Today, Morpheus, with its 90 million software downloads, along with millions of other consumers using other decentralized P2P platforms, are being forced into discussion between the value of content companies and technology companies. I would argue that consumers are confused and wondering what this fight is really all about. Is it about copyright, creativity, and growth of science and the human spirit? Or is it about control, power, money and maintaining the status quo?

We Must Find Common Ground

We need to understand that there are two very important issues: one of content and technology and how they converge. One that can have a dramatic impact on both industries. At StreamCast we believe that P2P is an important technology that not only can create important societal changes but itself reflects important societal changes that have already taken place. Individuals on their own, unaided by the communications giants-are finding their own new ways of connecting, of communicating, and of creating and controlling their own communication channels. Their will-connected and empowered-will prevail. It is prevailing now and we cannot forget them.

I have no doubt that P2P will become as ubiquitous as the telephone. To StreamCast this is not about content. It is not about media. It is about recognizing the freedom, and the power, of consumers to connect directly with each other and share and exchange information and communications. It is about developing an architecture that works with individuals, that provides tools that respect individual control and empowerment, and that offers pleasing and satisfying opportunities for communication and commerce. We must never lose sight of our common ground, that this is really all about the consumers and our future together with them.

PREPARED STATEMENT OF JACK VALENTI, PRESIDENT AND CHIEF EXECUTIVE OFFICER, THE MOTION PICTURE ASSOCIATION OF AMERICA

This document sets forth the goals that the American movie industry urges the Congress to seriously examine. The future of these unique creative story-telling works is in danger of being shrunk and squandered by an increasing thievery on the Internet. We cannot stand mute and observe the slow undoing of a formidable American economic and creative asset, which would cause terrible injury to the consumers of America.

Broadband (high speed, large pipe entry to the Internet) is an OPPORTUNITY to make available to consumers another delivery system for transporting visual entertainment to their homes. This means more freedom of choices for consumers. The Economic Worth of the Copyright Industries

What kind of asset is at stake here and what does it mean to this country? The facts are these: The Copyright Industries (movies, TV programs, home video music, books and computer software) are America's greatest trade export prize. They are responsible for some five percent of the GDP of the nation. They gather in more international revenues than automobiles and auto parts, more than aircraft, more than agriculture. They are creating NEW jobs at three times the rate of the rest of the national economy. The movie industry alone has a SURPLUS balance of trade with every single country in the world. No other American enterprise can make that statement. And all this at a time when the country is bleeding from a $400 Billion trade DEFICIT.

Which is why we come to you with a clear statement of what is needed to preserve this extraordinary economic/creative engine of growth in a broadband world.

As you may surmise, producers of visual entertainment are enthusiastic, ready and eager to offer their creative works on the Net. And to dispatch those works LEGALLY, at a fair and reasonable price to those American homes who choose to view them. It should be noted that “fair and reasonable" will be defined by the consumer and no one else.

But there is an obstacle. Consider this: The cost of making and marketing movies, for example, has risen to nerve-shattering heights. In 2000, the total cost to the major studios for making and marketing their films was, on the average, an astounding $82 Million! Only two in ten films ever retrieve their total investment from U.S. theatrical exhibition. Those films must journey through various marketplace sequences: airlines, home video, satellite delivery, premium and basic cable, over the air TV stations and internationally. They must make that journey to try to breakeven or ever make a profit.

Today as that movie travels its distribution compass course, it is exposed to great peril, especially in the digital environment. If that movie is ambushed early on in its travels, and then with a click of a mouse, and without authorization, sent hur

tling at the speed of light to every nook and cranny of this planet, its value will be seriously demeaned. Who on earth would continue to invest huge sums of private risk capital when the chances of redeeming that investment become remote, if not impossible?

Broadband entices and allows piracy of films and TV programs on a massive, unprecedented scale. And at this precise moment, movies and other visual entertainment works are in ever-multiplying numbers swarming illegally throughout socalled file-sharing sites (a more accurate description would be "file-stealing" sites). And this is in an environment where most people's broadband connections are not fast enough to enable speedy downloads of these illegally copied files (funny how people will wait a long time for something when it is free!).

Thus, the problem will only get worse as the speed of broadband increases. University-based piracy provides especially troubling evidence of this phenomenon, because university Ethernet systems are state-of-the-art, large pipe, highest speed broadband connections. These university systems are over-run and heavily burdened by student downloading of pirated movies and TV shows. It's easy. It's fast, and it's free. It is also illegal.

