Statement of Mitch Bainwol

Statement of Mitch Bainwol Chairman and CEO Recording Industry Association of America before the permanent subcommittee on investigations committee on governmental affairs United States Senate on "Privacy &Piracy: The Paradox of Illegal File Sharing on Peer-to-Peer Networks and the Impact of Technology on the Entertainment Industry"

Thank you Chairman Coleman and Senator Levin for the opportunity to testify here today.

My name is Mitch Bainwol. I am the Chairman and CEO of the Recording Industry Association of America, the trade association representing the U.S. recording industry. RIAA members create, manufacture and/or distribute 90 percent of all legitimate sound recordings in the United States.

I'd like to take this opportunity to provide the Committee with some background, insight and perspective on our multi- pronged efforts to combat the devastating effects that the massive illegal copying on peer-to-peer networks is having on the music industry. The problems currently facing the music industry will, as broadband expands, soon be the problems of all copyright holders. This is a point of national importance, as the copyright industries constitute five percent of the Gross Domestic Product and copyrighted works are the single largest United States export.

The decision to enforce our rights against egregious infringers was taken only after suffering years of mounting harm and trying all other avenues. The music industry first tried to use an aggressive public education campaign to discourage the unauthorized distribution of recordings, by explaining to the public that online piracy is not only illegal, but robs songwriters and recording artists of their livelihoods, stifles the careers of up-and-coming musicians, and threatens the jobs of tens of thousands of less celebrated people in the music industry.

The music industry also pursued lawsuits against the peer-to-peer systems, which are knowingly facilitating the illegal distribution of copyrighted recordings on a massive scale. Most important, the music industry has aggressively licensed legitimate online music services to offer legal alternatives to consumers. Only after these steps did not stem the tidal wave of illegal conduct has RIAA resorted to its current course, pursuing the users of peer-to-peer networks who are distributing substantial amounts of unauthorized copies of recordings. And there is one point on which all of the courts have agreed: these users are violating the copyright laws. Our heightened enforcement efforts are deliberately occurring now when, as a result of the music industry's extensive educational efforts, the public is more aware than ever before of the illegality and consequences of online piracy and, at the same time, the number of legitimate online music sources is exploding, giving music lovers a multitude of options for legally obtaining music online.

The Piracy Problem Facing the Music Industry

In the past three years, shipments of recorded music in the United States have fallen by an astounding 26 percent, from 1.16 billion units in 1999 to 860 million units in 2002. And worldwide, the recording industry has shrunk from a $40 billion industry in 2000 down to a $32 billion industry in 2002. Hit records - which are critical to the long-term health of the music industry and enable investment in new artists and new music - have suffered most dramatically. In 2000, the ten top-selling albums in the United States sold a total of 60 million units. In 2001, that number dropped to 40 million. Last year, it totaled just 34 million.

The root cause for this drastic decline in record sales is the astronomical rate of music piracy on the Internet. Computer users illegally download more than 2.6 billion copyrighted files (mostly recordings) every month. At any given moment, well over five million users are online offering well over 1 billion files for copying through various peer- to-peer networks. Peer-to-peer networks allow a user to make media files, including recordings, stored on that user's computer available for copying by others; to search for media files stored on other users' computers; and to transfer exact copies of the contents of other users' media files to that user's own computer. A song can be copied and distributed in this manner an unlimited number of times, without any degradation in sound quality. And unlike traditional music piracy, piracy through networks is viral: unless the user takes affirmative steps to prevent it, the user automatically and immediately begins offering the files that the user copied to millions of other users. Moreover, the overwhelming majority of the distribution that occurs on peer-to-peer networks is unauthorized.

It is widely recognized and acknowledged that individuals who engage in such unauthorized distribution - either by making recordings available for others to copy or by making copies of others' files - are committing a clear violation of the copyright laws. The courts have been unanimous on this point. As the Ninth Circuit explained in the Napster case, "a majority of Napster users use the service to download and upload copyrighted music. . . . And by doing that, . . . the uses constitute direct infringement of plaintiffs' musical compositions, recordings." Judge Wilson quoted this language in the recent Grokster case, and similarly recognized that many Grokster and Streamcast users were downloading copyrighted music, "thereby infring[ing] [copyright owners'] rights of reproduction and distribution." Most recently, in a case involving Aimster, Judge Posner of the Seventh Circuit noted that Aimster users who were distributing or making copies of copyrighted music were copyright infringers, and that there was no evidence in the record before him that Aimster "has ever been used for a noninfringing use."

