[Senate Hearing 107-1154]
[From the U.S. Government Publishing Office]
S. Hrg. 107-1154
PROTECTING CONTENT IN A DIGITAL AGE--
PROMOTING BROADBAND AND THE DIGITAL TELEVISION TRANSITION
=======================================================================
HEARING
before the
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
FEBRUARY 28, 2002
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
ERNEST F. HOLLINGS, South Carolina, Chairman
DANIEL K. INOUYE, Hawaii JOHN McCAIN, Arizona
JOHN D. ROCKEFELLER IV, West TED STEVENS, Alaska
Virginia CONRAD BURNS, Montana
JOHN F. KERRY, Massachusetts TRENT LOTT, Mississippi
JOHN B. BREAUX, Louisiana KAY BAILEY HUTCHISON, Texas
BYRON L. DORGAN, North Dakota OLYMPIA J. SNOWE, Maine
RON WYDEN, Oregon SAM BROWNBACK, Kansas
MAX CLELAND, Georgia GORDON SMITH, Oregon
BARBARA BOXER, California PETER G. FITZGERALD, Illinois
JOHN EDWARDS, North Carolina JOHN ENSIGN, Nevada
JEAN CARNAHAN, Missouri GEORGE ALLEN, Virginia
BILL NELSON, Florida
Kevin D. Kayes, Democratic Staff Director
Moses Boyd, Democratic Chief Counsel
Jeanne Bumpus, Republican Staff Director and General Counsel
C O N T E N T S
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Page
Hearing held on February 28, 2002................................ 1
Statement of Senator Allen....................................... 7
Statement of Senator Boxer....................................... 8
Prepared statement........................................... 9
Statement of Senator Breaux...................................... 42
Statement of Senator Brownback................................... 9
Statement of Senator Burns....................................... 4
Statement of Senator Dorgan...................................... 10
Statement of Senator Hollings.................................... 1
Article from Time Magazine, dated Feb. 16, 2002, entitled The
Pirates of Prime Time...................................... 27
Statement of Senator Kerry....................................... 6
Statement of Senator McCain...................................... 3
Statement of Senator Nelson...................................... 8
Statement of Senator Smith....................................... 10
Statement of Senator Snowe....................................... 44
Statement of Senator Stevens..................................... 4
Prepared statement........................................... 4
Witnesses
Bechtolscheim, Andy, Vice President/General Manager, Gigabit
Systems Business Unit, Cisco Systems, Inc...................... 65
Prepared statement........................................... 48
Chernin, Peter, President and Chief Operating Officer, News
Corporation.................................................... 16
Prepared statement........................................... 18
Eisner, Michael D., Chairman and CEO, The Walt Disney Company.... 11
Prepared statement........................................... 13
Meyer, James E., Special Advisor to the Chairman and Former
Senior Vice President/Chief Operating Officer, Thomson
Multimedia..................................................... 66
Prepared statement........................................... 56
Perry, Robert, Vice President, Marketing, Mitsubishi............. 67
Prepared statement........................................... 50
Vadasz, Leslie L., Executive Vice President, Intel Corporation... 21
Prepared statement........................................... 23
Valenti, Jack, President and Chief Executive Officer, Motion
Picture Association of America................................. 59
Prepared statement........................................... 63
PROTECTING CONTENT IN A DIGITAL AGE--PROMOTING BROADBAND AND THE
DIGITAL TELEVISION TRANSITION
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THURSDAY, FEBRUARY 28, 2002
U.S. Senate,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Committee met, pursuant to notice, at 9:35 a.m. in room
SR-253, Russell Senate Office Building, Hon. Ernest F.
Hollings, Chairman of the Committee, presiding.
OPENING STATEMENT OF HON. ERNEST F. HOLLINGS,
U.S. SENATOR FROM SOUTH CAROLINA
The Chairman. The Committee will please come to order.
Today, we examine the copyright protection problems that have
been stalling consumer adoption of broadband and digital
television, and what Government should do to solve it. We have
been here before, in 1962, under the All-Channel Receiver Act,
Congress mandated that all television receivers include the
capability to tune all channels, UHF and VHF, allocated to the
television broadcast service.
More recently, in 1998 Congress required that all analog
VCR's recognize the standard copy control technology known as
macrovision. In the former case, the Federal Government and the
FCC took the lead. In the latter case, industry first agreed
upon the macrovision standard, and Congress validated the
agreement in legislation, so whether Congress or industry led
the way, the results have benefited consumers and the industry
both by providing Americans with wider access to programming
and content. Ronald Reagan used to say, here we go again.
Industries are at odds as to how to solve the critical content
protection problems.
We have got the tools to break the log-jam. First, rural
and underserved areas aside, there is not a broadband
availability problem, there is a demand problem. 80 percent can
get broadband, but only 10 to 12 percent take it. Most
Americans do not want to pay $50 a month for faster access to
e-mail, but if more high-quality content were available online,
consumers would come. Today, there is very little high-quality
content available on the Internet. Why? Because content owners
are fearful that premium content will be stolen, and their
investment in creative works wasted. The same is true for
digital television, where piracy deters programmers from
putting high definition digital content over the airways.
America's creative artists deserve protection. Our
copyright industries are among our greatest economic and
creative assets. The Framers recognized that innovation and
creativity was instrumental to our country's economic health
when they empowered Congress in the Constitution to protect
copyrighted products. Now, however, in an era when products are
delivered digitally, copyright laws mean less and less. Absent
strong technological protections layered on top of the
copyright laws, it is virtually impossible to enforce the law
as it exists.
I might note at this particular point that the copyright
laws are there. That is a matter of jurisdiction for our
Judiciary Committee, but while they know the law, they do not
know the business, and this thing continues on into log-jam.
Every week a major magazine or newspaper reports on the
thousands of illegal pirated works that are available for
copying and redistribution online. Academy Award-winning motion
pictures, platinum records, Emmy Award-winning television shows
all for free are illegal. I think last night on the Grammy
Awards they had three college kids in a contest to see how many
movies--I think it was 8,000 movies that they could download,
or 6,000 songs I think, that they downloaded in 3 days.
Piracy is growing exponentially on college campuses and
among tech-savvy consumers. Over 10 million people use file-
sharing sites on the Internet to download movies and TV shows
with no penalty. Such lawlessness contributes to the studios'
and record labels' reluctance to place their digital content on
the Internet or over the airwaves.
When Congress sits idly by in the face of these activities,
we sanction the Internet as a haven for thievery. Luckily, a
solution is at hand. Leaders in the consumer electronics
information technology and content industries are America's
best and brightest. They can solve this problem. The consumer
electronics and high tech industries claim they are ready to do
just that.
Only yesterday, America's top high tech executive sent me a
letter to that effect. I want to believe them, but why have
they not done it? This has been going on for years, and today
the Committee wants results. Industry negotiations have been
going on for years with little to show for it. Both sides share
some blame in this area, as I see it. Some companies may have
divided loyalties. Existing propriety digital rights management
technologies licensed to content companies would be eliminated
by the adoption of a single standard. Other tech companies
profit from the sale of consumer electronics equipment that
enables piracy in the first place, so when I listen to high
tech's clarion call to the Government, please stay away from
our business, I am reminded of the police chief in Casablanca
who said, I'm shocked. I'm shocked that gambling's going on
here.
Senator Stevens and I are planning legislation that would
place a deadline on affected industries to come together to
solve these problems in private sector talks. We want industry
to solve its own problem, and if they do, we will empower
Government enforcement so that all consumer devices comply. If
they do not, the Government's technologists and engineers, in
consultation with the private sector, will step in.
In addition, I would emphasize that we will work to
preserve legitimate expectations of consumers and researchers.
We will make sure that you can take the program off and make
copies for your personal use on your VCR or for research. If
they engage in lawful behavior at the home or at the
university, we will permit them to do the same in the future.
This will not be the first time Congress imposed
technological requirements to benefit consumers, and it will
not be the last. Other standard-setting issues loom ahead, such
as the need to ensure compatibility of devices used by
different cable operators, but that is a topic for another
hearing. Today, we examine copyright protection issues in a
digital age, and we have distinguished panels with us.
Let me yield first to our distinguished former chairman,
John McCain.
STATEMENT OF HON. JOHN McCAIN,
U.S. SENATOR FROM ARIZONA
Senator McCain. Thank you, Mr. Chairman. I thank the
witnesses for being with us today, and I will be very
interested in hearing their insights on one of the most complex
issues facing the transition to digital television and the
roll-out of broadband services, which is content-protection.
The transition to digital television has been a long and
difficult road for consumers. It has been almost 5 years since
Congress gave broadcasters an enormous amount of free spectrum
so they could make the transition from analog to digital.
Unfortunately, very few consumers have yet to experience high
definition television. Moreover, industry in-fighting has
caused more arguments than actual progress over cable carriage,
interoperability, transmission standards, and content
protection.
The debate over content protection is a classic chicken-
and-egg story. Content providers spend vast amounts of capital
each year to produce quality films and programming for
consumers but are hesitant to supply it in digital form without
protecting their investment from illegal copying and
retransmission over the Internet. On the other hand, consumers
have little incentive to purchase expensive digital television
without compelling digital content. While DTV sales have been
slowly increasing each year, an overwhelming majority of
Americans are still purchasing analog sets.
I believe the concerns of content providers are justified.
They invest creativity, effort, and capital into producing
high-quality films and programming, and should be able to
adequately protect their investments. However, I believe that
such protections must not come at the expense of stifling new
and innovative technologies in the marketplace, and should not
restrict the rights of consumers to view and record content
that is legitimately purchased or obtained. I am apprehensive
of proposals that select technological winners and losers and
mandate Government intervention in the marketplace. The Federal
Government has a poor track record in attempting to dictate how
the marketplace should operate.
I thank the Chairman for holding the hearing on this
important issue and look forward to hearing from the witnesses,
and I think, Mr. Chairman, that this may be the beginning of
our examination of this very difficult and complex issue,
rather than the end.
I thank you, Mr. Chairman.
The Chairman. Very good. Let me recognize Senator Stevens,
our cosponsor.
STATEMENT OF HON. TED STEVENS,
U.S. SENATOR FROM ALASKA
Senator Stevens. Mr. Chairman, thank you very much. I have
a short statement just echoing your comments. I will just not
repeat it, and I will ask that you put it in the record, and
would yield to Senator Burns, the Chairman of our Subcommittee.
[The prepared statement of Senator Stevens follows:]
Prepared Statement of Hon. Ted Stevens, U.S. Senator from Alaska
I applaud the ongoing efforts of the Copy Protection Technical
Working Group--the consumer electronics industry, the content
producers, and others--to develop a standard to prevent Internet theft.
The private sector, those in the business, are in the best position to
develop a standard that works.
I not only hope, but believe, the private sector can and will do
the right thing to make it safe for the best producers and directors in
the world to make their movies and television shows available through
the internet and the digital airwaves.
That, like nothing else, will stimulate the next quantum leap not
only in the Internet and the devices used to take advantage of all it
offers, but our economic engine as well.
Soon we will be able to watch movies on our cell phones and even on
our watches. But we will have no movies to watch if a film producer who
has invested hundreds of millions of dollars feels he may be held up if
he puts his most recent release on the internet or distributes it over
the air for any bandit to steal.
The private market place can forge a solution that would be more
eloquent than anything government can do. But like Ronald Reagan, I
believe we must trust--but verify. If the private sector cannot or will
not develop a uniform, interoperable standard, government must step in
to help to provide the proper motivation.
Over the years Congress has done that when market forces have been
unable to do what is in the best interest of the country.
We did it in 1997 when we mandated digital television conversion.
We did it when we mandated the V-Chip in televisions and filtering
devices in libraries to protect kids from pornography on television and
the Internet.
And with a whole range of safety and environmental standards
designed to ensure everything from safe booster seats for kids to safer
food.
After years of hard work, the industry now tells us it on the verge
of a break through. it predicts an interim agreement on a standard to
protect broadcast signals by March 31st of this year. I am anxious to
hear today how those negotiations are proceeding and promise that those
of us on this Committee will follow your efforts with interest.
It is my strong hope and desire that those efforts will bear fruit
and that this Committee can simply ratify the private sector agreement.
But it that does not happen, I believe Congress will be forced to take
further action.
The Chairman. Senator Burns.
STATEMENT OF HON. CONRAD BURNS,
U.S. SENATOR FROM MONTANA
Senator Burns. Thank you, Mr. Chairman, and I thank my
friend from Alaska. I am very pleased to be here today, and I
am very pleased with the witnesses we have today because they
are at the center of the discussion. We have come together
today to discuss the protection of content in the digital age,
along with the promotion of broadband technologies, to all
Americans. While at first glance it appears to be a difficult
and complex exercise, I believe, through, an honest assessment
of the problem we can build a framework for the solution to
this critical problem.
We need to correctly determine whether or not the
marketplace is sufficiently driving content protection
standards, or whether we need to weigh in with legislation.
While I believe that both the transition to digital television
and the roll-out of broadband services are inevitable, the
question is, if we do set policy, will it provide enough
incentive to propel that process forward significantly.
When all is said and done, we have two major American
industries that are talking past each other. The entertainment
industry is looking for technological solutions to protect its
intellectual property as soon as possible, while the
information technology community says that technology exists
but does not want to impose a cookie-cutter solution.
Meanwhile, the consumer who wants high-quality content over
broadband pipes is reduced to waiting for the large players to
come up with a solution.
Throughout this debate, it is important to always bear in
mind the stakes involved for intellectual property holders. The
sheer volume and use of pirated content is astronomical. The
Napsterization of our society continues to escalate. In this
regard, a story I have been following closely is the free
software program called Morpheus.
Morpheus is a program that provides users instant access to
media files other users have downloaded, and whether legally or
not, have chosen to share. I am told more than a million users,
on average, are online and utilizing Morpheus at a time. The
download options are not only MP3 files but also television
shows and full-length movies. It is obvious to me Morpheus and
other programs like it pose a serious threat to content
providers and have complicated issues of copyright protection
and distribution of compelling content online.
Until compelling digital content is made available to
consumers, they will not purchase digital televisions or
subscribe to broadband services. Content providers, however,
are reluctant to provide quality content unless their material
can be properly protected from pirating and retransmission via
the Internet. Until the issues affecting broadband roll-out and
the transition to digital television are resolved, consumers
are left out in the cold.
This problem is not going to go away. I have spoken with
several interested parties, and have found that some think
there needs to be set a Government-imposed standard to protect
content. Some want more time. Some want action now. Some want
licensing, and some think Government interaction will only
stifle the process. While I do not claim to know which of these
scenarios is best, I am hopeful we can find out, or find the
outline of a solution anyways.
It is my hope the parties involved can reach agreement on a
way to protect the content that works technologically. If that
is not possible, Congress may indeed step in and will have to
take a more active role, a prospect that I do not look forward
to but may be necessary in the end. Usually when we come up
with Government-imposed solutions, we also create more
problems. I thank the Chairman.
The Chairman. Thank you. Senator Kerry.
STATEMENT OF HON. JOHN F. KERRY,
U.S. SENATOR FROM MASSACHUSETTS
Senator Kerry. Mr. Chairman, thank you very much. This is
one of those really interesting cross-sections of interest
issues that comes before us with enormous consequences,
economic consequences to some very large players, and I think
it is fair to say that it is the aspirations for those economic
consequences that perhaps are slowing down the process a little
bit.
Some people who might have a solution, or who may be able
to offer one, obviously have an economic interest in how that
solution plays out, and to a large degree the market share
desires that go along with those solutions are governing the
rapidity with which they are able to reach a closure here.
I think it is important, and I think the comments of each
of my colleagues up to this point underscore what is at stake
here. Our Founding Fathers were very clear, Article I of the
Constitution creates this property right, this right in
creative product to be held for a certain period of time, and
you would have chaos in the marketplace--to some degree we do
now--if there is not a means of enforcing that.
Analog piracy, I gather, in the motion picture industry
already is at about the $3 billion mark. Clearly, when you can
make a perfect copy and with the punch of a button distribute a
perfect copy to thousands, tens of thousands of people, the
undermining of Article I of the Constitution, the undermining
of the order in the marketplace is just extreme. It is in all
of our interests to address that. We have a balance of payments
deficit that is enormous. One of our best industries that
addresses that is the surplus in the combined industries
represented here, and we have got just a huge economic interest
to try to resolve it.
The question for us, obviously, is sort of a series of
interlocking and cross-purpose public policy interests. I mean,
do we rely on market forces, which is our preference, and many
people in the industry have been saying to us, do not tamp down
creativity, do not prevent the capacity of creative enterprises
to come up with technological solutions. Well, that is true. We
would love that to have happened and to happen, but it is the
economic interest that to some degree gets in the way of that.
I mean, do you adopt one standard? Will there be several
offerings? How do you manage the hardware component of this
coupled with the software component? These are all crossing our
public policy interest. Or do we mandate that certain
technologies be used to prevent the copying of movies, music,
and software? If the wireless example of Europe is any example
at all, they established a standard. We have seen some
differentials in our own deployment of wireless as a
consequence of our not having done so as we leave it to the
marketplace.
So Mr. Chairman, it is clear our first preference. I think
everybody on this Committee would like the solution to come
from the industries themselves, and we would like them to be
adopted as rapidly as possible. It might be that we need to
legislate initially, sort of codify whatever voluntary
agreements they arrive at, if that were to make sense, but if
the parties cannot, I would suggest that we reencourage them to
try to come together in short order to see if they can do more
to find a solution, and I would urge the leaders in the high
tech motion picture and consumer electronics industry to hasten
that negotiating process, but if not, we may be stuck with the
need to legislate somehow some broader way to resolve this in
order to protect the marketplace and the interest of our
country in the end.
Thank you, Mr. Chairman.
The Chairman. Senator Allen.
STATEMENT OF HON. GEORGE ALLEN,
U.S. SENATOR FROM VIRGINIA
Senator Allen. Thank you, Mr. Chairman. I want to thank you
for calling today's hearing, and I want to thank all our
witnesses for coming, and I look very much forward to listening
to your concerns and some of your possible hopeful solutions to
this challenge.
As chairman of the Republican High Tech Task Force, we care
about this issue and I care about it and have a special
interest. As stated by Senator Kerry, I think we all recognize
the value of the music industry, the motion picture industry,
and television as a tremendous export for business, but it is
also an export of our country as well. I will always remember
being in Tasmania speaking to fifth graders explaining my House
of Delegates District as being the home of Thomas Jefferson,
and none of them knew anything about Thomas Jefferson--they are
still loyal to the Queen there--and I said, but Nelson County
is the home of--I do not know if you have seen it, a show
called ``The Waltons''. They all smiled. They all had heard of
the Waltons and it is, again because of exports. Whether it is
music or motion pictures, it is very important for our economy
as well as hopefully a positive influence on our culture.
And all of us agree that piracy is something that we want
to stop. Protection of content is a significant concern not
only for the intellectual property owners, but also for the
content providers, and also I think for the whole technology
industry as a whole. I think we all desire to protect the
content, to also provide the consumers with more choices.
What Senator Burns said is exactly right. This whole nexus
between broadband, the roll-out of broadband, the desirability
of people paying a higher cost for broadband, a lot of that is
determined by how compelling the content is to pay that higher
price for high-speed Internet access. Senator Burns, I agree
with you 100 percent.
Now, this issue has to be addressed. I welcome
encouragement of voluntary multi-industry dialogs, but I am
leery of any process where the Government, rather than the
market, develops and specifically mandates the technology
standards.
I do understand in some areas that where the marketplace
and all the parties do agree on various standards or criteria,
that eventually the Government would have to come in and ratify
those standards. For example, the analog hole issue eventually
will need that sort of an approach. I think it is in all
parties' interests to come up with a solution. I think, though,
that if you have a Government-imposed mandate over these
technologies, the industry will only be stifled in innovations
and investments in technology, and I question whether
Government mandates anyway would be adequate over time to
protect the content from computer hackers.
The key is for everyone to work together and find credible
standards so that the content providers, the folks that invest
literally tens of millions of dollars for the production of a
movie, or whatever the product may be, feel that it is not
going to be easily pirated and unlawfully infringing on their
copyrights.
Now, it is my understanding, Mr. Chairman, that there are
companies such as Entertainer.com, Cinemanow.com, that
currently offer secure digital rights management software for
online distribution of music and video content. Business models
are only beginning to develop in this industry, and the fact
that some major movie studios already feel sufficiently
comfortable to provide online movie distribution to these web
sites suggests that this debate is a business model dispute
rather than a public policy debate of the Government coming up
with a standard or passing a law that says in 2 years the
Government will come up with a standard however long it takes
for that to be done.
Now, there have been, Mr. Chairman, strong partnerships
between the diverse high tech industry and the content sectors
to develop protection technology such as DVD encryption
systems, the DVD CSS encryption standard, and the privacy
content protection system. So, Mr. Chairman, I think this is
helpful, a good start, as Senator McCain said, and I look
forward to trying to prod the private sector toward getting to
where we all want to get. We all share the same goal, because
it is important for our Nation's economic future, it is
important to protect private property rights, because if you do
not, you will not invest those millions and millions of dollars
and create all those jobs if you are not going to get a return
on that investment.
I look forward to hearing from our witnesses as we try to
address this challenge. Thank you, Mr. Chairman.
The Chairman. Senator Nelson.
STATEMENT OF HON. BILL NELSON,
U.S. SENATOR FROM FLORIDA
Senator Nelson. Mr. Chairman, I will be very brief so we
can get on. I have a daughter who is a budding artist. She
writes, she sings, she choreographs, and she dances, and she
would not want her work stolen, nor would the people who
produce songs want that work stolen, so we have got to find a
solution here. I am looking forward to the testimony.
Thank you.
The Chairman. Very good. Senator Boxer.
STATEMENT OF HON. BARBARA BOXER,
U.S. SENATOR FROM CALIFORNIA
Senator Boxer. Thank you, Mr. Chairman. I ask that my
statement be put in the record in the interest of time. I just
want to point out to first thank you and Senator McCain for
your leadership on this very important issue. Out of the seven
witnesses today, five are from my State of California. I want
to welcome them. I think it is symbolic of what this means to
my State. Literally, all the stakeholders really, most of them
come from my State. We must resolve this. To me, it is simple.
Stealing is stealing, and so we have got an issue here. We have
got to address it. I think we can address it in a way that is
fair to consumers, that is fair to the artist, and that is fair
to the high tech companies, but I, too, hope it will come from
them, but I do stand ready to act if we must act, and I thank
you very much.
[The prepared statement of Senator Boxer follows:]
Prepared Statement of Hon. Barbara Boxer, U.S. Senator from California
Thank you Mr. Chairman for holding this hearing on how to protect
digital creative content from theft. You have played a crucial role in
bringing this issue to the forefront for discussion and I thank you for
doing so because its resolution is of vital importance to the future of
the film studios, technology companies, and the Internet.
As you can tell by the impressive representation of California
talent on both of the panels of witnesses testifying today, this issue
is of extreme importance to my state.
Let me begin by stating what I believe is a fundamental principle:
Stealing is stealing. And while new technologies have made stealing
creative content easier, it does not make stealing creative content
right. We are here today to explore ways to stop people from stealing
content.
The good news is that the industries involved in discussions on how
to protect digital content are well on their way to a solution on two
pieces of the puzzle. There is some agreement on digital copyright
protection of over-the-air broadcasts of creative content and some
agreement on protecting material that flows through analog devices.
Unfortunately, one issue seems close to an impasse: how do we keep
files from being illegally shared and distributed over the Internet? I
want to challenge all of you to commit to resolving this issue as soon
as possible and in a way that is fair to consumers, the technology
industry, and the producers of creative content.
Chairman Hollings has introduced a bill to force that resolution. I
look forward to hearing your thoughts on his bill as well as other
possible solutions to this problem.
The Chairman. Thank you. Senator Brownback.
STATEMENT OF HON. SAM BROWNBACK,
U.S. SENATOR FROM KANSAS
Senator Brownback. Thank you, Mr. Chairman. Thank you for
holding the hearing. Thank you for the witnesses and their
attendance and presentations here today. I want to take a
little different tack on this and to note something that just
happened in the House in providing the pipelines for this sort
of material to be able to get out. It is fitting that today's
hearing comes less than 24 hours after the House of
Representatives overwhelmingly passed the Tauzin-Dingell
broadband bill that deregulates in that field. That bill seeks
to create robust competition in the broadband marketplace by
freeing up local phone companies from certain network-sharing
regulations in the broadband market.
The regulation will place phone companies on a level
playing field with the cable industry, providing incentives for
phone companies to deploy broadband systems that not only
provide a fast Internet connection, but have the added benefit
of enabling them to compete with cable companies in this
multichannel video market by providing consumers with a direct
link to content providers. This competition would in turn force
the cable industry to release its strangle hold on that market
and open the floodgates on its own Internet pipes. One only has
to look as far as the always-evolving and highly competitive
wireless industry to witness the benefits of such a
deregulatory move.
I have introduced my own version of the broadband
regulation legislation that shares some of the same goals.
There are several Members of this Committee that have differing
versions and differing views on this issue. However, we all are
seeking and certainly try to provide an across-the-board
deregulation of the local telephone last mile facility, and to
be able to provide a system where we can get more of that fast
Internet service and more competition out there.
The Broadband Deployment and Competition Enhancement Act of
2001 extends deregulation only to those additions to the
telephone network that make broadband services possible over
existing phone lines, and I note all of this because what we
are talking about is trying to get more services out to
consumers and to protect those services as they are getting
out.
I think we can see what is taking place in the House that
is going to be a strong, we hope a strong competition for this
high-speed Internet access. We need to be able to protect those
intellectual property rights. I hope we can move forward on
both fronts in this effort so that we can get the pipes out
there, we can protect the material so people can have access to
this in a quick, easy, protected fashion.
So I look forward to discussing possibly some of that as
well with the witnesses that we have here today.
The Chairman. Senator Dorgan.
STATEMENT OF HON. BYRON L. DORGAN,
U.S. SENATOR FROM NORTH DAKOTA
Senator Dorgan. Mr. Chairman, I want to say, the question
is not whether we do something here. The question is how we
address this important issue, but I think most of what needs to
be said has been said.
The Chairman. Very good. Senator Breaux.
Senator Breaux. Thank you, Mr. Chairman. I am here to
listen.
