Good morning Mr. Chairman and distinguished members of the Committee. My name is Gerry Kearby and I am the Chief Executive Officer of Liquid Audio. I would like to thank Chairman Hatch, Senator Leahy and the other members of the Judiciary Committee for the opportunity to appear before you today to speak about an important topic: Online Entertainment and Copyright Law. I am a co-founder of Liquid Audio and have spent my working life in the music business. I began my 25-year music industry career playing in the United States Marine Corps band. After that I was a sound engineer for bands such as the Grateful Dead, Diana Ross and the Jefferson Starship. I was one of the first pioneers in the digital music industry when I built components for the first digital audio editing tools for LucasFilm Limited. My partners and I formed Liquid Audio to provide a secure environment for the delivery of digital music over the Internet.

II. Liquid Audio

Founded in 1996, Liquid Audio created and deployed the first, and most widely adopted solution for the secure delivery of digital music over the Internet. Liquid Audio provides a complete end-to-end infrastructure to use the Internet as a low-cost environment to distribute copyrighted music. This includes encoding, hosting, digital rights management (known as DRM), distribution, retail integration, consumer fulfillment, reporting services and payment of copyright royalties.

Liquid Audio has been first in every key area of digital music delivery. Some major record labels use Liquid Audio for a limited amount of music released thus far – a few hundred titles. The majority of EMI online retailers have chosen Liquid Audio as their digital service provider. The Liquid Audio DRM is one of the most widely used systems to protect music copyrights. The Liquid Catalog of 150,000 independent record label tracks is the largest collection of secure independent music. Finally, Microsoft named Liquid Audio "the key distribution channel for Windows Media content."

Liquid Audio has a proven its secure distribution system for the Internet marketplace that enables musicians, record labels and retailers to publish, and securely distribute digital music to online consumers. Highlights of the Liquid Audio system include:

- 1,200 Record Labels – Liquid Audio’s secure distribution solution enables more than 13,000 artists from 1,200 independent record labels to securely distribute their digital music.

- Network of 1,000 Music Retailers – Liquid Audio’s retail integration solution enables more than 1,000 retailer’s Web sites, including Amazon, Best Buy, Billboard, CDNOW, Tower Records and Yahoo!, to promote and sell digital music to consumers.

- Over 200 Radio Stations – Liquid Audio’s radio promotion network coordinates the promotion and distribution of new record releases, and through our joint effort with R&R Music Meeting, extends this reach to thousands of radio stations across the United States.

- Millions of Consumers – Liquid Audio’s consumer software enables the millions of consumers visiting the 1,000 sites in our network to download and enjoy digital music.

Liquid’s solution enables content owners to promote and sell their music in a variety of formats. Our Retail Integration and Fulfillment Systems (RIFFS) enables retail Web sites to sell music downloads from the 150,000 track Liquid Catalog. Liquid also provides a state-of-the-art consumer software application enabling users to preview, purchase, download, organize and export digital music in a secure environment. Finally, Liquid Audio’s distribution platform is open and compatible with many formats and technologies including MP3, RealNetworks, AOL WinAmp, Microsoft Windows Media, Liquid Audio, Sony ATRAC3, AAC and Dolby Digital AC-3.

Thus, Liquid Audio’s digital music distribution system is a comprehensive, secure platform that is delivering music in a legitimate, user-friendly environment to millions of customers today. Because it is open and scalable, Liquid’s system is capable of serving all of the needs of its existing users as well as millions of more users to access the music they demand while satisfying the needs of artists and labels to provide for security and compensation.

Knowing we could not build an industry alone, in 1998 Liquid Audio became a founding Board member of the Digital Media Association (DiMA), a trade organization of more than seventy member companies that provide legitimate, copyright-compliant music and audio-visual services for consumers, creators and business partners.

III. Digital Music Security

The primary challenge is balancing security with ease of use. Consumers will be driven to illegitimate channels by overly strict controls and complicated procedures. Since our founding, we have listened to and worked closely with artists, writers, publishers, record labels, retailers and consumers. Liquid Audio has been successful in developing a user-friendly system. Our four-part digital music security solution protects music on the Internet today. Those four parts are:

- Copy Control. Liquid Audio’s system enforces usage rules set by content owners that mandate how consumers can use their content, including rules on the number of secure copies, exports to devices and time-outs.

- Distribution Management. Secure protocols protect all parts of the Liquid Audio distribution system to prevent unauthorized acquisition of content as it moves from publishing through Internet distribution, downloading and reporting. Liquid Audio has developed a territory management system that ensures compliance with international licensing obligations.

- Usage Tracking. Liquid Audio is able to uniquely identify each piece of music. Liquid Audio can embed indelible and inaudible DRM information into the audio waveform as a watermark or in digital files as an encrypted header. The embedded information identifies and tracks audio usage and cannot be removed without destroying the recorded music.

- Royalty Payments. Liquid Audio’s reporting system allows for timely and accurate accounting for music use and distribution of the corresponding royalties to creators and content owners.

