"The Apple iPod iTunes Anti-Trust Litigation"

Filing 751

Administrative Motion to File Under Seal Plaintiffs' Memorandum of Law in Opposition to Defendant's Motion for Summary Judgment and to Exclude Expert Testimony of Roger G. Noll; Plaintiffs' Responsive Separate Statement in Support of Opposition to Defendant's Motion for Summary Judgment and to Exclude Expert Testimony of Roger G. Noll and Exhibits 1-4, 9-17, 20-29, 31-46, 48-54, 56, and 58-62 Under Seal Pursuant to Civil L.R. 7-11 and 79-5(c) filed by Somtai Troy Charoensak, Mariana Rosen, Melanie Tucker. (Attachments: # 1 Declaration in support thereof, # 2 Proposed Order Granting Plaintiffs' Administrative Motion to Seal, # 3 Unredacted Version of Plaintiffs Memorandum of Law in Opposition to Defendants Motion for Summary Judgment and to Exclude Expert Testimony of Roger G. Noll, # 4 Exhibit 1-2, # 5 Exhibit 3, # 6 Exhibit 4, # 7 Exhibit 5-8, # 8 Exhibit 9-17, # 9 Exhibit 18-19, # 10 Exhibit 20-29, # 11 Exhibit 30, # 12 Exhibit 31-35, # 13 Exhibit 36-46, # 14 Exhibit 47, # 15 Exhibit 48-54, # 16 Exhibit 55, # 17 Exhibit 56, # 18 Exhibit 57, # 19 Exhibit 58-62, # 20 Declaration of Bonny E. Sweeney in Support of Plaintiffs Memorandum of Law in Opposition to Defendants Motion for Summary Judgment and to Exclude Expert Testimony of Roger G. Noll, # 21 Unredacted Version of Plaintiffs' Responsive Separate Statement in Support of Opposition to Defendant's Motion for Summary Judgment and to Exclude Expert Testimony of Roger G. Noll, # 22 Proposed Order Denying Defendant's Motion for Summary Judgment and to Exclude Expert Testimony of Roger G. Noll)(Sweeney, Bonny) (Filed on 1/13/2014)

EXHIBIT 30

- DIGITAL MUSIC INTEROPERABILITY AND AVAILABILITY

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[House Hearing, 109 Congress]
[From the U.S. Government Printing Office]

DIGITAL MUSIC INTEROPERABILITY
AND AVAILABILITY
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON COURTS, THE INTERNET,
AND INTELLECTUAL PROPERTY
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
APRIL 6, 2005
__________
Serial No. 109-9
__________
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://www.house.gov/judiciary
______
U.S. GOVERNMENT PRINTING OFFICE
20-389
WASHINGTON : 2005
_____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free [phone]; (202) 512 091800
Fax: [phone] Mail: Stop SSOP, Washington, DC 20402 090001
COMMITTEE ON THE JUDICIARY
F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
HENRY J. HYDE, Illinois
JOHN CONYERS, Jr., Michigan
HOWARD COBLE, North Carolina
HOWARD L. BERMAN, California
LAMAR SMITH, Texas
RICK BOUCHER, Virginia

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ELTON GALLEGLY, California
BOB GOODLATTE, Virginia
STEVE CHABOT, Ohio
DANIEL E. LUNGREN, California
WILLIAM L. JENKINS, Tennessee
CHRIS CANNON, Utah
SPENCER BACHUS, Alabama
BOB INGLIS, South Carolina
JOHN N. HOSTETTLER, Indiana
MARK GREEN, Wisconsin
RIC KELLER, Florida
DARRELL ISSA, California
JEFF FLAKE, Arizona
MIKE PENCE, Indiana
J. RANDY FORBES, Virginia
STEVE KING, Iowa
TOM FEENEY, Florida
TRENT FRANKS, Arizona
LOUIE GOHMERT, Texas

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JERROLD NADLER, New York
ROBERT C. SCOTT, Virginia
MELVIN L. WATT, North Carolina
ZOE LOFGREN, California
SHEILA JACKSON LEE, Texas
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
ROBERT WEXLER, Florida
ANTHONY D. WEINER, New York
ADAM B. SCHIFF, California
LINDA T. SANCHEZ, California
ADAM SMITH, Washington
CHRIS VAN HOLLEN, Maryland

Philip G. Kiko, Chief of Staff-General Counsel
Perry H. Apelbaum, Minority Chief Counsel
-----Subcommittee on Courts, the Internet, and Intellectual Property
LAMAR SMITH, Texas, Chairman
HENRY J. HYDE, Illinois
ELTON GALLEGLY, California
BOB GOODLATTE, Virginia
WILLIAM L. JENKINS, Tennessee
SPENCER BACHUS, Alabama
BOB INGLIS, South Carolina
RIC KELLER, Florida
DARRELL ISSA, California
CHRIS CANNON, Utah
MIKE PENCE, Indiana
J. RANDY FORBES, Virginia

HOWARD L. BERMAN, California
JOHN CONYERS, Jr., Michigan
RICK BOUCHER, Virginia
ZOE LOFGREN, California
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
ROBERT WEXLER, Florida
ANTHONY D. WEINER, New York
ADAM B. SCHIFF, California
LINDA T. SANCHEZ, California

Blaine Merritt, Chief Counsel
David Whitney, Counsel
Joe Keeley, Counsel
Alec French, Minority Counsel
C O N T E N T S
---------APRIL 6, 2005
OPENING STATEMENT

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Page
The Honorable Lamar Smith, a Representative in Congress from the
State of Texas, and Chairman, Subcommittee on Courts, the
Internet, and Intellectual Property............................
The Honorable Howard L. Berman, a Representative in Congress from
the State of California, and Ranking Member, Subcommittee on
Courts, the Internet, and Intellectual Property................
The Honorable John Conyers, Jr., a Representative in Congress
from the State of Michigan, and Ranking Member, Committee on
the Judiciary..................................................

1
2
4

WITNESSES
Mr. Mark Cooper, PH.D., Director of Research, Consumer Federation
of America, on behalf of the Consumer Federation of America and
Consumer Union
Oral Testimony.................................................
Prepared Statement.............................................
Mr. Raymond L. Gifford, President, The Progress & Freedom
Foundation
Oral Testimony.................................................
Prepared Statement.............................................
Mr. William E. Pence, Ph.D., Chief Technology Officer, Napster
Oral Testimony.................................................
Prepared Statement.............................................
Mr. Michael Bracy, Policy Director, Future of Music Coalition
Oral Testimony.................................................
Prepared Statement.............................................

5
7
9
11
14
16
18
20

APPENDIX
Material Submitted for the Hearing Record
Prepared Statement of the Honorable Howard L. Berman, a
Representative in Congress from the State of California, and
Ranking Member, Subcommittee on Courts, the Internet, and
Intellectual Property..........................................
Prepared Statement of the Honorable John Conyers, Jr., a
Representative in Congress from the State of Michigan, and
Ranking Member, Committee on the Judiciary.....................

27
28

DIGITAL MUSIC INTEROPERABILITY
AND AVAILABILITY
---------WEDNESDAY, APRIL 6, 2005
House of Representatives,
Subcommittee on Courts, the Internet,
and Intellectual Property,
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:37 a.m., in
Room 2141, Rayburn House Office Building, the Honorable Lamar
Smith, (Chairman of the Subcommittee) presiding.

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Mr. Smith. The Subcommittee on Courts, the Internet, and
Intellectual Property will come to order. I am going to
recognize myself for an opening statement, and then recognize
other Members, and then we will proceed to introduce the
witnesses, and we will look forward to hearing from them.
Today, this Subcommittee continues its work to update music
licensing for the digital era. New technologies are providing
numerous and competing methods for delivering music content to
consumers. Consumers can buy music on-line for immediate
download, subscribe to unlimited amounts of music that can be
downloaded to a portable device, listen to webcasts of their
favorite radio stations on the Internet, and subscribe to music
broadcasts from satellites in space.
Each of these different types of music services is a new
and unique business model that brings different values and
opportunities for consumers. Consumers have multiple choices
for how they can purchase and listen to legal music.
Unfortunately, just as the number of legal options has
increased, so has the number of illegal ones.
Legitimate questions have been raised regarding the impact
of digital interoperability on consumers. In the physical
world, consumers didn't expect that music audio cassettes were
interoperable with CD players. Consumers switching from music
cassettes to CDs bought the same music for $10 to $20 per CD
that they already owned. Consumers accepted this, since they
felt they were getting something new with more value, a digital
format that made every reproduction sound as good as the first
playback.
Music is quickly becoming an on-line business with no
connection to the physical world, except for the Internet
connection. Even that connection is increasingly becoming
wireless. Some of the same interoperability issues that occur
in the physical world are now appearing here. Consumers who
want to switch from one digital music service to another must
often purchase new music files and sometimes new music players.
For example, music purchased from the iTunes Music Store will
only work on Apple's iPod music player. Music purchased from
RealNetworks cannot be accessed on the iPod.
Last year, both companies became involved in a dispute over
Real's attempt to offer software called ``Harmony,'' that would
have allowed legal copies of music purchased from Real's online music store to be playable on Apple's iPod music player.
Apple objected to this effort, calling it ``hacker-like,'' and
invoking the DMCA. Apple blocked Real software from working a
short time afterwards.
This interoperability issue is of concern, since consumers
who bought legal copies of music from Real could not play them
on the iPod. I suppose this is a good thing for Apple, but
perhaps not for consumers. Apple was invited to testify today,
but they chose not to appear. Generally speaking, companies
with 75-percent market share of any business, in this case, the
digital download market, need to step up to the plate when it
comes to testifying on policy issues that impact their
industry. Failure to do so is a mistake.
As a result of disputes like the one between Apple and
Real, some have suggested that efforts to boost digital music
interoperability should be encouraged by regulation or

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legislation. Others have urged Congress to leave the issue to
the marketplace and let consumers decide what is best for them.
Just last week, the Supreme Court heard a copyright case
dealing with the 1984 decision in the Sony-Betamax case.
Consumers ultimately chose the VHS format over their Betamax as
their preferred technology in their homes without any
intervention by Congress. At the same time, broadcasters chose
the Betamax standard for their internal broadcast operations.
If anything, this example demonstrates not only how consumers
will decide for themselves what standard best meets their
needs, but also that multiple standards can survive in the
marketplace.
The digital music interoperability issue is of interest to
more than consumers. Performers and songwriters are affected by
the decisions made about how their music is made available.
Music that is made available on only one digital music service
will limit the options for artists to earn royalties. Many of
the licenses and rights in the music industry stem from
compulsory licenses and exclusive contracts. Since one of these
licenses, the compulsory section 115 mechanical license, is now
being updated for the digital era, the time is appropriate for
the Subcommittee to learn more about the impact of digital
interoperability on consumers and artists.
That concludes my opening statement, and the gentleman from
California, the Ranking Member, Mr. Berman, is recognized for
his.
Mr. Berman. Thank you very much, Mr. Chairman, for
scheduling this hearing on digital music interoperability. The
explosion of technologies that enable consumers to digitally
download music has provided many new opportunities to the music
lover. The ultimate goal is to provide consumers with their
choice of music any time, anywhere, in any format. However,
this new environment has come at a great cost; that of rampant
piracy on peer-to-peer networks. What is considered free music
available on the Internet comes at the expense of numerous
people involved in the development of the sound recording, the
artists, songwriters, musicians, sound engineers and others.
The consequences of piracy are felt throughout our economy,
but they are especially harmful in my district, as well as
several other Members on this Committee, where many jobs depend
on the lawful sale of music. The proliferation of legitimate
music distributors in the marketplace has helped stem the tide
of piracy. The number of available digital music delivery
alternatives has increased, enabling technology companies to
help copyright owners make inroads against unauthorized
downloading and sharing of music files. However, music
companies will always have to compete with free music, and
analysts claim that it will take a number of years before
download services can provide a significant sales boost for the
content creators.
One of the major impediments to achieving a more level
playing field according to analysis is the bewildering array of
competing technologies. As with any nascent industry, the
development of new business models have unintended results. In
the case of digital music, there are concerns that
interoperability barriers between the various suppliers could
actually hinder growth in the market.