The Chairman. Very good. Senator Smith.
STATEMENT OF HON. GORDON SMITH,
U.S. SENATOR FROM OREGON
Senator Smith. Thank you, Mr. Chairman. Everything that can
be said has been said, so I will not repeat it, but I do want
to recognize Mr. Vadasz from Intel who is here. He is a citizen
of my State, and we are honored to have him here, and I think
we all share the feeling that we are caught between two of
America's greatest industries, and hope that this hearing will
provide a forum so that we encourage resolution of a very
serious issue, which is stealing, and also the freedom of the
marketplace to develop without undue Government intrusion.
Thank you, Mr. Chairman.
The Chairman. Very good, and we do have a very
distinguished panel here. Mr. Michael D. Eisner, Chairman and
CEO of the Walt Disney Company, Mr. Peter Chernin, President
and Chief Operating Officer of News Corporation, and Mr. Leslie
Vadasz, the Executive Vice President of Intel. The Committee
welcomes you, and we would recognize Mr. Eisner.
STATEMENT OF MICHAEL D. EISNER, CHAIRMAN AND CEO, THE WALT
DISNEY COMPANY
Mr. Eisner. Thank you, Mr. Chairman. I want to thank you--
--
The Chairman. And the full statements will be included and
you can, of course, deliver it as you wish, in full, or
highlight it, but all three statements will be included in the
record.
Mr. Eisner. I also want to thank Senator McCain and all of
your colleagues for inviting us to discuss the distribution of
creative content over digital broadband and digital broadcast
distribution systems. I am here today representing not only the
shareholders of the Walt Disney Company, but also the hundreds
of thousands of people across the country who participate in
the creation of American film entertainment. I am talking about
directors, writers, actors, editors, electricians, truck
drivers, all sorts of laborers, the list goes on and on. They
work on television shows and they work on movies. On many film
projects, they work as long as 4 years, until the film is ready
to be distributed in a theater. If the result of their efforts
can be digitally stolen, copied, and distributed around the
world before the first ticket is purchased on opening weekend,
then these people will no longer be able to earn their
livelihood because there will simply be no longer a need to
have a movie business, and that business will not employ them.
Consider the impact on assembly line workers if the latest
model Chevrolet were to be mass produced and given away free
before the car ever got to the showroom. You may think this is
unimaginable, but it is exactly the prospect that is being
faced by our industry.
I know this sounds alarming. It is alarming, and it should
be alarming. But make no mistake, this is not just about
entertainment, this is about the economy. U.S. creative content
industries, which, as has been alluded to already this morning,
produce such distinctly American products as films and
television shows, lead the U.S. economy in contributions to job
growth, gross domestic product, and foreign sales and exports.
That creative work accounts for a larger percent of U.S.
foreign sales and exports than most other sectors of our
economy, including automobiles, aircraft, and agriculture.
But all this success is threatened by digital piracy--or
what we would commonly call theft. To be sure, piracy has
always been with us. But, digital piracy is different. In the
analog world, each successive copy degrades in quality and
sharing a copy requires one consumer to physically relinquish
that copy to another person. In digital, each copy is perfect.
The one millionth copy is identical to the original. And,
because of the ubiquitous nature of the Internet, perfect, but
unauthorized, copies will be able to be transmitted
instantaneously all over the world, with no regard whatsoever
for the rights of the content owners. For a chillingly real
depiction of where we are headed, please take a look at this
clip from a year-old ``NightLine'' program in which 15-year-old
Benjamin illustrates his ability to take--for free--any motion
picture or television program of his choice.
[A video was shown.]
Mr. Eisner. We know that we can never achieve, nor do we
expect, 100 percent content security. But there must be a
reasonably secure environment to prevent widespread and
crippling theft of this creative content that drives our
economy. As Benjamin clearly demonstrated, today, we are not
even close. One research firm, Viant of Boston, estimates that
more than 350,000 illegal pirated movies are downloaded from
the Internet every day. In fact, today you can go to the
Internet and find illegal copies of brand-new films such as
``Harry Potter'', ``Lord of the Rings'', ``Monsters, Inc.'',
``Ocean's Eleven'', and so forth. Just take a look at this
excerpt from a recently downloaded pirated copy of ``Black Hawk
Down''.
[A video was shown.]
Mr. Eisner. There are several key considerations that
should be part of the solution to this pressing problem. First,
in addition to being in the interests of the creators of
content, it is also in the interests of the device
manufacturers and consumers that there be common technological
standards. Second, technological standards should not be
dominated by any single company, and should be open so that
consumers have convenient access to all content from all
producers.
Third, the private sector should be given every reasonable
opportunity to develop appropriate means of protection, and to
adopt common, open standards for use in a wide variety of
delivery devices, such as televisions, computers, Palm Pilot-
like devices, or anything that can receive audiovisual works.
Only in the event that computer companies, consumer electronic
manufacturers, software manufacturers and the content providers
fail to act should the Government set standards. But the
pressure of a timeline for eventual Government action is
critical to getting the private sector to do what is needed.
And let me add that we are delighted that yesterday eight
companies offered to get to work immediately. It is about time,
actually. But anyway, they finally did. So, any time period you
put into this legislation, whether it be 18 months, 12 months,
6 months, whatever it is, should now begin today, because the
letter that was sent is as of today. So, that could be the
first day of a new world of working together. It is amazing how
that letter came in yesterday.
Anyway, fourth, the standards that we seek must be
consistently adaptable, renewable, upgradable, and extendable
without the necessity of time-consuming bureaucratic processes
in either private sector or in Government standard-setting
organizations.
Fifth, once standards are set, they must be mandated for
inclusion in all digital media devices that handle creative
content.
Finally, it is critical that the Government act now to help
achieve appropriate solutions. The digital pirates are not
waiting to act, and neither can our Government.
Of course, any legislative solutions must be vetted by all
appropriate committees of Congress. And, legislation will enjoy
smoother sailing if it proceeds from agreement among the
affected industries, consumer groups, and others with a stake
in the digital future.
Given the complexity of the situation, we also acknowledge
the need to avoid unintended consequences of any legislative
intervention. But, the time to solve this problem is running
short.
There are those who would argue that it is unprecedented to
have Government involvement in the mandating of technological
standards. This simply is incorrect. There are numerous
precedents for a Government role here, such as the All-Channel
Receiver Act, which mandated VHF and UHF tuning in all
televisions, and the Digital Millennium Copyright Act, which
mandated Macrovision copy control technology in all VCR's.
These are examples of precedents where the Government has said,
put this piece of equipment in your television sets and have
UHF reception, or change the way you are dealing with VCR's.
Others claim that Disney and other content-owners are
seeking to stop home taping or eliminate fair use. Let me state
for the record we are not here to hinder libraries and college
professors from using portions of creative works for scholarly
research. Nor are we here to interfere with consumers who wish
to time-shift television programming.
Finally, the most outlandish misstatement I have heard is
that content providers want to stifle innovation,
experimentation, and research by our Nation's vibrant high
technology companies. This is simply ridiculous. At Disney, we
embrace technology. Continued innovation in high tech is
necessary for our company to evolve and grow.
In short, all we are asking is that the Government
facilitate the creation of standards to enforce current
intellectual property laws. Providing a more secure environment
for content is the single most important step the Government
can take to stimulate broadband deployment and the digital
television transition. And beyond the specific benefit, the
protection of copyrighted works will make it possible for
millions of Americans to continue to partake of the
extraordinary economic benefits that result from our Nation
being the preeminent content producer in the world. And, it
will allow the hundreds of thousands of artists and would-be
artists in high schools and grade schools to continue to have
something to aspire to.
I thank you again for the opportunity to testify here
today. I would be happy to answer any questions you might have.
[The prepared statement of Mr. Eisner follows:]
Prepared Statement of Michael D. Eisner, Chairman and CEO, the Walt
Disney Company
Thank you Mr. Chairman. I want to thank you, Ranking Member McCain
and all of your colleagues for inviting us here to discuss the
distribution of creative content over digital Broadband and digital
Broadcast distribution systems. For all the reasons that I will share
with you today, The Walt Disney Company urges the United States
Congress to act to facilitate the establishment of open and common
standards for technological protection of creative content in digital
distribution.
U.S. produced movies, TV shows and other audiovisual works are part
of the creative content industries that lead the U.S. economy in
contributions to job growth, Gross Domestic Product and foreign sales
and exports. Creative content represents nearly 5 percent of GDP,
generates more than $450 Billion annually and provides jobs for more
than 4 million Americans. In fact, creative works account for a larger
percentage of U.S. foreign sales and exports than almost all other
sectors of our economy, including automobiles, aircraft and
agriculture. By facilitating the establishment of open and common
standards for protection of creative content, Congress will be acting
to ensure the domestic viability of one of the most important positive
contributions to our nation's balance of international trade.
Technological content protection standards also will play an
important role in stimulating the deployment of Broadband
communications networks, accelerating the digital television transition
and re-energizing the sale of many different digital devices, including
personal computers. Our nation's build-out of Broadband networks is
going too slowly. The sale of computers and other digital media devices
has slowed. And, the pace of the digital television transition is a
frustration to many including the local broadcasters who have invested
Billions of Dollars in new digital transmission facilities.
The availability of high quality motion pictures and television
programs on DTV and on Broadband networks will help drive consumer
demand. That consumer demand will hasten the deployment of DTV,
stimulate the sales of digital media devices and speed the build out of
the vital telecommunications infrastructure that will drive our digital
economy.
Digital technology and Broadband communications hold the promise of
tremendous economic growth for our Nation. At Disney, we have embraced
advanced digital technology. We were one of the first major studios to
deliver our product digitally to consumers via direct broadcast
satellite. We have one of the largest and most successful digital
videodisc businesses. We broadcast digital television every day. We
have state-of-the-art digital feature film production studios and were
the first to produce and deliver our films completely in the digital
realm with major titles such as ``Dinosaur,'' ``Toy Story'' and
``Monsters, Inc.'' Currently we are pioneering the development of
digital cinema screens throughout the world. And, we have entered into
a joint venture with News Corporation entitled Movies.Com. This new
company will establish a direct broadband connection between U.S.-
produced motion pictures and U.S. consumers sitting in their own homes.
Using advanced digital technology, Movies.Com will enable exciting new
choices and options for consumers wishing to access our movies and
other creative content.
These Disney investments demonstrate two things. First, our Company
has been enthusiastic in its embrace of new technology. Second, the
digital revolution holds the promise of great economic growth for our
nation and wondrous new services for our citizens. Unfortunately, these
same digital technologies can enable a level of piracy--theft--that
would undermine our capacity to produce films and entertainment,
undermine the deployment of Broadband networks, undermine the digital
television transition and ultimately result in fewer choices and
options for American consumers.
To be sure, piracy has always been with us. But, digital piracy is
different. In the analog world, each successive copy degrades in
quality and sharing a copy requires one consumer to physically transfer
that copy to another. In digital, each copy is perfect--a perfectly
coded series of ones and zeros. The 1,000th copy is just as perfect as
the original. And, because of the ubiquitous nature of the Internet,
perfect, but unauthorized, copies can be transmitted virtually
instantaneously all over the world with no regard whatsoever for the
rights of the content owners. For a chillingly real depiction of where
we are headed, please take a look at this short clip from a recent
``Night Line'' program in which 15-year-old Benjamin illustrates his
ability to take--for free--any motion picture or television program of
his choice. [Play Night Line clip]
We know that we can never achieve--and do not expect--100 percent
content security. But, there must be a reasonably secure environment to
prevent widespread and crippling theft of the creative content that
drives our economy. As Benjamin clearly demonstrated, today, we are not
even close. One research firm, Viant of Boston, estimates that more
than 350,000 illegal pirate movies are downloaded from the Internet
every day. In fact today, you can go to the Internet and find illegal
copies of brand new films like ``Harry Potter,'' ``Lord of the Rings,''
``Monsters, Inc.'' and ``Ocean's Eleven.'' Just in case you have any
doubts about picture quality, just take a look at this excerpt from a
downloaded pirate copy of the recent film ``Black Hawk Down''. [Play
clip]
There are several key considerations that should be a part of the
solution to this pressing problem. First, the interests of consumers,
content owners and device manufacturers ALL require that there be
common technological standards. Common standards will prevent consumers
from confronting a bewildering array of confusing and incompatible
standards. Common standards will help create a technologically
predictable market to which content owners can bring their movies and
other works. And common standards will make it reasonable to mandate
that device manufacturers build the necessary hardware and/or software
into their devices.
This does not mean that there will be a single ``silver bullet''
solution or that all content owners must use the same digital rights
management system in the distribution of legitimate content. Rather,
what the market needs is some means to ensure interoperability and a
common set of ``baseline'' technologies to help digital media devices
identify and reject the illegal, pirated copies.
Second, the technological standards should be open--not limited to
the proprietary developments of a single firm. Widely available open
standards, licensed at reasonable costs, will prevent the emergence of
new ``gatekeepers'' who could retard the development of new digital
services and limit consumer choice in content. A top public policy goal
for Broadband should be open standards so that consumers have
convenient access to all content from all producers.
Third, the private sector should be given every reasonable
opportunity to develop appropriate means of protection and to adopt
common open standards for use in a wide variety of delivery devices.
Only in the event of private sector failure should government set the
standards. But, the pressure of a timeline for eventual government
action is critical to yield the desired standards in a reasonable time
frame.
Fourth, the standards that we seek must be renewable, upgradeable
and extensible without the necessity of time consuming bureaucratic
processes in either private sector, or government, standards setting
organizations.
Fifth, once standards are set, they must be mandated for inclusion
in all digital media devices that handle creative content. This is
necessary to ensure a reasonably secure environment and to prevent
unfair competition by non-compliant device manufacturers.
Finally, it is critical that the government act now to help achieve
appropriate solutions. Disney is very grateful for the efforts of many
in the Congress who have tried over the years to ``jawbone'' the
affected industries to negotiate the required technological standards.
For example, we thank Chairman Hollings and Ranking Member McCain for
scheduling this hearing, which has acted as a healthy spur to
discussions in the private sector. Other leading legislators have been
helpful as well. Members of both the House and the Senate, Democrats
and Republicans have written to the Motion Picture Association, to the
Electronics Industries Association, to prominent high tech companies
and to the FCC urging swift private sector agreement on technological
standards to protect creative content in the digital world. And, we are
grateful to Chairman Hollings and Senator Stevens for the Discussion
Draft Legislation that they circulated last year. That Discussion Draft
contained many innovative suggestions to break the Gordian knot that
has frustrated all prior attempts to solve the digital piracy problem.
Of course, any legislative solutions must be vetted by all the
appropriate Committees of the Congress. And, legislation will enjoy
smoother sailing if it proceeds from agreement among the affected
industries, consumer groups and others with a stake in the digital
future. Also, given the complexity of the problem, we need to proceed
carefully so as to avoid unintended consequences of any legislative
intervention. But, the time to solve this problem is running short and
prior attempts at jawboning have not produced a solution.
Some high tech companies, like Cisco Systems, have been helpful in
the search for solutions and to them we express our gratitude.
Unfortunately, other high tech companies have simply lectured us that
they have no obligation to help solve what they describe as ``our
problem.'' In fact, at least one high tech executive has described
illegal pirate content as a ``killer application'' that will drive
consumer demand for Broadband. Obviously, the development of Broadband
networks is an appropriate National goal only if those networks are
conduits for legitimate--not pirate--content.
I would like to respond briefly to some of the arguments that have
been raised against efforts to deal with this problem. First, some
argue that it is unprecedented to have government involvement in the
mandating of technological standards. That argument is incorrect. There
are numerous precedents for a government role here. For example, the
Audio Home Recording Act of 1992 required that all digital audio
recording devices conform to a specific content protection technology,
namely, the Serial Copy Management System (SCMS). And, the Digital
Millennium Copyright Act of 1998 requires all analog VCRs to include
the Macrovision copy control technology. The All-Channel Receiver Act
required all television sets sold in this Country to contain both VHF
and UHF tuners. Clearly, there is ample precedent for legislation to
mandate technical standards.
There is another issue I'd like to clarify. Disney and other
content owners are not seeking to stop home taping or eliminate ``fair
use.'' We are not here because we want to hinder libraries and college
professors in using portions of creative works for scholarly research.
Nor are we here because we want to interfere with consumers who wish to
make a home copy of Broadcast and basic cable TV programs for their own
personal time-shifted viewing. We are confident that the government can
act to facilitate the needed technology standards without endangering
home taping or fair use.
Finally, I want to emphasize that Disney has no desire to stifle
innovation, development, experimentation and research by our nation's
vibrant high-technology companies. We embrace technology--it is an
everyday part of our business. Continued innovation in high tech is
necessary for Disney to evolve how we create and distribute our content
and to reach consumers in new ways. We are eager to work with the
consumer electronics and information technology industries to ensure
that the technological standards we seek are NOT an impediment to
continued innovation and experimentation.
I thank you again for the opportunity to testify here today and I
would be happy to answer any questions that you might have.
The Chairman. We thank you, sir. Mr. Chernin.
STATEMENT OF PETER CHERNIN, PRESIDENT AND CHIEF OPERATING
OFFICER, NEWS CORPORATION
Mr. Chernin. Good morning, Mr. Chairman, Senator McCain,
Members of the Committee. My name is Peter Chernin, and I am
the President and COO of the News Corporation. Thank you, Mr.
Chairman, for inviting me to participate in today's hearing. I
would like to take this opportunity to applaud you for your
leadership on seeking to ensure copyright protection for
content producers in the digital broadband age. News
Corporation is one of the world's largest media companies. Our
job is to create and select the most valuable information and
entertainment and to distribute it as widely and as efficiently
as technology will allow.
The entertainment industry is in a very exciting but
challenging time. The rise of broadband, Internet, and other
digital technologies is providing us with tools of
unprecedented flexibility that we are only now beginning to
fathom. However, we strongly believe that the great potential
and promise of broadband, Internet, and other digital
technologies can be fully achieved only if protections are in
place to safeguard our investment in the development and
distribution of content.
Recently, we have seen more and more programs like DivX,
Gnutella, Morpheus, Bear Share, and LimeWire that streamline
the downloading of motion pictures and television programming
without compensation to the copyright-holder. With the advent
of broadband, it is only a matter of time before these file-
sharing technologies and other technologies have a serious
impact on the economic viability of the motion picture and
television broadcast industry.
One solution to this dilemma may be that we only distribute
our content through media that are secure, for example, pay
cable, direct broadcast satellite, and DVHS on digital
distribution channels to the home that provide a basic level of
security for digital content. In fact, even the Internet itself
is not the culprit. It is the unauthorized redistribution of
unencrypted content that we seek to halt.
In each of these distribution methods, we are able to
protect our content through either negotiation, licensing, or
contractual arrangements. However, there is one major digital
distribution method that does not currently offer adequate
protection, digital over-the-air broadcast television.
Presently, cable and satellite have a competitive advantage of
DTV due to the closed nature of cable and satellite systems
that allow for encryption and thus the protection of content.
DTV is not encrypted for public policy reasons and thus does
not enjoy the same protections today.
However, we have identified a technological solution that
works without encrypting DTV. It involves insertion of a
broadcast flag in DTV's signals that can be detected upon
receipt by DTV processing equipment. Once detected, the
receiving device would protect the content from being
redistributed illegally on the Internet. Unfortunately, we have
not yet reached agreement with the consumer electronics and
information technology industries about the use of the
broadcast flag.
Mr. Chairman, as you are no doubt aware, there has been an
ongoing effort for the last several years to negotiate the
protection of all digital audiovisual content delivered to the
home network, including but not limited to DTV. These
negotiations are often referred to as the 5C negotiations, and
have made substantial progress with regard to the protection of
pre-recorded and conditional access delivered content. Fox
applauds that progress. However, I regret to report to you
today that these negotiations are at an impasse over 5C's
refusal to include the broadcast flag in its license.
I have always believed that an agreement should first be
brokered through voluntary industry-led negotiations and then
blessed by Congress to ensure a level playing field against
rogue companies who will not sign up for voluntary obligations.
But time is growing short for digital TV copyright protection.
The parties to the negotiations all know that the broadcast
flag provides a workable low cost technological solution to
this problem, yet the 5C companies have been unwilling to
embrace this license-first then legislation approach.
I would hope that the 5C companies and their CE and IT
brethren would rethink their positions. If we cannot arrive at
a voluntary industry consensus very soon, broadcasters will be
forced to come to Congress to ask for legislation.
Another problem is that we need to be able to protect
analog content, given that hundreds of millions of TV sets can
only accept analog and not digital content. Unfortunately,
analog content can easily be converted into an unprotected
digital form that can in turn be copied or redistributed
without authorization. We are developing a plan to plug what is
known as the analog hole that includes harnessing watermark
technology that would prevent such conversion from being used
to avoid content protection obligations.
Finally, we are working on a plan to frustrate the
unauthorized viewing of content delivered via the Internet. We
are mindful of not overcorrecting a problem by burdening
Internet appliances any more than necessary, but we are
confident that the problem can be solved.
It is reported that every day hundreds of thousands of
movies are being downloaded without compensation to the
copyright holders. The competition from these illegal copies of
our movies and TV shows is the single biggest obstacle to
developing a viable business model to offer video content on
broadband. Again, we are optimistic we can develop a
technological solution to address this phenomenon in a cost-
effective way.
At the end of the day, Mr. Chairman and Members of the
Committee, if we do not find creative solutions to these real
and growing problems, DTV protection, plugging the analog hole,
and the wholesale looting of content via the Internet,
consumers will be the ultimate losers. While some may see a
short-term gain in avoiding copyright protection, the long-term
result will be less consumer choice, and stunted American
technological growth and development.
Thank you for providing me this opportunity to present the
views of News Corporation. I would be happy to answer any
questions, sir.
[The prepared statement of Mr. Chernin follows:]
Prepared Statement of Peter Chernin, President and Chief Operating
Officer, News Corporation
Good morning Mr. Chairman and Members of the Committee. My name is
Peter Chernin and I am the President and Chief Operating Officer of the
News Corporation. Thank you, Mr. Chairman, for inviting me to
participate in today's hearing. I would like to take this opportunity
to applaud you for your leadership on seeking to ensure copyright
protection for content producers in the digital broadband age.
News Corporation began fifty years ago as the owner and operator of
a single newspaper. Today we are one of the world's largest media
companies. News Corporation operates newspapers, a publishing house, a
film company, a television network, television stations, cable program
networks, and the largest TV production studios in the world. Yet in
all that time, and in all those businesses, the company's basic
function has not changed. Whether we're delivering the New York Post in
Harlem, New York, broadcasting our FOX television programs to viewers
across South Carolina, or preparing our novels from Harper Collins to
be downloaded onto e-books for students in Alaska, News Corporation is
essentially a producer and distributor of content. Our job is to create
and select the most valuable information and entertainment, to package
it as attractively as possible, and to distribute it as widely and as
efficiently as technology will allow.
As an industry, we are in a very exciting but challenging time. The
rise of broadband Internet and other digital technologies is providing
us with tools of unprecedented flexibility that we are only beginning
to fathom. We are already harnessing these new technologies and
distribution methods in a big way: over fifty percent of the United
States television households are able to receive FOX broadcast in DTV
(through 27 of our owned and operated and affiliate stations),
including the first-ever all-digital, widescreen Super Bowl earlier
this month; our BSkyB business is the leading digital satellite
broadcaster in Europe; and we have released hundreds of FOX movies in
digital form on hundreds of millions of DVDs sold allover the globe.
And there is much more to come. We hope soon to be rolling out
Movies.com and other interactive products, and be releasing FOX movies
in the high-definition digital D-VHS pre-recorded format. However, we
strongly believe that the great potential and promise of broadband
Internet and other digital technologies can be fully achieved only if
protections are in place to safeguard our investment in the development
and distribution of that content. Thus, the single most important issue
for all entertainment companies, and certainly for every content
producer, is that of copyright protection, a constitutional right that
has increasingly come under attack in this digital age.
The right to hold a copyright can be traced back to Article One of
the United States Constitution. However, the constitutional protections
of copyrighted works are being threatened by the ease with which people
can copy and distribute materials in cyberspace. There is no better
example of the content community's potential, as well as its
vulnerability, than the rollout of broadband Internet access. Without
the adequate technological and legal protections for intellectual
property, content producers and legitimate content distributors will
find themselves vulnerable to theft by anyone who owns or has access to
a computer with a broadband connection to the Internet.
The Internet is more than an economic medium; it is a supremely
democratic one in providing equality of access to information, and this
deserves to be celebrated. But its ability to empower the general
public must not be taken as a license for consumers to essentially
shoplift online. What the general public has to realize is that many
businesses that rely on the creation, distribution and sale of content
will be put in jeopardy by massive copyright infringement. This, in
turn, will impact the quality of content that makes the broadband
Internet so exciting for so many people.
Recently, we have seen more and more programs like DivX, Gnutella,
Morpheus, Bear Share and Lime Wire that streamline the downloading of
motion pictures and television programming without compensation to the
copyright holder. With the advent of broadband, it is only a matter of
time before these file-sharing technologies and other emerging
mechanisms have a serious impact on the economic viability of the
motion picture and television broadcast industry. Films and television
shows are like any other products in search of investors. However, if
investors believe that the products they are investing in cannot be
protected, thus losing their economic value, those investors will look
for other products to fund, or at least other distribution means for
those products. That alone will have a dramatic impact on the millions
of jobs that are created by the entertainment industry. Why would one
invest millions of dollars in a motion picture or a TV show only to
have it stolen and placed on the Internet where anyone can access it
for free?
Lack of protection of intellectual property is not just a threat to
the entertainment industry; it is a threat to American business as a
whole. Protection of intellectual property has been crucial to this
country's prosperity over the past several decades, and is as critical
to the success of the Information Revolution as it was to the
Industrial Revolution. U.S. media industries dependent on copyright
employ nearly four million workers and produce more than $65 billion in
exports. American books, movies, television and music are among our
most successful products overseas; but if they cannot be protected from
unlawful copying, their export value would shrink to nothing. The
potential of the wholesale disregard of copyrights would be devastating
to employment and job creation in the U.S., and to any chance of making
the Internet a boon to us all.
The threat is real not just for the creators of content, but also
for those businesses that make their livelihood on the redistribution
and licensing of content. For example, the market for network
television shows after the first network run (including the value of
rerun and re-purposing rights, and syndication to local broadcast
stations) in this country alone is hundreds of millions of dollars.
