Regrettably, in this effort to address Internet retransmission, BPDG has been taken over by a small group of companies that are pressing a particular approach that would affect ALL retransmission of content inside the home. This proposal tramples upon the fair use rights of the consumer and introduces unnecessary levels of complexity and costs in consumer devices.

Under the approach proposed by one Studio and a consortium of hardware companies called the 5C, digital television content would need to be "protected" once demodulated. The technologies that could be used for this protection, which are generally conceived to be encryption technologies, would be under the control of the studios and private consortia, such as the 5C. For example, the technologies that the studios wish to use as a benchmark for the protection are the encryption technologies licensed by the 5C entity (which encrypts content on digital links) and the related 4C entity (which encrypts content on removable recording media).

Any party interested in designing and manufacturing devices using these technologies to encrypt digital tevision programs would be required to sign up to a Byzantine set of complex, over-reaching contracts for these proprietary technologies. 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. These Compliance Rules and Robustness Rules are in the control of the studios and the private consortia and will be created in the first instance, and may be changed in the future, wholly in their discretion. The public, consumers, licensees, and public officials are, unfortunately, not a part of this process. In short, private interests are taking control of consumer rights and as a result establishing public policy! A small number of our competitors and the studios are put in control of the functionality of our products!

This result is possible because of the licensing construction built around the use of these technological solutions. Moreover, the technology licenses agreements and associated Rules include obligations that extend far beyond that which is necessary and appropriate to prevent the Internet retransmission of DTV.

Even if it were appropriate to cede public policy to private interests, the implementation of this most recent proposal is rife with unintended consequences for products and for the consumer. The obligation to include multiple encryption technologies in each device that handles DTV content will burden consumer devices, increase their cost and decrease their legitimate functionality.

Further, the 35+ million DVD players in the market today are unable to decrypt any discs recorded in the home using any proposed encryption system. If future DVD recorders are obligated to encrypt recordings of television broadcasts from digital sources, any such recordings made on those recorders will not be useable on any existing DVD player or on any DVD player likely to be shipped in the near future. Consumers should not be required to purchase a new set of devices or to make digital recordings of content of digital content through old fashioned analog interfaces simply to do what consumes have always done in their homes. To leave matters in this state is to deny the consumer the benefits of digital technology. Digital technology's primary advantage is to move and copy data without any qualitative loss. Where this is appropriate (such as in a consumers home) it is reasonable that the consumer not only retain the ability to watch broadcast content at a convenient time or to move content from one room to another but also to gain additional flexibility to utilize content. To do otherwise is to restrain technology solely for the benefit of the copyright holder as a mechanism to subdivide content into smaller units, each of which can be sold at a premium price.

The current proposal also would inhibit innovation in television products. Under the proposal, any innovative company interested in developing and marketing new products that would give consumers more control over how and when they view television would be required to sign these over-reaching, burdensome licenses for the "approved" proprietary encryption technologies, pay the applicable license fees, and bear the costs of including encryption and decryption capabilities in their products. The complexity and cost of these licenses and the technologies alone will inhibit start-up companies, which are often the most innovative.

The BPDG is not a consensus body and is certainly not a standards body.

Philips has lost all confidence that the BPDG discussion group as currently constituted can achieve meaningful results, or that it will allow for serious consideration or adoption of technology solutions of equal merit presented by other interested parties. BPDG is not an open, consensus standards setting process. BPDG has no process for making decisions. In fact, the studios and 5C have made clear their view that there need be no process, because BPDG is not a standards body; it simply is a forum for discussion and the identification of points of agreement and disagreement. Such discussions may have their place, but on this matter of such crit

ical importance to the establishment of good public policy, this approach is seriously lacking.

We respectfully believe that the decisions of how DTV content broadcast over the public airwaves will be handled in the home and how it will be available to consumers raise important public policy issues; issues that are far too important to leave to any group of private companies no matter how well intentioned. Private industry should be given a chance to reach a consensus, but the process should be cleansed by the sunlight of government. Further discussion should be held in an open forum, with the involvement of those who are entrusted with the development of public policy.