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Brandenburg, the father of the MP3, has warned that rival
technologies will baffle consumer and risk alienating fans,
driving them to unsanctioned file-sharing networks, where the
songs are free and encoded in the unprotected MP3 format.
The International Federation of Phonographic Industry has
noted that ``one important problem that hinders growth of the
on-line music business is the lack of interoperability between
services and devices. The danger is of wide-scale consumer
confusion and wasted opportunities in a market which has an
extraordinary growth potential.'' They observe that there is no
easy solution, that all players in the on-line market need to
work harder to solve the interoperability difficulties in 2005.
Yet the market continues to develop. The portable player market
already presents consumers with an array of choices.
Now, we see the convergence of music devices and mobile
handsets. The goal of making music easier to buy than to steal
is becoming a reality, and therefore these innovative services
deserve our thanks. However, anti-piracy efforts must remain a
focus for technology company industries as they develop their
products. A legitimate distribution business model must be one
that is based on payment and permission of the rights holder.
With digital music moving into the mainstream of consumer
life, I believe it will be helpful to further this conversation
by just guessing what, if any, impediments are facing companies
that are now distributing digital music and how they are
addressing consumers' needs for legitimate music. In an ideal
world, we would all have the major players in the digital music
market at the table to hear their opinions about this issue.
The Chairman made reference to at least one party not at the
table, but I do look forward from hearing these witnesses to
help define some of the issues.
Thank you very much, Mr. Chairman.
Mr. Smith. Thank you, Mr. Berman.
I understand that the Ranking Member of the Judiciary
Committee, Mr. Conyers, you have a statement?
Mr. Conyers. Only a comment or two, sir.
Mr. Smith. The gentleman is recognized.
Mr. Conyers. I will ask unanimous consent that my statement
be put in the record.
Mr. Smith. Without objection.
Mr. Conyers. First of all, I welcome this panel, and I
think this is an important discussion. I want to say that I
commend the Ranking Member, Mr. Berman, on his very thoughtful
presentation, which leads me to put mine in the record and let
it go at that.
A couple of things have been said by witnesses that I just
want to repeat; that market forces will continue to drive
innovation and new ways to enjoy music and pricing and will
eventually resolve the interoperability problem and that
Government intervention can probably inhibit innovation.
Finally, I join with those who believe that consumers will
ultimately choose the interoperable systems over closed
platforms.
With that, I would return my time and thank the Chairman
for his courtesy.
Mr. Smith. Thank you, Mr. Conyers.
I would, also, like to thank the gentlewoman from

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California, Ms. Lofgren, and the gentleman from California, Mr.
Schiff, for their attendance here today as well.
Before I introduce the witnesses, I would like you all to
stand so I can swear you in.
[Witnesses sworn en masse.]
Mr. Smith. Thank you. Please be seated.
Our first witness is Mark Cooper--oh, excuse me, in
recognizing other Members who are present, I didn't look far
enough or long enough to my right to see Bob English, the
gentleman from South Carolina. We appreciate his presence as
well.
Our first witness is Mark Cooper, the director of Research
at the Consumer Federation of America, where he has
responsibility for energy, telecommunications and economic
policy analysis. Dr. Cooper is a fellow of both the Stanford
Law School Center for Internet and Society and the Donald
McGannon Communications Center at Fordham University. He is the
author of five books and has published numerous chapters and
edited works and journal articles focusing on digital society
issues. Dr. Cooper holds a Ph.D. from Yale University and is a
former Yale University and Fulbright Fellow.
Our next witness is Ray Gifford, president of the Progress
& Freedom Foundation and a member of its board. Before joining
the foundation in 2003, Mr. Gifford served as chairman of the
Colorado Public Utilities Commission for 4 years. Mr. Gifford
earned his law degree from the University of Chicago, where he
served as president of the Federalist Society and chairman of
the Edmund Burke Society. He earned a bachelor's degree in
philosophy from St. John's College in Annapolis, Maryland.
Later on, you can tell us the difference between the
Federalist Society and the Edmund Burke Society, if you will.
Our next witness is Dr. William Pence, chief technology
officer of Napster. In 2000, Dr. Pence joined Universal Music
Group as lead technologist for its on-line music initiative. In
2001, he became chief technology officer of Pressplay, a joint
venture between Sony and Vivendi Universal, designed to offer
an on-line music subscription service. In 2002, Roxio acquired
Pressplay and rebranded that service with the Napster name. Dr.
Pence led the effort to build a legitimate service on the
Pressplay technology infrastructure, culminating in the
relaunch of Napster in October 2003. Most recently, he led the
effort which resulted in the world's first portable music
subscription service--Napster To Go.
Dr. Pence holds several U.S. patents, he received a B.S.
degree in physics from the University of Virginia in 1984 and a
Ph.D. degree in electrical engineering from Cornell University.
Our final witness is Michael Bracy, co-founder of the
Future of Music Coalition, where he currently serves as a board
member and its policy director. He, also, co-owns Misra, an
independent record label based in Austin, Texas, which, as one
would expect, is a city I have a particular interest in.
The Future of Music Coalition is a not-for-profit
collaboration between members of the music, technology, public
policy and intellectual property law communities. The Coalition
seeks to educate about music technology issues and to bring
together diverse voices in an effort to come up with creative
solutions. The Coalition, also, aims to identify and promote

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innovative business models that will help musicians and
citizens to benefit from new technologies. Mr. Bracy graduated
from Georgetown University.
By unanimous consent, as I think you all know, your
complete testimonies will be made a part of the record, and we
look forward to hearing your testimony now.
Dr. Cooper, we will begin with you.
TESTIMONY OF MARK COOPER, PH.D., DIRECTOR OF RESEARCH, CONSUMER
FEDERATION OF AMERICA, ON BEHALF OF THE CONSUMER FEDERATION OF
AMERICA AND CONSUMER UNION
Mr. Cooper. Thank you, Mr. Chairman.
Interoperability is an extremely valuable and important
trait in the digital economy. Digital products are inherently
networked, which means that they are made up of complimentary
components or the current terminology is they are layers of a
platform. These layers must interoperate if the product is to
function properly.
Over the past three decades, we have learned what I call
the Internet lesson. The more open the interfaces within the
platform, the more dynamic the development. Open platforms
create large network effects and an innovation-friendly
environment. Economists call them positive externalities
created by these open platforms.
However, it is extremely important to recognize that
interoperability plays different roles and needs different
policies at different points in this platform. The
communications network at the core of the digital economy must
be open and interoperable as a matter of obligation. Closed
proprietary platforms in the core destroy the vast array of
positive externalities that can develop above. Refusals to
deal, discrimination in functionalities, foreclosure,
anticompetitive bundling simply cannot be tolerated at the core
of the communications network, and that is why the
Communications Act requires just, reasonable, and
nondiscriminatory terms for interconnection and carriage.
But as we move above from that core or from the lower
layers to the upper layers, the basis for interoperability
changes. At the periphery of the digital platform, at the
applications layer it is called, interoperability is very
consumer friendly, but it needs to be enforced or created by
market forces. Applications are the widgets of the digital age,
the things that people make and sell directly to the public. In
the digital content and distribution of applications, like
music formats, the failure to interoperate affects the direct
consumer. It hurts the music consumer if you don't
interoperate, but only the music consumer. It doesn't damage
the rest of the economy.
If an applications developer fails to interoperate, we
believe that developer will ultimately pay the price because
consumers will migrate to interoperable offerings. We believe
consumers demand interoperability, will pick interoperability
if they have information, and they have a fair choice.
Disclosure and expectations play a key role. Consumers must
be aware that if they buy a certain product that will not
interoperate, they will be locked in and cut off. Once they

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know that, they will exercise, they will vote with their feet.
Similarly, a refusal to interoperate should not be a lever
for anticompetitive strategies. If we see lots of exclusive
deals and only a very few widget manufacturers, antitrust
authorities should become concerned because we expect the
applications layer, the widget manufacturers, to be plentiful
and competitive. If they don't behave in that fashion, if there
aren't a lot of choices, then there is a legitimate antitrust
concern.
As several Members have noted, last year, the recording
industry finally accepted the inevitability of digital
distribution of music. They sold more singles last year than
any time in the previous 20 years, and consumers saved a great
deal of money. The transition to digital distribution is
inevitable because it reduces the cost of production marketing
and distribution and may transform promotion as well. The cost
of delivering music to the public will decline, and the nature
of sales will shift from CDs and bundles to singles, and that
is a good thing for consumers and artists who can make more
money by selling lots of singles.
Now, those who had the foresight to see this digital
transformation coming and to put digital distribution in the
world, they have got a lead. They have, one, a first-mover
advantage. But as the entirety of the industry moves toward
digital distribution, there are no guarantees that that
advantage will persist, especially if they make a mistake on
interoperability.
It is not surprising to find that the very company that has
a lead today also had a lead 25 years ago in the PC market.
They were the dominant PC provider about a quarter of a century
ago. They refused to interoperate. They refused to open their
platform, and they were blown away. They are a niche market
player today, with a market share around 5 or 6 percent of the
market. Interoperability is consumer friendly, and it will
prevail in the marketplace.
I thank the Committee for giving me this opportunity, for
recognizing how important interoperability is in the digital
industries, and I look forward to working with the Committee to
find the right mix of public obligations at the core of the
digital economy and private incentives at the periphery and in
the widget manufacturers so that we can create competitive,
dynamic platforms that serve consumers, the economy and
artists.
Thank you.
[The prepared statement of Mr. Cooper follows:]
Prepared Statement of Dr. Mark Cooper
Mr. Chairman and Members of the Committee,
My name is Dr. Mark Cooper. I am Director of Research at the
Consumer Federation of America. I appreciate the opportunity to testify
on the subject of interoperability and commend the Committee for having
the foresight to hold hearings to explore the implications of this
important topic.
Interoperability is a critically important issue, not only for
consumers, but also for producers and the economy. However, it is
important for the Committee to appreciate that the role of