Liquid Audio’s digital music security system is flexible. It allows artists and labels a variety of security options when delivering music, and it allows users a variety of options when consuming the music.

Liquid’s digital music security system has been tested and approved – as demonstrated by use today by thousands of companies. EMI Recorded Music’s CEO, Ken Berry said: "We have elected to include Liquid Audio’s digital download format and software in our trial because it allows us to offer our music securely and at a very high quality, using an easy online purchasing process."

In addition to our retail network, some 1,200 record labels from majors to independents including Atlantic, Artemis, Capital, MCA, Zomba and edel AG labels, and artists such as Lenny Kravitz, Dave Matthews Band, Don Henley and Aimee Mann use the Liquid digital music security system. Finally, Liquid’s security systems are embedded in consumer products.

Security is not a barrier to supplying all the music consumers want on the Internet. Today, Liquid Audio provides a proven digital music security system in use by major labels, many independent labels, music retailers and consumer product companies.

IV. The Internet Music "Problem"

Over the last several months I have been dismayed and frustrated by the extraordinary traction in the marketplace and public attention awarded to companies that do not respect the law, or do not respect the copyrights of creators and producers. I am dismayed because it is difficult to compete with companies that have seemingly unlimited resources combined with disrespect for the law. But I am as frustrated with the response of the copyright owners to litigate rather than compete. That response has been detrimental to themselves, to the recording artists and to otherwise trusted partners such as Liquid Audio.

As a result of Napster, tens of millions of consumers who otherwise would have been willing to pay a fair price for quality online music have been conditioned to obtaining music for free. Creators and producers of music and other entertainment products have been forced to expend enormous resources to defend their copyrights. This has diverted their attention and resources away from legitimate partners like Liquid Audio that can help develop the ultimate marketplace weapon – competitive alternatives.

It is hard to blame millions of consumers for obtaining compelling music that is easily accessible and free. Some may find their actions unlawful, but the judicial system would be overwhelmed and artists’ fans would become their enemies if creators used the law as their only weapon. As noted below, Liquid Audio proposes a competitive marketplace solution. Napster has proven there is a market. Now the rest of us must work collaboratively to compete. In addition to litigating where appropriate, creators and record labels must turn to their trusted partners for assistance – not just Liquid Audio but several trusted partners, including our technology company competitors.

V. The Internet Music Solution – The Content

Liquid Audio’s digital music distribution system not only respects the copyright rules and protects the content, it provides an attractive environment for Internet users to legitimately experience and acquire music. As I noted earlier, although Liquid was the first, there are a number of other companies not present here today that are fully prepared to provide these secure services and have devoted themselves to the same effort. The stage is set for a competitive marketplace that will serve the needs of music fans, artists and their record companies.

Why then are tens of millions of users turning to unauthorized sites on the Internet to obtain digital music? The answer is simple. The music most people want is not available for purchase through legitimate Web sites. The good news is that millions and millions of consumers are excited about digital music. But those consumers must be attracted to legitimate Web sites.

Liquid Audio is optimistic that the current marketplace can be changed. Now, it is incumbent upon all of us to demonstrate that copyright can be respected and music can be accessible in every format, in every home, in every car and on every portable device. We do not believe that all or even the vast majority of the users of illegitimate music download systems are "cybershoplifters" at heart. We believe consumers will embrace and pay for services that are legitimate, reasonably priced and easy to use. Online resellers using a secure online system, such as Liquid Audio’s, will be able to add value to attract consumers to their sites and will provide a legitimate Internet digital music experience.

This cannot happen unless all the music that the consumers want is made available, including access to all the rich and varied catalogs owned by the major and independent record labels. Defining price points and business models in an open and competitive marketplace is never easy, and there will always be Napster progeny that promote taking rather than purchasing. But with the assistance of this Committee, by encouraging record labels and content owners to work with all participants who add value to the music industry, fans will remain loyal and the music economy will grow for all legitimate participants.

VI. Conclusion

Liquid Audio is optimistic that the current unfortunate state of affairs can be reversed. The Ninth Circuit has ruled. Now we must show our fellow citizens they can respect copyright yet still acquire the music they want, when they want it, where they want it, and how they want it. Liquid Audio stands ready to provide those services. But we can only provide the music consumers want if all music, and not just a token sample, is made available by the copyright owners on reasonable licensing terms.

We appreciate the efforts of the members of this Committee, and their encouraging remarks that record labels and content owners should work with all of the legitimate participants in the online music community to create a secure and competitive marketplace.

The problem before us does not involve a failure of the copyright system, but a failure in the marketplace. It is time to address this failure before the damage is irreversible. We look forward to further encouragement from this Committee and other members of Congress to make the dream of widespread legitimate online delivery of digital music a reality. This effort will help the entire music industry. It will also satisfy the innumerable music fans who are excited about the digital delivery of music but have not been able to find a broad and deep online music experience that offers them legitimacy and value. Thank you for this opportunity to testify today.