BUTERA & ANDREWS

Attorneys at Law

1301 Pennsylvania Avenue, N.W.

Washington, DC 20004-1701

Telephone (202) 347-6875

Facsimile (202) 347-6876

 

Philip S. Corwin

pcorwin@butera-andrews.com

 

 

 

 

 

 

                                                                                                February 26, 2002

 

Senator Joseph R. Biden, Jr.

221 Russell Senate Office Building

Washington, DC 20510

 

Dear Senator Biden:

 

            I am writing to you in your capacity as Chairman of the Senate Foreign Relations Committee. We represent Sharman Networks, which last month acquired certain assets of KaZaA BV, including the KaZaA.com website and the KaZaA Media Desktop Software, as well as the license for the FastTrack P2P Stack[1]. Sharman believes that the utilization of peer-to-peer (P2P) software applications is essential to generating the consumer demand for broadband connectivity that is required if the U.S. is to successfully make the next great digital leap forward.

 

            We are compelled to express our great distress at the one-sided and unsubstantiated attacks on KaZaA that took place at the Committee’s February 12 hearing, coinciding with the release of its Report titled “Theft of American Intellectual Property: Fighting Crime Abroad and at Home”. We are deeply offended by the gratuitous accusations made against KaZaA by witnesses before the Committee, including ludicrous attempts to associate an extremely beneficial, next-generation software program with organized criminal gangs and even terrorist organizations. We believe, as outlined below, that U.S. Courts will find the KaZaA software to be legal under current copyright law, and that our client is devoid of any civil, much less criminal, liability. We also wish the Committee to be aware that:

 

The Committee Report

 

            At the outset, we must comment on the ironic incongruity of permitting the Recording Industry Association of America to testify at a hearing focused on the “Theft of American Intellectual Property”. After a decade of rampant consolidation, five major labels that collectively control nearly ninety percent of the industry’s output dominate the recording industry. Four of the five members of this recording industry oligopoly are not U.S. companies but subsidiaries of foreign-based multimedia conglomerates.[2] These companies, which dominate the RIAA’s policy-making process, routinely strip U.S recording artists of all copyrights in their creative output as a standard aspect of the industry contract. Indeed, the industry recently succeeded in persuading Congress to strip even solo artists of the right to regain control of those copyrights, after the 35 year wait mandated under current law, by altering copyright law to classify all sound recordings as “works for hire”. Congress subsequently reversed this action and restored the status quo ante when vigorous artist protests brought the realization that this was hardly the mere “technical” clarification the RIAA had claimed it to be.

 

            The Committee’s Report asserts that “The music industry has also been victimized by piracy….user-friendly, piracy-enabling websites like…KaZaA in the Netherlands, allow users all over the world to download music illegally at no expense”. It continues: “Certainly, the pervasiveness of Napster’s successors…indicates the extent to which the music industry has already been victimized by online piracy; indeed, illegal downloading of songs is now at its highest level ever, despite any chilling effect brought about by the industry’s suit against Napster and, as noted earlier, is becoming more difficult to prosecute because of decentralization.” The only citation providing any documentation for these allegations is contained in footnote 38 of the Report, citing a “Judiciary Staff Briefing with the Recording Industry Association of America, January 14, 2002”. We are frankly shocked that the Committee would issue a Report suggesting conclusions on matters that are currently in litigation in the U.S. District Court for the Central District of California,[3] in which the court has yet to issue a single substantive ruling, based solely upon the assertions of the trade association representative of parties on one side of that dispute.

 

            Contrary to recording industry allegations that this alleged “piracy” is hurting sales of compact discs (CDs) and other recorded media, the industry’s problems are almost entirely self-inflicted[4]. Billboard magazine, the industry’s leading trade publication, recently reported:

Many attribute the album sales decline to the growing popularity of CD burning, but no hard data exists to back up that claim. Others attribute the decline to the label-led deliberate annihilation of the singles configuration….retailers argue that singles are an essential tool for encouraging young consumers to buy music, and since the labels mostly refuse to release hit songs on the format, that group is turning to the Internet to download pirated copies of those tunes or asking friends to burn the more costly albums that contain them….In looking at album sales by configuration, CD album sales increased last year….On the other hand, the cassette’s decline appears to be a reason why overall album sales declined last year, as titles released in the format  experienced a precipitous drop to 49.4 million units.[5] (emphasis added)

 

            This article makes clear certain facts that were probably not shared with Committee staff when they received the RIAA briefing:

 

·        CD sales increased in 2001 despite the recession. There is no documented evidence that music file-sharing has had any negative impact on record sales. Indeed, many experts believe that the song sampling facilitated by this activity actually stimulates such sales.

·        Overall recording industry sales would probably have been substantially higher if the industry had not unilaterally decided to severely curtail its own release of CD singles and audio cassettes. Indeed, the article cites file-sharing as a probable consequence of the industry’s singles cutback, rather than a cause of any decline in sales.