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interoperability and public policies to promote it vary greatly
depending on the nature of the economic activity that is being
analyzed.
INTEROPERABILITY SHOULD BE REQUIRED AS A MATTER OF
PUBLIC POLICY IN CORE NETWORKS
Ensuring interoperability is a critical and pressing public policy
concern when it affects the critical functions of a vital network in
our economy. For example, we demand interoperability in the
communications network, as a public obligation, because it is a vital
infrastructure at the core of our economy.\1\ Telephone networks have
interoperated for almost 100 years. The advent of the Internet has
brought with it amazing new opportunities for communication-WiFienabled telephones can connect with computers. E-mail users can connect
to Blackberries. Macintosh users can send and receive files to and from
Windows users. Interoperability supports a vast array of other
activities and the failure to interoperate would chill innovation and
distort economic activity.
--------------------------------------------------------------------------\1\ Mark Cooper, Open Architecture as Communications Policy
(Stanford Law School Center for Internet and Society, 2004), available
for download under a Creative Commons License at http://
Cyberlaw.Stanford,edu/blogs.cooper/openarchitecture.pdf.
--------------------------------------------------------------------------Over the past quarter of a century, as the digital economy has
grown and influenced the broader economy, the importance of
interoperability has grown because ``platforms'' play an increasingly
important role. ``A platform is a common arrangement of components and
activities, usually unified by a set of technical standards and
procedural norms round which users organize their activities. Platforms
have a known interface with respect to particular technologies and are
usually 'open' in some sense.'' \2\
--------------------------------------------------------------------------\2\ Shane Greenstein, ``The Evolving Structure of the Internet
Market'' in Understanding the Digital Economy (Erik Brynjolfson and
Brian Kahin (Eds) (2000), p. 155.
--------------------------------------------------------------------------Interoperability to maximize the availability of functionality has
been the hallmark of digital platforms for a simple reason. By keeping
interfaces open and making the functionality available, the entire
platform is driven forward, expanding the opportunities for all who
build to and take from (use) the platform. ``Interfaces exist to entice
other firms to use them to build product that conform to the defined
standards and therefore work efficiently with the platform.'' \3\
--------------------------------------------------------------------------\3\ Anabelle Gawer and Michael A. Cusumano, Platform Leadership
(2002), p. 56.
--------------------------------------------------------------------------The superior value of interoperability of critical networks through
open interfaces was recognized by the National Research Council of the
National Academy of Sciences in a 1994 analysis of the Internet, just
before it exploded into wide popular use in America. ``The telephone
system is an example of an open network, and it is clear to most people
that this kind of system is vastly more useful than a system in which
the users are portioned into closed groups based, for example, on
service provider or the user's employer.'' \4\

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--------------------------------------------------------------------------\4\ National Research Council, Realizing the Information Age
(1994), p. 43.
--------------------------------------------------------------------------In contrast, interoperability in the digital content and consumer
goods industries, like video games or music formats, is a consumerfriendly way to do business. The failure of interoperability in the
music industry affects the music industry and the consumers who
purchase digital music. The failure of interoperability in the
communications industry affects the entire economy.
INTEROPERABILITY SHOULD BE PROMOTED IN CONSUMER APPLICATIONS
We believe that interoperability best serves the interest of
consumers and producers throughout the digital platform, but as the
question moves from the interoperability of the network, to how that
network is used for music it becomes important for the marketplace to
provide better clarity. If an application developer refuses to
interoperate, we believe that developer will ultimately pay the price,
because consumers will migrate to interoperable offerings. Applications
developers should be allowed to discover the consequences of their bad
decisions in the marketplace.
We believe consumers demand interoperability, and will pick it when
given the choice. However, the development of converged or open
platforms takes time, and it requires that consumers understand their
options. Disclosure and consumer expectations should be taken into
consideration. Sellers of closed platforms need to better inform
consumers that their platforms are closed, and that consumers might be
locking themselves into future hardware and software purchases in that
platform.
Consumers have certain expectations that they could pop a record
onto a turntable or a compact disc into a CD player and music would
come out. If digital formats are not going to replicate that
interoperability, retailers of digital music and digital music players
have a special obligation to inform consumers who have built up
expectations of interoperability over years, even decades of
experience. Given good information-such as where and how things will
work, and where it won't--we are confident consumers will choose the
interoperable systems over closed platforms,
WHEN THE FAILURE TO INTEROPERATE RAISES CONCERNS
An industry's refusal to interoperate should also not become a
lever for anticompetitive strategies. This is a special concern in
platform industries where a company may come to dominate one critically
important component (layer) of a platform and seeks to use that
dominance to frustrate competition in other components.\5\ This is a
problem of vertical leverage in antitrust analysis and it grows in
significance in platform industries precisely because of the heightened
importance of interfaces between components (layers) in these
platforms. Closing interfaces takes on special importance.
Unfortunately, antitrust practice has drifted away from concerns about
vertical leverage, at precisely the moment it demands greater scrutiny
and attention.
--------------------------------------------------------------------------\5\ Mark Cooper, ``Antitrust as Consumer Protection in the New
Economy: Lessons from the Microsoft Case,'' Hastings Law Journal, 52:4,

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2001. Available at http://www.consumerfed.org/cooper--hastings--law-review--200106.pdf
--------------------------------------------------------------------------We believe that music, movies and other digital content could
quickly grow to become that anti-competitive lever, if it is not
already. For the consumer who purchased any digital music player other
than an iPod, there's no simple recourse when R.E.M. releases a series
of songs exclusively on iTunes Music Store.\6\ Nor is there any
recourse at all for a Mariah Carey fan with an iPod on a Macintosh when
she releases an exclusive song on MSN Music--a platform that simply
won't work with Macintosh or iPods.\7\
--------------------------------------------------------------------------\6\ While iTunes allows consumers to burn purchased protected
digital music to a CD--n open platform--it must be pointed out that a
consumer would need to install a new program, purchase the song, burn
the song to CD, rip the burned CD into a format their current player
will understand and then enter all the song information manually--a
cumbersome process digital music stores were supposed to make
automatic.
\7\ A consumer with an iPod and Windows might have more luck if
they followed the steps in Footnote 6, but users with a Mac are out of
luck--and won't be able to download that song legally.
--------------------------------------------------------------------------Consumers who run up against these problems with music, movies or
other digital content will increasingly turn to methods that
potentially infringe copyright to get the song they want, including
searching the Internet for a copy of the song converted to an open
format. This is a less-than-adequate solution, and one that all parties
should be wary of inadvertently promoting. Both the content and device
industries surely recognize that every time they drive a consumer to
infringe copyright because of their support for a closed platform, they
create new incentive to create and deliver an open platform.
DIGITAL DISTRIBUTION OF MUSIC HAS JUST BEGUN:
INTEROPERABILITY WILL LIKELY PREVAIL
Last year, when the recording industry finally accepted the
inevitability of digital distribution of music, the industry sold more
singles than at any time in the past two decades. The transition to
digital distribution has begun in earnest. This transition is
inevitable. Digital distribution reduces the costs of production,
marketing, and distribution. It may also radically alter the approach
to promotion. The cost of delivering music to the public will decline
by 50 percent or more and the selling of music will shift from bundles
of songs to singles.
Major record labels--whose artists account for over 80% of the
music purchased in America--are belatedly considering alternative
business models for digital distribution. This lead to subscription
services like Real Rhapsody and Napster 2.0 or a la carte services like
those two companies offer, iTunes Music Store, and others.
The music industry is not facing a format war, like the battle they
are currently fighting over high-definition music--where some labels
exclusively sell content on SuperAudio CD while others only release
premium music on the DVD-Audio format. A format war clearly would have
impeded the adoption of digital music. But as the amount music
exclusively available on one format increases, and as consumers
discover they've purchased thousands of dollars of music to fill up

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their digital music devices, locking themselves to one type of player
forever, they are more likely to get confused and frustrated. To
alleviate both, record labels and device manufacturers should
proactively inform consumers about the limitations of their closed
systems, and work to develop open standards.
Those who had foresight and created a digital music platform with
portable digital music players and digital music download stores now
have a lead, winning a first-mover advantage. But as the entirety of
the music industry makes the inevitable transition to digital
distribution, there are no guarantees that the initial advantage will
persist, especially if mistakes are made with regard to
interoperability. A quarter of a century ago a closed platform
dominated the computer desktop market. A more open platform quickly
replaced it, forcing all platforms to improve compatibility. Given a
choice that is not distorted by anticompetitive practices and good
information consumers will prefer and migrate to the interoperable
platforms.
CONCLUSION
Last week oral argument in two critical cases (National Cable and
Telecommunications Association et al. v. Brand X Internet Services et.
al and Metro-Goldwyn Mayer Studios Inc. et al v. Grokster) that will
determine the future of the Internet made it clear that technology
policy requires a careful balance between the public and private
interests. Interoperability in core infrastructure industries has been
a key ingredient in this nation's economic success since the railroad
track was standardized and the telecommunications network was obligated
to provide interconnection and carriage on just, reasonable and
nondiscriminatory rates, terms and conditions.
I thank the Committee for recognizing that in the digital economy
interoperability has even broader implications and I look forward to
working with the committee to find the right mix of public obligations
and private incentives to achieve open, competitive platforms that
provide a dynamic, consumer-friendly economy.
Mr. Smith. Thank you, Dr. Cooper.
Mr. Gifford?
TESTIMONY OF RAYMOND L. GIFFORD, PRESIDENT,
THE PROGRESS & FREEDOM FOUNDATION
Mr. Gifford. Thank you, Mr. Chairman.
When I begin to agree with my friend, and sometimes
nemesis, Mark Cooper I start to doubt myself, but I appreciate
the opportunity to speak with you today and the Members of the
Subcommittee.
In seizing on this topic, the Committee has hit upon one of
the key conundrums of the digital age, namely, the role of
standard-setting and the subsidiary goal of interoperability.
Interoperability is a key challenge to firms and network
industries. The success of a given platform depends on its
attractiveness to consumers, and a key value for consumers is
the platform's ability to interoperate with a variety of
applications. Interoperability, to be sure, is a value to
consumers and firms, but it is not an absolute value.
The Progress and Freedom Foundation recently hosted a

