, and I would like to 
thank you for your leadership on having this hearing today.
    And also, I need to acknowledge Senator Boxer, who was here 
a few moments ago. She and I have talked about this subject 
privately on more than one occasion, and so I just want you all 
to know, the people in this room, that she is not just here 
when the microphones are on and the cameras are on. She is very 
vigilant about this issue, is very concerned about this issue 
and wants to make sure that everyone's rights are protected.
    What Senator Levin said a few moments ago--he talked about 
different forces colliding, and I agree with him on that. And 
another way to look at that, I think, is you have the one 
traditional American force that is foundational to American 
law, and that is that this country, from the foundations of our 
Nation, made the commitment that we are going to protect 
intellectual property rights. We did that through the patent 
law initially and we have had a strong history of doing that 
for the last 200-plus years. I think that is one of the reasons 
why our economy has historically continued to grow and 
continued to be as strong as it is, and that is because people 
in this country who are creative and who are industrious know 
that their rights will be protected here in America.
    But at the same time, there is this other great force and 
it is the information age or the Internet, and it really is a 
revolution. It is changing the way business is done in this 
country. It is changing our law. It is changing people's 
ability to function in this country. It is something that I 
know the music industry has been struggling with in the last 
few years to try to get a handle on this. My hat is off to the 
ones who are trying and trying to protect the legitimate rights 
of the industry.
    Another thing that, Mr. Chairman, I just wanted to say is 
that I have some concerns, just general concerns, about the 
concept of file sharing. I am not opposed to that concept. I 
understand how it can be a very positive thing, a very 
constructive thing, a very good thing, but I am very concerned 
that we need to build in more consumer safeguards with regard 
to file sharing.
    There is a lot of inappropriate content out on the 
Internet. There are a lot of young people and others who come 
across inappropriate content that they really don't want to 
see, they don't have any desire to view, but nonetheless it is 
out there and file sharing adds to that.
    There is also the problem that was mentioned in someone's 
opening statement about the unwanted access to your personal 
files. If you are not careful, you are opening all of your 
personal files to people who you don't know and you don't 
intend to do that.
    Of course, a third thing about file sharing is the piracy 
aspect of that, which concerns me greatly.
    The prepared statement of Senator Pryor follows:

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    Senator Pryor. Mr. Valenti, let me start with you, if I 
may, and it is great to see you here in the Subcommittee today. 
I know that your industry is, in many ways, related to the 
recording industry. There is a lot of cross-pollination there 
and there is a lot of overlap there. What has the movie 
industry learned from the battles that you have seen the 
recording industry go through and is the movie industry 
changing its business model or what steps is the movie industry 
taking to prepare itself?
    Mr. Valenti. To paraphrase Mr. Churchill, I didn't become 
head of the Motion Picture Association to preside over a 
decaying industry. And when I see the pillaging that is going 
on in the music industry, and L.L. Cool J has explained why the 
artists are worried about this, I have a few Maalox moments 
when I do that. [Laughter.]
    We are following very closely, Senator Pryor, what is going 
on in the music industry right now. I have great sympathy and 
compassion for what they are going through, because you can 
bring down a song in real time, 2 or 3 minutes. One of L.L. 
Cool J's recordings, 3 or 4 minutes, bango, you have got it.
    So we are trying to put in place a lot of things. 
Ultimately, Senator Pryor, our aim is to benefit the consumer. 
That is what this is all about. When somebody said to me, why 
don't you Hollywood guys stop whining and get a new business 
model, and I said, ``boy, that is a great idea, why didn't I 
think of that,'' except there is no business model ever struck 
off by the hand and brain of man that can compete with free. 
That is an absolute truth.
    So we are working with technology, we are working with the 
colleges, we are doing public persuasion, upping our law 
enforcement, all of these converging elements in order to put 
in place something that is going to help us survive 3 to 4 
years from now when you can bring down these movies in minutes 
and seconds.
    Senator Pryor. Mr. Bainwol, let me ask you, if I may, there 
have been some press accounts of sort of innocent bystanders, 
so to speak, being dragged into this litigation. What 
safeguards are in place or should be put in place to make sure 
that innocent people don't get dragged into this?
    Mr. Bainwol. Great question, Senator. There are a number of 
safeguards that we do, in fact, employ, and more on the way.
    Let me first say that we focus on the most egregious 
offenders. The average number of uploaded files in the 261 
folks who were sued was over 1,000. I have had these CDs here 
for a reason and I have waited for the moment to pop them out 
and tell you why. It wasn't to hide my face. It is to make the 
point in a visual way that this is roughly the amount of 
material that was taken from the artists, from the L.L. Cool 
J's of the world. This is their work product. This is their 
dream. This is their future. This is what they have been 
compensated for. And this is what, on an average basis, what 
was taken down from the Internet.
    It seems awfully innocent for any individual that does it, 
but when you aggregate it by the millions, you are killing an 
industry, a great American industry. That is one.
    Two, based on the law and based on technology, what we do 
is we seek information from the ISPs on an IP account. We don't 
know who the individual is. What we know is, when you go on 
P2P, you are offering your files up to the world. There is no 
privacy there. You are exposing it literally to the entire 
world.
    We go in, we get a snapshot of that, and we are able to 
determine what files are out there and the IP address. That is 
what we send over to the ISP. They give us the name. What we 
get is the name, the E-mail account, the address, and the phone 
number. That is it. It is very limited. It is the same 
information that some ISPs sell to marketing partners.
    Senator Pryor. Mr. Chairman, that is all I have. Thank you.
    Senator Coleman. Thank you, Senator Pryor. Chairman 
Collins.

             OPENING STATEMENT OF CHAIRMAN COLLINS

    Chairman Collins. Thank you very much, Mr. Chairman. I have 
an opening statement that I would like to have inserted in the 
record.
    Senator Coleman. Without objection.
    The prepared statement of Senator Collins follows:

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    [GRAPHIC] [TIFF OMITTED] T0239.011
    