·        The only technology cited as possibly displacing record sales is that of CD-R burners, which are now routinely packaged with new computers[6] as well as sold as separate peripherals. Combined annual sales of these devices now number in the millions, while those of the blank CDs used by consumers as recording media are geometrically higher[7]. These hardware devices allow the creation in minutes of an exact, full-quality copy of an entire record album, whereas file-sharing generally involves individual songs in the radically compressed and therefore somewhat lower audio quality MP3 format. Yet the recording industry continues to litigate against file-sharing software companies and attempt to scapegoat them for its current difficulties (which are largely a result of its growing inefficiencies), as they apparently find small, underfunded technology startups more tempting litigation targets than the large information technology hardware and software firms that produce and actively market CD-R burners and related programs.

 

Copyright Law Framework

 

            As you are aware from your prior service as Chairman of, and continued service on, the Judiciary Committee, copyright law is extremely complex and its application to digital technologies is still in a state of uncertainty and judicial flux. Nonetheless, we are confident that self-organizing and -generating P2P file-sharing software applications such as that provided by KaZaA will be found by U.S. courts to be in conformity with all applicable law. When a consumer downloads the free KaZaA software that user subsequently decides whether and to what extent he wishes to share any files, of any type, from his own computer’s hard drive. All subsequent contacts and exchanges between KaZaA users take place on a direct basis, with no intervention or facilitation by KaZaA. KaZaA does not provide a centralized file index. Moreover, notwithstanding the recording and motion picture industries’ repeated assertions to the contrary, KaZaA has no ability to monitor, much less control, file exchanges between individual users. Indeed, even if KaZaA the company were to cease operations at this instant, the KaZaA software would continue to function and propagate.

 

            The applicable legal standard for judging the copyright compliance of new mass-market technology for a variety of uses (“staple articles of commerce”) was articulated by the Supreme Court in the 1984 Betamax case.[8] In that landmark case, the movie industry attempted to block the distribution and sale of videocassette recorders (VCRs). Fortunately for both the movie industry[9] and the American consumer, the Supreme Court stated:

[T]he sale of copying equipment, like the sale of other articles of commerce, does not constitute contributory infringement if the product is widely used for legitimate, unobjectionable purposes. Indeed, it need merely be capable of substantial noninfringing uses. The question is thus whether the Betamax is capable of commercially significant noninfringing uses. (emphasis added)

 

            There can be no doubt that P2P software is capable of myriad noninfringing uses. Moore’s Law, which postulates that computing speed and capabilities will double every 18 months, is being proven again as the typical personal computer acquires the attributes of traditional network servers in terms of processing speed and hard drive storage. This new capability allows individual PC users to move beyond being mere passive recipients of information and content from central servers; it is the essence of the true interactivity possible in this new era of the distributed network environment. As a ubiquitous broadband network connects these powerful computing and storage devices, P2P software applications are emerging as the next step in the natural and inexorable evolution of the Internet. Indeed, just three months ago RIAA President and CEO  Hilary Rosen conceded that P2P technologies have this substantially noninfringing capability, stating:

 

The multiple exciting applications of P to P that are being discussed over these few days show the limitless potential of the technology in multiple ways. The ability to achieve cost savings on storage and bandwidth, the web tools, the meeting applications, the communications applications, the customer service applications are all extremely exciting.[10]

           

Indeed, among the many exciting and substantially noninfringing uses for which

P2P software is being utilized are the compilation and distribution of:

·        more than 4,500 public domain books and documents for Project Gutenberg,

·        government publications,

·        authorized media content, and

·        public domain software.

 

            Moving from the Betamax case to the Napster decision[11], there is little wonder that the record industry is unable to capitalize on that latter ruling to halt the use of P2P software – because the decision makes clear that the distribution of such software, in and of itself, is noninfringing. In its ruling, the 9th Circuit first referenced the Supreme Court’s holding in the Betamax case, stating:

 

The Sony Court refused to hold the manufacturers and retailers of video tape recorders liable for contributory infringement despite evidence that such machines could be and were used to infringe plaintiffs’ copyrighted television shows….The Sony Court declined to impute the requisite level of knowledge where the defendants made and sold equipment capable of both infringing and “substantial noninfringing uses”.

We are bound to follow Sony, and will not impute the requisite level of knowledge to Napster merely because peer-to-peer file sharing technology may be used to infringe plaintiffs’ copyrights….

We depart from the reasoning of the district court that Napster failed to demonstrate that its system is capable of commercially significant noninfringing uses….The district court improperly confined the use analysis to current uses, ignoring the system’s capabilities….Consequently, the district court placed undue weight on the proportion of current infringing uses as compared  to current and future noninfringing uses….To enjoin simply because a computer network allows for infringing use would, in our opinion, violate Sony and potentially restrict activity unrelated to infringing use.

           

            As this excerpt makes clear, Napster’s P2P architecture, as opposed to the service that Napster operated, was found to pass muster under the Betamax standard. Indeed, this standard is critical if new information processing, storage, and transmission technologies are to avoid being crippled or killed at birth by the content industry’s pervasive protectionism.