Gresham's Law works its will in such a landscape. Just as cheap money drives out good money, so we are afraid that pirated movies will spoil the market for broadband delivery of high-quality films with superior fidelity to sight, sound and color once these high-speed connections proliferate. A consulting firm has estimated that more than 350,000 movies are being illegitimately brought down EVERY DAY. Who would choose to pay for movies when you can have them delivered to you FREE? It is this infection which corrodes the future of creative works. But if through technological measures, producers of visual entertainment could defeat the spread of pirated movies populating "outlaw" Net sites, the Net would be cleared of illegal debris and able to hospitably welcome legitimate, superior quality entertainment in a user-friendly format. The Consumer Electronics and Information Technology industries have been working cooperatively with us to find methods to deliver our legitimate content in a more secure digital environment. The largest beneficiary of such an environment would be American consumers.

The THREE GOALS I outline below are designed to protect valuable creative works in visual entertainment, and at the same time expand the reach and attraction of broadband in the consumer society.

How to achieve these GOALS? First and foremost both the House Energy and Commerce Committee and the House Judiciary Committee must be involved because these goals are umbilically connected to the oversight jurisdiction of both Committee.

Our Three Goals, whose Objective it is to Protect movies, TV programs and other. visual entertainment on the Net.

Goal One: to create a "broadcast flag" which would prevent broadcast programs exhibited on over the air TV stations from being re-distributed on the Net, which is a form of thievery.

Because just about all such TV creative material is in "deficit," (that is, its production costs are higher than the license fees it receives from the network) TV series and other high value broadcast material must go to "syndication" when they leave the network. Syndication means those programs must be licensed to local and international TV stations in order to recoup their total investments, and hopefully make a profit. If such programs are re-distributed on the Net while they are still on the network, it shrinks and decays the earning power of that program in the syndication market. As of last week, a technology for constructing the "broadcast flag" was nearing agreement among the Information Technology, Consumer Electronics and movie industry companies. We are deeply appreciative of these efforts.

Action: The parties will need to agree on how to achieve this goal, either through narrow congressional or agency action.

Goal Two: To "plug" the "analog hole."

This is technical jargon. Let me sort this out in plain English. All digital protection designs can only work in a digital environment, which is the environment of the Internet. When a digital signal comes down to a TV set in the consumer home, that TV set in 95% or more of American homes is an "analog" set. This means the digital signal is immediately transformed into an analog signal in order for the consumer to watch it. If the analog signal is then converted back to digital, it cannot be protected by any known protection device. This is called "the analog hole." One way to "plug the hole" could be through a "watermark detector." The "watermark" is an ingenious design, which commands the signal converter in the TV set to respond to the instructions on the movie. This can be accomplished through a concord agreed to by the Information Technology, Consumer Electronics and Movie industries.

Action: To reach this goal, Congressional assistance will be necessary.

Goal Three: To stop the avalanche of movie theft on so-called "file-sharing" Web sites, such as Morpheus, Gnutella, etc. (the more accurate name would be "file-stealing" sites).

Unhappily, neither the "broadcast flag" nor "plugging the analog" hole will stop this relentless thievery that is endemic.

We have not hesitated to spend considerable resources to fight these sites and services in the courts. But litigation alone cannot possibly provide an adequate solution, particularly as these services become increasingly decentralized, fragmented and anonymous. Constructive discussions need to take place with the Information Technology and Consumer Electronics industries to determine how best to develop effective technical solutions to crush online theft of our valuable creative works.

Action: Continuous negotiations must take place to develop technical solutions, which may require legislative enforcement.

There is one truth that sums up the urgency of this request to the Congress to enlist in the battle to preserve and protect an American economic and artistic asset, which attracts the enjoyment, the patronage and a most hospitable reception by every creed, culture and country throughout the world.

That truth is: If you cannot protect what you own, you don't own anything.

PREPARED STATEMENT OF THE VIDEO SOFTWARE DEALERS ASSOCIATION

The Video Software Dealers Association (VSDA), the international trade association representing the home video industry and video stores across the nation,' submits this statement for the record of the hearing on "Ensuring Content Protection in the Digital Age."

We respectfully suggest that Congress focus not only on protecting digital content from copyright infringement but also on protecting the rights of the owners of lawfully made copies of digital works. We are concerned that digital rights management constructs are being used not only to prevent piracy and to ensure payment for purchases, but also to circumvent constitutional and statutory limitations on the copyright monopoly.

For example, digital rights management systems can be used to:

1. Prevent a lawfully purchased, digitally delivered movie from being played more than a certain number of times, or from being played on any machine other than the first computer or player on which it is played (thereby preventing rentals, resales, lending, or gifts of previously viewed movies).

