their global popularity. Countering this trend, both independent and major recording companies have licensed their works to subscription online services such as MusicNet, Press Play, and Listen.com's Rhapsody and other online ventures. RealNetworks has been one of the driving forces behind the creation of legal subscription services. As for the prospect of distribution of feature films on a pay-perview basis, RealNetworks is contributing technology to the MovieLink venture and we hope to see other pay-per-view and subscription video services roll out in the near future. Our technology and subscription services model is designed to facilitate just this sort of business.

For any of these new content distribution channels to succeed, we will need to make sure that content is secured, that consumers see value in the digital purchases they make, and that the underlying business models make sense for all participants in the "food chain."

Security for music and video distribution is essential. Whether digital content is produced by a garage band or a global media company, content owners need to reach a comfort level with putting that content into the digital marketplace.

We all know that today's Internet marketplace is characterized by an unacceptable level of piracy of copyrighted works. The balance of copyright providing authors with a fixed exclusive period of time to reap the rewards from creating new works-will be upset if this situation prevails. The business leaders testifying alongside me today will undoubtedly give a more detailed picture of the dimension of the piracy problem and the steps they are taking to address it. Let me simply say that RealNetworks does not take widespread Internet piracy lightly, both as a creator and licensor of our own intellectual property and as a long-standing partner of many

content creators.

RealNetworks was the first company to successfully invoke the anti-circumvention mechanisms of the DMCA to stop the distribution of software that attempted to break the proprietary content protection measures within our RealServer and RealPlayer software and we will continue to invoke legal mechanisms to prevent piracy.

As a person who has spent most of my career in the entertainment industry, culminating from 1997 to 2000 as President of the Fox Television Network, I understand that copyright protection lies at the core of America's ability to create and sell entertainment products throughout the global marketplace on a variety of distribution platforms. Digital copying via the Internet poses fundamental challenges for the economics of both the entertainment and technology industries and we need to meet that challenge in order to realize the potential of this new distribution medium.

The good news is that RealNetworks is building distribution channels, business models and new subscription services that will over time create a robust and legitimate content marketplace for digital music, video and other products provided that license rights to that content can be efficiently and effectively obtained and administered.

DRM technology is one key ingredient for establishing a legitimate digital marketplace. The Real System Media Commerce Suite currently is used by technology platforms such as MusicNet to protect tens of thousands of valuable sound recordings from major record labels. To protect valuable intellectual property with a level of assurance required for digital distribution, DRM's must be universal, flexible and secure. We design our DRM with the ultimate goal of supporting all types of media to all devices. Further, these DRM's must support flexible set of business rules that allow the content creator to determine payment scenarios ranging from pay per use to permanent ownership. Finally, we design our DRM to be native, end-to-end, tamper resistant and to be quickly renewable in the event of malicious attack.

Technology alone will not create the legitimate marketplace for online distribution of content. After an era where first advertising and then e-commerce was widely expected to carry the new online industry to the promised land, we have learned from experience that a mix of business models, matched to consumer behaviors, are required for our industry to succeed. RealNetworks has led the way with premium content services offering distinct packages of digital downloads, on-demand streamed content and webcast streamed programming-that reward content owners while providing unique value to end users. These services are prime examples of RN working in content with using RN technology to promote content to deliver it to consumers on a subscription basis.

Baseball fans can't get condensed games of complete baseball broadcasts on-demand on network TV, but they will be able to pay for this product this season through our RealOne subscription products. In parallel efforts, we are working with Fox Sports, CNN, E! entertainment, ABC News, NASCAR, the NBA and other world-class media companies and sports leagues to bring unique value to the online consumer. In this sense, the Internet won't directly compete with television or radio,

but it will offer programming that is uniquely interactive and well-suited to the online digital medium.