Around the world, American-produced television programming generates
additional billions of dollars in revenues. Imagine a world where those
revenues vanish because any television episode can be posted to the
Internet at the time of its first network run for redistribution around
the world. What would happen to the hundreds of TV production companies
and distributors that employ thousands if buyers vanish because there
were no incentives to purchase the rights of episodes because that are
freely accessible on the Web? These are the questions we are asking
ourselves.
One solution to this dilemma may be that we only distribute our
content through media that are reasonably secure. For example, pay
cable, direct broadcast satellite, and D-VHS are digital distribution
channels to the home that provide a basic level of security for digital
content. Indeed, even the Internet affords us the basis to securely
transmit our content. In each of these areas we are able to protect our
content, through either a negotiation process regarding protection
technology (for example, ``D-Theater'' encryption for D-VHS), or a
licensing process using a commercially available Digital Rights
Management (DRM) technology for the Internet, or through contractual
arrangements with cable and satellite providers. However, there is one
major digital distribution method that does not currently offer
adequate protection right now--digital over-the-air broadcast TV
(``DTV'').
One might ask why broadcast television is worthy of protection in
this time of multichannel offerings such as cable and direct broadcast
satellite, each offering a vast array and variety of programming. The
answer lies in the unique local nature of the service provided by
broadcast television. For it is broadcasters who provide viewers with:
high quality local news that keeps viewers abreast of the
happenings in their community;
community affairs programs that help them keep up with local
politics, issues, and events in their area;
coverage of local sporting events at their local high school or
community college;
the weather reports that help them prepare for the coming day;
an emergency alert system that helps warn viewers of dangerous
weather conditions; and,
traffic reports that help them manage their local rush hour.
In addition to this local programming, local broadcasters provide
viewers with what is still, overall, the most popular and high quality
entertainment programming on the air, as well as the big ``event''
programming that touches us all and brings us together as a nation,
such as the Super Bowl, the Olympics, and the State of the Union
address. Finally, and perhaps most importantly, broadcast television is
universal, which means that for twenty-five percent of the country
broadcast television is their only source of programming.
News Corporation has recently spent a tremendous amount of money
investing in the future of this medium that, as I stated above, is so
vital to this country. I know that that Members of this Committee are
strong supporters of this medium and its rapid transition from analog
to digital. Our investment in new broadcast technologies and commitment
to the digital transition positions us to be a leader in the rollout of
DTV.
Presently, cable and satellite have a competitive advantage over
DTV due to the closed nature of cable and satellite systems that allow
for encryption, and thus the protection of content. DTV is not
encrypted for public policy reasons and thus does not enjoy those same
protections today. However, we have identified a technological solution
that works without encrypting DTV. It involves insertion of a
``broadcast flag''in DTV signals that can be detected upon receipt by
DTV processing equipment. Once detected, the receiving device would
protect the content from being redistributed on the Internet. Weare
hopeful that through negotiations with the consumer electronics (CE)
and information technology (IT) industries this solution will be
voluntarily agreed upon and incorporated in relevant copy protection
technology licenses; in fact, FOX is leading this charge. However, even
if we do reach agreement, targeted legislation will be necessary in
order to ensure a level playing field for all entities involved.
Unfortunately, we have not yet reached the agreement with the CE
and IT industries. Mr. Chairman, as you are undoubtedly aware, there
has been an on-going effort for the last several years to negotiate the
protection of all digital audio-visual content delivered to the ``home
network'', including but not limited to DTV. These negotiations are
often referred to as the ``5C'' negotiations. Those negotiations have
made substantial progress with regard to the protection of pre-recorded
and conditional-accessdelivered content (e.g., pay-per-view, video-on-
demand, pay and basic cable), and FOX applauds that progress. But as a
representative of one of the largest broadcasters in the country, I
regret to report to you today that, although some hopeful developments
have occurred with regard to protection of over-the-air broadcast
content, those negotiations are presently at an impasse over 5C's
refusal to include the obligation of protecting DTV via the ``broadcast
flag'' in its license. They say there are antitrust problems with
extending their license to cover broadcast; they also say that
potential licensees will be so turned off by a broadcast protection
obligation that they won't sign up for a 5C license at all. We think
these objections are unfounded. We don't believe that a serious
antitrust objection can be raised to such a narrowly targeted and pro-
competitive technology as the broadcast flag; nor do we think it right,
or even logical, that non-complying competitors would use the fact that
their devices do not contain protection of DTV as a selling point.
Regardless, we are currently at an impasse with 5C.
Needless to say, this impasse is much to the broadcast industry's
collective frustration. I have always believed that an agreement should
first be brokered through voluntary, industry-led negotiations, and
then blessed by Congress to ensure a level playing field against
``rogue''. companies who will not sign up for the voluntary
obligations. But time is growing short for digital TV copyright
protection. Lengthy negotiations have resulted in some progress in
airing the issues but have not produced tangible results. The parties
to the negotiations M.L know that the broadcast flag provides a
workable, low-cost technological solution to this problem. Yet, the 5C
companies have been unwilling to embrace this ``license-first, then
legislation'' approach. Other voices in the CE and IT industries have
likewise refused to support this two-step approach. I would hope that
the 5C companies and their CE and IT brethren would rethink the
position they are presently taking. If we cannot arrive at a voluntary
industry consensus very soon, broadcasters will be forced to come to
Congress to ask that a DTV solution be imposed on the CE and IT
industries.
Just as we are striving to protect our content when distributed by
DTV, we are addressing two other mechanisms that threaten content. Into
the foreseeable future we will still need to deliver content to
consumers in an analog form; after all, hundreds of millions of TV sets
can only accept content in that form. Unfortunately, analog content
(including protected digital content converted to analog for viewing
purposes) can easily be converted into an unprotected digital form that
can in turn be copied or redistributed without authorization. This is
called the ``analog hole'' in digital content protection schemes. We
are developing a plan to plug the ``analog hole'' that includes
harnessing watermark technology that would prevent such conversions
from being used to avoid content protection obligations.. We hope to
secure inter-industry consensus on such a proposal, and we welcome your
assistance in encouraging all relevant parties to make this happen.
Once it does, we would have that solution ratified by Congress.
Finally, we are working furiously on a plan to frustrate the
unauthorized viewing of content delivered via the Internet. It is a
difficult problem to address because there are We are also so many ways
unauthorized content can be distributed on the Internet. mindful of not
over-correcting the problem by burdening Internet appliances any more
than necessary. But we are confident that the problem can be solved; we
know it must be. It is reported that every day, hundreds of thousands
of copies of movies are being downloaded, without compensation to their
copyright holders, and this number is growing rapidly, in tandem with
the increasing speed and proliferation of Internet-delivered broadband.
The competition from free, but illegal copies of our movies and TV
shows is the single biggest obstacle to developing a viable business
model to offer consumers authorized versions of these same movies and
TV shows. Again, we are optimistic that we can develop a technological
solution to address this phenomenon in a cost-effective way, just as we
have with DTV, and will soon be doing with the ``analog hole''.
However, it is critical that Congress plays an active role in
ensuring that the parties reach a consensus on how to solve this
problem as quickly as it is technologically possible. This is an
Internet problem that needs to be solved at Internet speed; we need
Congress to help make that happen. As with the broadcast flag and
analog hole solutions, we will need Congress to codify the solution to
the illegal download problem. We at News Corporation are working to
build the necessary support in the private sector, with consumer
electronics and computer manufacturers and Internet service providers
and others to come up with solutions to this incredibly complex problem
so that we can all--but especially consumers--be the beneficiaries.
With our combined technological expertise, we have a chance to stop the
theft--which everyone agrees must be stopped--of copyrighted works and
to provide the business opportunities that will drive the development
of new and innovative products and services.
At the end of the day, Mr. Chairman and Members of the Committee,
if we do not find creative solutions to this real and growing problem,
consumers will be the ultimate losers. While some may see a short-term
gain in obtaining free unauthorized material from the Internet, the
long-term result will be less consumer choice and stunted American
technological growth and development.
Thank you for providing me this opportunity to present the views of
News Corporation on this important topic. I will be happy to answer
questions.
The Chairman. Very good. Mr. Vadasz.
STATEMENT OF LESLIE L. VADASZ, EXECUTIVE VICE PRESIDENT, INTEL
CORPORATION
Mr. Vadasz. Thank you, Mr. Chairman, for inviting me. My
name is Les Vadasz. I am executive vice president of Intel
Corporation. I have submitted my testimony in writing, and I am
just going to say a few words, just to mention a few points.
20 years ago, Mr. Valenti called the then-nascent VCR
industry the Boston Strangler of the film industry. In the year
2000, the media industry revenue from VCR amounted to about $11
billion, much more than their revenue from box office receipts.
The latest manifestation of the technophobia of the media
industry is the campaign to mandate the features of personal
computers and information technology product, Government-
mandate these features.
Let me talk about the information technology industry. I
spent over 40 years of my career either creating technology or
creating businesses out of technology. It is a fast-moving,
highly innovative industry, and it is very large, over 20 times
larger than the media industry we are working to protect.
Let me tell you how Intel works. We spend many hundreds of
millions of dollars to develop a single microprocessor. We
spend billions of dollars even before we develop that product
to equip our manufacturing plants. And, we run as fast as we
can. We listen to our customers; we listen to our constituents.
But, at the end of the day we can only run fast if the product
decision is ours. Success or failure is determined by what
features we include in our product, and how fast we get the
product on the market. To think that something good could come
out of a Government-mandated deliberative process interjected
in this development cycle is just plain wrong. Innovation would
suffer. Innovation would come to a screeching halt. Investment
levels would suffer, and you would create an irreparable damage
to a vital industry.
Now let me talk about copy protection. I do not think I
have to speak much about Intel's stand on intellectual property
protection. Our vigorous defense of our intellectual property
speaks louder than I could ever do, but it is not just our
intellectual property. We have to work in an industry
environment where everybody's intellectual property is
protected, or there is just chaos. There is no question in my
mind about that, and that is why Intel was a very active and
very willing participant in the cross-industry effort to attend
to the legitimate issues that the movie industry has.
We have been at this now for over 6 years. Lots of good
technology was developed. Some of that technology is beginning
to be used. Where are we? DVD is protected. Cable transmission
is protected. Satellite transmission is protected. Internet
transmission, contrary to some beliefs, is and can be
protected.
Furthermore, based upon the work of this Committee, who by
the way has some of the best engineers that I know, once the
protected content is receive in your home, it can be protected
as it goes from one device to another device to another device
in your home. That technology is available today. It only needs
to be used.
Now, the issue of the day is terrestrial broadcast and the
analog hole. There are about 130 people working on the issue of
the terrestrial broadcast, a cross-industry group, from the
content industry, from the consumer electronics industry, from
the information technology industry. I expect that by the end
of March there will be a specification proposed on how that
problem can be addressed, and I think to the satisfaction of
virtually everybody.
Now, the analog hole problem will probably need more time.
That is a difficult problem. That is a newer problem that that
committee is engaged in, but to me, when I look at all these
technology developments that we do, that is the easy part. It
is really how to use these technologies. We are putting some
very powerful technologies in the hands of the media industry,
and I have to admit, I worry: ``Is that going to be used to the
benefit of the consumer, or to the detriment of the consumer?''
Let me tell you what I mean. The personal computer started
out as a productivity tool, but today it is much more than
that. It is integral to the fiber of our life. It is integral
to the fabric of our children's life. The media industry would
try to make that personal computer nothing more than a DVD
player--an expensive DVD player--or a CD player, and maybe not,
at that.
Why am I worried? Well, I have here some of the newer CD's
you can buy. It comes with some disclaimer which says--well, if
I translate it, this may play on your PC or it may not play on
your PC, but certainly I can guarantee you that if you are used
to collecting a number of songs on your MP-3 player while you
exercise and listen to them, you cannot do that with this.
Worse than that, these CD's do not even play on your CD, so
I would like to leave you with two thoughts. First, please do
not tamper with the dynamics of the information technology
industry. You will create irreparable damage to a vital
industry.
Second, listen to the consumer. Be the voice of the
consumer. I think it is time we refocused this activity from
content protection to consumer protection.
Thank you very much for listening to me.
[The prepared statement of Mr. Vadasz follows:]
Prepared Statement of Leslie L. Vadasz, Executive Vice President, Intel
Corporation
I appreciate the opportunity to appear before the Committee to
discuss the information technology (IT) industry's work on creating a
more secure environment for the dissemination of digital content.
Intel--and the rest of our industry--has as great, if not a greater,
interest as the studios in the growth of a robust market for new
digital content offerings to the consumer. And, we have an equally
strong interest in the protection of intellectual property.
But we come at these challenges from very different perspectives.
The IT industry is all about innovation; we embrace and champion
technological progress. The content community, by contrast, has
historically feared technology--from the advent of sound recording, to
the development of the VCR, the DVD, the PC and other digital devices.
Yet every advancement in technology has proven to be a major growth
catalyst for the studios. Videocassette rental and sales totaled about
11 billion dollars last year, exceeding box office receipts by some 2+
billion dollars. This is the device once referred to by Jack Valenti as
the ``Boston Strangler'' of the film industry. Other ``attackers'' of
the film industry include the DVD, which added another 5.9 billion to
studio receipts in the last year. \1\ It is important to keep these
facts in perspective when reviewing claims of imminent threats to the
health of the film industry.
---------------------------------------------------------------------------
\1\ Scott Hettrick, ``2001: Higher Ground, Tight at the Top,''
Video Business, 21 January 21 2002, 32.
---------------------------------------------------------------------------
Nevertheless, we agree that content protection is important and we
are working together on that challenge. But at the outset, I want to
emphasize the following points:
Any attempt to inject a regulatory process into the design
of our products will irreparably damage the high-tech industry:
it will substantially retard innovation, investment in new
technologies, and will reduce the usefulness of our products to
consumers.
Consumer rights to enjoy powerful technology products, with
the robustness they have come to expect, and their right to
fully enjoy content in accordance with what the law permits,
would both be greatly diminished if the studios' ``wish list''
of content protection objectives were fully implemented. PC's
would become a ``dumb device'' when it comes to copyrighted
content, and consumers would lose important fair use rights now
protected in the law.
IT Industries: the power behind our economy
The information technology sector is enormously important to the
overall health of the US economy. The Department of Commerce just
released a new report entitled Digital Economy 2002. According to this
report, in 2000, the IT-producing industries employed some 5.6 million
workers, with average wages per worker more than twice the national
average. During the period from 1996-2000, IT ``was responsible for 28
percent of overall real economic growth''. Most importantly, the study
states that the evidence ``suggests that massive IT investments by U.S.
industries are producing positive and enduring changes in the nation's
economic potential.'' \2\
---------------------------------------------------------------------------
\2\ United States, Department of Commerce, Economics and Statistics
Administration, Digital Economy 2002 (Washington: February 2002,
accessed 25 February 2002); available from http://www.esa.doc.gov/508/
esa/DIGITALECONOMY2002.htm.
---------------------------------------------------------------------------
Information from the Bureau of Economic Analysis provides useful
insight into the relative positions--and importance to the economy--of
the IT industry and the studios. According to Digital Economy 2002,
business, personal, and government spending on IT goods and services
(not including communications services) totaled $600 billion in 2000.
Meanwhile, the gross domestic product of the motion picture industry
was approximately $35 billion in 2000. \3\
---------------------------------------------------------------------------
\3\ United States, Department of Commerce, Bureau of Economic
Analysis, Gross Domestic Product by Industry in Current Dollars, 1994-
2000, (Washington: undated, accessed 25 February 2002); available from
http://www.bea.doc.gov/bea/dn2/gpoc.htm.
---------------------------------------------------------------------------
Innovations in our industry have come at a staggering pace.
Consumers have come to expect from us a continuous flow of ever more
powerful devices, at lower cost, each year. These innovations require
large amounts of investment and tremendous amounts of research and
development. Last year, Intel spent $3.8 billion on R&D alone, about
half of all that Hollywood earned in box office receipts in the past
year. \4\
---------------------------------------------------------------------------
\4\ Box Office receipts totaled $8.35 billion in 2001. See Sharon
Waxman, ``Hollywood's Great Escapism: 2001 Box Office Receipts Set a
Record'' The Washington Post 4 January 2002, p A01.
---------------------------------------------------------------------------
This dynamic of innovation would be choked by any attempt to
regulate the design of products solely for the benefit of one industry.
Designing products through a regulatory process, as some studios have
advocated, would inject political influences into technology
development in very destructive ways. Investment and innovation will
both suffer, as a fear of entanglement with government processes will
have a chilling effect on investors and subject new ideas to ``reg
review''.
Overview of content protection: the work that has been done by the IT
industry
The primary challenge in content protection, we have found, comes
down not to technology but answering the question: how is the consumer
best served?
The first time the issue of digital video content protection arose
was in 1995, when Digital Versatile Discs--DVD's--were preparing to
come on the market. Concerned about mass copying of DVD's, Hollywood
attempted to persuade Congress to legislatively mandate technological
``fixes'' to address the prospect of widespread consumer copying of DVD
discs. Not surprisingly, the studios opted for an overreaching approach
that would have all but eliminated the value of the PC experience.
Responding to the threat of legislation freezing in place
inadequate, clumsy solutions to copy protection issues, Intel and the
PC industry mobilized the consumer electronics industry and the studios
to form a working group known as the Copy Protection Technical Working
Group (CPTWG). This body reviewed and enhanced cryptographic tools that
could be applied to DVD content--which still today protect DVD's from
being hacked by all but a tiny percentage of users of these products.
Through the work of CPTWG (subgroups 4C and 5C), we have also tackled
the issues of content distribution between devices and the protection
of information in recordable media.
While this consensual process yielded specifications that sped DVD
to market, I have serious concerns that consumers were not fully
served.
The over-the-air broadcast protection question
One immediate concern of the studios, today, is over-the-air
broadcast of digital content. The CPTWG is nearing completion of
technical specifications to address this issue. There is general
agreement that it may be necessary for the FCC to assist in the
implementation of the digital broadcast protection solution by enacting
a very narrow regulation respecting requirements for digital television
receiver products to ensure that they pass on the content in a
protected form. However, I have great concerns that we are, again,
rushing this technology to market without pausing to ensure that
customers' reasonable expectations for use of the products are weighed
in the balance.
The ``analog hole'' issue
Another issue, much more complex and difficult to solve, is the so-
called ``analog hole''. This is the situation presented by millions of
legacy devices--such as the commonly owned VCR of today--that have
digital inputs and analog outputs. Such devices can be used to
reconvert a digital signal to analog, from which it can then be
reconverted to digital through available PC equipment or other devices.
Work toward solving this issue has started--``watermarking''
solutions have been proposed and are being evaluated--but there is no
clear path to a solution at the present time. Again, we are working on
this issue aggressively, but some studio demands--we believe--would
infringe on consumer fair use rights.
It has been suggested by the studios that the placement on chips of
electronic circuitry that would recognize and respond to watermarks be
mandated by regulation. For the government to mandate how the IT
industry designs and develops chips--or to try and force agreement for
design features--would be ludicrous. As I said before, irreparable
economic damage would result.
Our view of the studio perspective
For some studios, the objective is total control. In the early
70's, when RCA was experimenting with the new technology of videotape,
researchers were eager to find a means to control consumers' use of the
product in order to maximize studio revenues. The means eventually
chosen was simple: a video would play once, and when finished, the
cassette would lock into place. The customer would have to return the
video to the store, and pay again, to have it unlocked. In spite of the
restrictive nature of this technology, the Disney executives were
horrified because they could not control how many people could watch
the videotape. \5\
---------------------------------------------------------------------------
\5\ Lawrence Lessig, ``May The Source Be With You,'' Wired
(December 2001, accessed 25 February 2002); available from http://
www.wired.com/wired/archive/9.12/lessig.html.
---------------------------------------------------------------------------
In 1981, Mr. Valenti bemoaned the prospect that the industry would
be overwhelmed by ``millions of little tapeworms'' eating at the very
heart and essence of copyright(s). \6\ Today there are 88 million VCR's
in use in the US alone, yet the studios are making more money than ever
before. Since the VCR has been introduced, the number of new films
released per year has more than doubled, while annual sales of
videotapes have grown from approximately 3 million units to over 700
million units. \7\ Four and a half million VHS tapes of Shrek were sold
in just two days. As I noted before, consumers spent $11 billion on the
rental and purchase of VHS tapes in 2001. \8\
---------------------------------------------------------------------------
\6\ Ellen Goodman, ``The Right To Zap,'' Washington Post, 24
January 1984, p A13.
\7\ MPAA Research Department, 2000 US Economic Review (accessed 25
February 2002): available from http://www.mpaa.org/useconomicreview/
2000Economic/index.htm.
\8\ Hettrick, 32.
---------------------------------------------------------------------------
Substitute ``digital'' for ``tape'' in Mr. Valenti's comments in
1981 and the arguments are the same. Congress should not engage in
futile attempts to design products by regulation. Instead, Congress
should focus attention on the degree to which the consumer interest is
being undermined by a slavish adherence to demands for ``total''
content protection.
Where is the voice of the consumer?
There is a fundamental difference between the perspectives of the
high-tech industry and the content community. High-tech does not have
one narrow market objective--that of maximizing revenue from content
distribution. We have a broader marketplace composed of hundreds of
millions of consumers who want ubiquitous, powerful digital tools that
can manage a wide variety of information, content, and applications and
who want to use them for all lawful purposes.
Consumers expect, when they buy a PC, that it will have the power,
versatility, and robustness that they know our industry can provide.
They also have expectations to be able to make full use of the PC's
ability to store, retrieve, create, and manage digital content. We
intend to provide that utility, while providing technologies to protect
against wholesale copyright infringement.
I have stated that I have concerns whether all of the compromises
that have been reached to date are in the best interests of the
consumer. We have rejected some of the more onerous controls that have
been advanced by the content community, such as:
``Forensics'' tracking--which would identify parties from
whom unauthorized copies of content products were obtained--
with very substantial impacts on consumer privacy;
``Selectable output'' controls that would allow the content
owner to arbitrarily meddle with the consumer's electronics;
Playback controls, which could require devices to inspect
all digital content and prevent playback of any content which
is not approved by Hollywood.
Voluntary, consensual standards--the best means to the right balance
In the end, the only way to effectively balance the interests of
content owners, manufacturers of consumer electronics devices, and the
information technology industry with the rights of consumers is through
the voluntary, consensus-based process. It can be difficult, does not
lend itself to ``one size fits all'' solutions, and may be viewed as
cumbersome by some who would rather see the process driven by top-down
control mechanisms. But it is the only path which will allow technology
to advance efficiently while reconciling all of these competing
interests.
There are new ``intelligent'' consumer products, exemplified by the
PC, that are dramatically improving the consumer experience. The real
question for the content community is not whether we will provide
effective content protection tools, but rather whether they are
prepared to enter the digital age. They must finally accept that
consumers want affordable, usable digital products and they must
develop new business models that give consumers what they want--without
obsessing about controlling all of the consumers' choices. The video
rental market has contributed very substantially to studio profits--but
that market developed over their early objections to the idea of
allowing consumers to view a film as many times as desired without
paying for each viewing. The same will be true of digital products,
once the studios move forward and take advantage of the content
protection tools that we are now offering.
I would like to leave this Committee with the following thoughts:
First, listen to the consumer--he is paying the bill for all
of our products. Consumers want flexibility and power in
digital products and robust applications.
Second, do not tinker with the IT industry by trying to
regulate the development of our technologies. Irreparable
damage will result--the pace of innovation, productivity
growth, and our industry's contribution to economic growth will
all decline.
Third, do not buy into a view of content protection that
will deprive consumers of the ability to get the full benefit
of the capabilities of the PC by neutering it--when it comes to
content management--to be nothing more than a more expensive
version of a ``dumb'' DVD player.
Thank you for your time. I would be happy to answer any questions.
The Chairman. Very good. Mr. Vadasz, your plea that we do
not tamper with the industry, you are the gentleman that is the
vice president of Intel, the executive vice president of Intel.
I think back on this Committee when we hampered and we saved
you. You would not be up here testifying. I will never forget
it. Everybody thinks of Ronald Reagan. I do, too, and one of
the best parts of his administration was, he was a
protectionist. He saved the automobile industry with a
voluntary restraint agreement on motor vehicles, the same with
the hand tools, the same with Sematech, the semiconductor
industry. I will never forget--and you go double-check it--a
gentleman by the name of Frank McCabe, and he was in charge of
your industry there in Dublin, Ireland. It is the most modern
microprocessing plant in the world. Intel--you know about it,
do you not?
Mr. Vadasz. Yes.
The Chairman. Well, you go ask him, because as he showed
me, and he said, Senator, if it had not been for Sematech--$900
million tampering by this Government over a 10-year period. He
said, if it had not been for your Sematech, we would not have
it here. What is your response? Now, where do you get all this
nonsense about how we are going to have irreparable damage?
We would not know, we are not technologists. We do not know
how to irreparably damage you, other than trying to bring in
line what you say you can do. We now have the letters here by
Intel and everybody else that technology is available and we
can do it. Until we had this hearing, they said it could not be
done, but now we know the best of the best can do it, and they
are ready to do it, and that is all we are asking.
We do not want to legislate. We want to give you time. What
would be a reasonable time? Since you know all the technology,
what would you think is a reasonable time to develop the
technology that you right now--and I will make this letter a
part of the record.
The Chairman. What would be a reasonable time, since you
know the technology and I do not?
Mr. Vadasz. First of all, Senator, I appreciate very much
what the Government has done in the time since Sematech was
formed. What was done was the right thing. It was creating the
necessary infusion of capital to have our industry continue
with innovation.
I am not talking about that. What I am talking about is
that when you put a regulatory process in a very rapid design
cycle of products you, perhaps inadvertently, will slow down
the process of innovation, and you put these kind of regulatory
uncertainties into new developments that the industry will have
irreparable damage. That is a totally different issue in my
mind, than providing the means for a capable industry like our
industry to continue with innovation, like what Sematech has
done.
The Chairman. Well, how did the All-Channel Receiver Act,
or how did macrovision put in uncertainties? It worked
extremely well, as far as we know here at the Committee level.