 

Napster ran afoul of the law due to its operation of a central file-indexing service that provided it with specific knowledge of specific infringements by specific users of its service. The Appeals Court stated:

 

Napster’s actual, specific knowledge of direct infringement renders Sony’s holding of limited assistance to Napster. We are compelled to make a clear distinction between the architecture of the Napster system and Napster’s conduct in relation to the operational capacity of the system. (emphasis added)

 

            In stark contrast to Napster, KaZaA does not operate a network or a file-indexing service, and does not monitor data or provide a data-sharing service. KaZaA merely provides self-generating and –organizing P2P software and has neither direct knowledge of how it is being used nor any ability to curb that use. KaZaA’s software does not create copies, but merely allows for the sharing of files created through other software programs. No central server is involved in the system’s operation, and all file information resides on the computers of individual users. Thus, under the 9th Circuit’s Napster decision, KaZaA’s architecture clearly deserves Sony case protection.  Indeed, if KaZaA were to permanently cease all business operations at this very moment users of the software could continue to enjoy its full functionality in perpetuity – the only way to halt such activity would be to permanently shut down the Internet, a step so drastic and reactionary that not even the RIAA and MPAA have (yet) dared to suggest it.

 

            Were the courts to hold KaZaA guilty of contributory infringement the results could be devastating for the entire technology sector, as any and all could be the next victims of the content industry’s ongoing litigation witch hunt. P2P software is but one of the essential tools that can facilitate copyright infringement, and KaZaA has no more direct knowledge of such uses than the manufacturers and providers of these other technologies. They include:

·        Telecommunications firms providing broadband connections.

·        Providers of Internet browser, server, media player, e-mail, instant messaging (IM), newsgroup, and File Transfer Protocol (FTP) software.

·        Internet relay chat servers.

·        Manufacturers of large capacity storage devices, including hard drives, CD-ROM and DVD-ROM burners, and ZIP drives.

·        The hypertext transfer protocol (HTTP), which is the basis for all web browsers, as well as e-mail protocols; both of which, like KaZaA and similar P2P software, cannot distinguish between copyrighted and non-copyrighted materials as they perform their search and transmission functions.

 

The P2P data-sharing technology provided by KaZaA has substantial advantages

 over previous Internet architectures, including major cost savings on bandwidth and storage[12], stability and protection from denial of service attacks, and efficient search capabilities, all of which combine to provide far better utilization of computing and network resources.

 

Summing up, P2P software of the type distributed by KaZaA has myriad substantial non-infringing uses that advance Internet technology and the public interest. We are confident that KaZaA will be found to be operating within the law. Any attempt by the content industries to alter the law to prevent the continued utilization of this breakthrough technology would be a grave disservice to the U.S. technology sector and to the millions of your constituents now utilizing the exciting applications made possible by P2P.

 

The Online Music Marketplace

 

             The testimony presented to the Committee by RIAA head Hilary Rosen clearly attempted to blame the recording industry’s failure to create a viable online music marketplace on P2P software. She stated, “with Internet piracy, the lack of real protection is actually stifling the development of a new marketplace….We must be vigilant in ensuring that standards of protection are not outdated by technology, and that financial rewards remain a realizable goal for American creators of copyrighted materials. These rewards are put at risk by commercial enterprises that allow for the unauthorized use of recorded music.”

 

            To the contrary, many observers of the online music marketplace believe that no one has done more to stifle its development than the major record labels, and that if the labels were granted but one wish it would be to make the Internet go away. The major labels appear to have one overriding goal, which is to transfer the market control they have enjoyed in the distribution of physical goods to the virtual digital realm, and their anti-competitive conduct has become the new focus of the ongoing Napster litigation.[13] They have either sued and/or refused to license their copyrights on reasonable terms to any innovative online music venture they do not control. The major labels’ only interaction with KaZaA has been to litigate, and to inform us that they will not enter into any constructive discussions as to how we might work together until the networks created by the KaZaA file-sharing software are shut down (an event that, as we have indicated, we are powerless to effect). We find this intransigent aggression to be remarkable, and lamentable, given the size of KaZaA’s user base and the many ways in which the labels could derive substantial benefit from P2P distribution utilizing a variety of available technical and economic solutions. 

 

The major labels’ litigation has resulted in the loss of independence of the two most exciting and innovative U.S.-based online music companies, MP3.com and Napster, and the transfer of control over them to, respectively, France’s Universal Vivendi and Germany’s Bertelsmann media conglomerates.  The major labels have also stifled the development of the online webcasting market, a goal that Congress intended to facilitate by its inclusion of a compulsory license for non-interactive webcasts in the Digital Millennium Copyright Act of 1998. More than three years after enactment of that law, the applicable royalty rate has just been determined through a Copyright Arbitration Panel (CARP) proceeding. In that proceeding, the RIAA proposed a royalty rate that was 30 times higher than the one put forward by a coalition of webcasters and broadcasters -- a rate that would instantly bankrupt this entire emergent sector.[14]

 

            The major labels’ own recently unveiled online services almost appear to be designed to fail from the start. None of them offers selections from all of the major labels due to refusals to cross-license. Even within the label groups that are offered by a particular service, many recent offerings by major artists are unavailable. These services merely rent song downloads to consumers rather than providing permanent ownership.[15] They also bar or severely restrict the features that consumers find most desirable, including the ability  to transfer song files to portable digital players or to burn them onto a  CD. Press reviews of these new services have ranged from severely negative to lukewarm, with most advising consumers to save their money until the services show substantial improvement. It is unseemly for the RIAA to blame the failure of these services to capture customers on KaZaA and similar software when they are so clearly lacking the basic attributes that should make for a compelling online music experience. Even within the major labels, voices are now being heard that an excessive focus on security is counterproductive to consumer acceptance.[16]

