Mr. Chairman and members of the Committee, thank you for inviting me to appear before you today. I am happy to be here on behalf of Napster and all the members of the Napster community. As I did last time I was here, I would like to take a moment to acknowledge Shawn Fanning, the founder of Napster, who is sitting behind me today. He was 19 then. He is 20 now – and despite his advanced years, he is not yet over the hill.

I think no one in this room - even those with whom we have disagreed vigorously - would contest that accessing music over the Internet is something that tens of millions of people, young and old, love to do. Over half of Napster’s users are over 25, and they come from all walks of life. The question before us today – from all of our very different perspectives and responsibilities -- is what does it take to make music on the Internet a fair and profitable business.

To realize this goal, I believe it will take an Act of Congress – a change to the laws to provide a compulsory license for the transmission of music over the Internet. And today I will tell you why I strongly believe such a change is necessary, an important step for the Internet, and why it will be good for artists, listeners and businesses.

Negotiation History

When I last testified before this Committee last July, I did not believe this issue required a legislative solution. I believed that Napster should find a private contractual solution that the rights holders and the people who use Napster could all support. We said "let the marketplace work."

Since that time the Napster community has continued to grow. We then had 20 million members; we have grown to more than 60 million members today, even as we aggressively comply with the District Court’s injunction.

Since people who use Napster buy more music than others and are very willing to pay for music over the Internet, I believed there was a basis for making an agreement with the record and music publishing companies. We built our business model around this idea: that the people using Napster want artists and songwriters to be paid, and that peer-to-peer Internet technology is the most efficient and convenient way ever devised to make music accessible.

I have tried for the last 9 months to make an agreement under which Napster can get a license from the record companies and the music publishers. I believed that any such agreement 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 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.

Perhaps I should not have been surprised at this result. Although the World Wide Web portion of the Internet has been around for 7 years, and billions of investor dollars have been spent founding and attempting to grow technology companies and consumer companies that would help all of us access music over the Internet, to this date no service has been able to provide a comprehensive offering of music on the Internet that is licensed by the major recording and publishing companies.

For the record companies, the promise of music over the Internet has always been "coming real soon now". Every time this Committee holds a hearing on these issues, new promises of imminent progress are made. Just last July, Fred Ehrlich from Sony told this Committee "we are in active conversations" with both eMusic and mp3.com. But, once again, these have turned out to be empty statements.

The DMCA was supposed to solve many of these problems. As Chairman Hatch said in the last hearing of this Committee on this issue:

"In short, it was believed that a stable, predictable legal environment would encourage the deployment of business models which would make properly licensed content more widely available. Sadly, this has not yet occurred to any great extent in the music industry, and the DMCA is nearly two years old."

Look at the facts. Where are the Internet businesses with clear and complete recording and music publishing licenses? There are none. Where are the emerging digital media companies with negotiated agreements with all rightsholders? There are none.

And of course these companies argue that this is Napster’s fault. That argument might be granted some validity if there were even one fully-licensed business with anything approaching a comprehensive consumer offer. But there are none.

We might all well ask - why is this so complicated? Why can’t the record companies and music publishing companies just issue licenses to eMusic, Liquid Audio, Listen.com, Yahoo, MSN and Napster, and everyone else, so consumers can pay money and have access to music over the Internet, while ensuring that artists and songwriters are paid? Why have the record and publishing companies continually said they are going to license, and then not followed through?

Well, one obstacle may have been a lack of will -- the record companies have stated repeatedly that they believe that licenses of sales over the Internet will cut into physical goods sales and generally damage, not increase, their business. This fear, of course, has not been founded in reality to date. CD sales are stronger than other retail, even in the face of uncertain economic times. Internet music has increased interest in music as a whole. Like the VCR, the cassette, and every other major innovation, Internet music has been greeted by a chorus of doom from existing distributors. But let’s assume that the will is there to license music over the Internet – certainly all of the record and publishing companies represented on this panel now say they want to move forward in this area.

Even if we assume that everyone agrees that licensing music for the Internet would be a good thing, my experience is that it is an almost impossibly complicated thing. And unfortunately I have to explain how complicated it is by going over the rights structure in this industry. So if you will let me do that . . .

Industry Overview

This background description here is for those of you who are not copyright lawyers. Bob Kohn of eMusic wrote a great book on this if you want further information.

