industries. We need each other and in the long term we do great things for each other. The problem is in the short term the content industry reacts to every new technology with fear, apprehension and cries for government intervention. The track record is unbroken. They opposed the player piano, FM radio, television, the cassette recorders, the VCR, the MP3 player, the TiVo, and I could go on and on and on. But again and again the content industries come here to Congress asking you to stop or limit technologies. And most of the time you have chosen the free market over regulation, and what has happened? Well, somehow the sky doesn't fall. New revenue streams are created and the economy and consumers have benefited.

The new villains today at this hearing are digital television, digital radio or HD radio, and satellite radio. Right now we are barraged by bills and lawsuits that would impose government mandates on our products and limit private non-commercial activities of consumers. The television broadcast flag and audio flag are two such proposals. They are radically different in terms of technology, implementation and impact on innovation and consumers, and that is why we have two separate panels and that is why I urge you to consider them separately.

The television broadcast flag emerged from a very rigorous multiyear, multi-industry technical process. It was implemented by the FCC and was only addressing redistribution over the Internet. By contrast the audio flag bill, H.R. 4861, is aimed to stop the copying, in other words, non-commercial recording inside your own home. The bill targets unauthorized copying, not illegal copying, but just unauthorized. And, secondly, no audio flag actually exists. Unlike the video flag, the audio flag was not the result of an industry process. The RIAA does not even have a technical proposal. Instead, they come with a theoretical mandate and so they come with a theoretical mandate and ask you to legislate on it.

The audio flag bill also contradicts the Audio Home Recording Act. Congress challenged us to come make a deal with the recording industry. We did. It said digital audio recording products shall not be restricted except by the law that was already in there so you cannot make copies of copies and royalties shall be paid and then they shall be produced. But yet here they are with legislation and lawsuits. Also significant, a flag would bring digital radio transition to a halt. The only way to accomplish the bill's ban on copying is through an encryption scheme which would obsolete all existing digital radios notwithstanding the prohibition in the legislation.

Basically the RIAA is showing up very late to the party. They ignored the CPTWG, they ignored the FCC. They have no evidence of real harm and they are demanding that everyone bring their lawful

businesses to a full stop. The bill's proposal to lock down satellite radio is even more outrageous. Exciting new products are being sold by XM and Sirius that allow consumers to record lawfully acquired material recording off of radio. They comply with the Audio Home Recording Act. They cannot be used for piracy and all digital recordings are locked into the device. There is no demonstrated problem and there is no evidence of harm to music sales.

These proposals are merely the latest step in a long-standing attempt to tip the balance of copyright. We always hear about balance, but we never hear about consumer rights and consumer balance. The lawsuit provides an example that you should focus on how much copyright has spun out of control. The record labels have sued XM radio for these devices. They are suing for statutory damages of $150,000 per song. That translates into $115 million per XM device already sold. That liability against five devices would exceed XM's 2005 revenues. Against 100 devices it would exceed the entire revenue of the recording industry and if the INO just becomes one-quarter as successful as the iPod, claim damages would exceed the gross domestic product of the United States of America.

This is all for a product that merely allows private recording. I can't imagine a stronger disincentive to new innovation, but for the RIAA, that is exactly the point. In the past two decades Congress has passed some 20 bills expanding copyright owners' rights and restricting consumer rights. That is why if Congress chooses to give even more powers to the copyright owners, it must protect the rights of consumers by passing H.R. 1201. It balances the copyright laws and it allows the real pirates to be put in jail. It codifies the Supreme Court Betamax decision and allows consumers to bypass technical protection measures to exercise their fair use rights. It is tough on pirates.

In conclusion, I ask you to be suspicious of claims that government limits on consumers and innovation are necessary to protect the content industry. Perhaps they are finally right. Maybe this time the sky is really falling. But I believe you have earned the right to be skeptical.

