Testimony of Mitch Bainwol Chairman and CEO Recording Industry Association of America Before the United States Senate Appropriations Committee
April 29, 2004
The Recording Industry Association of America (RIAA) is the trade group that represents the U.S. recording industry. Our mission is to foster a business and legal climate that supports and promotes our members' creative and financial vitality. Our members are the record companies that comprise the most vibrant national music industry in the world. RIAA members create, manufacture and/or distribute approximately 90% of all legitimate sound recordings produced and sold in the United States.
Music is the world's universal form of communication. It touches every person of every culture on the globe to the tune of $32 billion annually, and the U.S. recording industry accounts for more than one-third of that world market. Our members create employment for thousands of people, including singers, musicians, producers, sound engineers, record promoters and retail salespersons, to name only a few.
The importance of the U.S. recording industry, and intellectual property protection, to the U.S. economy
International markets are vital to our companies and our creative talent. Exports and other foreign sales account for over fifty percent of the revenues of the US record industry. This strong export base sustains American jobs.
In this respect, the protection of our intellectual property rights abroad is vital to promoting America’s competitive advantages in world commerce. As our trade deficit has soared, we call upon Congress to consider more closely the relationship between our widening trade and current account deficits and copyright piracy and to take steps to enable us to more effectively protect our intellectual property rights at home and abroad.
An important part of our nation’s competitive strength lies in the creation of knowledge-intensive intellectual property-based goods and services. This is one of those economic activities that Americans do better than the people of any other nation. The “core” U.S. copyright industries account for more than five per cent of US GDP. Employment in our industries has doubled over the past 20 years, growing three times as fast as the annual growth rate of the US economy as whole. The foreign sales and exports of U.S. copyright industries were nearly $90 billion in 2001, an amount greater than almost any other industry sector, including automobiles and auto parts, agriculture and aircraft.
In a sense, the intellectual property of the United States is like a warehouse of ideas and creativity. For people to walk in and steal them is no more tolerable than theft of physical goods. And the sale of our recordings abroad makes a major contribution to America’s current account balances. Each and every sale of a pirated product abroad that substitutes for the sale of a legitimate American product increases our current account deficit. As a result, Americans employed in competitive industries like ours are denied financial benefits that should have occurred but did not. The Effect of Music Piracy
The piracy of music is almost as old as the music industry itself, but historically it was difficult for the criminal to reproduce copies as good as the real thing. Now with the advent of digital recordings criminals can reproduce near perfect copies of any recording. There is massive manufacture and traffic of illegal CDs, both in the form of molded CDs that are produced in large plants, and CD-R’s produced with blank optical discs and readily available computer CD-R burners
Annual world-wide pirate sales approach 2 billion units; worth an estimated $4 - $5 billion. Globally, 2 in 5 recordings are pirate copies. Total optical disc manufacturing capacity (video / audio CDs, CD-ROMs and DVD) – stands at well over 40 billion units, having quadrupled in the past five years and greatly exceeds legitimate demand. This creates a business environment ripe for exploitation by criminal syndicates and even international terrorist groups, at times shielded by governments hostile to our interests. Given that the pirate producer has few or none of the overheads associated with genuine production, the profit margin is substantial.
The battle against intellectual property theft must be unrelenting. Digital technology and internet piracy have greatly exacerbated our problems. Our country must employ every tool at its disposal, including the critically important leverage provided by international trade agreements.
Recording Industry Actions to address Piracy
Through our international affiliate, the International Federation of Phonographic Industries, or “IFPI”, the recording industry maintains a global anti-piracy team of investigators and analysts, made up largely of ex-law enforcement personnel who develop civil litigation and work with law enforcement personnel in pursuit of criminal prosecutions. We also have an active online anti-piracy program. We work in close collaboration with governments, police forces and customs departments worldwide.
We also are engaged in extensive educational efforts, designed to increase public understanding of the value of intellectual property and to improve overall awareness of copyright laws, on a global basis.
We work closely with national and international bodies to encourage adoption of laws that strengthen copyright protection and promote an environment in which our industry can continue to innovate.