Philips believes the Congress should make clear that there will be no toleration of a system in which the private interests control the Rules for copy protection technologies that become de facto standards. The rules and licenses under which such technologies are used raise key public policy issues and must be subject to minimum standards of openness, reasonableness, scope and consensus. We have ideas for appropriate technologies that we are prepared to share with the industry in exactly this manner, as we have attempted in the past.

Philips, therefore, calls upon the Congress to reassert itself in this ongoing endeavor by providing under its auspices or the auspices of the Federal Communications Commission, or a suitable standards body an organized, open and fair venue to oversee the continuation of efforts to develop and implement next generations of copy protection technology. In support of such a change, Philips pledges its full, continued support and further pledges to do its part to make technological solutions available on open, fair and reasonable terms to all interested parties. We look forward to this Committee's continued leadership in this critical arena.

Mr. UPTON. Thank you.

Mr. Jacobson.

STATEMENT OF LARRY JACOBSON

Mr. JACOBSON. Mr. Chairman and Ranking Member Markey and members of the committee, I am delighted to appear before you today to discuss the pressing issues facing the media and technology industries in our digital era.

RealNetworks, founded in Seattle, Washington, in 1994, is a pioneer in the development of digital media technology and services that enable people to create, deliver, discover, and play digital audio and video content over the Internet, both through downloading and through a method RealNetworks invented called "streaming." Most of you probably know our RealPlayer or RO-1 player.

RealNetworks agrees that today's Internet marketplace suffers from an unacceptable level of piracy of copyrighted works. As a person who has spent most of my career in the entertainment and broadcast industry, I understand that copyright protection lies at the core of America's ability to create and sell entertainment products throughout the global marketplace on a variety of distribution platforms.

Digital copying via the Internet poses fundamental challenges for the economics of both the entertainment and technology industries, and we need to meet that challenge head on in order to realize the potential of this new distribution medium.

The good news is that RealNetworks is building distribution channels, business models, and new subscription services that will contribute to a robust and legitimate content marketplace for digital music, video, and other products. As a fundamental part of our digital media platform, RealNetworks has developed a robust and sophisticated digital rights management technology or DRM to protect content that is delivered to consumers.

This DRM and our other security technologies are in the marketplace today, and currently protect premier content we offer, from major record labels, CNN, Fox Sports, ABC News, NASCAR, major league baseball and the MBA, among others. Already in 18 months since we began offering our premium protected subscription services, we currently serve over 600,000 monthly paid subscribers.

In crafting legislation regarding the Internet, Congress to date has wisely refrained from sweeping regulation, resisting the temptation to become in essence the chief technology officer for the Internet. We should continue to be guided by three core principles: First, that government should only intervene in technology markets where there is a clear evidence of market failure; second, that private sector competition will always create the best technologies, resulting in new revenue, new quality jobs, and new consumer benefits; and, third, that all solutions must respect consumers' fair use rights to fully enjoy digitally delivered content.

In the spirit of these principles, scores of companies, including RealNetworks, are enabling secure content distribution through flexible DRMs that are protecting content in today's marketplace. Software can be built and adapted to accept multiple DRMs and play back content that is encoded in a variety of file formats, and we see evidence that market driven solutions for security are rapidly evolving on the Internet today.

In contrast to market driven solutions, we don't believe that the government should pick a single winner and mandate a security standard for the rapidly evolving digital market. This approach would politicize the standard process, establish more bureaucracy, create a single target for hackers, and ultimately not lead to the best technology for security.

Rather than focusing its energies on creating a new regulatory framework for digital media distribution, we believe it would be wiser for Congress to eliminate practical barriers to the growth of e-commerce and digital media.

As the Copyright Office recently recommended, existing laws should be fine tuned to clarify that payments due for streaming and downloading of music content should be put in place. We must also address the economic imbalances in the field of Internet radio, where new legal regulations have made it harder for innovative programming services to compete on a level playing field with other content offerings.

