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Michael Einhorn Deposition, in MPAA v. 2600

NY; July 14, 2000

See related files:
http://www.eff.org/IP/Video (EFF Archive)
http://jya.com/cryptout.htm#DVD-DeCSS (Cryptome Archive)
http://www.2600.com/dvd/docs (2600 Archive)
http://cyber.law.harvard.edu/openlaw/dvd/ (Harvard DVD OpenLaw Project)


  4  METRO-GOLDWYN-MAYER, INC.;      )  
     TRISTAR PICTURES, INC.;         )  
     INC.; and TWENTIETH CENTURY     )
  7  FOX FILM CORPORATION,           )
  8                  Plaintiffs,     )
  9             vs.                  ) No. 00  Civ. 277
                                     )  (LAK) (RLE)
 10  SHAWN C. REIMERDES; ERIC        )
     CORLEY A/K/A "EMMANUEL          )  
 11  GOLDSTEIN"; ROMAN KAZAN; and    ) 
     2600 ENTERPRISES, INC.,         )
 12                                  )
                      Defendants.    )
 13  --------------------------------)



 16                   New York, New York

 17                 Friday, July 14, 2000






     Reported by:
 24  Philip Rizzuti
     JOB NO. 111053




  4                        July 14, 2000

  5                        3:15 p.m.


  7             Deposition of MICHAEL EINHORN, held at 

  8       the offices of Proskauer Rose LLP, 1585 

  9       Broadway, New York, New York, pursuant to 

 10       notice, before Philip Rizzuti, a Notary 

 11       Public of the State of New York. 
















  2  A P P E A R A N C E S:



  5       Attorneys for Plaintiff

  6             1585 Broadway

  7             New York, New York 10036-8299

  8       BY:   CHARLES S. SIMS, ESQ.




 12       Attorneys for Defendants

 13             488 Madison Avenue

 14             New York, New York 10022


 16             MARTIN GARBUS, ESQ.












  3       by and between counsel for the respective 

  4       parties hereto, that the filing, sealing and

  5       certification of the within deposition shall

  6       be and the same are hereby waived;


  8       that all objections, except as to the form

  9       of the question, shall be reserved to the 

 10       time of the trial;


 12       that the within deposition may be signed 

 13       before any Notary Public with the same force

 14       and effect as if signed and sworn to before

 15       the Court.











  1                    Einhorn

  2  M I C H A E L       E I N H O R N,   called as a  

  3       witness, having been duly sworn by a Notary 

  4       Public, was examined and testified as 

  5       follows:


  7  MR. SIMS:

  8       Q.    State your name and address for the 

  9  record?







 17       Q.    Have you ever been deposed before, 

 18  Mr. Einhorn?

 19       A.    No.

 20       Q.    Have you ever testified in court before?

 21       A.    No.

 22       Q.    Why don't you me through your academic 

 23  degrees from college onward?

 24       A.    I have a BA from Dartmouth, sum cum 

 25  laude 1974.  I have got a masters in economics from 

  1                    Einhorn

  2  Yale that I earned in 1976.  I have a Ph.D. that I 

  3  completed in 1981.

  4       Q.    Ph.D. from?

  5       A.    Yale.


  4       Q.    Have you undertaken any study in 

  5  connection with your agreement to testify here 

  6  today or at trial over the next few weeks?

  7             MR. HERNSTADT:  Objection to form.  

  8       Vague.

  9       Q.    Have you undertaken any research with 

 10  respect to your testimony here today?

 11       A.    Could you explain what research means?

 12       Q.    Yes.  Have you conducted any survey of 

 13  any type?

 14       A.    I have conducted no survey.

 15       Q.    Let me ask it a different way:  What 

 16  have you done to prepare for your deposition today?

 17       A.    I read through the depositions -- the 

 18  declarations.

 19       Q.    Which ones?

 20       A.    All of the ones on our side.  I read 

 21  through Professor Fisher's declaration.  I read 

 22  through Professor Fisher's deposition.  I read 

 23  through the professor's testimony on Microsoft.  I 

 24  read through -- you got to give me a chance to 

 25  think, because I am trying to give you the full 

  1                    Einhorn

  2  answer.  I visited web-sites related to the DVD CCA 

  3  and LiViD.  I spoke to Mr. Pavlovich on the 

  4  telephone.

  5       Q.    Do you know whether that was before or 

  6  after he was deposed?

  7       A.    If you tell me when he was deposed, I 

  8  answer your question.

  9       Q.    Did you speak to him about his 

 10  deposition?

 11       A.    No, not about his deposition.

 12       Q.    Yes?

 13       A.    I think I have everything there.

 14       Q.    Did you --

 15       A.    I also read through the Audio Home 

 16  Recording Act.

 17       Q.    You get an award for that.

 18       A.    And section 1201 of the DMCA, and I 

 19  think I got everything there.

 20       Q.    Did you read Judge Kaplan's opinion in 

 21  this case?

 22       A.    If I read it, it was at the beginning of 

 23  the experience when I first began to read some 

 24  stuff and -- if I read it.  I may have read it at 

 25  the beginning or a couple of papers that I went 

  1                    Einhorn

  2  through.

  3       Q.    Do you believe you read it or not?

  4       A.    I don't think I read it.  I don't recall 

  5  reading it.

  6       Q.    With respect to the items that you 

  7  indicated above that you read, how did you obtain 

  8  them?

  9       A.    Mr. Garbus' office Xeroxed all the 

 10  depositions for me.  I visited the web-sites 

 11  myself. 

 12             MR. HERNSTADT:  You mean declarations.

 13       A.    I am sorry, the declarations.  They 

 14  Xeroxed Fisher's deposition.  I visited the 

 15  web-sites myself where I obtained Fisher's 

 16  Microsoft stuff, and all the other web-site stuff I 

 17  visited myself and I realized the one last thing 

 18  that I have to tell you. 

 19             I also read the antitrust guidelines of 

 20  the U.S. Department of Justice regarding 

 21  intellectual property which was co-published, 

 22  co-produced by the U.S. Department of Justice and 

 23  the Federal Trade Commission.

 24       Q.    When you worked in the Department of 

 25  Justice did you work on Microsoft?

  1                    Einhorn

  2       A.    No.

  3       Q.    Do you know when the antitrust 

  4  guidelines to which you referred were published?

  5       A.    1994, 1995 I believe.

  6       Q.    Did counsel advise you to read those?

  7       A.    No.


 20       Q.    Have you done any research into the 

 21  harm, if any, that would befall owners from the 

 22  widespread copy of their works?

 23             MR. HERNSTADT:  Objection to form.  

 24       Overbroad.  You can answer if you can.

 25       Q.    Read back the question. 

  1                    Einhorn

  2             (Record read.)

  3       A.    No, I have not.

  4       Q.    Have you done any research into the 

  5  problems of free riding?

  6             MR. HERNSTADT:  Objection to form.

  7       A.    I am sorry, when you say --

  8       Q.    Are you aware of a concept economists 

  9  use and refer to, namely the problem of free 

 10  riders?

 11       A.    Yes.

 12       Q.    Have you undertaken any research or 

 13  study in connection with the problems of free 

 14  riding or free riders in various industries?

 15             MR. HERNSTADT:  Objection to form.

 16       A.    I have not published a paper.  I have 

 17  not written a paper, this is certainly something 

 18  that I would have, that I thought about, and talked 

 19  about with people, but never sat down to do a 

 20  formal piece of research -- may I go back to the 

 21  previous question regarding the copy.

 22       Q.    When I am done your counsel can ask any 

 23  questions he wants to ask?

 24             MR. HERNSTADT:  Mark that question and 

 25       then I will ask you what the question was.  

  1                    Einhorn

  2       Q.    Have you done any research or 

  3  conducted any study concerning the impact of the 

  4  availability of a free good on the number of 

  5  persons willing to pay for an identical good?

  6             MR. HERNSTADT:  Objection to form.

  7       A.    Once again I have published no papers, 

  8  nor did I ever submit a draft paper on that topic.  

  9  But these things are topics of conversation that I 

 10  have gotten involved in more than just a chatty 

 11  kind of, you know, in and out kind of way.  So --

 12       Q.    Sorry?

 13       A.    It is something that has occupied my 

 14  professional attention, research usually means 

 15  some -- can sometimes mean have you published a 

 16  paper.

 17       Q.    Have you ever read any judge Richard 

 18  Posner on the subject of copyright?

 19       A.    No.

 20       Q.    Have you ever read any writings by 

 21  Steven Breier (phonetic) on the subject of 

 22  copyright?

 23       A.    No.


  5       A.    No.

  6       Q.    Have you published any books?

  7       A.    I have edited three books.  They were --

  8       Q.    What are the titles?

  9       A.    I don't remember the titles off the top 

 10  of my head.  Do you have my CV --

 11       Q.    No, do you have a CV with you?

 12       A.    I don't have a CV with me. 

 13  RQ         MR. SIMS:  I would call for production 

 14       of one. 

 15             MR. HERNSTADT:  We will get you one.  

 16       A.    The titles, basically I would tell you 

 17  the -- there was a book on price caps in 

 18  telecommunications.