Forensic analysis
We maintain a unique forensics laboratory at the IFPI headquarters in London that traces the manufacturing source of pirate CDs through microscopic examination and measurement. This has helped link infringing discs to source factories and resulted in many raids on suspect plants worldwide. This in turn encouraged several governments including Malaysia, Poland, Bulgaria and Russia to establish their own forensic programs.
International co-operation
Primarily through the IFPI we work with government enforcement agencies and international crime investigation organizations on a global basis. Interpol has recently created the Intellectual Property Crime Action Group (IIPCAG) in response to the growing incidence of counterfeit or copyright infringing goods. We are very active within this group, and also maintain an important partnership with the World Customs Organization's intellectual property strategic group to make IP protection a priority for customs authorities worldwide.
Tackling piracy at source
Increasingly, enforcement actions are being concentrated at the source of pirate operations, where raids and seizures can result in the confiscation of manufacturing or copying equipment. In 2002, 71 CD manufacturing lines were de-commissioned, 49 of them in Asia, up from 42 the year before. This represents a production capacity of over 300 million units, bigger than any legitimate music CD market except the United States.
Nearly 7,000 CD copying machines were seized, with a production capacity of 250 million pirate discs per annum - up from 4,500 seized in 2001. Seizures of blank discs and artwork inlays also rose sharply. In 2002 just over 90 million blank discs were seized with nearly 80 percent of these found in Latin America. They included huge one-off seizures of 13 million discs in Paraguay, 12.5 million in Mexico, 3 million in Colombia and 1.2 million in Argentina.
As you can see from the above, the recording industry is not sitting back and waiting for others to act. We are investing millions of dollars around the world to protect our products, but we are battling forces far beyond our ability, acting alone, to solve. First, government corruption in many other countries denies us any possibility of criminal or civil justice. In addition, and perhaps as part of this, there is a well-established link between piracy, organized crime, and even international terrorism which uses music piracy to divert huge sums of money to other criminal enterprises. Recent testimony by a Mafia boss from Forcella, Naples (February, 2003), clearly illustrated that the Mafia are directly involved in the production and distribution of pirate music, carving up the territory between various gangs and paying a share of profits to 'godfathers'.
The Importance of the U.S. Government to our industry
America’s music composers, performers and producers could not survive in the battle against piracy, domestic and international, but for the absolutely critical and splendid assistance that we have received over the past 15 years from the United States Government, Executive and Legislative branches—Republican and Democrat.
We rely heavily upon our government for our very survival in combating the plague of music piracy. The U.S. Government does more than any other government in protecting its nation’s intellectual property, and does so with vigor and determination, albeit with limited resources.
Since the passage of the 1988 Omnibus Trade and Competitiveness Act, intellectual property issues have been an integral part of our country’s international trade agenda. When it comes to U.S. Government efforts in this regard, it all starts at the Office of the U.S. Trade Representative. USTR develops, coordinates and implements our nation’s trade policy. With its small but highly dedicated staff of only 200 individuals, USTR provides leadership and negotiating expertise in nearly all trade policy areas.
It is in the context of the massive size and scope of our nation’s international trade activity that we look for so much help in protecting our nation’s creative wealth. Of course, USTR is not tasked with doing all these things alone. Its mission is to develop, coordinate and implement our nation’s trade policy in conjunction with other relevant and highly interested agencies, including the Departments of State and Commerce and, within Commerce, the U.S. Patent and Trademark Office, as well as the Copyright Office in the Library of Congress. Ultimately, helping us battle piracy abroad requires the involvement of these and other agencies of the U.S. Government, including the Ambassadors and officers in many of our embassies abroad.
Existing Tools for Addressing International Piracy Problems Congress has already provided several “tools” for our government to use in helping us better protect our intellectual property abroad.
Special 301: The first and most important tool for doing this, and one that is extremely important to us, is the annual “Special 301” review and report issued in just a few days. This annual review and report, mandated by the 1988 amendments to the Trade Act of 1974, requires USTR, with the active assistance of these other agencies, to identify foreign countries that deny adequate and effective protection of intellectual property rights or fair and equitable market access for U.S. persons that rely on intellectual property protection.
