Consumers Union, a publisher of both Consumer Reports—a print magazine with 4.5 million paid subscribers—and a Web site with one of the Internet’s largest paid subscriber bases, understands the importance and value of copyright protections. In our role as advocates for consumer and public interests, we also understand that copyright law is a delicate balance between the rights of those who create, compile, and distribute information and the ability of the public to get access to that information. We are, in a word, pro-consumer and pro-copyright. As Senator Hatch said last July at hearings on this same subject, we must protect the rights of the creator but we cannot in the name of copyright unduly burden consumers.

New technologies historically have challenged our system of protecting creative works through copyright, and required a balancing between the public’s right to know and the limited monopoly rights of authors. Whether it was the printing press, the jukebox, the photocopier, cable television, or the Internet, these technologies have forced us to continually revisit the balance between the rights of authors and rights of users to have access to information and creative works. Promoting and fostering innovation is clearly the goal of intellectual property law, but with changing technology we will continue to debate what will best accomplish that goal.

When the VCR was introduced in the early 1980s, Jack Valenti, lobbying for the Motion Picture Industry Association of America, made the famous statement, or in retrospect, perhaps, overstatement that “the VCR is to the motion picture industry and the American public what the Boston strangler is to the woman alone.” Of course, we now know the real end to the VCR story—videocassette sales and rentals are now one of the most lucrative slices of the industry’s copyright pie. Had it not been for judicious policymakers and judges, the story of VCRs might have had a very different ending—consumers could just as easily have been denied the benefits of the VCR if the industry’s “Chicken Little” approach had prevailed. We are concerned that the recording industry’s opposition to Napster and other peer-to-peer online systems may be more of the same.

While it is almost a cliché to speak of the Internet and information technologies as revolutionary, it is nonetheless accurate to say that the Internet has completely changed the way we gather and distribute information. I don’t think anyone here would disagree that Internet and information technologies have been responsible for tremendous gains in productivity and an unrivaled period of economic expansion.

As the Internet has developed, several milestones were responsible for huge increases in users on the network: the creation of HTML, the programming language of the World Wide Web, enabling users of the network to exchange information in a common format, and the creation of Mosaic, the world’s first generally accessible Web browser. And we believe that peer to peer networking is a milestone on par with these other developments.

Irrespective of the merits or legality of Napster’s service, Napster has popularized the power of peer to peer networking. The first Web browser introduced to users the idea that they could instantly get access to information anywhere on the planet—what Napster has done is introduce millions of users to the idea that they can find information by connecting directly with other users.

We believe peer to peer networking, which allows individual users to share files with other users without going through a central location, has the potential to revolutionize the way we communicate and learn, but it is a model in its infancy. Actions that we take today can have the effect of facilitating the development of peer to peer networking, or chilling its development.

CU understands the concern of the recording industry that Napster users enjoy creative works without having to pay the artist or the recording company. This is a valid issue. We firmly believe that creators of artistic works, be they musicians, artists, authors, or others, must have financial incentives to continue their creative endeavors and should be fairly compensated for their work. Those who add value to their work, like recording studios, have a right to fair compensation, as well. Unfortunately, we believe the Napster debate has been reduced to the question of whether music should be free, and we believe that is the wrong question. Of course music should not be free.

But there is an important point we should not lose sight of: in a very short period of time, over 72 million people have installed Napster’s online service and manifested a previously unimaginable demand for music distribution online. At the same time, that public demonstrated a previously unparalled appetite for peer to peer information delivery. We are concerned that shutting down Napster, and thereby sending a chilling message to other peer-to-peer online systems, will stifle the kind of innovation that brought us the Internet in the first place. The direction taken in response to Napster-like online music services will be instructive to every fledgling peer to peer service, and their network architecture will be directly influenced by legislative actions taken—or not taken—by this panel.

In the aftermath of the Federal court’s preliminary injunction ordering Napster to cease providing free downloads of copyrighted music, where do we go? Despite the recording industry protestations that it has made and is making efforts to provide music online, it appears to us that at this moment, the recording companies that control the music business aren’t giving consumers what they want. If ever there were a crystal clear indicator that the consumer demand is there, Napster is it. So why have the major labels not stepped up and given consumers what they are asking for?

To boil it down in even simpler terms, we have new technology and we have great consumer demand for that technology. But we have an inefficient marketplace and that prevents the new technology from operating in a way that appropriately balances the competing needs of copyright owners and the public’s right to receive information.

We suspect that the recording industry is resistant to changing the status quo and adapting to consumer demand for getting music online to protect current profit margins. According to columnist Thomas Weber writing in the Wall Street Journal last week, $1.50 or less of a CD priced at $15, goes to the artist.1 Add in composer’s royalties, manufacturing, packaging, and distribution costs and you’re only talking about $5 of the total price. $5 goes to the retailer, and the record company gets $5 for marketing costs and profit. But the record company also gets a portion of the manufacturing, packaging and distribution costs through its subsidiaries, so each “cost item” in that chain also may generate profit for them.

Therein lies the problem for consumers. The public demand for online music cries out for a transformation of the way music is delivered, but the recording industry has strong disincentives from transforming their current distribution and marketing system. With the courts ordering Napster to stop providing free downloads of copyrighted music, the recording industry failing to respond to Napster’s offers to set up a subscriber service, for which they have offered to pay the recording industry a lump sum of one billion dollars over five years, and the industry’s failure to offer the same Napster-style service to consumers themselves, we appear to be at an impasse. And so consumers turn to Congress to properly balance the interests at stake.

We believe the recording industry also fears that online distribution of music could result in total disintermediation. In other words, what if consumers have the means to bypass the label entirely, connecting directly to an artist’s Web site and cutting the recording company out of the transaction entirely?

