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maintain a system where they receive just compensation for their products in a technological environment where that task is increasingly difficult. Digital technology has made it extremely easy to "share" these files via the Internet. I have been shown a plethora of peer-to-peer sights on the net where one can go and download content for free. Obviously, this poses a severe threat to the recording, movie, and broadcasting industries.

At the same time, digital technology holds great promise for consumers. In our efforts to protect content, we must be careful not to throw the baby out with the bath water. I will admit my first reaction to proposed legislation that would have the government step in with a solution was not favorable. However, this is a complex issue, and I want to ensure that we maintain an environment as conducive as possible to innovation. I do not have the technological answer to the question of how to best protect digital content. However, I do not want to take steps that prevent those with the ability to create such a solution from doing so.

I am looking forward to the testimony today, and I am thankful to Chairman Upton for calling this hearing to give the industry stakeholders an opportunity to present their case. This afternoon will be an educational experience for us all, and will hopefully guide us in the right direction for any necessary legislative action.

PREPARED STATEMENT OF HON. LEE TERRY, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEBRASKA

Thank you Mr. Chairman and thank you for holding this hearing today.

It is well understood that as we move forward into the digital age, consumers will want the latest and greatest forms of technology and the content to go with it. Digital content has become the content demanded by consumers. DVD['s are one of the most popular segments of the entertainment industry and are considered to be the fastest growing consumer electronics product ever. Digital TV and HDTV programming are starting to role out and become available to consumers in many markets. As consumer demand for Digital TV and HDTV increases, it is imperative that their content be protected from piracy. I think this can best be done with a type of technology that is not selected by the Government.

There will always be men and women who feel that all content should be free and who will spend their time doing their best to hack the most sophisticated encryption programs. I believe that the people who hold this belief will never change this view. That is why all the industries affected by the need for DRM solutions must come together to sort out their problems and find ways to solve them. The revenue lost from content piracy is staggering, and losses increase annually. I have heard loss figures ranging from $10 Billion to $15 Billion. This is money that deserves to be in the hands of those who produce the content, not of those who steal it.

I am a firm believer in free markets and as such I also feel that industry experts can make better decisions on how to protect their goods from piracy than the Federal Government can. The Government should not pick winners and losers. We should not mandate a technology that could be obsolete within a year of our mandate.

Chairman Tauzin, you should be commended for bringing industry together for round-table discussions. These discussions are very important to finding the solutions to the transmission of free, over-the-air broadcasting, the analog hole, and peer-to-peer file sharing. Through these discussions, the solution to these problems can be found. If the Government were to mandate a solution, there could be no fruitful discussion that might lead to better ways and different forms of technology that would be best to protect the content providers from piracy.

I cannot believe that IT companies or the IT industry would support piracy. They have as much to lose as anyone else. Furthermore, I have seen these IT companies in action, and have witnessed their desire to be at the table to discuss the problems facing each industry and the various solutions that can be given to solve their problems.

There are also a host of companies that are spending their time and capital trying to solve the Digital Rights Management problem. Each one should be commended for their efforts. Companies like SealedMedia, who work to provide Digital Rights Management technology for organizations requiring persistent control for digital Internet content. SealedMedia's solution is unique, as its DRM technology is being developed to support multiple media formats. However, if the Government mandates a technology, we might be hindering SealedMedia's ability to innovate and come up with solutions that the Government and affected industries have not considered. The type of thinking that is needed to find a solution to the DRM problem is one that provides a series of different solutions in the short term with the capabilities

to provide additional protections in the future. Any thinking that moves towards mandating standards today, while well intentioned, is shortsighted.

DRM solutions and innovations should not be frozen by Governmental mandates. DRM solutions should protect content and the distribution of digital media in all forms. In addition, DRM solutions should be allowed to flourish in as many forms as necessary to accomplish the end goal of ending piracy. The Digital Rights Management issue cannot be solved with a one-size-fits-all approach. What works well for protecting content on a DVD might not work well for protecting broadcast content. These affected industries should be left to solve the DRM problem with minimal Governmental intervention. Rather the Government should focus on giving the DRM solutions all the enforcement protections they might need.

