Opening Remarks

• The Honorable Gordon Smith
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  Opening Remarks

  The Honorable Gordon Smith

  The purpose of today’s hearing is to examine the impact of peer-to-peer (or “P2P”) file distribution technology on consumers and the suppliers of digital media content. There is no question that the Internet has revolutionized many aspects of our lives – much of it in very beneficial ways, but some of it in a manner that raises new concerns. Today’s hearing will focus specifically on how one byproduct of the Internet revolution – peer-to-peer software – is being used now, and may be used in the future, not only in ways that benefit Internet users but also in ways that harm both consumers and providers of valuable digital content like films and music. The activity conducted over peer-to-peer networks is described with various terms, depending on who is doing the talking. The roughly 80 million users of P2P software, who trade nearly a billion files a month, call their activity file-“sharing.” The entertainment industry and other copyright holders who are experiencing sharp declines in sales of their products, however, call this activity file-“stealing” or, simply, “theft.” It is conceivable that some consumers who first took to the Internet when many services were free may have come to expect that all services over the Internet are, or should be, free. To them, perhaps, P2P is just “free downloading.” To me, it looks a lot more like “freeloading” – or taking someone else’s property without paying for it. Even more disturbing to me, though, is the amount of pornographic material that I’ve learned is traded over these P2P networks, and the relative ease with which users may obtain it. Additionally, recent studies have shown that computer viruses and software that poses risks to consumers’ privacy and security are also prevalent on P2P networks. Although I am very concerned about these aspects of P2P, I recognize that there are some businesses using P2P networks to legitimately distribute content, including software and music. Scientists also use P2P networks to aid their collaborative efforts at medical research and global weather prediction – two cases in which P2P helps them access data stored on colleagues’ computers located throughout the world whenever they need it. University officials are also good actors, but caught in the middle – balancing the legitimate academic needs of their community members who exchange works using P2P networks, with the illegitimate ambitions of those who merely want to trade movies and music for free. Universities must also contend with the network bandwidth, stability, and security problems that extensive use of P2P software often causes to their systems. We appreciate the opportunity to hear from our panel of witnesses today on these matters, and I thank them for their participation. I also want to especially welcome one of my constituents, Mr. Curt Pederson from Oregon State University. I hope that this hearing will prove beneficial in beginning to resolve some of the more troubling issues related to peer-to-peer technology that are presently before us.

Testimony

• Mr. John Rose
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  Testimony

  Mr. John Rose

  Mr. Chairman thank you for calling this hearing and for inviting me to testify. Five years ago, the record industry was quite a bit like an inattentive, distracted man walking down the street wearing headphones with the sound turned up too loud. He may have been getting nasty looks from people who didn’t like the music blaring out, to be sure. But one day, as he crossed the street, a speeding taxi swerved round the corner and hit him. Now, you might say that he was a little slow dodging the taxi because he was distracted by his loud music, but that hardly justifies the actions of the man driving the cab. And it certainly wouldn’t be a reason for the doctor to refuse to treat his injuries. What do you call a company that uses paid for content to attract millions of people to its site and then sells advertising revenue off the traffic – the readers, viewers and listeners – on its site? I call it a television or radio station or even a newspaper. What do you call a company that does the same but never pays for the content and that runs its business and makes its money off of encouraging illegal behavior? I call it an illicit business – not a technology. It’s imperative that we distinguish between behavior and technology when we look at organizations like Morpheus or Grokster. It’s not necessarily the technology that’s the problem – it’s how the technology has been used and the business model that has been willfully and ruthlessly built around it. Operators like Kazaa offload serious risks, costs and liabilities onto users by luring them into using software that gives them access to content – all without ever paying the artists and businesses that create the content. Mr. Chairman, I am not a lawyer, but I did read the California court decision on our lawsuit against Grokster where the judge said: “The court is not blind to the possibility that Defendants may have intentionally structured their businesses to avoid secondary liability for copyright infringement, while benefiting financially from the illicit draw of their wares. While the court need not decide whether steps could be taken to reduce the susceptibility of such software to unlawful use, assuming such steps could be taken, additional legislative guidance may be well-counseled.” Since I came to work for EMI almost three years ago, we’ve been working flat out to build a legitimate digital business that respects the consumer and pays the artists and content owners. The headphones are off, and we’re trying to navigate some complicated streets. But someone is still out on the streets driving a taxicab like there are no traffic rules -- running stoplights and flying around corners. So I would like to talk to you about two things: first, the dramatic and innovative changes we’ve undertaken at EMI; and second, what it’s like to do that in the face of widespread piracy. Let me turn to what we’re doing. In the face of massive industry change, EMI is actively finding ways to rethink its product and its distribution approaches. The music industry is learning to sell its music in an ever-expanding number of formats in only a few years. EMI has created standard deal terms, product definitions and deal policies that it uses worldwide. But it’s not just about the number of deals or the new formats we have, it’s about the underlying core values of the industry today – we believe that music is not about round discs with holes through them. We want to separate music from the format. Music should be sold to consumers however they want it. And it’s not just about one business model anymore. We are out there experimenting with as many models as we believe can rationally work. The music industry has been criticized for being slow to join the party. But given the dramatic paradigm shift the industry has undergone, I would say that EMI has been faster than other music companies and that overall the music business has actually been faster than other industries in comparable positions. Our ability as an industry to respond is at least comparable to that of the computer industry’s response to the evolution from the mainframe to the mini-computer to the personal computer. EMI has been at the forefront of efforts to legally distribute music online. No other company has been as aggressive and assertive about these opportunities. EMI was the first of the global record labels to provide its repertoire to both Pressplay and MusicNet, two of the first legitimate digital music distributors. Approximately 90 percent of EMI’s active repertoire is available by digital distribution to the American consumer -- from the latest Beastie Boys album that came out last week, to John Coltrane’s epic work Blue Train, to Sir Simon Rattle’s recording of Beethoven’s Ninth Symphony. Almost all of these works are available in both album form and as individual tracks. Indeed, in virtually every instance, the minute a new song goes to radio, it’s available for digital sale. In other words, you can buy the single before you can buy the album. When you buy it digitally, you can make multiple copies for your computer, for your portable device and for your CD player. To date, EMI is providing its music for digital distribution to more than 100 companies, and approximately another 250 deals are currently in the pipeline. More than 50,000 EMI tracks are available for download in the United States. Our online music is available at Apple’s ITunes store, on Napster, on Rhapsody, at Buymusic.com, at MusicMatch and on nearly every major portal and site that sells legitimate digital music. In addition, we’re exploring a new and innovative way to distribute our music digitally. Let me give you a few examples of the digital products were looking at: · Subscription streamed music services. · Kiosks · Downloads to mobile phones · Superdistribution via mobile phones · Downloads on planes · Video on demand · Portable music video devices · Ring tunes and ring backs People who haven’t experienced streamed subscription services don’t know what they’re missing. For a fee of anywhere between $10 to $15 per month, you can have unlimited computer based access to more than 700,000 music tracks. If you hook your computer up to your speakers at home – at the cost of about $15 to buy the cable – you can play all the music in the world whenever you want. We are also working very hard at enabling new business models like superdistribution – where consumers move content amongst themselves without going back to a central store. You could call this P2P, but in fact P2P is only one application of superdistribution. But I want to be perfectly clear, all of the models that we are working on are ones in which we receive a fair market value for our content. I understand that there is a lot of interest in providing our content to some of the current P2P services. And while we think there is some potential in P2P (one of but not the only superdistribution technology), there is a big difference between exploring a new business model in a legitimate and open business manner – which we do every day – and going into business with the taxicab driver who just ran the red light and hit me. I’ve got nothing against taxicabs in general. But I’m not ready yet to get into the taxicab that hit me. What does it take to do all this – to explore new business models, to try new technologies and to give consumers access to all the music they want for $10 a month or a 4 minute digital file for about 99 cents? It’s a lot harder than you think. We have had to build an entire new supply chain that is the equivalent of producing, manufacturing and distributing the physical world. We have had to create entirely new pricing schemes around the world – in yen, eurocents, rupees, bahts – in the currency of almost 50 countries. We have had to create new legal frameworks and in many cases have had to go back and relicense from music publishers exactly what we had licensed before in the physical world. We’ve built a whole new team of strategists and technologists within EMI. It is leading us to reengineer all of our core financial and operating systems. Not to mention all the work we’ve done with some of our artists to get their okay to distribute digitally. And we account to and pay our artists, among others, for these 99 cent transactions – and by the way EMI doesn’t even get the full 99 cents. We pay our 2200 US employees out of those transactions, and we invest in future stars like Joss Stone and musical icons like Wynton Marsalis Moreover, EMI and its digital partners (I Tunes et al) put all of our corporate resources behind making it a good experience for the consumer. We don’t infest our files with spyware or viruses. When appropriate, we label our product with the parental advisory notice. We respond to consumer complaints, and we give refunds for defective product. We pay our taxes in the United States, and we accept legal service in the United States. When we fail, we answer to you, to our consumers and to our shareholders. We do not design products that rely upon and profit from undermining the business models of other legitimate industries. We do not incorporate offshore for the purpose of evading liability. And we do not encourage our consumers to engage in behavior that puts them at risk of legal liability. The track you purchase today for 99 cents buys the consumer a safe experience and gives society an industry that produces jobs, new products and that invests in the future of music. So as I said, the headphones are off, and I believe you have a sense of the cityscape we are navigating. But to return to the taxicab that’s still out there driving recklessly, at EMI, we have felt the impact of the misbehavior of companies like Morpheus. The piracy it encourages and profits from has had a real and painful effect on us in several major respects: · Piracy affects our ability to reinvest in new and developing artists thereby imperiling the livelihood of new artists and the future of music itself. In 2002, at least in part due to digital piracy, EMI had to cut its artist roster by roughly one-fourth. We cut it by one-fourth again this year. Moreover, there is simply no question that digital piracy affects our decisions about signing new artists, how much we are willing to pay artists when we sign them, how long we are willing to maintain an unprofitable relationship with them hoping it will become profitable, and how many artistic risks we are willing to take. · Piracy affects our ability to invest in new technologies and in new or creative ways to distribute our product. · Piracy affects each of our shareholders. EMI is the only global pure music company that is publicly traded. We must satisfy our shareholders by delivering strong profitability, generating cash and demonstrating our potential to grow profits even as we add resources to fight piracy and invest in developing products and distribution schemes. We have worked hard, but despite our work the global music market declined by almost 8 percent in our last fiscal year in part because of piracy. Believe me when I say our shareholders feel the impact. · And finally piracy affects our employees. Since I started at EMI, our worldwide workforce has been reduced by 40 percent. We have a lot of empty offices. In 2002, digital piracy contributed to our decision to publicly and painfully cut our work force by about 20 percent. In April of this year, we cut our workforce again by about 20%. Mr. Chairman, I’m not really certain about the future of P2P technology per se. P2P technology is one of many that may be an important part of developing superdistribution models. However, the abuse and exploitation of that P2P technology by operators such as Kazaa has slowed the legitimate development of that technology. The legitimate uses of P2P have been blurred by out of control companies who want to believe that the rules of the road and the copyright laws don’t apply to them in their quest to make money. But I also know that the future of music has the potential to be dynamic and exciting. As we digitally deliver music to consumers and embrace the potential of new forms of distribution and technology, the music industry has the potential to drive dramatic innovations among the music, telecommunications, consumer electronics and computer industries. Thank you.

