Chairman Coleman and Members of the Subcommittee:

I thank you for this opportunity to express the views of Sharman Networks Limited (SNL) on the online digital content market today and the important role of peer-to-peer (P2P) in this market’s successful future. It is a pleasure to be here today with our Joint Enterprise Partner, Altnet, to articulate our plan co-created and designed to meet the needs of both content owners and consumers.

We applaud your efforts to investigate constructive ways to resolve the differences between the entertainment industry and companies like ours. We appreciate your enthusiasm and attention to these issues here and now, as it is our firm belief that both sides can and should be working together in the near future.

I am Sharman's Executive Vice President, responsible for supervising the enterprise from London whilst our Sydney headquarters is offline at night. I also have specific responsibility for developing the promotion and distribution of licensed content in conjunction with Altnet whose secure rights managed service is integrated into the Kazaa Media Desktop (KMD) software and makes secure authorized content available to each and every Kazaa user. Altnet is the world’s largest distributor of licensed and protected media files, and is the leading purveyor of files utilizing Microsoft Windows Media digital rights management (DRM) technology due to our mutual efforts to build an online distribution solution.

Embracing P2P for the Benefit of All Stakeholders

We are here today to discuss not only the future of this market but the current reckless events driven by parties led by the RIAA who could better spend their efforts making a responsible contribution to these future solutions.  We want to discuss the impact of their actions on consumers, and their misguided approaches to the very important need to address copyright infringement.

We do not believe that there is anyone in this room in opposition to a vibrant technology solution that protects copyright and sells products. We all agree that digital content delivery is not only here to stay but is the way of the future.

Where we differ is in the means to that end.

What we have witnessed in the recent RIAA litigation against consumers can only be considered a backward step in a market that is growing with rapid momentum. The market is not wayward – reactionary protectionism is. Though we have before us an effective means to influence consumers, we are seeing those same consumers overpowered by the RIAA’s legal assaults.  This may well cause a counterproductive backlash likely to damage those the RIAA’s litigation purports to benefit most – artists and creators.

The issue of copyright infringement is serious and legitimate. Whilst we cannot control the behavior of our customers, we have been committed since day one to working with the entertainment industry and with our customers to find solutions to this dilemma.  But, we believe the legal attack on individuals and technology providers on the grounds of protecting copyrights is really just a smokescreen to hide the real challenge confronting the entertainment industry – moving beyond an outdated economic model that is being rejected by the marketplace to a model for which we have a well conceived upgrade path.

Increasingly, the entertainment industry is being widely criticized for not responding to consumer demands and being unable to keep pace with new technologies entering the marketplace.  In a New York Times article on September 19th, reporter Amy Harmon noted that "the record industry's lawsuits appear to be spurring increasingly sharp debates about how the balance between the rights of copyright holders and those of copyright users should be redefined for a digital age." 

She quotes a physician, Dr. Steve Vaughan, 35, who has downloaded about 2,000 songs, which sums up the industry’s dilemma nicely:  "If they gave me a full selection, and I could sample what I want and it was well organized, I would love that.  I'm not doing this to save money.  I'm doing this because the music industry doesn't give me what I want."   Whether it's a drastically overpriced CD or a poorly constructed online music service, the industry is not delivering the goods and services their customers require.

There is a clear path out of this dilemma for the entertainment industry – a path to win back customer loyalty and market share.  Embracing peer-to-peer technology and creating a fair market for the licensing of its content will lead the entertainment industry down this path and back into consumer’s hearts, minds and pocketbooks. 

This is what Sharman & Altnet have been working towards tirelessly for the last 18 months - to develop and prove out a business model focused on delivering a compelling rights managed offering that responds to the preferences of 21^st century consumers. We believe we have co-created a plan that is not only a working solution today, delivering beneficial results to those who have already adopted the model, but that addresses the longer range future for the entertainment industry, enabling them to move forward and embrace a market driven opportunity.

We are poised to take advantage of the market demand for this new model.  Kazaa Media Desktop was created to respond to the very consumer demands expressed by Dr. Vaughan -- to enable users to reach across the Internet to search, buy, and share a wide range of digital content online through one simple, reliable and easy-to-use application.   Our tens of millions of users are living proof that consumers have tried file sharing, and found it to be a preferred way to access, purchase and share content.  But, sadly the major music labels have rejected every approach we have made to them to license their content and to deliver it to users of the Kazaa Media Desktop.