 19       Q.    Yes?

 20       A.    There was --

 21       Q.    Roughly wouldn't year?

 22       A.    1986.

 23       Q.    Yes?

 24       A.    There was a book on restructure of the 

 25  electricity industry, and there was a book on 

  1                    Einhorn

  2  transmission economics in the electricity industry.

  3       Q.    Were those books copyrighted?

  4       A.    Yes much.

  5       Q.    Did you hold the copyright in any of 

  6  them?

  7       A.    Which I had to give them all up of 

  8  course, but I had them originally.

  9       Q.    You sold the copyrights in exchange for 

 10  certain benefits from the publisher?

 11             MR. HERNSTADT:  Objection to form.

 12       A.    As a matter of fact I gave the 

 13  copyright over to the publisher.  


  3       Q.    Did you ever complain to either of those 

  4  three publishers about the form of the contract 

  5  notice that appeared in those books?

  6       A.    No.

  7       Q.    Do you remember what the form of the 

  8  copyright notice said?

  9       A.    No.

 10             MR. SIMS:  I want to mark as Einhorn 

 11       Exhibit 1, the first eight pages from a book 

 12       titled:  Price Caps and Incentive 

 13       Regulations in Telecommunications.  First 

 14       eight pages minus the dedication page, which 

 15       I am not interested in. 

 16             (Einhorn Exhibit 1, first eight pages 

 17       from a book titled Price Caps and Incentive 

 18       Regulations in Telecommunications, marked 

 19       for identification, as of this date.)

 20       Q.    Am I correct Mr. Einhorn that this is 

 21  the first few pages from the first book which you 

 22  identified a few moments ago?

 23       A.    Yes.

 24       Q.    Would you read if you would the 

 25  copyright notice into the record on I guess the 

  1                    Einhorn

  2  fourth page that appears here?

  3       A.    "All rights reserved, no part of this 

  4  publication may be reproduced, stored in a 

  5  retrieval system or transmitted in any form or by 

  6  any means, mechanical photocopying, recording or 

  7  otherwise without the prior written permission of 

  8  the publisher, Kluwer Academic Publishers, 101 

  9  Philip Drive, Assinippi Park, Norwell, 

 10  Massachusetts 02061."

 11       Q.    From an economic point of view what was 

 12  the function of this copyright notice?

 13             MR. HERNSTADT:  Objection to form.  If 

 14       you have an opinion as to the economic 

 15       purpose of it, the copyright notice.

 16       A.    To prevent copying.

 17       Q.    Am I correct that one function of a 

 18  notice like this would be to allow the copyright 

 19  owner to collect and enjoy the economic fruits of 

 20  its property?

 21             MR. HERNSTADT:  Objection to form.  If 

 22       you have an opinion on that you can answer.

 23       A.    As a non-lawyer --

 24       Q.    I am asking you not as a lawyer, but an 

 25  economist?

  1                    Einhorn

  2       A.    It would seem this is an appropriate 

  3  notice to allow them to collect for their 

  4  copyright.

  5       Q.    What was your first contact with any of 

  6  the attorneys at Frankfurt Garbus or any of the 

  7  defendants in this lawsuit?

  8       A.    I met -- I spoke with Robin Gross 

  9  sometime in the spring of this year in connection 

 10  with my professional research.  And professional 

 11  interests.  And in the course of time said that I 

 12  would try to catch up with her to see whether there 

 13  were any things in which -- where I could 

 14  justifiably cooperate with her in any manner, that 

 15  I felt comfortable cooperating with her. 

 16             I was in Washington last month and 

 17  stopped in to visit Terri Steel, who chatted about 

 18  the -- about copyright issues with me, and in the 

 19  course of time I learned about DeCSS.

 20       Q.    Who is Terri Steel?

 21       A.    Executive director of the Electronic 

 22  Frontier Foundation.

 23       Q.    You mentioned that you spoke with Robin 

 24  Gross in connection with professional research and 

 25  professional interest, am I correct?

  1                    Einhorn

  2       A.    Yes. 

  3       Q.    What was that professional research?

  4       A.    I contacted her originally because I was 

  5  doing some research into section 112 and 114 of the 

  6  Digital Millennium Copyright Act, which are matters 

  7  that are going to go before the copyright office 

  8  later this year.  And I just wanted to know what 

  9  her positions were.  If she intended to do anything 

 10  about it.

 11       Q.    Briefly what do the sections pertain to?

 12       A.    You are going to hate me for this --

 13       Q.    You got to two in two --

 14       A.    Section 114 is the big one, that 

 15  establishes the rules for collecting royalties for 

 16  digital audio transmissions of sound recordings in 

 17  interactive and non-interactive media.  That is 

 18  a -- that section 114 is a modification of the 

 19  copyright act.  Section 114 -- I am giving you the 

 20  copyright right modification. 

 21             Section 112 deals with ephemeral 

 22  reproductions.  Ephemeral reproductions are 

 23  reproductions made by broadcast stations, 

 24  non-profit institutions, and government 

 25  institutions for a period of six months or less as 

  1                    Einhorn

  2  back up reproductions that have been historically 

  3  exempt under the copyright act from making any 

  4  payments. 

  5             The big one is 114, because that added 

  6  the performance right in sound recordings.

  7       Q.    Does 114 provide any form of compulsory 

  8  license?

  9       A.    Yes.

 10       Q.    Does 112 afford any form of compulsory 

 11  license?

 12       A.    They have to figure out what they are 

 13  going to do with 112.

 14       Q.    114 already has --

 15       A.    For eligible non-interactive 

 16  performances.

 17       Q.    How did your conversation that you just 

 18  referred to with Terri Steel eventuate in a 

 19  decision by you to testify here today?

 20       A.    I got home to my -- I checked my E-mail 

 21  two or three weeks ago, and got a message to call 

 22  Robin Gross which I did.  And she discussed in 

 23  very -- she outlined there was a case about CSS, 

 24  would I be interested in looking at it.  I said I 

 25  would have to think about it and learn about all 

  1                    Einhorn

  2  the issues. 

  3             I thought about it for about 24 hours 

  4  and said there may be something here, but I have to 

  5  read some more, and then at that point she put me 

  6  in contact with Mr. Garbus and I began to read 

  7  about some of the issues at hand.

  8       Q.    Did you receive other than the materials 

  9  that you already identified, did you receive any 

 10  correspondence, letters, E-mails, from Mr. Garbus 

 11  or his colleagues?

 12       A.    I received no letters.  The E-mails 

 13  were, if anything at all, administrative.

 14       Q.    Nothing about the substance of the case?

 15       A.    No.

 16       Q.    How many times have you met with 

 17  Mr. Garbus?

 18       A.    Once before today.

 19       Q.    When and for how long?

 20       A.    Monday, we physically met for maybe, oh, 

 21  maybe a half hour.

 22       Q.    Today how long did you meet with him 

 23  prior to the, his entrance into this room?

 24       A.    I don't think we met at all today, we 

 25  just said hello together.

  1                    Einhorn

  2       Q.    Which other attorneys at Frankfurt 

  3  Garbus have you met with, if any?

  4       A.    David Atlas; Edward Hernstadt, and three 

  5  young fellows, I don't know their last names, 

  6  Jeremiah and a woman named Casey.  They are all 

  7  attorneys; and there is one more that I met with 

  8  actually, but I don't remember his name.

  9       Q.    I have been handed a declaration, it is 

 10  called a declaration, dated July 14th and signed by 

 11  Mr. Einhorn, which is roughly identical to what I 

 12  received yesterday at 5:30, but for a couple of 

 13  grammatical improvements that Mr. Einhorn has 

 14  provided.  Let's mark this as Einhorn Exhibit 2. 

 15             (Einhorn Exhibit 2, declaration of 

 16       Einhorn, marked for identification, as of 

 17       this date.)

 18       Q.    Mr. Einhorn, who drafted this?

 19       A.    I did.

 20       Q.    Entirely?

 21       A.    Entirely.

 22       Q.    Did you discuss a previous version of 

 23  the text with counsel and make changes as a result 

 24  of those conversations?

 25       A.    I made one change as the result of 

  1                    Einhorn

  2  conversation with counsel.

  3       Q.    Would you identify that change, please?

  4       A.    Yes.  The one clause that I added and I 

  5  feel counsel was right here, was number 7.

  6       Q.    The entire paragraph or some portion of 

  7  it?

  8       A.    7 --

  9       Q.    The entire paragraph 7?

 10       A.    Yes, the sentence.

 11       Q.    Were there sentences or clauses in a 

 12  prior version that were altered or deleted after 

 13  your conversations with counsel?

 14       A.    With counsel, no.

 15       Q.    You indicated before that you read what 

 16  you believe to be all of the declarations submitted 

 17  by defendants in this case?

 18       A.    I believe so.

 19       Q.    Do you know whether you read a 

 20  declaration of a professor -- I am sorry, a Louis 

 21  Kurlantzick?

 22       A.    Sure.

 23       Q.    Who gave that one to you?

 24       A.    All the declarations were given to me by 

 25  a young attorney in Mr. Garbus' office whose name 

  1                    Einhorn

  2  is Josh.  He had them Xeroxed for me and he gave 

  3  them to me.  I don't remember his last name.