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series of events in Europe on standard-setting and
interoperability. My conclusions from those events will serve
as my introduction here.
First, standard-setting is hard. We do not know, before the
fact, the optimal method or amount of standards or
interoperability. For public policy, this should inspire a
great deal of caution from mandating any given outcome or
particular standard. Because there are undeniable tradeoffs
from any standard-setting or interoperability decision
Governments should be wary of thinking they have sufficient
foresight to make proper interoperability decisions and
deferential to private attempts to achieve interoperability.
Finally, for public policymakers, we can never forget the
lessons of public choice theory, which predict that firms and
interest groups will seek Government favor in promoting their
interoperability solution and in handicapping their rivals.
I have three specific theses:
First, protect the Schumpeterian incentives to innovate and
compete for not just in the market;
Second, allow open and closed platform business models to
compete;
And, third, permit the freedom to use digital rights
management.
First, much of the brow-furrowing over interoperability and
digital music stems from the success of the Apple iPod
platform. I urge this Subcommittee not to give into the
politics of platform envy. Joseph Schumpeter, you may recall,
was the economist who described capitalism as a process of
creative destruction, with new firms and new products spurring
innovation and creating new markets. Digital music is a new
market, and the iPod platform and its remarkable success is the
harbinger of those types of markets and what they can be. The
law, intellectual property and antitrust law, specifically,
should encourage this dynamism.
Second, a related question to the types of competition that
is occurring in this market is the platform models that firms
choose to compete in the market. This gets to the heart of
interoperability as different firms opt for platforms of
varying degrees of openness on the one hand or closed
integration on the other.
From a business standpoint, you can see the tradeoffs and
strategic decisions the companies are making. By opting for a
more open platform, the firm hopes to attract more users to its
platform and increase the number of applications compatible
with its platform. The tradeoff involves sharing more of the
profits from that platform and, also, perhaps some of the
quality control over the whole consumer experience. In
contrast, a more closed platform rather audaciously attempts to
gather all of the rents from production, but perhaps at a cost
of interoperability.
Should public policy be concerned with these business
decisions? Probably not. If you start looking for standards to
scrutinize, you will see them everywhere, from razors and
blades, to PSPs and disk drives, to MP3 Players and iPods.
Because we cannot know in advance what consumers will prefer or
what is truly superior, we should forbear from interfering.
A final value of public policy should be to ratify the

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acceptability and use of digital rights management or DRM
technologies. DRM allows content providers a reasonable degree
of confidence in bringing digital music to market and consumers
the ability to purchase digital music. DRM will be integral to
consumers' access to digital content and, hence, must be
allowed its place as a valid market mechanism.
Standards are hard. Interoperability is a good thing, but
not an absolutely good thing. Consumers' tastes for the most
part will drive toward interoperable platforms, but not
necessarily. Intellectual property law, antitrust and
administrative regulation point in slightly different
directions on these issues, but are up to the task of
confronting the policy challenges presented by digital
technologies. From Congress's point of view, the best course
would be to resist calls for mandates or technology limitations
in this dynamic space.
I thank the Committee for the opportunity to testify today
and look forward to your questions.
[The prepared statement of Mr. Gifford follows:]
Prepared Statement of Raymond Gifford
Good morning, Mr. Chairman, Mr. Berman and members of the
subcommittee. Thank you for the opportunity to speak to you today on
digital music interoperability and availability. In seizing on this
topic, the Committee has hit upon one of the key conundrums of the
digital age; namely, the role of standard setting and the subsidiary
goal of interoperability. As you know, markets for digital music are
nascent and emerging. Different platforms, different file formats and
different digital rights management systems are competing for
dominance. Indeed, even different business models are duking it out,
with Napster To Go's subscription model taking on iTunes and Wal Mart's
(among others) pay-per-song model. All of this indicates a competitive,
functioning market working within the bounds of copyright and patent
law, with a backstop of antitrust should unlawful monopoly concerns
arise.
Interoperability is a key challenge to firms in network industries.
The success of a given platform depends on its attractiveness to
consumers, and a key value for consumers is the platform's ability to
interoperate with a variety of applications. Interoperability, to be
sure, is a value to consumers and firms, but it is not an absolute
value. Standards and interoperability can be achieved through a variety
of institutions: within single firms, within private consortia, with
government blessing and with government mandate. Standards can be open
and non-propriety, or closed and proprietary, and gradations in between
these extremes. In digital music markets we see all of these models, to
varying degrees. There is the relatively more closed and integrated
iPod platform; there are the relatively more open MP3 platforms. There
are different file formats; there are different DRM solutions.
I appreciate the opportunity to speak to you on this topic because
I have been thinking about it so much myself. The Progress & Freedom
Foundation recently hosted a series of events in Europe. My conclusions
from those events serve as my introduction here:
First, standard setting is hard. We do not know ex ante the
optimal method for standard setting, or the optimal model. Are
open standards preferable? In some cases, yes; in others, no--

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you are making a trade-off. Are proprietary or non-proprietary
standards going to give the greatest amount of innovation? We
cannot be sure. Do we prefer competition for a standard or
competition within a standard? Depends on the quality of the
standard you start with, and also requires recognition of the
(unknown and unknowable) costs of the standard foregone.
For public policy, all this should inspire a great deal of
caution for mandating any given outcome or specific standard.
Because there are undeniable trade-offs from any standardsetting decision, governments should be: a) wary of thinking
they have sufficient foresight to make proper standard-setting
decisions; and b) deferential to private attempts at standard
setting. Different business models will emerge, different
appetites for risk will be revealed--some firms will hedge risk
and cooperate with others in standard setting; others will
audaciously seek to ``win'' the standard with a fully closed,
vertically integrated model (large parts of the iPod business
model come to mind here). Only where the collective action
problem seems overwhelming should government deign to enter the
standard setting sphere.
Finally, for public policy makers, we can never forget the
lessons of public choice theory, which predicts that firms and
interest groups will seek government favor in promoting their
standards solution and handicapping their rivals. Any call for
government to prefer one standard or model over another must be
subject to the most exacting skepticism given what we know
about the propensity for the public policy process to be
perverted toward private ends.
With that, let me address three issues relating to digital music
interoperability that occasioned this hearing today. I have three
specific theses: first, protect the Schumpeterian incentives to
innovate and compete for, not just in, the market; second, allow open
and closed platform business models to compete; and, third, permit the
freedom to use digital rights management technology so digital music
will be brought to market.
PROTECT THE SCHUMPETERIAN INCENTIVE TO INNOVATE AND CREATE NEW
PLATFORMS
Much of the brow-furrowing over interoperability in digital music
stems from the success of Apple's iPod platform. I urge this
Subcommittee not to give in to the politics of platform envy, however.
Instead of being concerned with the business decisions of a firm, and
the preferences of consumers, the Committee should celebrate the
triumph of the iPod platform as Schumpeterian competition at its best.
Joseph Schumpeter, you may recall, was the economist who described
capitalism as a process of ``creative destruction,'' with new firms and
new products spurring innovation and creating new markets. Digital
music is a new market, and the iPod platform and its remarkable success
is the harbinger of that market and what it can be. In turn, this
competition for the market has spurred other innovation, other
platforms and other business models to emerge to challenge the iPod
platform. This is a type of competition that benefits consumers
immeasurably. It is the type of dynamic competition that is making

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digital music a reality to millions of American consumers. The law-intellectual property and antitrust law, specifically--should encourage
this dynamism.
There are at least three benefits to this Schumpeterian
competition: firms compete to build a valuable customer base, firms
bring new products to market more quickly for fear of being displaced,
and companies are driven to develop superior technologies. All of these
are benefits we are now seeing from inter-platform competition for
digital music markets. To be sure, this competition may create some
hiccups and difficulties for interoperability as it goes on, but the
innovation benefits are worth it. Furthermore, these markets usually
trend toward interoperability, as that is usually where consumer
preference directs them.
By contrast, government-mandated interoperability sacrifices the
dynamic competition for the standard for competition within the
standard. This mandate would appropriate the value that the platform
innovator has created, and allow others to interoperate on the
platform. Long-term, such mandated unbundling of digital music
platforms in the name of interoperability will quell innovation and
investment in the platform. Furthermore, this call for mandated
interoperability is, by definition, going to be opportunistic. No one
calls for access to failed platforms, say the Betamax, the Commodore
64, or the Digital Audio Tape.
One of the questions here is how law will treat cases of reverse
engineering, such as Real Networks has attempted to do with the iPod,
and various hackers have done with the Fairplay DRM system and the
Napster To Go DRM. Interestingly, copyright law tends to be more
solicitous of reverse engineering, while patent law tends to be hostile
toward reverse engineering attempts. On balance, it seems to me that IP
law should encourage this inter-platform competition such as we see
happening in digital music, and thus be suspicious of attempts to
reverse engineer and de facto ``unbundle'' the successful platform.
So, my first advice is: don't give into platform envy and mandate
some sort of interoperability. Antitrust law and the common law-like
doctrines of intellectual property law are adequately suited to address
the challenges from new digital music platforms.
(RELATIVELY) MORE OPEN AND MORE CLOSED PLATFORM MODELS
WILL COMPETE FOR DOMINANCE
A related question to the type of competition that is occurring in
this market is the platform models that firms choose to compete in the
market. This gets to the heart of interoperability, as different firms
opt for platforms of varying degrees of ``openness,'' on the one hand,
or closed integration, on the other. For Congress, I do not think this
should be of particular concern because the market will sort out what
is superior, or at the very least make a better judgment about the
inevitable trade-offs involved.
From a business standpoint, you can see the trade-offs and
strategic decisions that companies are making. By opting for a more
``open'' platform, the firm hopes to attract more users to its platform
and increase the number of applications compatible with its platform.
The trade-off involves sharing more of the profits from that platform,
and also perhaps some of the quality control over the whole consumer
experience. In contrast, a more closed platform rather audaciously
attempts to garner all of the ``rents'' from production, but at a cost
(perhaps) of interoperability. We saw this very dynamic in the