While RealNetworks can build the launching pad for digital distribution, our content partners supply the rockets. Simply put, there can be no meaningful marketplace for digital goods without compelling content. From major media companies, to independent radio stations, to non-profits, to individuals seeking an outlet for creative expression, the Internet is a vast network of content markets. It is in fact a "super market," where great content can reach over 500 million globally connected users. Just as other digital products such as the compact disc and DVD video disc created new markets for traditional content, online digital distribution will enrich content creators and serve consumers in new ways. RealNetworks has played a special role in inventing the channels for digital streaming and downloading of audio and video and our philosophy here is simply to "Let a Thousand Flowers Bloom." Building a Competitive Marketplace Absent Government Intervention

When the history of the first decade of the Internet is written by some future historian, he or she will probably focus one salient fact: that public policymakers in the United States were wise enough to let the infant medium evolve with a minimum of government interference and regulation. It is hardly a secret that the United States, spurred by companies such as Amazon.com, E-Bay, Cisco and Intel, to name only a few, leads the world in innovating the software, infrastructure and business models that make the Internet run and that unprecedented economic value has been created in a very short span of time. In contrast to the European Union, where policymakers have an instinct to "regulate first" then let the market develop, the foresight of American public policy in this sphere must not be underestimated. Congress has stepped in wisely, to respond to distinct needs to protect certain classes of information such as healthcare, financial data, or information pertinent to children. Yet Congress has eschewed more sweeping regulation, and has resisted any temptation to become, in essence, the "Chief Technology Officer for the Internet." We should continue to be guided by two core principles: First, that government should only intervene in technology markets where there is clear evidence of market failure. Second, that competition will always create the best technologies, resulting in new revenue, new quality jobs and new consumer benefits.

Let me first address the issue of market failure. Recently, we have been told that unless a single unitary and open standard is created for digital content protection, the digital marketplace will not evolve. Concerned companies have sketched a scenario where competing and conflicting technologies will create a digital Tower of Babel, where consumers are confused by different technical choices and where systems fail to interoperate with one another, preventing the build out of an end-toend distribution channel for digital content.

From our perspective, the Tower of Babel scenario ignores the realities of today's marketplace. Scores of companies, including RealNetworks, are laying the foundation for secure content distribution through flexible DRM's. Software can be built to accept multiple DRM's and play back content that is encoded in a variety of file formats. For example, RealNetworks supports several different secure file formats, including Microsoft's Windows Media DRM. Unlike a hardware environment where a media player is permanently "locked in" to one DRM or can only play content from one source, software media players are designed to be rapidly updated to accommodate new file formats and improved security schemes. In addition, our player technology supports multiple third party DRM solutions. In this manner, a consumer can get content secured by a variety of different DRM's in different formats. In designing these DRM solutions, we also adhere to a principle of "ease of use" for consumers, with the digital rights management functions occurring through automation that is essentially transparent to the end user who simply wants to access interesting and entertaining content delivered online.

To win the business of major media companies, technology companies will make sure that their security solutions meet the specifications outlined by copyright holders. If we fail to do this, we won't get their business. As in the case of the VHS vs. Betamax systems, the marketplace will ultimately decide on the most appropriate technology for specific consumer and industrial uses. We see evidence that market-driven solutions for security is rapidly evolving on the Internet today and we will continue to design our software players and security solutions to be flexible, multi-platform and renewable.

Market-driven solutions, as has been the case in American industry from the Nineteenth Century invention of the telegraph to the 21st Century mapping of the human genome, consistently create the most enduring economies economies that reward inventors and consumers with products that become a part of the fabric of their daily lives. Only a few years ago, the Internet was primarily a text-based me

dium. Now we think of going online in terms of accessing the latest news, sports, entertainment, music videos and short films. Ten years from now, we may think of the convenience of the Internet like a literal "home video" store, where we can "stop by" to rent the latest films or our favorite television shows. This is why we are so excited about playing a role in creating these new digital distribution markets by creating platforms for rich media content delivered to millions of consumers and secured by our DRM solutions.

Government-Mandated Standards will Stifle Innovation and Fail to Reduce Piracy.

The alternative to market led solutions for digital rights management is a scenario where the government picks a winner and mandates that this government regulated standard become the "open standard" for the industry. This scenario is embraced in the Consumer Broadband and Digital Television Promotion Act, S 2048, introduced a few weeks ago by Senators Hollings and Stevens.

The Bill mandates that all hardware and software digital media devices respect standard security technologies that are approved by the FCC. If the undefined "industry" fails to develop the specified security technologies within a one year period, then the FCC is authorized to develop a standard based on the criteria listed in the proposed bill.

The criteria may sound familiar to you, given my description of the RealNetworks and other industry developed DRM solutions that are already protecting digital content in today's marketplace.

Standard security technologies, according to the Hollings-Stevens legislation, must be: reliable, renewable, resistant to attack, readily implemented, modular, applicable to multiple technology platforms, extensible, upgradeable, not cost prohibitive and the software portion of such standards must be based on open source code.