• Mr. Curt Pederson
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  Testimony

  Mr. Curt Pederson

  Mr. Chairman and distinguished members of the Subcommittee, for the record my name is Curt Pederson, Vice President of University Advancement and Vice Provost for Information Services at Oregon State University. As Vice Provost for Information Services I have responsibility for a variety of core functions including campus networks and acceptable use of those networks. P2P at Oregon State University At Oregon State University we share your concerns with respect to copyright infringement in both the phenomenon of illegal sharing and the current approaches taken by the RIAA and MPAA in attempting to resolve the issue. All of us in Higher Education feel caught in the middle of what appears to be a clash of technology and social responsibility. We also feel obligated to protect our institutions from legal liability and to educate our students on the legal and ethical issues surrounding P2P file sharing. In the past we attempted to address this issue head on. We were one of the first universities to block the original Napster and worked actively to pursue campus discussions and lectures. Our motivation was primarily to protect our scarce bandwidth resources rather than actually police the activity. However, many students protested loudly. In fact, I was portrayed as the “net nanny” in several of these dialogs. To our surprise, we noticed a sharp increase in hacking attempts that coincided with our aggressive enforcement efforts. Today, given the benefit of time and experience, we use a multi-prong approach to dealing with P2P issues: · Students wishing to connect to our network are prevented from doing so until they have read and accepted our acceptable use policy which specifically addresses copyright issues. · OSU also continues to respond promptly to alleged DMCA violations in accordance with the requirements of this law, and counsels those involved in the complaints on the nature of the law and possible consequences given the current actions taken by RIAA. To date, we are aware of only two repeat offenders. · We had 70 RIAA DMCA complaints during the past academic year, which compared to 61 at University of Oregon and 23 at Portland State University. Portland State has a large part-time student population (75%) accounting for the lower number of violations, which typically occur in residence halls. · A network bandwidth packet shaper is employed to limit the overall amount of bandwidth allotted to P2P programs. Those wanting to use P2P for music and movie sharing, quickly discover that their requests receive a lower priority on the network than those doing legitimate scholarly or research activities. · We have set a policy prohibiting excessive bandwidth usage and monitor usage (but not content) with a series of software tools developed in-house to identify excessive users. · Finally, network policy has been implemented that limits the ability of computers on the residence hall network to act as file servers to computers outside of our network. As Intellectual Property holders ourselves, we are sensitive to the issues raised by the RIAA and the MPAA. However, we are not willing to violate the privacy of our students to police third party rights. We also believe that higher education is only the current battleground for this issue, and despite some assertions to the contrary, lifelong attitudes and habits around this issue are being formed well before students come to our campuses. If you have been freely transferring copy protected music or movies at home, it is not surprising that this practice continues when you arrive in a university residence hall where you are told that this is your “home away from home”. Emerging Illegal and Legal Uses of P2P In spite of the huge visibility that the record and movie industries have brought to the file sharing issue, Peer-to-Peer applications (P2P) at Oregon State University, and most other universities, have numerous legitimate purposes. As you know, P2P has received a lot of attention for its use in swapping copy protected music and movie files, and this may account for an estimated 80% of the usage. While we sympathize with those whose intellectual property rights are being violated, Congress needs to take a balanced view on the technology itself and recognize the legitimate, legal, and potentially powerful activities that could soon dominate P2P technology utilization. Campus music departments are starting to share, on campus and between campuses, their music which is not copy-protected. In addition, libraries are starting to increase access to their materials which are not copy-protected. Many place bound distance students appreciate having immediate access to their library and research materials. P2P applications represent a very powerful distribution mechanism, which we are just now starting to discover and which do not violate copyright law. For example, we know that even early on in this phenomenon (in the fall of 2001), Dr. Andrew Blaustein, in our Zoology department, was using P2P (Morpheous) to download video clips of dinosaurs and volcanoes erupting for his lecture presentations. Also, at Oregon State University, Jeremy Frumkin, Gray Family Chair for Innovation, at the Valley Library, currently has an NSF funded project which uses P2P technologies to build a peer-to-peer network for universities and libraries to share digital resources such as our Linus Pauling Collection. This is a great example of legally using peer-to-peer technology to share copy-protected material. Another example currently emerging at Oregon State University is how we are able to use P2P technology to allow for very fast downloads of various open source software packages. This includes software such as Red Hat Linux and other software being developed in our new campus Open Source Lab, such as our new help desk software. Even as these new uses emerge, we have come to appreciate that P2P is not a panacea for legal applications. We have already seen a number of evolutions happen to P2P programs and, in the absence of content controls, we may soon be seeing their obituaries. P2P applications have become a prime vector for the introduction of viruses, worms, and bots. I mentioned Dr. Andrew Blaustein earlier. He no longer uses these tools due to the viruses and worms they contain, and our students may soon follow suit. It is clear that P2P software applications need to mature, with more controls on content and network resource utilization. And we encourage you to be careful not to blame the technology itself for the inappropriate use of it. Not unlike VCRs or photocopiers, we predict the usefulness of these tools will soon far overshadow the apprehension of how they are used. Enforcement Concerns It appears some of the copyright holders have outsourced enforcement to specialty firms (MediaSentry, Inc., Entertainment Software Association, etc.) who are not partners in trying to find a permanent solution to the problem. These firms simply send infringement notices and are often unresponsive to our requests for clarification. Summary In summary, this is not an easy problem, and we appreciate this subcommittee wrestling with this vexing issue. File sharing technologies have a huge potential to change the way educational and research materials are shared, explored, dissected, or manipulated. While we appreciate the challenges confronting our colleagues in the recording industries, we also urge this subcommittee not to throw out the proverbial baby with the bathwater. If you or your staff would like us to elaborate on any of the specifics regarding our current activities, please feel free to contact me for more details.

• Mr. Howard Beales
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  Testimony

  Mr. Howard Beales

