Testimony of Manus Cooney Vice President for Corporate & Public Policy Development Napster, Inc

Hearing Before the House Subcommittee on the Internet, and Intellectual Property

United States House of Representatives on "Music on the Internet"

Thursday, May 17, 2001

Introduction

Mr. Chairman and distinguished members of the Committee on the Judiciary, I appreciate your willingness to examine the issue of online music. I believe the fundamental question this hearing will require you to ask is: What does it take to make music on the Internet a fair and profitable business? Napster believes the Congress needs to consider all options - including legislative options such as an industry-wide license - in its search for an answer to this question. The Internet needs a simple, objective, and comprehensive solution, similar to the sort of solution that allowed radio to succeed. The Internet does not need another decade of litigation. Congress needs to clarify the law so that all distributive media can compete on an equal footing.

This is a very complex area of the law and I know many of you have worked for years to develop a legal environment that will advance, rather than retard, the development of the online music marketplace. The challenge for Congress has been difficult but you have taken repeated steps to facilitate the growth of this nascent marketplace. Indeed, since 1995, Congress has passed several bills that contained provisions aimed at updating our copyright laws to adjust to the unique challenges of the Internet. However, the complex and uncertain legal environment has stimulated litigation rather then innovation. Indeed, most of today's panelists have recently been - or still are - a party to online music-related litigation involving another panelist. Even copyright owners have sued one another over their respective rights in the online music marketplace.

Napster Background

Before we explore these issues, I would like to summarize for the Committee the history of Napster. As you know, Napster has been the subject of considerable attention. Shawn Fanning, then an 18-year-old freshman at Northeastern University, invented the Napster software in 1999 and, in doing so, unleashed the fastest growing application in the history of the Internet. The Napster application has been installed more than 80 million times. The service has experienced peak use of more than 1.8 million people simultaneously and approximately 10 million unique IP addresses in one day.

The Napster software is a revolutionary technology based on person-to-person, non-commercial file sharing. The Napster application enables computer users to locate and share music files from one convenient, easy-to-use interface. The files are not stored on a central computer like most Internet music services. Rather, the music is stored on the hard drives of each of the millions of Napster users.

So who are Napster's users? They are people of all races, income levels, and ages who really love music. In fact, 86% have purchased CDs in the past six months and, on average, they have bought nine CDs in the past six months. Fully two-thirds (67%) say they use Napster to try out music before buying and they have a wide range of musical interests including jazz, pop, inspirational, gospel, R&B, and many, many more.

The Napster application allows users to share their music files. If they choose to share files - and they are not required to - the application makes a list of the files designated by the users to share and incorporates that users' list into the central Napster directory. The Napster directory is a list of all the files that members of the community are willing to share. Music files are shared by Napster users - person to person. It is the peer-to-peer nature of Napster that is so revolutionary and so powerful. This is what Intel's Andy Grove was referring to when he said that Napster could "rearchitecture" the Internet. It is a service that is easy to use, reliable, scalable, ubiquitous, and with limitless reach.

Napster Litigation

On December 6, 1999, the 18 affiliates of the 5 major recording labels - Warner Music Group (Warner), Universal Music Group (Universal), EMI, BMG, and Sony Music - filed a federal copyright lawsuit (A&M Records et al. v. Napster) seeking damages and injunctive relief against Napster, Inc. Warner is part of AOL-Time Warner, Universal is part of Vivendi Universal, and Sony Music is a division of the Sony Corporation. These companies allege that Napster's users all are violating copyrights and that the Napster peer-to-peer file sharing technology and Internet directory service made Napster contributorily and vicariously liable for its users' alleged copyright infringement. On January 7, 2000, songwriter/publisher Jerry Leiber and others filed a second action alleging similar claims. Five additional lawsuits were filed later against Napster by various recording industry entities, one of which, filed by TVT, has been resolved by agreement to license Napster and its users.

It is worth noting that it never has been alleged that Napster itself directly infringed a single copyrighted work. Rather, the labels allege the user-public is engaging in infringement and that Napster has enabled and/or could control the acts of infringement. Contributory infringement and vicarious infringement are not expressly recognized in the 1976 Copyright Act. Rather, they are court-made theories of legal liability which have been derived from the Act.

On June 12, 2000, the plaintiffs in the A&M Records and Leiber actions moved for a preliminary injunction (pre-trial order) and, on July 26, 2000, the District Court granted the plaintiff's motion. The District Court, in a broadly worded and then amended order, enjoined Napster from "engaging in, or facilitating others in copying downloading, uploading, transmitting, or distributing" copyrighted works "without express permission of the rights owner." On July 28, 2000, an emergency panel of the U.S. Court of Appeals for the Ninth Circuit granted Napster's motion to stay the District Court's pre-trial order pending an expedited appeal. The Ninth Circuit's stay order cited the "substantial questions of first impression going to both the merits and the form of the injunction" that Napster had raised. Oral arguments before the Court of Appeals took place on October 2, 2000, and the court issued its ruling on February 12, 2001.

