UNITED STATES SENATE APPROPRIATIONS COMMITTEE Subcommittee on Commerce, Justice, State and the Judiciary
April 29, 2004 Hearing on International and Domestic Intellectual Property Enforcement
Statement of Douglas Lowenstein, President Entertainment Software Association
I. INTRODUCTION
Mr. Chairman and members of the Subcommittee, thank you for the opportunity to discuss international and domestic intellectual property enforcement as it relates to the entertainment software industry. Our industry values its working relationship with Congress, the Office of the United States Trade Representative, and the Departments of Commerce, Justice, State, and Homeland Security, as we work cooperatively to ensure that one of America’s greatest assets—its intellectual property—receives adequate protection, domestically and abroad.
I appear on behalf of the members of the Entertainment Software Association (ESA). The ESA serves the business and public affairs interests of companies that publish video and computer games, including games for video game consoles, personal computers, handheld devices, and the Internet. ESA members produced more that 90 percent of the $7 billion in entertainment software sold in the United States in 2003. In addition, ESA’s member companies produced billions more in exports of American-made entertainment software, helping to power the $20 billion global game software market. The entertainment software industry is one of the nation’s fastest growing economic sectors, more than doubling in size since the mid-1990s and in so doing, has generated thousands of highly skilled jobs in the creative and technology fields.
Our industry makes a tremendous investment in its intellectual property. For an ESA member company to bring a top game to market, it often requires a team of 20 to 30 professionals—sometimes twice that number—working for two or three years to fuse together the work of writers, animators, musicians, sound engineers, software engineers, and programmers into an end product which, unlike any other form of entertainment, is interactive, allowing the user to direct and control the outcome of the experience. On top of these research and development costs, publishers will invest at least $5 to $10 million to market and distribute the game. The reality is that only a small percentage of these titles actually achieve profitability, and many more never recover their front-end R&D; costs. In this type of market, it is easy to understand how devastating piracy can be as it siphons the revenue required to sustain the enormously high creative costs necessary to produce successful products.
In this testimony, I would like to focus on a number of domestic and international intellectual property challenges we face today, including, most formidably, from large-scale, for-profit piracy of industry products. I will share with you what ESA and its member companies are doing to combat these problems, how government has responded, and what we all must do protect our industry and the nation.
II. THE PIRACY PROBLEM
Entertainment software piracy is an international problem occurring both in the United States and abroad. It takes many forms, which fall into two basic types: hard goods piracy and Internet piracy. Billions of dollars worth of pirated entertainment software products—including some produced by organized criminal syndicates—are present in worldwide markets today.
Hard Goods Piracy
Entertainment software programs are produced for a variety of platforms, including video game consoles, personal computers, handheld devices, and the Internet. Hard goods piracy involves the illegal manufacturing of counterfeit optical discs for use in personal computers (PCs) and consoles for the home, such as Microsoft Xbox, the Sony PlayStation2, as well as counterfeit cartridge manufacturing for handheld devices such as the Nintendo Game Boy.
Optical media piracy is a growing problem for the industry. In many parts of the world, especially Malaysia, China, Thailand, and Russia, pirate optical disc factories produce huge numbers of illegal copies of popular games. In its Special 301 report to the United States Trade Representative this February, the International Intellectual Property Alliance (IIPA) (of which ESA is a member) reported a “staggering” growth in the number and capacity of these optical disc factories across the globe. The “burning” or copying of compact discs and DVDs is also a global problem, not only in Asia, but in Europe and Central and South America as well. In addition, console game publishers are victimized by the growing prevalence of so-called “mod chips” and other devices designed to circumvent technological protection measures built into entertainment software products.
As with optical discs and mod chips, there is large-scale piracy of game cartridges used for handheld units. This piracy is committed in factories as well as smaller workshops which produce huge numbers of illegal products.
The extent of this problem cannot be overemphasized. In some nations, these large pirate enterprises operate in the open, raking in millions in illegal profits. For example, Professor Daniel Chow of Ohio State University said in recent congressional testimony that the intellectual property piracy problem in China has reached a crisis level, with virtually the entire economy of the Chinese city of Yiwu in Zhejiang Province now based on the trade of pirated products. The problem is widespread in China. As I testified before a House Subcommittee last month, enforcement undertaken by just one ESA member, Nintendo, resulted in the seizure of 4.7 million counterfeit items in China during 2003.