  Mr. Chairman and members of the Committee, I am Howard Beales, Director of the Bureau of Consumer Protection, Federal Trade Commission (“Commission” or “FTC”). I appreciate this opportunity to provide the Commission’s views on peer-to-peer (“P2P”) file-sharing and protecting consumers online. The Federal Trade Commission is the federal government’s principal consumer protection agency. Congress has directed the Commission, under the FTC Act, to take law enforcement action against “unfair or deceptive acts or practices” in almost all sectors of the economy and to promote vigorous competition in the marketplace. With the exception of certain industries and activities, the FTC Act provides the Commission with broad investigative and enforcement authority over entities engaged in, or whose business affects, commerce. The FTC Act also authorizes the Commission to conduct studies and collect information, and, in the public interest, to publish reports on the information it obtains. II. P2P File-Sharing Technology P2P file-sharing services make available for downloading computer programs that enable users to share computer files with other users of that file-sharing program. These files may be music, video, or data files. The files do not reside in a central location, but rather are stored on the hard drives of the individual users of the file-sharing software. File-sharing applications work by making selected files on a user’s computer available for upload, which in turn gives the user access to selected files on the computers of other users on the same P2P file-sharing network (hence the name, peer-to-peer). Each user on a particular P2P file-sharing network places files in a shared folder on his or her own hard drive and can label or designate these files in any manner he or she chooses. P2P file-sharing programs eliminate the need for a central storage point for files, and, therefore can increase the speed of file transfers and conserve bandwidth. This technology is significantly faster than traditional file transfer downloads and significantly cheaper because it requires less bandwidth. Downloading and using P2P file-sharing programs, however, sometimes also creates significant risks for consumers. When consumers download P2P file-sharing software programs, they may download other, unwanted, software, including spyware. The Commission recently held a public workshop on spyware. Later this year, the FTC will issue a comprehensive report addressing spyware, including the relationship between P2P file-sharing software and spyware. The Commission is also conducting non-public investigations concerning potential unfair or deceptive practices in connection with the dissemination of spyware. The Commission also is conducting non-public investigations concerning potential unfair or deceptive practices in connection with the dissemination of spyware. When consumers use P2P file-sharing software programs, they face additional risks. Consumers may inadvertently place files with sensitive personal information in their directory of files to be shared. Consumers may receive files with viruses and other programs that could impair the operation of their personal computers. Consumers may receive or redistribute files that may subject them to civil or criminal liability under laws governing copyright infringement and pornography. Because of the way the files are labeled, individuals, including children, may be exposed to unwanted and disturbing images. The Commission is concerned with the exposure of individuals, especially children, to unwanted pornographic materials through deceptive practices. There is reason to believe that many consumers already are aware of some of these risks. For example, with respect to the concern that consumers may use P2P software illegally to download copyrighted material, the recording industry has brought nearly 2000 copyright infringement actions since July 2003 against consumers who used P2P file-sharing programs to download music. Thus, many consumers likely are aware that they also could be liable for copyright infringement if they engage in similar conduct. Similarly, most consumers likely are aware that it may be a crime to possess or distribute child pornography. Given that many consumers know that one can receive a virus from a file attached to an e-mail, many of them may correctly infer that one can also receive a virus from a file received through the use of a P2P file-sharing program. Nevertheless, there may be some consumers who are unaware of some of these P2P file sharing risks. The FTC has engaged in educational efforts to inform consumers who may not know of these risks, so that they can protect themselves and their children from the risks of harm from P2P file-sharing technology. In July 2003, the FTC issued a consumer alert entitled, “File-Sharing: A Fair Share? Maybe Not.” In this alert, the Commission warned consumers about the various possible risks from downloading and using P2P file-sharing software. III. Potential FTC Act Violations An important question for the Commission is whether P2P file-sharing software distributors are violating Section 5 of the FTC Act by not adequately disclosing the risks of downloading and using their software. The issue of whether the distributor of a technology has a legal obligation under Section 5 of the FTC Act to disclose risks that depend on individual use is not limited to the P2P file-sharing program context; it also implicates many other consumer technologies. For example, consumers can use e-mail to send or receive copyrighted materials, pornography, viruses, and spyware. Similarly, search engine technology may expose consumers inadvertently to child pornography, viruses, and spyware. Videotape recorders and compact disc recorders may be used in violation of copyright laws by individuals who are unaware that they are doing so. Many risks associated with P2P file-sharing seem to result largely from the actions of individual users, rather than from the operation of the P2P file-sharing software itself. Although the Commission has required warnings with respect to inherently dangerous products in appropriate cases, we are not aware of any basis under the FTC Act for distinguishing P2P from other neutral consumer technologies. Distributors of P2P file-sharing programs could also violate Section 5 of the FTC Act if they made deceptive claims about such risks. The FTC staff reviewed the disclosures on the Web sites of the ten most popular P2P file-sharing software program distributors. Consumers have downloaded these ten file-sharing programs more than 640 million times. The purpose of this review was to determine whether these distributors misrepresent the risks associated with their P2P file-sharing programs. The FTC staff’s review revealed that distributors of P2P file-sharing programs use a variety of means to convey risk information to consumers. Distributors disclose risk information on their own Web sites or in their licensing agreements with consumers. Some distributors also provide consumers with a hyperlink to risk information at www.P2PUnited.org, one of the P2P file-sharing software industry’s trade associations. In addition, one of the main portals for downloading such programs, www.Download.com, discloses some risk information on its site. FTC staff reviewed and analyzed the representations made by these distributors about the risks associated with downloading and using their programs. None of these representations appear on their face to be false or misleading. Distributors of P2P file-sharing programs do not appear to be providing as much risk information about their products as they could or providing risk information as clearly and conspicuously as they might. Because risk information may be useful to consumers, the Commission believes that it would be beneficial for distributors to make this information more accessible. The Commission staff therefore is providing the ten largest distributors of P2P file-sharing programs with a copy of the FTC’s guidance document addressing how to disclose information in an online context. The staff will also inform distributors that they may incorporate in their Web sites a prominent link sending consumers to the FTC’s online brochure for more information about the risks associated with file-sharing software. A P2P file-sharing software industry trade association recently wrote to the Commission to report that its member companies have a “desire . . . to act responsibly, to improve their products and to offer consumers a high-quality experience.” We will encourage industry members to make good on this offer by improving their disclosures of risk information to consumers. Working with industry, through outreach, hosting roundtables, and holding public workshops, has proven beneficial in other areas, particularly those involving technology. Therefore, as an initial matter, the Commission staff will meet with P2P file-sharing software industry trade associations regarding improving disclosures. The Commission staff will also re-examine the Web sites of P2P file-sharing software programs to reassess the information that distributors are providing to consumers. Conclusion The FTC thanks the Committee for this opportunity to describe how the Commission has used its authority under of Section 5 of the FTC Act to address issues raised by P2P file-sharing technology.