  4       Q.    Did anyone at Frankfurt Garbus or on 

  5  behalf of the defendants ask you whether you agreed 

  6  with the statements in the Kurlantzick declaration?

  7       A.    No one asked me if I agreed with them.

  8       Q.    Did anyone on behalf of the defendants 

  9  or at Frankfurt Garbus ask you if you would include 

 10  any of those statements in your declaration?

 11       A.    No.  They did not. 

 12       Q.    Have you retained any earlier drafts of 

 13  your declaration?

 14       A.    I believe that I saved right over it and 

 15  kept the same name. 

 16             MR. GARBUS:  Without being rude, how 

 17       long do you think you are going to go?  

 18             MR. SIMS:  It is not rude at all to 

 19       ask.  My guess would be an hour and a half.  

 20       Q.    Do you plan to, as far as you know, 

 21  Mr. Einhorn, testify at the trial of this matter?

 22       A.    I believe I am going to be asked to 

 23  testify.

 24       Q.    What is the economic arrangement, if 

 25  any, that you have made in connection with that 

  1                    Einhorn

  2  testimony and your appearance here today?

  3       A.    I am appearing pro bono.

  4       Q.    What does paragraph 4 of your 

  5  declaration mean?

  6             MR. HERNSTADT:  Objection to form.  You 

  7       can answer.

  8       A.    Policies that are established 

  9  inevitably have some strengths and weaknesses that 

 10  are associated with them.  There is very rarely, 

 11  that is a perfect good or perfect bad.  It is 

 12  appropriate in choosing the optimal policy course 

 13  to consider the benefits and the costs of any 

 14  associated alternative, and try to consider the 

 15  combination that maximizes what I will call net 

 16  social benefits.

 17       Q.    With respect to policies embodied in 

 18  legislation, who is it who is entitled, as far as 

 19  you understand it, to make those judgments?

 20             MR. HERNSTADT:  Objection to form, and 

 21       insofar as it calls for a legal conclusion.

 22       A.    Exactly right.  I am speaking here as 

 23  an economist.  I am testifying as an economist.  I 

 24  sometimes understand that what might be the 

 25  economically rational policy may be a conflict with 

  1                    Einhorn

  2  law.

  3       Q.    Take a look, if you would, sir, at the 

  4  statement in paragraph 5 of your declaration?

  5       A.    Okay.

  6       Q.    I take it that that statement is 

  7  generally true of everybody; is that correct?

  8             MR. HERNSTADT:  Objection to form. 

  9             MR. GARBUS:  Everybody about the world 

 10       geography?

 11       Q.    That statement is generally true of 

 12  plaintiff's motion pictures?

 13       A.    I think that statement is true of any 

 14  good or service.

 15       Q.    What did you mean by the statement that 

 16  appears in paragraph 6?

 17             MR. HERNSTADT:  Objection to form.

 18       A.    Okay.  What I mean here is that piracy 

 19  or the threat of piracy cannot be evaluated simply 

 20  in a vacuum that suggests a hypothetical 

 21  possibility, piracy.  Rather I would suggest that 

 22  there are two things we must consider when we talk 

 23  about the threat of piracy that go beyond that 

 24  simple identification.  First, we have to figure 

 25  out what other technologies the pirate can use. 

  1                    Einhorn

  2             If we take away one piracy technology, 

  3  what else does he have at his disposal to use to 

  4  pirate.  And where on that continuum of 

  5  technologies does the proscribed method lie in 

  6  terms of costs. 

  7             That is what I meant.

  8       Q.    I think you have testified that when you 

  9  worked for Bell Labs, you worked on pay telephone 

 10  issues; is that correct?

 11       A.    Primarily. 

 12       Q.    Did the pay telephones that were -- what 

 13  is it that Bell Labs did with pay telephones, did 

 14  they build them or sell them or license, what is it 

 15  that Bell Labs did with respect to pay telephones. 

 16             MR. HERNSTADT:  Objection.

 17       A.    They attempted to install them in 

 18  places that would lead to maximum amount of 

 19  revenue, and to determine where the right spots 

 20  would be to build out the infrastructure of pay 

 21  telephones.  This is before of course the wireless 

 22  revolution, and they were trying to understand the 

 23  overall consumer demand for pay telephones, and the 

 24  determinates for the placement, and where the next 

 25  pay telephones should be.

  1                    Einhorn

  2       Q.    Do you have an opinion as to whether 

  3  people have a right to speak?

  4       A.    I think people have a right to speak.

  5       Q.    Do you believe they have a right to 

  6  speak to their friends and neighbors?

  7             MR. HERNSTADT:  Objection to form.

  8       A.    Yes.

  9       Q.    To their children and parents?

 10       A.    Yes. 

 11             MR. HERNSTADT:  Objection to form.

 12       Q.    Are you aware of whatever Bell 

 13  entities at that time that were deploying pay 

 14  telephones, had mechanisms on those phones so that 

 15  you had to put in money in order to -- to obligate 

 16  yourself to pay in order to make those telephone 

 17  calls?  

 18             MR. HERNSTADT:  Objection.

 19       A.    Actually even back then most calls 

 20  were made without dropping a coin in.

 21       Q.    But were they free?

 22       A.    No.

 23       Q.    It was impossible back then to make a 

 24  phone call without either paying up front or 

 25  incurring an obligation to pay the cost of the 

  1                    Einhorn

  2  call?

  3       A.    Quite right. 

  4             MR. HERNSTADT:  Objection to form.

  5       Q.    Putting aside -- what were the 

  6  exceptions to that overall policy?

  7             MR. HERNSTADT:  Objection to form.

  8       Q.    If any?

  9             MR. HERNSTADT:  I think it misstates the 

 10       testimony.

 11       A.    I am not sure that Bell Telephone ever 

 12  gave away any free telephone calls.

 13       Q.    Was it your view that the imposition of 

 14  a charge in order to make a phone call was a 

 15  violation of any rights of consumers?

 16             MR. HERNSTADT:  Objection to the 

 17       question insofar as it calls for a legal 

 18       conclusion.  You can answer it if you can.

 19       A.    I think that making people pay for 

 20  phone calls did not violate their legal rights.

 21       Q.    From an economic point of view did you 

 22  consider, did you have a judgment as to whether it 

 23  was rational from the point of view the phone 

 24  company to charge for the use of its service?

 25             MR. HERNSTADT:  I would like to put an 

  1                    Einhorn

  2       objection to this whole line of questioning.  

  3       Totally irrelevant.  But you can answer to 

  4       the best of your ability. 

  5             MR. GARBUS:  Off the record again for 

  6       a moment. 

  7             (Recess taken.)

  8       A.    It is quite rational for AT&T to 

  9  charge people for telephone calls.

 10       Q.    And did you have some view then as to 

 11  whether complex American sophisticated business 

 12  organizations such as AT&T generally had a pretty 

 13  good idea of their own best interests economically?

 14       A.    They certainly did.  Well --

 15       Q.    I mean to generalize the question; 

 16  wouldn't you agree as an economist that generally 

 17  speaking complex American business organizations 

 18  such as AT&T generally are a better judge of their 

 19  own best economic interest than outsiders?

 20             MR. HERNSTADT:  Objection to the 

 21       question as being ridiculous.  But go ahead. 

 22             MR. SIMS:  I would say it is a central 

 23       issue here.

 24       A.    I would say, what I have seen of so 

 25  many American organizations, they don't understand 

  1                    Einhorn

  2  what is in their best interests.  AT&T in fact is 

  3  notorious for not having gotten it right.  Look how 

  4  they broke themselves up.  You are picking on -- 

  5  you are picking on a -- don't say AT&T, maybe 

  6  Microsoft understands their own interest, but AT&T 

  7  does not.  That is the problem with AT&T.

  8       Q.    The question I asked was, whether 

  9  complex business organizations such as large 

 10  corporations in more than day American, generally 

 11  are better judges of their economic self interest 

 12  than consumers of their products?

 13             MR. HERNSTADT:  Objection to everything 

 14       about that question.

 15       A.    I can't guess on that one.

 16       Q.    Did AT&T and by that I mean to include 

 17  Bell Labs, invest in the security of the revenue 

 18  streams associated with the operation of the pay 

 19  telephones that they deployed. 

 20             MR. HERNSTADT:  Objection to the form of 

 21       the question, unbelievably vague.

 22       A.    What I think you mean, was there some 

 23  kind of investment in policing, in the loosest 

 24  sense of the word of policing.

 25       Q.    Was there an investment in the physical 

  1                    Einhorn

  2  security of the coin box?

  3       A.    Yes.  I believe there was.

  4       Q.    Was the coin box to the best of your 

  5  recollection opened for individuals to pull money 

  6  out of?

  7       A.    I am quite sure it was not.

  8       Q.    Was there investment in some level of 

  9  assurance that people who were promising to pay, 

 10  would in fact pay?

 11             MR. HERNSTADT:  Objection to form.

 12       A.    I believe that people who used the 

 13  telephone either dropped the coins in the box or 

 14  paid for phone calls by credit card, collect, or 

 15  collect calls or third-party.  And in each of those 

 16  cases I think there was an implied contract that 

 17  people were going to pay.