What kind of uncertainty? We are trying to fix certainty, but
let you do it. That is what we are trying to do is to give
certainty. That uncertainty allows for piracy.
And that is all the testimony I have got, and I will make a
copy in the record also of the Time Magazine, the Pirates of
Prime Time We will make that and put that in the record also.
[The information referred to follows:]
The Pirates of Prime Time
Anyone want to trade some episodes of The Simpsons online? TV Land is
getting Napsterized (By Anita Hamilton)
Saturday, Feb. 16, 2002
Michelle Chaplin can't get enough Sex and the City. She has seen
virtually all 66 episodes of the series--some of them, like the one in
which Samantha tries to seduce a priest, repeatedly. But unlike most
people, who pay an extra $13 a month on their cable bills to get HBO,
which carries the show (and is owned by TIME's parent company AOL Time
Warner), Chaplin gets her Sex and the City free. Using a program called
Morpheus, she goes online and downloads any episode she wants in as
little as 10 minutes. Then she watches her haul on the computer. ``I
know it's not legal,'' the college sophomore says, ``but it's easier
for me to download than it is to get HBO or cable.''
People like Chaplin pose an increasingly worrisome problem for the
$80 billion television industry. Just ask anyone who works in the music
business, which in 1999 was upended by a free music service called
Napster that made music swapping easy online. While Napster was
subsequently hobbled by lawsuits, it pried open a Pandora's jewel box:
Last year CD sales declined for the first time in a decade. Now, with
the proliferation of a new generation of ``file sharing'' programs such
as Morpheus, people are swapping TV shows and movies along with their
music--more than 11 million Americans do it. And since the current
programs, unlike Napster, are decentralized, it's much harder to shut
them down.
In TV Land, the swapping comes on top of another, potentially
bigger threat. While college kids and geeks are swapping comedies and
cartoons online via PCs, a controversial new device called ReplayTV
4000--think of a supersmart VCR--lets regular nontechie folks save
television shows in pristine digital format directly from their TV,
then watch them commercial free and send them over the Net to other
Replay users. Hackers have even figured out ways to copy Replay files
to their personal computers, where the files can be uploaded by users
of Morpheus and similar programs for wider dissemination.
Hollywood is not amused, and has filed two lawsuits: one against
the makers of Replay, the other against the creators of Morpheus and
two similar file-sharing services called Grokster and Kazaa. While it
may be O.K. to copy a show for yourself on the VCR, ``it's not O.K. to
start sending it around and file sharing,'' warns Jack Valenti, CEO of
the Motion Picture Association of America. The first legal face-off
begins March 4 with a hearing on the Morpheus case in federal district
court in Los Angeles. The Replay trial is scheduled for August.
While the legal battles drag out in court, pirates are enjoying a
virtual free-for-all. Necratog (who asked to be identified by his
screen name only) is the first link in a chain that supplies digitized
copies of Buffy the Vampire Slayer to an online chat room and a website
that get as many as 1,500 downloads a week. Not to be confused with the
many ``leechers'' (people who only download shows), he's a ``capper''
(someone who captures a TV show, digitizes it and sends it out to
others).
His PC is connected to a TV cable; an inexpensive video card allows
him to watch TV on his monitor. Using a free application called
VirtualDub, he digitizes any show he wants and saves it to his hard
drive. He then spends about five minutes editing out the commercials
and an hour compressing the file until it is small enough to swap
online. Then he uploads it to a friend who makes it available for
others to download.
Like many other TV freaks, Necratog, 21, also downloads favorite
programs and burns them onto CDs. His archives include 400 CDs that
hold more than a thousand Buffy, Babylon 5, South Park and Star Trek
shows. But Buffy is his favorite. ``I'll watch the same episode three
or four times in a row,'' he says. ``I've watched some over 20 times
altogether.''
In Napster's heyday, pirated TV shows were a rarity on the Net. But
that changed with the advent of broadband home connections, $40 TV
tuner cards that snap into your PC and cheap ways to store data.
Looking for episodes of Friends? The MPAA counted more than 5,000
locations on the Internet last year where people could download
episodes for free. Using custom software to track copyright violations,
it also found 4,000 sites for The Simpsons and 2,000 for The Sopranos.
Big Pussy is not going to like that!
The biggest threat to Hollywood may not come from the geeks but
from so-called personal video recorders. Like its competitor TiVo,
which has sold some 400,000 units to date, the newer Replay which has
sold only 5,000, gives owners an easy, menu-driven way to search for
shows to record onto its hard drive. The reason Sonicblue got sued is
that the new Replay 4000, which hit the market in late November and
sold out before Christmas, automatically fast-forwards shows past
commercials and lets broadband users send them to friends over the
Internet. (TiVos do not offer these features.) An independent site
called Planet Replay even helps match up people who want to trade
shows.
For now, though, Replay-to-Replay show swapping is painfully slow.
Software engineer Thomas Wagner, 32, who has three Replay boxes at
home, says it took him eight hours to get a half-hour episode of the
now defunct show The Tick from another user, even though he has a high-
speed cable modem. But he figures all that will change as the
technology improves.
To goose the process along, Wagner decided to write a program
called Replayer that lets people hack into their Replay 4000 and
transfer files to their PC. Once the shows are in the computer, users
are free to squeeze them down further, burn them onto a CD or dvd or
trade them online. It took Wagner less than a week to crack the box's
coding.
``These boxes have the potential to kill prime time,'' says
industry analyst P.J. McNealy of GartnerG2, a market-research firm.
McNealy notes the obvious: TV networks make their money from
commercials and syndication rights. ``We're not the police,'' counters
Sonicblue CEO Steve Griffin. ``We can't tell people who it's O.K. to
send shows to and who it isn't O.K. to send them to.''
A number of court decisions support Griffin's argument. In the
famous Sony Betamax case in 1984, the Supreme Court refused to block
the sale of vcrs even though they might be used in some instances to
make illegal copies of shows. And in the 1999 Rio lawsuit, Diamond
Multimedia (whose corporate name, perhaps not coincidentally, happens
to be Sonicblue) won the right to continue marketing the first portable
MP3 music player, the Rio, even though many people used it to play
pirated copies of copyrighted music. As long as Sonicblue and Morpheus
can demonstrate just two legitimate uses of their products--such as the
trading of TV shows that are not copyrighted or simply saving a show
onto the device for personal use--they could win their lawsuits, says
Stanford law professor and cyberlaw expert Lawrence Lessig. ``In order
to innovate, you shouldn't have to fund a new lawsuit,'' he says.
In the case of Napster, while a circuit judge found that the
service did have legitimate uses, she nonetheless forced the service to
block the trading of copyrighted songs on the grounds that Napster had
the ability to police the activities of its users and profited by
failing to do so. The owners of Morpheus, Grokster and Kazaa, on the
other hand, are expected to argue that since they don't use a Napster-
like central server--even the indexing software is distributed among
users--it is impossible for them to monitor the activities of the
millions of people who use their programs.
And if the industry tries to go after individuals like Chaplin, it
will probably be an uphill battle. According to Forrester Research,
personal video recorders will be in 40 percent of all U.S. households
by 2006. Until better encryption or industry-ordained alternatives give
consumers legitimate ways to watch any show, anytime--without bothering
to set the VCR--pirating and trading are bound to flourish. Even then,
concedes TiVo president Morgan Gunther, ``nothing is unhackable.''
While soap operas and sitcoms may not be getting any smarter, our ways
of watching them almost certainly will.
The Chairman. Everybody knows about it. It is the
uncertainty that allows that piracy to embellish and continue
and enlarge, but what is the uncertainty that you are talking
about?
Mr. Vadasz. Senator, the computer is a general purpose
device. We deal with video cassette recorders. The video player
is a very narrow function device. We have developed protection
technologies today that, if it is adapted by the studios, can
utilize--well, both the computing device and the content. All
it needs is a rapid adaptation of some of the technologies that
the cross-industry group has developed. That is all I am
saying, is that we do not need to neuter the personal computer
to be nothing more than a video cassette recorder. All we need
to do is adapt the technologies that our industry, our cross-
industry activities put on the table.
The Chairman. We are neutering piracy. We are not neutering
the technology.
Mr. Eisner, what is your comment?
Mr. Eisner. I think you are getting an example of the kind
of rhetoric we have been hearing for years. I have been asking
consistently, OK, you say we are impeding innovation--explain
to me exactly how we are impeding innovation by asking you to
help us create a technology that helps us end theft. And I get
exactly the kind of answer we just got. I did not understand it
before; I do not understand it now.
Intel is a great company, and has had fantastic effect,
positive effect, on our industry and our country. But, for some
reason, and I cannot get to the bottom of the reason--therefore
it must be economic, either the technology companies want to
become the gatekeeper and, by creating the lock on the door,
charge you for every person that wants to come in and use your
lock, and we have a lot of examples of that, or they are
afraid, honestly afraid that the legislation will be so
draconian that they will not be able to create technology
around it. I cannot fathom how an 80-cent chip to stop
unauthorized pirates would impede innovation. Once a
copyrighted work is on the Internet, in the clear, it is
totally available to be stolen. And, we must find a solution to
this problem.
We get to the Moon, we get to Mars, we create these great
companies. I cannot understand how difficult this is, and I
believe the difficulty of getting a letter from them was
overcome in 1 day by you having this hearing. I am absolutely
100 percent convinced that if you say to these people, who are
very talented, you give us a system by December 31 or we will
do it for you, you will be surprised how innovative they will
become, and how it will no longer hurt their product.
And by the way, Intel, again a great company, has so many
quotes about the sanctity of intellectual product, I have
quotes from this year--the last quote is, if you cannot beat
them, sue them. That is their strategy on intellectual product,
that we have an obligation to our shareholders to ensure their
investment in their intellectual property is protected. That
was Chuck Malloy, October 25, 2001. I have got all these
quotes. They really work hard to protect their intellectual
product. I would just like them to work modestly to protect the
intellectual product of another industry which needs their
expertise.
The Chairman. I have got a lot more, but let me yield to
Senator Burns.
Senator Burns. I would yield to Senator Stevens.
Senator Stevens. I do have to leave, so I would like to ask
a question. Do you believe there is such a thing as Internet
theft?
Mr. Vadasz. Absolutely.
Senator Stevens. Do you believe anyone should try to
prevent it?
Mr. Vadasz. Absolutely.
Senator Stevens. Now, we have a bill that is trying to say
to the copyright protection working group to get busy and get a
standard, and get a mechanism for protection in the private
industry, without Government intervention. Do you disagree with
that?
Mr. Vadasz. Well, sir, what I would like to see is that we
balance technology solutions with legal solutions.
Senator Stevens. Can that be done without Government
intervention?
Mr. Vadasz. I hope it can be. I believe that we have gone a
long distance to meet most of the needs of the content industry
with the technologies that we developed today, but there has to
be a balance between what kind of protection do we use and not
trample on the fair use expectation of the consumer, and what
kind of actions do we forbid people to do, and use the rule of
law to stop it. We cannot just solve all the problems with
technology, because I can guarantee you, Senator, we will
trample on fair use expectation of the consumers who pay for
the product.
Senator Stevens. All our bill says, if the private sector
does not develop a standard to prevent Internet theft, that the
people involved in Federal control, the FCC, must do it. Now,
what would be a reasonable time for the private sector to
develop such a standard on a balanced basis?
Mr. Vadasz. Well, the private sector, none of the elements
of the private sector is a monolith. For example, already today
some part of the media industry has started deploying the
technologies that the cross-industry working group has
developed. Some of the consumer electronics companies have
started to deploy it. The companies represented by the
gentlemen at the table have not started to deploy those
technologies. Maybe you should ask them why.
Senator Stevens. Well, I think what we are telling them as
well as you is that we feel like we did when the V chip issue
came before us. Remember, we had the V chip issue. The whole
industry opposed that, and Congress said, look, either develop
a V chip, or we will mandate it, and when the industry did not,
we did mandate it, and guess what, it is out there, it is
available to everybody.
All we are saying to you is, we want the industry to do
this, and if you do not do it, we are going to turn it over to
the Government experts to bring it out.
Mr. Vadasz. All I am saying, Senator, is that we have been
doing it, and the technology is on the table to be used.
Senator Stevens. There doesn't seem to be an agreement that
it is effective, Mr. Vadasz.
Mr. Vadasz. The latest issue of the day is terrestrial
broadcast and the analog hole. The previous issues have all
been handled and dealt with, and the technology solutions are
on the table. Some members of the media industry are adopting
it; others are not. As I said, in the case of the terrestrial
broadcast issue, by the end of March there will be a proposal
on the table.
Now, I expect that when that proposal comes, there may be a
need for a narrow Government action to change the current
rules, how broadcast is done in order to allow adequate
protection, and I think that at that point there is a very
important role that the Government can play.
Senator Stevens. I am very glad to hear that. All we are
asking is that the private sector do it. Theft is theft, and I
understood what Senator Nelson said. The concept of theft is
something that our society is dedicated to oppose. Why should
we allow it to continue on the Internet because there is a
failure to come to total agreement in the private sector?
Now, if the private sector does not come to an agreement
soon, I think we will pass our bill.
Mr. Eisner. Senator, the problem we have is that many
people in the technology realm have been quoted as saying that
the killer app for technology is pirated content. So, we are
dealing with an industry, some of whom feel that the actual
availability of illegal material to the consumer like this kid
sells computers.
He is buying a computer because he can get all of
``Seinfeld''. And, we have suspected that this is a strategy--
an unspoken strategy. We have heard it spoken, and we can
verify it and give you specific information on where this has
been said. But, it is very hard to negotiate with an industry
that thinks its short-term growth is dependent on pirated
content.
In the end, I believe the really smart people in the
technology world, understand that if they kill the content
companies, that will impede their long-term growth. However,
their quarter-to-quarter growth is definitely pushed forward by
people wanting to be able to get everything for free on their
television or their computer or their hand-held device.
Senator Stevens. Mr. Chairman, I still would express my
strong hope that we will find an industry agreement, and we
will not have to act.
Mr. Chernin. Senator Stevens, if I might, I think Mr.
Vadasz is guilty of some obfuscation on this issue. We are
looking for varying controlled solutions to issues, and it is
true we have made a lot of progress on a lot of issues. No one
is denying that, but we do need protection on DTV, we do need
protection on the analog hole, and for Mr. Vadasz to say that
there are no viable technological solutions to solving piracy
on platforms like Morpheus or peer-to-peer file-sharing, which
was demonstrated by Mr. Eisner's tape, is not accurate.
Senator Stevens. I have to leave, Mr. Chairman, but let me
just say, as a consumer, I would like to sit in front of my big
TV watching my videos. I do not really enjoy watching
television programs on a computer set. I see that all day, and
I hope that somehow or another we can preserve the whole
industry that delivers to all of us the way we want to enjoy
this media.
I have got a daughter that loves to pull down movies. She
is going to scream at me tonight on the phone, I am sure, but I
think you missed my point, Mr. Vadasz. You are talking about
the consumer. The consumer is a vast collection of people, some
of which do not even use computers. A lot in my generation do
not even know what they are, and so unless we protect this
industry against theft, they are not going to continue to enjoy
the movies, and I do believe we have to solve the theft
problem, and I hope you will come to an agreement. If you do
not, I am ready to go out on the floor with you, Mr. Chairman.
The Chairman. Very good. Senator Burns.
Senator Burns. I think the Senator from Alaska has pretty
much covered the ground. Looking at this whole thing from
30,000 feet, both are dependent on each other. Both of you need
each other, and I guess where I am coming from in this whole
debate is that, as dependent as you are on each other, why has
there not been a solution up until now?
Now, I have just got a question here for Mr. Chernin. We
have heard the concerns about selectable output controls. Can
you tell me what that phrase means, and is injected into the
public debate on this, and I get the feeling that--the other
day we had a new term injected into another piece of
legislation. We know what an endangered species is, we know
what a threatened species is, but a new term comes along and
says, sensitive species. I do not want to spend the next 20
years trying to find the definition to a term, so would you
enlighten me on selectable output controls?
Mr. Chernin. Yes. First of all, Senator, I am hardly a
technologist, but I believe selectable output control was a
very early stage proposal to try to solve the problem of
piracy. I know Fox and I believe all the other content
companies have explicitly abandoned this proposal several years
ago. It is a nonissue for us, and I think it has been largely
superseded by the 5C negotiations.
Senator Burns. OK, that is fine. Do you have any problem
with consumers copying television programs on a digital VCR and
then routing the copy to any other device in the home, as long
as it does not get uploaded to the Internet?
Mr. Chernin. No. I think in effect Mr. Vadasz sort of waved
the flag of fair use, and I think it is very clear that I know
myself and Mr. Eisner believe that home copying is a legitimate
use issue, and we do not seek to hinder home usage. It is the
transmission of perfect digital copies to millions of people on
the Internet illegally that we seek to halt.
Senator Burns. In other words, therein lies the problem. We
can narrow everything down to that problem, then.
Mr. Chernin. Yes, absolutely. We have no problems with
people using our content in multiple ways inside their own
home. It is the illegal use and transmission of that content to
millions of other people potentially which causes us grave
concern.
Senator Burns. I will ask this of both Mr. Eisner and Mr.
Chernin and Mr. Vadasz. The 5C negotiations, give me your
honest assessment of where they are. Are we making progress, or
have we almost come to the end of that process?
Mr. Eisner. Again--well, you go ahead.
Mr. Chernin. I will start. I think we have made substantial
progress, Senator, and we applaud our colleagues in both
industries for the progress we have made. However, I also think
7 years is enough time to come to a solution, and we have to
solve these three remaining points, and we have to solve them
with some alacrity. To be direct, this is an Internet problem.
It needs to be solved at Internet speed, and 7 years I believe
is too long.
Mr. Eisner. And the 5C does not really address the real
problem which we saw in the video. The big problem is the
pirated, de-crypted copy that goes up on the Internet. And that
can be from a print stolen out of a projection booth when 3,000
prints go out, or it could be stolen from the lab, or it could
be stolen from the FedEx car somewhere along the way, or it
could be some disgruntled employee that could send it to
somebody. There are many ways. We know that. And, whether it is
an analog or digital copy, it could be made into a digital
copy. It goes up illegally, in the clear, on the Internet.
I do not believe the most significant problem is a 5C
problem. Rather, it is the problem I was referring to--which is
the need for a different kind of technology. If ``Black Hawk
Down,'' the day it comes out, is in the clear up on the
Internet, it totally undermines the $100 million--not our $100
million, but the other company's, Sony's, $100 million--
investment in it.
Senator Burns. Mr. Vadasz.
Mr. Vadasz. First of all, I would like to take exception to
what Mr. Eisner said about our industry trying to build a
business on illicit trafficking of content. You cannot build
the kind of industry of the size that we are, or that we expect
to be, by illegitimate means. There has to be a rule of law.
There has to be a proper protection of all participants'
interest in order to build an industry, so I really take
exception to that.
Second, there are technologies today available as a result
of the 5C and 4C work to create a protected environment for the
content. Protected content; Napster or Morpheus does not work
with protected content, with the technology we have today. And
as I said before, terrestrial broadcasts, the analog hole is an
issue we are working on. That is not a 7-year-old issue that we
started to work on. That is about a 10-year-old issue, and
progress has been made, as I said before. The proposal will be
on the table by the end of March this year to solve one of
those.
Mr. Chernin. But if I may, Mr. Chairman, I would like to
dispute this notion of protected content. It may be true that
protected content cannot be used on Morpheus. But as Mr. Eisner
said, that content does not get there in legitimate ways. It is
stolen from theaters. Someone sits there with a digital video
camera and tapes it off the screen, so our problem is not that
we do not have ways of protecting content. I think there are
numerous ways, satellite, cable, et cetera, that we can
transmit protected content. It is that content that is obtained
illegally and is allowed to pass freely on the Internet without
any protection whatsoever that is the problem.
But if I may, Senator, there are no technological problems.
They are all problems of the world, I am sorry to say. You can
cut bread with your kitchen knife, or you can kill somebody
with it. There is no way to protect every element of our
society by technology. That is where the rule of law comes.
Mr. Eisner. If we do not protect content on the Internet,
you will end the entertainment business. Therefore, I would say
of all the things you are working on, this would be one to try
to work quickly on. If you are saying that you cannot do it, it
absolutely cannot be protected, like cutting bread, or whatever
that was, then we will not be able to distribute our movies to
consumers in the ways in which we have been doing it, and then
the consumer will really be deprived.
If that is what you are saying--you are telling us it
cannot be done, then fine. That is the first time I have heard
that. Then I know where I am.
Mr. Vadasz. That is not what I said, sir.
Mr. Eisner. OK. Can it be done?
Mr. Vadasz. The technology is on the table for you to
distribute protected content, and that protected content to be
distributed in our home.
Mr. Eisner. Can we stop what that kid was doing in the
video?
Mr. Vadasz. That is not protected content.
Mr. Eisner. Can you protect open content on the Internet
that has been stolen, sitting up on files? Is there a
technological way in the future to be able to protect that kind
of content?
Mr. Vadasz. Provided that you maintain fair use rights of
consumers. I doubt that some of the old content can be
protected.
Mr. Eisner. I am not talking about the emotional or moral
right. I just want to know if technically you could protect
content that is in the ether. Can you protect it from being
copied and transmitted? Forget for now about fair use, and the
emotional, the moral issues--just, can it be done?
Mr. Vadasz. I am sorry, sir, there is nothing emotional
about fair rights.
Mr. Eisner. Can it be done, yes or no?
Mr. Vadasz. No.
Mr. Eisner. Therefore, we have a big problem.
The Chairman. Very good.
Senator Burns. I am going to yield my time. I started this
problem. Now I will yield. I will let somebody else referee
from here on in.
The Chairman. I think it was a very meaningful exchange.
Senator Allen.
Senator Allen. Thank you, Mr. Chairman, and I do think it
was a very meaningful exchange. Listening to all the
gentlemen's comments, I do not think there is any doubt that
there is support for fair use. The compelling testimony of all
of them, and obviously Mr. Eisner's showing of these pirated,
stolen videos that are on the Internet, but the question is,
whether it is fair use or whether it is a broadcast flag issue.
These both make some sense. That is a roundabout way, or
watermarks is what you are all talking about.
And Mr. Vadasz is talking about the voice of the consumer.
It is good to be a voice of the consumer, but we must be a
voice for protecting private property rights. That is the rule
of law. It is so important in our country for those who invest,
take risks--they may invest $100 million in a movie. One out of
whatever number of them may actually recoup that investment.
Now, I think in that discussion, Mr. Chairman, it gets to
two points. One, this legislation and this hearing has been a
good prod, and certain things happen, and certain things happen
because of fear.
Senator Burns and I were talking about fear being a great
motivating factor. Whether it is the fear of draconian
Government regulations, or inept Government regulations,
regardless of what they may be, that may get folks moving. I
think it is very important that all parties recognize from my
point of view that I would like the private sector, clearly,
and the marketplace to derive and devise innovations that will
have the content producers feeling comfortable putting their
content over the Internet. The consumer electronics folks
should want that interest.
Now, in the midst of all this discussion here, that what
Mr. Eisner showed was not obtained by legitimate means, because
whether it is Disney, whether it is Fox, whether it was Warner
Brothers, or Sony, or whomever, they did not put that out over
the Internet, and somebody pirated it. It was somebody getting
it off of a projector in the movie theater, and so we have two
questions here. One is prospectively, what flags or watermarks
can be put on so it cannot be distributed? I am not talking
about fair use. I am talking about unfair, illegal utilization
that can be solved, right? Right.
Now, putting the cockroaches into a bottle in a dark
basement is a hard thing to do, and I think the testimony, Mr.
Chairman, from Mr. Vadasz was to try to get all those, the ones
who are pirating these, from filming it at a movie theater, or
however else they are purloining this property. There is not a
solution for that, is that what you are saying?
Mr. Vadasz. That is what I am saying, sir. You can take a
home movie and put it on the Internet. Once that home movie is
on the Internet, it is out there.
Senator Allen. And so therefore it would be available to
anyone, obviously.
Mr. Vadasz. I think that is correct, sir.
Mr. Eisner. You then have another issue, which is privacy.
I would think that technology should try to work on a way for
the home movies to be able to be sent from a mother to a son
and not be kidnapped by all of her son's school mates. I think
that is also a problem. So, I believe this is an escalating
problem on the Internet. I do not accept that you cannot
protect your content on the Internet--I just do not accept it.
But, I am Panglossian, so maybe I am wrong.
Senator Allen. If this is a situation, and you are saying
that the solution is suing those who are obviously not paying
what they should be paying to watch it, that just as a
practical matter is impossible. You all cannot be tracking
scanning, cruising the Internet, tracking all the Benjamins and
everyone that Benjamin linked into.
Mr. Eisner. Maybe the miscommunication here is, we do not
expect, because we know that is impractical, 100 percent
protection. We do not have it now. We probably only have 90
percent protection now. We can work in a world with 90 percent
protection. In some countries, it is 60 percent. In some, it is
95. In some, it is zero.
We can live with that world, and if the reason that the
answer is no is that we are asking for 100 percent protection,
and no genius from MIT can hack it, OK. But I am really asking,
can we get to 90-percent protection, so the general population
will not be able to download illegal material from the
Internet?
If you are basing it on 100 percent protection, and that is
why you are saying no, then I just want to back off a little
bit, because we are not asking for 100 percent.
Senator Allen. Mr. Vadasz.
Mr. Vadasz. I think we keep mixing the past and the future.
I have tried to state that through the working of the cross-
industry group, content can be protected as we go forward.
Not all the problems of the past can be solved. There are
1/2 billion PC's out there today. There are, I am told, amount
of content on the net, there are 150-plus million more PC's are
sold every year. The number of users on the Internet is growing
at a very fast rate. Not all of the past issues can be handled.
Mr. Eisner. I am not worried about the past.
Senator Allen. There is two different things, Mr. Chairman,
we are trying to get at. Most of this I look at as being in the
future, as opposed to what is existing.
Mr. Vadasz. And what I am saying is that what the cross-
industry working group has done provides protection, the kind
of protection that Mr. Eisner would like to have, with the
exception of the work that I described that is still in
progress.
Senator Allen. I do not think Mr. Eisner is yet satisfied
with that, but hopefully he will be.
Mr. Vadasz. If the answer is: ``My way or the highway,''
gentlemen, I do not know what to do about that.