 

            Finally, notwithstanding RIAA rhetoric regarding concern for music creators, we remind you that they represent record companies and not recording artists. The recording industry has a long and well-documented history of artist exploitation., including creative accounting practices that would do Enron proud. The standard recording artist contract has been characterized as the worst personal service agreement in the United States, with provisions that range from archaic deductions for “breakage” that date back to the days of shellac 78 RPM records to modern abuses such as clauses that deny artists the ability to own their name, or any variation of them, as a website URL in perpetuity (long after the contractual relationship between artist and label is likely to have expired)[17]. The major labels also appear to be using sound recordings on their own proprietary websites in violation of recording artist contracts, and to have structured any payments to artists derived from these services as licensing fees rather than far more substantial standard royalties. These abuses have prompted one well known artist manager to declare “It’s becoming very obvious to me and my peers that we’re becoming victims of what is a huge conspiracy”, and a leading music attorney to state, “from our perspective, if the technology is going to be out there and the artist isn’t really going to make money, we’d prefer that our fans just get it for free.”[18] (emphasis added) We have also already noted the RIAA’s failed attempt to have Congress enact a “technical” copyright amendment that would have characterized all sound recordings as “works for hire” and thereby deprived artists of the ability to regain their copyrights after a 35 year wait.

 

But that is hardly their sole anti-artist legislative initiative. At this very moment, the RIAA is waging a vigorous lobbying battle against such groups as the Recording Artists’ Coalition, the American Federation of Television and Radio Artists (AFTRA), the American Federation of Musicians (AFM), and other artist representatives in the California legislature. These groups are seeking to repeal a provision of California law that exempts recording artists alone from statutory protections that ban the enforcement of personal service contracts of more than seven years’ duration. The RIAA is no doubt aware that a landmark 1945 court case brought by actress Olivia DeHavilland under similar law marked the beginning of the end for the old Hollywood movie studio system and its pervasive control over actors’ careers. Some observers of the online music marketplace have opined that one of the chief motivations for the record industry’s litigation crusade against independent music upstarts is that they might provide recording artists with a promotion and distribution system beyond the control of the major labels. The current distribution and promotional system has erected such high barriers to entry[19] that it is difficult for less well known artists who are not signed to a major label to realize their audience potential; musicians remain hopeful that such direct relationships can be facilitated through independent Internet models.

 

P2P As The Driver of Broadband Demand

 

            It is well recognized that the rollout and mass adoption of broadband connections throughout the United States is the necessary precedent for the success of enhanced online services and the continued further growth of the telecommunications, computer hardware, and related critical industries. It is also increasingly acknowledged that lack of demand due to an absence of compelling content is the chief factor underlying the growing gap between the availability of broadband connections and consumer uptake. While KaZaA and similar P2P software is no threat to the content industries, the refusal of the content providers to offer attractive online services is a clear and present danger to the technological future of this Nation.

 

            FCC Chairman Michael Powell recently took note of this problem:

 

 I discussed earlier the chicken and egg problem of broadband content and distribution. Much of what is holding broadband content back is caused by copyright holders trying to protect their goods in a digitized environment (in other words, a perfect reproduction world). Stimulating content creation might involve a reexamination of the copyright laws. Arguably, VCRs would not be widely available today if Universal Studios had won its infringement case against Sony in 1984. They won in the Supreme Court by a vote of 5-4.[20] (emphasis added)

 

            The recalcitrance of the copyright industries and its direct relationship to the lag in broadband uptake has also been noted in the mainstream press:

 

A while back, there was a compelling reason to get a broadband connection. It was called Napster. And it was crippled by recording industry lawsuits. If cable and telecom companies want someone to blame for broadband’s lackluster growth, how about the record companies, which still aren’t giving consumers what they want.[21] 

           

            Another commentator recently observed:

 

Still, the broadband market isn’t operating as freely as it should. There are roadblocks that stop consumers from getting what they want. And it’s a legitimate function of government to remove those roadblocks – especially when government creates them.

 

Nearly all the obstacles are on the demand side. Federal Communications Chairman Michael Powell has observed that “broadband intensive content is in the hands of the major content holders” – especially music and movie companies that may appropriately fear Internet piracy but are inappropriately delaying economic progress in the process. These entertainment moguls have formed a frightened, retrograde cartel that’s been withholding content from the Internet.

 

Part of the problem is the cowardice and stupidity of Hollywood, but another part of it is law that needs to be brought up to date. In a recent article in the Washington Post, Stanford law professor Lawrence Lessig advocated a review of current copyright laws to assure that they do not “become a tool for dinosaurs to protect themselves against evolution”. Here’s a worthy project for the Bush Administration that would do far more to disseminate broadband than fooling with the 1996 Telecom Act.[22]

 

            When it comes to driving consumer demand for broadband connectivity, P2P services are the best hope for near-term success, and the music and movie industries are public enemy number one. If the movie industry truly intends to withhold its offerings until it can be assured of the “seamless protection” that MPAA Chairman Jack Valenti spoke of before the Committee, then that day will never arrive. This quixotic quest for absolute protection simply cannot be realized in the distribution over an open communications system of a consumer good meant to be seen and heard by millions; nor can it be reconciled with the reliability and ease-of-use demanded by consumers.[23] Knowing that, the MPAA apparently intends to seek Congressional intervention to mandate so-called protection standards on the manufacturers of computer and consumer electronics hardware. This  misguided mission, which is broadly opposed by a wide array of industry and citizen interests, would inevitably result in products with inflated price tags and diminished functionality. 