    Chairman Collins. I want to commend you for tackling this 
very interesting and difficult subject. I think you have said 
it well when you said that the law, ethics, and technology are 
not in sync and it is our job to try to deal with these very 
complex issues.
    Mr. Bainwol, in your testimony, you said that the music 
industry has for a number of years undertaken a massive 
campaign to educate consumers regarding the illegality of 
unauthorized distribution of copyrighted music online. Do you 
think that that campaign has been a success? Do you think that 
the average consumer who is downloading music from a peer-to-
peer network realizes that they are committing essentially a 
theft?
    Mr. Bainwol. The campaign was necessary, but not 
sufficient. There is no question. What we have seen is that as 
much as you tell folks, until you demonstrate that there is a 
consequence, the behavior is not going to change.
    But we also had to tell people and reach more people and 
penetrate with the message that downloading is wrong. The 
lawsuits have, in fact, done that. Earlier, I noted that we 
have public opinion data that suggests until June, prior to the 
launch of the subpoenas, that the number of folks who 
understood that it was illegal to download copyrighted 
materials was around a third. That number has doubled to about 
60 percent. So the legal action is a piece of an education 
campaign that happens to be profoundly effective.
    Chairman Collins. I think the lawsuits have certainly 
gotten everyone's attention. I would agree with you on that. I 
don't think the educational campaign has been successful. There 
is still a widespread misperception that if it is on the 
Internet, it is free, it is OK to use. An individual who would 
never think of going into Mr. Negra's store and stealing CDs 
sees nothing wrong with downloading the exact same music from 
the Internet. I think until we change how people perceive the 
Internet, that we are not really going to solve the root of 
this problem.
    I am also not sure that lawsuits are the answer, and Mr. 
Negra, I want to ask you how you feel about the lawsuits that 
have been filed. I have read your testimony where you say that 
you think they were required, but as a small business person, 
how do you feel about solving this problem through litigation?
    Mr. Negra. Well, my feeling is that something has to be 
done, and as a deterrent, a deterrent has to be present, very 
similar to Mr. Valenti's analogy to income tax. I absolutely 
agree with that. The entitlement issue that our customers feel, 
that they can go online and take that without consequence, has 
been the destructive force to my business and a lot of other 
businesses. So I am all in favor of the efforts of the RIAA 
towards this as long as obvious safeguards are taken.
    Chairman Collins. Mr. Bainwol, I want to go back to you on 
the issue of CD prices. One of your member companies, Universal 
Music Group, recently announced it was going to cut the 
wholesale price of its CDs by three dollars. Some experts 
believe that this move would help reduce the pirating of music 
from the Internet. Is that why the prices were cut? Is this an 
attempt to make music at the retail level more affordable?
    Mr. Bainwol. It is difficult for me, as an association 
chief, to speak to the pricing practices of member companies. 
As a consumer, lower prices certainly are attractive and I 
think I would leave it there.
    I do want to add one other thought, though, related to your 
first question, if I could. We try to get a message out, and in 
the absence of conflict, sometimes penetration is very 
difficult. The legal action stimulated coverage like you would 
never believe. Let me read three headlines. Newsweek: ``There 
is One More Talk You Need to Have.'' New York Times: ``New 
Parent-to-Child Chat: Do You Download Music?'' USA Today: 
``Parents Have a Hand in Song Swap Debate. The Kids All Do It, 
So Experts Say It is Up to Mom and Dad to Lay Down the Law.''
    The legal action is about setting up a deterrent, but it is 
also about making sure that parents do their duty and have that 
conversation.
    Mr. Negra. May I respond to the pricing issue?
    Chairman Collins. I was just going to turn to you for that, 
so please do.
    Mr. Negra. I don't believe that the idea of CDs being over-
priced was ever a concern or a conversation until ``free'' was 
the option. I have been in the business long enough to know 
that the value of CDs was considered, or the value of music, 
going back to vinyl, was fine. People responded to it, and 
obviously my business was strong and the business as a whole 
was strong until that option of ``free'' was out there.
    And so, yes, I mean, I am very glad that Universal is 
reducing the price, but still, paying $9.99 for a new release 
versus getting it for free on the Internet is still a no-
brainer to most kids.
    Chairman Collins. That is why I am curious about the action 
taken by Universal. Again, I was going to ask you whether you 
think it will reduce the pirating from the Internet, because I 
personally don't think it will have any impact because, as you 
just said, you are comparing it to getting it for free.
    Mr. Negra. Well, I think it is all part of the puzzle. I 
think that along with the RIAA's efforts towards deterrent and 
as far as reducing pricing and showing more value, including a 
DVD extra or whatever it takes to get people back into the 
stores, and I also believe that is one of the ways that we are 
going to determine whether the lawsuits are effective or not is 
increased traffic in physical stores as well as increased 
traffic on legitimate downloaded sites.
    I think that it is all part of pieces of the puzzle and 
that it can't be just one thing. There are a number of things, 
and lowering the prices is certainly a move in the right 
direction.
    Chairman Collins. Mr. Chairman, I will say, as someone who 
has no idea how to download music, that I am pleased to see the 
price cut. So it will make some of us who are older happy. 
Thank you, Mr. Chairman.
    Senator Coleman. Thank you, Madam Chairman.
    We do have two more distinguished panels, however. What I 
am going to do is provide an opportunity for one more 2-minute 
round. I think there are some follow-up questions that my 
colleagues have, and actually, I have two of them.
    Mr. Bainwol, Senator Levin had raised the issue of fairness 
and notification. In the present system, subpoenas are issued 
to the ISP. The individual doesn't know that they are subject 
to any investigation. The individual, in fact, may not be the 
person who was actually using it, and that is some of the 
problems that we are seeing, moms and dads, 12-year-olds, 
whatever, folks who said, ``It may not be me, it may be my 
brother or my friend.'' Do we need to--is there something that 
the Recording Industry can do voluntarily to provide more 
fairness?
    Mr. Bainwol. Yes, Mr. Chairman. As I noted in my testimony, 
there are two standards that we are living by as we go through 
this exercise. One is to vigorously advance our rights and the 
second is to try to do it in a reasonable, smart, and decent 
way. And toward that end, we would like to add one level to the 
process.
    Currently, before we go to the ISP, we do provide the ISP a 
notice that we are going to serve them a subpoena, we are going 
to issue a subpoena. So they have got that and they certainly 
have the right, if they choose, to notify the user.
    But what we are going to do in advance of filing the 
lawsuit against an infringer, and again, we are focusing on the 
egregious infringers who have downloaded something akin to what 
you see before me, but what we are going to do is we are going 
to notify folks that in a period of time, we will commence 
legal action. That gives them the opportunity to settle in 
advance of that legal action. It gives them the opportunity to 
make a case that we ought not, if that is their opinion. The 
idea is to be reasonable. We want to advance our rights and 
advance respect for property, but we want to do it in a fashion 
that is fair.
    Senator Coleman. My concern about the settlement are the 
penalties that individuals face. And by the way, many of these 
laws were passed, in the DMCA, the Digital Millennium Copyright 
Act, before the advent of peer-to-peer.
    I have two concerns about that. You have an individual, the 
little guy, a little person coming up and talking about the 
impact of being sued and they are being told that they face a 
penalty of up to $150,000 per song. Don't you think that is 
excessive?
    Mr. Bainwol. The $150,000 is law, and it is certainly not 
what we seek. What we do is leave it to the court to decide.
    But let me just make a point. If you are to go out and buy 
CDs, say they are all on sale and you got them for $9.99, you 
get 120 of them, that is a lot of money. That is $1,200, 
roughly. Many of these settlements are not much beyond that. 
And I think one could argue that if we are trying to establish 
a deterrent, and that is something we should do to be serious 
about a law, that, in fact, the penalties could be even higher. 
But nobody is talking about $150,000.
    Senator Coleman. But I think you have that threat and I am 
concerned about the excessive nature, and we talked about 
bringing things to people's attention. Public floggings would 
get people's attention, but we don't do that. I think there 
have got to be some limitations.
    Mr. Bainwol. But public flogging is not part of law. The 
$150,000 is.
    Senator Coleman. The last comment, though, as you indicated 
that you would know it is successful when the legal offerings 
are flourishing. I think it is fair to say that one of the 
problems is the legal offerings are coming back way after the 
P2Ps took hold. I mean, would it be fair to admit that the 
recording industry had not been quick enough to put on the 
table the kind of legal offerings that now we are talking 
about, and so we still haven't seen the impact of that. What I 
am hearing is promising, but P2Ps took hold way before the 
recording industry decided there should be legal offerings.
    Mr. Bainwol. The timing of this, I think, is subject to 
some debate. There is no question that it has been tough to get 
these offerings to flourish, but it is tough to compete with 
free. If you try to amass capital and raise money for a 
business proposition, it is very tough when you can go out 
there and download from Kazaa for free. So I have a pretty good 
understanding of the way marketplaces work. That is a tough 
thing to accomplish.
    Once you begin to enforce, once we begin to set an 
expectation with the Kazaas of the world, then these offerings 
have a real live chance to flourish.
    Senator Coleman. Senator Pryor, do you want to have any 
follow-up?
    Senator Pryor. I just had one quick follow-up, if I may, 
Mr. Bainwol, and that is I have heard the term, and I am not 
sure I understand how it works, but the clean state program?
    Mr. Bainwol. Clean slate.
    Senator Pryor. I am sorry, clean slate program. I can't 
read my own writing. Could you run through that very quickly 
with the Subcommittee, please?
    Mr. Bainwol. Sure. If somebody does not want to worry about 
subject to legal action, they can simply stop downloading and 
uploading illegally. That is all you have got to do, and you, 
in effect, got your own clean slate program.
    There were some people who came to us and said, we would 
like a piece of paper, a sense of certification that we can 
sleep at night. We want something that says we are OK. And so 
we made available a clean slate program that gave them the 
piece of paper, the sense of comfort, and it is at their 
request.
    There have been about 1,000 people who filed for that. 
Obviously, that is about four times the number of folks who 
have been sued so far. But I would suggest that there are 
probably hundreds of thousands, certainly tens of thousands of 
folks who have done the amnesty thing the old-fashioned way by 
stopping the illegal activity.
    Senator Coleman. Senator Sununu.
    Senator Sununu. Thank you, Mr. Chairman. I want to 
associate myself with your concerns, the remarks regarding the 
balance of the penalty. I don't hold the RIAA responsible for 
setting the $150,000 penalty, but it is important that we have 
in statute penalties that are commensurate with infractions, 
because if we don't, then they could be subject to abuse, 
although I don't know that anyone is suggesting at this point 
that RIAA has grossly misused the statute.
    Mr. Bainwol, let us stipulate that the scenario we have 
been talking about comes to pass, that your legal strategy 
succeeds, that we have dramatically reduced, if not totally 
eliminated, the incidence of illegal downloading on peer-to-
peer networks. Your offerings, as impressive as they are today, 
improve even further so that your public offerings, for sale 
offerings of peer-to-peer downloads of the best the music 
industry has to offer is thriving and utilized by countless 
music lovers across the country and across the world. Doesn't 
that still leave Mr. Negra without a livelihood?
    Mr. Bainwol. The future of music is both going to be in CD 
form and online, and that is the nature of life. If you are 22 
and under, some studies suggest that half of your music comes 
from the Internet. If you are over 23, most of it comes from 
plastic. So there is a marketplace for both.
    Senator Sununu. But in the scenario I described, the 
downturn in sales, the erosion of his business profile would be 
just the same, if not even more dramatic, would it not?
    Mr. Bainwol. I am not sure I follow that question.
    Senator Sununu. We are talking about a scenario where all 
the illegal downloading of music is replaced by legal 
downloading of music, unless you believe that someone would 
rather, instead of download it legally at the same or a cheaper 
price, actually go out of their home. So if you replace all the 
illegal downloading with legal downloading, you are still going 
to see an erosion of the business model and an erosion of the 
business that has sustained Mr. Negra and his family profitably 
for a number of years.
    Mr. Bainwol. There is an impact on the bricks-and-mortar 
side of the business if the legitimate businesses do flourish.
    Senator Sununu. Mr. Negra, your thoughts about that 
prospect?
    Mr. Negra. I can live with it. If there is a legitimate 
alternative, Mike's Movies and Music can move into an online 
service just as anybody else can. Things change.
    Mr. Bainwol. And I would add to that, a great Minnesota 
company, Best Buy, is, in fact, doing exactly that. Businesses 
are modifying their strategies so that they can take advantage 
of bricks-and-mortar, which is how some consumers want it, and 
online, which is how others, typically younger consumers, want 
it. The idea here is to get music that folks want, how they 
want it.
    Senator Sununu. Mr. Valenti, a number of different ideas 
were mentioned to deal with the illegal downloading on peer-to-
peer, a change in the default settings, filtering copyrighted 
materials, and disclosure. I think that was the third one. How 
do you get an offshore entity like Kazaa, which is the one we 
always talk about, to comply with those kinds of mandates?
    Mr. Valenti. The answer is very difficult, and that is the 
problem. By the way, Senator, $150,000--I can't speak for 
music, but for the movie industry, where the average movie made 
by the major studios to make and market costs $90 million, and 
only one out of ten pictures ever get their money back from 
theatrical exhibition, and that is how they become prey to the 
infestation of these peer-to-peer networks.
    I think at some point there is going to have to be some 
kind of legislation that will allow this country to be able to 
deal with people who get on some obscure island in the South 
Pacific and thumb their noses at legitimacy, and there has to 
be some way to deal with that. I am not prepared at this time 
to tell you how, but I think that is absolutely essential if we 
are going to have any kind of order in this country.
    But I think the question, going back to the Chairman, 
Senator Coleman, I think that you need to ask the Kazaas of the 
world. Incidentally, the interesting thing is, you go to 
business school and they tell you how you fix a profit. First, 
you have got to get cost of goods sold. Kazaa has a zero cost 
of goods sold and they are just rife with advertisements, and 
that is how they make a lot of money. I am ashamed to say that 
some segments of the U.S. Government advertise on Kazaa, which 
I think is shameful.
    Senator Sununu. I appreciate that. I am not aware of that, 
and I think that is something that would be cause for concern.
    Thank you, Mr. Chairman, and thank you for your directness, 
Mr. Valenti.
    Senator Coleman. Thank you, Senator Sununu. Chairman 
Collins.
    Chairman Collins. Thank you, Mr. Chairman. I have no 
further questions.
    Senator Coleman. With that, thank you to the panel. We are 
very appreciative.
    We will call the next panel, Alan Morris, the Executive 
Vice President of Sharman Networks Limited, the parent company 
of Kazaa, a peer-to-peer network; Derek Broes, the Executive 
Vice President of Altnet, an online business which sells 
recordings; Chris Gladwin, the founder and Chief Operating 
Officer of FullAudio Corporation; Lorraine Sullivan, the 
recipient of a RIAA subpoena and one of the targets of an RIAA 
lawsuit; and finally, another noted artist, Mr. Chuck D.
    Pursuant to Rule 6, all witnesses testifying before this 
Subcommittee are required to be sworn. At this time, I would 
ask the panel to all stand and raise your right hand.
    Do you swear that the testimony you will give before the 
Subcommittee will be the truth, the whole truth, and nothing 
but the truth, so help you, God?
    Mr. Morris. I do.
    Mr. Broes. I do.
    Mr. Gladwin. I do.
    Ms. Sullivan. I do.
    Mr. D. I do.
    Senator Coleman. Thank you very much.
    Again, we will stick to 5-minute statements by the 
witnesses and then we will do a round of questioning.
    With that, we will start with Mr. Morris.