According to a November 2002 survey by Peter D. Hart Research, by a nearly 2-to-1 margin, consumers who say they are illegally downloading more music report that they are purchasing less music. The same survey found that the main reason consumers are not buying more music is that they get a lot of what they want for free by illegally downloading or copying it from others. In a similar study conducted in May 2002 by Peter D. Hart Research, among 12- to 18-year- olds, 35 percent say the first thing they will do after hearing a new song that they like is download it, versus just 10 percent who will buy it. Among 19- to 24-year-olds, 32 percent download the new song first, versus 9 percent who will buy it.

These findings are bolstered by a June 2003 Edison Media Research report which found that "among the heaviest downloaders, 48% say they no longer have to buy CDs because they could download music for free over the Internet" - an increase of 61 percent in just one year. It is thus not surprising that, while sales of music CDs are dropping, sales of blank CDs (onto which downloaded recordings can be copied) have increased dramatically, by more than 30 percent in 2002. Sales of blank CDs now outstrip sales of music CDs by a more than 2-to-1 margin.

These findings are consistent with the skyrocketing number of users of peer-to-peer networks. As of July 2002, Kazaa - the most popular peer-to-peer network by far - boasted 100 million registered users. By May 2003, Kazaa had become the world's most downloaded software program of any kind, with 278 million downloads.

Although these peer-to-peer networks are well aware of the rampant illegal copying that occurs over their systems, they have taken no concrete steps to stop it, and in fact, they encourage and enable that conduct, while at the same time taking steps to shield themselves from liability. They provide no meaningful warning to their users that uploading or downloading copyrighted recordings violates the law. They provide no filter to prevent exchange of copyrighted material, even though many provide filters that at least attempt to block pornography and viruses. Peer-to-peer networks also establish "default" settings that, unless affirmatively changed by the user, automatically make the files on the user's hard drive available for copying by anyone else on the network. And, as John Malcolm the Deputy Assistant Attorney General of the Criminal Division noted in testimony before the Judiciary Committee earlier this month, in order to foster anonymity on the network:

"many peer-to-peer networks do not require individual users to set up accounts with a central authority. Peer-to-peer users can change their names at will and the names that they choose rarely contain true information that would identify them."

As Judge Wilson observed in the movie and music industries' case against Grokster, Streamcast, and Kazaa, these peer-to-peer networks "may have intentionally structured their businesses to avoid secondary liability for copyright infringement, while benefiting financially from the illicit draw of their wares." Indeed, Kazaa has established itself in the country of Vanuatu, while the illegal activities on its network are causing the loss of numerous jobs in the music industry in the United States. Taken together, all of these factors are clear evidence that the KaZaa's of the world have done and will do anything within their power to facilitate copyright infringement and avoid accountability or legal liability for their actions.

Verizon and SBC also Benefit from Piracy

Although Internet service providers, like Verizon and SBC, are in a unique position to educate their customers about the myriad of threats - legal, privacy, security -- posed by using P2P systems, they have chosen instead to do nothing to educate or warn subscribers. For example, nowhere in Verizon's or SBC's brochures, websites, or advertising are there any warnings or information about the real legal risks associated with using P2P software to get free music. To the contrary, both SBC and Verizon have used a combination of overt and subtle marketing strategies to encourage people to sign up for DSL so they can get all the music they want for free and not have to go to the record store anymore.

The motivation for this strategy is clear when you look at the broadband landscape.

According to a recent USAToday article, 70% of Americans with broadband capabilities use cable modems instead of DSL. The same article quotes an Internet analyst saying: "It's going to be more streaming video and music downloading that's really going to dictate the switch - far more than the price." And a recent report on broadband found that the "growth in peer-to-peer is really driving the market, . . . [and] P2P traffic now consumes 50% to 70% of the capacity . . . up from perhaps 20% to 30% a year ago, . . .".