As the members of this Committee know, when you buy a CD or tape, you are really getting copies of two separate works. The first is the sound recording that the artist and producers and musicians made in the studio. The second is the musical composition, the song that is being played. By law, each copy of the CD is also considered a reproduction of that musical composition. The complex part about this is that the sound recording and the musical composition that is sung on the sound recording (the "song" – the music) are almost always owned by different companies, even where, as in many cases, the recording artist is the same person who wrote the song.

Now if you are trying to make music available to the public on the Internet, whether for download or streaming or even for broadcast, and if you need a private contractual agreement to do that, then you have to negotiate with both sets of rightsholders – the record companies and the music publishers. First you have to go to the record companies (and if you want the good stuff, like polkas and Lithuanian folk songs, you have to go to many record companies - there are over 3,000 record companies in the US alone).

And when you have negotiated each of those 3,000 separate agreements, you are only half way there – because then you have to go and negotiate with all of the music publishers – and there are over 25,000 independent music publishers in the US alone. Mr. Murphy’s organization represents many of them, but I believe Mr. Roberts from MP3.com would tell you that anything less than an overall comprehensive license to all compositions doesn’t do you much good, because the likelihood is that rights you have and the rights you need will not match at all. And even one failure to match can bring down the whole structure.

This is further complicated by the fact that several of the largest music publishers, controlling millions of songs, are owned by the record labels, but the music publishing catalogs they control bear no relation to the sound recordings they control – they are not the same songs. For a final complication - the music publishers have two separate rights, the right to make a mechanical copy of the song and the public performance right, that may both be implicated in this type of licensing. And each of those rights is administered for them by a different rights organization.

Now, as you know Senator, that is a simplified statement of the rights structures in this industry.

Compulsory Licenses

So, what can Congress do to simplify this in a way that will work?

Well, here – at the center of the matter – I find myself in surprising agreement with a perceptive recent analysis by the RIAA.

Vivendi Universal and the National Association of Music Publishers are in a dispute based on the fact that Universal made musical compositions available online without getting the publishers’ permission. The RIAA has gone to the Copyright Office seeking guidance as to whether Section 115 of the Copyright Act applies in such circumstances. The RIAA articulates a compelling case for the need for compulsory licenses. The RIAA says that two fundamental problems limit access to music on the Internet: first, that independent sequential negotiations with all rights holders (like those I described a minute ago) are practically impossible in any reasonable time frame. Second, they say that the laws regarding rights are unclear.

It’s an argument I would like to examine with you in some detail.

So let me quote now from the RIAA’s Petition. I have attached the entire Petition to my testimony.

The RIAA said: "To the extent that On-Demand streams and Limited Downloads make use of musical works, it is right and proper that songwriters and music publishers receive a reasonable royalty, as appropriate and as provided under existing law. RIAA’s member companies are ready and willing to pay reasonable applicable royalties for the services they operate or authorize."

[so far so good]

A few paragraphs down, they continue.

"To be compelling to consumers, it is believed that a service must offer tens or hundreds of thousands of songs, in which rights may be owned by hundreds or thousands of publishers. No service provider is eager to embark on individual negotiations with all those publishers unless it is necessary."

[well - that’s my experience too. Continuing…] "The music industry is unique among owners and users of copyrighted works in that reproduction and distribution of musical works has been subject to a compulsory license since 1909. In the nearly a century that the mechanical compulsory license has existed, it has become the foundation of business practices that are deeply ingrained in the industry and have been embraced by the copyright owners whose works are subject to it."

"… the availability of a compulsory license has ensured that necessary rights can be obtained, when needed, at a known price, and pursuant to established procedures. Recognizing that the business practices founded upon the compulsory license extend to On-Demand streams would avoid the need for individual negotiations on a scale that is unprecedented in the industry and thus facilitate the launch of On-Demand Streaming services…"

"The lack of clarity as to the issues described above has become the primary obstacle to the launch of digital services designed to meet ever-increasing consumer demand…. Representatives of the RIAA and its members have negotiated with representatives of music publishers concerning the licensing of services that would offer On Demand Streams and Limited Downloads. However, in large part because of the uncertainty as to the fundamental questions of law addressed above, these negotiations have not yet successfully resolved the matter."

In short, the RIAA’s position is that Internet music is a mess because everyone involved asserts complex and varying rights, that there are too many potential licensors for "independent sequential negotiations", and that the best way for the market to move forward quickly and fairly may be a compulsory license for musical compositions.

That is the official position of the RIAA – and I endorse this principle. But I endorse it not just for musical compositions – but for sound recordings as well. Not just for music publishers, but also for record companies.

