terms. The same is true in the case of audiovisual works, and requires that we pay special attention to similar ventures in the motion picture industry such as MovieFly.

We also feel compelled to point out that we think non-discriminatory means offering these digital products equally on all levels, including at the same time, for the same price, with equivalent terms and conditions (such as warranties and replacement policies), and with the same bonus features (such as free promotional tracks or special added content).

To date, there have been announcements about the services, but no contact with retailers that we know of by Duet, MusicNet or any record companies about the planned new services. Nor have MovieFly or the motion picture studios been open to retail competition. Instead, announcements concerning their non-retail partners were made, with no mention of retail, which seems curious in light of Ms. Rosen's remarks about the importance of retailers to her member companies. The importance of retailers seems rather like that of a parasite to its live host, and reminds me of the analogy NARM drew to witchweed in its case against Sony, where it explained that "Witchweed (STRIGA ASIATICA) is a parasitic plant that attacks some of the most important crops in the U.S. Unlike most weeds, which merely compete with crops, parasites like WW do their damage more directly. They rob nutrients and moisture by tapping directly into the host's root system. Consequently, the host spends energy supporting WW growth at is own expense." Fact Sheet for Witchweed (WW), FACT Sheet 07 PPQ, made available through the Cooperative Agriculture Pest Survey program, May 25, 1993, http://ceris.purdue.edu/napis/pests/ ww/facts.txt accessed April 21, 2000. According to "Parasite," Microsoft Encarta Encyclopedia 2000, it eventually kills the host. And that is exactly how retailers are beginning to feel. We are an integral part of the industry which has resulted in the success of record companies, movie studios and computer game manufacturers, yet our root system-which is our customer base is being tapped in an effort to feed off of it until we are no longer needed. They can't live without us, just yet.

The last contact we had with MusicNet was a meeting where nothing remotely similar to their press release the day before the Senate hearing was even mentioned. There has been no contact with Tower regarding details of the offers from either MusicNet or Duet, much less any offer from the record companies to invite us to compete with either of the two entities they jointly control.

RESPONSE TO WRITTEN QUESTION FROM SENATOR KOHL

Question: While all of the panelists are primarily concerned with access to online entertainment marketplace, they must also understand that they have a responsibility to parents. The Internet makes it even more difficult for parents to police the songs that their children hear, the images that they see and the games that they play. I'd like the panelists to discuss what their company or industry plans to do to help parents as online entertainment becomes more readily accessible to all consumers, especially children.

Answer: We are proud of what Tower is doing in this area. We met with the RIAA in February at the NARM convention, agreed with their recommendations, and have initiated a project with our online merchandising team which will improve the current notification which we implement online in the following ways:

1. Clearer language indicating parental advisory titles. We intend to use the terms, "Unedited, Explicit Lyrics" to describe such titles in place of “PA,” or “explicit" to describe unedited recordings, and "Edited Lyrics" to describe edited versions.

2. Links to descriptions of what the language means. We intend to implement a web page describing what the terminology above means.

3. Persistent notification throughout the transaction process. While we haven't decided exactly how, we are working on methods to keep the Parental Advisory message "live" right through to the shopping basket.

You also asked about what our industry is doing. Tower is a member of two trade associations that have taken leading roles in this area. The National Association of Recording Merchandisers ("NARM ") is the principal trade association for retailers and distributors of sound recordings, and the Video Software Dealers Association ("VSDA") is the principal trade association for retailers and distributors of home video movies and video games. As an active member of each, Tower has had the privilege of having a representative on the Board of each of these trade associations, and has participated in the development of our industry's programs in this area.

I must note, however, that despite challenging all members to be responsive to public concerns, both trade associations have been careful to preserve the freedom of each member to remain competitive with other members when it comes to dealing

with their customers. Each retailer sees customer relationships as one of the key areas in which we all compete with each other, and attempt to distinguish ourselves as the retailer most responsive to consumers, including children and their parents. How we do that is, ultimately, something we, at Tower, work very hard on independent of what any competing retailer may do. So, although industry-wide programs such as those NARM and VSDA have initiated have a very important function, we recognize that there are some areas in which freedom of competition is the best solution. When push comes to shove, as it often does in the competitive retail level of distribution, we want customers to choose our store over any competitor's, and if a younger customer needs their parent's permission to shop with us, we certainly want every parent to feel confident that their permission should be granted. That is one reason why we have so vigorously opposed proposals that would give our suppliers permission to enter into agreements in unreasonable restraint of trade against us. After all, as my responses to the previous questions make clear, they are becoming our fiercest retail competitors, and we cannot afford to let them have any additional control over retail distribution.