• Mr. Michael Weiss
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  Testimony

  Mr. Michael Weiss

  Good afternoon, Chairman Smith, Sen. Dorgan and members of the Subcommittee. My name is Michael Weiss. I am the CEO of StreamCast Networks. StreamCast develops and distributes a “peer to peer” file-search-and sharing software product called “Morpheus.” It is the second most popular “P2P” software and the third most downloaded program on the Internet worldwide. Morpheus is not a network or, a service and it has no subscribers. We are proudly incorporated in Oregon and are backed primarily by venture funders based in Oregon and Washington State. Our corporate offices are located in Woodland Hills, California near Los Angeles. I very much appreciate the opportunity to appear before you today as the CEO of StreamCast. Where appropriate, however, I also will refer to and speak on behalf of P2P United, a non-profit trade association of the peer to peer technology industry formed almost one year ago by StreamCast and the developers and distributors of several other “consumer” P2P file-sharing software programs. The four other member companies of P2P United distribute the software popularly known as BearShare, Blubster, Grokster and eDonkey. I do not speak for KaZaA, its distributor Sharman Networks, its closely associated business affiliate AltNet, or its trade association the DCIA. P2P United is based and represented in Washington, DC by a former Member of Congress and by former counsel to the Senate Judiciary Committee. They are in regular contact with Members of Congress and their staffs, as well as with the Federal Trade Commission. The members of P2P United are incorporated both here in the United States and abroad. All but one maintain US offices and that member, Grokster, is StreamCast’s equally visible and accessible co-defendant in the ongoing Federal suit brought against us for vicarious and contributory copyright infringement – that is, secondary copyright infringement -- in the Central District of California by eight major motion picture studios, some twenty music labels, and multiple music publishers. Grokster participated fully in those proceedings and the court’s ruling that neither StreamCast nor Grokster violate copyright law by distributing their decentralized file-sharing software applies to Grokster despite its overseas incorporation. In essence, Mr. Chairman, the court found that the Morpheus and Grokster software is fundamentally different from software originally developed by Napster and should not be compelled to shut down. By extension, if the other members of P2P United had been plaintiffs in that lawsuit, I am confident that the Court also would have ruled in their favor as their software also is based on decentralized architecture. For the many reasons detailed below, StreamCast respectfully submits that the District Court’s detailed 35-page ruling (Exhibit 1) should figure prominently in today’s proceedings and in Congress’ subsequent consideration of the issues identified in your and Chairman McCain’s letter of invitation to appear before the Subcommittee. Permit me to address those issues in turn: I. Present and Future Uses of P2P Software Are Frequently and Increasingly Noninfringing or Unrelated to Copyrighted Materials. While others have sought to exhaustively document the ways in which individual users misuse P2P file sharing software, the District Court’s opinion makes absolutely clear that peer to peer software is not merely “capable of,” but actually is being used extensively for “substantial non-infringing” purposes today. The court noted in particular that, “StreamCast has adduced evidence that the Morpheus program is regularly used to facilitate and search for public domain materials, government documents, media content for which distribution is authorized, media content as to which the rights owners do not object to distribution, and computer software for which distribution is permitted.” Metro-Goldwyn-Mayer Studios, Inc. v. Grokster, Ltd., (C.D.Cal. Apr 25, 2003)259 F.Supp.2d 1029, 1035) Its opinion also emphasized that, “as the Supreme Court has explained, the existence of substantial noninfringing uses turns not only on a product’s current uses, but also on potential future noninfringing uses (emphasis in original, citations omitted). Plaintiffs do not dispute that Defendants' software is being used, and could be used, for substantial noninfringing purposes.” 259 F.Supp.2d 1029, *1036 Indeed, just since the court’s ruling last April, many published reports (Exhibit 2) attest to the fact that peer to peer software has been embraced and used to positive effect by such diverse information distributors as the United States Army (which uses it to inexpensively disseminate game-based recruiting software efficiently); the developer of Lindows, a Unix-based computer operating system seeking to compete with Microsoft (who cites significant bandwidth cost savings), and by the acclaimed Berklee College of Music in Massachusetts to broadly disseminate over 80 diverse music lessons derived from the school’s curriculum. The remarks on inauguration of this service by Berklee’s Associate Vice President, StreamCast submits, provide a useful lens for the Subcommittee through which to view the issues before it today. He said, “Offering free education over the Internet and through file sharing networks underscores the college’s core belief that these channels are an effective way to openly distribute meaningful educational content to a global audience. It also serves as a powerful promotional platform for artists to market, distribute, and sell their music.” Further, as reported last month in the Washington Post (Exhibit 3), StreamCast and its fellow members of P2P United are working to finalize arrangements with the FBI to rapidly and extensively disseminate to the public photos and other data about alleged child pornographers wanted by the Bureau. (The material distributed will be determined and furnished solely by the Bureau, of course.) StreamCast and the other members of P2P United initiated this effort inspired by the successful use of milk cartons to carry the photos of missing children. This, too, clearly will constitute “substantial non-infringing use” of inarguable and perhaps inestimable social importance. Clearly, these are just a few examples of non-infringing uses of P2P technology through our P2P United member companies. Indeed, the plaintiffs in our District Court case acknowledged that millions of non-infringing files are traded each month over P2P networks. Lastly in this regard, members of the Subcommittee may be particularly interested in the recent display of banner advertisements on eDonkey, a fellow P2P United member, for President Bush’s campaign. Comparable use of Morpheus was made by Senator Kerry’s campaign earlier this month. Of course, all manner of political public domain, and other public domain material, not subject to copyright also may readily be found through Morpheus and other peer to peer software. Political speech, thus represents an enormously important and extensive noninfringing use of decentralized peer to peer software. Part of my point in citing both the court’s opinion and these few innovative uses of non-restrictive peer to peer software, Mr. Chairman, is not to suggest that such P2P software is not misused by some consumers or that such misuse should not concern Congress and our industry. Rather, I do so to respectfully suggest that Congressionally or administratively mandated changes in the fundamental nature of peer to peer software are likely to have an immediate and substantial chilling effect on technology that the court found to be a content-neutral tool and that experience in our infancy already has shown to be a rapidly expanding boon to enterprises of many kinds: commercial, political, religious, humanistic, academic, and certainly artistic. Before turning to a rebuttal of the serious charges made by peer to peer technology’s antagonists in the entertainment industries, and the specific concerns expressed in your letter of May 4 attached as Exhibit 4, Mr. Chairman, I’d like also to put clearly on record that – unsupported allegations of the copyright industries notwithstanding -- neither StreamCast nor any other P2P United member is unwilling to prevent the misuse of our products by individuals to infringe copyright or commit crimes. Rather, as the District Court unambiguously found and the General Accounting Office has affirmed (Exhibit 5), we are technologically unable to do so for the very reasons that make peer to peer software the powerful, content-neutral tool that it is. As P2P United has already emphasized in public fora