Internet Piracy
While pirate factories tend to be an offshore problem, Internet piracy is a problem both domestically and internationally. Internet piracy has been a problem for several years, but is becoming an ever more serious threat due to advancing technology. While broadband Internet communication has created tremendous opportunities for consumers to enjoy high-speed communication and entertainment, it has also been a boon to pirates. High-speed Internet has given pirates the ability to readily distribute entertainment software around the globe. Some of the main Internet piracy problems include so-called “warez” sites, “cracker” groups, and peer-to-peer (P2P) distribution.
There are a number of ways in which the Internet is used to facilitate piracy of entertainment software products. It is a highly efficient distribution tool for the software and video games themselves. Each day, our investigators uncover hundreds of instances in which unauthorized copies of our members’ products are made available through the use of virtually all popular Internet protocols, including through websites, FTP sites, chat sessions and, increasingly, through a growing number of peer-to-peer protocols. The Internet is also used as an advertising vehicle for services that offer pirated hard copies of disc and cartridge-based games, circumvention devices, and circumvention services.
“Warez” is a name given to sites where software and other content is distributed illegally. Often, these warez sites are operated by teams of software “crackers,” individuals and groups skilled in “cracking” technological protection measures, thus allowing infringers to distribute unlimited copies of the games around the world. These sites represent a major threat to our industry. We have been extremely gratified with the Justice Department’s aggressive enforcement actions against these warez groups, including last week’s announcement of Operation Fastlink, an internationally coordinated investigation which resulted in the closing of warez servers and the seizure of pirated products. The Department of Justice reported that Operation Fastlink resulted in the seizure of more than 200 computers in the United States and 10 other countries. We are most appreciative for these actions that have effectively shut off illegal access to approximately $50 million of pirated works.
Internet piracy also fuels hard goods piracy by serving as an early source of the “cracked” version of game titles. Internet pirates generally obtain legitimate copies of games on the day of release or, in some cases, even prior to the commercial release of a game title. These copies are then farmed out to crackers, who, within 12 to 24 hours are often able to bypass the access and copy protection technologies included in the game software and produce a “cracked” version of the game, i.e., one stripped of these protection technologies. These cracked versions are immediately made available throughout the Internet and often are sold directly to different criminal organizations, which dominate the global trade in pirated entertainment software through a network of replication facilities in Southeast Asia and Eastern Europe. These organized crime syndicates are able to use these “cracked” versions of game software obtained illegally from the Internet to manufacture and sell pirated games on the streets, either in competition with legitimate versions or, as in most countries around the world, two to three weeks in advance of the time that legitimate goods are available.
Internet cafes offering computers for temporary use have become ubiquitous fixtures around the world. They provide a quick and easy way for people to check e-mail or use the web. Unfortunately, they also provide a quick and easy vehicle for piracy. For example, in countries throughout Asia, many Internet cafes buy only one licensed copy for use by hundreds of users in the café, while the café owner is making a profit from each and every user. In addition, many café operators turn a blind eye to customers who use their facilities to commit further infringements, such as burning software and other copyrighted works onto CDs.
Piracy and Organized Criminal Syndicates
Many organizations, including law enforcement agencies such as Interpol, have concluded that organized criminal enterprises are involved in intellectual property piracy. In its February Special 301 report, the IIPA reported that because of the immense profits that pirates can make by stealing intellectual property, criminal organizations have taken over pirating operations in many countries. In addition, the relatively weak penalties for intellectual property crimes in many nations make it an attractive funding source for organized criminal enterprises. Noting that intellectual property piracy gives organized criminal enterprises far greater profits and much less risk than dealing narcotics, the IIPA report cited organized crime involvement in intellectual property piracy in numerous nations, including Malaysia, Taiwan, Russia, Mexico, and Spain. Indeed, the cross-border nature of organized crime’s involvement in software piracy presents an additional challenge.
III. ESA AND MEMBER COMPANY RESPONSES TO THE PIRACY PROBLEM
The entertainment software industry has taken the initiative to protect its intellectual property with a variety of anti-piracy measures, including international enforcement programs, online monitoring efforts, civil litigation, support and assistance to law enforcement and border control agents, technological measures, policy interaction, training of law enforcement and intellectual property education programs.
