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same desire is there for a resolution of all of these issues. That is the product that is promised to the American public, this combination of broadband and content. But in order to telescope the timeframe for us to have this miracle, this product presented to the American public, in my opinion, it is going to require an industrial policy.

It is going to require the Federal Government to intervene, because I do not see any likely near term resolution of any of these issues in a way that resolves the big issue of presenting something to the consumer anymore than, in the absence of the Federal Government intervening, do I see any ultimate resolution of the HDTV conundrum; because there are so many moving parts, you cannot ultimately rely upon any one industry to resolve it. You have to have the Federal Government come in and make very difficult decisions.

That is my recommendation, Mr. Chairman, and it would be that this hearing be followed by a whole series of additional hearings that can allow us then to go down the list of still unresolved questions, because ultimately, I think, left to the private sector, we will just have a repetition syndrome of what has happened with HDTV, going back to 1988. We will not see the full resolution of all of these problems.

Thank you, Mr. Chairman.

Mr. UPTON. Thank you, Mr. Markey. I just want to say that I know that your participation in our roundtable meetings has been very constructive and productive, as we have all worked together. We are looking to have another one next month, and we will follow up with additional hearings. That is for sure, as the country watches what is going to happen.

Thank you very much. The hearing is adjourned.

[Whereupon, at 4:23 p.m., the subcommittee was adjourned.] [Additional material submitted for the record follows:]

PREPARED STATEMENT OF THE ASSOCIATION FOR COMPETITIVE TECHNOLOGY

INTRODUCTION

The Association for Competitive Technology (ACT) submits the following views on the subject of protecting digital content. ACT represents over 3,000 information technology (IT) companies and professionals, including those involved in creating solutions to transmit digital content. We strongly believe that the marketplace, without the assistance of additional legislation or regulation, is in the best position to respond to the demands of consumers and copyright holders. Legislative proposals that install government mandates for security standards (or DRM) are unnecessary and will be counterproductive.

The potential market for digital content is an estimated $270 billion, and Digital Rights Management (DRM) technologies and solutions are the keys to unlock it. IDC has estimated that the market for Digital Rights Management (DRM) software is expected to reach more than $3.5 billion in revenue by 2005. Without a doubt, emerging and maturing DRM technologies will enable a secure electronic marketplace where content providers can be compensated for the use of their digital content. Small and mid-size technology companies make up the bulk of the DRM developers heeding the call to action.

Currently, the flow of legitimate online content is a trickle compared to what it could be. Content owners are hesitant to release content for fear that once a song or movie is lost to digital pirates, all value in the investment and commercial opportunities are lost as well. The IT industry and entertainment industry seem to agree that it's going to take continued development of new technology and new business models to provide DRM while expanding consumer distribution, convenience, and choice. In other words, a DRM model needs to allow consumers to rent, buy, time

shift and place shift any piece of lawfully acquired digital content. To that end, the industry is already devoting billions in R&D to develop these technologies.

HOW DRM WORKS TO PROTECT DIGITAL CONTENT

DRM technologies can be grouped into three basic categories: 1) the access control with authentication and/or encryption mechanisms; 2) usage control according to rules that are set by the content distributor, e.g., listen-only rights, where the user is unable to save or distribute the music. 3) tracking mechanisms that allow the content provider to track subsequent use with watermarking and digital footprints. DRM technologies offer content owners the aforementioned dynamic solutions through passive and active methods. An example of a passive DRM technique is consumer identification and trace back to find illegally copied content. Methods include: serial numbers, digital fingerprints, traitor tracing. In order to ensure the integrity and authenticity of digital content, its accompanying metadata and the hardware and software components of a DRM system, security features such as digital signatures, fragile watermarks, and challenge-response protocols are included.

In terms of active protections, DRM systems have been developed that utilize specialized filters and marking techniques such as "audio fingerprinting" or "robust hash" that block unauthorized access to pirated content. In addition, fair-exchange protocols ensure technically that the consumer receives access to protected content only after having paid the appropriate price. If the DRM system detects a security breach, it can revoke and disable compromised consumer devices.