CONCLUDING STATEMENT

I respectfully ask the members of this Committee to consider whether you ever became fans of a particular artist because someone shared their copy of the music with you. I suspect that each of you can recall an occasion in which an artist's work touched you, even though someone else paid for the copy of the sound recording you heard. All of you have probably enjoyed the freedom to rent a movie instead of buying it. Yet, these opportunities are currently being threatened by technology. This debate should be more than about whether a record company may restrict distribution and redistribution to increase its profit from an artist's work, or whether a movie studio may use technology to prevent retailers from renting copies if their profit margins will increase. Rather, this debate should be about how "the Progress of Science and the Useful Arts" (U.S. Constitution, art. 8) can be promoted for the public good. The profits of the Copyright Industry Organization members, retailers and authors should be subservient to that end, and we think that end is best served by preserving our freedom to aggressively and lawfully compete in disseminating these treasures to the public.

Thank you for the opportunity to participate in this important debate.

Responses of Mark Traphagen, on behalf of InterTrust Technologies Corporation, to questions submitted by Senators Hatch, Leahy and Kohl I have heard a number of entertainment companies say that acceptable protection for online content simply does not exist yet, that existing Digital Rights Management and watermarks, wrappers, or encryption, is simply not good enough to protect valuable content. Yet we have a number of technology companies here today who believe that they have such a solution, and now we have announcements of online initiatives from all five major labels, which suggests the technological protection have developed recently. Would any of you care to comment on the state of technological protection for content?

RESPONSE BY INTERTRUST:

The DRM technology developed by InterTrust is now capable of securely managing rights in copyrighted works-music, video, text, and graphics—in the online environment without compromising the rights of artists, record labels, and other copyright owners. Indeed, a number of entertainment companies (including AOL Time Warner, Bertelsman, and Universal Music Group), entertainment distributors (including Blockbuster), and entertainment device manufacturers (including Diamond Rio, Samsung, Nokia, and Philips) are actively working with InterTrust DRM technology to make music video, published text and other information products available for consumers to use on PCs, portable music players, cable systems and mobile phones.

Unlike simple technological measures that carry copyrighted works from a server to a client and lock the copy to a single device, the InterTrust DRM technology protects copyrighted works regardless of the channel through or platform upon which the music is played, the number of intermediaries, the duration of time, or the physical location of the content. This post-delivery, persistent protection of copyrighted works permits alternatives in making copyrighted works available, including sale of

downloads, subscriptions, pay-per-use and peer-to-peer distribution. It also provides flexibility for each actor in the distribution channel, meaning that a publisher can establish the commercial terms for a work within the authority granted by the author; a distributor can set rules within the scope of authority granted by the publisher, and so on. Because the copyrighted works are persistently protected by the InterTrust DRM technology, it also permits flexible use of these works by consumers using different devices in different locations.

QUESTION FROM SENATOR LEAHY:

Concerns have heen expressed that "copyright management" measures heing developed by copyright owners to control the distribution of their digital works may erode the first sale doctrine. If a customer pays for the personal use of a copyrighted work, the rights holder may use technological means to ensure that the work is not posted on a weh site for use by others. Do you helieve that the marketplace will sort out the scope of copyright management measures since customers who helieve they are not getting what they pay for will simply stop huying?

RESPONSE BY INTERTRUST:

InterTrust believes that the advent of effective DRM technologies should launch a period of lively marketplace experimentation in online delivery by the owners and distributors of copyrighted works and that, as illustrated by the popularity of the Napster service, consumers will make their preferences clearly known. To avoid stifling this lively experimentation, InterTrust believes that, until it is shown to be ineffective in reflecting the balance struck in the Copyright Act, the marketplace should be where consumers, copyright owners, and distributors sort out the ways in which DRM technologies are used to protect and manage rights in copyrighted works.