With a long way to go before catching up to cable, it's no wonder Verizon and SBC - the nation's two largest DSL providers - are reluctant participants in the fight against online piracy. Fortunately, for the copyright community, the vast majority of other ISPs around the nation have been responsible and constructive partners in this important fight.

It's difficult to discount the commercial interests of Verizon and SBC when weighing the merits of their arguments. After all, rather than focusing on the most pressing problems facing their customers, they champion protecting the anonymity of subscribers who are engaged in clearly illegal activity. So while millions of their users are breaking the law while exposing their most sensitive personal information to the world, Verizon and SBC want Congress to believe that the true threat to their consumers is the DMCA information subpoena process and the RIAA, not the KaZaa's of the world. If Verizon and SBC spent as much time and resources educating their customers about the illegality of using P2P services to get free music as they have fighting the RIAA in Court and in Congress, the Internet piracy landscape might look a whole lot better.

The Availability of Legal Online Music

The widespread availability of free illegal copies to download through these peer-to-peer networks has greatly interfered with the development of legitimate online sources of music. But music lovers need not break the law to obtain their favorite music online. The music industry continues to respond to consumer demand by making its music available to a wide range of authorized online subscription, streaming, and download services that make it easier than ever for fans to get music legally on the Internet. There are now many legal and inexpensive ways to get music online. In the United States market alone, there are dozens of excellent legitimate online services that offer a variety of choices to enjoy and purchase online music. These services include:

aolmusic.com, apple.com/music, audiocandy.com, bestbuy.com, bet.com, buymusic.com, catsmusic.com, CircuitCity.com, collegeconcerts.com, cornercd.com, dimple.com, dothehole.com, earwax.com, efetus.com, emusic.com, exitosmusical.com, facethemusic.com, fullaudio.com, FYE.com, galleryofsound.com, independentrecord.com, instavid.com, latinoise.com, liquid.com, burnitfirst.com, listen.com, mainstreetmusic.com, millenniummusic.com, miramag.com, mp3.com, mtv.com, musicmatch.com, musicmillennium.com, musicnet.com, musicrebellion.com, netscape.com/music, newworldrecord.com, phillysoulclassics.com, pressplay.com, qhut.com, rasputinmusic.com, real.com/realone/rhapsody, recordandtapetraders.com, rollingstone.com, samgoody.com, spinner.com, streamwaves.com, tophitsmusic.com, towerrecords.com, windowsmedia.com.

Indeed, the number of legitimate online sources of music is continuing to increase. Additional major retailers and software companies - including companies that are household names - plan to enter the online market within the next six months.

The Music Industry's Massive Educational Campaign

The music industry has, for a number of years, undertaken a massive campaign to educate consumers regarding the illegality of the unauthorized distribution of copyrighted music online. Recording industry leaders, along with an unprecedented coalition of other groups like the National Music Publishers' Association, the Country Music Association, the Gospel Music Association, the American Federation of Television and Radio Artists, American Federation of Musicians, ASCAP, BMI, SESAC, the Songwriters Guild of America, Nashville Songwriters Association International, National Association of Recording Merchandisers, and many others, as well as individual songwriters, recording artists, retailers, and record companies have been educating music fans that the epidemic of illegal distribution of music not only robs songwriters and recording artists of their livelihoods, but also undermines the future of music itself by depriving the industry of the resources it needs to find and develop new talent. In addition, it threatens the jobs of tens of thousands of less celebrated people in the music industry, from engineers and technicians to warehouse workers and record store clerks.

The message of this campaign has been very clear: copying or distributing copyrighted music over the Internet without permission is stealing, plain and simple. Downloading illegal copies is no different than shoplifting CDs out of a record store, and uploading those recordings for others to illegally copy is no different than handing out stolen CDs on the street corner - and the act of downloading or uploading music on peer-to-peer networks is not an anonymous one. This message has been conveyed to the public in a series of print and broadcast ads featuring more than a hundred major artists and songwriters who ask their fans to stop stealing their music. These ads have appeared in a wide variety of outlets, including USA Today, BET, and MTV. The Grammy award-winning artists participating in this campaign range from country artists Brooks & Dunn and Martina McBride to rock artist Peter Gabriel to Christian artist Steven Curtis Chapman to opera star Luciano Pavarotti to hip hop artists DMX and Missy Elliot to legends Stevie Wonder, Brian Wilson, Don Henley and Elton John, among many others. Other participants include songwriters, session musicians, and retail store owners discussing the impact of music piracy in terms of lost sales, lost jobs, and closed stores.