and in correspondence with Congress, this issue cannot and should not be resolved by any party’s advocates or executives but, rather, by technologists without a political or commercial agenda. StreamCast, for P2P United, here renews our calls for an appropriate agency or other arm of the government to undertake this critical inquiry and to broadly publish its findings. We specifically ask that this inquiry encompass (but not be limited to) audio “fingerprinting” technology knowingly mischaracterized by the recording industry as a “filter” in demonstrations to policy makers, but never made available to P2P United or outside researchers for evaluation despite many written and telephone requests to the RIAA and the software’s developers to do so. Indeed, every such request has been ignored. To be absolutely clear, Mr. Chairman, without fundamentally redesigning the inherently decentralized nature of our software in a manner that will make it radically less useful (indeed to make it like the original Napster outlawed by the courts), we have no technical ability to centrally “filter” copyrighted, offensive or indeed any file content whatsoever. Frequent claims to the contrary are simply false, Mr. Chairman, and represent just the tip of the iceberg of a well-funded and massively deployed effort in Washington and state capitals across the country to, at root, “smear” decentralized peer to peer software, and the legitimate companies with legitimate business models who (as detailed below) responsibly provide it to the public. As the court noted, StreamCast and Grokster “provide software that communicates across networks that are entirely outside Defendants’ control. In the case of Grokster, the network is the proprietary FastTrack network, which is clearly not controlled by Defendant Grokster. In the case of StreamCast, the network is Gnutella, the open-source nature of which apparently places it outside the control of any single entity.” 259 F.Supp.2d 1029, *1045] The Gnutella network is available under General Public License. This means, in essence, that no one controls it, anyone can improve it, and anyone can build software that allows the users of that software to access a worldwide network of millions of decentralized peer to peer software users. StreamCast is aware of at least 30 such independently and often anonymously developed and published software programs, Mr. Chairman, many of which have their origins outside the United States. More are developed every day. The court went on to find that “[w]hile the parties dispute what Defendants feasibly could do to alter their software, here, unlike in Napster, there is no admissible evidence before the Court indicating that Defendants have the ability to supervise and control the infringing conduct (all of which occurs after the product has passed to end-users). The doctrine of vicarious infringement does not contemplate liability based upon the fact that a product could be made such that it is less susceptible to unlawful use, where no control over the user of the product exists.” 259 F.Supp.2d 1028, 1029 and 1045, 1046 The related charge that Grokster and StreamCast had “contributed” to copyright infringement also was rejected by the court with equal force: “Defendants distribute and support software, the users of which can and do choose to employ it for both lawful and unlawful ends. Grokster and StreamCast are not significantly different from companies that sell home video recorders or copy machines, both of which can be and are used to infringe copyrights. While Defendants, like Sony or Xerox, may know that their products will be used illegally by some (or even many) users, and may provide support services and refinements that indirectly support such use, liability for contributory infringement does not lie ‘merely because peer-to-peer file-sharing technology may be used to infringe plaintiffs’ copyrights.’ Napster, 239 F.3d at 1020-21 (citation omitted). Absent evidence of active and substantial contribution to the infringement itself, Defendants cannot be liable.” .” MGM v. Grokster, supra, 259 F.Supp.2d 1029, 1043. StreamCast thus does not “aid and abet” infringement, Mr. Chairman. To the contrary, individually and in concert with P2P United, our company has and will continue to actively and prominently encourage our users to educate themselves about and to respect copyright law. We also affirmatively help them to do that, and (as detailed below) to understand the consequences of failing to obey the law. II. Commonly Cited Detriments to Consumers of Using Peer to Peer Technology Are Frequently Overstated or Erroneous. As articulated in your letter of May 4, Mr. Chairman, the most commonly suggested dangers to consumers from peer to peer software revolve around three basic issues: exposure to pornography, copyright infringement liability, and data security breaches. Given limited time and resources to prepare for today’s hearing, StreamCast requests the option to supplement this submission prior to closure of the Subcommittee’s record. For the present, however, we respectfully offer the following points in response to the criticisms outlined above. A. Pornography Accessible through P2P Software is Not More Prevalent or More Virulent than that Available on the Internet and Cannot be Centrally Filtered by Software Developers. Late in 2003, Mr. Chairman, Senator Lindsey Graham – joined by you and three other Senators -- wrote to StreamCast and the other members of P2P United to ask whether and how we would take steps to “prevent illegal access to pornography.” A copy of our complete response through P2P United to that and other inquiries similar to those before the Subcommittee today is attached a Exhibit 6 to my testimony and incorporated here by reference. Now as then, Mr. Chairman, and as the District Court found, no decentralized peer to peer software program is capable of filtering content of any kind. StreamCast, however, both as a subscriber to the industry Code of Conduct adopted by all P2P United members and in its own right (Exhibit 7), has taken significant steps to educate and protect its users. Reproductions of the actual information screens containing a wide range of consumer advisories and cautions seen by Morpheus users during installation and use of our software are attached in a collected “User Guide” for the Subcommittee’s convenience as Exhibit 8. First, Morpheus software includes a series of “Parental Control” functions. Primary among these is the ability to password protect use of the software in its entirety and to prohibit users without the password from changing or deleting it. Second, Morpheus also enables parents to easily construct “key word” filters that reside locally on their computer similar to those commercially marketed for general internet use, such as Net Nanny, and our software – as some also have falsely suggested – in no way disables or otherwise interferes with the operation of such independent software in its “web-scrubbing” function. While I’m unaware of commercial filters now designed to review peer to peer files before or after their download, should such software be developed, Morpheus and presumably the other members of P2P United, will not disable or interfere with such software. Third, like other P2P United members, Morpheus includes a prominent, animated link at the top right of its home page and after its software has been downloaded to the specially designed “Parent to Parent” Resource Center maintained for public education purposes by P2P United and highly prominent on the association’s own website. This unmistakable rotating graphic bears the legend, “Protect Your Child Online. Click Here Now!” Indeed, as stated in P2P United’s reply to Sen. Graham and you earlier this year, Mr. Chairman, we frankly and conspicuously acknowledge the risk of exposure to legal and illegal pornography through files intentionally downloaded by users of peer to peer software. (Of course, identical material also is readily available in great quantity elsewhere online through websites from which it is further distributed through email, instant messaging programs, such as AOL’s Instant Messenger, and through chat rooms and on-line forums.) We also provide links to many sources of information (such as the National Center for Missing and Exploited Children) and solicit the public’s assistance in making the Resource Center even more robust. The P2P United Parent to Parent Resource Center also allows users to report suspected child pornographers directly to federal law enforcement authorities through the federal government’s website with a single click of their mouse. StreamCast and Morpheus also will play a key role in the “cyber milk