TESTIMONY OF ALAN MORRIS,\1\ EXECUTIVE VICE PRESIDENT, SHARMAN 
          NETWORKS LIMITED, AUSTRALIA/ENGLAND/VANUATU

    Mr. Morris. Thank you very much, Senator Coleman. Thank you 
very much indeed for your leadership and the timely nature of 
this inquiry.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Morris appears in the Appendix on 
page 103.
---------------------------------------------------------------------------
    I note also holding it in this august chamber, where there 
has been very much drama, and we have just seen a bit of drama 
now. I have not recognized what I just heard. I think the 
notion that we acquired Kazaa at the beginning of 2002 just to 
make a quick buck from advertising is both offensive and naive. 
I used to run a major advertising agency network and there are 
much easier ways of doing that.
    Now, when we acquired the asset, the first thing we did was 
remove anything at all which implied, suggested or condoned 
infringement. Second, we changed a lot of the settings so that 
people wouldn't be inadvertently sharing files.
    More importantly, we engaged straightaway with Altnet, 
sitting here, to fulfill our goal. Our goal was very simple 
when we acquired the asset, and that was to become the world's 
largest and most effective online distributor of licensed 
content, and we have achieved that. We distribute more DRM-
licensed files than anybody else in the world. Along with 
Altnet, we have been responsible for making new artists become 
successful, artists successful in some countries becoming 
successful in other countries. We have been embraced by the 
video games industry. They distribute massive files very 
successfully through the Altnet network.
    And what we have recognized is that as licensed files are 
available, then people will use them. I think it is patronizing 
and unkind to say of the 60 million people worldwide that use 
Kazaa, over two-thirds of whom, by the way, are over the age of 
majority, that they would go out and steal.
    There is infringement, and let me be clear, we do not 
condone infringement. We do not condone breach of copyright. I 
have run a pay-TV company. I have worked with copyrights all my 
life. The issue here doesn't seem to be about copyrights. It 
seems to be about the control of the Internet, the control of 
online distribution.
    We approached the major labels and major studios back in 
May last year with a workable solution, the ability to 
effectively and efficiently distribute files online. We are not 
talking about an e-commerce website. We are talking about the 
mechanism which is regarded by consumer electronics companies, 
the computing industries, and academics everywhere as the most 
effective way of distributing content. And they refused to do 
business.
    Now, it shows my age, but I was around in the age, at the 
time of the VCR. I was advising the MPAA at the time. It is 
like deja vu for me, because then I heard about the fact that 
advertising on TV would die, that broadcast TV would wither on 
the vine. That didn't happen. What we saw happening, and it is 
a lesson that maybe they can learn from, was they reduced the 
windows for exposure. Because, initially, you had to wait 5 
years before you put a video out. They reduced the price and 
gradually they capitalized, and once a critical mass had been 
achieved, the motion picture industry adopted the VCR as the 
most profitable way of moving forward.
    You have raised the issue of subpoenas, and we think they 
are most unfortunate. We think that rather than serving 
subpoenas, they should address the paradox in your title. Why 
sue the people who are your customers?
    The reason the public has chosen peer-to-peer isn't this 
naive notion that they are all criminals. I really don't 
subscribe to that. Sixty million people are not criminals. 
Thirty million in the United States are not criminals. The 
reason is that it allows them to access files in the most 
effective way.
    We promote independent artists. We distribute the material 
from upcoming bands worldwide, and these are the gold files 
that are at issue. People find that the peer-to-peer mechanism 
as opposed to the website mechanism is the most effective. 
There is a 95 percent efficiency in terms of distribution. Mr. 
Valenti talked about 4 years hence, being able to download 
large files using new technologies. We can offer those 
efficiencies today.
    So I would ask the industry, why don't they license to us? 
It is my firm belief that this notion of copyright, important 
as it is, is a smokescreen. They sought to control the 
distribution of video material. They have demonstrated, the 
RIAA and the MPAA, and not necessarily the entrepreneurial 
heads of labels, they have always sought to control. And maybe 
this is the one technology they feel they can't.
    Is there anybody in this room that honestly believes that 
peer-to-peer will go away? I could say their worst nightmare 
would be that responsible companies like ourselves and Altnet 
cease to operate, because then people would be driven to the 
darknets. These are the encrypted networks that are very 
difficult to detect. Or they would use the other means of the 
Internet, which they do anyway, for accessing infringing 
material. People have talked about downloading from the 
Internet, and that is true. It is not just about peer-to-peer.
    So we would say very simply to the entertainment industry: 
Serve consumers, not subpoenas. Why litigate when they could 
and prepared to license to us? They were prepared to license to 
Altnet. Their attorneys told them not to.
    Senator Coleman. Thank you, Mr. Morris. Mr. Broes.

  TESTIMONY OF DEREK S. BROES,\1\ EXECUTIVE VICE PRESIDENT OF 
    WORLDWIDE OPERATIONS, ALTNET, WOODLAND HILLS, CALIFORNIA

    Mr. Broes. Thank you. I would like to submit my written 
testimony into the record.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Broes appears in the Appendix on 
page 115.
---------------------------------------------------------------------------
    Senator Coleman. It will be entered in its entirety, 
without objection.
    Mr. Broes. Thank you. First, I would like to start by 
saying that we do not condone copyright infringement. It is 
illegal.
    I am a copyright owner. I have managed an Academy Award-
winning actor and produced multi-million dollar films. As a 
technologist, I have worked for the RIAA and the MPAA on this 
very subject.
    I would like to read you a quote. ``It is not in our 
national interest to ban what you cannot see, to prohibit what 
you do not know, to turn your back on what you cannot 
measure.'' Those are the words of a man who cares deeply for 
copyrighted intellectual property. They are the words of Jack 
Valenti's recent testimony before a Congressional Committee 
earlier this month. The words are profound. They do not, 
however, reflect his industry's actions.
    A closed mind is so intent on salvaging the status quo that 
it fails to embrace the potential of change. Our Nation is 
founded on the principles of accepting change, and having 
vision is one of our Nation's greatest attributes, whether it 
is a black student entering an all-white school and breaking 
the status quo for a great America, or our Nation's vision that 
space exploration is critical to future global needs. I fear, 
what kind of Nation would we be if we neglected to see the 
potential of desegregation or if we thought the moon was too 
far away and offered us nothing more than dust and rocks.
    It is both vision and an open mind that brings me here 
today. It is the love of creative works that fuels Mr. 
Valenti's argument, and I don't think anyone can argue with 
that. We agree that copyright is in peril and we agree that 
something must be done.
    Both the film and the recorded industry are building a 
business around peer-to-peer. They are inserting files into P2P 
networks in order to displace illicit files being traded. They 
are gathering information about users' appetite for specific 
artists so they can exploit that knowledge and guide marketing 
dollars in the right direction. They are evaluating technology, 
with great attention paid to the viral aspects of its users and 
their ability to distribute a single file to millions of users 
across the world without much cost at all, or effort.
    The facts that they have discovered should be an 
encouraging sign of future business growth. I am certain that 
creative executives that run the entertainment companies are 
excited at the thought of a larger distribution platform, and I 
am also equally certain that the attorneys managing these 
companies are fearful of losing control of distribution rather 
than entrusting technology and users to provide their new 
global channels.
    I can tell you with great confidence that the entire 
entertainment industry believes that peer-to-peer is the single 
most powerful distribution tool they have ever seen. The MPAA 
states that 400,000 to 600,000 films are being distributed 
every day on peer-to-peer. How much would it cost to distribute 
that many DVDs and could you do it in a day?
    With the industry's cooperation, Altnet could exceed that 
number and provide it securely and in a manner where we would 
assure that all parties were fairly compensated. If you can 
imagine a few years from now a blossoming music industry and a 
growing film market in line with other historical technological 
adoption, both would be exceeding past revenues. Can you 
imagine that? L.L. said they are dreamers. We are dreamers.
    The MPAA has urged Congress not to close the legislative 
door on any new technological magic that has the capacity to 
combat digital thievery. I would argue the same. I would ask 
Congress to encourage the industry to explore all sources of 
technological magic to combat the issue. I would ask Congress 
to encourage the industry to explore an open mind, including 
the solution that has been proven to increase revenue, mitigate 
piracy, displace illegal pornographic material, and proven to 
empower the industry and artists alike.
    Altnet's technology easily enables any content owner from 
the music, software, film, game industry to publish their 
content into Altnet's secure distribution platform. These files 
are displayed in a prioritized listing in the top slots of the 
user's returning search results. Any illicit file being traded 
will be pushed deeper into the system, since the licensed file 
is now taking up a very valuable slot in that system. Once 
downloaded, the user attempts to play the file. The digital 
rights management reaches out to deliver a license. The content 
owner maintains how they license and the rules surrounding a 
specific piece of content.
    As you will read in my written testimony, Altnet is 
leveraging its role as a market leader by spearheading efforts 
to establish a viable business model for peer-to-peer 
providers, content owners, and users, while at the same time 
having the highest regard and respect for the rights of each of 
the parties concerned. It is very effective.
    If the industry is truly enlisting the greatest 
technological minds to find a means to battle piracy 
technologically, we are right here. We are even in the same 
room.
    Ignoring the solution just because you don't understand it 
is a disservice to those almost one million men and women that 
work to create movies and music. They are counting on the MPAA 
and the RIAA to find a solution.
    Senator Coleman. I would have you sum up, Mr. Broes. Your 
time is up.
    Mr. Broes. Yes. If the industry truly wants to find a 
solution to piracy and as not just a way to control the vast 
distribution networks of the future, they would not ban what 
they cannot see. They would not prohibit what they do not know. 
And they would not turn their backs on what they cannot 
measure. Thank you.
    Senator Coleman. Thank you, Mr. Broes. Mr. Gladwin.

  TESTIMONY OF CHRIS GLADWIN,\1\ FOUNDER AND CHIEF OPERATING 
          OFFICER, FULLAUDIO, INC., CHICAGO, ILLINOIS

    Mr. Gladwin. Good morning. I am Chris Gladwin, founder and 
Chief Operating Officer of FullAudio, the company behind the 
MusicNow digital music service. I would like to thank the 
Subcommittee for scheduling this hearing and taking the time to 
address some important issues in the future of digital 
entertainment.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Gladwin appears in the Appendix 
on page 123.
---------------------------------------------------------------------------
    I started MusicNow 5 years ago with the purpose of creating 
an Internet-based music service that would improve the way 
people explore and enjoy music. MusicNow is an independent 
company without any financial support from record labels or 
traditional music industry executives. In our 5 years, we have 
worked through many difficult issues with major labels and 
music publishers to create the first licenses for interactive 
music services and to build a service that consumers are 
willing to pay for.
    We have always expected this business would be a challenge, 
but we never expected to be challenged by competition from 
black market networks that confuse consumers about intellectual 
property rights, that takes money from music fans without 
compensating creators, and that seem to thrive in the absence 
of law enforcement. In this challenging environment, MusicNow 
absolutely supports the recording industry's aggressive action 
in defense of its intellectual property.
    Other witnesses will testify, and are testifying, that 
copyright and music licensing laws are so outdated that the 
only reasonable alternative is a compulsory license that strips 
from creators their ability to manage their own creative works. 
MusicNow believes otherwise, that the basic foundation of 
copyright law is sound and that though some of the rights and 
technologies are complex, these complexities should not cloud 
the reality of how our industry must collectively proceed in a 
legitimate manner.
    Other witnesses will tell you that the record labels 
illegally or unreasonably withhold licenses. I will tell you a 
different story, that the recording industry and the companies 
in it have been slow to recognize the change in technology and 
consumer behavior around us, that the recording companies tried 
for several years to control the future of technology and 
consumer behaviors, and that as a result, they are exceedingly 
difficult to negotiate with at a time when MusicNow and several 
legitimate companies are trying to help them reach consumers 
with viable services.
    But speaking as one independently funded music service 
provider who is in the market of selling services, it is 
possible, although very difficult, to license digital music. 
Apple, RealNetworks, the new Napster, MusicMatch, BuyMusic.com, 
AOL, Dell, Amazon, and others offer or will soon offer digital 
music services that compete with MusicNow. MusicNow and several 
competitors have licensed interactive digital distribution 
rights from all five major labels, major publishers, as well as 
several independent labels and publishers. Using these 
licenses, MusicNow has developed Internet-based music services 
that enable consumers to play music on demand, to play Internet 
radio stations, to subscribe to music, and to buy music that 
could be burned onto a CD or transferred to a portable device.
    Black market network companies that complain that they 
haven't received licenses from music owners haven't worked hard 
enough to establish sensible business models nor to establish 
themselves as reputable business partners by not facilitating 
piracy.
    Another issue raised by this Subcommittee and by advocates 
is whether the RIAA's anti-piracy enforcement efforts have been 
over-aggressive or anti-consumer. Rather, I would suggest your 
concern should be whether these enforcement efforts may be too 
little, too late, whether they are adequately supported by 
Federal law enforcement, and whether the consumer education 
efforts behind this anti-piracy campaign are sufficient.
    Enforcement is valuable for a specific deterrence of bad 
behavior, but it is perhaps more important as a public 
education tool. The public needs to clearly understand that so-
called, ``peer-to-peer sharing'' of music is stealing and it is 
wrong and it will be prosecuted. The public also needs to be 
aware that several legal alternatives exist for acquiring 
digital music. We call on the RIAA, Congress, music companies, 
musicians, and the press to at least match the attention they 
have given to black market networks with an equal level of 
attention and support for legal services.
    Congress must also do its part. Two years ago, the U.S. 
Copyright Office reported to Congress suggesting changes in 
copyright law for digital online music, but neither the House 
nor the Senate has acted. We urge the Congress to consider 
these recommendations and to modernize our copyright laws for a 
digital age.
    MusicNow and other legitimate Internet music companies have 
built great services which offer hundreds of thousands of 
songs, including new releases and back catalog. Collectively, 
we have several hundred thousand paying customers who 
demonstrate that there are viable alternatives to stealing 
music online.
    I believe in the inherent ethics of the American people, 
and we prove that every day by signing up paying customers. 
However, in order for the United States to enjoy the benefits 
of our cultural creators and of a vibrant and healthy digital 
media industry in the 21st Century, we must establish and 
enforce property rights for digital media just as we did for 
manufactured goods in the 20th Century. Thank you.
    Senator Coleman. Thank you, Mr. Gladwin. Ms. Sullivan.