Do they Work? Examples of Compulsory Licenses As the RIAA says, compulsory licenses have a long history of success, allowing for the widespread implementation of a new technology while ensuring that rights holders are compensated. Congress has repeatedly used such licenses as a way of advancing public policy goals in the context of new and frequently inefficient marketplaces. Compulsory licenses have encouraged beneficial new technologies, and responded effectively to particular market failures – including excessive contracting costs and anticompetitive market structures.

Let’s look at some examples:

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 the Aeolian 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. Thanks to this, once a song has been recorded by anybody, it may be recorded by anyone else, without a further license from the music publisher, if the person making the new recording notifies the publisher and pays a statutorily mandated royalty based on the number of copes made. That’s where "cover" songs come from – and only those of us who have heard different versions of "Louie Louie" can appreciate what that compulsory license has meant for American music.

Years later, Congress again enacted several additional compulsory license, 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 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, I think we can all agree that AM and FM radio have been good for recorded music. The benefits of radio have flowed from the effective compulsory license created by performing rights societies, such as ASCAP and BMI. They enforce songwriters’ and music publishers’ performance rights through a court created process that removes 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.

In all of these cases of compulsory licensing, creators benefit from, but do not completely control, the distribution of their product. A balance is struck – a balance that is at the heart of all intellectual property law. Remember, intellectual property is not the same as real property or personal property – copyright is a limited right. Copyright is not based on a private right of the individual, it is a creation of and a tool of public policy. It requires a constant balance between the public’s interest in promoting creative expression and the public’s interest having access to those works. This is a balance that has often proven impossible to find without the help of the Congress.

Important Elements of Any Licensing Regime for Internet Music Let me offer a few specific elements that I think are important for a fair and equitable compulsory license law.

Any such solution has to apply to the entire catalog of the applicable rightsowner, whether record company or music publisher. Too often companies have entered into licensing arrangements that contain a clause saying that the subject matter of the license will be decided "later, when the rightsholders can determine what rights the rightsholder owns and can license." This process, which is generally know a "rights clearances" is often used to transform what looks like a real license into an empty shell.

Any such solution should also offer licensees both the sound recording rights and the musical composition rights. As we have seen above, it makes no sense for a licensee to have a sound recording license, and then have to begin negotiating with all the publishers.

Any technology requirements for copyright management and security have to be general enough so that they are capable of being fulfilled by many vendors. Private licensing regimes have been recently reported which would violate this basic principle of neutrality, by linking access to rights to the use of particular software – even as there are interlocking financial arrangements between the rightsholders and the software companies. ASCAP cannot tell a radio station what brand of transmitter to use; and no such new technological extensions of market power should be a part of any new licensing.

The licensing terms under any compulsory licensing system must be the same for all. I am particularly concerned here about a point Senator Hatch made at our hearing last July, that he was concerned that the major record companies would make cross-licensing arrangements among each other that would have economic terms that would ensure that the Internet services the record companies operate would have greater profits than any other licensed services.

Benefits to All Artists

We must be careful to construct a structure that will allow all recording artists, songwriters, record companies and publishers, not just the few large entities, to participate and profit from music on the Internet. I believe that the great strength of American music is as much in choral, gospel and inspirational music bands, as it is in the latest Top 40 hits. Certainly a 10 minute walk through the shared files of Napster users suggests the same. We all listen to everything. And so all independent labels and publishers should participate as well.

Finally, I think we should adopt a direct Internet rights payment to artists. There is certainly precedent for this in the so-called "writer’s share" of public performance (radio and television) payments that are made by ASCAP and BMI. As you know, a portion of those payments goes directly to the songwriter. We can do the same and give artists a direct benefit from these new technologies.

Conclusion

Senator, this is a moment of tremendous opportunity. For many years, our nation and this Committee heard wonderful promises of an emerging digital music era, where people could have convenient access to the entire catalog of recorded music over the Internet at the touch of a button.

Well, as often happens, history arrived ahead of time.

And it is a uniquely American story.

A young man with no standing, no credentials, no connections, and no plan for placating the powerful, sat down outside Boston and created an entirely new system.

Within 18 months, we were no longer debating whether there would be music on the Internet, but debating the best way to make sure that it continues. More than 60 million users have started a new stage in our national love affair with music. Napster users are nearly 50% more likely to say they are listening to more music now than six months ago, compared to others on line. All of us are finding new music - and music we’d forgotten how much we loved.

The question before this Committee is a matter of policy. How to make this new world of Internet music work. The next step should not be shutting it down, but making it work for everyone. The Congress has effectively promoted new technologies in the past, while ensuring that creators benefit; it is essential that we do so again today.

Thank you.