carton” campaign referred to above and intended to more efficiently involve the public in apprehending wanted child pornography suspects high on the FBI’s target list, once the Bureau authorizes and defines the scope of those efforts. Morpheus here reiterates the request made by P2P United in its reply to Sen. Graham and others that law enforcement authorities be queried directly about whether and how members of P2P United are actively assisting law enforcement authorities in their pursuit of child pornographers in ways that we cannot and should not discuss in a public forum StreamCast also urges the Subcommittee to take official note of repeated testimony before Congress by former Deputy Assistant Attorney General John Malcolm (Exhibit 9) and multiple analyses by the General Accounting Office. Mr. Malcolm made abundantly clear that, particularly with respect to child pornography, the “most troublesome” sources of exposure to child pornography remain by far commercial websites accessed through ordinary web browsers, like Microsoft Explorer and AOL’s Netscape Navigator. The GAO’s most recent report, released in early April, confirms its findings from the previous November: reported incidents of exposure to child pornography through peer to peer software are literally dwarfed by incidents involving web surfing and e-mail. (Exhibit 10) As a concerned parent of three, grandparent of two and a moral person, Mr. Chairman, I too want the scourge of child pornography abated and eliminated if humanly possible. As parents, grandparents and responsible adults and citizens, the people of StreamCast and its fellow P2P United members are committed to assisting Congress and law enforcement in those efforts and are willing, in fact, to continue to do more than our fair share. We respectfully submit, however, that imposing extraordinary warning requirements on our industry and technology without making such requirements equally applicable to web browser software, e-mail programs, instant messenger programs, chat rooms, and all other significant avenues of on-line exposure would be unjustified, unfair and – most importantly – ineffective. StreamCast and P2P United look forward to working with the Subcommittee, the Federal Trade Commission, and their staffs to identify other reasonable steps that we and other responsible members of the peer to peer industry may take as part of the solution to this disturbing set of problems that are inherent to all Internet-based software communications programs. Finally in this regard, StreamCast takes serious issue with the contention in the May 4 letter that users of peer to peer software could or should bear criminal liability for the “distribution” of legal pornographic material based solely on the passive residence of such material in their “shared files” folder. Absent the proven intent to make available and distribute such material to another individual in a manner that violates existing law, StreamCast does not believe it fair or accurate to suggest that the inherent nature and mere use of peer to peer software does or should make criminals of adults engaged in activities which many may view as unsavory, but which are legal and protected by the First Amendment. Although the word carries confusing and inappropriately negative connotations, it is precisely the “viral” nature of peer to peer programs that make them powerful information sharing tools. Neutralizing that quality of Morpheus or other similar software by either outlawing such software’s use unless confined to a defined set of users, or hobbling it by requiring a change in “sharing” default settings, is simply not justified in this context. B. StreamCast Has and Will Continue to Educate the Public about the Need to Respect Copyright Law. As in the case of risks related to legal adult file content, Mr. Chairman, StreamCast has made significant efforts of its own and through its trade association to urge its users to learn more about, and to respect, copyright. Specifically, consistent with P2P United’s Code of Conduct, the Morpheus software prominently includes at the bottom left of every active users’ home page a link bearing the bold P2P United logo and the legend, “Click Here for an Important Copyright Advisory!” In addition, Morpheus displays a prominent link to P2P United on both its home page and main software user page linking to P2P United with the legend, “Click here for important copyright and consumer protection information.” That link takes users to P2P United’s home page where an exceptionally large icon displaying the familiar “C” in a circle appears labeled, “Copyright and P2P.” The text associated with that link clearly and conspicuously states (with boldface as it appears in the original): “IMPORTANT NOTICE --- P2P United and it’s member companies remind all peer-to-peer software users that – while P2P technology makes it possible to share all kinds of information – some of that information may both be protected by copyright and require the copyright owner’s advance permission to make available to other P2P users. This will often be the case with popular music and other forms of entertainment, including games or other software. Title 17 of the U.S. Code includes stiff penalties for copyright infringement, including significant fines and – in severe cases – even jail sentences. All P2P users are urged to respect copyright laws and to learn more about them. The links below can help, but represent just a fraction of the material available on this important issue. Please contact us at P2P United with your suggestions for other links that may make this page more useful.” Immediately below this text, links to key sources of information about copyright appear, including one to the Recording Industry Association of America’s own “anti-piracy” website. After years of litigation against it StreamCast well understands, Mr. Chairman, that the member companies of the RIAA and MPAA believe that they are at war with the technology that we and other responsible companies legally make available to consumers. But frankly, it doesn’t have to be that way. Indeed, even in the midst of pitched legal battles, StreamCast, and I am certain other peer to peer software companies that compete with us, have sought from the major music labels or their licensed distributors the contractual means for peer to peer software to become a legal means by which our users could receive or purchase entertainment content from the labels and under end user licenses, and subject to digital protection chosen by the record labels. Unfortunately, we have been rebuffed at every turn, Mr. Chairman. On behalf of my company and the other members of P2P United, I would like today to renew our organization’s frequent call for Congress’ assistance in convening “all stakeholder” discussions of how the 60 million Americans estimated to use decentralized peer to peer file sharing software may be converted from alleged criminals to loyal customers for the benefit of all artists and other copyright holders. Solutions that stop short of mass consumer litigation can only be found if all the parties chose or are compelled, if necessary, to sit down together. As of this date, however, the MPAA and RIAA have been unwilling to do so with P2P United and it members. C. Claims that Morpheus or Other Responsibly Developed Peer to Peer Software Creates Significant or Disproportionate Risks to Consumers’ Personal Privacy are Simply False. StreamCast and the other members of P2P United also seek the assistance of the Subcommittee, Mr. Chairman, in putting to rest persistent and pernicious false allegations about peer to peer software and user security. Regrettably, many such claims were repeated in the May 4 letter to the Federal Trade Commission, and we look forward to the opportunity of Commission hearings to conclusively further rebut them. For purposes of today’s proceedings, StreamCast wishes to begin that process by emphasizing these 3key facts: 1) Personal Data -- As illustrated by the attached “screen captures” made during the process of installing Morpheus software, at no time and under no circumstances is a users’ entire hard drive (or, indeed any existing file on a user’s computer) automatically made available to other Morpheus users. Rather, all the software does by default upon installation is create two empty file folders which the user immediately has the option of deleting. One folder, the “Shared Folder” is intended to accept files manually inserted by users that they wish to share. The other “Download Folder” is where files that users download using our software will reside, or a folder where they can place other files previously downloaded using other P2P file-sharing