     TESTIMONY OF LORRAINE SULLIVAN,\1\ NEW YORK, NEW YORK

    Ms. Sullivan. Good afternoon, Mr. Chairman and Senators. In 
August 2003, I was sent a very confusing letter by my cable 
provider alerting me that they had been subpoenaed by the 
Recording Industry Association of America for my personal 
information for copyright infringement. I immediately called 
the phone numbers listed on the subpoena for the RIAA and the 
lawyers, but wasn't able to reach anyone. My customer service 
from the cable provider told me not to worry about the matter, 
that I would probably just receive a cease and desist order. 
However, that turned out not to be the case.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Sullivan appears in the Appendix 
on page 130.
---------------------------------------------------------------------------
    On September 9, 2003, I came home to four messages on my 
answering machine from reporters asking me for statements in 
response to being sued by the RIAA. After recovering from that 
shock, I immediately tried to contact the RIAA and the person I 
reached explained the charges and that they could range between 
$750 and $150,000 per song. He followed that up saying that the 
goal of the RIAA was not to ruin your life and make you 
bankruptcy.
    Actually, it felt like that. He said a letter would come 
with the summons. It would explain how I could settle the case 
out of court. He said a settlement would be in the low 
thousands and it would probably be worth it to put it all 
behind me and get on with my life. He referred me to Pat Benson 
and advised me not to seek her advice, as she was not my 
attorney.
    I phoned Pat Benson. She told me that if I settled, I would 
get settlement papers detailing a mutually agreed upon monetary 
settlement. I then asked the exact number and she quoted 
between $3,000 and $4,000. She said I probably heard about a 
12-year-old who had settled for $2,000, but informed me that 
that had been a special case, since Brianna's mother was on 
public assistance. This particularly upset me, because I 
thought since I worked so hard for many years and waited until 
my mid-20's to go to college and I am not on public assistance, 
my case is different. I couldn't understand that implication. I 
asked if the settlement had to be paid in one lump sum. She 
said yes, accepting increments would not be feasible.
    At this point, I was crying and told her that all I had was 
$1,500 to my name. I explained that I was already in debt, a 
full-time student. I also explained I had taken out student 
loans, but they had almost all gone to my tuition and expenses. 
She asked me if I could ask my parents for money, to which I 
replied no. She asked if there was anyone else I could go to 
and I said no. She asked if I had credit cards at that point. I 
told her I did, but they were pretty close to their limits, but 
perhaps I could inquire about cash advances.
    I was explaining to her that this was all pretty stressful 
and she said that nobody likes to be the heavy. She said she 
would go to her clients to see if they would be willing to 
accept less than $3,500 from me.
    Two days later, she told me that they had accepted the sum 
of $2,500. I had come up with $2,100 at that point. She told me 
that the paperwork would be sent out. I would have a week to 
look it over and send it back with a certified check. I created 
my website seeking advice or help from the 60 million or so 
other download users. It helped me raise $600 in donations 
towards my settlement. I actually received my summons on 
September 18, 2003, when they were hand-delivered to my 
address.
    I feel that I have been misled as a consumer of music. 
Particularly misleading is the advertising that Sony has for 
their mini-disks. In the commercial, you see a blue-headed 
alien encouraging a couple hundred friends to copy the play 
list he has created. Is it any wonder why other consumers such 
as me found and actually still continue to find it confusing? I 
mistakenly imagined that since Kazaa was still up and running, 
while Napster had been forced to close down, that the 
downloading I was personally responsible for was OK.
    I compared my actions to recorded songs on the radio. As 
far as I was concerned, the music I downloaded was for home 
personal use. I in no way financially benefited from nor 
intended to make a profit from this music. To me, copyright 
infringement actually pertained to the people in Chinatown who 
were hawking bootlegged and fake CDs on the street corner.
    I have taken responsibility for my part in all this. I 
fully realize that ``I didn't know what I was doing'' is 
certainly not a valid defense. Still, I am very upset with the 
way that the RIAA, and their unfairness in handling the 
subpoenas and lawsuits. Where is the due process of law?
    I resent the invasion of my privacy, being named publicly 
without any warning whatsoever and also being unfairly targeted 
and having to choose between paying a settlement I can barely 
afford or to deal with the stress of litigation and potentially 
being held responsible for a couple million dollars in damages.
    The RIAA manner of investigating is severely lacking. They 
may not seem to care how responsible the person listed on the 
IP address actually is for the crime they are accused of. They 
go through all the trouble to make press statements, but do not 
follow up on actually researching how egregious each user is. 
They could have at least informally gotten in touch with me 
before knowingly unleashing a media storm upon my head.
    Supposedly, though I never actually read one, the RIAA sent 
out instant messages of warnings to people. This doesn't make 
sense to me. If I am not the one who is actually on Kazaa at 
the time, how can they ever be sure it got to me? With all the 
people who have come and stayed at my apartment, including 
subletters, roommates, family members that I have had, it would 
be nearly impossible to monitor everyone and everything, and I 
wonder why they didn't send a letter in my name to address me 
personally and make me aware of their intentions. I would have 
ceased and desisted on the spot. I would have made sure all my 
household members did the same. Surely, a courteous letter 
would bring about a much quicker result than a complaint filed 
in court, but they never gave me that chance to protect my 
privacy.
    I have been a music fan all my life and until recently had 
still bought CDs of the artists I love because I do wish to 
support them. But until the RIAA stops targeting unwitting 
victims, I am not going to buy any more CDs and I know many 
consumers feel the same. The personal invasion of privacy, the 
financial punishment and personal stress I have suffered seem a 
very hefty price to pay.
    I settled my lawsuit, gained a whole education of what is 
really at stake here, and now my main concern is that this 
situation not happen to other people. It is not fair to anybody 
not to be duly warned nor to have a chance to answer the 
charges against them. We need to change the system without 
creating new victims, and I hope that change starts here.
    Senator Coleman. Thank you, Ms. Sullivan. Thank you for 
your courage to come forward today. Mr. D.