This antipiracy message is also featured on a music industry website, www.musicunited.org, which contains a number of clips from this educational campaign. The website also includes a wide array of pertinent information, including a description of the governing law, a list of legal online music sources, a guide for parents, as well as step-by-step instructions on how to disable or uninstall peer-to-peer software used to illegally offer music for copying.

Since April 2003, RIAA has been sending Instant Messages - and has now sent well over 4 million - directly to infringers on peer-to-peer networks. These messages inform infringers that their actions are illegal and direct them to the Music United website (www.musicunited.org) for information on how they can avoid breaking the law. While some users are responding to RIAA's messages by ceasing their illegal conduct, others have chosen to react by questioning RIAA's enforcement campaign rather than their own conduct. Kazaa, far from cooperating with this attempt to educate its users about the law, reconfigured the newest version of its software to disable the instant messaging system, thereby preventing RIAA from sending messages to Kazaa's newest users. Kazaa did not, however, change its "default" settings, which, as noted above, automatically make each user's files available for copying by others.

Moreover, prior to filing suits, RIAA publicly announced its intent to do so, giving infringers another opportunity to discontinue their illegal conduct. Since our enforcement effort commenced, virtually every major newspaper and television news channel, and hundreds of local news outlets, has covered our efforts. One of the benefits of this heightened awareness is that millions of parents around the nation are beginning, possibly for the first time ever, to talk to their children about what they are doing online.

The Information Subpoena Provision of the Digital Millennium Copyright Act

As you know, RIAA is collecting evidence pursuant to what is commonly referred to as the information subpoena provision of the Digital Millennium Copyright Act ("DMCA"), which is 17 U.S.C. §512(h). Congress enacted the DMCA in 1998 to encourage development of the Internet's potential, while at the same time protecting against the "massive piracy" of copyrighted works that Internet technology permits. One of the purposes of the DMCA was to allow copyright holders to enforce their copyrights against direct infringers rather than the Internet Service Providers ("ISPs"). Thus, in crafting the DMCA, Congress included a fair and balanced procedure - the information subpoena provision - to ensure that copyright owners, with the help of ISPs, have an accessible and efficient mechanism for identifying individuals who are using the Internet to commit piracy.

The balance struck by Congress in §512 was the result of a give and take - in the best sense - between the interests of ISPs and copyright owners, and the need to protect consumers. Congress recognized that traditional enforcement remedies available to copyright owners were insufficient in an era in which massive amounts of piracy could occur instantly at the hands of anyone with an Internet connection.

ISPs recognized that in a digital world they could have exposure to copyright claims, and thus sought from Congress limitations on liability in the DMCA. ISPs wanted copyright owners to focus on the direct infringers, but recognized that ISPs often would be the sole source for identifying individuals who are engaged in online piracy. So, in exchange for exempting ISPs from any monetary liability for the infringing activities occurring on or over their networks and connections (subject, of course, to certain prerequisites), Congress created a framework by which copyright owners, with the assistance of ISPs, could expeditiously identify individuals engaging in infringing activities online. That compromise - expeditious access for copyright owners to identifying information of infringers, in exchange for broad liability limitations for ISPs - is as fair today as it was in 1998.

It is important to note that absent the broad liability limitations of the DMCA, ISPs would most certainly be liable for secondary copyright infringement for the actions of their subscribers. ISPs who resist DMCA subpoenas are trying to enjoy the safe harbor benefit provided them by the DMCA, without shouldering the minimal corollary burden of responding to subpoenas, which is even less burdensome than would be responding to a notice to remove infringing material from their networks. That fact helps explain why Judge Bates - the federal district judge who presided over the subpoena enforcement proceedings between RIAA and Verizon - concluded as follows: "It would not serve the public interest for Verizon to continue to receive the benefits of the [DMCA] - liability protection - without the concomitant obligations of disclosing the identity of an alleged infringer [under §512]."