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competition for the personal computer standard with the lower-cost,
modular Wintel platform competing with the higher-cost, more tightly
integrated Apple MacIntosh platform. We see reflections of that same
business strategy difference now with digital music players.
Recently, The Wall Street Journal had a story about a new trend
toward ``closed'' non-interoperable platforms--in coffee makers. Yes,
coffee makers, which have traditionally been ``open-architectured''
devices with standard filter basket design and open to any brand or
grind of coffee. Now, companies such as Nestle with a Nespresso, Sara
Lee with Senseo and Kraft with a Tassimo, are making closed-platformed
coffee makers that use special fiters and coffees that work just with
the specific maker. And just last week a new, relatively closed
standard emerged on the consumer electronics scene, the Sony PSP. I
know this because my 10 year old son is bugging me for one. The PSP
uses a disk size that is proprietary to Sony. As a consumer, I may fear
``lock in'' on these closed platforms, but I can make the decisions
whether to buy or not.
Should public policy be concerned with this turn in the annals of
coffee maker platform design or video game devices? Probably not. If
you start looking for standards to scrutinize, you will see them
everywhere--from razors and blades, to PSPs and disk drives, to MP3
Players and iPods. Because we cannot know in advance what consumers
will prefer or what is truly superior, we should forbear from
interfering.
FREEDOM TO USE DIGITAL RIGHTS MANAGEMENT
A final value for public policy should be to ratify the
acceptability and use of digital rights management or DRM technologies.
DRM allows content providers a reasonable degree of confidence in
bringing digital music to market, and consumers the ability to purchase
digital music. DRM will be integral to consumers' access to digital
content and hence must be allowed its place as a valid market mechanism
to bring digital music to market.
Some argue that DRM is a limitation on consumers' freedom and its
used should be circumscribed. This is wrong on two fronts. First, the
price system in a functioning market takes this into account and
reduces consumers' costs correspondingly. If I purchase a song with DRM
attached that limits its platform compatibility, those limits are in
the price I pay. Because the nature of digital technologies allows
perfect, costless copying, my consent as a consumer to purchase a DRMrestricted song may be the only way I can enjoy digital music. If the
choice is between digital music with DRM and no digital music, I will
take the former.
The argument that DRM--and its associated technological arms races
to break it--is socially wasteful proves too much. By this logic, my
investment of locks on my home is socially wasteful because a
determined burglar will be able to break in anyway. DRM does, as we
see, inspire a hack and counter-hack arms race, and this is indeed not
salutary for the mass of consumers who want to properly use licensed
digital music. And indeed, DRM can be overrestrictive to consumers'
desires for interoperability. But right now, I do not have a better
idea. More important, the market opportunity for more-tailored DRM
should provide the opportunity for it to become better and more
accommodating of consumers' wishes.
Indeed, HR 1201, pending in another committee, would in effect
remove DRM as a marketplace option. By permitting consumers to

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circumvent copy-protection mechanisms, currently a violation of the
Digital Millennium Copyright Act, any contract between a consumer and a
content provider involving a fixed payment for a fixed set of rights
could be unilaterally voided by the consumer.
We are constantly hearing calls for more flexible business models
in digital content. If HR 1201 were to pass, I could approach the
existing smorgasbord of digital music offerings, for example, and
purchase the most affordable option, which likely involves limitations
on platforms and devices, enforced through DRM technology. I could then
legally hack through those protections and use the content however I
may see fit, gaining the same flexibility of use as a consumer who paid
full price for that use. It's not hard to imagine that in a world where
DRM hacking is legal, there would be little incentive for content
providers to compete with various rights models, as we see now with
Napster To Go. That would mean less content with fewer price options,
and thus a loss for consumers.
CONCLUSION
Standards are hard. Interoperability is a good thing, but not an
absolutely good thing. Consumers' tastes, for the most part, will drive
toward interoperable platforms, but not necessarily.
Intellectual property law, antitrust and administrative regulation
point in slightly different directions on these issues, but are up to
the task of confronting the policy challenges presented by digital
technologies. From Congress' point of view, the best course would be to
resist calls for mandates or technology limitations in this dynamic
space.
I thank the Committee for this opportunity and ask that my written
remarks be made part of the record. I am happy to answer any questions
you may have.
Mr. Smith. Thank you, Mr. Gifford.
Dr. Pence.
TESTIMONY OF WILLIAM E. PENCE, PH.D.,
CHIEF TECHNOLOGY OFFICER, NAPSTER
Mr. Pence. Thank you, Mr. Chairman, Mr. Berman, Members of
the Subcommittee for inviting me here today. Thank you, also,
for the leadership that you have exercised in the fight against
piracy and for recognizing the importance of the legitimate online music marketplace.
Like our colleagues in the on-line music industry, Napster
has a vision for what consumers want in a service: great music,
deep catalog, easy-to-use technology, high-quality files
without spyware, pornography or viruses, and flexibility and
portability all at a fair price.
Recently, as you may be aware, Napster introduced the first
portable music subscription service, Napster To Go, that allows
consumers to enjoy our large catalog of music on a variety of
portable devices for a plat price of only $15 a month. Combined
with unlimited downloading and streaming, we believe this
service provides consumers with all of the key elements they
want in a digital music service: freedom to discover music on
an unlimited basis and the ability to take that music with them
wherever they go.

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For many users, this is a more attractive option than
buying individual tracks for 99 cents. We support an ala
carte download store as well, and we strive to offer as
many choices to consumers as possible. All of these choices,
and more to come, are enabled through our underlying digital
rights management platform which is based on Microsoft software
components.
I have been asked to testify today specifically about
digital music interoperability, about the value of
interoperability to consumers, creators, and legitimate on-line
music marketplace and about when full digital music
interoperability may be available. In particular, some have
asked whether Congress should help jump-start the legitimate
marketplace by mandating digital music interoperability so that
consumers will no longer be confused, so that they will know
for sure that every digital song they acquire lawfully will
play on any portable music player and on any PC.
We have been asked whether digital interoperability might
be the magic bullet that enables legitimate on-line music to
win the battle against piracy and black-market networks.
As a technologist, it seems important to appreciate that
each digital song file has two essential components, the audio
compression software and the digital rights management software
and that each can be a source of interoperability confusion.
You may be familiar with audio compression software or codecs
that have been developed by Real Networks and Microsoft, as
well as the MP3 format developed by Fraunhofer and the AAC
format utilized by Apple. But there were literally dozens of
audio codecs offered in the late 1990's.
Historically, codecs were incompatible, and if one
downloaded a song in the MP3 format, it would not play if your
PC utilized a different format. Today, however, this is less of
an issue, generally, because audio codecs have been in the
marketplace for several years, and traditional marketplace
forces have evaluated the qualities and sustainability of each.
As a result, only two or three codecs are relevant in the online marketplace today, and interoperability is considered
essential and made possible by licenses that are easily
available and economically reasonable.
For consumers, the generally successful outcome is that PCs
and portable music devices today support more than one of the
surviving codecs, minimizing, although not eliminating,
dysfunction for end users. Today, for example, users can copy
their CD collection onto their PC in the MP3 format and combine
those music files with songs purchased from Napster in the
Microsoft WMA format and seamlessly transfer all to portable
devices without ever knowing that two separate formats were
involved.
In contrast, DRM interoperability has remained at the
center of debate in the on-line music industry. In the last
several years, high-quality DRM technologies have been
developed and offered by dozens of companies. While the market
has narrowed the field from dozens of DRM technologies to less
than a handful today that are commercially meaningful, the DRM
market is still significantly less mature than the codec
market, and the competing offerings are not fully rationalized
or stabilized.

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More importantly, DRM technology is still in a stage of
rapid innovation. This is best demonstrated by the pace of new
business models being introduced in the market, including our
own Napster To Go service. As consumers' on-line services and
copyright owners have become more sophisticated, technology
innovators have responded rapidly and brought improved products
to market, but DRMs are still being developed, tested,
challenged and upgraded, and I encourage Congress to welcome
and promote this innovation and the improved music offerings
that result.
It is my belief, and the essential point of my
participation today, that marketplace forces will continue to
drive innovation in the DRM arena with the tenant consumer
benefits, new ways to enjoy digital music at a variety of
different price points, while also gradually solving the
interoperability problem.
The solutions will be evident through a combination of
consumer devices that support multiple DRM formats and services
that will translate from one DRM format to another, as content
flows legitimately between devices, always maintaining the user
rules as defined by the service that originally makes the
content available. Already we see evidence of DRM market forces
in action, as companies coalesce around platforms.
Historically, the Government has not been a participant in
competition between early-stage consumer technologies.
Government intervention in the innovation business can lead to
politicizing and inhibiting such innovations rather than
allowing the marketplace, based on actual demand, to select
winners that must continue to provide viable solutions.
In contrast, Napster wholeheartedly endorses the
conclusions of Chairman Smith and Representative Berman that
were offered in a recent Subcommittee hearing about our music
licensing laws. Congress has a critical role to play in
facilitating the legitimate on-line music marketplace by
modernizing the Copyright Act.
Thank you, again, for providing the opportunity for Napster
to address the issues that continue to hamper industry and for
your continuing support in helping royalty-paying, on-line
music services defeat piracy.
[The prepared statement of Mr. Pence follows:]
Prepared Statement of William E. Pence
Mr. Chairman, Mr. Berman, and Members of the Subcommittee:
Thank you for inviting me, on behalf of Napster, to testify at
today's hearing at which the Subcommittee is considering the importance
of digital music interoperability. Thank you also for the leadership
that you and the Members of the Subcommittee have exercised in the
fight against piracy, and for recognizing the importance of the
legitimate online music marketplace, both for its independent value as
an opportunity for creators and consumers to distribute and enjoy more
and different types of music, and for the value of royalty-paying
online music as the marketplace solution to piracy.
Napster is also particularly appreciative of the Subcommittee's
leadership with regard to the education and youth market. Napster, as
you know, is working closely with the recording industry and a number
of universities to bring legal music to the campuses of America in a