Mr. Chernin. I do not think it is fair to say it is my way
or the highway. I think clearly both of us would say, as
unhappy as we are with what has happened in the past, we would
be thrilled if we could protect the future.
Second, I do think it is important to say that what we are
talking about, though, is the illegal sharing of unencrypted
files, regardless of how they get there. I do agree that it is
possible for us to encrypt and safely deliver certain kinds of
files. We are not concerned about that, and in fact we do
applaud the progress that has been made, but there still are
illegal movie, television, music files on the Internet that get
traded, and this can be solved in the future.
This is an industry that I know both of us have the highest
respect for. The people are geniuses with what they can
achieve, and I just find it hard to believe that with prodding
from this organization, and with the full intelligence and
resources and creativity that they have, that we cannot solve
the illegal transmission of encrypted files on the Internet
going forward.
Mr. Eisner. I was in New York in the Village last weekend,
and bought on the street several video cassettes of films that
opened that Friday of the Disney Company and other companies.
Now, the quality was pretty pathetic, but they could be
digitized and put up on the Internet. I do not know where they
came from. I do not know whether it was a screening in
Indonesia that came back. Who knows? But every single film and
every single television program is pirated. The problem that is
a killer is when it becomes digitized and put up in the ether.
The Chairman. Very good. Senator Nelson?
Senator Nelson. Thank you, Mr. Chairman. This hearing is
taking a turn that I didn't expect, because I thought this was
just going to be intellectual property rights versus equipment
manufacturers that didn't want to do what needed to be done
about that.
Now, if the question is, can you protect intellectual
property rights once they're in the ether, as Mr. Eisner says,
is the technology there? I just don't believe that the
technology's not there or that the technology can't be
developed, Mr. Vadasz.
Mr. Vadasz. Let me just say as clearly as I can, the
technology is there today. If you use it, you can protect your
intellectual property rights in the ether, over cable, over
satellite, over the Internet, and in your home, going from one
device to another device to another device. That technology is
there.
Mr. Eisner. But the hardware manufacturers have to put
into--tell me if I'm wrong--have to put into a computer a chip
to make that technology workable. And right now, we have not
gotten the agreement from the hardware makers--computer makers,
etc.--to spend the 80 cents a chip, or whatever it is, to make
it prevent piracy.
Yes, I think the answer is, it is available or could be
available. There's a long way between that and putting it in
the device.
Senator Nelson. Is that what you referred to as the
watermark?
Mr. Eisner. That is one way of doing it. As a matter of
fact, there are computer companies, that their ads, full-page
ads, billboards up and down San Francisco and L.A., that say--
what do they say?--``rip, mix, burn'' to kids to buy the
computer. They are selling the computer with the encouragement
of the advertising that they can rip, mix, and burn. In other
words, they can create a theft and distribute it to all their
friends if they buy this particular computer. Definitely,
content moves distribution and hardware.
Senator Nelson. Mr. Vadasz?
Mr. Vadasz. Sir, I would just like to clarify the
discussion here. My statement, what I said, referred to no
chip--no new chip in the personal computer. My statement
referred to the work of the committee that has been done in the
5C and the 4C with the adaption by the consumer equipment
companies for the specification. That is absolutely capable
today. It has nothing to do with the microprocessor design.
Mr. Chernin. But I think that--let's be very clear what
we're talking about here. Again, we have made substantial
progress, and no one is denying that. And we do have the
ability to protect numerous legitimate downloaded content on
satellite, on digital television, on digital cable, et cetera.
What we complained about is three very specific issues--
digital broadcast television, the analog hole, and the use of
un-encrypted illegal files and sharing them back and forth. And
for Mr. Vadasz to say that it is impossible to stop that--it's
the equivalent of saying, yes, we can stop the people who don't
steal from stealing. But we have to stop the people who are
stealing. In addition, we have to stop the people who are
sharing illegal un-encrypted files, who are stealing, and that
is not something that they have attempted to solve.
There are, indeed, legitimate uses and legitimate solutions
that have been created. It is these three areas that we're
focused on.
Senator Nelson. Well, Mr. Chairman, I want to ask a
technical question. But before I do, this is the kind of
situation. These folks had better work it out, or we're going
to work it out for them.
The Chairman. Yes, sir. No question.
Senator Nelson. Let me ask you a more technical question.
Watermarks, as I understand them, are fairly permanent. And yet
intellectual property, the Constitution says, has a limited
lifetime. So if, in fact, there's a present case in front of
the Supreme Court, if the Supreme Court accepts that premise,
what can we do to make sure that while we're developing the
watermarks, or whatever the technology is that's developed,
that we're also protecting the consumers and the collectors of
the future? Would, Mr. Chernin and Mr. Eisner address that?
Mr. Chernin. I actually think that's quite simple, Senator,
which is a watermark, or a broadcast flag are all fancy
technology terms which I certainly don't understand, but they
are--quite simply, they are labels and instructions. So a piece
of content can be labeled ``watermark'' to say, ``Protect this
as long as its copyright is in effect.'' A piece of content can
contain instructions that say, ``Stop it from doing this for
the period of time that the copyright is in effect,'' and stop
protecting it the moment that copyright expires.
So, yes, there are permanent--but all it is a label. And,
in fact, it's a very efficacious way of labeling this is when
the copyright expires, among other things, so I don't think
that that's a potential issue at all.
Senator Nelson. Thank you, Mr. Chairman.
The Chairman. Thank you. Senator Boxer?
Senator Boxer. Thanks, Mr. Chairman. Believe me, no one on
this panel wants this issue to go away more than I do.
(Laughter.)
Senator Boxer. I mean, this is one of those moments where
you say, ``Oh, God.'' We've got Silicon Valley. We've got
entertainment. Got it all.
So the way I've been trying to approach it is right and
wrong, which is always a good thing to do on most issues, if
not all. So I see it this way, and I think you all three agree
with this. There's no question that it is wrong to steal
intellectual property. Everyone agrees. You all said that. OK.
So that's right and wrong. And, in fact, we know that property
is protected in the Constitution. So set aside all the
interests of the groups. I do believe we would all, I think,
agree on that.
So then you come to the issue of what's right and wrong for
each industry, 'cause, you know, we're not--we know that the
bottom line is the bottom line for all of you, and you wouldn't
deny that. So what's in, you know, the short-term economic
interests of each of you, and what's in the long-term? And I
think that was what--Mr. Eisner said that, and I just want to
pick up on that, 'cause Mr.--Mr. Vadasz, is that--am I saying
it right?
Mr. Vadasz. That's close enough.
Senator Boxer. Good enough? OK. You know, I truly do
believe, in the long-term--and I know it's hard sometimes for a
business to think long-term. I think the really good ones do.
If there is a situation where there's no longer capital flowing
into creativity here to create these incredible exports, OK, in
the end, no one's going to want to really look at this content.
This kid's excited--this kid, who doesn't think he's a thief.
He's really excited, because he's gotten some fabulous products
for free.
But if there's nothing out there but junk, in the long-
term--my point is, I think everyone suffers, including the
group you talk about, the consumers. And I do serve on the
Consumer Protection Subcommittee here. So I would hope,
therefore, that my high-tech people are as interested in
solving this problem as my entertainment people, because in the
long run, it's in your self interest.
What I would like to get to is, how are these meetings
going? I mean, I was hopeful--I learned about this issue quite
a while ago, and I was extremely hopeful that things would be
resolved by now. I'm a little concerned, frankly, given some of
the comments here, which, by the way, I think are very helpful
to you, Mr. Chairman, because you've got the bill that
basically says, ``Please figure it out. Please figure it out.
And if not, we're going to have to figure it out.'' So I get
the sense that the meetings haven't been as productive as I
thought and hoped.
Is there any truth to Mr. Eisner's point that it's more
than a coincidence that these letters arrived today from the
high-tech people?
Mr. Vadasz. Frankly, I think it is a coincidence. However,
let me just----
Senator Boxer. But that's good.
Mr. Vadasz.--say it's because----
Senator Boxer. But this was really what was coming, and if
a breakthrough was coming without this hearing, that's good.
Mr. Vadasz. I hope, Senator, that you include us, Intel, as
one of the companies who looks at the long-term. And for
everything that we have done, we----
Senator Boxer. Yes.
Mr. Vadasz.--have demonstrated that. That's why we always
believe that there has to be a rule of law governing the whole
structure here, so that we don't try to build business on the
illicit use of anybody's intellectual property. And that's why
we are an active participant in that.
Senator Boxer. I know. I'm very glad. But you seemed to be,
at one point in your testimony, extremely disturbed at the
thought that this Committee might get involved if nothing
happens. You know, it confuses me, because you sure want us to
get involved if there's a problem of counterfeiting your chips,
right?
Mr. Vadasz. Absolutely.
Senator Boxer. OK. I mean, I think the Chairman made this
point in the beginning. I mean, I would just roll up my
sleeves, and I have done so, to protect my high-tech people,
because it's a nightmare. It's happening to you in many cases.
So I think we need to not have a double standard here. We need
to work this out. In many ways, it is our economy. You know? In
many ways, are we going to continue to be the economic leader
of the world? So I know that businesses do get very--you know,
do have disagreements, and I understand it. But in the end, I
think it's in all of our interests to protect this property and
do it in the right way.
So let me just close, because my time is up, but ask each
of you, you know, your perspective on how the negotiations are
going--have gone so far. Now, Mr. Vadasz says that, in fact,
you do have at your disposal, is what I understand--he says you
have at your disposal the way to fix this problem. I believe he
said that. Would you comment on whether you--that's your
feeling? And how do you think these negotiations have gone?
Mr. Eisner. Well, first of all, I don't want to single out
Intel, because Intel is one of the most respected companies, if
not the most respected company, in the Silicon Valley, so they
are not--you just happen to have a spokesman----
Senator Boxer. I know. They're here, so I----
Mr. Eisner.--here. But I can tell you, that until the
Senator said he was going to consider legislation, you couldn't
even have a conversation about the big issue. I can tell you--
and I tried to have a conversation personally; this is not
hearsay--I can tell you, until the hearing was set, that I
could not get people from the high-tech world to discuss this
issue. I can tell you, before this hearing was set, I had never
had a conversation with the largest company in the world about
this particular issue. I can tell you, until yesterday, we were
told that if you had this hearing, that the high-tech industry
would then get more entrenched, rather than less entrenched.
And in comes a letter, by coincidence, yesterday, the day
before the hearing. I think that coincidence is highly
unlikely. So the conversations are just now beginning, because
I think everybody recognizes that the legislators have a right
to regulate street lights and interstate commerce and a lot of
things that they've regulated for two or three hundred years.
This is not unusual.
And, frankly, this is the court of last resort for us. This
is the place that we learned in civics you go to to get action.
And that's why we're here. And we are hopeful that in the next
60 days, if our associates in California believe this is real,
they'll come in, and we'll get this done. But they have to
believe it's real.
Senator Boxer. OK. Mr. Chernin, when you--would you address
the fact that you do have these technologies at your disposal
now? Because that was stated, and I'm----
Mr. Chernin. Yes, I think--again, let me be as clear as I
possibly can. We think substantial progress has been made in
numerous technologies, which is what I assume Mr. Vadasz is
referring to. We are safely encrypting content for satellite
and digital cable and DVHS, et cetera. And we applaud and
appreciate the cooperation in those areas.
I think it does come down to this--there are three areas in
which we are frustrated and stymied--protection of digital
broadcast signals, the analog hole, and the protection of un-
encrypted illegal files that are passing back and forth on the
Internet. So I do think we want to make it very clear, we're
not saying everything's wrong, and these guys are horrible
guys. In fact, we are saying we've made some progress in some
areas. But we have reached what feels pretty close to a brick
wall on these final issues. And I do share Mr. Eisner's
suspicion about the coincidence of the letter arriving
yesterday. And I applaud this Committee for at least goading
all of us into what hopefully is the final action to get this
done.
Mr. Vadasz. May I?
Senator Boxer. Please.
Mr. Vadasz. First of all, this is not just an activity that
started when the threat of legislative mandate on PC designs
have come about. We have been at it for 6 years--over 6 years.
As you know, our industry does not have an excess of good
engineers. We have spent our resources for 6 years working on
this problem. It's not ignoring it. It's not ``not listening.''
It's working, and it's hard work.
And as far as the industry listening to the studio's
better, I'd just like to remind Mr. Eisner that our CEO, Mr.
Barrett, tried to have a session with you last October, which
you canceled. So that's unfortunate, but we go on.
What I would like to suggest is that we also recognize that
this is a very talented industry. I'm not talking about ours.
I'm talking about the media industry. And then the issue of the
VCR came, and they dealt with it. And they dealt with every
other technology generation, although somewhat reluctantly at
first, but they dealt with it. And they did brilliantly.
Maybe it's time that we tell them--there's a lot of
technology out there, time that we deal with the new digital
world. But when we do that, I think you have to also see how
they deal with it that the consumer also gets a fair shake.
Mr. Chernin. Senator, if I may, I think this issue of
bringing up the Betamax case from more than 20 years ago is a
little bit of a shibboleth, and that, you know, there's a huge
difference between analog, in-home taping, which, as both of us
have said repeatedly, is something we support and are willing
to support in both analog and digital form. There's a huge
difference between that and the ability to make one million,
ten million, a hundred million perfect digital copies and press
a send button and send them. And to bring up the Betamax case,
which, indeed, executives long before either of our tenure
opposed 20-something years ago, I do think is an attempt to
take our eye off what's the real issue.
Mr. Eisner. And the other attempt, and I'll just say no
more--I'm accused of being a meddler and being into everything.
And I assure you, if somebody wants to see me, they can see me.
My only recollection is being on a bike trip with Andy Grove,
who never mentioned it to me over 5 days. But if somebody at
Intel wanted to see me, they certainly know my telephone
number.
I want to point out one company up there, Cisco, who has
done an enormous introspective look at this problem and has
decided that it is in the best interest of Cisco to be
cooperative in this whole area. Whereas, four or 5 years ago,
they questioned whether they should even participate. So there
are companies that are definitely addressing this issue.
The Chairman. We have been a little liberal up here, but we
have got Mr. Cisco, and we have got to move. Senator Breaux?
STATEMENT OF HON. JOHN B. BREAUX,
U.S. SENATOR FROM LOUISIANA
Senator Breaux. Thank you, Mr. Chairman. As the saying
goes, everything that needs to be said has probably been said,
but not everybody has said it.
(Laughter.)
Senator Breaux. So let me see if I can say it also. Let me
ask Mr. Vadasz. Is there equipment that is now available that
could be put into personal computers to prevent Benjamin from
doing what Benjamin did so well?
Mr. Vadasz. That could be put in the personal computer?
Senator Breaux. Yeah, somehow preventing Benjamin from
copying the things he did.
Mr. Vadasz. The protection has to start at the source. So
if the source material is protected, then you can protect it in
the chain. And what I'm saying is that that technology is
available today.
Senator Breaux. OK. If Congress said that that technology
should be made available by December the 31st of this year,
could the industry comply with that?
Mr. Vadasz. I believe they could.
Senator Breaux. I was impressed with the letter that you
sent to Eisner and all of his colleagues--not you, personally,
but from all of the industry. And I'll bet some people spent a
lot of time writing this letter, because it was very carefully
worded. And that read, ``It's critically important to
development anti-piracy tools. We're working diligently to
develop systems. The meetings have been highly productive.
Optimally effective solutions are in reach. Informed consensus
on key technologies. Working diligently. We're committed.
Working with you. Consensus. Cooperation.'' I mean, all these
words--I mean, the bottom line is that we're going to work with
you. And does the letter say anything more than that?
Mr. Vadasz. Well, just a confirmation that we will work----
Senator Breaux. It's a well-written letter saying, we're
going to continue to work with you.
Mr. Vadasz. That's right.
Senator Breaux. The question we have before us how long is
it going to take?
Mr. Vadasz. Well, the real problem of the day, as I
mentioned to you before, is the over-the-air transmission, and
the analog hole. And I also said that proposals will come to
the cable this yeas, this quarter, on the over-the-air
broadcast. And there is more work to do on the analog hole. And
I do not have a timescale. I just don't know.
Senator Breaux. Well, the interesting thing, I think, is
that there is, Mr. Chairman, equipment available that can, I
think, get this done. It's a question of whether we're going to
mandate it or whether the industries will get together and do
it themselves. I'd prefer the latter, but it may be necessary
for this Committee to take action, which I would support, if
need be. Thank you very much.
The Chairman. Senator Smith?
Senator Smith. Thank you, Mr. Chairman. Mr. Vadasz, I want
to give you a chance to correct what I think you said. And you
quoted Jack Valenti as saying that--in the former period, that
you're industry was the Boston Strangler.
Mr. Vadasz. No, Senator. I said the VCR industry.
Senator Smith. The VCR industry. Were you implying at all
that they're making a lot of money, so a certain amount of
theft is OK?
Mr. Vadasz. Absolutely not, Senator. What I'm implying is
that this is a very talented industry. And when they had to
deal with the changing technology, they dealt with it in a very
successful commercial manner.
Senator Smith. I am wondering what this chip costs that has
been spoken of here. What does it cost? What does it mean to
the consumer, in terms of the cost? And what does it do to the
efficiency of the computer--its speed and the consumer
friendliness--if this were required to be included?
Mr. Vadasz. I don't think it's really a cost issue. I mean,
whether it's five cents or five dollars, that's really not the
issue. The issue is abdicating the design decision of our
microprocessor and potentially creating technology cul-de-sac
for our product. So I would like to see that the solutions that
come do not have the chance of limiting technology's ability to
move forward.
It's not that I want to see piracy happen. It's not that I
want to see an unsafe environment. But I do not want to see our
industry simply abdicate some key design decisions to the
studios.
Senator Smith. Some in the entertainment industry would
charge that your industry doesn't want to fix this, because you
make money selling equipment that boots up their material and
sells it for free. Is that the case?
Mr. Vadasz. It seems like that's ``guilt by association.''
As I said before, I don't think that we can build a significant
big business on illicit use of intellectual property. So this
problem needs to be solved. There is no question in my mind.
Now, there is no question in my mind, either, that rich
content--use of rich content in very different ways is
beneficial to our industry, is beneficial to the networking
industry, is beneficial to the telecommunications industry. And
I think, at the end of the day, it's beneficial to the media
industry, as well.
Senator Smith. I guess my questions now turn to the
entertainment industry. If you're pointing the finger at the IT
industry, saying they need to fix it; and they're saying
there's some watermark or some technology available to you,
that if you use it, then this boy couldn't steal your product.
What is that technology?
Mr. Eisner. There has to be--at the end of the game, there
has to be something at the hardware end. So if he doesn't want
to put in that chip at the last--at the end of the game, for a
reason that I just don't understand, whether it's five cents or
five dollars, it's just not going to work. So you have to--it's
the whole chain. You put it in--and I'm not a technician
either; you probably can do better than I can on this--but you
put it in in the creation of the product. You put it in in all
the legal transportation of the product, and you put it in in
the end-usage of the product, as long as there's some sort of
flag or some watermark on the illegal use, so when it comes to
the computer, it won't play.
Now, if that's a cul-de-sac, and we're asking for something
that is--it's going to make the computer blow up--they've
taken--they used to say it would slow down. They're off slowing
it down. There was always a reason it couldn't be done. The
reason now is a cul-de-sac. I don't know why they just don't do
it and get over with it, because they admit that it is this
high-quality video--movies, television, and other things,
sports and so forth--that will drive broadband and drive their
business. So let's get it done and move on and not fight about
it.
We don't want to make any money from it. We'll pay for what
we have to pay to encrypt our product. We're not asking anybody
else to pay for it. We just don't want to pay a continuing fee
for that.
Senator Smith. So at the end of the day, there's nothing
you can really do to fix this from getting onto digital and
having it multiplied perfectly every time.
Mr. Eisner. We don't make the televison sets or the
computers where this is distributed. We can do it up to that
point.
Senator Smith. Up to that point. Is that right?
Mr. Eisner. Yes.
Senator Smith. The cul-de-sac that we're talking about--my
concern for the IT industry is that when we establish it, that
just begs the stealers to get around it.
Mr. Eisner. Well, we're asking for renewable, changeable,
expendable, all those words that mean it has to be developed
and legislated to be able to adapt to new technology. Yes, if
you make one system, and you tell them they have to do one
thing, that will be antiquated probably the day it opens. So it
has to be--like everything else--renewable. And it doesn't have
to be a hundred percent. I mean, if some people get into it for
awhile, then they get into it. DVD has been hacked. Normal
people just say, ``I'll pay the money.''
Senator Smith. Thank you. Mr. Chairman, I just want to say
I thought that the video of this young boy--and I don't want to
moralize here, but I thought it was a tragic thing that we saw.
I mean, we're all worried about the Ten Commandments being hung
in a courthouse. Heavens, we took them down at home a long time
ago, apparently.
The Chairman. Right.
Senator Smith. Because the commandment ``Thou shalt not
steal'' is clearly not taught in somebody's home, and
apparently a whole lot of homes. And that's a real tragedy for
our country.
The Chairman. Senator Snowe? And they don't feel like
they're stealing. They just see it out there, and they just
take it. That's the truth. Go ahead.
STATEMENT OF HON. OLYMPIA J. SNOWE,
U.S. SENATOR FROM MAINE
Senator Snowe. Thank you, Mr. Chairman. And I want to thank
the panel here this morning. I obviously have heard the
preference that--from the Committee, I think, essentially that
if we could work this out through the private-sector industry,
that certainly would be most desirable.
I think that--one of the areas I want to probe is to why
the industry has reached an impasse. Has it reached an impasse?
Is it unresolvable at this point with the association, or is it
still possible? And what's the timeframe here? At what point
would it be, you know, an absolute necessity that Congress take
action to mandate a solution, if that becomes the only option
remaining?
Mr. Chernin. Well, I'll speak, for at least ourselves. We
think we have reached an impasse, but we certainly do not think
it's unresolvable. We're certainly willing to do it, but I
think that, as I said earlier, 7 years is too long a timetable.
If the timetable is 12 months or 18 months or 2 years, I'm not
the one to say.
As I said, I applaud these hearings, because I think just
that letter showing up is an indication of some movement. These
issues are resolvable. But for some reason we haven't been able
to get there yet. And we think that the threat of these
hearings has been a big help. And if this isn't enough and we
can't resolve it, then I think we are going to come and ask for
legislative help to solve it.
Senator Snowe. Yes, Mr. Vadasz?
Mr. Vadasz. It's very interesting, because I thought that
we didn't reach an impasse. I thought that we were working
diligently on the issues that you brought up. I thought the
issue of her terrestrial broadcast and the analog hole came up
as an issue that you wanted to be solved in a relatively recent
time, like a year ago or so. And we have been working on it.
But if you think that we have reached an impasse, I'm really
sorry to hear that. I thought that our--jointly our people have
been working diligently on this issue--your people and ours.
Mr. Chernin. I guess maybe what makes us more pained, Mr.
Vadasz, is when you see several hundred thousand of our movies
and our television shows downloaded every day. Perhaps we're a
little bit more sensitive, and perhaps we're even a little
hypersensitive about this. But given the millions of dollars
and thousands of jobs that contribute to the economy, this is
an extraordinarily important issue for those of us in the
content business.
Mr. Eisner. I'm not super sensitive about this. I know when
I'm being finessed. You know, finesse is finesse. And until
this process that we're going through now started, you couldn't
discuss this. At least at my level, you couldn't discuss this.
And when you discussed it with your friends, who I have in high
places in Silicon Valley, you would get a lot of negative body-
language. You know when you're making a deal and it's not going
to happen and you're being treated very respectfully.
I would say there was a total impasse, and I think--good-
natured impasse, by the way--friendly impasse, not hostile, and
a lot of good work being done around the impasse, a lot of
other things being done between us and Intel and Microsoft and
Cisco and all the rest. But on this particular issue of that
kid downloading our movies, putting our industry in real
jeopardy, I would say there's been an impasse.
Senator Snowe. So are the negotiations still ongoing? The
discussions ongoing? Or is anything happening?
Mr. Eisner. We are assuming that Congress is going to come
up with some period of time that we have to do something. And
we are going to subtract every day starting today from that
period of time, because now we have a letter from a high-tech
company saying they're going to be cooperative, they're going
to sit down. So we're going to call them tomorrow morning and
say, ``OK, when do we meet?'' I'm returning the call from last
August that I don't remember getting.
Mr. Vadasz. October.
Mr. Eisner. Excuse me, October--that I don't remember
getting. I'm pretty good at returning my calls, but I'll return
it now: Let's meet.
Senator Snowe. Well, Mr. Vadasz, you had mentioned in your
testimony on--that your concern is it would infringe on
consumer rights and it would do irreparable economic damage. On
the other hand, you also can recognize--the concerns of the
entertainment industry. Whether you regard it as, you know,
real or not, or it should be done by government or not, the
fact of the matter is it remains a real concern. And our
economic system operates on incentives and disincentives. And
if the industry refuses to make the investments to take the
risk, obviously that affects not only the industry, but it
affects the American economy, as well.
So I think you can understand why there would be a true
interest on our part to try to resolve this issue. We would
prefer it to be done within the industry. But clearly, if all
else fails, then we're not going to have any choice in the
matter, because they do have a legitimate concern. I mean,
would you take those--would you make those investments, would
you take those risks, if you were in their shoes?
Mr. Vadasz. Senator, first of all, I do agree with you that
this issue needs to be resolved, and that's exactly why we have
committed the kind of resources we have in all of our other
industry partners in the past. So there is no disagreement on
solving legitimate issues.
But when it comes to taking risks with investment, nobody
can manage the kind of risks we take with the investment on our
future products.
Mr. Eisner. Can I ask one question? Is it your customers?
Because they sell their chips to the computer manufacturers. Is
it that your customers don't want this chip? Because you would
do the chip if your customers wanted it. There's no reason for
you not to do the chip. So is it COMPAQ or Dell that says,
``You know what? Don't send me that chip. I don't want that
chip''?
Mr. Vadasz. That's not the issue. The issue is how does the
industry moves forward. What are the dynamics of the industry?
Who makes the design decisions?
Mr. Eisner. If Michael Dell said, ``I want the chip,''
would you give them the chip?
Mr. Vadasz. If Michael Dell wants to put that capability
into his machine, he's perfectly capable of doing that.