 

            A just-released and highly praised[24] study[25] by the Computer Science and Telecommunications Board of the National Research Council emphasizes the critical relationship between content availability and broadband demand:

 

Notably, today's demand level has been based mainly on a limited set of applications (e-mail, Web browsing, file sharing, and limited audio and video streaming). Indeed, there is a significant gap between the capabilities of current broadband services and some of the cutting-edge applications that have been touted but are not generally available to the public. Continued growth in demand for higher-speed services can be foreseen based on applications being used or tested by early adopters in enterprise and campus networks, experimental initiatives in both industry and academia, and the possibilities afforded by increasingly cheap home networks and specialized consumer electronics. With new applications, wider penetration, and broadband's use as a convergent platform for multimedia content delivery, much wider demand and use can occur.[26]

 

The study also makes clear that a wide variety of content types beyond those offered by the entertainment establishment will be facilitated (and these substantially noninfringing content types are ideally suited for P2P distribution):

 

More diverse content and applications--beyond mass entertainment and more commercially oriented content--could create new sources of demand and help attract individuals and communities to make further investments in broadband. Examples of such content include information of local interest; enhanced access to government information and services; and materials related to education, health, and culture. Not all such services require broadband (narrowband may be sufficient, and a way of reaching a wider audience in the short term), but broadband supports much richer content.[27]

 

                        The study further stresses the tremendous benefits that broadband provides to media download applications such as those facilitated by P2P software:

                       

It is important not to underestimate the impact of fast file-downloading capability on a very wide range of applications, including audio and video. Streaming is complicated compared with file downloading, and the main reasons that people do it, other than for real-time delivery, is because the files are so large that users do not want to wait while the files download; the files are too big to store locally conveniently (although storage space is rapidly becoming very inexpensive); and/or there are intellectual property protection concerns (but application of digital rights management technologies to stored files can provide protection comparable to that of encrypted streams). If one can move music files in a few seconds, videos in a minute or two, or an entire newspaper or book in a minute, many applications become practical. In addition, the economics are becoming more appealing with the spread of very large, cheap storage units. Downloading is of particular value when one wants the content for portable appliances--such as e-book readers or music players…[28]

 

Finally ,and perhaps most importantly, the study elaborates on the large customer

base required to successfully drive the broadband marketplace – numbers far in excess of even the most optimistic projections for the music and movie industry’s proprietary services, but that are fully consistent with current usage of P2P file-sharing applications:

 

In addition to technical obstacles, the familiar chicken-and-egg phenomenon comes into play. Without a mass market of consumers with broadband access, it is hard to develop a business model that justifies investment in new content (or translating old content). One new media businessperson, Andrew Sharpless, addressed the committee from his vantage at that time of developing new online services for Discovery Communications. He suggested that at least 10 million households would need to use broadband before meaningful content would emerge, and he noted that cable experience shows that serving 50 million customers is key to lining up advertisers.[29] (emphasis added)

 

            Summing up, there is no escaping the conclusion that the current practices and attitudes of major copyright owners constitute the most serious obstacle to mass demand for broadband, while the utilization of P2P file-sharing offers the best near-term means to drive that demand.

 

Compensating the Creators Through a Legislated IPUF

 

            KaZaA is fully aware of and sensitive to the need to respect applicable copyright law. The KaZaA P2P distribution software is fully compatible with digital rights management (DRM) technologies that can be used by content owners to protect their copyrighted works. KaZaA’s web page contains the following conspicuous notice to users of the software:

COPYRIGHT - KaZaA does not condone activities and actions that breach the copyright of artists and copyright owners - as a KaZaA user you are bound by the KaZaA Terms of Use and laws governing copyright in each country.

 

            As previously explained in this letter, KaZaA has no means to monitor, much less control, any activities by software users that may infringe copyright.

 

            While we disagree with the assertions and litigation practices of the major corporate copyright owners, we are not insensitive to the need to maintain the incentives for creators that are fostered by copyright law; and to provide those creators with fair compensation for the content that enriches the lives, and advances the business plans, of millions.

 

            We suggest that it is time for Congress to step in and halt the “whack-a-mole” litigation excesses of the music and movie industries through new legislative initiatives that compel content availability, while establishing a compensation scheme that requires a contribution from all the many industry sectors beyond P2P software that benefit from content availability. These players who form the links of this long and interdependent media file value chain clearly include:

·        Computer hardware manufacturers.

·        Consumer electronics manufacturers.

·        Storage device and media manufacturers.

·        Cable, telephone, and wireless telecommunications firms.

·        Providers of “ripping” and media player software.