I thank you Mr. Chairman and I look forward to the testimony from our witnesses today.

PREPARED STATEMENT OF HON. ELIOT L. ENGEL, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW YORK

Mr. Chairman—I want to thank you and the panelists for holding this hearing. It is vital for the Congress to do a better job of understanding the nuances involved in technology and the law. Before us today is literally what the future of copyright protection should be.

There has been a great deal of discussion regarding legislation introduced by Senator Hollings. Some have said that it specifies a standard, but this is not true. I have reviewed the legislation and does no such thing. It does authorize a federal agency, the FCC, to do so. I'd like that point to be clear, because agencies can change regulations far easier than Congress can change laws.

The need for standards is so important, so evident, and so prevalent, that we often do not see it before our very eyes. In 1901 Congress created the National Bureau of Standards, which today is the National Institute of Standards and Technology. One of the very first challenges the Bureau of Standards faced dealt directly with health and safety of every citizen within the United States. The need for standards was dramatized in 1904, when more than 1,500 buildings burned down in Baltimore, because of a lack of standard fire-hose couplings. When firefighters from Washington and as far away as New York arrived to help douse the fire, few of their hoses fit the hydrants. The Bureau of Standards had already collected more than 600 sizes and variations in fire-hose couplings in a previous investigation and, after the Baltimore fire, was a key figure in setting a national standard.

Today we are concerned about the standards to protect the intellectual property of movies and music. This doesn't rise to level of importance of universal fire-house couplings, but it is nevertheless important. Though a person's life is not endangered by piracy, harm nevertheless occurs. What your job-and I speak to the panelists now-what your job is today is to try and convince us whether or not the Congress or Administration needs to intervene.

I have heard good arguments on both sides and I have heard some bad arguments on both sides. So this is your opportunity to educate me and influence my opinion.

PREPARED STATEMENT OF HON. JOHN D. DINGELL, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MICHIGAN

The transition to digital television is, without question, one of the thorniest issues this Subcommittee has had to deal with. Its success hinges on the actions of a disparate group of industry players, many of whom historically make their living competing against one another. Now these companies must find a way to work together for the good of the whole. It is a very tall order, as we've learned from the DTV roundtable discussions led by Chairmen Tauzin and Upton, but I remain hopeful it can be done.

Some believe the transition will not succeed unless more high value, high definition television programming is produced by the broadcast and cable networks. Others say that the key to success lies in making sure broadcasters meet the digital TV buildout deadlines. Still others say cable and satellite systems must be made to pass through high definition content when it is available, and that these distribution systems must be compatible with any television display. And, of course, there remains a statutory conversion date by which this great experiment must be completed.

In my view, all of these claims have merit. But, in the end, success will be measured in terms of whether consumers ultimately enjoy a higher value television product than they do today. And I am convinced that day will come. It may not happen

magically on December 31, 2006. In fact, consumers may be watching digital television signals reconverted to display on their old analog sets for many more years beyond that. But eventually, consumers will migrate to digital sets, so long as they perceive value in doing so.

So where does the value come from? I believe you need to look no further than the many hearings we've held on this subject over the past twenty years. High Definition Television, or HDTV, was part and parcel to this digital experiment. That idea didn't originate with me or the other Members serving at the time. It was the simple commitment made by the broadcast industry when it pitched the idea of receiving a second channel. In fact, as recently as 1996, the National Association of Broadcasters (NAB) maintained that TV stations "will use this spectrum for HDTV, pure and simple."

It is true that the 1996 Telecommunication Act permits flexibility to offer ancillary video, data, and other non-high-definition services on this digital channel. But my sense is the tide may be turning on these plans for a number of reasons. First and foremost, there is a glut of digital channels out there, both on satellite TV and digital cable. Simply adding more to the mix may not make good sense if few people are watching.