Mr. Eisner. I think that may be the issue. I don't know.
I've been trying to figure out for 2 years why we can't get
this done.
Senator Snowe. Well, maybe as a result of this hearing
today, maybe we have now sort of figured out what the issues
are, and maybe we can get it resolved, Mr. Chairman. Thank you.
The Chairman. ``On behalf of the Committee, and this letter
here from the Business Software Alliance, I read, ''The
software and hardware industries are committed at the highest
level to a solution that protects content,`` signed by Michael
Dell of Dell, Mr. Capellis of COMPAQ, Mr. Gerstner of IBM, Mr.
Bennett of Intuit, Balmar of Microsoft, Galvin of Motorola,
Chen of Sybase, Weinback of Unisys, and none other than Mr.
Craig Barrett, the chief executive officer of Intel.
And now we know the time, because I can go back to the
taken record, and Mr. Vadasz has testified that the technology
is on the table and ready to be used. I remember asking--and I
have toyed with my friend, Mr. Valenti, for two or 3 years over
this same problem--and the testimony has shown we have been at
it for 7 years of listening and waiting and listening and
waiting. But now we know that the technology is on the table
and ready to be used.
I asked--I said our bill has got 18 months. And the answer
from one of the real good experts says you can do it in 18
days. And Mr. Vadasz says you can do it now. So that question
is answered.
That won't be a technological cul de sac--we don't have a
genius for that in Congress.
(Laughter.)
The Chairman. But we can create an economic cul de sac for
the standard technology. And that's what we're about to do if
you don't.
And otherwise, Mr. Vadasz, in thanking you and thanking the
entire panel, it's been the most outstanding panel we've had in
a long time. You say looking at Intel for the long-term. That's
all I got to know about the Dublin, Ireland, plant. That's a
billion-dollar plant, and I tried my best to get it from Andy
Grove to go into South Carolina.
(Laughter.)
The Chairman. And I'm still trying. And incidentally, we've
got the technology ready for it, because the vice president of
Intel in Dublin took me down the road, and he said, ''Senator,
I've got a surprise for you.`` And he showed me a technology
training institute very, very similar to the one I had broken
ground for myself in Columbus, South Carolina, 40 years ago. He
said, ''I sent two teams on two occasions to Midland Tech in
Columbia, South Carolina, and we duplicated your facility,``
and that's how they got it up and got it operating and in the
black.
And this has been a wonderful success. So I thank you, Mr.
Vadasz. I thank you, Mr. Chernin, and thank you, Mr. Eisner.
We've got a very important panel of five others here this
morning. And we want to excuse you folks and get them forward
here.
Mr. Jack Valenti, the president and CEO of the Motion
Picture Association of America--let's do it as quietly as we
can--Mr. James E. Meyer, the special advisor to the Chairman
and former Senior Vice president and Chief Operating Officer of
Thomson, Mr. Andreas Bechtolsheim, the General Manager and Vice
President of Cisco, and Robert Perry, the Vice President,
Marketing, of Mitsubishi.
Mr. Valenti, while they're moving out, I'm reminded of the
time after the hurricane, Camille, hit the Gulf and Senator
Houston took Senator Stennis down to President Nixon in the
Oval Office to have a disaster declared. And they sat in the
Oval Office, and President Nixon came in, and the president had
already been briefed, obviously, and he said, ''This has been a
very terrible thing down there, and I'm ready``--he was ready
to declare it an emergency, a Federal emergency.
But Senator Stennis interrupted and said, ''Now, Mr.
President, you don't understand.`` He said, ''It just took all
the boats, the docks and washed them away.`` President Nixon
said, ''Yes, but, Senator, I know, and I'm ready.`` ''Oh, no,``
Senator Stennis interrupted again. He says, ''It washed ashore
and took all the houses.`` And the president started one more
time. He said, ''I understand there's been quite a loss down
there, and I'm ready to``--''But you don't know,`` Senator
Stennis said.
(Laughter.)
The Chairman. ''And it washed away all the palms.``
Finally, Senator Eastland reached out and touched Senator
Stennis on the knee. He said, ''John. John, hush. Let the boy
talk.``
(Laughter.)
The Chairman. We have let the boys talk already this
morning, and I apologize to this important panel. But the truth
sort of comes out, and we're better informed. That's one of the
best panels we've had. But without further ado, obviously, Mr.
Valenti, Mr. Meyer, Mr. Bechtolsheim, Mr. Perry, we welcome
you. Your statements in their entirety are included in the
record, and we can highlight them or deliver them as you wish.
I can start with Mr. Bechtolsheim.
[The prepared statements of Mr. Bechtolsheim, Mr. Perry and
Mr. Meyer follow:]
Prepared Statement of Andy Bechtolscheim, Vice President/General
Manager, Gigabit Systems Business Unit, Cisco Systems, Inc.
Good morning and thank you, Mr. Chairman, for convening these
hearings on protecting digital content and promoting broadband
deployment. At Cisco, we believe that growing the Internet from the
current narrowband generation of email and web browsing to one that is
capable of delivering movies and multimedia applications is crucial to
the economic future of our country. Although many forces will drive
broadband deployment, one key factor will be the availability of
audiovisual content on the Internet. The more and better content that
is available on the Internet, the more consumers will choose broadband
connections to access that content and also gain access to the benefits
of broadband in other areas, such as education, medicine, and
government services.
But why should government care about the deployment of broadband
Internet networks? The answer is simple, yet compelling. Broadband
enables new applications and services that will continue the radical
transformation of our economy that the Internet has begun. It is not
just about watching movies online or playing interactive games, however
interesting those activities may be. It is about improving the
productivity of our workforce and increasing long term economic growth.
If we look at the recent past, we can see the enormous impact of first
generation Internet services on the economy. In industries where
information technology and Internet services were integrated into their
operations, productivity increased four times faster than in industries
that did not integrate information technology. Higher productivity
growth creates more jobs, strengthens existing industries, and provides
higher wages for workers.
But as I said before, movies will help draw consumers to broadband
services. But first, the movies must be drawn to the Internet. The
motion picture industry is certainly interested in using the Internet
as a new distribution platform for its movies. But the movie industry
is not interested in doing so without proper protection against
unauthorized copying of copyrighted material. We would not expect
anyone to put their money in a bank that does not have a safe and
secure vault to store the money. Likewise, it is not reasonable to
expect movie studios to release content on the Internet without strong
copy protection systems in place. The technology industry, including
Cisco, has worked hard to create copy protection technology and
continues to work with the content industry to improve and implement
such technologies.
Copy protection technology, however, must be about more than just
preventing authorized copying of content. The technology must support
multiple encoding technologies, multiple platforms, and multiple
categories of devices. Most importantly, the technology must be
consumer friendly. If consumers find the copy protection technology to
be confusing, difficult and burdensome, they will not move to the new
services. For consumers to embrace broadband distribution of movies,
copy protection must be transparent to the user, available for multiple
platforms and formats, and support multiple usage models such as
purchase, rental, subscription and broadcast.
The best example of this type of security is already in widespread
use on the Internet today. Millions of consumers make secure
transactions on the Internet using the Secure Socket Layer encryption
technology, commonly referred to as SSL. The open and interoperable SSL
technology allows for the transmission of sensitive data, such as
credit card numbers, securely across the Internet in a manner that is
virtually transparent to the user. In fact, most Internet users do not
even know that they are using SSL protection in making these
transactions. The creation of SSL was critical to developing commerce
on the Internet largely because it is an open and interoperable system
that supports almost all technologies and is easy for consumers to use.
It became clear that a similar system for protecting content on the
Internet would be the best and most consumer friendly way to bring high
value content to the Internet. So Cisco took up this task and has
created a system called Open Conditional Content Access Management, or
OCCAM. OCCAM is an end-to-end protocol for protecting content from
unauthorized copying, distribution and playback and can be used to
protect content during transmission and storage in any public, private
or home network.
OCCAM utilizes 128-bit AES or Advanced Encryption Standard for
encrypting content. This is one of the best encryption technologies
known today which was created by industry working with the National
Institute of Standards at the Department of Commerce. In addition,
OCCAM uses PKE or Public Key Encryption which allows for the secure
transmission of a content key from a content provider to the consumer
playback device. Both of these technologies have been extensively
researched, are in wide use on the Internet today, and are considered
open standards.
I would like to state for the record that government, in particular
the Department of Commerce has already greatly contributed to enabling
content protection technology, by defining the standards for security
technologies that are used as the basis for e-commerce,.
In order to maintain the open nature of this system, Cisco has
created a non-profit licensing organization to administer the OCCAM
technology. The licensing organization can also be used to enforce the
robust implementation of the copy protection technology by
manufacturers of compliant equipment. Cisco believes that the open
licensing of open and interoperable technology will be the best means
of creating strong and consumer friendly content protection to
encourage the distribution of content on the Internet.
The availability of open systems of content protection like OCCAM,
which can be enforced through licensing regimes leads to the conclusion
that legislation prescribing specific content protection technology, is
not necessary. In fact, it would be quite undesirable. If the decision
on selecting and implementing technologies were left to government
bureaucrats, we run the risk of selecting inferior, market-unfriendly,
and limited technologies. We would also limit future innovation in
security technology by freezing in place current technology and only
making changes at the speed of government, not the speed of the
Internet.
Looking at history only confirms this conclusion. For example, the
Audio Home Recording Act attempted to legislatively protect digital
audio content through a government-mandated copy control technology.
Initially, the AHRA largely succeeded only in destroying the market for
digital audio devices. Then, as technology developed, it became clear
that the copy protection system of the AHRA was extremely ineffective.
Despite provisions in the AHRA that would allow the mandated technology
to be ``updated,'' no serious attempt has been made to do so. Instead,
the recording industry is working through private sector technologies
to solve its problems, rather than seeking another government mandate.
The best way to protect content is through technology, not
government. Proven content protection technology exists today that does
not require new legislation for efficacy. Alternative technologies that
would require new legislation to be effective in our opinion are not
technically sound because the protection offered by the law can never
be as strong as protection offered by the strength of encryption and
mathematics.
A standard for copy protection is required to assure a viable
market for content creators and consumer electronics companies, while
making the widest range of content available to the public. Such a
standard should be technically sound, be open to all qualfied
participants, and not be controlled by a for-profit entity. Cisco
remains committed to work with the industry to implement an open and
interoperable system of this nature.
Mr. Chairman, thank you for the opportunity to present Cisco's
views today.
______
Prepared Statement of Robert A. Perry, Vice President, Marketing,
Mitsubishi
Chairman Hollings, Ranking Member McCain, and Members of the
Committee--
I am pleased to appear today on behalf of the Home Recording Rights
Coalition (``HRRC''). I serve on the Board of the HRRC, and currently
chair the Video Board of the Consumer Electronics Association
(``CEA''). I also serve as Vice President of Marketing of Mitsubishi
Digital Electronics America, Inc., a corporate leader in the transition
to DTV and other digital products for the home network. In my role at
Mitsubishi, I am the executive directly responsible for the product
strategy of the company.
The HRRC was founded more than 20 years ago, after a U.S. Court of
Appeals ruled that Sony could not legally sell the first ``Betamax''
home VCR to consumers. Fortunately for all involved--including the
motion picture industry--that decision was reversed by the U.S. Supreme
Court. Not many years after having failed to keep the Betamax and
successive generations of VCRs off the market, the motion picture
industry began receiving greater revenue from the home video market
than it does from the theatrical box office, a trend that continues in
the digital DVD era.
This morning it should be apparent why, after twenty years and a
Supreme Court victory for consumers, the HRRC finds it necessary to
remain active. Despite the tremendous benefits conferred on the
entertainment industry by consumer electronics products, some in the
content creation and distribution industries continue with their
efforts to limit, curtail, restrict and confine the design of these
products, and their use by consumers. Many or most of the areas in
which restrictions are now sought are targeted at the home, and the
home network, rather than at abuses related to the Internet, which is
their purported justification.
Proposals to restrict the development of new technology, and
consumers' use of it, represent an alarming trend which in our view
should be a main subject, if not the subject, of the hearing today. We
are at the forefront of a digital revolution that, if allowed to
proceed, can offer consumers greater value at lower prices. But history
teaches that if the Congress allows content industries to dictate the
designs and uses of new products, the digital revolution will never
reach its full potential.
All who seek regulation or legislation today cite to actual and
potential redistribution of commercial programming over the Internet.
But the legislative agenda of some is not confined to addressing this
problem. It extends to dictation of the design of products by
technology companies, and the dictation of their use by consumers. We
hope this Committee, in its fact finding, will sort the wheat from the
chaff.
The HRRC Has Worked With Content Industries On Approaches That Are
Balanced And Fair To Consumers
In the analog domain, HRRC cooperated with the entertainment
industry in drafting section 1201(k) of the Digital Millennium
Copyright Act of 1998 (DMCA). Prior to that, we worked with the
recording industry on the Audio Home Recording Act, and we took the
initiative in negotiating with the motion picture industry, to address
their concerns over emerging digital video formats, starting in 1992.
It was, literally, we who invited them to the table. We were also among
the founders, along with information technology and content
participants, of the Copy Protection Technical Working Group
(``CPTWG''), which has met approximately every month on the West Coast
for the last six years. Its most recent meeting was yesterday.
For several years, both HRRC and consumer electronics companies
have offered to work, via legislation if necessary, with those who
legitimately want to address large scale, anonymous redistribution of
content over the Internet. I am a co-chair of a CPTWG work group on
this particular subject. Consumer electronics companies have already
committed publicly to support measures, regulatory if necessary,
addressing such redistribution.
Some Content Industry Agendas Extend Into Deep Control Over Consumer
Practices In The Home, Not On The Internet
The movie industry agendas from which consumers need protection go
well beyond dealing with external connections to the Internet. Rather,
they extend internally, inside the home, into heart of the consumer
home network. We are concerned about efforts to control or eliminate
reasonable, healthy, and constructive practices of consumers, and to
chill the design of innovative products.
Congress Should Not Allow Control Over Consumer Home Recording Of Free
Over The Air Broadcasts
At least one motion picture and television network company has
sought, through regulation or legislation, the ability to control
consumers' enjoyment of free, over the air broadcast programming within
the home--not just on the Internet. The argument has been that private
sector content distribution licenses provide for ``generational''
control of home recording in some instances. So, it is reasoned, free,
over the air digital broadcasts should be similarly controlled, and
consumers may be limited to making a single, personal copy.
They shouldn't be. Consumer expectations about free, over the air
broadcasting are different from those as to cable and satellite
delivery. Those who receive programming over cable or satellite have
contractual relationships with their content distributors; the devices
they use are specifically licensed to receive content Approximately 15
percent of the public, however, chooses to forego such contractual or
license relationships, preferring to watch whatever they choose, plus
the advertising, delivered via rooftop antennas or rabbit ears.
Imposing a technical regime on free broadcasts would forever change
this paradigm and experience. If those who want to equate free
programming with paid programming had their way, these consumers would
become involuntary licensees, subject to technological controls
negotiated elsewhere.
Advocates of such a regime say they would still allow consumers to
make a single copy of a program. Beware. As Herbert T. Gillis famously
advised, ``The first step down is a long way.'' Any imposition on
consumer home recording of free, over the air broadcasts would have
significant, harmful consequences for consumers.
For example, many consumers now have set-top boxes with built-in
``personal video recorders,'' or PVRs, as well as plain-old VCRs. Some
studios insist that consumers should only be able to make one copy of a
broadcast, claiming that they never have a need for more than one. If a
PVR copy counts as the consumer's one copy, however, he or she can
never record it on a VCR, or play it back on another TV in the house. A
program recorded for viewing by the children could only be viewed on
the same TV on which a parent would otherwise watch Sunday sports. A
program of local interest could not be shared with parents or grown
children living in another community.
Licenses governing programs distributed over cable and satellite
systems have complex and expensive ways to deal with such issues--for
example, allowing transfer of a copy from a PVR to a VCR, if the PVR
copy is erased at the same time. Nor have such licenses imposed
restraints on programs originating as free, over the air broadcasts,
even when delivered to the home over cable or satellite. Imposing such
complexities as to free, over the air programming would bring the
government into a complex, changing, and expensive technical area, with
consumers suffering the consequences.
HRRC is strongly opposed to any legislative (or regulatory)
interference with consumers' rights to engage in inhome, private, non-
commercial recording of programming originating as free over the air
broadcasts. We urge the proponents of legislation to publicly disclaim
any such objective today, on the record, and without condition.
Congress And The FCC Should Not Allow Content Owners And Distributors
To Exert Remote Control Over Consumers' Selection Of Home
Network Interfaces And Viewing Products
Another agenda of some studios, that we already see in proposed
licenses to be administered by the Federal Communications Commission,
is the exertion of remote control over the daily operation of consumer
devices. The technical phrase, ``selectable output control,'' sounds
inviting--until one realizes that the ``selection'' would be done by
the movie studio or cable company, not by the consumer. The technology
as to which some studios seek mandated adherence would allow them, or
cable or satellite operators, to exercise direct, remote control over
all product-to-product connections in the home. Once given this power,
a movie studio, or cable or satellite operator, could simply turn off
any interface at will, effectively making the consumer home network a
part of its own distribution system.
Please remember that digital technology, which causes content
owners to feel threatened as to its distribution potential, offers a
much more frightening potential for control--if the FCC and the
Congress allow such control to be exercised. And here is why it is
being sought. Today, there are two standard all-digital interfaces
being readied for widespread use in the home. One, known as IEEE 1394,
iLink, or ``firewire,'' provides a bi-directional means of connecting
TVs, VCRs, and other standard consumer products within a home network.
This connection allows home recording to be either supported or
disabled. The other digital interface, called ``DVI,'' is a one-way,
broader digital connection originally designed to hook personal
computers to digital monitors. The DVI signal used in this interface is
simply not recordable by any known consumer technology.
Over several years of negotiations, license agreements governing
the ``1394'' interface have spelled out when this technology may be
used to block home recording of certain content, based on ``encoding
rules'' that protect current consumer practices. (Congress in fact
endorsed these rules in principle as part of section 1201(k) of the
DMCA.) Such an approach is not possible utilizing DVI alone.
Each of these interfaces offers different advantages. Many people
in my industry envision home networks in which each interface
connection would be available to consumers--some TV receivers might be
designed to rely on the ``1394'' inputs, some on DVI, some on both.
Connections to digital VCRs, for example, would be made through the
1394 interface, meaning that copying would be controlled, but subject
to balanced ``encoding rules.''
However, if those studios seeking to impose ``selectable output
control'' gain this power, they could remotely control, on a program by
program basis, which one of these interfaces would be active in a home,
and which would be switched off for all purposes. A studio, cable MSO,
or satellite provider that did not want to permit any home recording on
VCRs would simply turn off the ``1394'' interface, and the ``encoding
rule'' protections for consumers, painfully negotiated over several
years, would become irrelevant. But the damage would not stop there. A
consumer who had bought a state of the art HDTV receiver, with a copy-
protected digital 1394 interface, would lose the signal from this
interface for all purposes, including viewing the program. So even
consumer high resolution viewing, on the newest frontline, digital
products of the DTV transition, could be cut off at the discretion of
the studio, cable, or satellite company.
Unfortunately, the damage to consumer living rooms from
``selectable output control'' would not stop even at the choice of
digital interfaces. Neither of these digital interfaces is yet in
general use. Most HDTV displays in the market today, and sold over the
last three years, rely on the same sort of broadband interface that is
used to deliver signals from PCs to computer monitors. (In computer
terminology it is called ``RGB.'' Its consumer electronics cousin is
component video, also known as ``Y, Pb, Pr''.) If Congress were to give
this enormous ``selectable output control'' power to content owners,
they could simply cut off broadband signals to the pioneering Americans
who have purchased these 2.5 million displays.
To simplify this issue--if studios and content distributors were
given this power over consumer viewing, some consumers might conclude
that they had overpaid for their brand new HDTV. Even more disastrously
for our country's digital television transition, they might conclude,
and tell their friends, that it was a mistake to buy any new digital
television at all--because all the high resolution inputs on the TVs
manufactured to date could become useless as to content delivered over
cable, satellite, or broadcast. We suggest that any studio proponents
of such control be asked to explain to the Committee how such an
outcome could possibly serve the public interest.
Spokesmen for the entertainment industry have never publicly
disclaimed any intention of proceeding with such an agenda, through
licenses as enforced by the FCC or through the Congress. We call upon
them to do so today.
A Cable Industry Proposed License And Specification Threatens Consumer
Enjoyment Of Innocent Home Products
Ironically, the Federal Communications Commission today is in a
position to enforce anti-consumer license provisions because of a
provision passed by the Congress, in the 1996 Telecommunications Act,
that was meant to be explicitly proconsumer. Section 304 of the 1996
Telecommunications Act requires the FCC to assure in its regulations
the competitive commercial availability of devices that attach directly
to cable systems--breaking the 50-year monopoly, based on their
concerns over theft of service, that cable multi-system operators have
enjoyed.
To achieve competitive entry with a range of new devices, as
occurred in telephone deregulation, the FCC oversaw a standards
development process that would also protect the security of cable
signals from unauthorized use. CableLabs, the research consortium of
the cable industry, volunteered, and was chosen by the FCC, to set such
standards. But as presently drafted these standards, and the license
agreement that would extend from the cable industry to device
manufacturers, pose another threat to consumer enjoyment of home
devices, and represent yet another part of a motion picture industry
agenda represented before you today. We believe that in combination,
their specifications and their license would:
impose ``selectable output control,'' as I have described,
on all downstream devices
reduce viewing resolution by three-fourths, at the option of
the content owner (out of concern for potential copying)
restrict the other functions and the flexibility of devices
hooked up to cable, making sure that the competitive flowering
and diversity that followed telephone deregulation does not
happen with respect to cable
HRRC and others have repeatedly requested, in writing, that the FCC
publish the pending drafts of this license, for public comment. We urge
this Committee to exercise its jurisdiction to see that this occurs.
Several of these impositions are said to be at the behest of
content owners. We call upon those who seek legislation that would
grant them power over consumer devices to state clearly whether and how
they intend to preserve consumer enjoyment of home devices attached to
cable and satellite systems.
Congress Should Look Skeptically At Vague Proposals For A ``Single,
Standard Secure Domain'' Controlling All Consumer Use Of
Consumer Electronics And Information Technology Products
The Consumer Electronics Association (``CEA'') has provided
financial support for its members' attendance at CPTWG, and has also
supported research and testing products of its work groups. I am
thoroughly familiar with the technical proposals pending as to Internet
redistribution. This project does not and should not require the sort
of control over the home network that apparently has been sought as a
part of a separate legislative agenda of the sort I have described
today.
In addition to going well beyond the redistribution issue, these
agendas also get well ahead of private sector processes. We have heard
speeches about ``single, standard security domains,'' but have yet to
see particular proposals, in the CPTWG or elsewhere, specifically
related to such speeches, defining what is sought, and what it would
mean for products that are in consumers' hands today. This imprecision
will not be improved by tossing everything into the hands of a
government agency to figure out. In my view, the output of industry-led
groups such as the CPTWG should be an essential input for the
consideration of any proposed legislative or regulatory agenda. We do
not have an admirable history in doing the opposite--legislating the
``solution,'' and expecting the private sector to figure out what the
Congress meant.
Any Further Regulation Or Legislation Would Be Appropriate Only As A
Narrow, Necessary, And Targeted Supplement To A Private Sector
Consensus That Protects Consumers
As I noted near the outset, the HRRC has worked cooperatively on
legislative and regulatory proposals over the last two decades, so long
as they gave fair consideration and protection to consumer interests
and practices. In the analog domain, HRRC cooperated with the
entertainment industry in drafting section 1201(k) of the Digital
Millennium Copyright Act of 1998 (DMCA). This section--the only part of
the DMCA that provides for any mandate on product design--takes a
balanced approach. It recognizes the prevailing technology that may be
used to limit analog home recording, but subjects any use of such
technology by content owners to clear ``encoding rules'' that protect
reasonable and customary consumer practices.
A similar approach could be identified to address widescale
redistribution of content over the Internet, and, on an appropriate
time scale, to provide necessary tools for the enforcement of
reasonably balanced license agreements that address copy protection
issues, as well. Such an approach has been suggested by Rep. Boucher in
House hearings over the last several years. In fact, representatives of
the content industry at times have appeared publicly committed to work
towards enactment of a digital video version of section 1201(k), but
little has been proposed as to such a project.
HRRC has been engaged in the debates over actual and potential
copyright legislation for the digital era since that era began, for
consumer recording devices, in the mid-1980's. We have developed a set
of principles, as to potential legislative or regulatory mandates,
which we commend to the Congress in the interest of protecting
consumers and not interfering with either technical progress or
commerce:
HRRC will consider supporting a regulatory or legislative mandate
only if--
(1) the issue cannot be addressed effectively by private sector
standards or licensing activity alone,
(2) the result promotes rather than hinders technical progress
and legal certainty,
(3) the mandate is of a known technology and as narrow as
possible, and
(4) the outcome protects consumers' reasonable and customary
expectations.
Narrow And Targeted Provisions May Be Appropriate To Secure Full
Consumer Use And Reliance On Component Analog Interfaces
I have already identified the pending consensus, private sector
approach to redistribution of broadcast content over the Internet as
one candidate for government support of an existing private sector
consensus. There is one other issue that we see, a bit further on the
horizon, which might be addressed according to the principles that I
have suggested.
The preferred methods for dealing with reasonable content industry
concerns are private sector development of technologies, and private
sector licensing as the prevailing means to apply such technologies.
These should be subject to fair ``encoding rules,'' protecting
consumers from arbitrary impositions that interfere with their
reasonable and customary expectations. Through licensing alone,
however, it may not ultimately be possible to reach all the relevant
devices in the market, or to protect consumers through adequate
encoding rules.
For example, HRRC is committed to maintaining the full consumer
enjoyment of DTV displays, owned by millions of consumers, that rely on
the ``component analog'' video interface. We have asked the FCC, and we
are asking the Congress, not to do or allow anything that would
interfere with the right of consumers--the pioneers in the DTV
transition--to use and enjoy these display devices. Those who seek the
discretion to turn off or degrade the quality of this interface in set-
top boxes (that would feed signals to these displays), however, cite
their inability, using present technical and licensing tools, to
provide any protection for high definition signals once they are
allowed to pass over these interfaces. They argue that without such
tools, there will be no means to prevent the future re-digitization of
these signals for passage over the Internet. They would also need a
means to enforce whatever copy control they may apply to licensed
programs provided by cable or satellite conditional access--e.g., pay
per view, video on demand--as allowed by reasonable ``encoding rules.''