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manner that encourages this important consumer group to respect the
legitimate marketplace while recognizing its hunger for a full-featured
digital music service at a reasonable price.
Like our colleagues in the online music industry Napster has a
vision of what consumers want in an online music service: great music,
deep catalog, easy-to-use technology, high-quality files without
spyware, pornography, or viruses, and flexibility and portability, all
at a fair price. Moreover, our company story demonstrates that
consumers are willing to pay for this: from a standing start four years
ago as PressPlay to today's Napster, we now have more than 400,000
paying subscribers worldwide, including more than 50,000 subscribers on
college campuses.
Recently, as you may be aware, Napster introduced the first
portable music subscription service, Napster-to-Go, that allows
consumers to enjoy our large catalog of music on a variety of portable
devices for a flat price of only $15 a month. Combined with unlimited
downloading and streaming, we believe this service provides consumers
with all the key elements they want in a digital music service--freedom
to discover music on an unlimited basis, and the ability to take that
music with them wherever they go. For many users, this is a more
attractive value than buying individual tracks for $0.99, though we
support an a la carte download store as well, and we strive to offer as
many choices to consumers as possible. All of these choices, and more
to come, are enabled through our underlying digital rights management
platform, which is based on Microsoft software components.
I have been asked to testify today specifically about digital music
interoperability--about the value of interoperability to consumers,
creators, and the legitimate online music marketplace--and about when
full digital music interoperability may be available. In particular,
some have asked whether Congress should help jump-start the legitimate
marketplace by mandating digital music interoperability so that
consumers will no longer be confused, and rather they will know for
sure that every digital song they acquire lawfully will play on any
portable music player, on any PC, and if burned to a compact disc that
it will play on every CD player. We have been asked whether digital
interoperability might be the magic bullet that enables legitimate
online music to win the battle against black market networks that
enable music theft and generate no royalties to artists.
As a technologist, it seems important to appreciate that each
digital song file has two essential components--the audio format
software and the digital rights management software--that can each be a
source of incompatibility. You may be familiar with audio format
softwares, or codecs, that have been developed by RealNetworks and
Microsoft, as well as the MP3 format developed by Fraunhofer and the
AAC format utilized by Apple. But there were literally dozens of audio
codecs offered in the late 1990s, including software developed by AT&T
Labs and Universal Music.
Historically codecs were incompatible, and if one downloaded a song
in the MP3 format it would not play if your PC utilized Liquid Audio
software, and vice-versa. Today, however, this is less of an issue,
generally because audio codecs have been in the marketplace for several
years and traditional marketplace forces have evaluated the qualities
and sustainability of each. As a result only two or three codecs are
relevant in the online music industry today, and interoperability is
considered essential and is made possible by licenses that are easily
available and economically reasonable. And for consumers, the generally
successful outcome is that PCs and portable music devices today support

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more than one of the surviving codecs, minimizing (although not
eliminating) dysfunction for end users. Today, for example, users can
copy their CD collection onto their PC in the MP3 format and combine
those music files with songs purchased from Napster in the Microsoft
WMA format, and seamlessly transfer all to portable devices without
ever knowing that two separate formats were being integrated.
In contrast, DRM interoperability has emerged recently as the
center of debate in the online music industry. In the last several
years high-quality DRM technologies have been developed and offered by
dozens of companies, including Liquid Audio, AT&T Labs, Universal
Music, RealNetworks, IBM, Microsoft, Contentguard, Intertrust, Verance
and Macrovision. While the market has narrowed the field from dozens of
DRM softwares to less than a handful today that are commercially
meaningful, the DRM market is significantly less mature than the codec
market, so the competing offerings are not fully rationalized or
stabilized.
Importantly, the market's immaturity is driven by the technology's
immaturity, as DRM technology is still in a stage of rapid innovation.
This is best demonstrated by the pace of new business models being
introduced in the market, including our own Napster to Go service,
based on the just released DRM10 technology from Microsoft. As
consumers, online services and copyright owners have become more
sophisticated, technology innovators have responded rapidly and brought
improved products to market, but DRMs are still being developed,
tested, challenged, and upgraded--and I encourage Congress to welcome
and promote this innovation and the improved music offerings that
result.
It is my belief, and the essential point of my participation today,
that marketplace forces will continue to drive innovation in the DRM
arena with attendant consumer benefits--new ways to enjoy digital music
at a variety of different price points--while also gradually
``solving'' the interoperability problem. The solutions will be evident
through a combination of consumer devices that support multiple DRM
formats, and services that will translate from one DRM format to
another as content flows legitimately between devices, always
maintaining the user rules as defined by the service that originally
makes the content available.
Already we see evidence of DRM market forces in action as companies
coalesce around platforms. A good example of this is the many online
services and device manufacturers that have licensed and deployed the
Microsoft DRM. Others, such as Apple, have chosen not to license their
technology platform under any terms to services and manufacturers eager
to offer innovative business models to consumers. Perhaps Apple is
confident that its market-leading position is best maintained by
promoting a closed environment, and that is a legitimate business
decision that some endorse and others may question. Napster believes
that allowing the iPod to work with multiple service offerings would
benefit consumers. Nevertheless, I do not see Government intervention
as the solution, as it would stifle competition and innovation that
will benefit consumers and copyright owners at a very early stage of
the market's development.
Historically the Government has not been a participant in
competition between early-stage consumer technologies, such as between
the VHS and the Betamax, the cassette and the 8-track tape, USB and
Firewire, or the current competition between DVD Audio and Super Audio
CD. Similarly, it does not seem prudent for Government to pick a winner
in the continuing (but still quite early-stage) marketplace battle

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between Apple's Fairplay DRM and its competitors. Government
intervention in the innovation business can lead to politicizing and
inhibiting such innovation, rather than allowing the marketplace, based
on actual demand, to select ``winners'' that must continue to provide
viable solutions or lose their market--deservedly--to the next great
offering that someone develops in his or her garage or corporate lab.
In contrast, Napster wholeheartedly endorses the conclusions of
Chairman Smith and Representative Berman that were offered in the
recent Subcommittee hearing about our music licensing laws. Congress
has a critical role to play in facilitating the legitimate online music
marketplace, by modernizing the Copyright Act--in particular, Sections
115 and 112 as they relate to music publishing rights and royalties.
Napster and our legitimate online music competitors compete with pirate
services, and it is critical to creators and all who support them that
royalty-paying services win the day.
If this Subcommittee helps legal services to secure blanket
licenses for music publishing rights, we will offer the full catalog of
music that, ironically, only the black market networks players can
currently provide to consumers. Once we are actually functioning on an
equal music playing field, Napster believes that our then-significantly
larger number of consumers who realize that our features and
functionality are so much more robust and appealing than the virusridden free option, will speak out on the subject of interoperability
and encourage the market to adapt.
Thank you again for providing the opportunity for Napster to
address the issues that continue to hamper our industry, and for your
continuing support in helping royalty-paying online services defeat
piracy.
Mr. Smith. Thank you, Dr. Pence.
Mr. Bracy?
TESTIMONY OF MICHAEL BRACY, POLICY DIRECTOR,
FUTURE OF MUSIC COALITION
Mr. Bracy. Thank you, Mr. Chairman, Mr. Berman, Mr.
Conyers, for being here today, and the rest of the
Subcommittee. We appreciate the opportunity to present some
testimony, some thoughts.
You have our written statement, so I am just going to kind
of give some reflections off that if that is okay with the
Committee.
As we are preparing for this hearing, it occurred to us
that this is actually the 5-year anniversary of the formation
of Future Music Coalition, and it gave us an opportunity to
reflect on sort of what we have seen over the last 5 years and
some kind of larger themes.
I think one of the things that is important to recognize is
that a lot of what we are dealing with in the music community
is the idea that new technologies have dropped the cost of
actually getting involved in the music community, that
technology creates more musicians because more people have
access to capital to create music and to distribute music, to
promote themselves, and to build that one-on-one relationship
with friends.
The challenge that you see, as more and more people come
into the community, is that the existing music structures, the

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historic music structures don't really support the amount of
content that comes into the marketplace, and, frankly, didn't
support in the traditional models the way and the ability for
consumers to then to access that content.
And while there is a lot of disagreement and a lot of
different sort of visions as far as how you get to the end
game, as far as the legitimate digital marketplace for music,
there are some themes that we think cut across all aspects of
the music community of musicians an songwriters; the first
being that whenever possible artists need to maintain control
over their copyright and their career decisions.
Second is that artists, as independent entrepreneurs, need
the ability to compete in the marketplace, meaning they need
access to the basic networks, they need the ability to be
compensated for their work, and they need the ability to access
consumers.
The third is something that you have done a great job
throughout this process with the Committee is that artists need
to be seen by policymakers as valued participants in this
process, that is, the new systems are designed, new structures
are designed that artists need to be at the table, and we
certainly appreciate your leadership.
Now, this transition, as we said, is necessary and it is
welcome, and it is important, and that as more people get into
this marketplace, you are starting to see the type of
experimentation that really leads to this development of a
legitimate marketplace. Five years ago, we said the only way to
compete with Napster, an unlicensed Napster, was with a legal
Napster, that you have to really try to create incentives in
the marketplace to grow the market, to create legitimate
models.
And in the music community and among musicians, you really
see an embracing of those technologies. We recently published a
study with the Pew Internet and American Life project that
really had two major conclusions:
The first is that, on a universal basis, artists are
embracing the Internet. They are embracing technology. They are
trying to integrate that into their careers as a way to reach
their fans directly and to promote their work.
Of course, at the same time, there is this wide diversity
of opinions as far as where we are today. There are a lot of
different opinions in terms of peer-to-peer. You see that
emerging artists embrace peer-to-peer, to a certain degree,
because it gives them exposure. It is a way to get their name
out there. Existing artists, established artists, they are
concerned about what is happening to their revenue streams.
They are skeptical about what is happening with the new models,
and they are eager to see revenue flow into them directly. They
see what is going on with their checks.
Now, as the other witnesses have talked about, you are
starting to really see this digital marketplace emerging. It is
remarkable, 5 years on, to think about the growth of satellite
radio, digital subscription services, music blogs, e-zines,
Internet radio, webcasting, podcasting, iTunes.
Consumers are demonstrating their willingness to adopt
legitimate digital services. The marketplace is beginning to
take hold. The question is can we continue to see a legitimate

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marketplace that really will benefit musicians and music fans.
In fact, the point is not that this industry is perfect or that
there even is a ``solution'' in place. It is a complicated
process. It includes multiple competing markets which are
dependent on evolving, technological innovation and regulatory
policy decisions. The future music marketplace will be driven,
to a large degree, by consumer adoption of broadband and highspeed services to the home, which has its own regulatory and
technological uncertainty. Spectrum policy and the transition
to digital radio are going to play a big part of this as well.
So vigilant congressional oversight to date has been
critical to this process. We are making a lot of inroads. We
are seeing the growth of the market. Now, there are a lot of
other sort of issues that are involved here that some don't
have the jurisdiction of this Committee, some do, but that help
sort of inform the growth of this digital marketplace.
They include looking at issues of consolidation of the
existing commercial radio industry, accusations of structural
payola that limit the amount of songs or the type of songs they
can get on the public airwaves, expanding community-based lowpower radio networks into urban markets, looking at the digital
audio broadcasting question to make sure that DAB is
implemented in a way that addresses the fundamental concerns
about localism, competition and diversity that we have raised
as far as what is happening in the commercial radio
marketplace, and bringing digital radio in line with other
noninteractive digital transmission services that are required
to pay an additional performance royalty to performers for the
use of the music.
Finally, I want to echo Mark Cooper's point, which is that,
as independent entrepreneurs, it is absolutely critical that
musicians and artists have access to the underlying networks,
that they can't be blocked off of the main channels.
So, again, we appreciate the opportunity to testify. We
look forward to answering any questions and thank the Committee
for their leadership.
[The prepared statement of Mr. Bracy follows:]
Prepared Statement of Michael Bracy
My name is Michael Bracy. As a founder and the Policy Director of
the Future of Music Coalition, I appreciate the opportunity to speak
with you today.
FMC was founded on the belief that the terrestrial music industry
is fundamentally broken. By that we mean that the structures that
dominate the marketplace underserve the majority of creators and music
fans. We did not form FMC simply to complain, but to effect substantive
change in the music community by injecting the critical voices of
artists and creators in the midst of this transition from analog to
digital. By including these often absent voices at this critical
juncture, we work to build more equitable and responsive models. By
that we mean:
1. Whenever possible, artists must maintain control over
copyright and career decisions.
2.