 

 

These industry participants provide the software that creates full or compressed files of digital media, the hard drives and optical storage media that provide for their storage, the connectivity that provides for their transfer, and the portable playback devices that allow for use away from the computer. Many of their marketing materials implicitly promote the duplication of copyrighted materials as an incentive for purchase of their products or services.[30]

 

The Audio Home Recording Act provides a model for the undertaking that needs to be considered. That 1992 statute mandates a small royalty on digital audio recorders and recording media, with the proceeds of that levy redistributed to content creators. A similar levy – an Intellectual Property Use Fee (IPUF) -- applied to a much broader base of parties, could provide a significant new revenue stream to copyright owners to compensate them for the inevitable “leakage” resulting from Internet distribution.[31] We do not minimize the difficulty in arriving at a reasonable royalty rate or designating the parties or products it should be levied on, nor of devising a means for equitable distribution of the proceeds (however, most media players already possess the ability to monitor and report on content usage, a task that can be performed in the aggregate to alleviate privacy concerns, and future media compression formats are being designed to tag and track the individual elements of a creative work). Yet there is already ample precedent, especially in the music realm, for the need for and workability of such compulsory license and royalty schemes. We also realize that some would prefer a market solution negotiated by private parties, yet the content marketplace is already a landscape littered with content and broadcasting oligopolies, performance rights organizations operating under antitrust decrees, and myriad compulsory licenses facilitated by complex royalty collection and distribution schemes. Whatever the difficulties may be in pursuing this concept, they are nothing compared to the present practices of the content industries that are stifling innovation, retarding the necessary rollout of broadband, and threatening the innovative freedom of the information technology industry.

 

             This type of policy initiative would also be fully consistent with one of the seminal recommendations of the National Research Council’s groundbreaking “Digital Dilemma” report:

 

Recommendation: The committee suggests exploring whether or not the notion of copy is an appropriate foundation for copyright law, and whether a new foundation can be constructed for copyright, based on the goal set forth in the Constitution ("promote the progress of science and the useful arts") and a tactic by which it is achieved, namely, providing incentive to authors and publishers. In this framework, the question would not be whether a copy had been made, but whether a use of a work was consistent with the goal and tactic (i.e., did it contribute to the desired "progress" and was it destructive, when taken alone or aggregated with other similar copies, of an author's incentive?). This concept is similar to fair use but broader in scope, as it requires considering the range of factors by which to measure the impact of the activity on authors, publishers, and others.[32]

 

            Our notion of an IPUF is consistent with this recommendation, in that it moves away from the notion of copy while providing a new means to provide the necessary incentive for the continued creation of video, audio, and print content that entertains and enlightens millions and sustains thousands of different businesses. It also recognizes the reality that notions of security and control that may have been exercisable in the non-networked, analog world cannot be effectively transferred to a realm where even a single digital copy can propagate millions of perfect clones, world-wide, almost instantaneously, and where control over the quantity and destiny of the bits that comprise digital media will be imperfect at best.

 

Conclusion

 

            As we have outlined, the attempts by the music and movie industries to mislead your Committee with the false notion that our client’s software is criminal in nature, and that P2P software is a major threat to their interests and a rationale for their withholding of content from the Internet, have no basis in fact or law. These content industries have a long history of opposing new reproduction and distribution technologies[33], and in every instance their dire predictions have not only been proven wrong but they have been substantially enriched by the very developments they sought to stifle. Self-generating and –organizing P2P software is the natural and inevitable next step in the development of the Internet and offers a dizzying array of potential benefits to society. It is also the only means at hand for driving the mass adoption of broadband that is critical to the advancement of the U.S. technology sector and the myriad new services it can support. 

 

            We certainly hope that any future Committee inquiries into intellectual property matters provide for a more balanced consideration of this complex subject. We stand ready to assist the Committee and the Congress in understanding the many benefits provided by P2P file-sharing technology and in developing a new means of providing creator incentives that is not antithetical to technological progress. Congressional intervention driven only by the self-serving and incomplete testimony of the content industries could have the unintended effect of seriously thwarting U.S. economic and technical progress while subverting the very goals that copyright law is meant to serve.[34]

 

            Thank you for your consideration of our views.

 

                                                                                                Sincerely,

 

                                                                                                Philip S. Corwin

 

 

 

 

Cc:             Members, Senate Foreign Relations Committee

Chairman Patrick Leahy and Ranking Member Orrin Hatch, Senate Judiciary Committee

 

 

 

           

                       

 



[1] Contrary to the implication contained in testimony presented to the Committee by RIAA President and CEO Hilary Rosen, this transaction was not effected to avoid jurisdiction of the Dutch courts but because Sharman is far better able to develop the potential business model made possible by the KaZaA software.  Australia is a modern western nation and Sharman believes that its acquisition of KaZaA in no way violates  that nation’s copyright or other applicable law.

[2] AOL/Time Warner’s Warner Music division is the only U.S. parent affiliated major record label. The others are Bertelsmann (Germany), EMI (United Kingdom), Sony (Japan), and Universal Vivendi (France).