The Ninth Circuit Court of Appeals affirmed the District Court's preliminary injunction against Napster, subject to a narrowing of the injunction's scope. The 3 judge Ninth Circuit Court panel ruled on the basis of what it recognized was an incomplete factual record established during the District Court proceeding, and thus void of the many developments that have taken place since the lower court proceedings (e.g., the Bertelsmann alliance and the TVT and Edel agreements). Napster disagrees with the Ninth Circuit Court's ruling and has appealed the court's decision.

The District Court's revised preliminary injunction requires copyright holders (in most cases, record companies and music publishers) who want music excluded from file-sharing to give Napster explicit notice about each recording they want to be excluded. That notice must include the following information: the work's title; the name of the featured recording artist performing it; the name(s) of one or more files containing the work available through Napster's file-sharing service; and certification that the rightsholder owns or controls the rights to the work they want excluded.

After receiving an appropriate notice, the injunction requires Napster to filter the specified work from the Napster index. Napster also shares the burden with the rightsholder of identifying variations of file names in order to exclude as many differently-named versions of the file as possible, within the limits of the Napster system. Napster has designed and implemented a file-filtering system and is complying with the District Court's injunction. More specifically, Napster has taken numerous steps to ensure that it complies with the District Court's preliminary injunction. First, Napster engineers have instituted an advanced three-step filtering system that blocks infringing files. Second, approximately 30% of Napster's workforce is tasked with manually searching for and entering into the filtering database file name variations. Napster also recently entered into agreements with Gracenote, Relatable, and Gigabeat, three music service companies that will enhance Napster's ability to filter noticed files and identify file name variations. Further, Napster amended its terms of service to provide that the company will deny users that attempt to circumvent Napster's filtering system access to the service. As a result of these compliance efforts, Napster's filtering system is, if anything, over-inclusive in that it blocks many non-infringing files.

Market Based Solutions Are Not Available

Today, Napster is free. But Napster believes that the Napster service is compelling and attractive enough that consumers are willing to pay for it so that artists, songwriters, the record labels, and other rights holders can get paid. In fact, 70% of Napster's users have said they will pay for continued access to the Napster service.

On February 20, 2001, Napster unveiled to the public the business model for its new membership-based service. The New Napster Service, which the company plans to launch this summer, will charge users a reasonable subscription fee so that Napster can pay all rights holders.

The New Napster Service will also integrate features that stress the promotional nature of the service, so as to insure that Napster continues to enhance CD purchasing rather than supplant it. For example, the New Napster Service will: (1) allow Napster to limit our users ability to transfer a file to another device, in essence tethering the file to the user's computer; and (2) limit the sound quality through fidelity limitations of 128 kbps and lower.

Unfortunately, it does not appear as though the Courts will resolve the legal issues any time soon. And it is clear that the marketplace is not resolving these issues either. It should be emphasized that, notwithstanding our legal arguments in court, it has been Napster's persistent and unwavering focus to obtain licenses from the major record labels. Hank Barry, our Interim CEO, has tried for the last year to make an agreement under which Napster can get a license from the record companies and the music publishers in order that we all might coexist peacefully and guarantee payments to artists, songwriters and other rights holders. In fact, Hank Barry has spoken and met with the heads of each of the major labels on several occasions. In those discussions, he articulated the New Napster Service: one that is secure, tethered to the desktop, and which charges users a fair subscription fee. Napster believed that any such agreement with the labels would serve as a precedent for other agreements and could serve as the basis for payments by the people using Napster to recording artists and songwriters. We were able to reach an agreement with Bertelsmann on a business model for a new service and license terms for the sound recordings and the musical compositions they control. Yet, I cannot today report that any other such agreement has been reached with a major label.

Moreover, music distribution over the Internet is hampered by the incredibly complex and inefficient music licensing procedures that often involve multiple licensors for one particular song. Each song on a CD actually constitutes two copyrights. The first copyright is the sound recording, or the artist's performance, that the recording company (usually) owns. The second copyright, known as the musical composition, is the underlying musical work being performed. The complexity arises from the fact that the musical composition and the sound recording almost always are owned by separate companies or individuals. With approximately 3,000 recording companies and over 25,000 independent music publishers in the United States alone, the prospect of negotiating the sound recording and musical composition rights for every song for online distribution is virtually an impossible task. This situation has led to endless private negotiations and litigation. So what should Congress do? Congress should seriously consider enactment of an industry-wide license for music, commonly referred to as a compulsory license.

Compulsory License

Copyright is a tool of public policy that requires a constant balance between the public's interest in promoting creative expression and the public's interest in having access to works. And in its effort to strike a balance, Congress has consistently turned to the so-called compulsory (or industry-wide) license.

A compulsory license acts as a means to compel a copyright holder to license its programming to a distributor in return for the distributor paying a fee that is either statutorily or administratively prescribed. Congressional use of compulsory licenses generally occurs as the result of a desire to advance specific public policy goals within the framework of an inefficient marketplace. More specifically, compulsory licenses are used to: (1) allow for the implementation of a new technology while ensuring that rights holders are compensated; (2) encourage the widespread dissemination of information to the public through these new technologies; and (3) combat an inefficient marketplace (e.g., inability to obtain licenses from all relevant copyright holders, monopolistic environment, etc.) that otherwise would hinder the development of these new technologies. There are numerous examples in the last hundred years where Congress implemented a compulsory license system in response to these specific policy goals and market characteristics.