Artists must be able to compete fairly in the marketplace,

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meaning they must be able to receive compensation for their
work and have access to consumers.
3. Artists must be seen by the policymaking community as
valued stakeholders in policy debates
The music community is in the midst of a necessary and welcome
transition to a digital business model. Major labels and commercial
radio stations have became integrated into huge corporations focused
less on music and culture but on maximizing revenues. The fundamental
basics of the major label structure--the need for huge capital
investment and scarcity of promotion and retail outlets--have been
overrun by technological innovation.
This innovation has reshaped the way that music is recorded,
manufactured, promoted and distributed. Digital studios and software
programs dramatically reduce production costs. The Internet vastly
increases promotional and sales opportunities. The marketplace for
independent music has exploded, as indie labels proliferate to serve
the expanding artist community. While much of this music is simply not
aimed at the kinds of mass audiences of interest to major labels or
commercial radio, there clearly is a market for this music, and
alternate and Internet-based economies have begun to take shape.
As these digital models take flight, many musicians are embracing
new business models that allow greater independence, direct contact
with their fans and more control over their careers. Others point out
the uncertainty of these times, and express skepticism that legitimate
digital distribution structures can be monetized at a level that would
replicate their revenue streams they are used to receiving from
previous models.
In this context, the results of a recent study conducted by FMC and
the Pew Internet and American Life Project should not be surprising, or
controversial. This study found that musicians fully embrace the
Internet to promote and sell their work but remain divided over the
question of file-sharing.
To a large degree, we found that these results could be tracked
according to demographic factors--emerging artists were more likely to
embrace file sharing services as a way to promote and distribute their
work, while established artists who made a majority of their income
from being a musician or songwriter raised more concerns.
From our standpoint, it is important to recognize that we are still
in the early days of a significant marketplace transition. While peerto-peer remains extraordinarily popular, a legitimate digital
marketplace is emerging. Consumers are exploring new, licensed ways of
accessing and enjoying music, including satellite radio, digital
subscription services like Rhapsody, Emusic and Napster, music blogs
and ezines, the growth of Internet radio, webcasting, podcasting and
digital download stores like iTunes. This trend demonstrates consumers'
willingness to adopt legitimate digital services, and reinforces the
critical notion that the combination of technical innovation, access to
the underlying delivery mechanisms and reasonable licensing terms can
create a revitalized industry that serves both musicians and music
fans.
The point is not that this industry is now perfect, or that we even
can see the ``solution''. Rather, we all should acknowledge that the
digital transition is complicated. It includes multiple competing
markets, dependent on evolving technological innovation and regulatory
policy decisions. The future music marketplace will be driven by

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consumer adoption of broadband to the home, an area full of regulatory
and technological uncertainty of its own. Spectrum policy and the
transition to digital terrestrial radio will play a significant role in
determining how consumers are able to access digital content, and how
performers will be compensated in the future.
Vigilant Congressional oversight of the transition of the music
marketplace has played a critical role in its success to date. At the
same time FMC sees a number of potential opportunities for action
today. Will Congress listen to the concerns of the music community by
addressing consolidation of the commercial radio industry and
accusations of structural payola that limit the songs that appear on
the public airwaves? Will the FCC be permitted by Congress to expand
the wildly popular non-commercial Low Power Radio licenses to urban
markets? Will Digital Audio Broadcasting be implemented in a way that
addresses the fundamental concerns about localism, competition and
diversity in the radio marketplace? And will digital radio be brought
in line with other non-interactive digital transmission platforms that
are required to pay an additional performance royalty to performers?
Most importantly, will Congress be able to defend the ability of
musicians and songwriters to compete in the marketplace by ensuring
access to high speed networks? As independent entrepreneurs, musicians
and songwriters require that the fundamental open structures of the
Internet remain in place and that innovation is allowed to continue.
Over the past five years, the Future of Music Coalition has been
fortunate to collaborate with dozens of organizations, representing
hundreds of thousands of musicians, songwriters, retailers, promoters,
community broadcasters and fans. The transition to a digital economy
represents real threats and real opportunities to these communities.
That being said, there are core themes that cut across all aspects of
the music community. These shared values of artists' control over their
copyright and career decision, ability to compete in the marketplace by
receiving compensation for their work and accessing consumers, and
being active participants in the policy process can serve us going
forward.
Thank you again for the opportunity to participate in this hearing,
and I look forward to answering your questions.
Mr. Smith. Thank you, Mr. Bracy.
Dr. Cooper, in your testimony you said sellers of closed
platforms need to better inform consumers that their platforms
are closed. How would you suggest that they do that? Are you
just talking about a warning label or something else? And if
there's anyone who disagrees with that, I'd like to know that
as well.
Mr. Cooper. You know, we could hypothesize a labeling
program which would be an obligation, but I don't necessarily
want to get there because that creates a process of gaming that
Mr. Gifford talked about.
But the simple fact of the matter is, imagine if we had--if
iPods had to be labeled that said, ``This music won't play on
anything else,'' or vice versa. That would actually, people
would then start to think. And as people build up libraries and
they discover that they can't move their music from one device
to another, although if that continues what you'll get is
hackers who will start making it possible because innovation is
hard to quell in this marketplace.
So the point is that policymakers need to engage in a

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little bit of jawboning here, as maybe instead of a regulatory
position.
Mr. Smith. So maybe not a Government mandate, but still
full disclosure.
Mr. Cooper. Sure. Full disclosure, and attorneys general
ought to be asking these questions, this Committee, et cetera.
Jawboning can frequently get you a lot of help in the
marketplace rather than having a formal process about is this
labeled.
Mr. Smith. Is there anyone who disagrees with the idea of
full disclosure and labeling for the consumers?
[No response.]
Mr. Smith. Okay. Mr. Gifford, I'm tempted to ask you if you
think Schumpeter should be the patron saint of Congress, but
let me ask you a more colloquial question, which is, do you see
any role for Government at all in the process?
And that's a question I'd like the other members to address
as well.
Mr. Gifford. Not at this time, Congressman. You have an
emerging nascent market. I think Dr. Pence spoke well, that you
have DRM technologies that are less mature than file format
technologies, and there's a lot of foment going on right now in
this marketplace, a lot of business models that are being
tried, a lot of reliance interests that are just taking root,
and I don't know how Government can do anything but upset that
very tentative equilibrium we're seeing.
Mr. Smith. Dr. Pence and Mr. Bracy, what do you think about
any role for Government?
Mr. Pence. Well, I mentioned the 115 issue in my opening
remarks. Short of that I don't think there is much of a role to
play at this time. We think the market is very dynamic. We've
been introducing new business models as some of our competitors
have been, and we think the market is in the early stages where
it should be allowed to evolve and offer more choices to
consumers. So we don't--I don't see any additional role at this
time.
Mr. Smith. Okay. Mr. Bracy?
Mr. Bracy. Mr. Chairman, I think one of the challenges is
that to a certain extent it's important that Congress look at
ways of demonstrating that there is this broader marketplace
for local and independent music. I mean one of the realities of
the music community is that it is local, it's independent. The
music community has very little to do as far as the mass
marketing of music that you see in terms of major, you know,
huge platinum selling artists. And there are little things that
I mentioned in our testimony that can be done tangentially,
less on technology mandates or DRM discussions or things like
that, but more on looking at the existing ways that most
consumers access music and making sure they have access to
independent voices.
Mr. Smith. Okay. Thank you, Mr. Bracy.
Mr. Bracy, let me ask you and Dr. Pence to go beyond your
testimony. And you don't have to answer this question if you
don't want to, but I want to ask you about the Apple business
model, whether you think limiting the interoperability to
iTunes and the iPod is going to be a successful business model
or not, just your opinion?

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Mr. Bracy. You know, with the understanding that this is
really we have very limited expertise, but as a personal on the
specific concept, you know, business people do business and we
do different things, but, you know, that we are glad to see the
market evolving and obviously they have first mover advantage,
but you know, the challenge is will the market speak? And the
question is will the market speak or not? And I don't really
have an opinion on that.
Mr. Smith. Dr. Pence, do you have a---Mr. Pence. I do have an opinion. I think it is a business
model that has clearly had some success. It's actually--the ala
carte model is one that we offer as well. However, we have
offered other business models and we expect to offer additional
models in the future, so we think choice is very, very
critical, and that's the path we've embraced, choice not only
in business models but an open approach to devices and support
on different platforms. The choice Apple has made about
retaining a closed environment is a legitimate business choice
they have made and time will tell whether the marketplace will
reward that or not.
Mr. Smith. And I think as the market evolves you're
probably going to have consumers want more choice, but that's
also just my opinion as well.
Mr. Gifford, anything to add to that?
Mr. Gifford. Well, actually, I think, and I mentioned---Mr. Smith. Well, actually, Dr. Cooper. I called on Mr.
Gifford, but then I'll ask you for your response in a minute
too.
Mr. Cooper. I think this history of the last 25 years
really, I started from that one example of--I'm sure Mac thinks
they had a very successful business model, and they have 5
percent of the market now, and that may make them happy. But we
can go back and find other examples.
One really interesting example has to do with the World
Wide Web, and the predecessor to World Wide Web was a service
known as Gopher. It was an application, and some people in this
room may remember that. And there was a key moment where the
owners of Gopher, the creators of Gopher had said, hey, we're
going to start charging people royalties and reorganizing this,
and folks dropped it like a rock. And the World Wide Web came
along, which is a magnificently open system. And I could give
you other examples.
So what happens here is that business people can make
decisions about what serves their interest, and they'll be
happy with a nice little niche market, but our society is much
better served by the drive toward open platform.
Mr. Smith. Thank you, Dr. Cooper.
Anything to add, Mr. Gifford?
Mr. Gifford. First of all, Mr. Chairman, I've been on
enough panels with Dr. Cooper to know that he can't help
himself. [Laughter.]
I don't think I have anything to add. I think you could,
you can recognize a general trend, that digital markets tend
toward interoperability, but not necessarily.
Mr. Smith. Agreed. And despite the sort of divergent
backgrounds of the four panelists today, it's interesting that
almost everybody seems to agree on the issue at hand.

