sumer organization support for the proposal as a solution to the problem of unauthorized redistribution of broadcast content. To date, the group formed as a result of this initiative has undertaken considerable activity

• The Broadcast Protection Discussion Group ("BPDG") has met 13 times in four months, in person and by phone.

• The participants in these discussions appear to be in fundamental agreement that an approach based on a "Broadcast Flag" is technically sufficient for the purpose of signaling protection of DTV content in digital form, beginning at the point of demodulation, against unauthorized redistribution.

• There is likewise substantial agreement as to the particular flag to be used, and that_content that is either marked with the flag or has not been screened for the flag may only be recorded or output from covered products by either (a) analog products and recording methods; and (b) digital outputs and recording methods that provide protection against unauthorized redistribution.

• Certain issues currently remain unresolved, including (a) finalization of criteria used to determine whether a particular recording technology or digital output protection method should be deemed "authorized;" and (b) whether there is adequate support for an alternative proposal, advanced by Philips, which would allow unencrypted digital-to-digital recordings of broadcast content for at least some period of time.

• The schedule for BPDG now calls for a final report by mid-May, and I believe that this is achievable.

• Since the BPDG was primarily focused on technical matters, a separate, “parallel group" has been formed to begin discussing how to enforce the hoped-for technology solution. It is possible that narrowly focused government action will be necessary to support any private sector technology approach.

Plugging the so called “analog hole"

Digital content delivered in a protected manner must nevertheless be converted to an unprotected analog format in order for it to be viewed on the vast majority of HDTV and digital televisions in consumers homes. The "analog hole" refers to the potential which exists for redigitization and subsequent unauthorized redistribution of content (via peer to peer networks or otherwise) because of this need to convert digital signals to analog form in order for them to be viewed. It is currently thought that the most effective means by which the so called "analog hole" issue can be addressed is by using a watermark to indicate how content marked with the watermark can be copied and redistributed.

There are efforts currently underway, under the auspices of the DVDCCA, to evaluate "standard definition" watermarks which we hope will be extensible to "high definition" content. This process has shown that there are serious business, legal and technical issues that need to be resolved before a watermark can be identified for use to plug the "analog hole." Further efforts are necessary before it can be determined how such a watermark might practically be implemented in order to mitigate the analog hole problem. It is possible that narrowly-tailored government efforts may be necessary to address this problem once an appropriate watermark has been identified, however these decisions should await identification of such a watermark.

Preventing unauthorized peer to peer distribution of content

The problem of unauthorized peer to peer distribution of copyrighted content is most difficult to solve. CE and IT companies, including the members of 5C, are sympathetic to the concerns of content owners, yet it is in the arena of solving the peer to peer problem where the legitimate concerns of content owners, the legitimate interests of consumers, and the ability of CE and IT manufacturers to deliver products that are affordable and innovative may be hardest to harmonize. The problem is made even more difficult by the fact that digital devices are used to enjoy (and sometimes share) a variety of data-some of which are not copyrighted.

To my knowledge no concrete proposals concerning how to solve the peer to peer problem have been proposed by any industry sector. It is quite likely that no single solution to this problem will be developed and that instead a variety of technical, legal and business approaches will be necessary. At the moment the immediate, although admittedly partial, solution appears to be consumer education efforts and strong enforcement of copyright laws to punish commercial piracy of copyrighted content. In the event that inter-industry efforts to address the issue are convened, Panasonic stands ready to contribute its technical knowledge to find a solution which promotes the availability of digital content while promoting the twin goals of preserving consumer rights and protecting the intellectual property of content own

ers.

Conclusion

Panasonic has built its business on delivering innovative products to consumers. We realize that in order to deliver the greatest value to our customers we must likewise provide strong copyright protection for the owners of copyrighted content. For this reason we, together with other members of 5C have been at the forefront of developing technologies that aid the transition to the digital environment for all parties involved. Panasonic will continue to contribute, where it can, to help address technical challenges faced by the industries represented here today and to promote a rapid and fruitful transition to DTV.

Mr. UPTON. Thank you. I note that the House is going to have votes in a short time. So my goal is to try to strictly adhere to this 5-minute rule so that we can get into some questions before the votes start, knowing that we will come back.

Mr. Blanford.

STATEMENT OF LAWRENCE J. BLANFORD

Mr. BLANFORD. Mr. Chairman and members of the subcommittee, my name is Larry Blanford. I am president and CEO of Philips Consumer Electronics in North America. I do appreciate the opportunity to appear before you today, and applaud your leadership on this extremely important and complex set of content protection issues.

I am accompanied today by the Managing Director and Senior Vice President of Philips Research in New York, Dr. Barry Singer. Now Philips is a global leader in display, storage and connectivity in the digital age. We have nearly a century of experience in consumer electronics, research, design, and manufacturing, and a proud history of inventing and developing consumer electronics products from the audio cassette and the compact disc to high definition television.

We also have a long history of constructive participation in content protection activities and in developing content protection technologies, from the pioneering serial copy management system to what we believe is the leading candidate for video watermarking technology now being evaluated.