EXAMPLES OF “APPLIED" DRM

In order to be successful on the mass-market, DRM technologies must continue to be effectively integrated into consumer devices. A positive sign is that a number systems for playing digital content currently utilize DRM technology. DRM components can be found in pay TV systems, DAT and some types of compact disc players. The DVD system employs various technological protection measures, including the Content Scramble System (CSS). Other DRM standards include the High-bandwidth Digital Content Protection (HDCP) for protecting digital video outputs, and Content Protection for Recordable and Prerecorded Media (CPRM/CPPM). DRM solutions are being integrated into new devices and software including digital audio and video players, e-book readers, operating systems and mobile devices. These solutions all have one thing in common; they were created without technology mandates.

The technology industry remains focused on creating marketable solutions. Content owners, device manufactures and IT companies have agreed that the successful DRM solutions for digital content should have these features:

• DRM software and devices should be so easy to use that they're nearly invisible to the consumer, even as they move digital entertainment content among their own household and personal devices.

• Users should be able to recombine and share any of their own digital content. DRM solutions should be inter-operable among devices and distribution channels, and the technology should have consistent enforcement of rights wherever the content goes.

• DRM technology should be flexible enough to adapt to different business models (e.g., charges for a single use or for a specified time period).

• DRM technology and devices should be capable of online updates with new protection software.

• Content providers will need DRM databases and systems to define and manage rights to their content.

• Enterprises such as corporations and educational institutions need DRM systems to manage content and group rights.

No doubt integrating the above features creates challenges in balancing the rights of content owners with the demands of consumers. There should also be no doubt that thousands of technology developers are racing to deliver solutions that meet those challenges. The enormous value of the music market provides a powerful financial incentive for DRM innovation, but it's up to content owners, the IT industry and consumers to pick the winning solutions.

XrML

In the attempt to implement these features, one machine-to-machine standard has emerged. The extensible rights Markup Language (XrML) syntax provides content owners the opportunity to attach data about royalty arrangements, ownership, listening limitations, and context pricing (e.g., sale or rental) to the content, so it can "travel" across devices without degrading the copyright. XrML as been embraced by Microsoft and is a primary feature of their DRM function. Moreover, the number

of licensees of XrML's is growing rapidly and is already in the thousands. Now that XrML is emerging as the industry standard language for digital rights, companies are taking initiatives that will keep the DRM marketplace moving.

As mentioned above, XrML supports trial use, rental and sale distribution models. This means that "old" models of selling music will find "new" viability. For example, music content owners, utilizing XrML based DRM distribution systems, can provide a consumer the opportunity to listen to parts of songs for free, purchase singles for a competitive price and purchase albums for download to a digital device.

Eliminate the incentive

Technologists at RSA and Bell Labs have begun addressing the piracy problem by developing a practical solution designed to make it less economically viable to steal content. Their models are aimed at the typical scenario most feared by content owners. The case is which a pirate obtains a legitimate, secure copy, potentially alters, and then distributes copies in order to make a profit. RSA and Bell Labs have offered a solution currently targeted toward software, but applicable to digital content, relying on periodic updates. The key is required interaction between the owner of the content and the legitimate distributor.

Subscriptions

DRM integrated into a subscription model allows content owners to bundle a large number digital content for a fixed price. In a variety of circumstances, a multi-product content owner can extract substantially higher profits by offering one or more bundles of digital media than by offering the same goods separately. At the same time, bundling can be used to introduce new songs, movies, documents and titles to create a continuous relationship with the consumer. This relationship offers a foundation on which content owners can generate revenues. The subscription model may represent a mix between indirect and direct revenues with the option of consumption combined with transparent pricing. Forrester expects additional revenues from digital music subscriptions of $3.3 billion. Subscriptions provide flexibility that will attract consumers. For example, a premium membership might offer a flat rate, eventually combined with services from the second scenario, while an advertisingbased membership might limit access in quantity, time or actuality.

By utilizing DRM technology to securely encrypt the music with a key, the package can be digitally delivered to the consumer's device. There, the locally installed trusted tool gains access to the digital content with an unlock key which leaves the file locally encrypted and streams the digital content into the memory for "on the fly" decryption. The user, who has agreed to the terms and conditions of use, has now the license to access the content. His usage is recorded and the transaction is reported to a clearinghouse to initiate payments and backup system information. The content owner is being protected and the content owner maintains control and determines payment collection.