Once this pool of countries has been determined, the USTR, again with the active involvement of other agencies, is required to decide which, if any, of these countries should be designated “Priority Foreign Countries.” Priority Foreign Countries are those countries that: (1) have the most onerous and egregious acts, policies and practices which have the greatest adverse impact (actual or potential) on the relevant U.S. products; and (2) are not engaged in good faith negotiations or making significant progress in negotiations to address these problems. If a trading partner is identified as a Priority Foreign Country, USTR must decide within 30 days whether to initiate an investigation of those acts, policies, and practices that were the basis for identifying the country as a Priority Foreign Country. A Special 301 investigation is similar to an investigation initiated in response to an industry Section 301 petition, except that the maximum time for an investigation under Special 301 is shorter in some circumstances.
This annual review is an outstanding tool for leveraging other countries into making needed improvements to their intellectual property laws and/or enforcement. It also serves as the mechanism for the executive branch to set its annual agenda for how it will address intellectual property matters in our bilateral, regional and multilateral trade relationships, and how it will allocate its resources in combating intellectual property problems globally.
USTR and the other agencies do a tremendous job with the limited resources available to them, but there is little doubt that this program could be more effective if there were additional resources. For example, an extremely effective aspect of Special 301 is conducting “out-of-cycle” reviews of selected countries over the course of the year, and other less structured but intensive bilateral engagement. Otherwise, some countries conduct a flurry of activity prior to April 30 in order to avoid an undesirable designation in the report, then turn a blind eye to piracy once the report is issued. This can be remedied by re-visiting the most problematic countries over the course of the year by announcing that they will be reviewed again after a certain number of months. However, limited resources at several agencies, including at USTR, in recent years have limited the utilization of the very effective tool of out-of-cycle reviews.
“GSP” Trade Benefits: Another important tool in our trade policy arsenal is the conditioning of the grant of duty-free importation to developing countries under the Generalized System of Preferences (GSP) on adequate and effective intellectual property protection in such countries. The law authorizes the President to suspend or revoke all or part of a country’s GSP benefits if he determines that it denies adequate and effective intellectual property protection to U.S. right-holders. In the past, suspension of such benefits has been an extremely effective tool in achieving meaningful IPR improvements in these countries. We have pending petitions to suspend GSP benefits for Russia, Brazil, and other countries. An important Presidential review is due for completion on July 1. We hope the Administration will act upon our petitions, unless of course these countries make meaningful and sustained progress prior to this date.
The TRIPS Agreement in the WTO: An important multilateral tool is active U.S. Government participation in the World Trade Organization’s Agreement on Trade-Related Intellectual Property Rights, or the “TRIPS Agreement. All 146 members of the WTO are obligated to provide and enforce minimum standards of intellectual property protection to all the other members. If they fail to do so, the WTO provides an effective dispute resolution process that provides with imposition of trade sanctions against countries that fail to comply with TRIPS obligations. The TRIPS Agreement, which came into effect in 1995, ensured that scores of countries adopted and committed to enforce fairly modern, substantive copyright laws. This was a tremendous achievement. Monitoring full implementation of the TRIPS Agreement, and aggressive use of WTO dispute settlement against non-compliance, remains a top priority for our association and our members. The WIPO Digital Treaties: Digital technology, much of which came onto the market after the TRIPS Agreement came into effect, has brought many changes and challenges to international trade and perhaps none more so than with respect to the protection of intellectual property rights. In this new digital environment, entertainment products, legitimate and pirated, can be transmitted across the internet in perfect digital form from one corner of the globe to another in a matter of seconds. Revolutionary new technologies of this nature sometimes demand that revolutionary new rules be included in the agreements that govern trade between nations.
Two significant treaties to this effect were concluded at the World Intellectual Property Organization in 1996. Ratification and implementation of these treaties is a high priority for our organization. We are pleased that our government has made achieving ratification of these treaties an important element of its bilateral intellectual property agenda.