Indeed, the recording industry has demonstrated through its actions that it is entirely aware of this possibility by waging a war on the technologies of online music distribution, rather than going after uses of those technologies. Over the last few years, Congress has already passed the No Electronic Theft Act of 1997 and the Digital Millennium Copyright Act in 1998, both of which would allow the Recording Industry Association of America (RIAA) to go after individuals who are illegally copying. But the recording industry seems not to be going after individual violators; their real interest seems to be in going after the technology. They realize that with 72 million people installing Napster, they cannot all be made criminals. Regrettably, the recording industry appears to be attacking innovation more than it is attacking piracy.

Consumers are paying the price doubly: they are faced with fewer choices and are paying higher prices for those choices. It also appears that the recording industry may be using litigation as a strong-arm business tactic to freeze the status quo and protect its profits. For instance, the Recording Industry Association of America (RIAA) sued MP3.com, a service that merely allowed users to take a CD that they legitimately bought and access it from any location through the Internet. As Michael Robinson of MP3.com testified here last summer, when MP3.com attempted to abide by a court order and get its system licensed, the company ran into a hornet’s nest of different licensing agreements and spent large sums of money in the process. This for a service that simply gave users the ability to get online access to music they legitimately purchased and owned. MP3.com’s experience is hardly incentive for other Internet innovations.

We have another concern that may contribute to the diminishment of rights consumers now have. In the offline world, once an individual purchases a copy of music, that individual is allowed to give or sell that copy to anyone he or she pleases, otherwise known as the first sale doctrine.2 Yet in the online world, first sale is rapidly disappearing. CU acknowledges that when the first sale doctrine was first contemplated, peer-to-peer online capability didn’t exist. That is why we think Congress should take a look at this issue as well.

Congress has a model for addressing and balancing interests to arrive at a fair and equitable balance between copyright owners, creative artists, and the public. Last July, when this panel last held hearings on this issue, Senator Leahy expressed hope that the parties might work together toward some mutual agreement, otherwise there will be pressure on Congress to create statutory compulsory licenses. That hearing happened before the preliminary injunction against Napster was in place, and before Napster had offered to pay the recording industry $1 billion to license Napster to offer its users paid subscriptions. To our knowledge, the industry, with the exception of Bertelsmann, has flatly rejected that offer and has made no counteroffer. We have neither heard of nor seen any signs of progress. Meanwhile, consumers continue to be deprived of access, for a reasonable fee, to the kind of online service that Napster was providing. We believe the need for Congressional action is even more urgent today than it was last July.

In that vein, Consumers Union believes the best approach would be one that has been tested and proved successful for other new technologies. We propose the establishment of a compulsory licensing mechanism through which Napster and other online music providers would have a legal avenue for the 72 million people who have installed Napster. The compulsory licensing system supercedes the normal marketing mechanism for distributing copyrighted works and allows the prospective user the right to obtain a compulsory license under which he or she can use the work without the copyright owner’s permission. In this way, we believe that Congress would help peer to peer networking to realize its full potential.

Congress has set up compulsory licensing systems in several instances (one repealed pertaining to jukebox licensing), each outlined below.

The Mechanical License, Congress in 1909 created a right against the reproduction of musical compositions in mechanical forms (piano rolls). Congress limited this right however, through the creation of a mechanical compulsory license for musical works. The Cable License of Section 111 establishes a compulsory license for secondary transmissions by cable television systems. The Satellite Retransmission License establishes a compulsory license for satellite retransmissions to the public for private viewing. The Audio Home Recording Act, establishes compulsory licensing-like system by proving immunity from liability for copyright infringement by manufacturers and importers of digital recording devices, but imposes a levy on these devices, the proceeds from which are to be distributed to copyright owners.

We urge this Committee use these models to authorize a Copyright Arbitration Royalty Panel, or CARP, to resolve the disputes over the issue of music royalties between Napster and other peer-to-peer online service, and the recording industry. We also urge the panel to set a time limit in the law to finalize royalties, so that the parties are not debating the issue 3 years down the road, with consumers still left out in the cold. While we realize fully that rights holders tend to dislike compulsory licensingsystems, these systems are products of political compromise; they serve both owners and users by reducing the transaction costs involved in licensing works through the private market system. Compulsory licensing has worked well in other contexts where we have supported it. For instance, CU is on record supporting compulsory licensing for both cable and satellite transmission entities. CU’s Gene Kimmelman told the Senate Commerce Committee in 1998 and 1999 that by “eliminating the transaction costs associated with thousands of copyright clearing negotiations, the compulsory license ensures fair compensation to copyright holders while also providing consumers greater opportunity to receive multichannel video programming from a variety of vendors.” Those principles apply to music, as they do to cable and satellite. Indeed, without compulsory licensing mechanisms for satellite or cable systems, consumers would not have had access to a broad range of programming and we don’t believe these technologies could have flourished. Compulsory licensing provides a fair profit to owners of the copyright while ensuring that the public has access to creative works.

Compulsory licensing has not only provided consumers with greater choice, it also spurred competition. Imagine if Congress had not acted to provide a compulsory license in the case of satellite retransmission of broadcast signals. The only truly viable potential competitor to cable monopolies—direct broadcast satellite—would not be in a position to offer consumers an alternative to cable.

We support compulsory licensing because we believe that “killer applications” like Napster will encourage the rollout of broadband Internet services, just as email and instant messaging were responsible for huge growth in the narrowband Internet. Congressional action will be instrumental in greasing the wheels to facilitate this process, thereby bringing users of Napster and other peer-to-peer technologies into the sanctioned marketplace.

Consumers Union is concerned that unless Congress provides for compulsory licensing, a tried-and-true system that has worked in the past to provide the consumers with access to emerging technologies, we will see a chilling of innovation and competition, and consumers will be the losers.