Companies providing "applied" DRM

There are dozens of companies that are creating and deploying DRM solutions for a number of scenarios. The table below lists some emerging ones and their area of expertise:

Company

Authentica

e-Vue

MediaDNA

SealedMedia

DRM Solution

Focused on "digital rights management software for protecting and controlling valuable business information shared internally or across company boundaries. Product suite lets users share valuable digital content-e-mail, documents, and Web content-without giving up the rights to determine what happens to it, no matter who has it or where it's stored."

"e-Vue also integrates digital rights management (DRM) tools into its MPEG-4 solutions to provide a
powerful and secure multimedia content delivery engine."

"MediaDNA's patented solutions provide business enterprises and publishers of valuable information
with a framework for safely promoting and controlling content distributed over the Internet.
intranets, extranets, and other media such as CD-ROM. MediaDNA's approach is unique in that
its comprehensive solutions not only include proven, Digital Rights Management (DRM)."
"[P]rovides Digital Rights Management (DRM) technology for organizations requiring persistent con-
trol for digital content delivered over the Internet. Unique to Sealed Media is its support for mul-
tiple media formats, its association of licenses with people rather than devices, and the flexibility
of the usage models it enables. Sealed Media customers include ipicturebooks.com (AOL Time War-
ner), Harcourt, Pearson Education, Congressional Quarterly and Xansa."

GOVERNMENT TECHNOLOGY MANDATES ARE UNNECESSARY AND WILL DO MORE HARM THAN GOOD

History has shown that the market, not government regulators, is responsible for bringing copyright protections to bear. The same can be said in the digital media context. The DRM solutions in the section above demonstrate that there can be any number of ways to address the need to protect content owners while providing consumers maximum utility. In this regard, the IT industry is currently working feverishly to develop and deploy robust rights management technology.

We share with the content owners, the goal of providing rich digital content to consumers at an attractive price. However, legislation proposed by some content owners will frustrate our ability to achieve this goal. The Consumer Broadband and Digital Television Act (CBDTA) proposal is myopic with respect to rights management solutions and have the potential of lock out promising technologies. Further, CBDTA creates a scenario where companies not involved in digital media will inadvertently find themselves in violation of a law never meant to be applied to their business model.

ACT remains steadfastly opposed to government-mandated rights management technology standards, for the following reasons:

• The government should not pick winners and losers through its certification process; especially while the IT industry is working to achieve an open DRM standard.

• These standards will "freeze" technology by requiring government approval of design changes. Instead of real-time innovation, we could easily end up with a one-size-fits-all standard.

• Publishing standards on government web sites makes it too easy for hackers to circumvent. • Innovators can't receive government certification if your copyright protection technology isn't "reasonably priced" according to a current draft of a legislative proposal.

CBDTA is out of touch with the realities of the DRM marketplace. Not all solutions will have the same features. Currently, companies focusing on DRM are able to quickly tailor their solution to the evolving need of the content owners. CBDTA requires that content owners, IT companies, devices manufactures and consumer groups come up with standards for all permutations of digital media distribution in one year. The history of DRM shows that there is no such thing as a quick fix. Current technologies are years, not months in the making. It is absurd to believe that all security standards can be discussed and agreed upon in one year. Meanwhile, development of DRM will have to slow pending the discussion. If not, the discussions would have to continue in perpetuity or risk leaving some standards outside the law. The bottom line is that the bill will cut off the development of promising technologies.

Small technology companies, which are the bulk of the DRM innovators, will also suffer under the CBDTA. The proposal calls for representatives of content owners, IT companies, devices manufactures and consumer groups to create security standards. Although the bill attempts to bring all interested parties together, the reality is that small companies will be shut out. Again, the result will be a cessation of innovation. Only the most well funded companies will dare continue because they will have the resources to switch gears when the standard is announced. The smaller companies risk running afoul of the law by putting out illegal software. There is no doubt that venture capital and other funding sources will find "safer" places to put their money. Widespread DRM development will become a distant memory. The net effect will be fewer companies able to provide cost effective, targeted DRM solutions for content owners.