In 1909, Congress created a right against the reproduction of musical compositions in mechanical forms (i.e., piano rolls), but limited this right through the creation of a mechanical compulsory license for musical works. The legislative history behind the mechanical compulsory license reveals that Congress enacted this provision, not only to compensate composers, but to prevent one company - which had acquired mechanical reproduction rights from all of the nation's leading music publishers - from limiting the dissemination of the music to the public through the creation of a monopolistic environment.

Years later, Congress again enacted several additional compulsory licenses, this time related to consumers' ability to access broadcast transmissions via cable and satellite systems. In 1976, Congress passed a compulsory license for cable television systems that retransmit copyrighted works. Pursuant to the compulsory license provision, copyright owners are entitled to be paid prescribed royalty fees for a cable television company's secondary transmission of the copyrighted work embodied in television and radio broadcasts.

Then, in 1988, Congress passed the Satellite Home Viewer Act of 1988 (SHVA), which created a compulsory license system for satellite carriers that retransmit television broadcasts that operates similar to the cable compulsory license. Congress acted again in 1999 when it expanded the SHVA's scope to include local-into-local retransmission.

Congress recognized the ability of these then cutting edge technologies to further disseminate to the public television and radio content, and the need to ensure that rights holders remained adequately compensated. Congress also understood, however, the inefficiencies inherent in forcing cable or satellite providers to negotiate individual licensing agreements, thereby resulting in the use of a compulsory license system.

Interestingly enough, considering the current controversy, Congress' next foray into compulsory licenses applied specifically to music. The Digital Performance Rights in Sound Recordings Act of 1995 created a limited performance right for sound recordings, subject to a compulsory license for certain digital audio deliveries of sound recordings. The compulsory license originally applied, in general, to non-interactive satellite and cable audio digital deliveries. The Digital Millennium Copyright Act amended the original law to explicitly include non-interactive webcasting of sound recordings within the compulsory license's scope.

At the time, Congress reasoned that these new technologies promised to encourage the widespread dissemination of this music to the public. Once again, Congress enacted the compulsory license mechanism as a means to ensure that artists and other rights holders were compensated, while not hindering the continued development and deployment of these digital delivery systems.

Finally, it should also be noted that performing rights societies, such as ASCAP and BMI, enforce songwriters' and music publishers' performance rights through a court created process that operates, in effect, like a compulsory license by removing the need to negotiate with individual rights holders. While Congress did not create this procedure, it has implicitly endorsed it by recognizing these performing rights societies in recent legislation. Further, Congress repeatedly has refused requests to outlaw the use of these blanket licenses.

Licensing Problems Are Not Unique to Napster

As I mentioned a moment ago, the licensing problems are not necessarily unique to Napster. Indeed, much of the testimony at today's hearing is expected to focus attention on those circumstances under which the publishing compulsory license should apply to the Internet. Ironically, some of those who oppose Napster's suggestion that Congress consider an industry-wide compulsory license are supportive of compulsory licenses - so long as their copyright is not the subject of one.

One of the record labels represented at today's hearing recently made musical compositions available online without getting the publishers permission. The RIAA has gone to the copyright office after the fact arguing for a compulsory license for the publishers musical works. As part of the record labels consistent attack on nascent, non-proprietary media technology companies who have called for legislative action (i.e. MP3.com and Napster), the record labels have urged Congress to refrain from legislating and, instead, allow the market to resolve these issues. Indeed, Mr. Parsons criticized the "logical absurdity of trying to write regulations for an industry that doesn't even exist yet." Yet, it is possible that the record labels will directly, or indirectly, urge Congress and/or the Copyright Office to do just that: conform the law or pressure the industry to accommodate their own proprietary business models but to not take action to accommodate other business models such as Napster's.

I believe the Committee should reject this clearly self-serving, double standard. If compulsory licensing is appropriate for radio, cable, television and satellite television and for publishing rights to sound recording, I believe it is fair to ask: why not here on the Internet? If the record labels currently benefit from a compulsory license and if they are looking to expand this license to give their respective business models an advantage, why shouldn't Congress consider covering them with the same licenses?

Mr. Chairman, Congress should not be picking winners and losers in the online music marketplace. Through legislation or other means, Congress should not be blessing one business model for the distribution of music online. Consider where our consumer electronics industry and motion picture industry would be today had Congress directed through legislation or pressure those technologies that had to be used in a vcr. Consider where we would be today if Congress sanctioned a Hollywood studio business model for the sale of vcrs - one that empowered the studios to prevent the sale of vcrs by companies it chose not to do business with. Fast forward more than twenty years and that is what some are suggesting that Congress facilitate today..

This is a moment of tremendous opportunity. And the question before this Committee is how to make the world of Internet music work - work simply, work objectively, and work fairly across business models. I submit that the Congress has a record of effectively promoting new technologies in a neutral way while ensuring that creators benefit and are paid. And I believe it is essential that Congress do so again today.