understand the kind of structure by which this protection is achieved, and I think this goes to the heart of the issue that Mr. Blanford has been discussing.

The broadcast flag signals the TV receiver that this content should not be retransmitted over the Internet. So sure enough, that TV receiver will know this is a no-no, don't do that. But there are outputs to the TV receiver. For example, with the set top box there needs to be an output that brings it to the television.

Those outputs may be analog in nature. They may be digital in nature. If they are analog in nature, actually, the agreements of all the industry participants-to my knowledge, all the industry participants has been that the broadcast flag, no matter what its setting, will permit, continue to permit, that analog output to output the signal.

So for example, today if you have a receiver, it will output that thing through the analog output and display it on your display, perhaps the high definition display that you have recently purchased. No problem. Or you could take that analog output and put it into your DVD player or recorder and make a very nice DVD recording, probably equivalent to the kind of displays you are seeing because, after all, that is the same output that you use for your display, and make a recording.

That recording, if you make it on the right DVD media, will be able to play on the legacy players. For example, if you bought a Panasonic DVD recorder today and recorded on DVD RME, you could record it on that and play it on most of the legacy players.

On the other hand, if it is a digital output, and it is really digital protection that we have been talking about in the Broadcast Protection Discussion Group, in order to protect that digital copy, what we have been talking about is encrypting it. Now why should it be encrypted? The reason it is being encrypted is that is how you protect it from being misappropriated at a later stage in some other part of the chain.

Remember, the whole thing about today's network world is that we are talking about going from one box to another through all these networks. So in order to maintain that protection in the digital world, we have taken the approach of encrypting it. It was something that was not easy for all of us to agree to, but it provides that kind of a balance between this protection of that material and the use of the consumer.

The consumer can always make the recording and can make as many recordings as they want. Those recordings will always play in, for example, the recorder that they made it in, because the recorder is made to play its own recordings. So there is never a problem with playing a recording that he makes on a consumer's own recorder her own recorder. It will play, no problem.

So this is the kind of balance we have had to struggle with.

Mr. BLANFORD. I don't want to get into point-counterpoint, but what was just described, though, locks the consumer to a degree, a large degree, in the analog world; because, yes, you can see the digital signal on your display, but to record it you are not able to use it on the 35 million DVD players that are in existence today unless you record it as analog. Then, I mean, what is the point?

We have locked the consumer in the digital world, and we are not able to take advantage of the full promise of digital.

So we are in a point-counterpoint. That is correct, but I think, again, it is this fundamental balance that we are speaking to in terms of who all should be at the table. The 5C only represents four consumer electronics companies. I wish that is all I had to compete against. Last I looked, I think it is more like 15. So it is a very small group. It does not represent the consumer electronic industry nor those other constituencies that have not been represented either.

I think this is just a huge-I mean, we recognize it is very complex. It is very huge. I think the consumer at the end of the day is going to speak. I think, if we don't get it right, your in-boxes are going to be very full.

Mr. JACOBSON. Mr. Chairman, if I may. I applaud the notion of a very narrow mandate at the BPDG when it comes to preventing the unauthorized retransmission of content over the Internet. I understand that. My concern is that, from what I have seen of the specifications, and I am on the mailing list for those specifications, the power of the specification is actually far broader.

It gives the ability for, as far as I can tell, a small group, subgroup, of BPDG to determine what technologies are essentially approved, and the scope of those technologies doesn't necessarily have to be limited to only retransmission.

So, for example, a technology could get approved. As I mentioned in my testimony, nothing in the specification prohibits, I might say-not necessarily that it will happen, but nothing prohibits the ability of a technology to get deployed which might make my VCR recordings expire. Yes, I might be able to make them, but maybe they expire without my choosing.

So what I believe and there's been questions about when should we give this specification the force of law. My interest is not so much a question of when, but what. I believe that this specification needs to have and I am heartened by the comments of Mr. Parsons and Mr. Chernin on fair use, but I believe that the specification gives broad powers to a group of people, and before you stamp that into law, I think you need a fair use assertion in that document to make sure that none of the provisions, none of the technologies that do get approved-and consumers are not going to be in the room when that gets approved. You need to make sure that what you pass, regardless of when you pass it, has fair use assertions in that specification itself.