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So I thank you all for your testimony, and the gentleman
from California, Mr. Berman, is recognized.
Mr. Berman. Thank you very much, Mr. Chairman.
So, Dr. Pence, even though my daughter complains about not
being able to get the Napster service on her iPod, you don't
think Congress should make iPod get the Napster service?
Mr. Pence. Well, Congressman, we have a very active
community in the Napster service, as I'm sure your daughter
knows, and we have very active message boards, and so the issue
of iPod compatibility is raised all the time to our customer
care group, to us directly. And there's no question that we
would benefit with interoperability with iPod.
However, having said that, I think to take that into a
Government mandate for some sort of interoperability solution
is not the right answer. The Apple service has been very
successful. We announced 2 days ago very, very strong growth in
our own business, as you may have heard. So we feel very
confident that over time by offering choice and using every
legitimate means to license the various platforms to take the
Napster service to all devices and all platforms, we think that
is the best way for us to proceed, and we think it's in the
best interest of consumers in the market.
Mr. Berman. All right. I'm going to tell her to quit
bothering me and go to your message board. [Laughter.]
Dr. Cooper, you make a differentiation in your testimony
about when it's okay to demand interoperability, and you cite
as an example the music industry is limited in that it affects
only the music business, while the railroad industry affects
the entire economy. Ignoring the fact that you brush over the
role of music and the productivity of the workforce, I want to
carry out your assertion, take the logic of your assertion and
apply it to something else here. When you say the marketplace
and not Government intervention or legislation should and will
resolve the interoperability question for technology, why
doesn't this analysis work for the copyright owners who use too
restrictive DRM? Won't they also pay the price, consumers will
choose formats more convenient for them? Isn't that the most
efficient way for consumers to let it be known to the copyright
owner instead of through legislation? What is the difference
between the developer and the content owner in this particular
area?
Mr. Cooper. No. I agree. I think that DRM, once we have
choices out there, different people will choose the level of
use that they're allowing to their customers. And you've heard
examples of different kinds of models. And the marketplace will
decide that. I do also think that a too restrictive DRM is
going to be a form of failure of interoperability and consumers
will--we will get competition for DRM as well. And so I do
think because--but that's still the widgets part, and we think
that that marketplace will actually also address that problem.
So I accept your challenge. And we consistently will argue and
have argued that give consumers choices about the level of
functionality and they will make their choice and it will drive
the marketplace.
Mr. Berman. Good answer. Not consistent with the Consumer
Federation's position on some legislation that's come to
Congress, but a good answer.

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Mr. Cooper. Well, I think it went too far but---Mr. Berman. The legislation the Consumer Federation
endorsed or the ones it opposed?
Mr. Cooper. No, no. We endorse a reasonable definition of
``fair use'' for consumer and oppose the legislation that we
think---Mr. Berman. And a mandate on labeling requirements, okay.
You state that the retailers of digital music--well, actually
what I'd like to--the French Consumer Federation, in effect,
which is a better way for you to hear about this than me trying
to pronounce the French name, has launched a legal action over
the two companies' proprietary music formats, claiming that the
respective digital rights management used by both Sony and
Apple which prevents songs brought from their online music
shops from being played on other manufacturers' media players
is limiting consumers' choice. The total absence of
interoperability between DRM removes not only consumers' power
to independently choose their purchase and where they buy it,
but also constitutes a significant restraint on the free
circulation of creative works, that group said.
It's interesting how the French perspective on this is
different than the Consumer Federation's. Could you develop
that?
Mr. Cooper. Well, look, our testimony is clear. When we get
to widgets, and in my opinion applications of widgets in the
digital age, we believe market forces will solve these
problems. I've identified the situation in which as the market
matures if we have lots of exclusive deals and not lots of
competition widgets, then we would get some antitrust concerns.
But at this stage of this game, especially with the recording
industry, the established recording industry just getting into
this business--last year was our watershed year--we think that
this is not the time or the place to impose mandates. We think
we still have platform competition going on at the level of
widgets, and we think that we are going to be much better
served with the industry now adopting a digital distribution
and allowing innovators to continue to innovate, including all
forms of distribution.
Mr. Berman. The only thing I'll say in closing because my
time has expired is I understand this position and it makes a
lot of sense to me. What I don't understand is supporting my
friend's bill in the context of why won't the same market
forces end up creating music that individuals be able to pass
to their friends and take in other formats in their home and do
all those things because it will serve a need that consumers
want? Why are we getting into trying to draft the exact
contours of that?
Mr. Cooper. Well, the--one of the central concerns about
DRM is that it is taking away some of my rights that I thought
I had in terms of my fair use rights, and that's a source of
concern to us. So that we used to be able to listen to music in
a variety of ways, to make copies to share, and those were fair
uses, and maybe unregulated uses that were not bones of
contention. And our concern is that we don't want to lose a lot
of functionality and flexibility in this transition, which is
supposed to be increasing my functionality and flexibility. And
so we'll be glad to come back and testify on that legislation

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too, if I can wangle an invite.
Mr. Smith. Thank you, Mr. Berman.
The gentlewoman from California, Ms. Lofgren, is recognized
for questions.
Ms. Lofgren. I'll be brief because our joint session of
Congress is about to begin. But I'll just say that this has
been interesting to hear such unanimity actually from all of
the witnesses, that this is a situation where Congress doesn't
have to get involved. I mean there are some interoperability
issues that demand congressional attention in fire services and
the like, but this is not one of them. So I appreciate the
intelligent commentary and the pitch to get a hearing on my
bill, which would be great.
I yield back. Thank you.
Mr. Smith. Thank you, Ms. Lofgren.
There are no other Members here, no other questions, so we
thank you for your expert testimony today. It's been very, very
helpful and very, very conducive to our being able to move
forward with the process. So thank you all very much.
And we stand adjourned.
[Whereupon, at 10:52 a.m., the Subcommittee was adjourned.]
A P P E N D I X
---------Material Submitted for the Hearing Record
Prepared Statement of the Honorable Howard L. Berman, a Representative
in Congress from the State of California, and Ranking Member,
Subcommittee on Courts, the Internet, and Intellectual Property
Mr. Chairman,
Thank you for scheduling this hearing on digital music
interoperability. I hope the testimony will be helpful in our
continuing discussion of issues concerning the availability of
legitimate distribution mechanisms for digital music.
The explosion of technologies that enable consumers to digitally
download music has provided many new opportunities to the music lover.
The ultimate goal is to provide consumers with their choice of music
anytime, anywhere, in any format. However, this new environment has
come at a great cost, that of rampant piracy on Peer to Peer Networks.
What is considered ``free'' music available on the internet comes at
the expense of the numerous people involved in the development of the
sound recording: the artists, songwriters, musicians, sound engineers,
and others. The consequences of piracy are felt throughout our economy,
but they are especially harmful in my district where many jobs depend
on the lawful sale of music.
The proliferation of legitimate music distributors in the
marketplace has helped stem the tide of piracy. The number of available
digital music delivery alternatives has increased enabling technology
companies to help copyright owners make inroads against unauthorized
downloading and sharing of music files. However, music companies will
always have to compete with free music and analysts claim it will take
a number of years before download services can provide a significant

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sales boost for the content creators. One of the major impediments to
achieving a more level playing field, according to analysts, is the
bewildering array of competing technologies.
As with any nascent industry, the development of new business
models can lead to unintended results. In the case of digital music,
there are concerns that interoperability barriers between the various
suppliers could actually hinder growth in the market. Brandenburg, the
father of the MP3, has warned that rival technologies will baffle
consumers and risk alienating fans, driving them to unsanctioned file
sharing networks where the songs are ``free'' and encoded in the
unprotected MP3 format.
The International Federation of the Phonographic Industry (IPFI)
has noted that ``one important problem that hinders growth of the
online music business is the lack of interoperability between services
and devices. The danger is of wide-scale consumer confusion and wasted
opportunities in a market which has extraordinary growth potential.''
They observe that there is no easy solution, but that all the players
in the online market need to work harder to solve the interoperability
difficulties in 2005.
Yet the market continues to develop. The portable player market
already presents consumers with an array of choices. Now we see the
convergence of music devices and mobile handsets. The goal of making
music easier to buy then to steal is becoming a reality, and therefore
these innovative services deserve our thanks.
However, anti-piracy efforts must remain a focus for technology
companies industries as they develop their products. A legitimate
distribution business model must be one that is based on payment and
permission of the rights holder.
With digital music moving into the mainstream of consumer life, I
believe it will be helpful to further this conversation by discussing
what, if any, impediments are facing companies that are now
distributing digital music and how they are addressing consumers' needs
for legitimate music.
In an ideal world, we would have all the major players in the
digital music market at the table to hear their opinions about the
issue--but I look forward to hearing from these witnesses to help
define some of the issues.
---------Prepared Statement of the Honorable John Conyers, Jr., a Representative
in Congress from the State of Michigan, and Ranking Member, Committee
on the Judiciary
Content owners and the high-tech industry should be commended for
responding to consumer demand for digital music. For years, consumers
have been clamoring for access to digital content. Because content
protection technology and content owners had not caught up with the
Internet, music lovers turned to illegal download sites like Napster
and Kazaa for digital content.
We had heard that, if the content industry would just create a
legal avenue for obtaining digital music, consumers would embrace it.
The premonition was largely true. The record industry and high-tech
worked together to develop digital content protection, to clear the
rights needed to get music online, and to get music on the Internet.
According to the Pew Internet and American Life Project, the response
to legitimate digital content has been overwhelming: in 2004, only

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twenty-four percent of music downloaders had tried legitimate download
sites; in 2005 to date, the number jumped to forty-three percent.
It is probably safe to say that the reason for this overwhelming
response is the late 2003 launch of Apple iTunes. In business for a
little over a year, iTunes has sold a record-breaking 300 million songs
through its online store. Other download sites, like Napster and
Rhapsody, are gaining speed by offering alternatives such as monthly
subscription services instead of just downloads and allowing transfers
to numerous digital music players. No matter how you view it, the
marketplace is working.
Digital piracy existed long before legitimate services like iTunes
came onto the market and, unfortunately, it likely will continue no
matter how much easier the songwriters, recording artists, and record
labels make it to obtain music digitally.

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