Aside from the last requirement, several current DRM's meet the proposed legislation's test. The recent advances in the Broadcast Protection Discussion Group for digital television affirm that the IT, consumer electronics and content industries can work together to develop effective security measures outside a framework of government bureaucracy and regulation.

However, S. 2048 not only sets abstract requirements for a technical standard, but also poses serious issues for consumer use of digital content. We find it very troubling that S. 2048 appears to make it a crime for an individual to alter security technology to access protected content, unless their behavior fits within a very narrow safe harbor. To be precise, the person must be a lawful recipient of a personal copy for lawful use in their home and only play back such content at a time when "it is lawfully performed." This safe harbor is so narrow as to radically rewrite the long-standing Fair Use doctrine in our copyright law, which has been applied time and again by courts from every Federal Judicial Circuit to ensure that consumers can use purchased or public domain content for legitimate purposes.

For example, S. 2048 could be read to prohibit-indeed criminalize the practice of a consumer taping a digital TV program and saving that file for future multiple viewings with extended family and friends.

Mr. Chairman, this proposed "government mandate" approach to solving the digital piracy problem will create a host of problems for the information technology industries, cause a firestorm of protest among American consumers, and ultimately do very little to prevent the proliferation of pirated digital music and video files. We reach this conclusion, based on our track record of developing successful software products that are used by millions of consumers to legitimately play back and store online content and from our observation of the history of government mandated standards. Please allow me to summarize these conclusions as seven "lessons" based on our experience, which call into question whether any government mandated standard would solve the piracy problem it is designed to address:

1. Forcing an industry to reach a "common standard" inevitably results in lost time to market for effective solutions. This was the case with the effort to protect digital music in the Secure Digital Music Initiative. It is especially true where RealNetworks, IBM, InterTrust, RSA, Microsoft and a host of other leading companies have already deployed DRM's that meet many of the security criteria of S. 2048;

2. Government standards inevitably try to solve "last year's problem," while technology, consumers and the hacker community march on. The FCC, already burdened with a full plate of important regulatory tasks, is unsuited to stay on top of the latest industry developments in encryption, tamper resistance, new formats and online security measures and would be unable to deploy solutions in the matter of hours required to stop system-wide hacks of the government administered standards;

3. Creating a process for the government to pick a winner will politicize the standards process and favor those companies with staying power and political skill, not necessarily the best technologies;

4. A single uniform standard presents a bigger target for hackers;

5. Overbroad laws that mandate content protection for all digital media devices would potentially criminalize widespread lawful and reasonable consumer activity on home networks and common practices of making back-up copies for future use;

6. New laws creating legal uncertainty will result in less investment in new technologies that in any way process digital content, thus slowing the roll-out of digital television and broadband deployment;

7. Finally, we have learned that the adoption of new and confusing Fair Use tests that apply to narrow sets of consumer behavior, such as the safe harbor envisioned in S. 2048, lead to legal confusion, consumer confusion and eventual market paralysis.

The Need for Targeted Legislation to Update Existing Copyright Law to Accommodate New Technologies and Promote Digital Content Services Congress must always proceed carefully before tampering with the regime of Copyright, Patent and technology laws that maintain the balance of copyright between the incentive to create new works and the rights of consumers to enjoy those works. S. 2048, as currently drafted, would radically alter the copyright balance in ways that disrupt the development of a robust marketplace for digital media, and therefore would benefit neither content creators, nor distributors, nor consumers.

Only four years ago, Congress created new rights in copyright law and new security enforcement mechanisms with the passage of the Digital Millennium Copyright Act. Recently, in its Section 104 report, the Copyright Office recommended several changes that would update the DMCA to better solve the problems of digital distribution. Clarifying the status of temporary copies in RAM and server copies, for example, would eliminate legal uncertainty in the area of licensing of music for online distribution and speed up the legitimate offering of music on a subscription basis. Changing notice provisions to copyright owners, allowing for blanket notices to license thousands of works at a time, would similarly stimulate this music distribution channel-all in a way designed to compensate copyright owners.

We don't need additional new criminal penalties designed to make it harder for consumers to access digital works. In fact, the DMCA already provides powerful mechanisms to prosecute those who distribute software primarily designed to circumvent technical protection measures and, as I mentioned above, RealNetworks was the first company to enforce these provisions. If pirates reach a level of activity where they begin to pose a challenge to secure distribution of content in a given channel, the DMCA and current copyright and criminal laws provide the tools to go after them and shut down illegal products.