 18       Q.    Was there investment made in deterring 

 19  theft of phone service?

 20             MR. HERNSTADT:  How much further are you 

 21       going to go with this, you are going to --

 22             MR. SIMS:  Ten minutes. 

 23             MR. HERNSTADT:  You are asking about 

 24       what Bell Labs did in 1984 to 199 --

 25             MR. SIMS:  I think the witness' 

  1                    Einhorn

  2       declaration as I understand it is attempting 

  3       to say that the motion picture industry is 

  4       not entitled to what the phone company is 

  5       entitled to.  I think I am entitled --

  6             MR. HERNSTADT:  Ask him if that is 

  7       what he said.  It is not in the declaration 

  8       at all. 

  9             MR. SIMS:  You want to take his 

 10       deposition when I am done, you may try. 

 11             MR. HERNSTADT:  I will let this go a 

 12       little further, but it is so completely 

 13       irrelevant to this case what Bell was doing 

 14       in '81 to '94 --

 15             MR. SIMS:  I think there is a question 

 16       on the record. 

 17             (Record read.)

 18       A.    Yes.

 19       Q.    Do you think it was economically 

 20  rational to make that investment, as an economist?

 21       A.    Based on my surmise, yes, I think it was 

 22  rational.  On a surmise, not as an economist, on a 

 23  surmise.

 24       Q.    When AT&T deployed its resources to 

 25  deter and defeat piracy of pay phone service, did 

  1                    Einhorn

  2  they consider the costs to the pirate --

  3             MR. HERNSTADT:  Objection to form --

  4       Q.    -- in proceeding along that course?

  5             MR. HERNSTADT:  Objection to form.  

  6       Assumes facts not in evidence.

  7       A.    I have no idea. 

  8       Q.    What is the relationship of the 

  9  statement you make in paragraph 6 to the issues in 

 10  this case, as you understand it?

 11             MR. HERNSTADT:  Hold on a second.  I 

 12       would like to take a look at paragraph 6 

 13       again, okay.

 14       A.    I think that some suggestion has been 

 15  made that the DeCSS technology facilitates piracy 

 16  and I think any time a charge like that is aired, 

 17  the next logical step is to figure out exactly how 

 18  that piracy is going to be done and what kind of 

 19  materials are going to be used to make -- to use 

 20  the appointed method to make the illegal copies. 

 21             So what I want to do here would be to go 

 22  through and say, well, just, what, you know, take 

 23  me through the steps here.  What I would say to 

 24  myself, take me through the steps, Mr. Einhorn, of 

 25  how you get from this charge that there is a 

  1                    Einhorn

  2  possibility hypothetical possibility of piracy and 

  3  how you get there from that position at alpha over 

  4  to the omega that says this poses a realistic, and 

  5  I emphasize that word, realistic piracy threat.

  6       Q.    Have you made any study with respect to 

  7  whether the availability of DeCSS on the 

  8  plaintiff's web-site or its availability through 

  9  the plaintiff's web-site --

 10             MR. HERNSTADT:  You mean plaintiffs or 

 11       defendants?

 12             MR. HERNSTADT:  Defendants.

 13       Q.    Have you made any study as to 

 14  the connection, if any, between the availability of 

 15  the DeCSS on or through defendant's web-sites, 

 16  whether it could or has led to the copying without 

 17  consent of encrypted motion pictures on DVD?

 18             MR. HERNSTADT:  Objection to form.  

 19       Facts not in evidence.

 20       A.    I have made no study of consumer 

 21  behavior.

 22       Q.    Have you used DeCSS?

 23       A.    Never.

 24       Q.    Have you downloaded it?

 25       A.    No.

  1                    Einhorn

  2       Q.    Why not?

  3             MR. HERNSTADT:  Objection to the form.

  4       A.    I don't have a DVD player yet.  I 

  5  don't have a DVD player.  It would serve me no 

  6  purpose.

  7       Q.    Does your background and training and 

  8  experience as an economist provide you with the 

  9  means of assessing the likelihood that the 

 10  availability of DeCSS on or through defendant's 

 11  web-site will lead to the copying of plaintiff's 

 12  motion pictures from encrypted DVD?

 13             MR. HERNSTADT:  Objection.

 14       A.    I don't think my ability as an 

 15  economist helps me at all.  If I may go further 

 16  here, what I mean by that is I must, as I 

 17  understand the question, there are a number of 

 18  different costs and technologies that I have to 

 19  understand that do not come from the realm of 

 20  economics; that economists are not academically 

 21  trained to understand, and it is from this realm of 

 22  shall we call it telecommunications science that 

 23  the answers may lie. 

 24             I can review what telecommunications 

 25  folks may say and form my opinion based on what 

  1                    Einhorn

  2  they say.

  3       Q.    Focussing for a moment on paragraph 6 of 

  4  your declaration, do you know whether when Bell 

  5  Labs was assessing the threat of theft of pay 

  6  telephone service, they associated the cost of the 

  7  pirate as well as alternative technologies at the 

  8  pirates disposal?  

  9             MR. HERNSTADT:  Objection to form.

 10       A.    I worked as an economist at Bell Labs.  

 11  I didn't see any of this sort of administrative 

 12  stuff. 

 13       Q.    Is it your view as an economist that 

 14  AT&T could not properly assess the threat of piracy 

 15  for its pay telephone system without considering 

 16  the associated costs to those who they thought 

 17  might steal their service?

 18             MR. HERNSTADT:  Objection to the 

 19       question.  You may answer.

 20       A.    I don't know a thing about it.  I 

 21  didn't come near that end of the business.  

 22       Q.    Is it your view as an economist that it 

 23  would have been irrational for them to take action 

 24  and make investments to deter phone service theft 

 25  without considering the associated costs to the 

  1                    Einhorn

  2  pirate as well as alternative technologies at the 

  3  pirates disposal?  

  4             MR. HERNSTADT:  Objection.  No 

  5       foundation.  You may answer if you can.

  6       A.    Given my very limited understanding of 

  7  how I understand this kind of, this issue.  The 

  8  nature of pay telecommunications is such that there 

  9  are no really good, or there were no really good 

 10  pay telephone technologies to pay telephone piracy, 

 11  and that therefore such a determination would have 

 12  been what a mathematician may call a null sell. 

 13             That is to say a pirate who wants to rip 

 14  off the phone company -- limited understanding 

 15  here -- would go to the pay telephone, and if he 

 16  didn't have that, he would be, I think, back then, 

 17  pretty much out of luck to continue long-term 

 18  piracy of pay telephones. 

 19             But again I simply don't know how these, 

 20  how pirate technologies work, so it is hard to 

 21  answer.

 22       Q.    Do you have any expertise with respect 

 23  to the cost associated with decrypting a DVD with 

 24  DeCSS?

 25       A.    Do I have any expertise?

  1                    Einhorn

  2       Q.    Yes, with respect to that?

  3       A.    To the cost?

  4       Q.    Yes?

  5       A.    No.

  6       Q.    Do you have any expertise with respect 

  7  to the cost associated with uploading that 

  8  decrypted file to the Internet for downloading?

  9       A.    All the information I have is based 

 10  on --

 11       Q.    Things you read?

 12       A.    Depositions or declarations.

 13       Q.    So you have no knowledge yourself?

 14       A.    No.

 15       Q.    Do you have a knowledge as an economist 

 16  about the costs associated with downloading a 

 17  decrypted motion picture which is stored on the 

 18  Internet in digital form?

 19       A.    I do not have any personal expertise.

 20       Q.    I turn your attention to paragraph 8 of 

 21  your declaration?

 22             MR. HERNSTADT:  If we can take five --

 23             MR. SIMS:  Let takes five now. 

 24             (Recess taken.)

 25       Q.    What, Mr. Einhorn, does paragraph 8 

  1                    Einhorn

  2  mean -- what do you mean by paragraph 8, that is 

  3  the question on the table?

  4             MR. HERNSTADT:  Objection to form.  It 

  5       means what it says.  It says what it says, 

  6       the words are there, if you would like him 

  7       to explain it.

  8       A.    Can I give examples of this?

  9       Q.    I withdraw the question.  In what way 

 10  are copyright owners compensated in the United 

 11  States for illegal sales displacement?

 12             MR. HERNSTADT:  Read that back, please. 

 13             (Record read.)

 14             MR. HERNSTADT:  Objection in so far as 

 15       it calls for legal conclusion.

 16       A.    I said for legal and illegal sales 

 17  displacement, I can't distinguish between the two 

 18  of them.  When books and professional journals are 

 19  sold to libraries, they are made available to 

 20  libraries at higher prices, including your 

 21  publisher, Kluwer, will sell them at higher prices 

 22  to libraries with the understanding that the 

 23  material inside will be copied by other people. 

 24             Now, whether the people who do the 

 25  copying are doing everything in a legal fashion I 

  1                    Einhorn

  2  don't know.  But the library implicitly makes the 

  3  publisher whole by paying a higher price.  That is 

  4  example number 1. 