 TESTIMONY OF CHUCK D, RECORDING ARTIST, AUTHOR, ACTIVIST, LOS 
                      ANGELES, CALIFORNIA

    Mr. D. Good afternoon. I see there is less of an audience 
than the first panel. Maybe they are getting their picture 
taken and autographs.
    I repeatedly come to you as an artist, a fan, a father, and 
a technology buff. I feel that we should go forward, that we 
want to go forward, that as technology prevails, it giveth and 
it taketh away, and the industry knows this. The horseshoe 
makers probably got upset at the train manufacturers because it 
took away their transport dominance, just as the train 
manufacturing business probably got mad at the airline 
industry.
    I think this expands artistry and it is about adjustments. 
And if the Internet reaches the world, then maybe we should 
think about becoming more worldly, and if P2P reaches the 
world, we should think the same. We shouldn't just detach 
ourselves from the planet for the sake of just having American 
business.
    As this pertains to the music, the industry has lost sense 
of its humbly beginnings while being hypocritical at the same 
time. The fans have gotten hold of the technology before the 
industry. Just like once upon a time the photography business 
thought they could make a killing on the exclusivity, and all 
of a sudden, portable cameras came out. We still have a viable 
photography industry. People still take their pictures. They 
make a living. Maybe they don't make a killing. Maybe that 
should be the theme of American business.
    Companies digitized. Record companies digitized in the late 
1970's and the early 1980's and they let the genie out of the 
bottle then, and they knew it was an unprotected format, 
digitizing signals and waves so they could raise the prices as 
hardware and software companies merged. And so it is difficult 
to define the crime alongside the technological innovations 
that move faster than the domestic legal corralling of that 
industry.
    I speak at many colleges. They know it is a crumbling 
economy. Increasing tuition. The college student would rather 
have Wendy's and lunch than try to buy an expensive CD.
    The collusion of five record companies and four radio 
networks and TV outlets is becoming issues of the FCC, and as 
it pertains to artists, it stifles the growth of grassroots 
businesses from the bottom up to the top. I think this is a 
great way to expose across the planet. I call it a new 
accessible radio. In fairness, performance fees might have to 
take place of the mechanical fees that companies and artists 
seem to think that they miss.
    As an artist representing an 80-year period of black 
musicianship, I never felt that my copyrights were protected 
anyway. I would sign a contract and my lawyer would tell me, 
this goes out to the world and the universe. So that means when 
I get to Venus, why should Universal get the rights when they 
can't be there themselves? If I could get to the Ukraine with 
my copyrights, then it should be up to me with my flexible 
business plan.
    I have been spending most of my career ducking lawyers, 
accountants, business executives who have basically been more 
blasphemous than file sharing and P2P. I trust the consumer 
more than I trust the people that have been at the helm of 
these companies.
    I have been told by Universal themselves that, Chuck, you 
have sold millions of records for us, but you will never 
receive a dime from us again in lieu of spending money on my 
behalf and marketing and promotional fees that had to clear the 
high hurdle that the collusion formed in the first place. So 
they say it costs money to promote, but they create the 
standard that costs so much for the artist to get exposure to 
the marketplace. That is what got me involved with file sharing 
in the first place. It is controlled and the usual names and 
suspects want to maintain it.
    In all fairness to my friend, L.L. Cool J and Leo Cohen, I 
was there at rap music and we know the beginnings of it, with 
the machinery, the turn tables, the drum machines, and the 
hypocrisy of the contracts and what built the damn thing in the 
first place is forgotten since some people have become the 
haves looking at everybody else like they are the have-nots. 
They used music that was previously copywritten music in the 
first place to make the music that form the companies that 
makes this guy sell his company for $160 million. Music was 
sold and exchanged at swap meets, flea markets. Illegal tapes 
were sold to build and promote the music in the first place in 
the 1980's and in the 1990's.
    And as far as rock and roll, blues licks were taken from 
the Mississippi Delta without authorization so people could 
spend $180 to check out the Rolling Stones do it all over 
again. So the record industry is hypocritical and the 
domination has to be shared.
    P2P to me means power to the people, and let us get this to 
a balance, and that is what we are talking about.
    Senator Coleman. Thank you, Mr. D.
    I am going to come back in reverse order and come right 
back to you, Mr. D. I asked L.L. Cool J about the new artist, 
somebody coming up. You have the recording industry and you 
have technology that is offering these new opportunities out 
there, but at some risk. What advice do you give somebody 
coming up?
    Mr. D. To learn all of the above, to at least have control 
of their business model and make sure it is flexible, and to be 
able to use these exposures to the best of their ability. You 
have to reach the fans, and in the businesses in both film and 
music have gotten away from the people. I mean, people wouldn't 
use it if it wasn't out there in the first place. When it comes 
down to it, blank CDs--CDs are still selling. They are just 
blank.
    And it all brings us back to the table. This is the same 
bullet and gun as the K-Mart argument. Best Buy sells computers 
and blank CDs. So the consumers come in and say, wow, this is a 
technology that the music business and the film industry did 
not come up with in the first place. We came up with it. What 
do you expect them to do?
    Senator Coleman. What about the artist who is taking the 
other path? Don't they have a right to do that and don't they 
stand to lose?
    Mr. D. What other path?
    Senator Coleman. The path of saying, I am working with a 
recording company. This is the way I am going. I have got a 
copyright. I produced something. I should get paid for that.
    Mr. D. If there was honesty in that neo-plantationistic 
attitude of a company telling the artist exactly, like you 
signed a worldwide contract, but we can't sell CDs in Africa. 
We can't sell CDs in the Ukraine. Then it should just be a 
domestic contract. The problem is, is that the lawyer that 
negotiates for the artist many times is on the same side as the 
record company and they flip back and forth. So the artist 
never, ever knows the truth. So their trust in the companies 
has been defaulted for the last 80 years anyway. What other 
choice for innovative artists do we have?
    And what other choice does a new artist--I will tell you 
what is going on, because it is also combined with the FCC. If 
an artist comes out of Phoenix and wants to get played on 
Phoenix radio, they have got to get signed by the major 
companies in order to get played back in Phoenix to their 
demographic. That is crazy.
    Senator Coleman. Thank you, Mr. D.
    Ms. Sullivan, when you were first notified that you were 
being sued and you had a conversation with the folks from the 
RIAA, or at least directed to them, and you were told there was 
a potential of a $150,000 penalty, what did you feel?
    Ms. Sullivan. I was horrified, because the first thing I 
thought of was, well, that is it. My life is over. I will have 
to file bankruptcy. I won't be able to get a house. I mean, 
those were the fears that immediately came into my mind.
    Senator Coleman. Before this, you talked a little bit about 
Napster and that it is gone, and that Kazaa is still there. You 
figured this may be legal. You go into the store and you see 
the CDs that are available. Had you seen anything from the 
RIAA, anything from the recording industry about the evils of 
downloading?
    Ms. Sullivan. No, I haven't, but I don't watch a lot of 
television. I listen to CDs that I buy. I don't really listen 
to the radio. So no, I really hadn't seen anything that they 
had put out there, I guess.
    Senator Coleman. What do your friends say now? How did they 
react? Do you know folks who still download, and have they been 
moved one way or the other?
    Ms. Sullivan. Not my close friends and family. As soon as I 
told them, they all immediately put a stop to what they were 
doing, and most of them feel the same way I do, which is that 
they don't want to buy CDs anymore. They feel like this is so 
unfair, that until it changes we are not going to keep buying 
the music or the product.
    Senator Coleman. Thank you, and again, thank you for your 
courage in coming forward.
    This question, I am going to put to all three of the 
gentlemen there. I am trying to understand whether this thing 
is solvable, whether, in fact, you can work with the recording 
industry to approach a workable solution. I got a sense from 
Mr. Gladwin saying, yes, I am going to work with the industry. 
We have got that worked out. Mr. Broes and Mr. Morris, you have 
got a different perspective.
    Can you help me understand the division here? What is 
missing, and in your own words, why is it easier for Mr. 
Gladwin to do what he is doing, but Mr. Broes and Mr. Morris, 
you still see some difficulty in reaching that workable 
solution.
    Mr. Broes. Well, I think that there are two issues here. 
There is about commercializing the Internet from a film and a 
music industry point of view. This is about maintaining their 
existing relationships and distribution channels. I understand 
that is a very delicate balance. They have to maintain their 
relationships with Best Buy and they have to appease those and 
I understand that.
    But we also have an issue of peer-to-peer networks and it 
is precisely why I got involved in it in the first place. I was 
hired to investigate peer-to-peer networks on behalf of the 
RIAA and the MPAA. In fact, I was hired to investigate Kazaa, 
which I did. When I saw the technology, I saw how powerful it 
was, I encouraged them to exploit that technology, and the 
approach, the only solution from a technology standpoint that I 
saw was commercializing that in the same way that Yahoo and 
Google has commercialized their search results.
    When you type in ``Tom Cruise,'' you get 20,000 sites that 
were essentially pirating Tom Cruise's name, and they would be 
pornography sites and such. They started selling those search 
results and pushing those illigal results deeper. They are 
still there, and they are still as illegal as they ever were, 
but they are just very difficult to get to.
    And so as far as from a technology standpoint, the solution 
is commercializing peer-to-peer networks. It is not colluding 
with the enemy, and that has been our goal from day one.
    Mr. Gladwin. With all due respect, I think there is some 
misunderstanding of what the real issue is. The real issue is 
not peer-to-peer technology. We have technology that we 
actually think is better than peer-to-peer. There are other 
companies like us that offer licensed, legitimate digital music 
on the Internet that have similar approaches.
    We don't have a problem figuring out how to distribute 
hundreds of thousands or tens of millions of legal songs. That 
is not the problem that the industry is looking for a solution 
for. The issue here is copyright law and compensating owners 
for their works.
    FullAudio and similar companies approached the music 
industry and said, look, we would like to work out an 
arrangement where we fairly compensate owners and copyright 
owners. And by taking that approach, we have been able to get 
those licenses.
    Mr. Morris. You talked about paradox. Derek is responsible 
for negotiations in the USA and I am responsible for 
negotiations in the rest of the world, and we have companies in 
India's ``Bollywood,'' a major distributor of films outside the 
United States. We have independent artists and companies in the 
UK. We have 30,000 emerging artists.
    You asked Chuck D how should a new artist go. Thirty-
thousand emerging bands have distributed license content 
through Altnet. You can go to Altnet and for $99 you can 
distribute your content in a licensed way on KMD. That is how 
easy it is to do it. So the paradox I have is when everybody 
else recognizes--and I think it is reasonable to presume, also, 
that, as Derek said, many people in Hollywood recognize that 
this is the best method in terms of efficiencies and in terms 
of being a chosen method for distributing.
    Why won't they license the content? I know it is hard to 
negotiate. We have no difficulty with that; we were set up to 
do that. There has got to be another reason, and people have 
always said this is probably about control.
    Senator Coleman. Thank you, Mr. Morris.
    Senator Pryor, you have been here. I am going to recogize 
the presence of the distinguished Ranking Member, but I will 
defer to you for your questions first.
    Senator Pryor. Go ahead.
    Senator Levin. You have been here consistently. You go 
ahead.
    Senator Pryor. All right. Well, let me run through my 
questions because I certainly want to hear from Senator Levin, 
as well. He always has great questions.
    Mr. Morris, you mentioned a couple of times, I believe, in 
your statement and in answering questions that this is, at 
least today, the most efficient and effective way to distribute 
music. Tell me about your traffic count, so to speak. Are you 
increasing or decreasing in the number of people who are using 
your site?
    Mr. Morris. Are you talking about in the last month or two?
    Senator Pryor. Yes, just in the last, say, 6 months or so.
    Mr. Morris. Data would indicate that there has been the 
normal seasonal drop. As I say, I used to run a TV company. We 
all know what happens in the summer, and there was a drop at 
the beginning of the holiday period; there always is. It looks 
as though it is coming back, so we don't see significant 
reductions or changes other than those we would expect.
    Given, also, that the growth of P2P has been nearly 
exponential over the last 3 years, even though I am a 
statistician by background, projecting what it would be this 
year isn't a perfect science. But it doesn't look as though 
there has been a massive reduction. That is my best guess.
    Senator Pryor. You seem to be kind of on track with where 
you thought you might be? Is that fair?
    Mr. Morris. Well, we might be in terms of number of 
instances of the application downloaded, yes; in terms of the 
critical mass of users, yes; in terms of having licenses so 
that those users can access the content they want, no.
    Senator Pryor. I am not as familiar with your site as maybe 
I should be, but when someone comes on your site, they have 
different choices. One thing they can do is they can download 
your software. Is that right?
    Mr. Morris. Yes. I will very briefly talk you through it. 
People are referred by friends or they go on to one of the 
portal sites or whatever. If they go to CNET Download, which is 
one of the major sources, they will be given the option of 
downloading. The applicaiton will be described in a standard 
way in terms of size, etc. The application is downloaded. There 
is a very full disclosure then, and as I testified at another 
place in this building, we work very hard to make sure that it 
is very difficult for anybody to share that which they don't 
wish to share.
    So all the defaults are set basically with big yellow signs 
saying ``Do you want to share this?'' So the application is 
then installed on the computer in the way in which any 
application would be, and then it is used. So the site is 
purely a way by which people obtain the application.
    Senator Pryor. Now, that application you are talking 
about--is that software that you have created?
    Mr. Morris. There are two aspects to the software. One is 
the underlying protocol. Just as HTTP is the protocol used on 
the Internet, there is a peer-to-peer protocol, and we have the 
graphic user interface which plugs onto that. So we have 
acquired that. The user interface is ours.
    Senator Pryor. Now, is that software that you have 
copyrighted or protected in some way?
    Mr. Morris. It is, indeed.
    Senator Pryor. Let me ask you this question. Does anyone 
pay for music on your site?
    Mr. Morris. Yes.
    Senator Pryor. OK, and how does that work?
    Mr. Morris. That works through Altnet.
    Senator Pryor. Some do, some don't, or is that by the 
artist, or how do you know?
    Mr. Morris. The Altnet mechanism--and I will just explain 
it very briefly, if I may--is that when somebody searches for 
content and there is a DRM-protected and licensed file, that 
file, as Derek says, will be displayed first. The content owner 
then has complete control over the terms under which that file 
is then licensed.
    They may well say somebody can play it for 3 days. They may 
well say you have to pay straightaway. They may well say this 
is promotional. I should say that the upcoming software 
release--the things that we are doing in terms of making it 
even more creative and more effective for users are increasing 
even more.
    So that file has allowed the content owner, in negotiation 
with Altnet, to set their own terms. If you go to the Altnet 
site, you can actually do a click-through. For $99, you can put 
your own material up there, and it will say what level of 
security do you want, what licenses do you want, etc.
    The important issue, of course, is--and this is where the 
efficiency of P2P comes in--that gold file sits in somebody's 
shared folder and we have a program with Altnet which 
encourages, like a frequent-flyer program, the sharing of these 
gold files, something which Altnet funds.
    If somebody then searches that file and finds it from a 
peer and downloads it, that file is still protected. The DRM 
still works. So that file will again go back to the DRM server 
and say what are the terms for me to see this? That is why P2P 
is so efficient. Instead of downloading each one each time, the 
distribution is dealt with by the network.
    Senator Pryor. Well, they are downloading it each time, but 
are they paying for it each time?
    Mr. Morris. Yes, they are.
