Hollywood content would only be possible if the content owners felt that their product was being rigorously secured and that the end-user was getting a high quality viewing experience. As you can see from this demonstration of the service, Intertainer represents the convergence of secure digital delivery and broadband connectivity to give American consumers a new way to control and enjoy their entertainment.

This content is all digitally encrypted and protected by a commercially available digital rights management system that is bundled into Microsoft's popular Windows Media Player. A similar DRM system built by Intertrust is offered with another leading digital media player from Real Networks. It is my belief that these and other DRM systems that are available and in use today are continually improving their encryption scheme and that they already provide artists and copyright holders with a powerful tool to sell their content in a digital world with a high degree of security. I don't believe that either Microsoft or Intertrust would argue that the DRM systems are absolutely uncrackable, but I do know that both organizations have been able to respond very quickly to attacks and change the encryption, thus rendering the hack unusable. In addition, my company is continuously exposed to a steady stream of entrepreneurs showing us new DRM products in development, which I believe is a strong indication that the traditional innovation that has come out of the US software industry will continue to develop more mature digital rights management products. The genius of the Digital Millennium Copyright Act is that it encourages this innovation while providing legal protection for the copyright hold

ers.

I realize that there is considerable discussion going on in Congress about the need to legislate an open-standards digital rights management solution, but it is my strong belief that Congressional intervention is not necessary. As I've outlined, the marketplace is already working aggressively to meet the need for effective DRM solutions. A government-mandated solution would take considerable time to develop and implement, and in the meantime, content owners may seize the opportunity to withhold content from legitimate services such as mine until the new standard is adopted. Certain media CEO's will tell you that unless you mandate a foolproof copy protection system, they will never put their content on digital broadband networks. I have another point of view on this. Historically, open standards solutions are behind the curve in terms of attracting the capital and talent to keep them bullet proof. Private companies, in the interest of competition and innovation, are more incented to constantly refine and improve their products in order to maintain market share. With an open-standards solution, the inability to formulate a rapid response to inevitable security breaches is a fatal flaw. The system is working right now. Premiere Hollywood content is being digitally distributed and secured right now. A federally mandated open-standards solution would put a halt to DRM innovations and possibly cripple services like Intertainer.

Mr. Chairman and members of the committee, I would argue that a standard for digital rights management is not the source of our digital piracy problems. It is my steadfast belief that the private sector already has developed DRM solutions that are more than adequate, and that technology companies will bring DRM innovation to a fever pitch once a more fundamental, underlying issue is addressed. That issue is the standardization of the broadband industry. What we have here is a classic chicken and egg scenario multiplied several times over: content owners will not allow their content to be legitimately digitally distributed until the digital rights management issue is sufficiently addressed; the technology companies in the DRM space are not maximizing their resources to further innovate because there is a dearth of legitimate content being made available for digital distribution over the Internet; digital content, particularly long-form streaming video content, can only be enjoyed with a high-speed, broadband Internet connection; consumers need an incentive, such as compelling content, to switch from their current dial-up modems to high-speed broadband services offered by DSL and cable modem providers; consumers who do decide to move up from a 56k modem to a broadband service are often frustrated because there is no guaranteed minimum connection speed for broadband subscribers, therefore many of today's broadband customers can't even take advantage of so-called broadband services.

To further illustrate this point, imagine picking up your telephone and not getting a dial tone on random occasions. Imagine still that you perceived that as normal. That's the experience of today's broadband Internet user, who has no guaranteed minimum connection speed and often finds that their high-priced, high-speed service is scarcely crawling above dial-up. Is this the fulfillment of the broadband promise? Many broadband providers are out in the marketplace today advertising the revolutionary benefits consumers will realize with these fast connections. Benefits such as distance learning, video conferencing, and access to enormous libraries of entertain

ment instantly available with the click of a mouse. But content providers looking to stonewall digital distribution until they find a way to become the digital gatekeepers will say that those vast entertainment libraries accessible via broadband services will never be made available to the citizens of this country until the digital rights management issue is addressed. Some studios that licensed to us in the past using our existing DRM system have indeed withdrawn their licenses in the last year and created a classic supply demand squeeze. My contention is that the DRM issue is being addressed; it's the distribution network for this wealth of digital content that needs attention.

The fact that less than 6% of the optical fiber that was laid down in the tech boom of the last four years is in use should concern not only investors in Cisco, Nortel and Lucent, but also educators, medical professionals and every artist interested in reaching an audience with a film, a song or a game. With the right regulatory guidance we could offer interactive DVD quality video on demand service to most every home and classroom in the country by the end of 2003. This service could retrain workers in their homes, provide inexpensive video conferencing, allow doctors to have access to specialists for consultation and provide an open platform for the filmmakers and musicians of the country to reach their audience without having to pay most of their income to gatekeepers.