  5             Example 2 is video cassettes that are 

  6  made available to stores like Blockbuster Video and 

  7  Hollywood video, are made available to these stores 

  8  at higher prices than they are made available to 

  9  the consumers who buy them for end use, because it 

 10  is surely understood that the rental of these 

 11  cassettes can displace sales, again, through either 

 12  rentals or illegal copying. 

 13             And the third example is the case of 

 14  digital audio recorders back in 1992 which 

 15  Congress -- which the Recording Industry 

 16  Association of America contended was going to 

 17  create copying that was going to displace record 

 18  sales, and Congress passed a law that said that we 

 19  will affix taxes on to the recorders and the tapes 

 20  for the purpose of implicitly covering the defrayed 

 21  or the forgone lost copyright royalties, and those 

 22  royalties taxes are put into an account in the U.S. 

 23  treasury and dispensed by the copyright office 

 24  under section 1004 of section 10 -- of chapter 10 

 25  of the title 17. 

  1                    Einhorn

  2             So those are three examples I think of 

  3  where technologies that do have the potential of 

  4  displacing sales through certain kinds of ways, 

  5  legal or illegal, in some way we make copyright 

  6  holders whole for their efforts. 

  7       Q.    Is it fair to say that your position is 

  8  that some copyright owners are compensated for some 

  9  illegal sales displacement in some circumstances; 

 10  is that the extent of your position on that point?

 11             MR. HERNSTADT:  Objection to the form.

 12       A.    I would have to say I would be a fool 

 13  if I believed that copyright owners were always 

 14  compensated for piracy.  So I have to say it is 

 15  some, because if I said all, I would be an idiot.

 16       Q.    So the statement in the first line of 

 17  paragraph 8 of your declaration?

 18       A.    As it stands on the page is a gross 

 19  overstatement; is that correct?

 20             MR. HERNSTADT:  Objection to the form.

 21       A.    I don't know whether it is an 

 22  overstatement or not, but I would be happy to 

 23  clarify for you.

 24       Q.    You don't mean, do you, that copyright 

 25  owners are compensated for all illegal sales 

  1                    Einhorn

  2  displacement in the United States?

  3             MR. HERNSTADT:  Objection to form.  I 

  4       think the thing to do is to read the 

  5       statement in --

  6             MR. SIMS:  I am going to ask 

  7       questions.

  8             MR. HERNSTADT:  Fine.  I will instruct 

  9       you that you should probably read this into 

 10       the record as part of your answer, because 

 11       that question implied something that is not 

 12       in the document itself. 

 13             MR. SIMS:  Reread the question, 

 14       please. 

 15             (Record read.)

 16       A.    I don't think I ever said that.

 17       Q.    I am not asking whether you ever said it 

 18  and I will phrase the question this way, do you 

 19  agree with me that copyright owners are not 

 20  compensated for all illegal sales displacement in 

 21  the United States?

 22       A.    Yes. 

 23             MR. SIMS:  Let the record show that the 

 24       witness is nodding to the attorney.

 25       A.    Yes.

  1                    Einhorn

  2       Q.    You would agree with me that copyright 

  3  owners are probably not compensated for most 

  4  illegal sales displacement in the United States?

  5       A.    I have no way of knowing.

  6       Q.    Have you thought at all about what has 

  7  been happening over the last six months with 

  8  respect to Napster and --

  9       A.    Yes.

 10       Q.    And do you believe for example, that the 

 11  sound recording companies, record companies, are 

 12  being compensated for the full amount of illegal 

 13  sales displacement occurring on Napster?

 14             MR. HERNSTADT:  Objection to form, 

 15       assumes a fact not in evidence.

 16       A.    It is a very difficult question to 

 17  answer.  I will tell you why, because I have to see 

 18  and I have not seen what is the estimate of sales 

 19  displacement.  Sales have gone down, if -- there 

 20  are at -- at some point sales have gone down 

 21  hypothetically from a hundred to something less.  I 

 22  have to see where that displacement is, and I have 

 23  not.  I have not seen the evidence.  I have seen 

 24  stuff on your web-site --

 25             MR. HERNSTADT:  Specify.

  1                    Einhorn

  2       A.    Not your web-site, either the RIAA or 

  3  the Proskauer web-site, from a lady, I forget her 

  4  name.

  5       Q.    Hillary Rosen.

  6       A.    No, a marketing analyst.  I forget the 

  7  name, where she did some research that shows that a 

  8  good number of people who use Napster in her mind 

  9  are using it to displace record sales.  This seems 

 10  interesting.  I have not yet reviewed Mr. Latanaro 

 11  or Mr. Fader (phonetic) on their comparable 

 12  studies.  I have seen some studies, some statements 

 13  from record store owners that purport to show that 

 14  Napster is displacing their sales of physical 

 15  records.  I think that is bogus. 

 16             I really have not seen, you know, the 

 17  bottom line.  I have not seen where the 

 18  displacement is in Napster to understand whether 

 19  this thing is facilitating net piracy or not.  I 

 20  mean "net" as compared with "gross".

 21       Q.    You do not presently have the opinion, 

 22  am I correct, that the music companies have been 

 23  fully compensated for illegal sales displacement of 

 24  the recordings in the United States from all 

 25  causes?

  1                    Einhorn

  2             MR. HERNSTADT:  Object to the form.  I 

  3       did not get the nots, read it back. 

  4             (Record read.)

  5       A.    Being familiar as best I can as an 

  6  economist with the legal structures of copyright, I 

  7  am going to tell you honestly, I am out on this 

  8  one.  I am a agnostic.  I just have not formed -- 

  9  done the work that I need to do.

 10       Q.    Are you aware that there are areas in 

 11  the United States and throughout the world where 

 12  there are unconsented sales of videotapes of 

 13  plaintiff's films that have been made without their 

 14  permission?

 15             MR. HERNSTADT:  Objection to the form.  

 16       Assumes facts not in evidence.

 17       A.    I have come across that statement in 

 18  declarations that I have read in the past week or 

 19  so, I have never experienced a firsthand 

 20  activity -- certainly I never bought any, but I 

 21  never seen it in the market, foreign market.

 22       Q.    Have you ever seen any on Eighth Avenue 

 23  near the bus station?

 24       A.    Frankly, I walk --

 25       Q.    Video cassettes?

  1                    Einhorn

  2       A.    Die pay attention.  I would be afraid to 

  3  go near them, because I don't trust the quality.

  4       Q.    There is a reference in paragraph 8 to 

  5  the existing rights of consumers, researchers and 

  6  others, what existing rights are you referring to?

  7       A.    This is number 8?

  8       Q.    Yes, the last half line or so of 

  9  paragraph 8?

 10       A.    Yes, okay.  --

 11             MR. HERNSTADT:  Objection to the form of 

 12       the question.  He.

 13             MR. SIMS:  I was asking what he was 

 14       referring to.

 15       A.    For one thing, regarding consumer 

 16  rights, we are talking here about what I will call 

 17  first use rights; once I buy a piece of property, 

 18  it is my property, and how I use, how I choose to 

 19  dispose of that is usually something that the 

 20  copyright law allows me to do in my own personal 

 21  way, up to and including the point of being allowed 

 22  to resell.

 23             My records -- despite the fact that that 

 24  resale may indeed displace the sale of a new copy, 

 25  and I am legally empowered to do that because there 

  1                    Einhorn

  2  are certain rights that I have in my embedded 

  3  property that the law upholds.  That is what I am 

  4  talking about with consumers.

  5             With researchers is the right of 

  6  computer scientists to work on open source code in 

  7  a way that will advance their profession, both as a 

  8  very narrow and technical profession, but also I 

  9  hope will enable the open source systems to become 

 10  increasingly deployable on PCs throughout the 

 11  world. 

 12             So I am talking here about, in specific, 

 13  the rights to do research on open source software 

 14  and to enable it to come to higher levels.

 15       Q.    Do you have an opinion as an economist 

 16  with respect to whether a system of property rights 

 17  encourages investment in the development of 

 18  property?

 19             MR. HERNSTADT:  Objection to form.

 20       A.    Property rights encourage investment.

 21       Q.    And are you familiar with economic 

 22  papers and analyses with respect to systems in 

 23  which there are no property rights and whether 

 24  there is sub optimal investment under those 

 25  systems?

  1                    Einhorn

  2             MR. HERNSTADT:  Objection to form.

  3       A.    I am quite aware of most -- most of my 

  4  exposure to this issue came through the reading of 

  5  economic history and one of the reasons why 

  6  economic historians believe the industrial, one of 

  7  the reasons why it was possible for the industrial 

  8  revolution to take off in England, was there 

  9  because there was a firm system of copyrights. 

 10             Without having reviewed this issue in 

 11  any truly scholarly fashion, let me say that I am 

 12  inclined to agree that you must have a system of 

 13  property rights to establish the structure on which 

 14  an economy and go forward to secure for investors 

 15  the right to appropriate the legitimate profits of 

 16  their investments.

 17       Q.    What is the relationship that you see 

 18  between what you state in paragraph 9 of your 

 19  declaration and the issues in this lawsuit?

 20       A.    Okay.  Obviously when I talk about 

 21  legitimate computer scientist in the advancements 

 22  of their profession, I am talking about the people 

 23  who work on the open source software movement.  