Consumer Privacy Rights

There is another issue at hand here, and that is the delicate subject of privacy—a matter of continued debate among users of the Internet everywhere, and one that is clearly raised by the RIAA’s recent legal action against P2P users. We believe that the basic principles of privacy protection should remain intact for everyone, whether in the real or virtual world. Sharman takes privacy seriously, and has worked tirelessly to enhance the privacy protections afforded to KMD software users by according them enhanced control over third parties’ viewing of their shared folder’s contents, and the ability to block unwanted instant messaging, as well as by altering the user interface to make unintended sharing of personal information much less likely to occur.

People from industry, academia and the consumers themselves are talking about how the RIAA actions have crossed the line. It is not only the backward thinking of the industry that is being widely criticized, but also the ‘back door’ approach they have taken pursuing their goals.  Their total lack of respect and regard for the accepted principles of user privacy on the Internet demonstrates their total disdain and lack of respect for the modern Internet user’s habits and practices.

In a recent article in St Louis Post-Dispatch, Selim Bongol of SBC comments “We think the standards that they’re (the content industry) using here are so incredibly low to obtain personal information on people that it’s invasion of privacy. It’s chipping away at personal privacy and using kind of a meat ax to get at it.”  And there is collateral damage to other potential benefits. Lawrence Lessig, a professor at Stanford University and an expert on Internet law, said recently on PBS “In combating Internet piracy, we are destroying the opportunity of the Internet to serve as a tool for extraordinary creativity and innovation.”

Privacy is critical for Internet applications to protect consumers from viruses, spammers, stalkers, identity thieves and other entities that would misuse the information they collect.  However, there remains a degree of openness to the Internet that allows law enforcement to use additional powers to determine the real identity of an Internet user by requesting that an ISP disclose the identity of a user behind an IP number at a certain time.  It is critical that this aspect of the Internet is not so abused that users of Internet software seek to hide their identity to protect their basic right to privacy. Driving masses of consumers onto private, encrypted, and anonymous networks will create a virtual ecosystem much to the liking and benefit of criminals such as child pornographers, terrorists, and others seeking to operate covertly.

Using companies such as Overpeer, Vidius and MediaDefender to hack into applications like Kazaa to distort its intended purpose, send spoof files to users and even look into users’ folders, is only once removed from the malicious actions of other hackers who employ the same practices.

Clearly, we must draw a line that takes account of the benefits of this evolving technology, users’ adoption of it, and content owner’s need to reasonably monetize it to ensure a thriving new market – a line that preserves privacy and due process. Indeed, Senator Brownback last week voiced the concerns of many across the world when he said; 'Due process, if it existed within the DMCA subpoena process, would provide accused pirates identified through the subpoena with the critical opportunity to rebut accusations of piracy and prevent the release of their identifying information to accusers.'

Striking the Proper Balance

So the question we raise is: Why can’t we strike a balance between the rights of users to privacy, the rights of technology to develop and grow, and the rights of artists and content holders to be rewarded?

We believe a balance can, and must, be reached to protect the rights of all.  So, we have taken the following steps to help drive this process in an open minded, collaborative and forward thinking manner.

The current version of Kazaa, combined with the Altnet technology, creates a solution for an efficient, user-friendly way to sell and market content. It addresses two requirements critical to achieving the goal of monetizing an active market and diminishing piracy:

• An end to end technical solution that prioritizes and promotes rights managed content

• Active consumer education and marketing

Here is how the combined KMD and Altnet technologies address these factors:

1.      The Kazaa product interface is designed and organized in a way that users like and find efficient, enabling the functions of seek, find, purchase, download, store, and share to be easily employed.

2.      Altnet’s DRM technology wraps a file, making it secure the first time it is downloaded by a consumer and every other time a different consumer downloads it from a fellow peer. Importantly, it also enables the content holder to define the terms of sale to the user.

3.      Altnet’s “TopSearch” technology ensures that, in response to a search, rights managed content is delivered in priority order within the Kazaa interface, ensuring that the user will always see rights managed content (if the content holder has licensed its distribution) before any other content.

4.      Altnet’s Peer Points Manager technology enables Altnet to reward users for sharing rights managed content and thereby encourage users of the KMD to share additional rights managed content. Additionally, by rewarding users with points which can be used to purchase more rights managed content, the system promotes loyalty and more active purchasing.

5.      Altnet’s payment gateway provides content holders with a means to sell content on a micro-payment basis using credit cards.