Bilateral Trade Agreements: The Administration’s ambitious agenda to negotiate bilateral free trade agreements has proven to be an excellent mechanism for achieving legally-binding bilateral obligations from certain trading partners to ensure that digitized content and transmissions are correctly and adequately provided full copyright protection. The FTAs negotiated thus far with Jordan, Singapore, Chile, Australia, Morocco, and the five Central American countries under the CAFTA address this urgent need. We look forward to significant improvements in addressing rampant copyright piracy in such countries as Thailand, Colombia, Bolivia and Peru, where FTA negotiations begin this summer. The FTA negotiating process is the best avenue currently available to us for ensuring that these important digital copyright issues are adequately addressed. We praise USTR, Commerce, PTO, the U.S. Copyright Office and other agencies for doing so and congratulate them for achieving significant results in these negotiations.
At present, it is the view of RIAA that the global political environment will not, at the multilateral level, accommodate the significant revision of laws and practices necessitated by changes in technology, and it is therefore necessary to address these on a bilateral, and occasionally regional, basis. This is extremely time and resource consuming—but absolutely necessary if we are to preserve the US economic competitiveness created by American ingenuity, know how, and creativity. We thus strongly support the negotiation of free trade agreements to introduce laws and practices consistent with the needs of today’s business world.
In addition, we have major music piracy problems in countries with which the U.S. Government is not negotiating free trade agreements. China, Russia, Taiwan and Pakistan are particularly egregious examples, but there are many others. It thus is critically important that the U.S. Government have adequate resources to actively press these countries using, when appropriate, the tools already granted by Congress to do much more to significantly reduce music piracy in these countries. The recently concluded U.S.-China Joint Commission on Commerce and Trade included potentially significant new commitments by China in this regard. But significant follow-up efforts will be required to ensure that they live up to these new commitments.
Other Activities: Traditional diplomacy is also very important, bringing the weight to USG power to play quickly when we encounter foreign governments unwilling to enforce their laws against those pirating our products.
Cultural outreach is useful to help empower local cultural communities to lobby for IP protection. Education/technical assistance are also important. Beyond the simple transfer of information and enforcement methods, such training can reinforce links among IPR officials within a region and build working relations between US and foreign law enforcement.
Intelligence gathering/analysis is also increasingly important to deal with the organized criminal element or terrorist financing links associated with international piracy.
Proposals for Reform--International
First, given the critical nexus between intellectual property piracy and international trade, we propose that Congress elevate the status of international intellectual property protection on our nation’s trade policy agenda. Here are our suggestions:
USTR: Given their central role in the trade-policy making process, I suggest elevating the status of trade-related intellectual property policy at USTR. This could be accomplished by creating a special Ambassador for intellectual property. Such a person would be able to advocate strongly on behalf of U.S. trade-related intellectual property interests internationally and inside the U.S. Government. A similar position already exists at USTR with respect to agricultural issues and has existed in the past with respect to textiles and apparel that could serve as useful models. The copyright industries alone account for over 5% of US GDP. While I have not seen the precise figures, IP industries writ large must account for well over 10% of US GDP. Protection of the leading edge of the US economy demands no less.
The creation within USTR of a stand-alone intellectual property office with adequate staff to conduct multilateral and bilateral negotiations and to ensure that our trading partners honor their IPR obligations to the United States would also be useful. IPR issues are presently included in an office within USTR that also covers services and investment issues. Services and investment account for two-thirds of the U.S. economy. The incumbent Assistant USTR is thus responsible for trade and investment issues covering an enormous swath of the U.S. economy in addition to intellectual property issues.
So it might be time to separate intellectual property from services and investment. With adequate staff, an IPR office would be able to ensure that the Special 301 program is used to its potential, as described earlier in my testimony, including through the more aggressive use of out-of-cycle reviews. Similarly, this expanded office could help ensure that the GSP program is used more aggressively to leverage countries to better protect American intellectual property rights.