2. Lock out, delete, or disable lawfully made copies of motion pictures residing on a computer hard drive or other storage system.

3. Prevent consumers from privately performing a work over a home network. 4. Lock up material that is not copyrightable or is in the public domain.

5. Effectively expand the term of the copyright monopoly indefinitely.

This overreaching promises to undermine copyright law and the public policies it serves, suppress consumer choice and retail competition, and ultimately impede the development of online entertainment, to the detriment of consumers, retailers, and copyright owners.

COPYRIGHT LAW AND HOME VIDEO

Having built the world's first home distribution system for motion pictures on the strength of the first sale provision of the Copyright Act,2 video retailers may have as much at stake in this discussion as any other market segment.

Copyright law provides the legal foundation that has facilitated the phenomenal growth of the home video industry over the past two decades. The copyright monopoly supplied motion picture copyright holders with the economic incentive to develop new markets for their motion pictures, which led first to the emergence of videocassettes, then digital versatile disks (DVDs), and most recently, Internet-based "video on demand." These innovations have enhanced the consumer's access to motion pictures and created a vibrant, competitive industry.

Established in 1981, VSDA is a not-for-profit international trade association serving the $19 billion home entertainment industry. VSDA represents more than 1,700 companies throughout the United States, Canada, and a dozen other countries. Membership comprises the full spectrum of video retailers (both independents and large chains), as well as the home video divisions of major and independent motion picture studios, and other related businesses that constitute and support the home video entertainment industry.

217 U.S.C. 109(a).

When videocassette recorders (VCRs) first emerged as a consumer electronics product in the late 1970s, few imagined how ubiquitous they would become in America's homes and how popular watching a prerecorded video of a motion picture would be. For an overwhelming majority of America's 250 million plus consumers, renting and buying prerecorded videocassettes and DVDs is an integral component of their entertainment options. More than 90% of the households in the U.S. own at least one VCR. And although the DVD is a relatively new format, it is projected that approximately 24 million U.S. households now own a DVD player. It is estimated that almost 3 billion videotapes and DVDs were rented in 2001. Approximately one-third of all video-equipped households rent a videotape or DVD weekly, while 50% rent at least once a month. More than 60% of video-equipped homes have a video library of some sort. The average videotape library contains 75 titles, while the average DVD collection contains 19 titles. Consumer spending on video rentals in 2001 was a record $8.42 billion. More than $10 billion was spent purchasing the most popular videotapes and DVDs in retail establishments.

Essential to the success of the home video industry is the first sale doctrine of copyright law, codified at 17 U.S.C. 109(a). By giving retailers the right to sell and rent lawfully made videos and video games without restriction by the copyright owner, the first sale provision benefits society by promoting retail competition and maximizing distribution of creative works.

Although the motion picture studios strenuously resisted the emergence of the VCR and the creation of the video rental industry, even going so far as petitioning Congress to eliminate the first sale doctrine for prerecorded videos of movies, the home video industry today is an enormously profitable enterprise for the studios. Over the past several years, revenue from home video has accounted for more than half of the studios' gross domestic film revenue. Total revenue to the studios from domestic video sales and rentals totaled $10.7 billion in 2000.

Video retailing, while experiencing some of the consolidation and slowing of growth of a maturing industry, remains a vibrant competitive enterprise. There are 24,000 video rental specialty stores in the U.S. These stores include the major public chains such as Blockbuster, Hollywood Video, and Movie Gallery, and a significant number of independent retailers. It is estimated that more than 40% of video specialty stores currently are single-store operations. Another 4,000 non-specialists, primarily supermarkets and drugstores, also rent video as a regular part of their business, and numerous other retail outlets sell prerecorded videos.

Home video has flourished precisely because copyright holders could not control the home video rental and resale market. The freedom to rent and resell videos guaranteed by the first sale provision has provided consumers with access to a wide variety of affordable, quality entertainment from different sources, generated a tremendous revenue stream for the copyright holders, and created a thriving industry with a high level of competition.

THE FIRST SALE DOCTRINE

Copyright law maintains a careful balance between protecting the intellectual property of copyright holders and promoting the broad dissemination and enjoyment of protected works. The Constitution provides Congress with the authority to enact copyright laws "[t]o promote the Progress of Science and the useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries."3 The intent of this provision is to encourage authors to create and to disseminate their works. Nevertheless, copyright law carefully limits the scope of the copyright monopoly. The copyright holder and the owner of a lawful copy of a copyrighted work each have distinct rights under the Copyright Act, and the rights of each must be respected.