We hope that everyone in the Congress, the FCC, the movie industry,
and the cable and satellite industries will agree with us that it is
essential that consumers who buy DTV and HDTV receivers not lose most,
or even any, of the benefits of their bargain. Therefore, in HRRC's
view, a balanced regime as to ``component analog outputs,'' that is
fair to consumers, is far preferable to the imposition of broader
measures such as ``selectable output control'' or ``downresolution.''
One such approach--which at this stage would still need much private
sector investigation and discussion--would be an obligation only on
narrowly and specifically defined, future analog-todigital converters,
to read and respond to so-called ``watermark'' technology that may
emerge from a private sector consensus. Since private licenses cannot
and should not reach every product, to enforce that obligation
equitably some regulatory or legislative action may be necessary. We
emphasize, however, that much needs to be done in the private sector
first, before we can know whether the necessary preconditions as to
fairness to consumers, and not hindering technology or commerce, can be
met. We know there is particular concern on these points in the
information technology industry, and we share it.
A Published Draft Of Legislation Is Unfocused And Dangerously Overbroad
I have attached the HRRC critique of the first published version of
a draft bill entitled the ``SSSCA.'' I understand that it is being
reconsidered. The fundamental problem with its approach--aside from its
potential support for goals that we consider to be anti-consumer--is
the lack of any apparent nexus between content that would be protected,
devices that would be subject to mandate, and the results that would be
achieved.
One could go on and on about the sorts of devices that would be
covered, intentionally or inadvertently--from wristwatches to PDAs to
ordinary TV receivers to supercomputers. This is not a drafting issue.
This is a fundamental policy issue. The main question is whether the
Congress is going to hand unfettered control of the future design of
devices by consumer electronics and computer makers over to a few
studios to who wish to exert absolute authority over what consumers can
do with lawfully acquired programming in the privacy of their homes.
If Congress is not about to hand over such power, we respectfully
suggest that it needs to back up and focus on particular issues and
problems, find out exactly what the private sector is capable of doing,
find out where the private sector would need help as to enforcement of
reasonable measures, and, most importantly, assure that the outcome is
fair to the consumers who are critical to the success of the digital
television revolution.
On behalf of the HRRC and the other organizations with which I am
affiliated, I greatly appreciate the opportunity to have appeared
today.
Home Recording Rights Coalition Analysis And Concerns, Draft ``SSSCA''
Technology Mandate Legislation
I. Objections In Principle
The approach taken in the published staff working draft of
``SSSCA'' technology mandate legislation would deal far too harshly
with consumers, and put an end to their reasonable and customary home
recording practices which, to date, have contributed to entertainment
industry prosperity. The draft--
Does not distinguish between ordinary consumer
retransmission or copying of a work in a home network; and the
redistribution of programs, outside the home, in competition
with the original public distribution. It would prevent both.
The single exception, for making a ``personal'' time-shift
copy of only certain video programming, would not acknowledge
the common practice of sharing of lawfully acquired material
among family and close friends, nor would it recognize
customary consumer ``place shifting'' of audio recordings. It
would, therefore, in the guise of ``security'' legislation,
virtually wipe out most private, noncommercial audiovisual, and
audio, home recording.
For the first time, this legislation would constrain
consumer use, within the home, of free, over the air TV and
radio broadcasts. After passage of this bill, requiring device
compliance with an encryption regime as ``security'' for
receipt of free as well as paid services, no consumer could
hoist a pair of rabbit ears, or turn on a car radio, without
having to agree to become a ``licensee.''
The draft bill makes no reference to the Digital Millennium
Copyright Act of 1998 (DMCA), and thus may make illegal devices
built in conformance with that statute, in part icular analog
recording devices (containing digital circuitry) that implement
a well-known anti-copying technology as required under section
1201(k).
The bill contains no exemption for products that comply with
the Audio Home Recording Act of 1992 (AHRA), under which
consumers pay levies on products and media used primarily for
digital audio recording. Nor does the bill repeal the AHRA.
II. Objections As To Overbreadth And Ambiguity
The draft legislation is so broad in its application that,
technically and legislatively, it entirely lacks focus. Selecting
actual products to which to apply its provisions, from the literally
millions that would be covered, would be pure guesswork. Hence, its
application would arbitrary, its direction uncertain, and its effect on
the marketplace potentially catastrophic. The draft--
Does not require that ``digital'' products be in any sense
electronic.
Does not require that an ``interactive digital device'' be
in any sense interactive. It covers all devices primarily used
for ``storing, retrieving, processing, performing,
transmitting, receiving, or copying information in digital
form.'' Even if limited to electronic devices, this would
include most wristwatches, microwave ovens, TV sets, radios--
anything with an IC chip in it. Obviously, all PCs, PDAs, and
consumer electronics products would be covered.
Does not indicate or even imply what relationship is desired
between the device, the ``certified security technology,'' and
the content that is sought to be ``protected.'' Thus it
entirely lacks focus or direction. Having identified a device
that falls within the definition of ``interactive digital
device,'' how is the private party or government body to decide
what is to be ``certified,'' and thus mandated for application
and conformance? Must a device (like a PDA) that stores,
processes, performs, transmits, receives, and copies
information be subject to a separate ``certified security
technology'' for each of these functions? If not, why not?
III. Objections To Nature And Sweep Of Government Mandate
Consumers, consumer organizations, retailers, and others would be
shut out of the preliminary round of ``negotiations'' as to imposition
of any ``certified security technology''--only ``device manufacturers''
and ``copyright owners'' would participate. Even the device
manufacturers would lack negotiating leverage, as the bill puts no
constraint whatsoever on the objectives and means of enforcement that
can be demanded by the copyright owners. The draft--
Provides no guidance to the Administration as to which
products and technology must be subject to a Federal mandate
after private sector negotiations fail. Is a Federal mandate
triggered after any and every failed discussion between any
device manufacturer and any copyright owner? If not, which
private sector discussions would be chosen as triggering a
mandate, and which would not?
Would provide a sweeping antitrust exemption for private
party cooperation in imposing constraints, without providing
for any input from the Department of Justice, its Antitrust
Division, or the FTC.
______
Prepared Statement of James E. Meyer, Special Advisor to the Chairman
and Former Senior Vice President/Chief Operating Officer, Thomson
Multimedia
Thank you, Chairman Hollings, Senator McCain, and Members of the
Committee for the opportunity to bring the views of my company to this
hearing.
My name is Jim Meyer, most recently Senior Executive Vice President
and Chief Operating Officer and currently special adviser to the
Chairman of Thomson multimedia. I have over 25 years of experience in
the consumer electronics industry, and I'm here today to share the
views of one of America's largest entertainment industry employers. I
believe that I also can speak fairly for the millions of consumers who
purchase RCA brand home entertainment products each year and call us if
there is a problem.
I commend you, Mr. Chairman, for holding this hearing and for the
continued leadership that you, Senator McCain and other Members of the
Committee have demonstrated over the past decade in attempting to guide
and accelerate our nation's transition to digital television. The
subject of today's hearing, the protection of copyrighted video
programming formatted digitally and electronically transmitted by
broadcast, satellite, cable or over the Internet, involves numerous
difficult technical and business issues. I would suggest, however, that
the public policy issues are relatively few and straightforward.
First, there needs to be agreement on digital copy protection
standards if the conversion to digital television is to move forward
more rapidly.
Second, any such agreement must embody one fundamental principle:
it must protect both the interests of digital content owners and
providers and consumers. Copy protection must be effective,
particularly in addressing the core problem of unlawful internet
retransmission, but it must permit consumers to continue to make
recordings for their personal use within their homes just as they have
come to expect in the analog world since the advent of the VCR.
Consumers making investments in advanced digital products will not and
should not accept reduced functionality in their digital viewing
experience.
Third, ideally, agreement should be reached voluntarily among the
affected parties through private negotiations using established
standard setting processes. However, if that effort does not succeed
within a reasonable period of time, the government must facilitate and,
if necessary, mandate the adoption of standards.
1. Unresolved Issues Slow The Digital TV Transition
While digital technology is transforming our industry, the switch
to digital transmission and reception of TV signals has been a bumpy
ride so far. Fewer than one out of six broadcasters is now sending a
digital TV signal. We are hopeful that by May 1, 2002, an additional
400 to 500 broadcasters will be transmitting digitally. While consumers
have purchased more than two million HDTV monitors and sets, the
reality is that this transition has only just begun.
Content owners have yet to release truly compelling digital high-
definition movies, sports, and shows. Their reasoning is simple--they
want more protection from illicit Internet redistribution of digital
content.
Obviously, if we're going to have an orderly transition, there
needs to be agreement about what we're trying to protect and how.
Thomson prefers private agreements that insure full functionality in a
Personal Home Network, and protection of digital content from
widespread piracy.
To that end, Thomson is developing a new technology called
SmartRight. Designed to work with a simple ``smart card,'' the
SmartRight system would permit a consumer to view, record, and store
digital content for his own use within what is called a personal
private network. The system would work for broadcasters, for cable and
satellite operators, and could even be extended to computing platforms.
SmartRight is a good example of a technology that is reliable,
renewable, modular, and easily applied to a variety of situations.
Beginning this year, Thomson is also building copy protected
interfaces for cable and satellite programming into its new line of RCA
Scenium integrated digital television receivers and in RCA HDTV
monitors that will be available to consumers in time for this year's
Christmas shopping season.
Another roadblock in the digital TV transition is incompatibility
between various cable systems throughout the country. Current cable TV
systems are proprietary and closed, making it impossible to develop new
digital TV products that could easily be sold anywhere in the U.S. and
plug directly into a cable outlet. This is an unfortunate fact that
will certainly hinder a speedy digital TV transition.
2. Background on Thomson multimedia
Thomson multimedia is the company behind RCA home entertainment
products and the owner of Technicolor, a service provider to the film
industry. As the leading manufacturer and marketer of consumer
entertainment products, and as a trusted supplier of DVD and tape
replication services to Hollywood, Thomson is well positioned to
comment on how best to expand broadband entertainment while preserving
both home recording rights and the rights of copyright holders.
One out of five TV sets sold in America comes from Thomson's RCA
brand, our professional broadcast division is one of the world's
largest, and we are the worldwide leader in DVD and CD-ROM replication
serving such diverse customers as RadioShack, Circuit City, Best Buy,
Wal-Mart, Fox, Disney, Warner Bros., and hundreds of others. Of course,
millions of consumers are also our customers, and we field more than
10,000 calls, e-mails, and letters each day with consumers who need
help, need service, or just need some advice.
As one of the largest employers in the entertainment industry, our
reach spans these United States, with more than 10,000 employees in 30
different communities. Our biggest concentration of employees live and
work near Indianapolis, Indiana and in Senator Boxer's home state of
California (near Hollywood) at Technicolor.
So, we have a unique position in both of the content and
electronics industries--by helping the creative community reach the
public through Technicolor's trusted film and video services, and by
designing and selling new RCA home entertainment products that
entertain and inform millions of people.
3. Consumers Expect Features Like Home Recording
With my 25 years of experience in the consumer electronics
industry, I've lived through several revolutionary changes in our
business. I was there when RCA sold the very first VCR that could
record four hours on one tape. That business is now very mature, with
VCRs themselves selling for under $75 and both content owners and
consumers migrating to the popular DVD platform.
Home recording has become a popular past-time, as people use their
VCRs to watch their favorite programs at different times and keep
``bookshelf'' copies in a collection. Thomson, alone, sold more than 55
million blank VHS tapes last year. While not formally enshrined as a
U.S. law, home recording has become a feature that consumers expect to
enjoy. They like the convenience. Some record to catch up on favorite
programs, others to skip the commercials. But most people aren't using
a home VCR to become pirates.
Prerecorded movies and TV shows on tape and disc are coded to
prevent copies from being made. Both the VCR and the DVD player
recognize standardized copy protection methods for prerecorded content,
restricting the average person from making and selling pirated copies.
With today's products, a good balance has been struck between the
consumer convenience and popularity of home recording and protecting
copyrights. Tomorrow's products are another story. Digital recording
makes perfect digital copies. The situation is compounded by the
convergence of the computer with many popular consumer electronics
products. Typically, computing devices are not subject to the same
restrictions as consumer electronics products. This disparity is the
cause of much debate and concern.
Today, Thomson is working on new technologies that will link
together digital entertainment products in a Personal Home Network.
This is the VCR of the future--the ability to easily record shows and
watch them anywhere in your home, at any time. Our customers have been
struggling to identify how the ``rules of the game'' should change as
products go digital and perfect copies are possible. Thomson draws the
line at the Personal Home Network, allowing consumers to time shift,
keep archival copies, move content to various devices, and preserve
favorite content as long the consumer wants to. But there are
legitimate fears about sending that content outside the home network.
These issues are now heating up because of America's transition to
digital television.
4. Thomson Leads the Digital TV Transition
With the transition to digital TV just a few years old, Thomson has
already developed a broad array of RCA-brand digital television
equipment that spans a wide range of price points--including digital
satellite receivers, DVD players, HDTV monitors and HDTV receivers.
Consumers can make the digital transition in a manner that serves
their own needs and personal budgets. For most people, it means the
addition of a digital satellite receiver or digital video disc player--
and maybe an upgrade to an HDTV monitor. Slowly, as the amount of good
HDTV programming is increasing, we're also seeing growth in the market
for fully-integrated high-definition televisions.
As I mentioned earlier, Thomson supplies digital broadcast
equipment to broadcasters, cable networks, satellite broadcasters,
local stations, and production companies. And all of them worry about
security.
5. More Digital Content and More Digital Products Will Drive the
Transition
It is indisputable that high-value, high-quality content will drive
deeper consumer acceptance of digital television. For example, the
availability of thousands of movies on DVD has sparked strong sales of
high definition TV monitors and sets--as well as discs and players.
Thomson views the digital TV transition holistically--that is, the
pieces are interconnected: viewers want content; broadcasters want
viewers; and content companies want to sell their content, with
assurances that their digital material is secure. For more consumers to
embrace digital TV, we believe that two things must happen.
First, high quality and innovative digital content must be created
by the content community and distributed in its fullest quality and
integrity. This happens with over-the-air terrestrial broadcasts,
through the cable and satellite facilities, with pre-recorded media,
and someday even over the Internet.
Secondly, for more consumer acceptance of digital TV, companies
like Thomson must offer innovative products that let consumers exploit
the full benefits of going digital. As your constituents buy new
digital gear, they will still want to record favorite shows, pause to
take a call during a broadcast, and save episodes or sports events for
posterity.
Achieving these two mutually reinforcing--not mutually exclusive--
goals of more HDTV content and more digital products requires certainty
for content providers, for consumers, and for manufacturers.
6. Copy Protection Standards Provide Assurances for Studios, Network
Operators, Manufacturers, and Consumers
What's missing from the transition is certainty--for everyone.
There are holes in the system that could be used to steal content. That
worries the Studios. Broadcasters fear they'll be passed over for more
secure networks like satellite and cable. Manufacturers move
cautiously, because of the huge engineering investments required to
make new products. And Consumers may not buy anything, fearing
obsolescence.
In more detail:
Studios need assurance that their content (their intellectual
property) is protected before they make investments in the production
and distribution of high quality digital content. They will not have
that certainty unless there is genuine and effective protection against
commercial piracy and against unauthorized retransmission of digital
content--especially over the Internet. Once the necessary copyright
protections are in place, we believe that consumers will enjoy a
dramatic increase, not decrease, in the availability of compelling,
creative works online. This will be good for consumers, and very good
for the companies that provide the content.
Network Operators like cable, satellite, and terrestrial
broadcasters want to offer their services in a secure environment so
that they get the best content and interested subscribers.
Manufacturers like Thomson need to know that consumers won't be
stranded by obscure licensing agreements or heavy-handed control
exercised by content owners under the terms of licensing agreements
between Cable Labs and consumer electronics manufacturers. Some
proposals would allow the owner of the content to prevent recording, or
worse, automatically erase programs that consumers have recorded at
home. Just because we move to digital delivery doesn't mean that we
should run roughshod over law-abiding consumers.
Consumers expect full functionality in new products. They want home
entertainment systems to work as advertised, and consumers want to know
that common home recording practices enjoyed today will continue.
Believe me, nothing will kill the transition to digital television
faster than trying to sell digital products that are actually less
functional than today's common VCR.
It's clear that some form of copy protection standard setting is
necessary. (Some of this work has already been done for cable networks,
although HOW that technology is used remains an open question.)
Preferably, these standards should be adopted expeditiously by private
negotiations among affected industries. If that effort fails, the
government must facilitate and, if necessary, mandate their adoption.
These standards must, however, focus on the real concerns--such as
commercial piracy and illicit retransmission of content over the
Internet, and not just new ways for the copyright holders or network
operators to charge for consumer convenience.
During the last few months, progress has been made within the Copy
Protection Technical Working Group and related groups, bringing
together representatives of all industry stakeholders, toward agreement
on a number of outstanding copy protection issues, most notably a
broadcast flag which could be embedded in the digital bitstream and
recognized by a digital television receiver, cable set top box or
computer. The heightened Congressional interest in these activities
reflected in discussion draft legislation circulated by Chairman
Hollings' Commerce Committee staff and the roundtable discussions led
by Chairman Tauzin and Upton in the House have clearly accelerated the
pace of these discussions. Hopefully, they will conclude swiftly and
successfully.
Thomson multimedia remains squarely focused on the needs and
desires of our customers. If we can work this out, then everyone will
benefit. Studios will sell more content. Network Operators will have
more viewers. Manufacturers will sell more products, and Consumers will
enjoy a better entertainment experience.
Ultimately, our own government will be able to reclaim the valuable
broadcast spectrum now used for analog TV--and reassign it for future
communications needs.
Thank you for your interest in these complex but critical issues. I
look forward to your questions.
The Chairman. Thank you. Mr. Valenti.
STATEMENT OF JACK VALENTI, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, MOTION PICTURE ASSOCIATION OF AMERICA
Mr. Valenti. Thank you, Mr. Chairman, for you and Senator
McCain calling this hearing. I really think in my frail
judgment that the progress that is being made now would have
been in exile had you and Senator McCain and your Committee not
given some, quote, incentive, unquote, for these talks to
begin.
And I want to thank Senator Smith and Senator Boxer for
their patience in being here. The greatest gift one can give
another human being is the gift of one's presence, particularly
in Congressional hearings. So I am grateful to you for that.
The Chairman. I am grateful to them, too.
[Laughter.]
Mr. Valenti. One of the down sides of being chairman of a
committee is that you are forced to stay at a hearing, and so I
have compassion for you, Mr. Chairman.
I must say that I thought that Mr. Eisner and Mr. Chernin
laid this out compellingly, and persuasively, and accurately.
My only regret is that they said it so well that all these
picturesque phrases that I had in mind I am going to have to
discard now, and take some of Senator Eastland's advice and let
the boy talk.
I do believe that there is a truth that underlies
everything that we are doing. Let me get that out of the way.
Mr. Churchill once said, The truth is incontrovertible.'' He
said, ``Ignorance may deride it, panic may distort it, and
malice may ignore it, but there it is.''
One of America's greatest assets is in danger of being
slowly squandered and shrunk as a result of virulent piracy
that in ever multiplying avalanches is on the Internet, and
that is a truth that we have to deal with.
Now why is that important to the American people? Why?
Well, what is the economic worth of these copyright industries:
movies, television, home video, books, music, and computer
software, the intellectual property community copyright
industry. What is at stake here, not just for us at this table
and the previous panel, but for the citizens of this country?
The copyright industries are America's greatest trade
export prize. We comprise about almost 5 percent of the GDP of
this nation. We bring in more revenues, as Mr. Eisner pointed
out, than aircraft, than agriculture, than automobiles, and
auto parts. We accrue new jobs at three times the rate of the
rest of the national economy.
And the movie industry alone has a surplus balance of trade
with every single country in the world. No other American
enterprise can make that statement at a time when you all know
we are bleeding from over $400 billion in deficit. That is why
it is important to the American people, not to let this
enormous awesome engine of economic growth go into decline, and
it very well may be.
For as Senator Boxer pointed out, who on earth in their
right mind is going to continue to invest large sums of private
risk capital in a movie that is going to be ambushed in the
first day it is in the theater before it makes its journey
through all the other sequences that it has to go through in
order to retrieve its investment, much less make a profit?
That is what is at issue here, and that is why it is
important. And I am grateful for--Andy, it is good to see you
here, and Mr. Meyer, and Mr. Perry. I want to deal with Mr.
Perry in just a minute.
Because we are here in order to find solutions. Now, there
are three goals that I put in the paper that I have submitted
to you that we have to solve. The other panel made it very
clear, and truthfully, as Mr. Eisner and Mr. Chernin, and the
gentleman from Intel, by the way, I wish I was as sure of one
thing as he is of everything. I mean that would be something.
But I think that we know we can protect our property. There
are a number of wonderful content encryption systems out there
to bring them down from a satellite to a home. But we have
other issues, and I set forth three goals, Mr. Chairman, in my
document.
Goal No. 1 is the broadcast flag which will keep television
programs from being redistributed on the Internet which is a
form of thievery. Now, I want to pay compliments to the great
majority of the information technology community. I laud them,
and the consumer electronics industry, and the movie industry
for getting together and dealing with this broadcast flag. I
cannot say enough wonderful things about all three of these
groups where they are really trying strenuously to find an
answer to the broadcast flag.
And I think maybe by the end of March I have been told
there is a possibility of this coming to pass. And it may be
that they need to come to Congress or the regulatory agencies
for implementation and enforcement of the broadcast flag. And I
thank you all. I think you had a lot to do with making us go
forward.
Goal No. 2 is plugging the analog hole. Now that is
technical jargon, and I want to put it in plain English,
because I have a technique for dealing with abstruse issues,
Mr. Chairman. If I can understand it, your granddaughter, your
grandchildren can understand it. So I use myself as a template
here.
What it means is that when a digital signal comes down and
goes into a set top box or whatever, a digital signal, and it
goes into the television set. Ninety-nine percent of television
sets in this country are not digital. I do not even own a
digital set. I am going to buy one, but I do not have one.
So it is an analog set. That digital signal then comes out
of the set top box, and it is transformed immediately into
analog. Why? So it can be watched on the television screen.
But once that happens that can be sent off to a computer.
It can be sent to the Internet in unprotected form. That is
what is called the ``analog hole.'' That is kind of an awkward
phrase, but I guess it is the best way to describe it. And
conversations are going on now with your community, all these
three gentlemen's community, the consumer electronics'
industry, information technology, and the movie industry to try
to find some way to plug that analog hole.
But the third goal, and the one that was talked out at
great length, and wherein there was an astonishing revelation
from the gentleman from Intel. He threw up his hands and said,
``We cannot do anything about it.'' Well, I do not believe that
for one minute.
The point is that unless we can deal with peer-to-peer or
so called ``file sharing sites,'' the Gnutellas, the Groksters,
the Morpheus that you heard about. You saw it brought down. My
colleagues bring stuff down all the time, and I am appalled at
how watchable it is. But that is going on.
Viant, a consulting firm in Boston, estimates 350,000
movies a day, a day are being brought down. And all of the
university systems here in this country, all the California
systems, and Oregon, and South Carolina, and my home state of
Texas, all of those university, state-of-the-art, large pipe,
high-speed Ethernet systems, the best there is, are being
overburdened, an avalanche with students using that to bring
down stuff in 20 minutes.
I am not going to give you the name of this university, but
I found out by reading one of their campus newspapers, somebody
sent it to me, they were so appalled and so angst-ridden by the
fact that their system is being crushed by all these students
using it to do what? To bring down movies. It is easy, it is
fast, it is free, and it is also illegal.
And for this, parents are spending a couple hundred
thousand dollars a year to send their son to the university
that says it is OK to steal. This university, in order to
relieve the burden on their Internet system, set up a separate
server of what? For Gnutella. Gnutella is one of these
fragmented, anonymous systems up there where everybody shares
their files. As I said, file stealing sites is what they are.
And I sent a letter--I would like to believe it was a
rational letter, but I guess I was a little angry, I sent to
the president of the university. I said, ``Your disreputable
plausibility about this collides with the concept of a free
society, its ethics, and its morality. How can you do this?'' I
am pleased to say that instantly they responded, and they took
down the server.
But that is what is going on. We have got to find a way to
deal with this. Now, right now these discussions are going on
in the first two goals. That is, the broadcast flag and
plugging the analog hole.
We need to begin continuous negotiations with the
information technology people, with the consumer electronics
people to find a solution. I cannot believe that there is not
some two young nerds somewhere in a garage in San Diego who do
not have the solution right now, just as Mr. Hewlett and Mr.
Packard did, just as Mr. Jobs and Mr. Wasnowski did some years
ago. It is out there somewhere, and we have got to find it.
Finally, what I want Mr. Perry to do, and I will join him
in this, let's don't go back and dredge up the past. None of us
is flawless. I am willing to talk to you about that, because
the facts are all wrong. I think I will do it right now.
We were never against the VCR. We were trying to establish
copyright infringement. So then we could get a copyright
royalty fee on blank cassettes. By the way, Mr. Chairman,
copyright royalty fees are resident in just about every country
in Europe and in Asia today in which they take a little fee on
every blank tape you buy, and they give that money back to the
creators to compensate them in part for their losses in piracy.
And at that time I predicted--I said, ``This will create
piracy.'' And guess what? We are suffering from $3.5 billion a
year right now in analog piracy on the VCR. But never did we
want to get rid of the VCR. I mean they accuse us of a lot of
things, but there are some smart people in the motion picture
industry, and they are not fiscal lunatics. They understood
what this issue was all about.
So let is get rid of that. I want to put that on the record
so next time somebody says, ``Well, Valenti said it was the
Boston Strangler.'' By the way, I did say it. It was a
picturesque phrase. I really liked it at the time. And if I had
the opportunity I would say it again.
Having said all of this, I think what we need to do, and a
lot of people at this table and others are already doing it.