Kazaa and Altnet have combined this approach with promotional and marketing initiatives to achieve user focus on official content such as:

§         Kazaa Showcase, the premium promotional space within the product dedicated to rights managed content promotion.

§         Kazaa Channels – Areas within Kazaa that a consumer can visit for an immersive experience in their chosen category. These Channels, such as Russell Simmons Hip Hop; One Love Reggae, featuring Bob Marley; and various computer games, ring tones and software application Channels, give users the option to enjoy content on a subscription basis as well as a pay-per-piece option, thus presenting the content industry with two separate revenue models within the Kazaa interface.

Importantly, our DRM solution is designed not only to encourage consumers to pay for licensed content; it is designed to discourage users from downloading unauthorized copyrighted materials for free.

We believe that if peer-to-peer users are presented quality, rights managed, original works for downloading at a reasonable price to be paid to the copyright owners, if meaningful incentives are offered for those purchases, and if these products are well marketed, wrongful conduct will diminish dramatically and the availability of infringing files will be suppressed.  Our marketing programs are designed to reinforce this solution further.

But, this solution requires fair market licenses from the music industry and at the time of writing this statement those licenses are not forthcoming.

P2P Benefits for Content Holders

P2P delivers many benefits to content holders in its current form, and will continue to as the model advances:

§         DRM licensing is flexible and terms of sale can be entirely governed by the rights holder

§         Peer-to-peer enables content holders to harness the power of ‘viral marketing,’ a phenomena virtually non-existent outside the on-line world.  The impact of consumers promoting to other consumers can not only enhance a product’s success but can deliver significant reductions in marketing budgets.

§         Peer-to-peer offers tremendous distribution cost efficiencies, since the users assume these storage and bandwidth costs directly; such costs are negligible to the consumer, as sharing a file requires no more hard drive space and consumers paying for 24/7 ‘always on’ broadband connectivity tend to use only a small portion of that capacity. This makes promotional campaigns and video extremely cost effective -- as evidenced in such Kazaa/Altnet success stories as Tony Hawks’ very successful Huckjam tour; artists like Barrington Levy gaining widespread popularity in other countries; and innovative product deals like Ice T’s CD album promotion.

§         Content holders can acquire important insight into user response to products and adapt offerings and promotions cost effectively.

§         New bands, artists and directors can access a user market at low costs and build popularity before partnering with a record label or studio.

Despite the lack of support from the content industry and the persistence of their legal advisors in preventing them from capitalizing on the P2P phenomena, Sharman and Altnet have been able to prove out our model by working in cooperation with content providers ranging from independent artists to worldwide videogame publishers to international movie producers. Sharman has distributed and promoted content from independent music labels worldwide over the Internet using peer-to-peer technology and Altnet’s digital rights managed solution.  Among those who have benefited from our technology are:

1.      Cornerband, a company that allows small, local bands worldwide to DRM encode music and make it available on the Internet, which since June 2002 has been distributing music over the KMD.  These are bands not signed by any label that are in search of an audience, which the KMD provides. Cornerband’s success in using KMD has encouraged other bands to use KMD to dramatically improve their visibility, and allowed some to achieve mainstream prominence.

2.      Australian independent recording label 301 Records for its artists, including “The Honey Palace.”  Music from the band “The Honey Palace” will be digitally wrapped, digitally distributed, and sold on Kazaa for .25¢ a track;

3.      Yash Raj Films, Bollywood’s (India’s) largest producer of feature length movies, which has distributed movie and music trailers and post theatrical release music videos over the KMD.

Through these relationships the Sharman/Altnet joint enterprise has gained tremendous insight into consumer behavior on-line over the past 18 months, and we have equally invested time and energy into understanding and planning the important next phases of our business plan.

The Betamax Doctrine Revisited – And at Grave Risk

Today, as with the VCR in the early Eighties, a new technology has emerged that affords consumer a way to acquire and enjoy content. This way is better, faster, cheaper and more convenient than the existing retail channels.  However, the entertainment industry chooses not to capitalize on this new technology – because they are not yet in position to control distribution in this channel. 

So, to effect control of distribution they resort to their tried and true tactics – demonizing the technology (and those who own it) and, in a sign of true desperation, even demonizing their own customers.  They have attacked the P2P industry and their own customers in the courts in the purported name of stopping illegal copyright infringement. They have attempted to smear the P2P industry and scare consumers by making false and misleading claims over bogus security issues and alleged privacy concerns, and have even stooped to making patently false claims that P2P is a major factor in the distribution of illegal pornography.