One of the essential rights of an owner of a lawful copy is embodied in the first sale provision. Section 109(a) provides that, notwithstanding a copyright owner's distribution right, the owner of a particular copy lawfully made under U.S. copyright law "is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy." The first sale provision applies to “copies," including digital copies fixed in a tangible medium,4 without regard to where or how they were made. Moreover, the Copyright Act also makes clear that the first sale doctrine need not involve a sale. Rather, the pivotal question is whether the person asserting the first sale doctrine right is the "owner" of a "lawfully made"

U.S. CONST., art. I, cl. 8.

4U.S. Copyright Office, "DMCA Section 104 Report," 78 (2001).

copy. There is no requirement that the tangible medium of expression have been sold by the copyright holder.

Copies can be mass produced at a factory or singularly by the consumer at a home computer. The owner of a lawfully made copy may assert his or her first sale rights regardless of whether the copy was purchased or, after the purchase of a blank medium, “made" by exercising a license to make a copy.5

Thus, a person who lawfully makes a copy of a motion picture through a digital download at a retail location or at home is authorized, under Section 109(a), to sell it to the highest bidder, loan it, trade it, or give it away, and the copyright owner is powerless under the Copyright Act to prevent it. Video retailers would also be free to rent them for profit, just as is the practice today with audiovisual works lawfully reproduced on videocassettes and DVDs.

PRIVATE PERFORMANCES

The Copyright Act gives copyright holders the exclusive right to perform a work "publicly," but reserves to the public the right to perform privately copies they own." Theater owners need a license to show a motion picture, but the person who sneaks into a theater without paying infringes no right of the copyright owner. Owners of lawful copies need licenses to play them in public for pay, but need no one's permission to play them at home for private enjoyment. In short, there is no copyright to control or in any way limit private performances. To limit such performances is like preventing parents from reading books to their own children.

"LIMITED DOWNLOADS” AND “ONLINE RENTALS"

Today, technological restraints have been fashioned to give copyright holders de facto control over the distribution and use of copyrighted works where de jure control has been denied to them. These restraints seek to disable the protections that copyright law provides to legal owners of lawfully made copies of copyrighted works and expand the limited privileges granted to copyright holders by Congress in order to give them control over the lawful distribution and use of copyrighted materials, control Congress has expressly denied to them in the Copyright Act. They seek this control in order to impose a business model under which they can charge for repeated use or multiple users of copyrighted works.

Copyright holders have taken the position that they are free to control the distribution and use of digitally delivered copyrighted works by reclassifying the transfer of ownership of digitally delivered copies of copyright works as "limited downloads" or "online rentals." The classifications are imposed on the owners of lawfully made copies through digitial rights management constructs such as non-negotiable contracts and access control technology.

Non-negotiable contracts in the digital environment are most commonly presented as "click-thru end user license agreements." These contracts of adhesion typically incant that the download does not transfer ownership of the copy of the work and declare that there are restrictions on the length of time or number of times the purchaser can view or listen to the product, the ability to transfer ownership of the copy, and/or the number of devices on which the product may be played. The restrictions are enforced by "access control technologies" that automatically disable the copy after a certain amount of time or number of plays ("timing out") and/or prevent the copy from being played on any device other than the device on which it was downloaded ("tethering").

For example, a download from a soon-to-be-launched "video on demand" online delivery service for motion pictures reportedly will have to be watched within 30 days from the date of download and will be operable only for 24 hours after the first viewing, after which the movie will be rendered as inaccessible code. In addition,

5 See United States v. Sachs, 801 F.2d 839, 842 (6th Cir. 1986); see also United States v. Cohen, 946 F.2d 430, 434 (6th Cir. 1991) ("This [first sale] doctrine recognizes that copyright law does not forbid an individual from renting or selling a copy of a copyrighted work which was lawfully obtained or lawfully manufactured by that individual"); M. Nimmer and D. Nimmer, Nimmer on Copyright $8.12[B][3][c].

Under 17 U.S.C. 101, "to perform or display a work publicly' means (1) to perform or display it at a place open to the public or at any place where a substantial number of persons outside or a normal circle of a family and its social acquaintances is gathered; or (2) to transmit or otherwise communicate a performance or display of the work to a place specified by clause (1) or to the public, by means of any device or process, whether the members of the public capable of receiving the performance or display receive it in the same place or in separate places and at the same time or at different times.'

'Twentieth Century Music Corp. v. Aiken, 422 U.S. 151, 155 (1975).