[The prepared statement of Gary Shapiro follows:]

PREPARED STATEMENT OF GARY SHAPIRO, PRESIDENT AND CHIEF EXECUTIVE OFFICER, CONSUMER ELECTRONICS ASSOCIATION

Chairman Upton and members of the subcommittee, thank you for inviting me to appear today on behalf of the Home Recording Rights Coalition and the Consumer Electronics Association. At CEA, we have more than 2,000 corporate members who contribute more than $120 billion to our economy and serve almost every household in the country. We thus believe it is vital to preserve the innovation, integrity, and usefulness of the products that our members deliver to consumers. The Home Recording Rights Coalition was founded almost 25 years ago, in response to a court decision that said copyright proprietors could, via a lawsuit, stop the distribution of a new and useful product - the VCR. Even the motion picture industry has admitted that it is glad that the VCR was allowed to come to market. Congress should be very careful not to impose any mandates that would be regretted later.

Before discussing the advisability of any sort of "flag" legislation, I want to emphasize that both CEA and the HRRC share and applaud Chairman Barton's and Mr. Boucher's determination that if the Congress should find it appropriate to proceed, it should do so only while enacting H.R. 1201 at the same time. We believe this legislation, as formulated and introduced in this Congress, would protect consumers without threatening any legitimate service. It would not remove any tools against pirates. It has been unfairly caricatured by some, and deserves consideration on its own merits.

On the subject at hand, we have grave concerns. While the rationale for a video flag is questionable, we have not seen any rationale whatsoever for an "audio flag,” nor have we seen any actual technical proposal on the subject. Moreover, based on experience this year, we are deeply concerned about how the entertainment industry will interpret, tomorrow, the legislative language that it accepts today. These industries are turning now to both the Congress and the courts to seek new, damaging, and unreasonable interpretations of legislation which, in retrospect, we were perhaps naïve enough to join them in supporting.

We worked closely with the music industry and this Committee to help draft and enact the Audio Home Recording Act of 1992. The music industry, then, agreed with us, and told the Congress, that the AHRA was forward-looking legislation that would cover all digital audio recorders, even devices that recorded music from digital cable, satellite and terrestrial radio services. What they told the Congress then is not what they tell you now; nor is it what they tell the courts. The music industry no longer agrees that a consumer's right to make a first generation copy of a song includes the right to play it back when and how the consumer wishes. Nor do they any longer agree that the words "No action may be brought under this title alleging infringement of copyright ..." have the meaning they told the Congress they had in 1992. (They do seem still to appreciate the word "royalties” – though apparently they are becoming ever more fond of the word "damages.")

We worked with this Committee and the motion picture industry on the Digital Millennium Copyright Act of 1998 (the "DMCA") as well. Yet, we have also been surprised at some of the later interpretations of this law, and at the reluctance of some to consider the clarifications proposed by Chairman Barton and Congressman Boucher. We therefore are very cautious in discussing any legislation that may impose a mandate on new technology and consumer devices. Both of today's subjects have that potential.

Any "Flag" Provision Should Be Proven Necessary And Accompanied By H.R. 1201 The most vital requirement is that the legislation be necessary in the first place. There has been much discussion and review on this subject by the FCC with respect to the Video Broadcast Flag, which addresses only the mass, indiscriminate redistribution of content over the Internet. There has been no such focused discussion about an "audio

flag" because we have not yet seen any actual proposal for such a "flag." It seems evident that addressing “mass, indiscriminate redistribution" is very far from what the recording industry actually has in mind when it asks for a "flag." The Video Broadcast Flag, as promulgated by the FCC, assured consumers' rights to record from broadcast television. The recording industry seems intent on targeting, and preventing or taxing, consumers' rights to record from terrestrial and satellite radio.

Concerns About Technical Mandates In General

Hard experience counsels that you establish some touchstones before even considering any such legislation. First, given the inherent difficulty of anticipating the timetable and course of specific technological developments, it should be shown unequivocally that the drastic step of a technology mandate is necessary. In addition:

• Any technical terms, and their consequences, must be absolutely clear and well understood before legislation is passed.

• The mandated technologies, their effects in the marketplace and on consumers, and the entire terms under which technology would be available to makers of the covered products must similarly be subject to a clear, common, and immutable understanding.

Mandating the use of the technology should not harm technological progress or unduly burden legitimate products.

• It is no longer enough that, as we have previously insisted, a mandate must be accompanied by affirmative language that protect a consumer's right to make private, noncommercial recordings at home. It is now clear to us, as I discuss below, that any mandate legislation also needs to protect, specifically, the consumer's right to search for, index, store, and play back any home recorded content, in the desired order, and to shift content in terms of time and place -just as consumers lawfully do with their personal video and audio recorders today.