They are supporting Luddite-like legislation that would ban P2P technology, and that would subject P2P users to the threat of federal prison time for unauthorized sharing of a single media file. These tactics are extreme, and they will not work. Yet among all these fundamentalist actions, they fail to act to mitigate their theoretical losses by providing fair market licenses of their music so P2P applications like Kazaa can extend choices of the exact files the music industry would prefer these users to be using.

In the case of the VCR, when a critical mass of market penetration was achieved, the entertainment companies released licenses and adopted sensible pricing strategies, and ultimately gained control of distribution.

We believe the entertainment industry is attempting to manipulate the same outcome with P2P. Ultimately, the industry lost their ill-advised legal battle against the VCR in the historic Betamax decision.  But, ironically, they ended up being the single largest beneficiary of the advent of that important new consumer technology, and of its successor – DVD. Indeed, contrary to the scare stories propagated by the industry two decades ago, TV advertising did not die, broadcast TV did not whither, and the movie industry did not suffer the predations of a technological serial killer.

The clear and unbroken two decades’ linkage between the misguided attack upon the VCR, and the Betamax doctrine it spawned, was made clear last week in four powerful amicus briefs filed on behalf of defendants in the MGM v Grokster case now before the Ninth Circuit.

These arguments delineate that there are critical issues at stake in both the judiciary and the legislature as both consider the proper response to the entertainment industry’s decision to attack digital technologies rather than embrace them. Any court ruling or legislative action that distorts or erases the bright line of protection accorded to new technologies, like P2P, that are capable of substantial non-infringing uses would result in a crippling of technological innovation and progress and in substantial economic and functionality losses for consumers.

The Betamax doctrine offers simplicity, clarity, predictability and objectivity, and any departure from it would put the fate of new digital breakthroughs at the mercy of a weak standard that would be complex, murky, unpredictable and subjective.

Among the key points made by those amici curiae are the following:

• A brief filed by forty professors of intellectual property and technology law notes that the Betamax doctrine “clarifies the boundary between contributory infringement and the evolving doctrine of copyright misuse, which limits the power of copyright owners to obtain an unjustified monopoly over technologies”.

They observe, “a capability rule accommodates the fact that uses of a technology may evolve significantly over time…Peer-to-peer technologies, which promise numerous benefits, e.g., relieving network congestion and increasing security and fault tolerance, are still in early development. Uses of these technologies will not evolve over time if progress in this field is stymied by expansive secondary liability… To hold developers of multi-use technologies liable for their customers’ infringing uses – even if those uses are the “primary use” at a particular moment in the technology’s life cycle – would disserve the public interest in encouraging development of technologies with noninfringing uses… Neither Federal judges or copyright holders should be in charge of industrial design policy for the United States.”

• The American Library Association, American Association of Law Libraries, American Civil Liberties Union, and others join to focus on the free speech implications of the present debate.

They declare that while Grokster “was pled purely as a copyright case, its resolution has obvious implications for the development of free speech on the Internet… Despite the attempts of both plaintiffs and their amici to argue that this case is not about the abolition of a medium of communication, that is precisely what it is about… copyright law must be interpreted to preclude the possibility that the development of a new medium of communication could be prohibited simply because it is capable of misuse… at stake in this case is the fundamental issue of whether citizens can be denied valuable technological tools for sharing information and ideas simply because some may use those tools for improper purpose… the law must not be allowed to unduly impede the noninfringing, socially and commercially valuable  uses of new powerful technologies.”

They go on to list what may be lost by a wrong judgment that bows to copyright holders’ exaggerated fears, noting “the potential for peer-to-peer technology to share information in such areas as medicine, law, and science; to archive historical documents; and to provide economic access to a broad range of public domain information, including government documents.” They also observe that P2P already provides substantial noninfringing uses, reporting, “A mid-September 2003 search of files on Kazaa…revealed that at the time the program was accessed… over 176 million files, for which there is no evidence of infringement, can be accessed using defendants’ software.”

The political realm can also benefit from P2P: “As political campaigns move on-line, it is likely that candidates will turn to peer-to-peer technology to distribute position papers and campaign videos… the cost savings of peer-to-peer distribution would clearly make it a superior alternative to other forms of web-based political organizing”. They attack plaintiffs’ essential argument “that when a technology is used primarily for infringing purposes, the noninfringing speech that also relies on the technology can be sacrificed as collateral damage, regardless of its value”. In some cases, this “collateral damage” may be a grievous wound to the yearning for political freedom, as “forcing software companies to incorporate methods to monitor users and choke points to control the flow of information will only make it easier for the governments in China, Saudi Arabia, and other totalitarian regimes to clamp down on speech with which they disagree.”