    Senator Pryor. Can you tell us how that works?
    Mr. Broes. They pay through a payment gateway that we have 
provided, so I will give you just a very basic scenario. If you 
download one of our files or you type in an artist's name, you 
double-click the file and you download it. When you open that 
to play, a window will pop up and say, this is the artist, and 
say it is 99 cents or 49 cents, or whatever the price that the 
content owner has set.
    You enter your credit card, or we have other systems that 
allow you to receive a telephone call. It will be a recording 
of the artist on the line saying thanks for downloading my 
product, press 1 to confirm your purchase. The license is 
acquired. Now, that file is free for them to play.
    In the interest of paying, I think it is important to note 
that we are distributing close to 35 million licenses of legal 
content, of licensed content, every single month, and that is 
without having the major labels' content. We also do this for 
the game industry, as well, and do the same function for 
software. We distribute up to 30,000 licensed games right now, 
including many games from some of the major gaming companies 
like Atari.
    They understand how this mechanism works and they are 
ecstatic that they can provide the game on our company's peer-
to-peer network in the same fashion that they do in the stores, 
but without having to pay for the packaging and the wrapping, 
and they sell it. These are big files; these are one-gigabyte 
files and they sell for $50, and people put their credit cards 
across the line. And let's keep in mind, I am also competing 
with free. So if I can compete with free and succeed, then the 
industry certainly can.
    Senator Pryor. But are you saying that every single person 
that accesses your site is actually paying in some way or is 
entering into a licensing agreement in some way with musicians?
    Mr. Broes. There is a choice that individuals make. When 
they see a gold file, they choose to purchase it. When they 
download that gold file, they choose to purchase that file.
    Senator Pryor. Yes, but is every single person doing that?
    Mr. Broes. Well, if every single person were doing that, I 
would be distributing more than 35 million files a month. Let 
me put it this way: If I can put the industry's content--if the 
labels licensed me their content as they have licensed iTunes 
and BuyMusic.com--if they license me that music and I put it 
into the system in a secure fashion, I guarantee you that every 
single one of those users will purchase those files. Some 
won't, and maybe then that is the time for the stick approach. 
We are saying that there is a carrot-and-stick approach for the 
solution.
    Senator Pryor. That is all I have, Mr. Chairman. Thank you.
    Senator Coleman. Thank you, Senator Pryor. Senator Levin.
    Senator Levin. Thank you, Mr. Chairman.
    First, a question for Mr. Gladwin. I am trying to 
understand some of the technology, also, here. Is it 
technologically possible for a software developer to include in 
online software the capacity to block a person who has 
downloaded the software from subsequently using it, like a 
turn-off switch?
    Mr. Gladwin. Yes. That is not only technically possible, 
but it is standard industry practice. There have been a number 
of instances where AOL, Prodigy, and other services 5 or 10 
years ago started that practice.
    Senator Levin. Now, Mr. Morris, let me ask you whether or 
not your company can cut off people who are violating your end 
user agreement's prohibition against downloading copyrighted 
material.
    Mr. Morris. We have no knowledge and control over users, in 
the same way that Microsoft doesn't know who has a copy of 
Outlook or whatever. So, technically, it isn't possible.
    Senator Levin. So you disagree with Mr. Gladwin's answer?
    Mr. Morris. Yes.
    Mr. Broes. I would like to add a piece of this, because 
prior to Altnet I was the CEO of Vidius, which I said had done 
some work for the MPAA and the RIAA on peer-to-peer, 
specifically Kazaa. We practiced interdiction. We invented many 
of the technologies that they use today--interdiction, blocking 
the files. We also were involved in spoofing files, putting 
files out there to try to disguise them in certain ways.
    What I found was it is not impossible. It is certainly 
possible from an outsider's standpoint, when you can recognize 
someone sharing. The difference is we have a real issue 
identifying, without question, that the file that they have is 
specifically the one--for instance, I don't want some 15-year-
old or some 12-year-old boy to make a movie in his backyard 
called ``Gladiator'' and I start interdicting and blocking that 
file because of the name, that it is called ``Gladiator.'' So 
the process to verify those files is very extensive and it is 
not cost-effective when you are looking at trying to prevent 
the piracy.
    Senator Levin. You have the ability to do it, though?
    Mr. Broes. Do we have the ability?
    Senator Levin. Technologically, the ability is there?
    Mr. Broes. Sure. The ISP can shut down that individual user 
if you notify them. Of course, they can.
    Senator Levin. Do you disagree with Mr. Morris' answer that 
they cannot technologically do that?
    Mr. Morris. I think we are answering two different 
questions.
    Senator Levin. Well, I asked a question of Mr. Gladwin and 
he answered the question yes. I asked the same question of you 
and you answered no. So I tried to ask the same question.
    Mr. Morris. My understanding of your question, Senator, is 
you asked, if a person had downloaded the Kazaa Media Desktop 
application--that having happened, was there any way in which 
we could technically stop that person from using the 
application.
    Derek, you would agree that that is impossible?
    Mr. Broes. Yes.
    Mr. Morris. I think you are answering a slightly different 
question.
    Mr. Broes. Yes. I was answering the question, is 
interdiction possible.
    Senator Levin. Here is my question. I will repeat it. Is it 
technologically possible for a software developer to include in 
online software the capacity to block a person who has 
downloaded the software from subsequently using it, like a 
turn-off switch? Mr. Gladwin's answer was yes.
    Your answer, Mr. Morris?
    Mr. Morris. No.
    Senator Levin. Now, it is the same question, Mr. Broes. So 
we don't have a problem of answering different questions. We 
have a problem of answering the same question the opposite way. 
I don't want to argue which is correct.
    Mr. Broes. Sure, I understand.
    Senator Levin. But in any event, if you could have that 
capability, would you use it, Mr. Morris?
    Mr. Morris. That is a hypothetical question.
    Senator Levin. It sure is.
    Mr. Morris. I mean, first, we don't. Second, to Derek's 
point, I think that there is a myth around that somehow you can 
identify what a file is. There are many promotional files out 
there. There are files that are misnamed. The provenance of a 
file is very difficult to identify.
    So there are two problems in my answering your question. 
First, could we be certain that people were infringing? Second, 
could we switch them off? And the answer to both is no.
    Senator Levin. So you would not use that technology even if 
it were technologically possible?
    Mr. Morris. If it were technologically possible, which is 
bounded by the laws of physics rather than anything else, then 
in answer to the first question, I don't know if we would use 
because we would have to be certain if we were to use it that 
the files could actually be identified. So I can't answer the 
question, sir.
    Senator Levin. How do you enforce your prohibition that is 
in your agreement against users infringing on copyrights?
    Mr. Morris. My understanding--and you must know I am not an 
attorney--is that EULA, which is pretty standard----
    Senator Levin. That what?
    Mr. Morris. Yes. EULA, the end user license agreement--
sorry I slipped into jargon there--is a permissive one. What it 
says--this is the interpretation of our attorneys--is that if 
people carry out the permitted acts, then they are licensed. 
They are not licensed when they carry out non-permitted acts. 
So it isn't a matter of revoking the license. The license 
doesn't exist if they carry out prohibited acts.
    Senator Levin. Let me read you your agreement, your EULA. 
``Your rights under this license will terminate immediately and 
without prior notice if you violated any terms of this license. 
. . .'' It sounds to me like it is going to terminate, which is 
not what you just described.
    Mr. Morris. I am advised by our attorneys--and I don't 
know, Senator, if you are an attorney.
    Senator Levin. Well, I am an attorney, but I also am just 
reading your agreement. I mean, the fact that I am an attorney 
isn't relevant to my question. The agreement is very clear that 
the agreement will terminate. ``Your rights under this license 
will terminate immediately and without prior notice if you 
violate any terms of this license, including violating any 
applicable laws or rights of any third party, including the 
intellectual property rights of any such third party,'' which 
is very different from what you just said.
    Mr. Morris. These honor agreements are common.
    Senator Levin. These what?
    Mr. Morris. Honor agreements.
    Senator Levin. This isn't a real agreement? This is an 
honor agreement?
    Mr. Morris. These are honor agreements.
    Senator Levin. Which means----
    Mr. Morris. They are common throughout the Internet. They 
are click-wrap agreements. Because we don't know who the users 
are, because we can't technically control them, they are called 
honor agreements.
    Senator Levin. Which means they are not worth the paper 
they are written on?
    Mr. Morris. I wouldn't say that, sir.
    Senator Levin. Well, what would you say if they are honor 
agreements?
    Mr. Morris. I would say that honor is respected.
    Senator Levin. They are not enforceable, though?
    Mr. Morris. It is not enforceable. I don't believe that 
because something is not enforceable, it shouldn't be set down.
    Senator Levin. If you had the power to enforce it, would 
you?
    Mr. Morris. So what you are saying, if I may paraphrase, is 
if a court of due competence judged that somebody was in breach 
of a law or an obligation--Is this what you are saying?
    Senator Levin. No. I am asking a question. If you could 
enforce it, would you?
    Mr. Morris. If we could enforce it, would we? My answer is 
if the court of due competence stated that there had been an 
infringement, then we would certainly look at it.
    Senator Levin. My time is up. Thanks.
    Senator Coleman. I want to follow up with a couple-minute 
follow-up. I sense that there are some follow-up questions that 
Subcommittee Members would like to ask.
    Mr. Morris, let me raise the question with you about 
notifying users that copyrighted material is illegal. One of 
the concerns that has been raised is when one goes on Kazaa, 
the notice that this is illegal is not prominently displayed.
    Is there a reason why you wouldn't want to more prominently 
display that? Is there any thought about doing that?
    Mr. Morris. As I said, when we acquired www.kazaa.com and 
the Kazaa Media Desktop, the first thing we did was to take it 
all offline, strip it down, change the EULA to which your 
colleagues refers, and put in those prominent notices.
    You are saying, could they be larger? I suspect that there 
is a debate with designers about how large something has to be. 
We would certainly consider making it more prominent if that 
will be beneficial, but there is no magic in the size.
    Senator Coleman. Mr. Broes, do you want to respond?
    Mr. Broes. Yes. I think I can do one better than just 
notifying those users. I would like that when they type in 
``Eminem'' to find licensed songs that they can purchase from 
Eminem, and to replace that and let them know right away that 
this is a legal file and displace all those illegal files. I 
think that is more powerful than you are doing the wrong thing.
    Senator Coleman. We are getting to whether we can get long-
term solutions here, which is licensed material online.
    Mr. Broes. Yes, absolutely.
    Senator Coleman. And let me ask just one other kind of 
technical question. Mr. Morris, apparently there are updated 
versions of Kazaa, which I think are actually better in terms 
of identifying this stuff. But I have been told that 
penetration is still pretty light, that folks aren't 
transferring over. How do you get folks to transfer over to an 
updated version? What kind of penetration do you have?
    Mr. Morris. Again, because we don't know specifically, it 
is anecdotal, but the evidence seems to be from our technical 
director that over a relatively short space of time--we are 
only talking about months--that about 90 percent of people will 
upgrade. The reason the application is so popular is that we 
worked very hard on it. It is smooth. It works very well. We 
put a lot of features in there. And particularly since the 
relationship with Altnet, by including things like the 
channels--there is a hip-hop channel, the emerging artist 
channel, which I mentioned--there are major incentives to 
people to upgrade.
    So we can't make people upgrade, but all the evidence 
suggests that, over a relatively short space of time, most do. 
Some will not, because some people always stick with what they 
are with, but over time, that tends to be a small proportion.
    Senator Coleman. Great. Thank you. Senator Pryor.
    Senator Pryor. Mr. Chairman, if it is OK, I would like to 
allow Senator Levin to proceed with his questions and his 
follow-ups and I may have a few follow-ups after that.
    Senator Coleman. Senator Levin.
    Senator Levin. I am just curious about--we are trying to 
find out more about your company. It is normal for most 
companies and corporations that are incorporated in the United 
States, for us to get a feel as to who these folks are and it 
is public information. You are incorporated, or your parent is 
incorporated in Vanuatu?
    Mr. Morris. Indeed, yes.
    Senator Levin. We have got a lot of experience with that 
particular jurisdiction, not particularly positive. When I say 
``we,'' I mean the Subcommittee. It is a very secretive 
jurisdiction, incorporates companies within 24 hours of 
request. It allows companies to set up websites to conduct 
business without requiring residency, directors, shareholders, 
or a registered office in the country, according to our State 
Department. It has been named by our State Department as a 
country of money laundering concern--that is a State Department 
issue--due to the excessive secrecy laws, weak anti-money 
laundering enforcement, other problems. It licenses offshore 
shell banks.
    This is a problem with Vanuatu that we have had as we have 
gone through some investigations. It characterizes itself as a 
tax haven, one of seven countries on an international list up 
until a few months ago of uncooperative tax havens. It has been 
removed from that list after promising to increase 
transparency.
    I am just curious why you are incorporated there. What is 
your--I am trying to figure out who owns your company. Most of 
that information should be public, if it were an American 
corporation, but why Vanuatu?
    Mr. Morris. I think there is a perception in the States--
this is my observation--that offshore is somehow something----
    Senator Levin. No, Vanuatu specifically. Why Vanuatu?
    Mr. Morris. Because it is the closest island to Australia 
and that is where we are----
    Senator Levin. Why not Australia?
    Mr. Morris. We are registered in Australia. The service 
company is registered in Australia.
    Senator Levin. Your parent company, the beneficiaries, the 
trust, the owners could be----
    Mr. Morris. No, that is incorporated in Vanuatu.
    Senator Levin. Why not Australia?
    Mr. Morris. Sir, the same reason that major banks, media 
companies, and others are--Australian companies are 
incorporated in Vanuatu, for tax savings.
    Senator Levin. They are tax havens.
    Mr. Morris. Yes.
    Senator Levin. Are you----
    Mr. Morris. Major banks, major companies do exactly the 
same thing. It is a much more common thing than it is in the 
States. It is the same way that people register in Delaware.
    Senator Levin. Are you able or willing to share with us the 
ownership of your company, your parent company?
    Mr. Morris. The ownership of the company is a matter of 
record in Federal deposition.
    Senator Levin. The trust beneficiaries who truly own the 
company, is that a matter of public record?
    Mr. Morris. Sir, it is a matter of record in deposition. I 
am not an owner or shareholder of that company, so I cannot 
speak on behalf of the company.
    Senator Levin. The information you make reference to in 
depositions is under seal. Would you be willing to make that 
public?
    Mr. Morris. Without advice, I can't do that. This is a 
subject----
    Senator Levin. Would you let us know?
    Mr. Morris. It is a subject of litigation, as you know, by 
a particularly aggressive foe, so I would need to take 
advisement.
    Senator Levin. Would you let the Subcommittee know whether 
you would be willing to do that, for the record?
    Mr. Morris. Yes, certainly. I will liaise with the relevant 
staff.
    Senator Levin. And the balance of my questions, I will save 
for the record in light of the time. Thank you, Mr. Chairman. I 
thank all of our witnesses.
    Senator Coleman. Thanks, Senator Levin. The panel is 
excused. Thank you very much.
    Senator Coleman. The final panel is Dr. Jonathan D. Moreno, 
Director of the Center for Biomedical Ethics, University of 
Virginia, Charlottesville, Virginia, and James DeLong, Senior 
Fellow and Director, Center for the Study of Digital Property, 
The Progress and Freedom Foundation in Washington.
    Pursuant to Rule VI, all witnesses before the Subcommittee 
are required to be sworn, and gentlemen, will you please stand. 
I ask you to raise your right hand and repeat after me.
    Do you swear the testimony you give before the Subcommittee 
will be the truth, the whole truth, and nothing but the truth, 
so help you, God?
    Mr. Moreno. I do.
    Mr. DeLong. I do.
    Senator Coleman. Thank you. You can sit down.
    There are no rock stars at this panel, but the discussion, 
I am sure, will be very worthwhile.
    Mr. Moreno, it is a pleasure to see you. You may proceed.