Instead, broadcasters may need to distinguish their programming. One way is by telling better stories. But another way is to make their content look, sound, and feel superior to other programming available to viewers. They certainly have the tools to do the latter, and I hope they're beginning to see the wisdom of that. Several networks are already putting more and more HDTV on the air, and competition from cable networks like HBO, Showtime, HD-Net, and Discovery will only increase the competitive pressure to do so.

Now it is true that more HD programming does not necessarily mean the viewer will automatically see it. Cable and satellite companies must carry the programming, and do so in a way that is compatible with any and all digital television displays.

But, on this point, broadcasters may hold the keys to the kingdom. If they put on more HDTV, differentiating their programming, the signs point to tremendous consumer demand, and cable systems will be forced to respond. Some have started to negotiate carriage agreements in earnest, and the pressure from satellite will be very important as well. We're already seeing DirecTV putting more HD programming on its system. In fact, I understand they're adding Showtime HD this month at no additional cost to subscribers, and that trend will likely continue.

The hurdle, of course, to putting on more high value, high definition digital programming is the very real concern of content owners over piracy of their works. We've been down this road many times before as technology evolves. And it's pretty clear that the best result occurs when competing interests in industry work together to find the right solutions. I am not convinced that government has the tools or the expertise to make the right judgments on these matters.

Certainly there are some in the industry who would prefer a legislative approach. And I note that Senator Hollings has introduced legislation that brings this debate into sharper focus. But the bill as drafted is unbalanced, stunting the growth of one industry in order to protect the growth of another.

Imagine if the motion picture industry had won its fight against the VCR in the early 1980s. At that time the industry believed VCRs would provide the death knell to first run motion pictures. Now, of course, sales of VHS tapes actually exceed box office receipts each year. But if that notion had prevailed in the Supreme Court, the VCR would have been outlawed and the benefits to both the film industry and the consumer would never have been realized. As the industry learned then, the answer is not to limit technological advances. Rather, it is to embrace them and adapt business strategies to exploit their inherent value.

While I believe the industry is best poised to negotiate the technical details of digital rights management, the government certainly does have an ongoing and important role in protecting consumers. That means making sure reasonable consumer expectations are met. That goes for recordability and playback on a variety of devices throughout the home. But, just as important are reasonable consumer expectations about the functionality of the new equipment they already have bought. Over $5 billion of high definition equipment has been sold to date, and that number is projected to soar to $9 billion by the end of this year.

This equipment was bought with the promise of delivering high definition pictures. In my view, the proposals made by some industry players to downgrade the resolution of programs delivered to this new equipment are unfair, counterproductive to the transition, and possibly unlawful. Consumers should not be left holding the bag. Content owners and equipment manufacturers should find technological solutions to close the analog hole and address "in the clear" transmissions—

and the sooner the better-so the industry's exposure to piracy is limited going forward. But to do so in a way that makes obsolete, or even degrades the functionality of, existing products should be a nonstarter.

Mr. Chairman, again I commend you for tackling these difficult issues today, and I look forward to continuing our work together to meet the challenges they present.

Mr. UPTON. This is a first that we are actually going to have a video conference in this hearing room, and our first witness will be Mr. Peter Chernin, President and CEO of News Corporation, who is actually in Los Angeles, to be followed by Mr. Richard Parsons, Co-Chief Operating Officer of AOL Time Warner, Dr. Paul Liao, Chief Technology Officer of_Panasonic/Matsushita, Mr. Larry Blanford, CEO of Philips Consumer Electronics, Mr. Larry Jacobson, President and Chief Operating Officer of RealNetworks, Mr. Assaf Litai, Founder and Acting CEO of Vidius, and Mr. Joe Kraus, Co-founder of DigitalConsumer.org.

We will start long distance with Mr. Peter Chernin. Peter, welcome. Thank you for appearing. All of your statements are all made part of the record. If you could also try to abide by the 5-minute rule, that would be truly appreciated. Thank you.

Mr. Chernin.