Philips has been guided in its development of its consumer products and protection technologies by certain principles: maintaining ease of use and user friendliness; providing backward compatibility with existing devices; preserving the opportunity for new, innovative products; respecting intellectual property rights; preserving the consumer's fair use rights; and, importantly, balancing among the various competing rights and interests.

Philips comes before you today with a call for action, one which I believe is important, if collective we are to achieve technological solutions that strike the all important proper balance of rights in the emerging digital age, those of consumers, device manufacturers and content owners.

I say collectively, because when it comes to setting content protection policy and ensuring the balance of interests and rights, your role is just as critical as that of the private sector. Simply put, the process we are now using to pick a technological solution and balance these interests is flawed, and we need your help to fix it.

Today you are reviewing the status of the most recent developments in digital age content protection, the need to protect digital terrestrial television broadcasts from unauthorized retransmission

over the Internet. Philips fully supports the goal of the Broadcast Protection Discussions Group to protect against such retransmission, and we support the concept of a flag in the ATS signal to achieve this end.

We also appreciate much of the progress made by that group. However, we along with a growing number of participants are deeply concerned about the direction that the group is taking with respect to what happens after the broadcast flag is identified and how DTV would be constrained inside the home.

Basically, the only paradigm being considered by BPDG is one that would, in most cases, require public broadcast content to be encrypted upon receipt in the home and on any copies on removable media. You have heard repeatedly that a solution to this problem is imminent. We appear here today, however, to say that, although we are actively involved in those discussions, we do not believe we are anywhere close to a consensus solution.

Philips, along with Thompson, RCA, and Zenith, shared their concerns as formal objections to the recent BPDG interim report, and raised them with you at the April 9 DTV roundtable discussion. Others have expressed similar concerns privately. I am here to reiterate those concerns today.

No. 1, the direction of the current discussions threatens to constrain the consumer's fair use rights and expectations. For example, if future DVD recorders are obligated to encrypt recordings of television broadcasts from digital sources, any such recordings made on those recorders would not be usable on the 35 million DVD players consumers own today.

No. 2, the process by which decisions are being reached is not fair, reasonable or open, and is not seeking consensus. Rather, it is a carefully choreographed drive toward a preordained result.

No. 3, the decisions regarding how products will be allowed to handle content and the rights of consumers would reside with a few companies through private contractual relationships.

No. 4, companies interested in making devices that handle digital television would be required to sign up to a complex web of overreaching contracts. These contracts include obligations called compliance rules and robustness rules that extend deeply into the design and functionality of each device, and dictate what actions the devices may take and what consumers can do.

Put simply, those driving BPDG are rushing the group to judgment without a thorough public consideration of how the group's approach will diminish the rights of the consumer and competition in affected industries.

At the April 9 DTV roundtable discussion, important questions were posed by Chairman Tauzin: Who has control? Who makes the final decisions? In this case, no public official, no consumer, no licensee, no other interested party has a seat the decisionmaking table. Only the licensors of the preferred technologies and the content community can set policy and make decisions.

Balancing the rights of consumers and differing business interests are a matter of public policy. Consumers' rights must not be left in the hands of private interests. We call upon you today to establish a forum under government auspices in which we can all participate in order to get this right.

While we do not know the perfect forum of this private-public partnership to take, we believe the former Advisory Committee for Advanced Television Services with its strong and effective leadership serves as a useful model. Again, we are not recommending that government mandates the solution, but provides a governance to a process so that we can get the solution correct.

Philips wants to be part of that solution, and we, as much as any company, want this digital transition to flourish and flourish quickly. We believe an appropriate public-private partnership will move us to that consensus solution more rapidly.

Thank you for this opportunity to share our views and our concerns. I would be happy to answer any questions you might have. [The prepared statement of Lawrence J. Blanford follows:]

PREPARED STATEMENT OF LAWRENCE J. BLANFORD, PRESIDENT AND CEO, PHILIPS CONSUMER ELECTRONICS COMPANY

Mr. Chairman and Members of the Subcommittee, my name is Larry Blanford. I am President and Chief Executive Officer of Philips Consumer Electronics Company, a division of Philips Electronics North America Corporation, which is the US subsidiary of Philips Electronics of the Netherlands. In the United States, Philips employs over 35,000 people manufacturing and selling over $10 Billion dollars of goods and services in the areas of consumer electronics, lighting, medical systems and devices, semiconductors, displays and domestic appliances.

I thank you for the opportunity to appear before you today and commend you for conducting this hearing entitled, Ensuring Content Protection in the Digital Age at such an important juncture in the transition to that new age. Your attention to the Digital Television (DTV) transition and to the complex set of issues that remain to be addressed is vital to the ultimate success of that transition. You rightfully focus today on a key challenge-resolving copy protection and digital rights management in a way that is consistent with public policy goals of protecting content, allowing technology to thrive and, most importantly, preserving the fair use rights and expectations of the consumer in this new digital age. The manner in which we proceed will dictate the measure of success we attain.