   TESTIMONY OF JONATHAN D. MORENO,\1\ DIRECTOR, CENTER FOR 
  BIOMEDICAL ETHICS, UNIVERSITY OF VIRGINIA, CHARLOTTESVILLE, 
                            VIRGINIA

    Mr. Moreno. Thank you, Senator. Good to see you. This has 
been a fascinating colloquy this morning. I spend most of my 
time worrying about matters of life and death and the paradoxes 
and contradictions of taking care of people under extreme 
circumstances when moral values are in conflict. Although this 
is not specifically perhaps a matter of life and death, it is 
obviously of grave concern to people who make their living.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Moreno appears in the Appendix on 
page 134.
---------------------------------------------------------------------------
    I am reminded, in thinking about analogies for the ways in 
which ethical change is created by technological change, of my 
mother's situation 46 years ago. My mother was diagnosed with a 
chondrosarcoma when she was in her late 40's. Her arm was 
amputated. She lives to this day, I am happy to say. She is 86 
years old. But she was not told her prognosis by her doctor, 
and that was very common 50 years ago for cancer patients not 
to be told their prognosis.
    As the technology changed and we began to have more control 
over the course of a disease, the consumer, the patient, 
insisted on having control over information. So we have an 
interesting analogy here of the way that in health care, 
technological change has created moral change. Fifty years ago, 
it was thought that doctors would be unethical to tell a cancer 
patient their prognosis. Today, we clearly don't feel that is 
the case, and just the opposite.
    Having said that, today, I come before you not as a 
bioethicist but as a social ethicist. In one sense, the 
question before us in social ethics is straightforward. As has 
been said this morning, to intentionally take that which does 
not belong to you is to violate the social contract. 
Intellectual property is a form of property and intellectual 
theft is a form of theft.
    Yet if our goal is not merely to be punitive but to craft 
an effective public policy, as we know, the law is a 
notoriously blunt instrument. There are many social behaviors 
in which the rigid application of the law is not only 
ineffective in solving the underlying problem, but may actually 
aggravate the problem by encouraging offenders to find 
ingenious new ways to use technology, in this case, to evade 
authorities or decrease their buying of legitimate CDs.
    Prosecution may also be disproportionate to the value of 
its loss, up to $150,000 in fines in this case. It may be 
seemingly arbitrary in its selection of targets. Making an 
example of a few people for the sake of deterrence makes many 
Americans uncomfortable. Or the prosecution may be erroneous. 
Files may be misidentified by ISPs.
    Furthermore, if powerful and distant entities that control 
a highly-valued item, like music, institute legal measures that 
are widely perceived as draconian, they may encourage 
disrespect for law, especially among young people. Still more 
complex situations like this in which the culture itself is 
evolving in tandem with technological change.
    Here is the underlying problem. Many people with otherwise 
healthy moral intuitions fail to see Internet file sharing as 
theft, or if they do, they do not perceive it as wrong, or at 
least not very wrong. I have spoken to a lot of my students 
about this in the last few days and I can tell you this is the 
case.
    The lawsuits themselves may not, in fact, send a moral 
message. They may teach people that this is theft, but they may 
not teach them that it is wrong. And it may not teach them--the 
lawsuits may not teach them that this is not worth the risk of 
prosecution.
    Of course, we have heard that the pricing structure of 
compact disks is widely resented because the blank CD is so 
inexpensive. I went to Office Depot yesterday and I looked at 
blank CDs for 50 cents or less. And downloading can be 
accomplished with ease. But these facts don't explain the moral 
psychology underlying this phenomenon. What is the psychology 
of guilt-free file sharers when they know that it is theft and 
when these are not evil people?
    I think there are a number of explanations. First, and this 
is a complex phenomenon, those who are victimized are moral 
strangers. They are not known to us. They are distant. They are 
unknown to us as individuals. The engineer, the janitor in the 
factory, the studio musician, the record store clerk, they are 
not known to us. Harms to moral strangers don't easily excite 
our guilt.
    Second, consumers have become accustomed to the portability 
and transferability of music, partly because of successful 
marketing by the industry.
    Third, as someone alluded to, unlike familiar forms of 
copying a record, as in the case of bootleg audio tapes, a copy 
never needs to be a physical object. It doesn't need even to be 
put on a CD but can remain in electronic form. Physical 
associations with theft may be absent.
    Now, the very term file sharing, fourth, file sharing is an 
interesting term. It connotes altruism and community. In 
particular, many adolescents find a sense of community more 
easily in the World Wide Web than in the rest of their lives. 
In this case, what seems to be an impersonal, wealthy, and 
imperious industry places itself in opposition to this 
otherwise positive value.
    Now, these factors don't justify theft. File sharing, 
though, is misunderstood as simply an attack on a concept of 
private property. It is primarily a demand for access to a 
highly-valued social commodity, a demand triggered and 
facilitated by technology.
    A new interpretation of the social contract in this area, 
Mr. Chairman, may be emerging, and industry and the law must 
take note. Thank you.
    Senator Coleman. Thank you, Mr. Moreno, and Mr. Moreno, 
your full statement will be entered into the record without 
objection. Thank you. Mr. DeLong.