 24  That is the legitimate work that I am talking 

 25  about. 

  1                    Einhorn

  2             When I say technology policies that 

  3  require them to apply for licenses, et cetera, what 

  4  I am talking here, if they have to go to the DVD 

  5  CCA and get licenses from them to license their 

  6  work, or license their use of descrambling 

  7  technology, and if there are restrictions on them 

  8  sharing results, and if they have to post a 

  9  liquidated damages clause of one million dollars 

 10  for any possible violation. 

 11             I am concerned there that in an open 

 12  community of researchers where people all chip in 

 13  their efforts pro bono, I am concerned that that 

 14  kind of arrangement can have a chilling effect, 

 15  because there is no one organizational or corporate 

 16  entity that is able to foot these responsibilities 

 17  or these tabs. 

 18             The movement is so open-ended, who could 

 19  possibly sign a contract -- who could possibly 

 20  oblige a group of scientist to the acceptance of a 

 21  liquidated damages clause; who is empowered to make 

 22  that kind of obligation.

 23       Q.    Do you know any scientist who want -- 

 24  who is presently engaged in studying or wants to 

 25  study CSS?

  1                    Einhorn

  2       A.    Yes, by scientist, I mean, maybe I am 

  3  using the wrong word here, I mean commuter science, 

  4  not physicist.

  5       Q.    Can you name one computer scientist who 

  6  presently wants to study a 40 bit encryption system 

  7  known as CSS?

  8       A.    Maybe I am getting something wrong here, 

  9  but I got the impression that people like Andrew 

 10  Apple and Chris DiBono and Matt Pavlovich and other 

 11  people whose -- Edward Felton and other people 

 12  whose declarations I read were all, and maybe I am 

 13  showing my lack of understanding of the word 

 14  computer scientist here, but I thought these guys 

 15  were -- could all be lumped together to be computer 

 16  scientists.

 17       Q.    Do you know, do you have any firsthand 

 18  knowledge as to whether or not they are engaged or 

 19  want to be engaged in the study of CSS?

 20       A.    The only thing that I know of them is 

 21  their -- is through the declarations.

 22       Q.    Do you know whether or not a DVD CCA has 

 23  licensed any consumer electronics or computer 

 24  companies to manufacture LINUX based DVD players?

 25             MR. HERNSTADT:  Objection to form.  

  1                    Einhorn

  2       Assumes facts not in evidence.

  3       A.    I made a phone call about this two 

  4  days ago, my understanding is that at this point 

  5  the DVD CCA has not licensed -- I am sorry, they 

  6  may have licensed one group, they may have licensed 

  7  a group that has a technology called LS DVD.  But 

  8  my understanding of how far -- that this group has 

  9  come along is so sketchy, that I don't know if they 

 10  have a license.  I don't if they have gone along 

 11  any further than just having a license, my 

 12  understanding is that they barely have anything 

 13  else organized -- think of certainly indicated that 

 14  they want a license.  Whether they have formally 

 15  gone ahead and gotten a license, I don't know.

 16       Q.    You don't know whether anyone has a 

 17  license?

 18       A.    I believe that the group that provides 

 19  LS DVD now has a license.

 20       Q.    How do you know that or why do you 

 21  believe that?

 22       A.    I read it in some declaration that there 

 23  were two groups, LS DVD and LiViD, and I don't 

 24  remember which declaration.

 25       Q.    Do you know whether there are any 

  1                    Einhorn

  2  companies with the name of Intermedia or Intervideo 

  3  and Sigma that have obtained licenses for the 

  4  manufacture of LINUX based DVD players; the 

  5  question is do you know one way or the other?

  6       A.    I don't know of the names of any 

  7  particulars who became licensed.

  8       Q.    Do you know whether any corporations you 

  9  referred to groups, do you know whether any 

 10  business corporations have in fact obtained 

 11  licenses for the manufacture and production of 

 12  LINUX based DVD players?

 13       A.    I have asked if there was a corporation 

 14  that was behind getting licenses and I was told 

 15  there was a beard and there was somebody behind and 

 16  no one knows who it is.

 17       Q.    Who did you have this conversation with?

 18       A.    Matt Pavlovich.

 19       Q.    Who is he?

 20       A.    He is the -- he has his own organization 

 21  now called Debian, D-E-B-I-A-N, and his work is 

 22  involved primarily with bringing a LiViD player to 

 23  fruition.

 24       Q.    So other than the conversation you had 

 25  with Mr. Pavlovich which probably the judge will 

  1                    Einhorn

  2  consider to be hearsay, do you have any other 

  3  information about whether or not there is any LINUX 

  4  based DVD player that has been licensed for 

  5  manufacture our production?

  6       A.    The only other thing that I know about 

  7  LINUX in connection with a license provided by the 

  8  DVD CCA is through a technology known as LS DVD, 

  9  and that is where my knowledge stops. 

 10             I visited the CCA web-site to learn more 

 11  about it, and they did not list the names of their 

 12  licensees of the people who now license their 

 13  technology.

 14       Q.    Do you know whether any computer 

 15  scientist has asked the DVD CCA or any other 

 16  licensing agent or technology owner for permission 

 17  to undertake research with respect to CSS?

 18             MR. HERNSTADT:  Read that back, please.  

 19       Objection to form. 

 20             (Record read.)

 21       A.    I don't know to what -- I don't know 

 22  to the full -- I do not know the interactions 

 23  between the computer research community and the CCA 

 24  and what they are --

 25       Q.    Okay.  Focussing on paragraph 11 of your 

  1                    Einhorn

  2  declaration.  If as a result of DeCSS, what you 

  3  referred to as the open source community, creates a 

  4  LiViD DVD player that would be freely available to 

  5  home PCs, what would you expect as an economist the 

  6  impact of that to be on the market for licensed 

  7  LINUX DVD players?

  8             MR. HERNSTADT:  Objection to form.  

  9       Assumes facts not in evidence.

 10       A.    It could go either way.  It could 

 11  stimulate demand or it could repress it.

 12       Q.    If the DVD CCA concluded that the 

 13  availability of LINUX DVD players freely available 

 14  to home PCs would be harmful to the market for 

 15  licensed players, do you have any basis for 

 16  disagreeing with their conclusion?

 17             MR. HERNSTADT:  Objection to form.  

 18       Assumes facts not in evidence.  Vague.  No 

 19       foundation.  You may answer if you can.

 20       A.    Yes.  I could see reasons -- can I 

 21  give an example of why --

 22       Q.    Can you read the question again, please.  

 23  The question was whether you can see reasons.  The 

 24  question is whether you have information at present 

 25  to believe their judgement is incorrect?

  1                    Einhorn

  2       A.    Yes, I do.

  3       Q.    Please provide me the information you 

  4  have?

  5       A.    We are talking here about a licensed DVD 

  6  player, okay --

  7       Q.    The question is -- we got here when I 

  8  asked you whether the availability of an unlicensed 

  9  LINUX DVD player, what effect that would have on 

 10  the market for licensed LINUX DVD players; you said 

 11  you couldn't tell, you were agnostic on that?

 12       A.    Yes.

 13       Q.    My question is if the DVD CCA is not 

 14  agnostic, if they have a judgment that it would be 

 15  harmful to the market for licensed players, what 

 16  information do you have that their judgment of 

 17  their interest is wrong?

 18             MR. HERNSTADT:  Objection.  Not in 

 19       evidence.

 20       A.    The information that I have is my 

 21  judgment as an economist, and the capacity for 

 22  economists sometimes to perceive effects that other 

 23  people don't perceive.  We like to think of the 

 24  world as being myopic.  And I think people who -- 

 25  if they were to make, assert that position, they 

  1                    Einhorn

  2  perhaps would be myopic.  Let me explain to you 

  3  why. 

  4             DVD players will be sold only insofar as 

  5  there are DVDs out there that can be used, and the 

  6  more DVDs that are out there, the more likely it is 

  7  that people will buy DVD players.  The only reason 

  8  why you buy a player is to get your hands on the 

  9  DVD.  So, how do I imagine this; if I had a world 

 10  where you had DVD players sold only by licensed 

 11  corporations, and these were fairly -- perhaps very 

 12  good machines, but fairly expensive.  A very small 

 13  fraction of the population may buy them. 

 14             They may be great machines, but so 

 15  expensive that we may find that the DVD industry is 

 16  not taking off.  Like Apple software not taking off 

 17  because they don't have the base of technology that 

 18  wants to use it. 

 19             Enter the LiViD player available for 

 20  free, available to people like me who wouldn't want 

 21  to spend a lot of money for a DVD, but might 

 22  download it for a cheap price.  Once you have this 

 23  thing built out and you got penetration conceivably 

 24  across 100 percent of the households that have a 

 25  computer, if it is free, then you got a base of 

  1                    Einhorn

  2  people who will use DVDs and you have widened, if 

  3  you will, the operating system. 