[3] Metro-Goldwyn-Mayer et al v. Grokster, Ltd. Et al, Case. No. CV 01-08541 SVM (RNBX)

[4] “The major labels have already missed so many opportunities. Back when CD-RW drives cost thousands of dollars, labels could have licensed their catalogues to the companies offering to make custom-mix CDs for users. Before MP3 rose to popularity, they could have developed a more efficient digital-music format that included some anti-piracy limits. Back when Napster was the one place everybody went to share music, they could have bought out the service and turned it into a higher-reliability, subscription-based system, with the proceeds shared among the industry….”Reasonable price” probably means “fewer profits”. Well, too bad. That will happen anyway if record labels don’t extract themselves from the tar pit their obstructionist stance has led them into.” (Rob Pegoraro, “Logging On: Labels With the Wrong Music Mission”; Washington Post”, December 21, 2001)

[5] “U.S. Music Sales Hit a Wall”; Billboard, January 26, 2002

[6] Computers shipped with built-in CD burners also routinely include bundled software that allows for automatic creation of an exact “burned” duplicate of a copyrighted audio CD through a simple, often one-click process that even includes automatic contact over the Internet with the Compact Disc Data Base (CDDB) to identify the CD and provide track name and other pertinent information and services, such as the creation of liner information sheets that can inserted into CD “jewel cases”. The software also facilitates the creation of  MP3, Windows Media, or other compression format music files that reside on the computer’s hard drive and may be burned onto a blank CD disc or shared with others over the Internet via P2P file-sharing software, e-mail, instant messaging, or a variety of additional communication means. It is important that the Committee understand that the creation of unauthorized audio compression files from original copyrighted material that may be subsequently burned or shared are facilitated in their entirety by well-known computer hardware and software companies, not by KaZaA.

[7] It is estimated that in 2001 5.6 billion CD-R discs were produced worldwide to meet a demand for 4.77 billion blank discs, demand having increased 40 percent over 2000; and that one CD was burned for each 2.5 sold. (IFPI Network, Issue 8, October 2001, p.12). In the United States, 2001 sales of blank CDs are reported to have actually exceeded those of recorded CDs. (New York Times, “Behind the Grammys, Revolt in the Industry”, February 24, 2002.

[8] Sony Corporation of America v. Universal City Studios, 464 U.S. 417 (1984)

[9] In 1982 MPAA Chairman and CEO Jack Valenti testified before Congress, stating “I say to you that the VCR is to the American Film Industry as the Boston Strangler is to the woman home alone”. Following the Betamax decision, movie industry revenues from videocassette sales first exceeded those from the box office in 1989, and have remained higher ever since.  In 1992, reversing his prior position of dire warning, Mr. Valenti stated of  the VCR , “It’s really one of the most marvelous things that’s happened to the movie industry.”

[10] Statement of Hilary Rosen, O’Reilly Peer to Peer Conference, Washington, DC, November 6, 2001.

[11] A&M Records, Inc. v. Napster, Inc., 239 F.3d 1004 (9th Cir. 2000)

[12] P2P industry studies indicate that, compared to central server models, peered systems provide very significant bandwidth savings that can be passed along to consumers in the form of considerably less expensive media distribution services. The average annual bandwidth distribution costs for a P2P system have been estimated to be one-third that of central server download networks and one-tenth of central server streaming networks.

[13] On February 22, 2002, Federal District Court Judge Marilyn Hall Patel announced her intention to give close scrutiny to this issue, declaring that the major label’s MusicNet and Pressplay joint online music ventures "“may run afoul of antitrust laws"”. Continuing, she declared, “Even on the undeveloped record before the court, these joint ventures look bad, sound bad and smell bad….If Napster is correct, these plaintiffs are attempting the near monopolization of the digital distribution market”, and that these ventures appear designed to let the labels “use their copyrights and extensive market power to dominate the market for digital music distribution”. She also commented on the prospective injury resulting from these ongoing joint ventures, stating, “The extent of the prospective damage is massive….the resulting injury affects…the public interest”. The Justice Department is also conducting its own investigation into possible antitrust violations by these online music joint ventures.

[14] On February 20, 2002, the CARP ruled that commercial webcasters would owe royalties of 0.14 cents per listener per song, a rate roughly one-third of that proposed by the RIAA but ten times that proposed by webcasters (and, significantly, double the rate set for Internet transmissions of terrestrial AM and FM radio broadcasts). The head of the Digital Media Association declared that his webcaster members were “extremely disappointed” by the ruling. Absent Congressional intervention, the proposed rate will become final after review by the Library of Congress, and the royalty will be owed retroactively for all webcasts dating back to October 1998. Industry analysts have questioned the financial ability of most independent webcasters to pay this hefty retroactive levy. The ruling also imposes extensive and burdensome song and user reporting requirements that will be expensive and difficult to implement and that appear to violate the current privacy policies of many of these services.

[15] “The problem is that record companies don’t seem to want to sell you music anymore. They want to lease it, collecting rent checks in perpetuity. People who fail to keep up on their payments may well find that their music collections have evaporated.” Thomas E. Weber, “How the Music Industry is Plotting to Control Your Record Collection”, Wall Street Journal, December 17, 2001.  

[16] “Don’t focus on security; instead think about creating products consumers want and the other issues will go away”. – Steve Sheiner, Chief Revenue Officer, Vivendi Universal Net USA; Music Industry News, February 6, 2002.

[17] Another new contract clause being imposed by major labels compels recording artists to allow their songs to be sold on the Internet regardless of their satisfaction with provisions for compensation, if any, from such distribution.  These contracts also deduct nearly one-half of whatever is owed to the artist for purported expenses such as packaging and promotional copies that exist for physical CDs but not in the online world. “Record Labels’ Answer to Napster Still Has Artists Feeling Bypassed”, New York Times, February 18, 2002.