To achieve this transformation the FCC would simply have to mandate a truth in advertising policy in regards to broadband. Today if you buy broadband service from your local telephone company, cable company or ISP you are offered "up to 1.5 MBPS". You are not told what the minimum level of service is. Broadband providers are "oversubscribing" their networks in order to maximize profits on broadband service. But to deliver advanced video services a minimum of 750 KBPS is required to the home for VHS video quality. For DVD quality a minimum of 1 MBPS is required.

I have to confess that I have a great deal of optimism for what a world of on demand media might look like. A few years ago, Bruce Springsteen wrote a song that typifies many Americans' view of television . "57 Channels and Nothing On". Going forward our country has a choice of two visions of what our media culture might look like. One might be 500 channels (owned by 6 corporations) and nothing on. The other might allow consumers easy on-demand access to a world of unique artistry of such power and grace as would melt the heart. I believe that the same innovative spirit that allowed me to show you “Shrek” running over a telephone line this morning will continue to improve the current protection of all forms of digital intellectual property. While I believe that Congress can play a major role in moving us towards the world of digital abundance, trying to set a national encryption policy is surely not the way to get there.

Chairman LEAHY. Joe Kraus is the cofounder of Excite.com and a new consumer organization called DigitalConsumer.org. He graduated in the early 1990s from Stanford and he borrowed the huge venture capital sum of $15,000 and built the Internet search engine Excite, which later became Excite At Home.

Mr. Kraus, we are delighted to have you here. Please go ahead, sir.

STATEMENT OF JOE KRAUS, FOUNDER,
DIGITALCONSUMER.ORG

Mr. KRAUS. Thank you. Chairman Leahy, I am glad you mentioned Amy Harmon's piece in the New York Times this morning. I do think it outlines the issue well. However, it is not just Hollywood versus technology. As Walt Mosberg's piece in the Wall Street Journal pointed out this morning, there is a third actor in this play and that third actor is the customer, the consumer.

Chairman LEAHY. In fact, we will put Mr. Mosberg's column, one I read every time, part of the record.

Mr. KRAUS. Thank you.

That consumer legally buys digital media and expects to use it in flexible ways, and it is these consumers whom we hope to rep

resent and who we hope have a seat at the table where decisions are being made that affect their daily lives.

So my name again is Joe Kraus and I am cofounder of DigitalConsumer.org. We are new consumer advocacy organization comprised of executives, entrepreneurs, innovators and consumers who want to protect a consumer's personal use rights in the digital media world.

Before I begin the substance of my testimony, I want to make sure I stress one point. I am a proponent of intellectual property. I am a technology entrepreneur and I started a company and made money from strong intellectual property protection. So simply put, I am an IP believer, but I am concerned about recent trends.

Historically, our country has really enjoyed a balance between the rights of citizens and the rights of copyright-holders. Generally speaking, rights-holders have the exclusive right to distribute and profit from the distribution of artistic works. Consumers who legally acquire these works are then free to use them in certain noncommercial ways.

For example, we are all used to buying a CD and making a tape of it. We are all used to buying a CD and listening to it in our car, making a tape to listen to in our car. We are used to recording a football game so we can watch it after our child's soccer practice. So essentially we are used to having flexible use as to how we use the media we acquire.

But unfortunately this balance has really shifted dramatically in recent years, much to the detriment of consumers, but also entrepreneurs and the risk capital markets, and let me give you some examples, starting with the consumer.

This past Christmas, I bought my dad a DVD player and within two weeks I got a phone call and he said, it is broken. I said, why do you think it is broken? He said, well, when you put the DVD in-and as he had been accustomed to with his videotapes, when the movie previews came up he went to skip through them, but now the DVD player wouldn't let him. I told him that his DVD player wasn't broken, but that existing law made it illegal to create a DVD player that would skip through content flagged as "must watch." He didn't know what I was talking about.

Similarly, my mom bought an MP3 player recently. In early February, I got a phone call from her saying my MP3 player is broken. When I asked why, she said that she had been putting CDs on her MP3 player, but that a couple of the CDs she bought recently didn't seem to transfer. I told her she probably had some of those new copy-protected CDs. She asked what that meant and I explained that while she was granted the right in the 1992 Audio Home Recording Act to make personal-use copies of CDs she bought

Chairman LEAHY. Somebody has got an important phone call. If they would like to leave to take the phone call, we will allow that. Go ahead.

Mr. KRAUS. Sure.

So I explained that while she was granted in 1992 the right to make personal-use copies of those CDs, in 1998 her ability to do so was taken away if record companies tried to prevent the making

of those personal-use copies. As you can imagine, she didn't know what I was talking about.

So now I have a big "x" marked on my calendar waiting for the phone call from my parents when the new digital television standards are implemented because the standards clearly envision a market where a network broadcaster like Disney's ABC gets to decide what programs my parents are allowed to record and which ones they aren't. And I can just hear them saying, Joe, why can you record the nightly news but not "Everybody Loves Raymond"? So the solutions the content industry have advanced to date have been more effective at preventing my mom from copying her legally-bought music to her MP3 player than at diminishing major commercial piracy operations in China and Taiwan.