Rather than focusing its energy on creating a new regulatory framework for digital media distribution, we believe it would be wiser for Congress to eliminate practical barriers to the current marketplace, particularly in areas such as Internet radio where new legal regulations have made it harder for innovative programming services to compete on a level playing field with other content offerings. Several of these measures are already under consideration in the House and Senate and RealNetworks would urge policy makers to adopt limited legislation designed to impact and resolve the following issues:

1. Online Music Licensing-we need to update existing statutory licensing provisions and make it easier, not harder, to pay writers and publishers for use of their works online via music subscription services. To compete effectively with unlicensed music file sharing services, legitimate online services should be legally enabled to offer comprehensive content offerings, such as complete libraries of songs, to end users, without burdensome notice requirements that necessitate thousands of individual licensing transactions before any content can be offered to music consumers;

2. Web Radio-Congress should examine whether the current standard for the performance of sound recordings via web radio has been interpreted to create a burdensome rate structure on an innovative new medium that offers a diversity of content from a wide variety of webcasters to the public;

3. Network Transmission-we need to clarify that copies that are not accessed by the consumer, but simply facilitate the transmission of a final copy to the end user, should not bear separate royalties or taxes;

4. Performances and Reproductions—as recently recommended by the Copyright Office, Congress should distinguish between a performance, such as an on

demand stream, and a permanent reproduction, such as a digital download, for the purpose of computing royalty payments;

5. Copyright Royalty Tribunal-Congress should explore the reestablishment of a permanent judicial panel such as the Copyright Royalty Tribunal-in order to speed up rate-making proceedings and foster new distribution models such as webcasting.

Mr. Chairman, as set forth in Article I of The Constitution, our copyright system is predicated on the balance of consumer rights to enjoy content and the limited monopolies granted to creators of content in order to incentivize them to create works that promote the progress of "Science and the Useful Arts." Yet recent changes in our copyright laws threaten this delicate balance and we believe it is time for Congress to address the confusion caused by the DMCA regarding the status of consumer Fair Use, not in the limited and restrictive manner contemplated by S. 2048, but in a way that clarifies that consumers have the right to store, archive and time shift purchased and public domain content. The simple act of breaking a digital seal should not be a crime in this country if the underlying purpose falls within the accepted personal use ambit of our long-standing copyright balance. A clearer zone of fair use will stimulate the invention of legitimate products designed to allow users to enjoy purchased music and video that is delivered by new digital services. In turn, this will create demand for broadband services and increase investment in new technologies.

Working cooperatively, the content and technology industries will create a dynamic marketplace for digital distribution of content. Such a market will enrich consumers with new choices and lead to new product innovation. Eventually, it will stimulate artists to create new art forms unique to the new digital medium.

RealNetworks has worked in partnership with independent artists and leading media companies to build the framework for online distribution in a way that respects copyright, pays artists and offers value to consumers. We stand ready to work with policymakers, consumer electronics companies, broadband providers, media ccmpanies and all other important actors in this environment to create a digital marketplace that affirms the best principles of American innovation and the rule of law.

Thank you for your attention. I'd be happy to answer any questions you may have.

Mr. UPTON. Thank you.
Mr. Assaf Litai.

STATEMENT OF ASSAF LITAI

Mr. LITAI. Thank you, Mr. Chairman. I am Assaf Litai, founder of Vidius, Incorporated. Vidius is a startup company that offers services for use by content owners concerned over peer-to-peer distribution of their products. We also offer auditing services for use by corporations and other institutions who may find that their corporate computers are being used without their knowledge or approval for peer-to-peer distribution of movies, games, computer software, books, data bases and objectionable material.

Today I will demonstrate a video system called Clearsight that is capable of identifying, auditing, and interdicting such piracy. I want to emphasize the importance of its auditing feature.

Most of the peer-to-peer services that deliver pirated material are owned and controlled by legitimate institutions in other lines of endeavor. This should not be a surprise, because most symmetrical broadband access today that is high band width for uploads as well as downloads is provided to institutions rather than private homes. This is unlikely to change anytime soon, because even cable modems and DSL lines provide for slow upload speeds. Viral distribution occurs where both the upload and download are a true broadband speed.

Vidius has applied for over 20 patents on the techniques and services that I will demonstrate today, but demand for them thus