Mr. UPTON. Mr. Markey.

Mr. MARKEY. I have no further questions. I thank you all for your excellent testimony.

Mr. UPTON. Mr. Boucher.

Mr. BOUCHER. Thank you very much, Mr. Chairman. I will be brief, since I am the last person to question this panel, and it has been a long afternoon.

Mr. Blanford, I can't resist the opportunity of your presence here today to discuss with you another subject. It is also a subject relating to the protection of content in the digital era, but from a very different vantage point. That is the general matter of the introduction of copy protected CDs into the U.S. market.

Philips, as I recall, was one of the companies that developed the original standard for CDs.

Mr. BLANFORD. That is correct.

Mr. BOUCHER. I think, in fact, you own some intellectual property in the brand. I will tell you that I am somewhat perplexed by the rationale of those who are introducing the copy protected CDs. If you look at the circumstance carefully, you readily see that copy protected CDs will do virtually nothing to guard against Internet free, peer-to-peer file sharing. Someone will crack the code. That someone will put the then unprotected CD up on the Internet. Once it goes up, it is likely to stay there forever, and it will find its way into the free peer-to-peer file sharing services.

I think that is absolutely inevitable. So copy protecting the CD does not really protect against Internet peer-to-peer file sharing, and we have heard repeatedly from the recording industry that their greatest concern about the escape of their digital content and the piracy of that content is with respect to Internet peer-to-peer file sharing. Copy protecting doesn't guard against that.

It does guard against the casual making of a CD at home and giving that to someone else. Frankly, I don't term that fair use, Mr. Parsons. I am a big fair use advocate, but I don't think recording a CD at home and giving that to another person is fair use. For your own purposes, it is. I mean for your own convenience, it is, but once you give it to somebody else, I think it is not.

Really, all copy protecting CDs does is guard against that, and historically the record industry has more or less accepted that, kind of tolerated that low level of piracy. That is rather casual. So I am perplexed by the rationale for this.

On the other hand, introducing copy protected CDs is angering a very large number of the best customers of the recording industry who are now frustrated in their ability to exercise their fair use right to make a copy at home of music they have lawfully acquired, when that music is going to be used for their own convenience and personal use in the home setting or the extended home setting.

I suspect eventually millions of people are going to express that same concern. Let me ask you as the developer of the original format for your view of this general subject matter or any concerns that you might have about the dysfunctionality that attends the copy protection technology that disables CDs from playing perhaps on a personal computer or in a DVD drive, and I understand some of the technologies have that characteristic.

Are you concerned that consumers will be confused? Are you concerned that some of the blame will be directed toward the manufacturers of equipment, potentially your own equipment, and do you think that perhaps, assuming there is that confusion and that misdirected blame, that the case is made for Congress to step in and to require appropriate labeling when CDs are copy protected?

Mr. BLANFORD. Congressman, I think you articulated the issue extraordinarily well, and I am not sure I can add a lot. Yes, we are very concerned that consumers will be confused, that they will blame their equipment. Indeed as the copy protected CDs do hit the market, in many cases they will not play on existing equipment, leading to confusion, leading to consumers that feel that

their equipment is broken, leading to calls to our consumer care

centers.

There is already a fairly, I think, sizable revolt going on, on the Internet. My own e-mail box is getting swamped with letters from consumers who are actually supporting Philips as we have been attempting to put the brakes on such copy protection, and again making sure that we all understand what we are doing as we go forward.

So it is a very serious area. I think you are also right, to the true pirate they are going to find a way around it. So it is casual copying that we are talking about, but a very serious problem for us right now, and growing.

Mr. BOUCHER. Should we legislate to require appropriate labeling when the disk is dysfunctional because of the copy protection?

Mr. BLANFORD. Well, I think, you know, that would be certainly I mean, the ethical thing for the producer of that particular disk to do would be to label, and we could legislate that. Unfortunately, I think consumers will still be surprised. They may not see the label. They are still going to take it home, tear open the wrapper, put it in their CD player, and it is not going to play.

So I am not sure if I would support it, but I am not sure that that is going to solve the problem, and it is another area where, again, more discussion is needed.