STATEMENTS OF PETER CHERNIN, PRESIDENT AND CHIEF OPERATING OFFICER, NEWS CORPORATION; RICHARD D. PARSONS, CO-CHIEF OPERATING OFFICER, AOL TIME WARNER INC.; PAUL F. LIAO, CHIEF TECHNOLOGY OFFICER, PANASONIC/MATSUSHITA ELECTRIC CORPORATION OF AMERICA; LAWRENCE J. BLANFORD, CEO, PHILIPS CONSUMER ELECTRONICS; LARRY JACOBSON, PRESIDENT AND CHIEF OPERATING OFFICER, REALNETWORKS; ASSAF LITAI, FOUNDER AND ACTING CEO, VIDIUS; AND JOE KRAUS, COFOUNDER, DIGITALCONSUMER.ORG

Mr. CHERNIN. Thank you, sir. Good afternoon, Mr. Chairman, Ranking Member Markey and members of the subcommittee. My name is Peter Chernin, and I am the President of the News Corporation. Thank you, Mr. Chairman and Ranking Member Markey, for inviting me to participate in today's hearing by video conference.

I would like to take this opportunity to applaud all of you for your leadership in seeking to ensure copyright protection for content providers in the digital age.

First, I would like to point out that, although some content providers have been accused of being backward thinking and antitechnology, I am proud to be aggressively pioneering this committee's brand new video conference technology.

As an industry, we are in a very exciting but challenging time. The rise of the broadband Internet and other digital technologies is providing us with tools of unprecedented flexibility that we are only beginning to fathom. News Corporation is already harnessing these technologies and distribution methods on an unprecedented scale.

For example, over 50 percent of United States television households are able to receive Fox programming in digital form, including the first ever all digital, wide screen Super Bowl earlier this year. We have released hundreds of Fox movies on DVD, and will soon be releasing Fox movies in the high definition digital DVHS

prerecorded format. However, we strongly believe that the great promise of broadband Internet and other digital technologies can be fully achieved only if protections are in place to safeguard our investment in the development and distribution of content.

Recently, we have seen more and more Napster-like programs, such as Gnutella and Morpheus, which facilitate the downloading of motion pictures and television programming without authorization or compensation to the copyright holder.

With the advent of broadband, it is only a matter of time before these file sharing technologies and other emerging mechanisms have a serious impact on the economic viability of the motion picture and television broadcast industries. However, I cannot emphasize enough that it will not be just the media companies that will be hurt economically if this piracy continues.

Rampant piracy will hurt all businesses and consumers and individuals that make their livelihood from the making, redistribution, and licensing of content.

We are working to solve the piracy problems ourselves by distributing our content through media that are reasonably secure. For example, pay cable, direct broadcast satellite, and DVHS are digital distribution channels to the home that provide a basic level of security for digital content.

In each of these areas we are able to protect our content either through contractual arrangements with cable and satellite providers or through a licensing process using commercially available digital rights management, DRM, technology for the Internet. However, I want to focus for a moment on the one major digital distribution method that does not currently offer adequate protection, digital over the air broadcast television or so called DTV.

Presently, cable and satellite have a competitive advantage over DTV due to the closed nature of cable and satellite systems that allow for encryption and, thus, for the protection of content. DTV, on the other hand, is not encrypted for public policy reasons and, therefore, does not enjoy these same protections. However, we have identified a technological solution that works without encrypting DTV.

It involves the insertion of a broadcast flag in DTV signals that can be detected upon receipt by DTV processing equipment. Once detected, the receiving device would protect the content from being redistributed on the Internet. However, this technology would have no impact on the ability of individuals to make personal copies of their favorite television shows.

Mr. Chairman, as you are undoubtedly aware, there has been an ongoing effort for the last several years to negotiate the protection of all digital audio-visual content delivered to the home network, including but not limited to DTV. These negotiations, often referred to as the 5C negotiations, have made substantial progress with regard to the protection of pre-recorded and conditional access delivered content such as pay per view, video on demand, and pay and basic cable, and we at Fox applaud that progress.

I am also pleased to note, Mr. Chairman, that over the past few weeks significant progress has been made between our industry and the IT and consumer electronics industries on solving the prob

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