International Enforcement
Internationally, ESA and its members companies have targeted game piracy through the establishment of local enforcement programs in countries across the world. For its foreign programs, ESA typically will engage local attorneys and investigators to work with and support local law enforcement and customs officials in pursuing enforcement actions against local individuals and entities engaged in game piracy. In Asia, ESA established programs in Hong Kong and Singapore several years ago to address burgeoning game piracy in those countries. These programs have successfully curtailed the spread of street-level and retail piracy, with the Hong Kong program now focused on addressing upstream targets which are involved in the import/export of pirated goods to other markets. In South America, ESA initiated an industry program in Brazil two years ago as a joint effort with a local software industry association. This program is quite active, with monthly actions against retail venues in Sao Paulo and other major Brazilian cities as well as actions against local labs that routinely burn copies of games for distribution in the local market place. More recently, ESA is has begun work on launching new enforcement programs in Canada and Mexico to address growing piracy situations there.
ESA’s programs complement local enforcement programs established by some of our larger members, including Electronic Arts, Microsoft, Nintendo, Sony Computer Entertainment, and Vivendi Universal Games. These member programs similarly involve the retention of local attorneys and investigators who focus on the pirate trade in that member’s game products, and work with local police and customs officials to seize pirate game product and arrest and prosecute the responsible parties. Periodically, member companies will also undertake civil actions against pirate groups. Collectively, these member companies have programs operating in more than 30 countries.
Online Monitoring and Enforcement
ESA has implemented an online monitoring program to enforce its members’ intellectual property rights against Internet piracy. Under the online monitoring program, ESA has tracked an average of 400,000 new incidents of infringements per month and, over the last year, issued more than 130,000 takedown notices to Internet service providers (ISPs) under the provisions of the Digital Millennium Copyright Act (DMCA) and related authorities. These notices were addressed to ISPs both in the United States and abroad regarding instances of infringing activity engaged in by their users.
In addition to its online monitoring activities, ESA and its members have availed themselves of civil remedies available under law—including cease and desist notices, and when necessary, civil litigation—in enforcing member company rights against individuals engaging in online piracy.
U.S. Law Enforcement Support and Assistance
ESA and its member companies cooperate with United States customs and law enforcement officials on a number of levels, including preliminary investigative work, examination of seized products, and the preparation and submission of relevant documentation and affidavits in support of criminal prosecutions. ESA also assists law enforcement by providing trial testimony, identifying infringing game material found on servers, and assisting in high-level investigations of criminal organizations involved in game piracy. The U.S. Attorney’s Office for the Eastern District of Virginia cited the entertainment software industry’s assistance in obtaining a conviction of a member of the highly organized “DrinkorDie” piracy group targeted in “Operation Buccaneer.” Last week, Attorney General Ashcroft credited ESA and other associations with providing vital assistance in “Operation Fastlink,” an investigation that resulted in the coordinated takedown of more than 200 computers, including more than 30 servers that acted as storage and distribution hubs for warez groups, including Fairlight, Kalisto, Echelon, Class, and Project X.
Technological Measures
The entertainment software industry uses an array of technological protection measures (TPMs) to protect its various products, including those for personal computer, console, and handheld games. These self-help protection methods act as “digital locks,” preventing unauthorized access to the game content. However, criminal enterprises manufacture, create, and distribute illegal circumvention devices to disable or bypass these games’ TPMs, and use the Internet to advertise and distribute these tools as well as the “cracked” (unprotected) products.
However, it has become clear that technology is not enough. We must have laws that protect not only the intellectual property, but the technological protection measures that facilitate distribution while safeguarding industry products. Furthermore, we must have meaningful enforcement of these laws in order to deter the often highly organized criminal enterprises from engaging in the piracy.
Policy Engagement
The entertainment software industry is also engaged—at both the association and member company levels—in legal and policy reform. In this capacity, we work closely with U.S. and foreign government officials to help provide an effective legal and commercial framework for the healthy growth of the industry and to promote the increased availability of entertainment software products.
Training of Law Enforcement
The entertainment software industry has assisted government in the area of intellectual property enforcement by having ESA conduct training sessions across the nation and internationally to help educate law enforcement on intellectual property issues. Over the past year, in over 70 training sessions involving approximately 1,400 officials and agents in the United States and three foreign countries, ESA provided training on methods of detection and identification of pirated game products.
Intellectual Property Education
Recently, the ESA and its member companies have undertaken a number of different initiatives to educate different segments of the public, in particular, younger age groups, regarding the importance of intellectual property, the harm that game piracy and other forms of intellectual property infringement can cause, as well as the risks inherent in engaging in pirate activities. Most of these efforts have focused on providing children a deeper appreciation of the value and importance of intellectual property such as copyright and trademarks.