Summing up, they declare that P2P “facilitates pure speech to a greater degree than virtually any other technology available today… Particularly for digital libraries and other entities devoted to public education and the free flow of information, peer-to-peer technology provides the most cost-effective and in some cases the only feasible alternative for accomplishing their mission.”

• The joint brief of the Computer and Communications Industry Association, and NetCoalition, warns of the disastrous result of a denial of Betamax protection to new digital technologies, charging that entertainment industry plaintiffs “seek to change these rules, and replace them with new standards that would give the entertainment industry a veto power over the development of innovative products and services… This misreading would wreck havoc in the information and technology industries, and would harm users of digital information.”

The domino effect of an erroneous judgment is also noted: “But if P2P software distributors have a legal duty to use infringement filters, so do all other software and hardware firms.”, including those that provide general purpose computers and their operating systems, Internet web browsers, and e-mail and instant messaging software. Recent Congressional judgments would also be overturned, as “appellants are recasting vicarious liability as a means of requiring IT companies to implement digital rights management (“DRM”) systems.

They are trying to get this court to grant what Congress has already denied.” through its inclusion of the “no mandate clause” in the Digital Millennium Copyright Act and its rejection of legislative proposals to have the government mandate copy control technology acceptable to entertainment industry interests. Rejection of mandatory DRM is critical to the preservation of free speech and the inherent balance in copyright law, as, “it is impossible to design a DRM system that can distinguish between fair uses and infringing uses.”

They conclude with the declaration that failing to maintain Betamax protection for P2P software “would fundamentally change the character of the IT industry in this country. Instead of a highly innovative and competitive sector, where new products are rushed to market in an effort to satisfy market demand and capture market-share, the IT industry will be regulated by copyright lawyers from the entertainment industry. These lawyers will second guess every engineering decision made by every IT company, and will insist upon DRM systems that limit the many lawful uses recognized by Congress and the courts.”

• Finally, the joint brief of the Consumer Electronics Association and the Home Recording Rights Coalition begins by declaring, “The Betamax doctrine stands as the Magna Carta of the technology age” and that plaintiffs’ attempt to “eviscerate the Betamax doctrine by imposing numerous limitations on it… would, inexorably, extend the copyright monopoly beyond protected expression to include control over technology… the positions advocated by the MGM appellants and Professors would cause copyright to yield exactly the opposite result than that mandated by Article I, Section 8, clause 8 of the Constitution – it would stifle, rather than promote, ‘the progress of Science and the useful Arts’.”

Consumers would suffer if plaintiffs succeeded in “turning the law of vicarious copyright liability into a more generalized duty on the part of these companies to have the interests of copyright holders rather than consumers uppermost in their minds when making design decisions.” (Emphasis added to all passages above.)

Necessary Next Steps

With the technology and the business solutions in place, the next steps are two-fold; to acquire widespread copyrighted works to digitally wrap and make available for download and purchase by users of KMD, and to extend current payment methods to make on-line purchasing accessible to the widest possible audience in an easy to use, and enjoyable way.

The first step requires the entertainment industry to move forward at the pace of the market and not try to delay, for whatever reason, this massive opportunity. It must learn from history’s successes, not repeat history’s mistakes.

The second step requires the involvement of the other players in the integration chain such as telecommunication firms and Internet Service Providers (ISPs), both industries that are already benefiting from the mass adoption of broadband and wireless connectivity that turbo charges P2P technology. Whether this involvement will take the form of negotiated or compulsory licensing, or some combination of both, will be the subject of much debate here and elsewhere.

Conclusion

Sharman and Altnet are proving this commercial solution that can work for the record labels, movie studios, and game makers. The model can be hugely profitable for the entertainment industry.  We’ve invested in the development of the technology and the refinement of the business model.  The infrastructure is already in place through Kazaa and other peer-to-peer applications.

But the entertainment industry and the peer-to-peer industry must work together if this dynamic new content distribution model is going to realize its potential. The marketplace is ready for it.  Our customers are demanding it.  Wouldn’t it be better to sell to them rather than sue them?

We eagerly await the chance to hold formal, constructive talks with the entertainment industry to see how we can work together to build the digital distribution model of the future.