software. Furthermore, at that point in the installation, the user is conspicuously cautioned with asterisked text that, “If there are any folders on your computer you do not wish to share, please be sure to remove them from your shared folders directory.” We are in the process now of further strengthening this warning in the next generation of Morpheus now under development. The new text will read: “If you have downloaded any files that you do not wish to share, please remove them from your ‘Share Folder’ or modify your default settings under ‘Preferences’.” Thus, functionally speaking, only files downloaded to or intentionally placed in a user’s “Shared Folder” will be available to other P2P software users. These safeguards render the feared “broadcast” of personal data to “millions of others of Internet users” cited in the May 4 letter to the FTC wholly without foundation. These design features and notices also are consistent with the voluntary industry Code of Conduct promulgated by P2P United in September of 2003 and with which all members of the association have pledged to comply. The Code states unequivocally, in relevant part, that: “Members’ software and associated user instructions shall conspicuously require the user to confirm the folder(s) containing the file material that the user wishes to make available to other users before making such material available, and shall be designed to reasonably prevent the inadvertent designation of the content of the user’s entire hard drive (or other principal data repository) as material available to other users.” Thus, insofar as StreamCast and other members of P2P United in compliance with our Code of Conduct are concerned, allegations that it is easy for a user to inadvertently “publish” sensitive material like medical or tax information through our software is literally the equivalent of an urban myth, no more accurate – though easily as persistent – as reports of alligators in New York’s storm drains. To the extent that the Subcommittee retains concerns about this issue, we urge it and the FTC to call in neutral experts without industry or political portfolio, unlike those cited in the May 4 letter, to systematically and dispassionately assess this matter. 2) Virus Exposure – This issue also cries out for systematic and nonsensationalized investigation, Mr. Chairman, before special strictures on peer to peer software are deemed justified. As StreamCast is confident that such analysis will make clear, neither Morpheus nor any other responsibly designed peer to peer application presents any lesser or greater danger to the public from viruses and other malicious code than web surfing, or e-mailing. The May 4 letter cites a single study, “recently reported” in PC Magazine in support of this allegation. In reality, Mr. Chairman, the quoted article itself is now 7 months old, the study it reports on was done over a year before the article was published, and the study itself was not claimed to be either comprehensive or scientific and consisted a single article in a consumer magazine. StreamCast and P2P United are not familiar with TruSecure and the data attributed to it in the May 4 letter concerning the alleged prevalence of viruses in a claimed majority of “executable files downloaded with popular file sharing software programs.” I am pleased to be able to state categorically for StreamCast, however, that the Morpheus software available from us over the Internet is 100% virus free as delivered to the consumer. Moreover, even if that were not the case, the Morpheus software package is fully compatible with all of the most popular commercial anti-virus software programs now in widespread use, such as those marketed by Norton and McAfee. Thus, in the event that an infected file subsequently was downloaded to a user’s computer, the resident anti-virus program would work seamlessly with Morpheus. For valid technical reasons intended to assure compatibility of Morpheus with such applications, the current version of our software asks the user which, if any, such program he or she would like to interface with Morpheus. New versions of Morpheus will automatically seek out and integrate any such commercial anti-virus software resident on a user’s computer to provide consumers with even further protection against malicious viruses. 3) Spyware -- StreamCast shares your and the Committee’s concern, Mr. Chairman, about the stealth installation on a users computer of programs of unknown origin, difficult to find and purge, that without the user’s permission can report personally attributable surfing habits and even specific key strokes to unknown third parties. That is “spyware,” Mr. Chairman, and – as noted in Morpheus’ public description of our software on download.com – we are proudly 100% spyware-free. This representation also is made on the very first screen presented to a user who has initiated the process of downloading the Morpheus software. Like many responsible peer to peer software and other internet companies, however, the free version of our software is advertising supported just as free, over-the-air television has been supported for decades by “pop-up” advertisements of a more familiar and widely accepted kind called “commercials”. The advertising programs installed with Morpheus, properly categorized as “adware,” are identified immediately as “third party software” in the Morpheus setup process and users are urged to read the unavoidably extensive “end user licensing agreement” furnished by StreamCast’s independent adware partners presented on the screen. Critically, unlike spyware, the advertising software bundled with Morpheus is conspicuous, easily and completely uninstalled in conformance with the P2P United Code of Conduct, and does not record keystrokes or report individually identifiable user data to any third party. In fact, StreamCast clearly explains to users how to uninstall any 3rd party software distributed with Morpheus. Today, only two such software programs come with Morpheus; and both are wholly benign “adware.” Candidly, Mr. Chairman, StreamCast believes that detailed end user licensing agreements widely used with many forms of software – as well as the printed “shrink-wrap” licenses routinely included in hard copies of popular software -- are too often simply “clicked” or scrolled through by consumers because of their length and apparent complexity. This issue, however, is not unique to peer to peer software. Nor, as has been suggested of peer to peer developers, does it not involve intentionally deceptive practices. Rather, lengthy and sometimes complex contracts and licenses are pervasive throughout the software and internet commerce industries. Accordingly, StreamCast and the other member companies of P2P United affirmatively urge the Subcommittee and the FTC to consider whether and how all similarly situated businesses, including software developers and online marketers might voluntarily (or by regulation, if necessary) be encouraged to make such agreements and licenses both more user-friendly to the consumer, and enforceable. Lastly, I have made a public and personal commitment to our users that Morpheus will not install anything on a user’s computer of which the user is unaware. StreamCast and I take this commitment very seriously and believe that gaining and keeping the trust of our users and is a primary goal of our company in the face of the outrageous falsehoods being routinely told about us by the entertainment industries by which we have been and continue to be sued. III. The Envisionable Future for Widespread Social and Com- mercial Use of Peer to Peer Software May be Bright or Heavily Shadowed, Depending Upon Choices Now Before Congress. In your letter inviting me to testify here today, Mr. Chairman, you also asked me to address my expectations of how peer to peer technology or “substitute technologies” will develop in the future. I appreciate that invitation and foresee a future for peer to peer technology with little middle ground. On the one hand, if the demonization of peer to peer technology fomented by powerful entertainment business interests continues to be credited without more rigorous scrutiny by policy makers, then technological or other regulatory mandates could well drive companies who strive to market it responsibly out of business. As reported upon widely in the past several months (see attached articles from Business Week of January 27th and USA Today of June 14th of this year attached as Exhibit 11) that future would be “dark” indeed because, while the widespread use of peer to peer software would continue unabated and could well grow, the new “underground” providers of the software used – unlike StreamCast