Why does InterTrust believe this? Because DRM technologies give copyright owners new confidence that their works will be protected in the online environment, DRM technologies also enable them to permit consumers to use copyrighted works in new and more convenient ways, some of which may surpass the scope of copyright exceptions such as the first sale doctrine. For example, while the first sale doctrine exhausts the exclusive right to distribute a copy or a phonorecord of most copyrighted works to the public, it does not limit the other exclusive rights of the copyright owner-reproduction, adaptation, public display, and public performance. With the protection of effective DRM technology, however, some copyright owners and distributors could choose to attract consumers by permitting them to make and display copies.

Moreover, InterTrust's DRM technology also enables copyright owners and distributors to accommodate a richly diverse range of policies arising through law or through accepted practice (provided they are sufficiently detailed) for use of works by particular groups of consumers, such as schools and universities, libraries and archival institutions, and those with special needs, such as the blind. Consumers are likely to respond favorably to copyright owners and distributors who use these capabilities of DRM technologies to permit flexible use in the course of managing their rights.

QUESTION FROM SENATOR KOHL:

While all of the panelists are primarily concerned with access to the online entertainment marketplace, they must also understand that they have a responsibility to parents. The Internet makes it even more difificultfor parents to police the songs that their children hear, the images that they see and the games that they play. I'd like the panelists to discuss what their company or industry plans to do to help parents as online entertainment becomes more readily accessible to all consumers, especially children.

RESPONSE FROM INTERTRUST:

The InterTrust DRM technology includes features that enable entertainment producers and distributors to associate content advisories, such as ratings and labels, with the digital material and to display such advisories when the digital material is opened by consumers. The DRM technology also includes other features that enable parents to control or prohibit access to digital material incorporating such content advisories. Provided that these features are used by producers, distributors, and parents, the content advisories would be persistently associated with the digital material after delivery to the consumer.

Responses of Gerald W. Kearby to questions submitted by Senators Hatch and Leahy

I. INTRODUCTION

Thank you for the opportunity to respond to the written questions from the Chairman and the Ranking Minority Member of the Committee. I have only endeavored to answer the questions that directly pertain to my testimony as supplemented on April 5, 2001 (the Supplement).

Question. Acceptable Protection for Online Content:

Answer. Detailed answers to this question are contained both in my testimony and in the Supplement. To reiterate, the basic points of that testimony, the technology necessary to secure distribute online music has been available for several years. Liquid Audio commercially deployed such a system in 1997, and we are currently developing our 6th generation of products. Liquid Audio requests the opportunity to demonstrate its copy protection system to the Committee. One demonstration is worth several thousand words and, we hope, would set this issue to rest.

Question. When Will Digital Music Come to A Device Near You?

Answer. Unfortunately, it appears as though billions of digital songs are now on a large variety of devices today. I say unfortunately because the vast, vast majority of those digital songs were downloaded from Napster without authorization from the copyright holder. The question should be: when will there be a legitimate market supplying digital music to those devices near you? That is entirely in the hands of the major record labels. As discussed below, it appears that they have taken some first steps towards entering the marketplace. Those steps, however, appear unclear and do not seem to represent an adequate response to the demand in the market. Question. Record Companies and Online Resellers. Senator Leahy asks: "Do you believe that it is also important for the record companies to make digital music available to those competing retailers capable of offering secure and accountable downloads on a non-discriminatory basis that does not price them out of any competitive opportunity or give them substantially less attractive non-price terms?"

Answer. The answer is simple yes! To attract the tens of millions of people away from unauthorized distribution of digital music will require adding value to attract them to the legitimate online music sites. Competing resellers of digital music are far better positioned to respond to the market than would be a monolithic captive reseller. Obviously price will be an important factor. But beyond that ease of user, i.e., user interface and additional services such as playlist creation and distribution, music news, personalized music search and delivery, custom CD creation, etc. will need to be created to draw users from illegal services such as Napster.

There are lessons to be learned from the Napster experience beyond the fact that many people will trade music for free. One significant factor is that consumers want all of the music available in one place. A music buyer in the analog world won't tolerate a record store that only carried three of the five major labels' CDs. Unlike buying an automobile, the consumer doesn't go into a record store to buy a brand. They go to buy music by artist, or by song or by genre-few clerks are asked for a Sony Music CD, rather the user would ask, for example, for music by the artist Billy Joel or the song Piano Man. So it is in the digital world. At the moment there are two nascent services: Duet with two labels and Music.Net with three labels. Online resellers must be able to offer one-stop shopping for all the music. Consumers demand it.