[18] Ibid.

[19] In addition to the recording industry oligopoly, substantial consolidation of the commercial terrestrial radio broadcasting industry over the past decade has placed effective control of the Nation’s airways in a handful of major conglomerates, which also exercise substantial power over the live concert industry. This development has  further diminished promotional opportunities for independent artists. It has been widely reported that, in a form of barely disguised payola, major labels must expend large sums on third party “independent promoters” to assure that their own recordings get sufficient radio airplay; these expenditures are generally recouped (that is, deducted) from any royalties owed by the label to the recording artist.

[20] Remarks of FCC Chairman Michael K. Powell to the National Summit on Broadband Deployment, Washington, DC, October 25, 2001.

[21] Tom Weber, “E-World”, The Wall Street Journal, January 28, 2002.

[22] James K. Glassman, Fellow, American Enterprise Institute; “Network to Nowhere”; The Weekly Standard; February 11, 2002.

[23] “The problem that digital rights management addresses is simple; the solution ought to be just as simple,” says Martin Lambert, founder and director of London-based content protection firm SealedMedia. “But to actually build technology that enforces a degree of control over content without creating some horrid security framework turns out to be despicably difficult.” Wade Rousch, “The Death of Digital Rights Management?”, Technology Review, March 2002.

[24] “The depth and scope of the report, from the characteristics of broadband characteristics to its application and content, its economic realities, the technology, and the structure of its regulatory and policy framework, is as comprehensive a look at broadband as I have seen.” Letter of FCC Chairman Michael K. Powell to Dr. David C. Clark, Chair, Computer Science and Telecommunications Board; February 11, 2002.

[25] “Broadband: Bringing Home the Bits”;  National Academy Press, 2002.

[26] Ibid., Chapter One, Finding 3

[27] ibid., Chapter One, Recommendation 7.3

[28] ibid., Chapter Three, Fast File Downloading

[29] ibid., Chapter Three, Availability of Content

[30] Last year, for example, Apple ran a series of  ads for its computers featuring CD burners under the theme of “Rip. Mix. Burn”. More recently, in January 2002 SBC/Pacific Bell ran this ad in the Los Angeles Times and other publications : “Download all the music you like. And all the music you sort of, kind of, maybe even a little bit like. Go mp3 crazy. Try new music. Build a song library. Whatever. Just know it’s hard to do with a 56k dial-up modem. Unless you have all day and the patience of a kindergarten teacher. Sign up now for Pacific Bell DSL Internet access kits for $49.95 a month, plus a free modem and free self-installation kit.” 

[31] This concept is already sparking serious discussion in the technology community: “Users would pay a fixed rate for unlimited access to a database that could include every song recording in existence. This approach is already used in cable and satellite TV, satellite radio, and Internet service. Subscriptions are not the only source of revenue. For example, a small tax is already placed on sales of blank CDs that are used to store digital music; proceeds go to music rights holders. That tax could be extended to memory sticks, data CDs, even hard drives…. the music industry might well capture more money than it currently sees…. Meanwhile, the boost to Internet service providers, consumer appliance manufacturers, cellphone companies, and suppliers of related goods and services would be enormous…. Large Internet service providers, if they paid a dollar per user per month, would create a fund of almost $2 billion per year just for North America”. (Emphasis added) Steven M. Cherry, “Getting Copyright Right”, IEEE Spectrum Online, February 2002.

[32] “The Digital Dilemma: Intellectual Property in the Information Age”; Committee on Intellectual Property Rights in the Emerging Information Infrastructure, National Research Council, 2000.

[33] At its inception, commercial radio was regarded as a pirate medium by the record industry; even today, terrestrial broadcasters are exempt from paying royalties to the owners of sound recording copyrights, although they are obligated to compensate performers and song writers. The fledgling movie industry was attacked by music publishers for the unauthorized use of the music that accompanied silent films. Similarly, the cable television industry was in its early days charged with ”pirating” the television broadcasts it distributed to rural customers, and the granting of a compulsory license eventually ended protracted litigation; today, cable is the dominant means by which broadcasters reach their audience, and easing ownership rules are expected to stimulate the purchase of broadcast networks by cable operators.  Finally, just three years ago, the RIAA unsuccessfully attempted to halt the distribution and sale of portable digital music players (RIAA v. Diamond Multimedia, 180 F. 3d 1072, 9th Cir. 1999); subsequently, these players became the fastest growing segment of the $6 billion portable audio sector, with U.S. sales exceeding one million units in 2001 (source: Consumer Electronics Association).

[34] “The Napster lawsuit and shared music brought the issue of intellectual property protection on the Internet to the attention of the American Public. The larger issue will only grow as increases in bandwidth capacity make duplication of other works, like videos, more practical. At the same time, however, a reactive Congress could attempt a legislative solution that tips the delicate balance between stakeholders. Draconian laws and excessive penalties will create confusion in the marketplace and drive users from the Internet. Washington over-reaching in areas like patents and database compilations could cast a chill on innovation and dilute if not destroy the Founding Fathers’ vision of an enlightened populace.” – Building a Positive, Competitive Broadband Agenda; Information Technology Association of America White Paper, October 2001, p.18.