and the other members of P2P United – would likely operate outside the reach of U.S. law, and proceed blithely about their truly shadowy business without regard for our law or this Subcommittee’s, the FTC’s or any other regulatory body’s concerns over true spyware, or any of the other matters addressed by the Subcommittee today. In sum, Mr. Chairman, as a parent, grand-parent and law abiding citizen, as well as the CEO of StreamCast, I am concerned that the premature or overregulation of responsibly developed peer to peer software will exacerbate existing problems by driving P2P software development into the true cyber-shadows. Accordingly as we wrote to Senator Graham and yourself early this year, Mr. Chairman, StreamCast and P2P United urge this Subcommittee and the FTC to employ “a light regulatory touch, and technology neutrality in the event of regulation” to avoid the specter of the darknet that already has begun to propagate. Conversely, Mr. Chairman, with Congress’ help, I also can foresee a win-win marketplace in which no individual user of peer to peer software need be worried about the prospect of crippling copyright litigation or about being labeled a “pirate” or criminal. In this brighter future, music labels and other copyright holders could receive significant royalty revenue based upon the degree to which their copyrighted material is determined to have been distributed each year, and individual artists and songwriters – particularly those not affiliated with one of the major labels -- also might share in a significant royalty pool. I am speaking, of course, of the creation of voluntary collective licensing societies and agreements or, failing agreement, a compulsory license for the peer to peer distribution of copyrighted works. Such a system in this country – already employed in several ways under U.S. copyright law, Mr. Chairman, might be similar to variations employed to positive effect in Canada and several other countries around the globe. While many respected academics have propounded variations on this theme, its hallmarks are essentially the same. For example, a small levy is placed on goods and services that profit from consumer’s P2P usage (such as the 2 billion blank CDs being sold this year, CD/DVD burners and their software, high speed internet service, and perhaps even net advertising revenue earned by P2P software distributors and others in the P2P “food chain”) in order to build royalty pools that can reach into the billions of dollars annually. Indeed, while Mr. Valenti of the MPAA and the RIAA decry such government intervention in this context, Mr. Chairman, as recently as Monday of this week, Mr. Valenti reiterated his longstanding support for a levy in the US on blank VHS tapes like those applied overseas in a lengthy June 21 interview published on cNet (Exhibit 12). The member companies of the RIAA successfully sought similar statutory relief and the Audio Home Recording Act imposes a similar royalty pool-building levy on blank digital audio tapes which the music industry regarded some years ago as the certain instrument of their digital doom. Compulsory licensing also was embraced recently by Congress as an imperfect, but necessary, means of fostering the then-fledgling webcasting and audio streaming industry. Second, representatives of affected rightsholders would meet under Congressional auspices to negotiate royalty rates and entitlements based upon their contributions to the overall market. Third, responsible means of measuring Internet “play” of individual pieces of copyrighted works would be defined (such technological tools already exist and, in fact, are employed by major music groups today to track peer to peer “uptake” of new music for marketing purposes). Fourth, an administrative apparatus – not dissimilar from existing collective licensing societies like ASCAP, BMI, and SESAC – would be put in place to distribute collected royalties held in trust according to the formula noted above and based upon Internet downloading measurements. As noted above, such a system recently was deployed for the online webcasting industry and is in place today as mandated by Congress. Although I am not an expert in international law, I am reliably informed that such a model could be constructed in a manner wholly consistent with the United States’ Berne Convention, WIPO, and TRIPS obligations, and would qualify for reciprocity overseas to the benefit of American copyright holders. StreamCast and P2P United acknowledge, as any honest stakeholder must, that compulsory licenses of the kind here described are somewhat cumbersome and often are instituted only in the case of market failure. We also recognize that, given the tireless opposition to such proposals by entrenched rightsholders, compulsory and collective licensing models are politically “sensitive.” That said, StreamCast urges this Subcommittee and its counterpart in the House of Representatives to hold a series of hearings in this and the coming Congress on the pros and cons of such a system for the legitimization and monetization of conduct engaged in by more than 60 million file sharing Americans who would much rather be considered customers than criminals. In conclusion, StreamCast respectfully requests this Subcommittee’s assistance with what we and P2P United view as the real work to be done: building a market in which peer to peer software can fulfill its real destiny as a vehicle for all artists, indeed all citizens, to be publishers and, as merited, to profit from the popularity of their creations. There is room for major copyright conglomerates in such a market, Mr. Chairman, but without encouragement from Congress and the courts, history tells us that they will fight against new business models with all of the considerable resources at their disposal. When it comes to new technology, Mr. Chairman, history has proven that they have been uniformly wrong, but unfortunately, just like a bad rerun of an old TV program, they continually put innovators through years of pain and suffering to protect their interests before finally adapting—and invariably profiting handsomely—from these very same new technologies. Indeed, in the only empirical and statistically significant study of actual downloading done to date (others rely on surveys and user self-reporting) -- a widely reported (e.g., Exhibit 13), March 2004 study by Harvard Business School professor Felix Oberholzer-Gee and his co-author Koleman Strumpf, of the University of North Carolina at Chapel Hill titled The Effect of File Sharing on Record Sales" – strong evidence was adduced that widespread file sharing does not hurt, and affirmatively helps stimulate the sale of popular music. The full study and more information about it may be accessed online at: www.hbs.edu/about/news/032904_file_sharing.html The 60 million Americans (and growing) who use file sharing software now considered criminals by the recording industry deserve better, Mr. Chairman. IV. Other Relevant Matters: A Request for Rhetorical Restraint StreamCast hopes that it’s willing participation and testimony before the Subcommittee today for itself and P2P United puts to rest to all past suggestions that our companies, our products, and the people who produce and market them are the willing accomplices of pedophiles, hostile to copyright, intentional seeders of spyware and malicious computer code among an unsuspecting public, evaders of the judicial process and, at root, dangerous to the American consumer. Nothing could be further from the truth. Words matter in the making of policy, Mr. Chairman, and StreamCast urges you and your colleagues not to accept or embrace intellectually empty but emotionally loaded phrases about peer to peer software like the cleverly menacing references to “dark-alley file-sharing software,” “illegal pirate sites” and use of the word “viral” to mean the far more innocuous “distributed” often repeated in your May 4 letter to the federal Trade Commission. The issues before us are difficult; Mr. Chairman, but StreamCast and the other members of P2P United are committed to working with you and the Federal Trade Commission in good faith to strip the rhetoric from the realities of our technology and of the markets here at issue. We look forward to helping craft, and taking a responsible and profitable place, in the market of tomorrow that StreamCast and the other members of P2P United believe we all must work dispassionately to forge today. Thank you for the opportunity to appear before you today. I look forward to your questions.

• Mr. Les Ottolenghi
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  Mr. Les Ottolenghi

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