Moreover, Congress must always proceed carefully before tampering with our carefully balanced copyright laws. Clarifying the status of temporary copies in RAM and server copies, for example, would make it easier to lawfully perform and download digital content, all in a way designed to compensate copyright owners.

Finally, Congress should clarify how longstanding fair use principles peacefully coexist with the anti-circumvention provisions of the DMCA. Any marketplace for digital goods must preserve longstanding consumer rights to use content they have purchased in a variety of ways. We must treat Internet users like potential customers and not potential criminals, if we are to build a marketplace based on mutual trust.

In closing, RealNetworks stands ready to work with policymakers and all other concerned parties to create a digital marketplace that

affirms the best principles of American innovation, consumer value, and the rule of law.

Thank you for your attention, and I would be happy to answer any questions that you may have.

[The prepared statement of Larry Jacobson follows:]

PREPARED STATEMENT OF LARRY JACOBSON, PRESIDENT AND CHIEF OPERATING OFFICER, REALNETWORKS, INC.

Mr. Chairman and members of the Committee, I am delighted to appear before you today and thank you for the opportunity to come to Washington-the "other Washington" for those of us with a Seattle orientation-to discuss some of the pressing issues facing the media and technology industries at this moment. RealNetworks as a Pioneer in Internet Media Delivery

RealNetworks, founded in Seattle, Washington in 1994, is a pioneer in the development of digital media technology and services that enable people to create, deliver, discover, and play digital audio and video content over the Internet and within intranets, both through downloading and through a method RealNetworks developed called "streaming." Streaming enables consumers to enjoy uninterrupted, realtime broadcasts over the Internet, by compressing digital media files and dividing them into packets, that then are delivered to the consumer's personal computer.

RealNetworks developed the first streaming media player and the first streaming media server in 1995. RealNetworks has released nine versions of the RealPlayer streaming media player. In addition, RealNetworks has released two versions of its RealJukebox software, which was first introduced in 1999, and which permits consumers to manage their music collections on their personal computers. That dynamic pace of innovation continues given the rapid adoption and increasing use of digital media on the Internet.

RealNetworks offers a universal platform for end-to-end delivery of digital media, from creation to broadcasting to end-user consumption. This allows companies to build powerful digital media applications like video subscription services on our platform without regard to the underlying hardware or the software operating system. RealNetwork's business model is based primarily on (1) licensing and selling software to create, deliver, play and secure digital media; (2) selling subscriptions for access to audio and video content from major content providers, including ABC News, CNN, Wall Street Journal, Fox Sports, E! Entertainment, Warner Music Group, BMG Records and EMI Music; (3) providing professional services, such as hosting others' streaming media and technology implementation, and (4) selling advertising and promotions via RealPlayer, RealJukebox, and the RealOne Player for our RealOne sports, news and entertainment subscription service.

As a fundamental part of our digital media platform, RealNetworks has developed a robust and sophisticated DRM-Digital Rights Management-technology to protect content that is delivered in streaming or digital download formats. This DRM, called the Real System Media Commerce Suite, currently protects digitally downloaded and streamed files from major record labels via the MusicNet platform and has been licensed to the MovieLink consortium, organized by Sony, Universal, Warner Brothers, MGM and Paramount Pictures, to protect the digital download of feature films.

Today, we have licensed our technology to over 270 million unique registered users around the world with at least one of our products. These consumers have consistently proven their desire to enjoy music and video, whether streamed on demand, streamed in a webcast mode, or delivered via digital download. As bandwidth increases for connected users, music video and long-form video content are proving equally popular. In fact, broadband consumers are the heaviest users of our technology and as broadband adoption increases we can expect similar increases for streaming media technologies.