IV. GOVERNMENT’S RESPONSE TO THE PIRACY PROBLEM
USTR and other key offices in the Departments of Commerce and State tasked with enforcing U.S. trade law and – as part of the trade agenda – intellectual property law, have consistently demonstrated their strong and continuing commitment to creators generally and the entertainment software industry specifically, pressing for the highest attainable standards of protection for intellectual property rights through the successful negotiation of multilateral and bilateral agreements with other nations. These agencies have also stood firm in monitoring, rewarding, and in notable instances, penalizing countries for failing to achieve compliance with U.S. trade law and international intellectual property norms.
One especially valuable tool has been the “Special 301” review process, which the U.S. government utilizes effectively to target countries that must improve their efforts to protect intellectual property. In addition to Special 301, by requiring countries in the Generalized System of Preferences (GSP) program to ensure adequate and effective protection of intellectual property rights as a condition of obtaining the program’s tariff free status for their exports to the United States, the U.S. has also raised awareness of intellectual property rights as a national policy priority.
Several U.S. agencies also monitor and help to dismantle market access barriers that hinder the flow of U.S. products to overseas markets. The market access problems facing the entertainment software industry include compliance with legitimate product identification formalities (such as so-called “stickering” regimes), protracted content review periods, and other trade or import restrictions against U.S. computer and video game products. These regimes not only increase the cost incurred by U.S. publishers in getting legitimate product to market but also add considerable delay before products are actually made available for sale. This delay, in turn, works to the advantage of pirates who bypass processes required of legitimate publishers.
The Department of Commerce, through its International Trade Administration (ITA), has made it a priority to gather information from our industry on trade barriers and other impediments to commerce, chief among them being endemic piracy, and to bring these barriers to the attention of U.S. and foreign officials. We are similarly appreciative of the resources dedicated year-round by the Department in support of the government's international negotiations (such as the recently concluded Joint Commission on Commerce and Trade with China), and steps taken by the Department’s Trade Compliance Center to ensure that American exporters overcome foreign trade barriers.
The Commerce Department’s Patent and Trademark Office also contributes immensely to the work of USTR, by providing, for instance, the necessary technical expertise and advice during free trade negotiations and discussions of intellectual property issues at the multilateral level. In addition, the PTO provides training and technical assistance programs, not only to promote intellectual property protection, but also to foreign governments to improve their intellectual property laws and to train their law enforcement agencies to better address intellectual property infringement.
With respect to domestic enforcement, intellectual property rightsholders have been increasingly better served by the efforts of the investigative arms of the Departments of Justice and Homeland Security and the prosecutorial capabilities of the Department of Justice. Investigative agencies contributing to this mission include the FBI and Customs’ Bureau of Investigations and Criminal Enforcement (ICE), as well as its Bureau of Customs and Border Protection (CBP). The prosecutorial offices contributing to the success of this mission include the Computer Hacking and Intellectual Property (CHIPs) units within several key U.S. Attorneys’ offices and the Computer Crime and Intellectual Property Section (CCIPS) of the Department of Justice.
The Department of Justice has recently taken two important actions in the fight against piracy. First, it has established the Intellectual Property Task Force to coordinate the department’s intellectual property enforcement activities. Second, as mentioned earlier, the Attorney General last week announced Operation Fastlink, a coordinated effort with law enforcement agencies around the world to stop Internet piracy. Operation Fastlink is an important example of the positive results that can be achieved when our government works together with other governments to coordinate response to piracy problems. With the global nature of the Internet, this type of international cooperation is vital.
In sum, we are extremely grateful that so many U.S. government agencies have taken action in the fight against global piracy. We believe, overall, that existing roles and responsibilities are allocated appropriately to assure that agencies with the greatest subject-matter expertise are on the job. That said, we believe there are a few actions that this Subcommittee can take to strengthen the U.S. Government’s ability to strike additional blows that weaken the global pirate trade.
V. RECOMMENDATIONS
The entertainment software industry will continue to use technological and legal measures to protect its intellectual property, but private efforts are not enough. It is imperative that the U.S. government remain firm in its commitment to fight the rampant international and domestic piracy of intellectual property. The various government agencies responsible for the protection of intellectual property are doing a remarkable job in many ways, but can be hindered in their efforts to focus on enforcing the intellectual property provisions of international treaties and domestic laws due to insufficient resources and personnel. Following are some concrete steps we believe will arm our government with additional tools and authorities to win the war on piracy.