  4             Once that operating system is widened, 

  5  you have what are called network effects.  People 

  6  that make DVDs can build for the bigger operating 

  7  system.  This could be wonderful for the LS DVD 

  8  business, particularly if they make a better 

  9  player, because then they are going to get the 

 10  build out from the cheap's like me, but still have 

 11  the high end folks who are going to run to them, 

 12  and more likely to buy from them because the DVDs 

 13  are out there. 

 14       Q.    What in your judgment is the 

 15  relationship between the statement you make in 

 16  paragraph 12 and the claims and defenses in this 

 17  lawsuit?

 18             MR. HERNSTADT:  Objection to form.

 19       A.    LINUX is an operating system.  It is 

 20  an open source operating system.  It is an 

 21  operating system that has swept over the low end 

 22  server market in the past two to three years and is 

 23  now making its way into hand held devices as well.  

 24  Major problem, it ain't making it on the home PC 

 25  right now as I estimate it.  Maybe 4 or 5 percent, 

  1                    Einhorn

  2  no more, of Intel powered PCs are on the LINUX 

  3  operating system. 

  4             You know, personally, the thought that 

  5  we will eventually go over to an open source 

  6  operating system is encouraging, because all 

  7  programmers can write to it and all software will 

  8  be compatible with it.  So then I ask myself, what 

  9  do I have to do as an economist to recommend what 

 10  policy steps are necessary to make this operating 

 11  system more prevalent in American homes. 

 12             One thing that I would like to do is do 

 13  exactly what the U.S. Department of Justice is 

 14  doing, to work on those strategies used by the 

 15  monopolist here to illegally protect its power.  

 16  But there is something else that I want to do; that 

 17  is make it possible for the LINUX operating system 

 18  to be viable in the minds of most consumers. 

 19             If LINUX is going to survive in the 

 20  consumer market it has to have software 

 21  applications written to it.  One of the reasons why 

 22  MacIntosh doesn't do as well as Windows, it is a 

 23  superior operating system, but it doesn't have the 

 24  software applications written to it that Windows 

 25  does. 

  1                    Einhorn

  2             So I regard the LINUX DVD or the LiViD 

  3  DVD as a very important software application that 

  4  would enable many consumers to make the jump over 

  5  from the Windows system to a LINUX system.  Let me 

  6  say it another way.  If you didn't have a DVD 

  7  player that was accessible to them at a low price, 

  8  I don't see how LINUX would make it into the home 

  9  PC market if Microsoft has the capacity to provide 

 10  that very same application.

 11       Q.    And am I correct that your personal 

 12  interest in the displacement of some of Microsoft's 

 13  market share in the home PC market by an open 

 14  source system underlies your view that it ought to 

 15  be permissible to decrypt videos that are presently 

 16  encrypted with CSS, and play them eventually on 

 17  LINUX based machines?

 18             MR. HERNSTADT:  Objection to form.  

 19       Refers to statements and facts not in 

 20       evidence, he has expressed no personal 

 21       view --

 22       A.    No way.  This requires us backing up 

 23  considerably more than looking at this as an 

 24  antitrust issue, this point that I made is, can be 

 25  explored here, but there are a lot of other things 

  1                    Einhorn

  2  that I would have to consider first that are 

  3  fundamentally, fundamentally part of economic 

  4  analysis, as I put in the first part of my 

  5  declaration, that have to be considered long before 

  6  we jump to point 12. 

  7             This is something that can be considered 

  8  at the end, but I would certainly not suggest that 

  9  a system -- hypothetically, if there were a system 

 10  that out and out displaced sales of Hollywood 

 11  movies, and profited illegal pirates, if there were 

 12  such a system and if that could be shown somehow to 

 13  hurt Microsoft, I would be on your side, and say 

 14  let -- we are going to have let Microsoft off the 

 15  hook here, I cannot advocate this policy solely as 

 16  way of taming, the, as a means of taming Microsoft, 

 17  we would have to rely upon other legal matters in 

 18  which to do it.

 19       Q.    Would you agree that there is some 

 20  relationship between the availability of decrypted 

 21  digital motion pictures on the Internet and the 

 22  revenues that plaintiff's can obtain from their 

 23  motion pictures?

 24             MR. HERNSTADT:  Objection to form.  

 25       Vague.

  1                    Einhorn

  2       A.    Theoretical relationship or empirical 

  3  relationship.

  4       Q.    First theoretical?

  5       A.    I can imagine in a world, sometime out 

  6  there, I can imagine this, a state maybe 20 years 

  7  from now, 30 years from now, where it is 

  8  conceivable that movies can be pirated in some 

  9  means, and that piracy will -- could hurt movie 

 10  studios.  Whether that form of piracy -- well, I 

 11  will call it high tech piracy. 

 12             That certainly is imaginable.  But at 

 13  the present, seeing the numbers that I have seen in 

 14  front of me, admittedly as an economist and not as 

 15  a telecommunications engineer, I don't see how it 

 16  is possible.

 17       Q.    Let me restate the question.  Because I 

 18  don't think I got an answer to it.  Do you believe 

 19  as an economist based on your experience that there 

 20  is a relationship between the availability of a 

 21  film in a decrypted form on the Internet, available 

 22  for downloading, and the revenues that the 

 23  copyright owner can obtain for that film?

 24             MR. HERNSTADT:  Objection to the 

 25       question, incomplete hypothetical and vague.

  1                    Einhorn

  2       A.    There is no relationship that I have 

  3  ever observed here.

  4       Q.    What does economic theory as you 

  5  understand it posit about whether or not the 

  6  availability of a free good has an effect on the 

  7  revenues that a proprietor will obtain for sales of 

  8  the goods?

  9       A.    Well, I will answer that question.  

 10  Economic theory says --

 11       Q.    That is the question that I have been 

 12  posing for five minutes?

 13       A.    Economic theory says that if there is a 

 14  free good that is made available to consumers, that 

 15  free good may attract sales away from people who 

 16  would otherwise buy the more expensive good.

 17       Q.    And for a good that is made available 

 18  not only through sales, but in various ways, 

 19  through rentals, licenses, sales, other means as 

 20  well, does the relationship still hold true, namely 

 21  that the availability of a free good will have an 

 22  adverse impact on the total revenues that could be 

 23  obtained in the various ways that the copyright or 

 24  property owner obtains them?

 25             MR. HERNSTADT:  Objection to the form.  

  1                    Einhorn

  2       Misstates the testimony.

  3       A.    You got to distinct between having a 

  4  bad effect on revenues and displacement of sales.

  5       Q.    I didn't asked about displacement?

  6             MR. HERNSTADT:  You asked a question, 

  7       putting words into his mouth he did not 

  8       utter. 

  9             MR. SIMS:  I asked a question. 

 10             MR. HERNSTADT:  You said --

 11       A.    It may hurt revenues and it may help 

 12  revenues.  I gave you an example I think about 15 

 13  minutes age regarding the LS DVD of where free 

 14  goods can sometimes help revenues, and I will 

 15  reiterate that example.

 16       Q.    I have not asked for that.  I asked as a 

 17  matter of economic theory, what economic theory 

 18  teaches about the likely impact of the availability 

 19  of a free good on the revenues available through 

 20  exploitation of the good by sale or by license?

 21             MR. HERNSTADT:  Is this a question on 

 22       economic theory?

 23             MR. SIMS:  Yes.

 24       A.    I will generally answer your question.  

 25  I will generally say that economic theory will say 

  1                    Einhorn

  2  that free goods may either hurt or harm -- either 

  3  harm or benefit certain companies that sell other 

  4  goods that are roughly in the same market.  There 

  5  can be sales displacement; there can be economic 

  6  harm; there also can be under some instances 

  7  economic gain for the parties who are purportedly 

  8  displaced.  They still may be better off in the 

  9  end.

 10       Q.    Paragraph 13 of your declaration refers 

 11  to Professor Fisher's declaration.  Let me put a 

 12  document in front of you and ask whether this is 

 13  the document, I am going to mark this as Einhorn 

 14  Exhibit 3.  Declaration of Franklin M. Fisher. 

 15             (Einhorn Exhibit 3, declaration of 

 16       Franklin M. Fisher, marked for 

 17       identification, as of this date.)

 18       Q.    Is this the declaration to which you 

 19  referred in paragraph 15 of your declaration?

 20       A.    This is the declaration.

 21       Q.    Why don't you direct me, if you would, 

 22  to statements made by Mr. Fisher, professor Fisher 

 23  which you believe to lack awareness of some 

 24  fundamentally technology and copy institutions?

 25       A.    I found those more in his deposition.

  1                    Einhorn

  2       Q.    Are there any in the declaration that 

  3  you found --

  4             MR. HERNSTADT:  Take your time and go 

  5       through the declaration and tell us when you 

  6       find one.

  7       A.    Let me first focus on the declaration.

  8       Q.    Okay?

  9       A.    Professor Fisher's declaration 

 10  fundamentally sets out that if a good is available 

 11  for free, it will hurt -- displace sales and 

 12  provide harm -- or harm people who would otherwise 

 13  have made that good available at a positive price. 

 14             This is generally very quite often true.  

 15  But ignores the possibility of the network effects 

 16  that I described that involve the interrelationship 

 17  between DVD players and DVD movies.  Remember that 

 18  by giving away the player, you do not necessarily 

 19  harm the people who sell the movies.  And by 

 20  enabling the player to -- by maximizing the base of 

 21  people who have DVD players, you maximize the base 

 22  of consumers who may use the movie. 