 TESTIMONY OF JAMES V. DeLONG,\1\ SENIOR FELLOW AND DIRECTOR, 
  CENTER FOR THE STUDY OF DIGITAL PROPERTY, THE PROGRESS AND 
               FREEDOM FOUNDATION, WASHINGTON, DC

    Mr. DeLong. Thank you, Senator. It is a pleasure to be here 
today, particularly with Dr. Moreno, because I think the 
ethical dimensions of this whole issue are absolutely 
fascinating, and endless, I might add.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. DeLong with an attachment appears 
in the Appendix on page 136.
---------------------------------------------------------------------------
    I would like to emphasize just one point here, and that is 
that this is a class of problems called prisoner's dilemma, in 
which, obviously, the interest of each individual consumer is 
in free-riding and getting music for free. But, equally 
obviously, everyone cannot free-ride and get music for free. 
And so the collective interest is in having functioning 
markets, functioning property rights that deliver the music and 
other intellectual products as efficiently and as cheaply as 
possible.
    Now, there is a tension between those two because everyone, 
in pursuing their individual interest of getting it for free, 
then tends to destroy the social system. We have all sorts of 
ways of compensating for prisoner's dilemma problems. The 
social contract analogy was used by Dr. Moreno, and I think 
that is very applicable. And what we use primarily are markets 
and property rights and then some enforcement as a way of doing 
this.
    But this highlights, I think, a fundamental point, and that 
is a great deal of what I read somehow seems to assume that 
there is a conflict here between producers and consumers and 
that consumers have some right to get things for free and that 
in some way, when you make them pay, you are inhibiting their 
interests. It isn't so. My interest as a consumer is in making 
my voice, my pocketbook, felt in the marketplace in buying 
things and in giving the incentives to producers to actually 
make the things that I want to buy. If I don't have any way of 
buying something, of actually giving money to the producers for 
it, obviously they don't do it, and you and I do without.
    So at the moment, what is going on is that we have this 
huge backlog of music that can be looted because it is already 
there. But if you think about it in terms of not even very 
long--in terms simply of a couple of years down the road, it is 
rather obvious this can't go on very long because there will no 
longer be the production.
    Starting from there, it is fairly clear where we want to 
get on this. The difficulty is in figuring out how to get there 
and the outlines of a solution.
    There must be legitimate online services that wring the 
unnecessary transaction costs out of the deal. You can send 
bits over fiber optic cable very cheaply. It is much more 
expensive to put them on plastic and send them around the 
country by truck. So inevitably, the prices have to come down, 
legitimate services have to be there, and the people have to 
perceive it as being fair.
    If I were a student and a downloader, I might well take the 
position that it was up to the industry to get these services 
online. Once they did get them online, I would be glad to pay 
for it. Until that time, there is this firehose of stuff going 
by and I am going to drink from it. That is exactly the 
attitude of some college students I have talked to, mostly 
children of acquaintances and such.
    This is both good news and bad news. They can be brought 
around to a paid system, once it is there, and they can see 
their ethical obligation to support the industry. Some of them, 
in fact, even make a point of downloading some things and then 
going out and buying some CDs to sort of make the moral balance 
proper.
    The second thing, there must be digital rights management 
control over the downloading so that you can allow people to 
pay for different levels of use, so people can pay for a single 
use, multi use, or put it in their library.
    There has to be education, not just in the form of saying 
downloading is wrong, but education in the form of saying, that 
this whole system depends on the market and on reciprocity. I 
know I am showing my age, but I remember when you could walk 
down the street in Boston or Chicago, walk by a newsstand, and 
there would be a pile of newspapers with a cigar box on it. You 
took a paper, tossed your money in, and then eventually the 
operator would come around and pick up the money. I haven't 
seen that in some time. That is a form of social reciprocity 
that works, or did work.
    And then, finally, there has got to be some enforcement, 
and I know the RIAA people here are obviously not happy with 
what they have been forced into, but they have to do it to send 
a message to the downloaders, to send a message to people who 
want to invest in the legitimate services, and also to disrupt 
the system. They are trying to get the downloaders to get 
themselves into a position where they are willing to download 
but not upload, because that will destroy the system. If people 
think, well, I will take, but not give, it won't last very 
long.
    So I think the solution is in prospect, but it may take 
some time and pain to get there and I certainly hope this body 
helps us do it. Thank you.
    Senator Coleman. Thank you, Mr. DeLong.
    I actually would have hoped that this panel may have 
preceded the other panels. It is, I think for me, very 
worthwhile to hear what I am hearing, which is that in the long 
run, we can work it out, there is a solution here. Our 
challenge, it appears to be, in the short run, is whether the 
strategies being employed or strategies in effect generate any 
change in behavior.
    One of the witnesses talked about the dark net and there 
are other variations of technology that could push this stuff 
further and further away. I am a parent and I have a 17-year-
old and a 13-year-old and it is a place I don't want them to 
go, so how do we deal with that?
    So the question that remains is certainly the short term. 
Let me just kind of throw it out to both of you. One of the 
witnesses, Lorraine who is the subject of a subpoena and a 
suit, talked about facing $150,000--someone telling her, you 
can face a $150,000 penalty. I presume that has got to be 
pretty daunting to somebody who is struggling to make ends 
meet. Understanding the RIAA had to do something, and I think, 
by the way, they got great benefit out of this discussion. A 
lot of discussion. A lot of people who knew before, or who may 
not have known at all--know now that there is a problem.
    But I still worry about that kind of heavy hand--that 
penalty sitting out there. How do lawmakers try to figure out 
what is the right balance? How do we, sitting up here--I don't 
know whether it is $150 a song, or $150,000. Is there a way to 
get a better sense of what kind of balance, what kind of 
authority can you give somebody to enforce their interests but 
not let it be too heavy-handed?
    Mr. Moreno. Well, I think that a psychologist would 
probably tell you that you don't need a $150,000 threat in this 
case to give somebody a disincentive. You can get just as much 
bang for your buck, as it were, with a lot less bucks involved. 
So there probably is some recrafting of the law, the copyright 
law, required for this kind of situation. My guess is, again, 
that much of it--this is a disincentive that is really 
horrifying and it seems to strike fear into the heart of 
anybody that thinks about it and just seems to be way out of 
proportion.
    Senator Coleman. Mr. DeLong.
    Mr. DeLong. Yes. I think, clearly, the lack of 
proportionality is a problem and the penalty was set for other 
circumstances than this. It was set for people engaging in mass 
piracy.
    Senator Coleman. Right.
    Mr. DeLong. But I notice that there has been a scaling down 
by the RIAA itself, and I think certainly by the courts. They 
figure they aren't going to get anything except--I think what 
Mitch Bainwol said was the price of the CD.
    I might add, generally, there has been a huge increase in 
criminalization in this country, just one offense after another 
made into very hefty criminal penalties, and I think this is 
something, in general, that this body should look at very 
closely. It is getting to be a severe problem in a number of 
areas.
    Mr. Moreno. Can I add, Senator, also, that there was a 
little discussion earlier about the carrot approach as well as 
the stick. It strikes me, as a consumer, I have only seen one 
instance in which one of these public service announcements was 
used, and it was in a movie theater about a couple of weeks ago 
with my wife, I saw it.
    Mr. DeLong. Yes.
    Mr. Moreno. It was pretty effective. They had a recording 
engineer who said, ``I am a working guy and I am afraid of 
losing my job.'' But I haven't seen the industry use its 
ingenuity and its resources that it uses to sell its products 
and develop them in the same way to create this public 
education campaign. I just haven't seen it.
    Senator Coleman. Do you think that kind of public education 
campaign can be effective when you have a generation of kids 
who don't think that they are doing anything wrong?
    Mr. Moreno. Yes.
    Senator Coleman. I am trying to get into the mindset of 
that 13-year-old, or think that--and maybe it is not--you made 
a distinction, I have got to get it, between--what was it----
    Mr. Moreno. Realizing it is theft but not thinking it is 
wrong?
    Senator Coleman. Right. Help me understand that.
    Mr. Moreno. Well----
    Senator Coleman. And in understanding that, talk to me then 
about things that would actually flip the switch that says, 
hey, I shouldn't be doing what I am doing.
    Mr. Moreno. I think the key is the concept of the moral 
stranger. The recording engineer, I thought was pretty 
effective, a regular guy. But what about the recording 
engineer's 13-year-old? What if you put the recording 
engineer's child on the screen--and this kid said, ``My dad 
came home the other day and said he might lose his job because 
my friends in school are downloading and file sharing.'' That 
would be a very powerful message, and I am sure it is 
happening.
    But I think, somehow, we have to use these images to make a 
connection, a living connection, to the experience of people 
who are affected, not the industry CEOs and the rock stars, but 
the actual folks. I think the industry is smart enough and 
creative enough to do this, but I think they haven't done it 
yet.
    Mr. DeLong. I think, also, you see a tremendous amount of 
demonization of the movie industry and the recording industry 
in particular. As far as I know, they are just normal, good, 
greedy American industries trying to make money and have fun at 
the same time, and they are no worse or better than anybody 
else, or than any other institution.
    But it is like there has been almost--the academic left is 
a bit opposed to property rights generally, including 
intellectual property rights, and it is like there is an effort 
to give people license to rip these people off because they are 
nasty people and, therefore, go ahead. It seems to me that in 
educating if you can get across this point that you are 
injuring your fellow consumers by not doing your share, because 
you are not helping to pay for this and not helping to produce 
it, that is an important educational message.
    Senator Coleman. But, Dr. Moreno, following up on that 
point, your last comment in your oral testimony, not your 
prepared testimony, was the note of a new interpretation of the 
social contract is emerging and the industry and law must take 
note. I don't know whether you are part of that academic left 
or anything, but---- [Laughter.]
    Mr. DeLong. Present company excepted. [Laughter.]
    Senator Coleman. Is there a sense that perhaps our notion 
of what our property rights, traditional property rights may, 
in fact, be changing? Should they be changing? Talk to me a 
little about that.
    Mr. Moreno. Actually, that comment was only addressed at 
the instant case, namely the music industry, and I actually, 
with due respect to one of the Senators who is not here, I am 
not persuaded that this is the first step in a slippery slope, 
an attack on the concept of copyright or private property. I 
don't think that is what is going on here, and I actually think 
that music itself is a different case from film.
    Film takes 90 minutes to 2 hours to watch. You can't walk 
around on the street watching a movie unless you want to bump 
into things. Music is different. We can walk around. We can 
take a minute, 2 minutes to listen to a song.
    So I actually think that the social contract that I am 
referring to is really about access to music and the 
transformation of musical imagery, auditory images into 
digitization. That is what I am talking about.
    Mr. DeLong. I think that is a very interesting point. I 
think music is somewhat special, although the movies are 
getting downloaded. The video game industry has been quite 
successful at maintaining a sense of community and hasn't been 
hit as hard. Now, part of that may be simply downloading time, 
but it is very interesting to talk to them about it. They have 
some interesting ideas.
    Mr. Moreno. And in that case--this is a good example. My 
son, years ago, even when he was in middle school, would play 
these video games with other kids online. He had a community of 
friends online that he would play these--and he still does, 
with anonymous people playing chess. The file sharing business 
in music is analogous, I think, in some respects.
    Senator Coleman. Both of your testimonies indicated a 
prospect for this thing being resolved down the road. Any sense 
of how long it will take the market to kind of sort all this 
thing out? And--I will leave it at that. Any best guess as to 
how long it takes to bring these sides together, the peer-to-
peer folks saying, hey, we are ready to step this forward. We 
want to make this happen. The music industry says, we are ready 
to step forward, ready to make it happen. Obviously, that 
hasn't happened and the focus today are 12-year-old kids or 71-
year-old grandmas or Lorraine who was here. So what is your 
best guess of how long that takes?
    Mr. DeLong. I am optimistic. I think with iTune coming on 
and MusicMatch and the others, they are getting their act 
together on that and the downloading services is the biggest 
piece of the puzzle. I would say a couple of years.
    Mr. Moreno. I was going to say within 5 years. Capitalism 
is about innovation, and innovation is stimulated by losing 
money. [Laughter.]
    So I think this is going to move along pretty well. I was 
going to say 5 years, but I will take 2 years.
    Senator Coleman. We will put that in an envelope and we 
will open it up in 2 years.
    Mr. Moreno. Oh, oh. [Laughter.]
    Senator Coleman. I want to thank you both very much for 
your presence here. Your full testimony will be entered into 
the record as part of the record.
    We will keep the record open for 3 weeks for additional 
questions from other Senators on the Subcommittee.
    So with that, this hearing is adjourned.
    [Whereupon, at 1:08 p.m., the Subcommittee was adjourned.]


                            A P P E N D I X

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