The combined efforts of the public and private sectors have come a long way toward ushering in this new digital age, but I come before you today to raise a caution-that the current direction embodied in the on-going Broadcast Protection Discussion Group addressing ways to prevent Internet Retransmission of digital television broadcasts is not in the interest of sound public policy, is not in the best interest of the affected industries and is certainly not in the interest of the consumer. Mr. Chairman, Philips raised its concerns in the most recent DTV Roundtable Discussion on April 9. We are here today because we feel it is very important to bring to your attention the fact that the chorus you will hear today, as Senators Leahy and Hatch heard at their hearing only weeks ago, that a solution to the problem of Internet redistribution is imminent misrepresents the current state of affairs and the nature of the challenge that still lies ahead.

Philips, as much as any company in the US wants to see this transition to the digital age, and more specifically this transition to digital television, move as swiftly as possible. But we also know from decades of involvement in the consumer electronics industry that we must get this right, meaning that we cannot rush to judgment on technological solutions that are not widely accepted as the best solution for all parties involved the CE industry, the Information Technology industry, the Content Community and, of course, the consumer. Philips calls upon the Congress today to reassert its role in this critical public-private partnership by providing an appropriate, public forum to continue these industry discussions and to foster workable solutions on a timely basis. Further, today we offer to provide our complete support to such an effort, including offering related Philips technologies to all comers, under open, fair and easily available terms. Philips has an extensive technology portfolio, which we believe can contribute to the development of solutions every bit as robust and effective as those embodied in the current, BPDG direction. Philips has long history in development of consumer electronics products and technologies

Philips is no stranger to the world of inventing and developing products and technologies in the area of consumer electronics. From the Compact Cassette to the

Compact Disc to the one chip TV, Philips has invented and developed products that have enjoyed widespread acceptance in the industry and among consumers. The Compact Disc is the most widely implemented digital technology on the face of the earth. Open, public standards helped make this so, open, public standards should help us select new copy protection schemes.

Our untiring commitment to the development and implementation of advanced television in the United States began in our research labs in Briarcliff Manor, New York in 1981. With decades of financial investment and enormous scientific effort, we worked to help create and commercialize Digital Television. Philips is extremely proud to have been instrumental in the development of Digital HDTV, beginning with its own system, later as a member of the Advanced Television Research Consortium, and finally as a founding member of the "Grand Alliance," which produced the DTV standard adopted by the FCC in 1996. This unprecedented standards setting process involved numerous private companies from each affected industry but just as importantly involved an extraordinary public-private collaboration fostered by the Congress and the Federal Communications Commission embodied in the Advisory Committee for Advanced Television Services (ACATS) chaired by Mr. Richard Wiley. The positive result has propelled the United States into an historic transition to advanced digital television and related services.

Philips has been an active participant in the development of Copy Protection Technologies and Adheres to Basic Principles to Protect the Consumer

The implementation phase has certainly presented its challenges, not the least of which has been the development of copy protection technologies. Philips has long developed solutions along with the content community that struck the proper balance between the interests of the copyright holder and the consumer. Philips invented, and offered to the consumer electronics industry for free, the Serial Copy Management System, which simply provided the necessary instruction to the recording device as to whether a copy was or was not allowed. We continue to be equally involved and committed to seeking solutions that strike the proper balance. Philips has for years been a constructive participant in inter-industry copy protection activities. We have dedicated millions of dollars and thousands of hours of effort from our best engineers to groups such as the Copy Protection Technical Working Group (CPTWĞ), the Secure Digital Music Initiative (SDMI), and the Broadcast Protection Discussion Group (BPDG). Drawing on our expertise in digital video we were the lead developer of one of the two watermark technologies being considered for the protection of digital video content. Philips created and offered to the record labels an innovative technology to work with watermarks to address Internet file sharing of sound recordings. We have suggested several approaches to the BPDG.

As these contributions suggest, Philips develops new products and technologies with the interest of the consumers" rights and expectations at top of mind:

• Consumers' fair use rights must be preserved in any technical or public policy solutions to digital age challenges

• Backward compatibility has been the backbone of the consumer electronics industries' product designs.

• Consumers react negatively and very strongly when their expectations for fair use and ease of use are not met.

• Ever increasing levels of complexity in consumers' devices will render products increasingly unreliable, more expensive and will constrain consumer activities. • User Friendliness is a hallmark of CE products.

Consumers should not bear the costs, in dollar terms and in terms of technological complexity, when there are much simpler solutions to the agreed upon problemthe prospect of Internet redistribution of digital terrestrial broadcasts.

Philips Supports the Goal of Preventing Internet Retransmission of Digital Terrestrial Broadcasts, But Believes the BPDG Process Is Actually Retarding Industry Efforts To Move Forward

We fully support the goal of BPDG to protect against retransmission of digital television over the Internet and the concept of a flag in the ATSC signal to achieve this end. We also appreciate the progress made by that group, including the general agreement that a flag in the ATSC signal can be used to trigger protection, the idea of starting protection upon demodulation, and many of the other details that have been advanced. However, we, along with a growing number of participants, are deeply concerned about the direction that the group is taking with respect to what happens AFTER the broadcast flag is identified, and how DTV would be constrained inside the home.

This issue of protecting broadcast content is a complex one that merits careful consideration and the evaluation of a variety of alternatives.