Separately, we note and are pleased that USTR is creating a separate and expanded Office of China Affairs to accommodate an increase in staff dedicated to the many China trade issues confronting our country. In the Consolidated Appropriations Act, 2004, Congress, through the leadership of Chairmen Gregg and Congressman Frank Wolf, provided additional funds to USTR for this purpose. Just as the magnitude of our trade relations with China necessitates a separate China office, the enormous effect of foreign piracy of American intellectual property argues for establishing a separate, high profile intellectual property office at USTR. . Department of Commerce: We are very grateful for the role that Under Secretary Grant Aldonas and Assistant Secretary for Market Access and Compliance William Lash have played in helping us address music piracy issues in various countries. Under Secretary Aldonas played a critical role in IPR negotiations with China as part of the preparations for last week’s meeting of the Joint Commission on Commerce and Trade. Assistant Secretary Lash has been outstanding in actively confronting many countries with significant piracy problems. We are most grateful for their personal involvement, and for the hard work of numerous other Commerce Department officials in helping us address piracy around the globe.
Department of State: The State Department’s Ambassadors, embassy staff and officials here in Washington have been consistently extremely helpful in addressing our problems abroad. The State Department has consistently instructed its embassies to help us wherever problems arise. They have worked closely with us to ensure that their officers in the field are adequately trained to be able to advocate to their foreign counterparts about our concerns.
State has a broad range of foreign policy issues to resolve and balance. Within the context of foreign policy problems competing for resolution, copyright piracy issues must be given the prominence they deserve. To better ensure this outcome, one possible improvement might be to elevate the State Department’s Intellectual Property Division to “Office-level” status, thereby granting this unit greater authority to carry arguments with other offices within the State Department.
In addition, during this fiscal year, the State Department began playing a critical role in providing funding for helping other countries improve their law enforcement against copyright piracy. Specifically, Congress directed that State should provide $2.5 million on building the capacity of foreign law enforcement officials to better enable these countries to comply with their obligations under international copyright and intellectual property treaties. This was a one-year allocation. However, we strongly urge the Congress to continue and significantly expand this allocation in subsequent years so that this $2.5 million for FY 2004 becomes the seed money for what will ultimately be a truly effective, ongoing program. At the same time that we are demanding that foreign countries prepare themselves for the protection of IP in the 21st century, we need to recognize that many of them have 19th century technology and know how. Arming them so that they can establish effective IPR protection helps them and helps us.
The Patent and Trademark Office: PTO does an excellent job in reaching out and promoting effective intellectual property protection and enforcement internationally. We appreciate its efforts in providing technical assistance and training to foreign IP officials and helping USTR negotiate strong IP provisions in the FTAs. We hope that the Congress will provide full funding for PTO and enact PTO's fee modernization bill.
Proposals for Reform -- Domestic
Here in the United the low-cost, low-risk, high-return nature of intellectual property theft like music piracy, when compared to other criminal endeavors, is attracting more criminals. Increased law enforcement resources to the Department of Justice Computer Crime and Intellectual Property (CCIPs) investigative units and Computer Hacking and Intellectual Property (CHIPs) prosecutorial units ensure more vigorous enforcement of existing laws. We applaud the Justice Department's recent formation of an Intellectual Property Task Force designed to look at ways the Department can strengthen and improve its efforts to combat theft of intellectual property. Because of the expanding geographical scope and sophistication of the organized criminal enterprises behind the piracy problem, cooperation among local, state, federal and international law enforcement entities will continue to be important.
There clearly is no silver bullet answer to solving the problem of physical piracy. However, there are several things that can be done that would help change the risk/reward calculation for pirates. These include, among other things, increased asset forfeiture, lower criminal thresholds, increased sentencing guidelines, as well as easier and more definite loss calculations. In other contexts, these tools have provided law enforcement with greater flexibility and authority to crack down on the epicenter of criminal enterprises as opposed to continually dealing with the problem further downstream. It will come as no surprise that attacking these criminal enterprises higher “up the ladder” (i.e. acting against manufacturers and distributors as opposed to low-level street vendors) not only increases our deterrent impact, but is also a much more efficient use of our limited resources.