To achieve their purpose, DMCA subpoenas must bear fruit quickly. An individual Internet pirate can cause tens of thousands of infringing copies to be distributed in a single day. In the case of recordings that have not yet been released publicly, the economic impact of this viral propagation can be devastating. Thus, as Judge Bates noted, Congress provided "express and repeated direction to make the subpoena process 'expeditious.'"

At the same time, Congress carefully built safeguards into §512 to ensure that it is used only to enforce valid copyright claims. A copyright owner or its agent must supply a "sworn declaration to the effect that the purpose for which the subpoena is sought is to obtain the identity of an alleged infringer and that such information will only be used for the purpose of protecting rights under this title." 17 U.S.C. §512(h)(2)(C). The copyright owner must also file a notification that, among other things, identifies material being infringed and information sufficient to allow the service provider to locate the material and, if appropriate, disable access to it. By substantially complying with this notification requirement, the copyright owner or its agent has established the bona fides of its ownership and claim of infringement.

RIAA recognizes that a failure to adhere to any of these requirements is a justification for denying the subpoena and that any copyright owner who misrepresents itself in satisfying these requirements is potentially liable for damages, including attorney's fees. Thus, as described further below, RIAA takes great care to ensure that a user is illegally distributing or copying copyrighted recordings before it files a request for a subpoena.

Moreover, although the DMCA sets forth the minimum requirements for seeking a subpoena, RIAA is not seeking a subpoena as to everyone who is illegally distributing copyrighted reco rdings. Rather, at this time, RIAA is focusing on egregious infringers, those who are engaging in substantial amounts of illegal activity. In so prioritizing its efforts, RIAA is acting no differently than anyone in this country whose property rights have been violated and who is faced with a decision whether to press a legal claim: we are making a judgment as to whether pursuing a possible lawsuit is appropriate given the circumstances.

As discussed above, peer-to-peer networks like FastTrack and Gnutella are, by design and practice, open networks that enable individual users to search for and copy files located on the hard-drives of other users on the network. To gather evidence against individual infringers, RIAA typically uses software that searches the public directories available to any user of a peer-to-peer network. These directories list all the files that other users of the network are currently offering to distribute. By logging onto these open networks and searching for recordings owned by RIAA's members just like any other user, the software finds users who are offering to distribute copyrighted music files. When the software finds such a user, it downloads a sample of the infringing files, along with the date and time it accessed the files, and locates the user's Internet Protocol ("IP") address. Additional information that is publicly available allows RIAA to then identify the infringer's Internet Service Provider.

Before acting on any of the information obtained by the software, an employee at RIAA manually reviews and verifies the information. And, before filing a request for a subpoena, RIAA sends the infringer's ISP advance notice that RIAA intends to issue a subpoena with respect to a particular IP address. Among other things, that allows the ISP, if it wishes, to notify its subscriber that its account is soon to be the subject of a subpoena request. Only after completing all of these steps does RIAA request a subpoena from the clerk of court (using the standard set forth in the DMCA as discussed above), seeking from the ISP identifying information for the individual whose account was being used to distribute the copyrighted music.

As demonstrated by our first-round of lawsuits, RIAA is in no way targeting "de minimis" users. RIAA is gathering evidence and preparing lawsuits only against individual computer users who are illegally distributing a substantial amount of copyrighted music. As indicated above, the subpoenas issued at the request of RIAA thus far involve infringers distributing, on average, 1000 copyrighted recordings. That said, RIAA does not condone any illegal copying - and does not want anyone to think that even a little illegal activity is acceptable. Indeed, in the case of a recording that has not yet been released, the illegal distribution of just that one file can have a devastating impact on the sales of the forthcoming album.

Last spring, the record companies brought suits against college students who had established and were running unauthorized peer-to-peer networks on their college networks, on which they were illegally distributing tens of thousands of recordings. The industry settled those cases for $12,500 to $17,000. While every case is unique, we intend to be similarly fair and proportionate with respect to individual infringers and to consider each individual's circumstances.