This Hearing Is About Very Different Subjects

The first thing our experience teaches us is that the issues noticed for this hearing are very different subjects. If I can emphasize one fundamental point, it is that these subjects should not be conflated or confused. Each is a separate and distinct issue, whether perceived from the content side as a "problem," from the "technology" side as a potential "burden," or from the consumer side as an obstacle to convenient and quiet enjoyment of products and services at home.

The "Broadcast Flag Authorization Act"

The proposals for a “broadcast flag" emerged from two forums in which CEA, the HRRC, and various members have been very active - the Advanced Television Systems Committee (ATSC) and the Copy Protection Technical Work Group. In ATSC committees, members of the content community for years pushed for a "descriptor" for the purportedly limited purpose of marking content, for possible control over mass Internet transmission. Members of the consumer electronics industry were greatly concerned that such a "flag" might be abused or used for other purposes, resulting in unwarranted control over consumer devices inside the home – something that had never been imposed on free, over-the-air commercial broadcasting. In response to these concerns, the content and broadcasting representatives agreed to clarify that the flag was meant to govern not transmission, but retransmission, outside the home.

Our members led in forming a Broadcast Flag work group at the CPTWG, and in drafting a final report. While the concept of a passive "flag" proved simple enough, the digital means of securing content, in response to such a flag, and the potential effect on consumers and their devices, proved highly controversial and contentious. The pros and

cons finally were sorted out in the FCC Report & Order, which specified that the Flag was meant solely to address "mass, indiscriminate redistribution" of content over the Internet. This is the Order that the Court of Appeals nullified on jurisdictional grounds, and which, we assume, any "flag" legislation would reinstate.

While our members have a variety of views on the FCC action, CEA and HRRC have a couple of very clear concerns:

• First, we have been disappointed to see the "ATSC Descriptor" show up in a number of standards proceedings, proposed by the content industry for uses that go well beyond those originally described to the ATSC.

Second, some of the legislative language that at times has been circulated and attributed to the Motion Picture Association of America and its members would go well beyond the FCC's "mass, indiscriminate redistribution" standard, and could be interpreted as constraining distribution on networks inside the home. • Third, the flag regulations were invalidated before they ever took effect. It should be clearly understood that, if legislation is enacted that would put the FCC regulations into force for the first time, manufacturers must be given a commercially reasonable period of time to manufacture and include the necessary circuitry in their devices.

• Fourth, exceptions for consumer fair use, news and public affairs programming, and distance education, as we proposed to the FCC, should be part of any legislation addressing this subject.

The "Audio Flag"

It is hard to think of a phrase that has been more abused in Washington this year than the words "Audio Flag." From the context of the "Video Broadcast Flag" discussed above, one would naturally think that "audio flag" represents some proposal that:

(a) refers to some known technology

(b) is aimed only at "mass, indiscriminate redistribution of content over the Internet, and

(c) is not aimed at restricting consumers' in-home use of content that they have lawfully obtained.

Unfortunately, this is not the case.

Most Proposals Are Not For "Flags" At All

1

Flying generally under "flag" colors in both bodies this year, either legislatively or in the PR wars, have been proposals that would govern the playback of lawfully received satellite radio content,' require a license for and then deny it to music services that are deemed to encourage lawful home recording,2 define a "flag" as pertaining to music "distribution" rather than to the public performance in question, or require a radio

3

The "Perform Act," H.R. 2466, would require any device that can record from a satellite radio service to play back songs only in the order transmitted on a particular channel not in the order desired by the owner of the device.

2 The "Section 115 Reform Act," H.R. 5553, would revoke the necessary license in the case of any service that "takes affirmative steps to authorize, enable, cause, or induce the making of reproductions of musical works by or for end users that are accessible by such end users for future listening" - "future listening" meaning even the type of time-shift recording that the Supreme Court protected as fair use in the Betamax case.

The "Digital Audio Broadcast" provisions of S. 2686, telecommunications reform legislation under consideration by the Senate Commerce Committee at the time of submission of this written statement, would require the Federal Communications Commission to impose regulations governing such purported "distributions" – apparently, by implication, reclassifying broadcast performances as "distributions" and so by implication amending copyright law.