Mr. BOUCHER. Well, thank you, Mr. Blanford. I think more discussion is needed and, hopefully, this subcommittee will take the opportunity to look at this issue at the proper time. Thank you again.

Mr. BLANFORD. Thank you, Congressman.

Mr. UPTON. Mr. Markey.

Mr. MARKEY. Fourteen years ago, we set up a screen in this room, and we had the first international broadcast of an HDTV signal from Canada into this room. The members on this committee, they just fell over wanting to know where they are going to be able to get the sets, when they were going to be able to see all this programming in HDTV.

The policy that our country constructed was essentially 6 megahertz for the broadcasters, and then walk away. Even when I, in 1997, had an amendment here that said that all television sets sold in the United States that would be digital at least have a digitalhave an ability to receive a digital signal, even if it was an analog set, by 2001, it was rejected like 35 to 7 here on the committee. So just dealing with that one issue, the 6 megahertz, doesn't really create a policy, if that is the only role the government is going to play, because if you walk away, you wind up with chaos. Same thing as here, and after I have heard all of the testimony here today.

We can deal with flags or this or that or the other thing, but we just can't deal with any one part of it. We have to deal with all of it, and we have to deal with all of it at the same time or else any un-dealt-with part of the puzzle has the capacity to paralyze all the rest of the resolved issues.

My own personal experience now 14 years later after conducting that hearing-I have been on the committee for 26 years-was the breath taking response from the committee members. I think the

same desire is there for a resolution of all of these issues. That is the product that is promised to the American public, this combination of broadband and content. But in order to telescope the timeframe for us to have this miracle, this product presented to the American public, in my opinion, it is going to require an industrial policy.

It is going to require the Federal Government to intervene, because I do not see any likely near term resolution of any of these issues in a way that resolves the big issue of presenting something to the consumer anymore than, in the absence of the Federal Government intervening, do I see any ultimate resolution of the HDTV conundrum; because there are so many moving parts, you cannot ultimately rely upon any one industry to resolve it. You have to have the Federal Government come in and make very difficult decisions.

That is my recommendation, Mr. Chairman, and it would be that this hearing be followed by a whole series of additional hearings that can allow us then to go down the list of still unresolved questions, because ultimately, I think, left to the private sector, we will just have a repetition syndrome of what has happened with HDTV, going back to 1988. We will not see the full resolution of all of these problems.

Thank you, Mr. Chairman.

Mr. UPTON. Thank you, Mr. Markey. I just want to say that I know that your participation in our roundtable meetings has been very constructive and productive, as we have all worked together. We are looking to have another one next month, and we will follow up with additional hearings. That is for sure, as the country watches what is going to happen.

Thank you very much. The hearing is adjourned.

[Whereupon, at 4:23 p.m., the subcommittee was adjourned.] [Additional material submitted for the record follows:]

PREPARED STATEMENT OF THE ASSOCIATION FOR COMPETITIVE TECHNOLOGY

INTRODUCTION

The Association for Competitive Technology (ACT) submits the following views on the subject of protecting digital content. ACT represents over 3,000 information technology (IT) companies and professionals, including those involved in creating solutions to transmit digital content. We strongly believe that the marketplace, without the assistance of additional legislation or regulation, is in the best position to respond to the demands of consumers and copyright holders. Legislative proposals that install government mandates for security standards (or DRM) are unnecessary and will be counterproductive.

The potential market for digital content is an estimated $270 billion, and Digital Rights Management (DRM) technologies and solutions are the keys to unlock it. IDC has estimated that the market for Digital Rights Management (DRM) software is expected to reach more than $3.5 billion in revenue by 2005. Without a doubt, emerging and maturing DRM technologies will enable a secure electronic marketplace where content providers can be compensated for the use of their digital content. Small and mid-size technology companies make up the bulk of the DRM developers heeding the call to action.

Currently, the flow of legitimate online content is a trickle compared to what it could be. Content owners are hesitant to release content for fear that once a song or movie is lost to digital pirates, all value in the investment and commercial opportunities are lost as well. The IT industry and entertainment industry seem to agree that it's going to take continued development of new technology and new business models to provide DRM while expanding consumer distribution, convenience, and choice. In other words, a DRM model needs to allow consumers to rent, buy, time