As a company with applications on an estimated ninety percent of personal computer desktops in the United States and hundreds of millions of users around the globe, we are keenly aware of the challenges to Internet distribution of music, video and other forms of content that require licensing of intellectual property rights. The Challenge of Secure Digital Distribution at a Critical Time for our Industry

Mr. Chairman, this hearing comes at a critical time for the Internet and specifically for companies that are building the new distribution channels for music and video content. We are all aware of the explosion of online file-sharing services and

their global popularity. Countering this trend, both independent and major recording companies have licensed their works to subscription online services such as MusicNet, PressPlay, and Listen.com's Rhapsody and other online ventures. RealNetworks has been one of the driving forces behind the creation of legal subscription services. As for the prospect of distribution of feature films on a pay-perview basis, RealNetworks is contributing technology to the MovieLink venture and we hope to see other pay-per-view and subscription video services roll out in the near future. Our technology and subscription services model is designed to facilitate just this sort of business.

For any of these new content distribution channels to succeed, we will need to make sure that content is secured, that consumers see value in the digital purchases they make, and that the underlying business models make sense for all participants in the "food chain."

Security for music and video distribution is essential. Whether digital content is produced by a garage band or a global media company, content owners need to reach a comfort level with putting that content into the digital marketplace.

We all know that today's Internet marketplace is characterized by an unacceptable level of piracy of copyrighted works. The balance of copyright-providing authors with a fixed exclusive period of time to reap the rewards from creating new works-will be upset if this situation prevails. The business leaders testifying alongside me today will undoubtedly give a more detailed picture of the dimension of the piracy problem and the steps they are taking to address it. Let me simply say that RealNetworks does not take widespread Internet piracy lightly, both as a creator and licensor of our own intellectual property and as a long-standing partner of many

content creators.

RealNetworks was the first company to successfully invoke the anti-circumvention mechanisms of the DMCA to stop the distribution of software that attempted to break the proprietary content protection measures within our RealServer and RealPlayer software and we will continue to invoke legal mechanisms to prevent pi

racy.

As a person who has spent most of my career in the entertainment industry, culminating from 1997 to 2000 as President of the Fox Television Network, I understand that copyright protection lies at the core of America's ability to create and sell entertainment products throughout the global marketplace on a variety of distribution platforms. Digital copying via the Internet poses fundamental challenges for the economics of both the entertainment and technology industries and we need to meet that challenge in order to realize the potential of this new distribution medium.

The good news is that RealNetworks is building distribution channels, business models and new subscription services that will over time create a robust and legitimate content marketplace for digital music, video and other products provided that license rights to that content can be efficiently and effectively obtained and administered.

DRM technology is one key ingredient for establishing a legitimate digital marketplace. The Real System Media Commerce Suite currently is used by technology platforms such as MusicNet to protect tens of thousands of valuable sound recordings from major record labels. To protect valuable intellectual property with a level of assurance required for digital distribution, DRM's must be universal, flexible and secure. We design our DRM with the ultimate goal of supporting all types of media to all devices. Further, these DRM's must support flexible set of business rules that allow the content creator to determine payment scenarios ranging from pay per use to permanent ownership. Finally, we design our DRM to be native, end-to-end, tamper resistant and to be quickly renewable in the event of malicious attack.

Technology alone will not create the legitimate marketplace for online distribution of content. After an era where first advertising and then e-commerce was widely expected to carry the new online industry to the promised land, we have learned from experience that a mix of business models, matched to consumer behaviors, are required for our industry to succeed. RealNetworks has led the way with premium content services offering distinct packages of digital downloads, on-demand streamed content and webcast streamed programming-that reward content owners while providing unique value to end users. These services are prime examples of RN working in content with using RN technology to promote content to deliver it to consumers on a subscription basis.

Baseball fans can't get condensed games of complete baseball broadcasts on-demand on network TV, but they will be able to pay for this product this season through our RealOne subscription products. In parallel efforts, we are working with Fox Sports, CNN, E! entertainment, ABC News, NASCAR, the NBA and other world-class media companies and sports leagues to bring unique value to the online consumer. In this sense, the Internet won't directly compete with television or radio,