Office of the U.S. Trade Representative
In recent years, the Office of the U.S. Trade Representative (USTR) has done a tremendous job of successfully negotiating free trade agreements that raise intellectual property protection standards to the highest levels. We thank the Subcommittee for the $5 million that Congress added to the FY 2004 budget for USTR, and acknowledge USTR’s efforts to reorganize its China office in order to make best use of these resources. However, with the increasing burden of broadening the free trade sphere, USTR has not had the resources or personnel to devote to its other mission: monitoring compliance with and enforcing U.S. trade law and bilateral trade agreements.
USTR, to its benefit, relies on personnel from other federal agencies to perform its monitoring duties. Moreover, intellectual property rights issues are currently included in an office within USTR that also covers services and investment issues. Given the enormous importance of intellectual property to our economy, ESA recommends that the Subcommittee create a stand-alone intellectual property office with dedicated and adequate staff to conduct multilateral and bilateral negotiations and also to ensure that our trading partners comply with their intellectual property-related obligations to the United States. Additionally, the Subcommittee could consider creating a special ambassador for intellectual property and provide that official with adequate staff and resources dedicated to the enforcement of existing agreements.
Whatever approach is taken, the addition of new staff dedicated to enforcement of agreements will materially strengthen USTR’s ability to monitor WTO/TRIPS compliance, and to fulfill the potential of the 301 program by more aggressive use of out-of-cycle reviews. Similarly, dedicated intellectual property staff could help ensure that the GSP program is used as effectively as possible to induce foreign nations to better protect American intellectual property rights. (A reinvigoration of the GSP review process would be much desired as the prospect of losing tariff-free trade benefits that reach into the billions for certain nations would certainly prove to be a great incentive to improving intellectual property protections.)
Department of State
The State Department is playing a critical role in providing funds to foreign countries to help improve their law enforcement against copyright piracy. During this fiscal year, Congress provided a one-year allocation of funds to the State Department and directed it to spend the $2.5 million on building the capacity of foreign law enforcement agencies to better enable certain countries to comply with their obligations under the international intellectual property treaties.
ESA believes it is critical to sustain and grow this funding in the new fiscal year to help ensure that foreign enforcement programs will become fully developed and effective. The U.S. can only do so much, and this program recognizes that an investment in enhancing the ability of other nations to assume a greater role in enforcement may reduce demands on our own government in future years.
Furthermore, as helpful as the State Department has been, the fact remains that it is responsible for a broad range of foreign policy issues. Understandably, intellectual property issues often do not take priority. We believe the Subcommittee should consider elevating the State Department’s Intellectual Property Division to “Office-level” status, thereby granting this unit greater authority to advocate for enforcement of intellectual property protections with other offices within the State Department.
Department of Justice
As noted elsewhere, the Justice Department has been increasingly aggressive and effective in the fight against piracy. Therefore, we recommend strongly that the Subcommittee allocate sufficient funds for Justice to continue its recent efforts and undertake new initiatives, such as the Intellectual Property Task Force and Operation Fastlink. We believe that the investigative capabilities of the FBI and the prosecutorial resources of the Department of Justice, including the Computer Crime and Intellectual Property Section (CCIPS) and the Computer Hacking and Intellectual Property (CHIPs) sections of the U.S. Attorneys’ Offices should be fully funded to accomplish their vital missions.
We thank the Subcommittee for the support it has already given to the Department by setting aside a portion of the DOJ’s appropriation for cybercrime and intellectual property crime enforcement. However, we recommend that Congress provide additional resources to the Justice Department to expand these efforts. Specifically, we recommend additional funding for the investigation of intellectual property crimes by the FBI. We believe that additional agents specifically trained in online investigations are essential to fighting domestic intellectual property piracy. This will enhance and support the efforts of U.S. Attorneys engaged in prosecuting intellectual property offenses.
VI. CONCLUSION
Mr. Chairman and members of the Subcommittee, it is clear from my testimony that our industry has in the U.S. Government a strong and effective partner in the battle against global entertainment software piracy. Your Subcommittee’s commitment to fighting piracy is well-documented. We are grateful for your commitment, especially at a time when our nation faces so many other threats to our security. But it is equally clear that the global piracy problem remains deeply entrenched, and that it directly endangers America’s economic security as U.S. companies see viable potential markets closed-off due to the proliferation of pirated and counterfeit products. We need your continued help, and we appreciate the opportunity to share some ideas on additional steps that can be taken to protect America’s greatest export: our creative and intellectual property. Working together, I believe we can fight piracy to protect what is one of America’s most dynamic and fastest growing creative industries.