As discussed above, the DMCA itself builds in ample safeguards for the privacy of individuals. As Judge Bates held, "These [§512 information subpoena] protections ensure that a service provider will not be forced to disclose its customer's identifying information without a reasonable showing that there has been copyright infringement" and "[t]hese requirements provide substantial protection to service providers and their customers against overly aggressive copyright owners and unwarranted subpoenas." As Judge Bates noted in his decision, the DMCA subpoena process "provide[s] greater threshold protection against issuance of an unsupported subpoena than is available in the context of a John Doe action." This is undoubtedly true.

Under the DMCA subpoena process, there are statutory limits on the type of information a copyright owner can obtain via subpoena and the purpose for which that information can be used. Under a DMCA subpoena, a copyright owner can only receive information that is necessary to identify and contact the alleged infringer - such as a name, address, phone number, and e-mail address. More importantly, the copyright owner is statutorily limited to using that information exclusively for purposes of enforcing its copyright. Compare that to filing a "John Doe" lawsuit, in which any aggrieved party could issue a subpoena requesting anything relating to the subscriber account, including user habits, website visits, and payment records. Moreover, once that information has been provided to a copyright owner via a subpoena in the context of a John Doe lawsuit, there are no statutory restrictions whatsoever on how it can be used or with whom it can be shared.

In short, requiring copyright owners to file John Doe lawsuits would provide fewer protections to an ISP's subscribers, while effectively depriving copyright owners of expeditious access to an alleged infringer's information. That would defeat the careful balance crafted by Congress in the DMCA. Moreover, a substantial influx of John Doe suits would be much more burdensome on the court system. If RIAA were filing John Doe lawsuits in place of each of these DMCA subpoenas, that would affect not only the clerk's office but also the judges.

RIAA shares your concern with respect to not overwhelming the court. It thus has worked with the clerk's office, since prior to beginning our heightened efforts, to establish a process (including providing files electronically) that is acceptable to the court, and has issued its subpoenas on a rolling basis to minimize any impact on the workings of the clerk's office. Moreover, RIAA is willing - and would very much like - to reduce substantially the number of subpoenas it issues by providing multiple IP addresses for the same ISP on each subpoena. RIAA believes the DMCA allows this practice but, because many of the ISPs have objected, to date the RIAA has issued separate subpoenas for each IP address. Providing multiple addresses per subpoena would significantly reduce the administrative tasks for the clerk's office, and any support you could provide on this issue would be greatly appreciated.

Copyright infringers on peer-to-peer networks should have little expectation of privacy. Individuals on peer-to-peer networks have opened their computers, permitting access to countless others to copy whatever they wish. As Judge Bates observed, "it is hard to understand just what privacy expectation he or she has after essentially opening the computer to the world." The use of peer-to-peer networks is not anonymous: the user's IP address is publicly available to anyone else on the peer-to-peer network, and the user's ISP can determine which subscriber was using that IP address. Moreover, almost all ISPs disclose in their User's Terms of Service that, pursuant to the DMCA, they must provide the subscriber's identity to a copyright holder when there is reason to believe copyrights are being infringed. For example, Verizon informs its subscribers that it will "disclose individual customer information to an outside entity . . . when Verizon is served with valid legal process for customer information."

Conclusion

Although there is no silver bullet solution to the growing problem of music piracy over the Internet, we believe that a three-prong approach to the problem consisting of education, legitimate alternatives, and enforcement, is a fair and balanced strategy for revitalizing the music industry in the digital age. Thank you again for the opportunity to testify and I look forward to answering the Committee's questions.

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The Recording Industry Association of America (RIAA) is the trade organization that supports and promotes the creative and financial vitality of the major music companies. Its members are the music labels that comprise the most vibrant record industry in the world. RIAA® members create, manufacture and/or distribute approximately 85% of all legitimate recorded music produced and sold in the United States.

In support of this mission, the RIAA works to protect the intellectual property and First Amendment rights of artists and music labels; conduct consumer, industry and technical research; and monitor and review state and federal laws, regulations and policies. The RIAA® also certifies Gold®, Platinum®, Multi- Platinum™ and Diamond sales awards as well as Los Premios De Oro y Platino™, an award celebrating Latin music sales.