I agree with Professor Felten's written testimony that copy protection isn't breakable by my mother, but it is very breakable by many people with computer backgrounds. So when we debate how we prevent illegal copying, my parents, unbeknownst to them, are losing their historic personal-use rights. I think this is wrong and cannot continue unabated.

I want to stress also that the cloud around personal use rights affects not only consumers but the capital markets as well. Major media companies have used lawsuits and attempts to stop or delay consumer electronics devices that deal with personal use. It began with the VCR, continued with the MP3 player, and most recently is occurring with the ReplayTV personal video recorder.

When new consumer electronics introductions yield new lawsuits from the media companies, these lawsuits inhibit investment. Geoff Yang, head venture capitalist at Silicon Valley-based Redpoint Ventures and lead investor in Tivo, which is a personal video recording company, put it this way: "Given the current state, I can't see how we could invest in another revolutionary consumer technology such as Tivo, given the cloud currently surrounding personal use of the media people already own.”

Our organization therefore is advocating a set of principles we call the Consumer Technology Bill of Rights. It is a proposal we hope this committee will seriously consider, as it is simply an attempt to positively assert the consuming public's personal use rights. These rights aren't new. They are historic rights granted in previous legislation and court rulings which over the last four years have been whittled away.

These include the right to time shift, to record a television program and watch it later, and the right to space shift, to copy a piece of music from a CD to a Walkman or MP3 player, or to make a mixed tape. The full list of rights can be viewed at our Web site www.digitalconsumer.org, and I am happy to provide a written list to anyone who would like to read them.

Under the guise of preventing illegal copying, I believe Hollywood is using the legislative process to create new lines of business at the consumer's expense. The goal is to create a legal system that denies consumers their personal use rights and then charge those consumers additional fees to recoup them.

After years of successful litigation and legislative efforts, many in the entertainment industry are back in Washington asking for more changes to the law. All the while, services have been devel

oped and technologies have been developed that eliminate fair use rights for consumers, your constituents.

Many in the copyright community don't admit that there are such things as fair use rights, and this denial persists despite 30 years of congressional action and Supreme Court rulings affirming. And while I am not a lawyer, and I don't play one on TV, I do know this much: Consumers believe they have personal use rights and they expect Congress to ensure that they are safeguarded.

Copy protection, especially overseas piracy for illicit sale, is an important issue. But before this committee considers yet another change in the law at the behest of the copyright owners, I would respectfully urge you to ensure that the interests of the consumer are ensured.

Chairman LEAHY. Mr. Kraus, you probably agree with Mr. Barrett that if it is not protected initially, then you probably have lost your ability to protect.

Mr. KRAUS. I agree with that, and I would point people to Professor Felten's testimony, a respected security expert from Princeton University, who said that a government standard that mandates secure technology is like a government standard for teleportation technology. It is not going to be possible, and any totally secure system isn't possible to build, in my opinion, and certainly in the opinion of greater experts than me. Protecting it at the source is most likely the only way.

[The prepared statement of Mr. Kraus follows:]

STATEMENT OF JOE KRAUS, FOUNDER, DIGITALCONSUMER.ORG

Chairman Leahy and members of this committee, good afternoon. My name is Joe Kraus and I am a co-founder of digitalconsumer.org. We are a new consumer advocacy organization comprised of executives, entrepreneurs, venture capitalists and consumers who want to protect a consumer's personal use rights in the digital media world.

Before I begin the substance of my testimony I want to stress one point: I am a proponent of intellectual property. I am a technology entrepreneur. In 1993 I started a company called Excite which after 7 years became the third most trafficked site on the Internet. My professional success depended upon strong intellectual property protection. I am an IP believer.

However, I am concerned about recent trends. Historically, our country has enjoyed a balance between the rights of copyright holders and the rights of citizens who legally acquire copyrighted works. Generally speaking, rights holders have the exclusive right to distribute and profit from artistic works. Consumers who legally acquire these works are free to use them in certain noncommercial ways.

For example, we're all used to buying a CD and making a tape of it to listen to in our car. We're used to making mixed tapes of our favorite music. We're used to recording the football game so we can watch it after our child's soccer practice. We're used to buying a book and lending it to a friend. Essentially, we're used to having a reasonable degree of freedom as to how we use the media we buy.

It's important to emphasize that these rights are embodied in legislation and court decisions. Congress and the courts have carefully crafted a deliberate balance between media companies and ordinary citizens.

Unfortunately, this balance has shifted dramatically in recent years, much to the detriment of consumers, entrepreneurs and the risk capital markets. Let me give you some examples, starting with the consumer.

This past Christmas I bought my dad a DVD player. Within two weeks I got a phone call. "It's broken" he insisted. When I asked why, he said that he put a DVD in and as he had become accustomed to doing with his video tapes, when the movie previews came up, he went to skip through them. But now, the DVD player wouldn't let him. I told him that his VD player wasn't broken but that existing law made it illegal to create a DVD player that would skip through content that the media