Consumers also want an easy to use digital system. They don't want to click through fourteen steps before they can download their music. Competition among resellers will result in the best interfaces succeeding in the market. In addition, to attract customers resellers will have to add value beyond just having all the music. The more legitimate resellers that have access to the music at reasonable nondiscriminatory prices, the more services will be developed. That in turn will lure music fans away from unauthorized services.

Responses of Billy Pitts, Executive Vice President, MP3.com Inc., on behalf of Robin Richards, to questions submitted by Senators Hatch and Leahy Question. For all panelists (especially Mr. Parsons, Mr. Ken Berry, Mr. Murphy, and Mr. Richards, and Mr. Henley and Ms. Morissette): One argument we have

heard in favor of a compulsory license is that music has so many pieces to license and there have been substantial disputes between the record labels, the publishers and technology companies like MP3.com about how to get the publishing rights cleared in the volume demanded by online offerings. Some have suggested that a stumbling block to getting the labels to license sound recordings is that they may not have the rights from their artists to grant these rights. I understand there may even be problems with the MusicNet offering to some degree because of these impediments. Would any of you be interested in commenting on this particular problem and suggest ways to remedy it?

Answer: As we discussed in our written testimony, the existing marketplace and statutory mechanisms for licensing the use or music simply do not work m the digital environment. The My.MP3.com service allows consumers to "store" CDs that they purchase in a digital "locker" and to use any Internet-enabled device to playback the songs on those CDs. There is no practicable way for MP3.com (or similar service providers) to identify and obtain licenses from the copyright owners for each and every song on the wide array of CDs that consumers might choose to store (assuming that it even is necessary to obtain licenses to offer consumers this tool). These practical problems could be overcome by establishing a more streamlined compulsory license, modeled on the satellite and cable licenses (Sections 119 and Section 111). Under such a compulsory license, it would be sufficient for the user of the work to submit to the Copyright Office information identifying the user and the works being used along with semi-annual royalty payments (with rates set by arbitration). The copyright owners whose works were used could then submit claims for their respective shares of the royalty pool.

Question. For all panelists: Mr. Hank Barry argues that we have created compulsory licenses in the past, for publishing rights in music and in rebroadcast of television programming because it was difficult to clear the rights to the myriad creative interests involved in making up a broadcast day. Would anyone like to explain why that analogy does or does not obtain in the online music and entertainment world?

Answer: In the context of cable and satellite retransmissions of broadcast television programming, Congress has recognized that compulsory licensing is necessary to overcome the logistical burdens that would otherwise arise. It is not possible for cable operators and satellite carriers to identify and contact, either in advance or after the fact, each of the copyright owners claiming an interest in each of the dozens of television programs broadcast daily on the broadcast channels that the cable operator and satellite carrier retransmit. The situation presented by the on-line delivery of music, particularly by services that offer access to a vast library of CDs containing hundreds of thousands of song titles, is directly analogous.

Question. For all panelists: I have heard a number of entertainment companies say that acceptable protection for online content simply does not exist yet, that existing Digital Rights Management and watermarks, wrappers, or encryption, is simply not good enough to protect valuable content. Yet we have a number of technology companies here today who believe that they have such a solution, and now we have announcements of online initiatives from all five major labels, which suggests the technological protections have developed recently. Would any of you care to comment on the state of technological protection for content?

Answer: MP3.com's server-side security system is designed to fulfill the needs of the consumer, the rights-holder, and the emerging technology providers. Our first goal is to provide the consumer with a satisfying experience where he or she may access content already purchased and play that content back to themselves in a secure and transparent environment. Through the development of our Beam-It and Instant Listening programs, we are able to help consumers verify ownership of their CDs and store those CDs in a matter of seconds as opposed to having to wait hours to rip and encode the song themselves and then having to worry about the amount of space the song is taking up on their hard drive. Our security mechanisms have been independently evaluated by Adam Stubblefield and Dan Wallach at the Department of Computer Science at Rice University.

Our second goal is to ensure rights-holders that our system will replicate the protection of their content as well or better than the protection in place in the physical world. Through our server-side DRM system we provide a number of levels of security that are not available in the physical world. For instance, CDs produced today are created without copy protection and CD players are unable to keep users from copying songs at will. Because music can be distributed quickly through the digital space, we have put measures in place to monitor the behavior of an account to make sure that the activity of that account is consistent with the guidelines set by the