Let's get rid of all these hostilities. Let's get rid of all of
our rigid conceptions that might be wrong, and let's do what
they do in the Congress, and that is when there are opposing
views in the Congress, you sit down and you try to work it out.
You try to make compromises. You try to find some place to
bring the extremes into the center.
That is what we have to do, and we have to do it without
antagonism. We have got to do it in good faith. We have really
got to do our dead level best to do this. And I have nothing
but praise for the information technology group and the
consumer electronics. I believe that they are really moving
with us in trying to find an answer to this.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Valenti follows:]
Prepared Statement of Jack Valenti, President and Chief Executive
Officer, Motion Picture Association of America
If You Cannot Protect What You Own, You Don't Own Anything!
A brief report concerning the dark underside of Internet piracy as well
as the possibility of a cleansing redemption to benefit the
American consumer
On behalf of the member companies of The Motion Picture Association of
America
This document sets forth the goals that the American movie industry
urges the Congress to seriously examine. The future of these unique
creative story-telling works is in danger of being shrunk and
squandered by an increasing thievery on the Internet. We cannot stand
mute and observe the slow undoing of a formidable American economic and
creative asset.
The Economic Worth of the Copyright Industries
What kind of asset is at stake here and what does it mean to this
country? The facts are these: The Copyright Industries (movies, TV
programs, home video music, books and computer software) are America's
greatest trade export prize. They are responsible for some five percent
of the GDP of the nation. They gather in more international revenues
than automobiles and auto parts, more than aircraft, more than
agriculture. They are creating NEW jobs at three times the rate of the
rest of the national economy. The movie industry alone has a SURPLUS
balance of trade with every single country in the world. No other
American enterprise can make that statement. And all this at a time
when the country is bleeding from a $400 Billion trade DEFICIT.
Which is why we come to you with a clear statement of what is
needed to preserve this extraordinary economic/creative engine of
growth in a broadband world.
Broadband (high speed, large pipe entry to the Internet) is an
OPPORTUNITY to make available to consumers another delivery system for
transporting visual entertainment to their homes. This means more
freedom of choices for consumers.
As you may surmise, producers of visual entertainment are
enthusiastic, ready and eager to offer their creative works on the Net.
And to dispatch those works LEGALLY, at a fair and reasonable price to
those American homes who choose to view them. It should be noted that
`fair and reasonable' will be defined by the consumer and no one else.
But there is an obstacle. Consider this: The cost of making and
marketing movies, for example, has risen to nerve-shattering heights.
In 2000, the total cost to the major studios for making and marketing
their films was, on the average, an astounding $82 Million! Only two in
ten films ever retrieve their total investment from U.S. theatrical
exhibition. Those films must journey through various marketplace
sequences: airlines, home video, satellite delivery, premium and basic
cable, over the air TV stations and internationally. They must make
that journey to try to break-even or ever make a profit.
Today as that movie travels its distribution compass course, it is
exposed to great peril, especially in the digital environment. If that
movie is ambushed early on in its travels, and then with a click of a
mouse, and without authorization, sent hurtling at the speed of light
to every nook and cranny of this planet, its value will be seriously
demeaned. Who on earth would continue to invest huge sums of private
risk capital when the chances of redeeming that investment become
remote, if not impossible?
Broadband entices and allows piracy of films and TV programs on a
massive, unprecedented scale. And at this precise moment, movies and
other visual entertainment works are in ever-multiplying numbers
swarming illegally throughout so-called file-sharing sites (a more
accurate description would be ``file-stealing'' sites). And this is in
an environment where most people's broadband connections are not fast
enough to enable speedy downloads of these illegally copied files
(funny how people will wait a long time for something when it is
free!).
Thus, the problem will only get worse as the speed of broadband
increases. University-based piracy provides especially troubling
evidence of this phenomenon, because university ethernet systems are
state-of-the-art, large pipe, highest speed broadband connections.
These university systems are over-run and heavily burdened by student
downloading of pirated movies and TV shows. It's easy. It's fast, and
it's free. It is also illegal.
Gresham's Law works its will in such a landscape. Just as cheap
money drives out good money, so we are afraid that pirated movies will
spoil the market for broadband delivery of high-quality films with
superior fidelity to sight, sound and color once these high-speed
connections proliferate. A consulting firm has estimated that more than
350,000 movies are being illegitimately brought down EVERY DAY. Who
would choose to pay for movies when you can have them delivered to you
FREE? It is this infection which corrodes the future of creative works.
But if through technological measures, producers of visual
entertainment could defeat the spread of pirated movies populating
`outlaw' Net sites, the Net would be cleared of illegal debris and able
to hospitably welcome legitimate, superior quality entertainment in a
user-friendly format. The Consumer Electronics and Information
Technology industries have been working cooperatively with us to find
methods to deliver our legitimate content in a more secure digital
environment. The largest beneficiary of such an environment would be
American consumers.
The THREE GOALS I outline below are designed to protect valuable
creative works in visual entertainment, and at the same time expand the
reach and attraction of broadband in the consumer society.
How to achieve these GOALS? First and foremost both the Senate
Commerce Committee and the Senate Judiciary Committee must be involved
because these goals are umbillically connected to the oversight
jurisdiction of both Committees.
Our Three Goals, whose Objective it is to Protect movies, TV
programs and other visual entertainment on the Net.
Goal One: to create a ``broadcast flag'' which would prevent
broadcast programs exhibited on over the air TV stations from being re-
distributed on the Net, which is a form of thievery.
Because just about all such TV creative material is in ``deficit,''
(that is, its production costs are higher than the license fees it
receives from the network) TV series and other high value broadcast
material must go to `syndication' when they leave the network.
Syndication means those programs must be licensed to local and
international TV stations in order to recoup their total investments,
and hopefully make a profit. If such programs are re-distributed on the
Net while they are still on the network, it shrinks and decays the
earning power of that program in the syndication market. Discussions
are now going on which could result in a mutually-agreed upon accord to
construct a `broadcast flag.' Praise is due all those Information
Technology, Consumer Electronics, and Movie industry companies for
these good faith discussions which I pray will end in a unanimous
accord.
Action: To achieve this important goal will require congressional
or agency action to implement the accord. In the absence of such an
agreement, a narrow mandate may be necessary.
Goal Two: To ``plug'' the ``analog hole.''
This is technical jargon. Let me sort this out in plain English.
All digital protection designs can only work in a digital environment,
which is the environment of the Internet. When a digital signal comes
down to a TV set in the consumer home, that TV set in 95 percent or
more of American homes is an ``analog'' set. This means the digital
signal is immediately transformed into an analog signal in order for
the consumer to watch it. If the analog signal is then converted back
to digital, it cannot be protected by any known protection device. This
is called ``the analog hole.'' One way to `plug the hole' could be
through a `watermark detector.' The `watermark' is an ingenious design,
which commands the signal converter in the TV set to respond to the
instructions on the movie. This can be accomplished through a concord
agreed to by the Information Technology, Consumer Electronics and Movie
industries.
Action: To reach this goal, Congressional assistance will be
necessary.
Goal Three: To stop the avalanche of movie theft on so-called
`file-sharing'' Web sites, such as Morpheus, Gnutella, etc. (the more
accurate name would be `file-stealing' sites).
Unhappily, neither the `broadcast flag' nor `plugging the analog'
hole will stop this relentless thievery that is endemic.
We have not hesitated to spend considerable resources to fight
these sites and services in the courts. But litigation alone cannot
possibly provide an adequate solution, particularly as these services
become increasingly decentralized, fragmented and anonymous.
Constructive discussions need to take place with the Information
Technology and Consumer Electronics industries to determine how best to
develop effective technical solutions to crush online theft of our
valuable creative works.
Action: Continuous negotiations must take place to develop
technical solutions, which may require legislative enforcement.
There is one truth that sums up the urgency of this request to the
Congress to enlist in the battle to preserve and protect an American
economic and artistic asset which attracts the enjoyment, the patronage
and a most hospitable reception by every creed, culture and country
throughout the world.
That truth is: If you cannot protect what you own, you don't own
anything.
The Chairman. Thank you, and I will join in with your
observation with Mr. Perry, because Mr. Perry, you are right as
rain, we are going to protect the VCR. You are going to be able
to record that particular program for home use on your VCR. I
do not believe you could get one vote out of 535 otherwise. So
our bill, proposed bill, protects the recording of the program
for home use all within the university for research or
educational purposes.
Mr. Bechtolsheim should have been included with all of
those research individuals, Mr. Valenti, because he developed I
think Sun Microsystems. Do you think Sun Microsystems could
have been created without the Stanford Research Institute
financed by this government that you want to get the government
out of the business?
STATEMENT OF ANDREAS BECHTOLSHEIM, GENERAL MANAGER AND VICE
PRESIDENT OF CISCO
Mr. Bechtolsheim. No, I should have mean meant to point out
that the government played a very important role in the
creation of Internet standards. The original TCPIP transmission
standard was in fact funded by the Defense Department Advanced
Research Project Agency, and became the basis for the Internet
as we know it today.
So I think the government through this type of funding
played a hugely important role in the creation of essential
standards for the--open standards for the business today.
The Chairman. Thank you, Senator Boxer.
Senator Boxer. Well, this has been really one of the best
hearings, and that is really why I stayed here. Because if they
are not getting anywhere, I'm not learning anything, I go to
another hearing. So this has been really excellent.
And let me say again, as all of the pressures come down to
bear at this hearing. It is pretty clear to me where we are
going. I think Mr. Valenti puts his finger right on the button
when he says, ``Look, we have got to get past it, and we have
got to just get together.''
And I look at it this way, because in many ways it is about
America in the world, our economic leadership in the world. We
need to come together. Sometimes we compete, and sometimes we
have to overlook these differences, and the short-term
interests and come together. This is one of those moments.
And I really thank my Chair. I just wanted to say to Mr.
Perry who I think I was watching during the first panel was
getting agitated at some of the things. When you put up your
chart, Technology Threat or Growth Engine, there is not one
person I do not think in this room, be they in the
entertainment industry, or up here on this panel or staff that
thinks that technology is not a growth engine and the way to
our future. There is complete agreement there.
But that is not what this hearing is about. I will tell you
what the threat is. The threat is piracy. The threat is not an
industry. That is not the issue. So if you thought that any of
us thought that, please put that to rest. We do not see it that
way at all.
As a matter of fact, we are looking to you to help solve
this incredibly important problem that we are facing in a fair
and just way.
And to Mr. Meyer, I just want to say I thought your
presentation was exceptional. I really have to say I mean you
just talk straight from the heart and did not mince words.
And you are basically saying--and I want to make sure I
understand--that the reason you do not see more digital content
is because this problem has not been solved yet.
STATEMENT OF JAMES E. MEYER, SPECIAL ADVISOR TO THE CHAIRMAN
AND FORMER SENIOR VICE PRESIDENT/CHIEF OPERATING OFFICER,
THOMSON MULTIMEDIA
Mr. Meyer. That is correct.
Senator Boxer. Am I right on that point?
Mr. Meyer. I just, on the record, this new technology does
allow a great deal of temptation. And that temptation on many
people's parts. And that is the heart of this argument, OK, is
who can control what?
I think it is pretty easily agreed upon what we are and are
not going to allow, and then getting the technology in place to
do that. And a TV or a set-top box I think can be done. Will
consumers ultimately buy a lot of digital TVs? I do not know.
My company and Mr. Perry's company have bet hundreds and
millions they will.
Senator Boxer I have one.
Mr. Meyer. And I believe they will. But they will not
without the spirit of Hollywood.
Senator Boxer. Right.
Mr. Meyer. They do not on anything.
Senator Boxer. I mean I watch, because it is so fantastic,
I watch, you know, rivers going down and falling down into
streams, and that is about what you get to watch.
Mr. Meyer. After an hour it gets old.
Senator Boxer. Yeah. I mean there is just so much of that.
I want to take up what Mr. Meyer told us, because I think
it is interesting. If we together, meaning you hopefully, can
resolve this problem, it is not only going to stop piracy and
take care of that problem and thievery, because it is just the
same if you steal my purse is to steal someone else's work. I
hope we agree on that.
So you solve that. And that is the right and just thing to
do. And then you get into protecting investors' dollars, but
that is not my business. My business really is what the
constitution says about the rights of property.
But you also will hopefully unleash this industry that has
been sitting there, this Direct TV, this digital TV, because
they are saying to us, the people who are in the business, the
content is not coming. So it is not just----
So what you are trying to do, Mr. Chairman, is not only
right a wrong and a problem, but you will also unleash some
positive things as a result. I have learned an enormous amount
today.
And again I make my plea to every one of you here. Please
fix this so that it happens in the private sector. We can
ratify it. We can help you make sure it is in force, but we are
asking you to step up to the plate. No one is going to get
everything he or she wants. Life is not like that. Believe me.
I have passed a lot of legislation that did not look like the
one I introduced. I have to compromise.
This is that moment. And if you step up to the plate, trust
me when I say the American people appreciate it. I think our
economy will take off as a result of it. And in the long run,
in the long run, everyone is going to prosper, even though some
of you think you will not. In the long run everyone will
prosper. I truly believe that.
STATEMENT OF ROBERT PERRY, VICE PRESIDENT OF MARKETING,
MITSUBISHI
Mr. Perry. Senator Boxer, thank you very much for bringing
up my squirming in my seat while sitting in the audience. It is
due to a number of things.
I would like to make a couple points very clear on behalf
of the HRRC, the company I represent, and as well as our trade
association of which I am a board member, the Consumer
Electronics Association.
We absolutely abhor the concept of any intellectual
property, whether it is creative, electrical, whatever being
stolen. People who share files and do things of that nature are
stealing. They are not compensating the copyright holder for
all their investment and creative genius, and we find that
offensive.
My company has spent tens of millions of dollars in direct
subsidies to U.S. broadcasters to bring HDTV content to
television. That is tens of millions of dollars in direct cash
payments to U.S. broadcasters to make HD content available.
Every HDTV we sell that has a tuner, an integrated tuner, or a
digital connection to a recording device incorporates a copy
protection system that prevents the content from going on the
Internet. We absolutely support it.
My company has also spent hundreds of millions of dollars
trying to negotiate in advance through all of these issues. I
believe that this hearing today, the interest of the chairman,
the interest of all the representatives clearly places pressure
to get that accomplished.
No one in this room wants this situation solved more than
I. I have got hundreds of millions of dollars of investment
that has to go forward based on this country's transition to
digital television.
The squirming in my seat surrounds a couple of issues which
I think perhaps are not yet resolved. With just one moment I
would like to point them out.
The FCC is preparing to rule to require our industry to
adopt a license agreement that is being put forth by the cable
industry. That license agreement is known as the FILA license.
That license basically talks about how a digital TV can talk to
a cable system. That license which is supported specifically by
the content community absolutely requires content encoded
output switching.
In other words, the creator of a piece of content, perhaps
even being created in another country, when that content is
being broadcast, can turn off the outputs of the television so
it cannot be recorded. That issue has not been resolved. The
technical issue in protecting content that is being broadcast
is absolutely resolvable. As our spokesperson from Intel
mentioned, we have the technology to do that.
Part of the question he was asked, however, perhaps is less
clear. The question he was asked was: Can you prevent all the
file sharing on the Internet today? Of course not. The reason
for it is very simple. It is not up to the IT industry or the
CE industry to go into theaters and arrest people with
camcorders. It is not up to our industry to control how film is
duplicated in production houses.
When Mr. Eisner talks about stuff being on the Internet
before it is broadcast, that is not an IT problem. That is not
a CE problem. Somebody got the film before it got broadcast. We
will put all the safeguards that are commercially viable and
reasonable based on all of our discussions and consensus
building of which we have made a lot of progress. We will put
those in our products. But we cannot stop stuff that never got
into the system.
So if a movie gets stolen, we have no way of controlling
that. And it is unfair perhaps to place that burden on the CE
and IT industries. In fact, if you think about it most of the
commercial piracy that occurs does not occur with consumer
electronics devices.
If I want to steal a high-definition movie, I put a
commercial satellite receiver on a truck. I receive the movie.
I store it on a disk. I take it out of the country for
duplication. It is stolen. I did not use a TV or VCR to do it.
We will work very hard toward this goal. We have poured
huge resources into it.
One of the additional frustrations I think that we have not
really voiced we have talked about is the goal keeps moving.
Even today you heard from Disney and Fox a divergence of
opinion. Disney has been in the copy protection working group
meetings for many years. Perhaps Mr. Eisner himself has not
attended. That is rational. He has teams of people to do that
for him. They have been in that. There is a divergence of
opinion of exactly what they want.
Warner Brothers and Sony have already agreed. Those studies
have already agreed to some standards. Those are being
implemented by companies like myself and others. We are getting
there.
What we need to do is resolve this last issue. How to
protect broadcast content over the air from getting on the
Internet. Generally, if I can be so bold as the co-chair of
that committee, we think we have a technical solution that is
very low cost.
And by the way, there is no chip involved. There is no such
thing as a chip. And it is not a cost issue. We have a
technical solution.
What we are doing now with Hollywood, IT, and consumer
electronics' companies, and with very strong support from the
MPAA, I might add, what we are doing is discussing exactly how
do we do it with the least possible interference into these
products without impinging on consumers' rights. And how do we
make it happen very quickly?
We believe by March 31st we will have that. And at that
time we may need to come to the FCC for some very narrow
regulatory rulings so that this would apply to everybody, so
there are in fact no scoundrels taking advantage. Because it is
not companies like ours, by the way, that provide methods for
stealing stuff. We are too easy of a target. It is small
companies that skirt the law.
If the FCC does not have the regulatory authority, once we
reach consensus about the commonsense way to deal with this
issue, like we have all the other issues like DVD, we may need
to come here to Congress to ask for your support for some very
narrow, limited legislation that would require the
implementation of our consensus agreement so that in fact we
give everyone exactly the protection they have asked for.
But broad over-reaching legislation that tries to hit it
with a shotgun unfortunately would damage some other
technologies that have not yet been created. Every time we have
created a digital technology, ladies and gentlemen, we have
created a solution together. I really believe we will be able
to do it this time around, and I applaud this willingness to
continue talking. But he has misstated something, and he did it
inadvertently, not deliberately, that I need to clear up.
Neither Mr. Eisner, nor Mr. Chernin, nor I are blaming the
consumer electronics' people who do theft in our theaters or
steal something. Not at all. That is not the issue.
The issue is what happens when somebody does steal
something, however it is done, and throws it on the Internet to
go into the Morpheus and the Grokster, and all of these
Gnutella anonymous, fragmented and very difficult to find
sites? That is the issue.
In other words, when that is up there unprotected, and
somebody has to bring it down on file sharing, is there some
technological way we can then baffle the entry of that stolen
movie going to somebody else's hard drive? We are not blaming
you at all, Mr. Perry. I think you guys have done a great job.
But you have misstated what the issue is. And that is what we
are talking about.
When you have 350 to 400,000 movies being brought down
illegally every day, and it is broadband growth--by the way,
the one moat that surrounds our castle now that is keeping us
from being inundated is only about nine-and-a-half to ten
million out of the 66 million computers homes are on broadband,
Mr. Chairman.
And as broadband begins to grow, although it is growing
very slowly now, because there is nothing up there, as you
pointed out. You do not need broadband for e-mail, or instant
messaging, or text, or references, or anything like that. You
can do that with a 56K modem.
But as broadband grows, the threat to us becomes more
onimous, more perilous and more difficult to avoid. That is why
we need the help of these very, very smart people in technology
to help us.
And by the way, whatever they develop we are going to buy
by the long ton so everybody benefits, as Senator Boxer said.
The Chairman. Senator Smith.
Senator Smith. Thank you, Mr. Chairman. I join Senator
Boxer in thanking you for this hearing. It is been one of the
more enlightening that I have ever attended.
Mr. Perry, I think you have defined very clearly for me how
difficult a cul-de-sac we are talking about. And I now see that
it is a moving cul-de-sac, and everybody has a different
interpretation as to the dimensions of that cul-de-sac.
Your description of the box that people would buy, and the
inability to keep it, it would go back, I think that is a real
consumer irritation. That is a problem. We have got to figure
that out.
What we have got to also do is figure out how to stop--
allow it to happen in the home, and to be kept in the home, but
stop it from going to somebody else's home. And I do not know
the engineering to make that possible. I think you are telling
me it is impossible.
Mr. Perry. Yes, sir. That is in fact not only possible, but
it is implemented on the products that my company has been
selling in the marketplace.
Senator Smith. OK.
Mr. Perry. The issue that Mr. Valenti just brought up is
the issue of content that has never had any form of protection
system applied to it. That gets hijacked before it is
broadcast. How do we clean that off of the Net? And the reality
is, is that it is a little bit like a piece of stolen art or
anything else that is stolen. Once it is stolen, it is very
hard to get it back into the barn.
Senator Smith. And are you saying that there is some
technology that the content industry, the entertainment
industry can apply when it leaves their studio that they can
protect it? Do they have the technology to do that?
Mr. Perry. I believe, Senator, that there are technologies.
So let me please explain just for a moment. There are really
two segments to this.
If a studio produces a master negative or film of a movie,
and they lose control of it, and it gets pirated, there is
nothing that can be done by anybody with any magic wand. It is
a fact. Because frankly it goes outside of the United States.
And regardless of what legislation we pass, it will not matter.
It will be entered into the Internet.
There is however a transition that is occurring in
Hollywood where more and more films, instead of being created
on films, are being created digitally. And as they are being
created digitally, there are certain technologies which we are
discussing in the copy protection working group that could be
applied to the master version of that videotape that would keep
it from going out into the Internet.
Now it still does not stop when somebody crawls, some
nefarious person crawls into a theater with a camcorder. There
is simply no tool we can use to do that.
Senator Smith. That brings me to my only other question,
Mr. Chairman, and that is with respect to your chart. I want to
understand it better. Are the green lines on the graph, are
those the profits of the entertainment industry?
Mr. Perry. They are the revenues of the entertainment
industry, and in general their profit margins have remained
relatively constant as an industry over this time. So they
would reflect increasing profits as well.
Senator Smith. In spite of the theft.
Mr. Perry. Yes. Although I do want to point out that
regardless of how profitable they are, the stealing of property
is absolutely wrong. And even if you can cover it with growing
profitability, it is still wrong. It still needs to be stopped.
Senator Smith. Well, that is the point I wanted to make. I
was afraid--and I am glad you corrected it, because I think we
are leaving the impression that as long as they are growing we
can codify and support theft. And I think, Jack, you would
argue that if there was some protection here, that growth would
be even greater.
And I am saying as a Republican, I think growth is good. I
think a Democrat would say that, too, our Chairman.
And I want more of those green lines going out. I do not
want less of them. That is not to be ashamed of, that is to be
encouraged. And I thank the IT industry for helping that to
grow. We just got to figure out how to have both of you grow,
because you totally need each other.
Mr. Valenti. That is precisely correct, Senator. And I
might add to go back to what the Chairman said. We are also
talking about not taking away one jot of a right of what a
consumer does in their home today. You made that point, Mr.
Chairman, and I want to confirm it.
See, what we do not know, how long will there be DVD? There
will be something else. For example, digital. Instead of coming
to your computer, you will have a little line going from your
computer into your television set. Or you can do it right
direct to your television set, and bring stuff on the Internet,
bypassing the computer completely, and maybe not even need DVD
in the future.
There are all sorts of new ways to have movies into the
home, and I applaud that. The more choices you give to
consumers to rent or buy movies at a fair and reasonable
price--a phrase that will be defined by the consumer and not by
the movie distributor--that is wonderful.
But I am saying to you like Banquo's ghost right outside of
the shadow of our dinner table that there is the danger of the
pilfering of this material as it is ambushed.
Let me just make one other statement. The average cost in
the year 2000 to make and market a movie made by a major
studio, one of the seven members of my association, the average
cost is $82 million. Only two out of ten movies ever get back
their investment, much less a profit, from the United States
theatrical exhibition.
That means that a picture must journey through airline,
home video, Blockbuster, premium cable, pay-per-view, basic
cable, over-the-air television, and international in order to
try to retrieve this investment and hopefully make a profit.
Now if it is ambushed early in that journey, when you are
setting out you are going to cross the United States before you
get to the Appalachians, the wagon train, the bandits take it
over. And as broadband grows to 20, 30, 40, 50 million homes,
you can see, I do not have to draw a chart for you, is the
possibility of peril there that causes us many Maalox moments
out when we make movies.
Senator Smith. So those green lines disappear. I mean they
go away at some point if we do not figure this out.
Mr. Valenti. That is right. Nothing less, Mr. Chairman and
Senator Smith. And as a businessman you know that, and we all
know it. While those lines are going up now, I am not looking
at the past. I want to look at the future.
How do we keep those green lines growing, which is in the
long-range interest of this economy. It is in the long-range
interest of the American consumer that all of these choices be
made available to him and her. And this is what it is all
about.
Senator Smith. Mr. Chairman, I think these two industries
are in the long-term interest of the United States. So I plead
with you, as my colleagues have, that we get this figured out.
The Chairman. Well, thank you very much, Senator. I hope we
get together.
What happens? Let's say they do not get together, Mr.
Valenti. What happens?
Mr. Valenti. Well, that is a mystery wrapped in an enigma
inside a riddle. But eventually----
The Chairman. And assume we cannot do anything about it. I
think I can. Do not worry about it.
Mr. Valenti. I know.
The Chairman. Go ahead. The worst case if nothing happens.
Mr. Valenti. I think that we have to go back and do some
more talking. But if both sides come to the agreement that
there is an impasse, we simply cannot agree, well that does
tend to concentrate the mind wonderfully. And you then have to
say, ``I have to go either to regulatory agencies or the
Congress for help and assistance in whatever they can do. I do
not know any other option.
The Chairman. Well, The Chairman of the regulatory agency
believes that his authority is only to get rid of every
regulation. So do not worry about that one.
I have got to thank you for the very valuable contribution,
Mr. Bechtolsheim, Mr. Perry, and each of you. Mr. Meyer, if
this had been a court of law, and I would have been a judge, I
could have directed a verdict after what you said. You brought
it right--you encapsulated it. You had it first. And Mr.
Valenti, you are always the best. I would buy a ticket to hear
you.
Thank you all very, very much. The Committee will be at
ease subject to call of the Chair.
[Whereupon, at 12:45 p.m., the hearing was adjourned.]