Finally, CDBTA is overly broad and invites unintended consequences. Its definition of "digital device manufacturer" was created to capture any type of digital media software and hardware. Such a definition must be written broadly lest it create loopholes for digital pirates. Its application to “any" type of software that can transmit digital content captures an array of software (and the companies that develop them) that are not intended to transmit content. Companies that develop and ship spreadsheets, word processors and e-mail programs would be in violation of the law unless they implemented security standards. These vendors will face the Hobbesian choice of either raising prices to cover the new development costs (which will not sit with consumers) or break the law (which doesn't sit well with anyone). These problems are inherent within legislative approaches like CBTDA are unwarranted and should be avoided. ACT and the IT industry are not alone in taking this position. Even content providers such as Pressplay (an online music distributor

created by music labels), have urged Congress to focus on applying existing law to the marketplace instead of creating new laws.

CONCLUSION

Development of DRM technology will take two things: continued innovation and time. Unfortunately, government technology mandates do not encourage either. Given the tremendous opportunity for a digital media marketplace, nothing should stand in the way of technologies aggressively competing to create solutions that protect the rights of content owners while meeting the needs of consumers. The only way this will happen is through an unfettered market.

PREPARED STATEMENT OF STEVE GRIFFIN, CEO AND CHAIRMAN, STREAMCAST

NETWORKS, INC.

I would like start out by asking a simple question. What would life be like in America today, if you could not go down to the local Blockbuster and get a movie on a Friday night?

Since 1906 when music publishers fought the introduction of the player piano to today, content companies have tried to slow down or eliminate technologies that they believe threaten their rights and their methods of business.

In the early 1980's the climate surrounding advancements of technology was just as confused as it is today. Then it was the call to arms by the entertainment industry that VCRS needed to be recalled from consumers' homes and banned from sale. We are in the latest chapter of a familiar story; one of content companies vs. technology companies.

I am pleased to have the opportunity to share the story of Morpheus and discuss with you today our vision Peer-to-Peer (P2P) communications and the role it will play in this universe of Digital Media.

The Fear of Technological Innovation

As they say, hindsight is 20-20. Today we have the benefit of looking back and seeing that the VCR was not the threat the motion picture had imagined it to be. Indeed, without the introduction and acceptance of the VCR, entire industries would not exist, the entertainment industry would not have experienced the powerful and profitable growth it has enjoyed, and consumers would have continued to be forced to watch media either in a theatre or on TV.

The ability to enjoy the freedom to go down to your local Blockbuster and get a movie if you chose and watch it in your own home is provided only by the Supreme Court decision in the Sony Betamax case.

I look forward to the day when we will all look back on the early fears of Morpheus and other P2P technologies and recognize them as just as misplaced as the fears of the Betamax were.

P2P Allows People to Communicate Directly Like Never Before

I believe that P2P networks will become as common as the telephone, where people can connect directly to one another without having the operator listen in on your calls.

There has been a lot of misunderstanding surrounding P2P Networks and products like Morpheus by the press and by the community. A true P2P software product, like Morpheus, allows consumers to connect directly with each other and to exchange any type of information-anything-recipes, family photographs, a poem from a budding poet, commentary on public issues, anything. Once the consumer has downloaded the Morpheus software they choose what electronic information that they want to make available to people around the world.

With Morpheus our business model started with advertising and has provided us a revenue platform to achieve profitability. This year we will introduce several additional revenue streams as we attempt to be responsive to the Morpheus users, potential business partners and new marketing strategies. We are passionate about incorporating different tools that empower consumers to communicate and exchange information while protecting the creators' content.

When consumers launch the Morpheus software, they join and help create a selforganizing, self-sustaining network of users around the world. The more users that join the network and share content-the richer the experience. It is a true decentralized P2P network since StreamCast has no involvement with the consumer as it relates to the sharing of information. Consumers can chat using Morpheus just like AOL instant messenger. They can post promotional brochures, they communicate in multiple languages.

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