 23             But he doesn't recognize here, he is 

 24  talking about certain products, but fails to make 

 25  the extension to the kind of market that we are 

  1                    Einhorn

  2  dealing with where you have a two part process, a 

  3  player and the movie.  Once you deal with two 

  4  goods, razor blades and racers and camera and film, 

  5  the analysis gets tougher than merely suggesting, 

  6  give the stuff away for free and you are going to 

  7  hurt people, you are going to hurt the sellers. 

  8             Wonderful example from telephone.  For 

  9  the longest time AT&T, my old company, put 

 10  telephones into people's houses at a reduced price.  

 11  They charge for the telephone less than the cost to 

 12  provide service.  That is to say the cost of them 

 13  stringing in the wire, they took a loss.  They took 

 14  a loss on the phone.  But they took a loss because 

 15  they knew they were going to make it back in 

 16  telephone calls.  And the same way by reducing the 

 17  price of one product, we may establish the economic 

 18  base for other products to come in for higher 

 19  revenues.  He doesn't get into that full analysis 

 20  of the problem.

 21       Q.    Is there any statement in here that you 

 22  think is incorrect, or he doesn't address things 

 23  that you --

 24       A.    I said sketchy.  I didn't say that he 

 25  was incorrect here.  The only thing that I thought 

  1                    Einhorn

  2  was possibly incorrect in the literal sense of the 

  3  board, is I don't think professor Kurlantzick, 

  4  number 6, professor says that -- Professor 

  5  Kurlantzick claims three things.  My reading of the 

  6  Kurlantzick declaration only confirms I think that 

  7  Professor Kurlantzick only believes one thing.  

  8  That is the middle one, concludes that persons who 

  9  may get such material at little or no cost would 

 10  not necessarily have purchased the legitimate 

 11  product at a higher cost. 

 12             I don't think anything else in here is 

 13  factual incorrect, I think I used the word, I am 

 14  sure I used the word sketchy.  Sketchy meaning it 

 15  is impressionistic, it is catchers catch can, but 

 16  doesn't go through the requisite analysis that I 

 17  would have used here on the problem.  The other 

 18  thing that we, I also see here is a difficulty, is 

 19  while he does talk of this effect, he has not 

 20  related this to the problem at hand. 

 21             He has talked about the piracy, and what 

 22  piracy and what low prices can do, but has not 

 23  established in my mind a very clear connection 

 24  between the particular matter at hand, DeCSS and 

 25  the piracy issues that it poses, vis a vis piracy 

  1                    Einhorn

  2  in general.  It would be -- people like who would 

  3  analogize MP3 and Napster and try to draw their 

  4  assessments of one technology based on their 

  5  assessments of the other. 

  6             You can establish this theory of piracy, 

  7  but then at some point you got to go in and apply 

  8  it to the particular market at hand here and the 

  9  particular market at hand here is a far more 

 10  complex market than the kind of market that says 

 11  push down the price of one good and you harm 

 12  everybody else that has the copyright.

 13       Q.    Do you think it is economically rational 

 14  to try to secure intellectual property against 

 15  widespread digital copying?

 16             MR. HERNSTADT:  Objection to the form of 

 17       the question.  Lack of foundation.  You may 

 18       answer if you understand what he is saying.

 19       A.    It would be economically rational 

 20  to -- sure, it would be certainly rational to worry 

 21  about it, sure.

 22       Q.    And are you aware that plaintiffs began 

 23  marketing motion pictures on DVDs in an encrypted 

 24  form sometime within the last five years?

 25       A.    Yes, I believe that to be correct.

  1                    Einhorn

  2       Q.    And as an economist, what do you expect 

  3  would have been the -- strike that. 

  4             As an economist, what do you expect 

  5  would be the impact on their ability to collect 

  6  revenues for their films made available on DVDs if 

  7  those DVDs had no encryption capability. 

  8             MR. HERNSTADT:  Objection to form.  Lack 

  9       of foundation, you may answer if you can.

 10       A.    I can't, because do you make the 

 11  pirated stuff available over the Internet.  Do you 

 12  make it available -- where do you make it 

 13  available.  Do you sell it on the street.

 14       Q.    The question I asked was, if the motion 

 15  picture companies had released DVDs without any 

 16  encryption, what as an economist do you think the 

 17  impact of that would be on their long-term ability 

 18  to collect revenues?

 19       A.    That would probably hurt them.

 20       Q.    How would it hurt them?

 21       A.    I said probably hurt them.

 22       Q.    How would it probably hurt them; what as 

 23  an economist are the reasons that lead you to 

 24  believe that would probably hurt them?

 25       A.    There would be two effects that would 

  1                    Einhorn

  2  take place.  One of which is that people would make 

  3  copies of popular movies and sell them illegally to 

  4  others who would willingly buy them.  And for every 

  5  such sale there might be, not necessarily will be, 

  6  but might be a displacement of an original copy, 

  7  and I say because, because if the original was $25 

  8  and the replacement is $5, if I buy the replacement 

  9  it doesn't mean that I would have bought the 

 10  original at 25. 

 11             So I say there might be a displacement 

 12  of original copy, if there is a kind of person that 

 13  is going to buy it originally, but gets the pirated 

 14  good.

 15       Q.    Does economic doctrine suggest to you 

 16  that there would also be a displacement of some 

 17  theatrical revenue?

 18       A.    Yes, but I have not have not finished my 

 19  point on the other side.

 20       Q.    Yes?

 21       A.    The other side is that DVD are a new 

 22  industry, just taking off, and one of the things 

 23  that really matters to someone who is selling DVDs 

 24  is to have the base of appliances out there that 

 25  use DVDs.  Now, my bet is that some fraction of 

  1                    Einhorn

  2  DVDs were available hypothetically at 5 or $6, 

  3  pirated admittedly, what that would do is encourage 

  4  sales and what some people would do, is more people 

  5  might buy DVD players. 

  6             So in the end what you may see is a 

  7  displacement of specific sales in some movies, but 

  8  simultaneously a more rapid build out of the DVD 

  9  infrastructure and conceivably for all the movies 

 10  that you can't buy on the corner of 42nd and 

 11  eighth, conceivably you will have other people who 

 12  will buy other movies from Hollywood because they 

 13  have a DVD player. 

 14             MR. HERNSTADT:  Can we take five 

 15       minutes.  Off the record. 

 16             (Recess taken.)

 17       Q.    Do you have an opinion as an economist 

 18  as to whether the ability of plaintiffs to recover 

 19  revenues for their works are at greater risk if 

 20  digital copying is practicable than they were 

 21  earlier when only VHS copying -- when VHS copying 

 22  was the only mode of duplication of their works?

 23             MR. HERNSTADT:  Objection to form.  Lack 

 24       of foundation.  Assumes facts not in 

 25       evidence, you may answer.

  1                    Einhorn

  2       A.    When you say more at risk, you mean 

  3  the likelihood of a published unit is more likely 

  4  to be copied in a digital regime.

  5       Q.    No, the question is whether the 

  6  availability of -- let me rephrase the question.  

  7  Does the -- does the -- do you have an opinion as 

  8  an economist whether the introduction of 

  9  plaintiff's motion pictures in digital form poses 

 10  additional risk to their ability to exploit their 

 11  property that did not exist before the availability 

 12  of those films in digital form?

 13             MR. HERNSTADT:  Same objection.

 14       A.    At this point digital copying poses 

 15  less of a risk.

 16       Q.    Let me restate the question, because I 

 17  don't think I have gotten an answer to it. 

 18             The question is whether once digital 

 19  technology became available and plaintiff's 

 20  distributed their films in digital format, whether 

 21  that carried additional risks that they didn't 

 22  theretofore face.

 23             MR. HERNSTADT:  Same objection.

 24       A.    Yes.  I believe there are additional 

 25  risks.

  1                    Einhorn

  2       Q.    Thank you?

  3       A.    Associated with digital technology, yes.

  4       Q.    And do you believe it is rational for 

  5  them to seek technological means to protect against 

  6  those risk and reduce those risk?  

  7             MR. HERNSTADT:  Objection, his opinion 

  8       as an economist.

  9             MR. SIMS:  Yes.

 10       A.    It is rational. 

 11       Q.    Do you understand what property rights 

 12  are?

 13       A.    Yes.

 14       Q.    From the point of view of economic 

 15  theory, not legal?

 16       A.    Yes.

 17       Q.    Is it fair to say that from the point of 

 18  view of economic theory, that section 1201 to 1203 

 19  of the DMCA, give the plaintiffs, among others, 

 20  property rights with respect to the ability to 

 21  deploy digital films in an encrypted mode? 

 22             MR. HERNSTADT:  Objection to the form of 

 23       the question.  Particularly since he said he 

 24       only read 1201, I am going to direct 

 25       Dr. Einhorn not to answer if the only answer 

  1                    Einhorn

  2       is a legal interpretation of the statute.  

  3       Otherwise you --

  4             MR. SIMS:  I asked him from the point 

  5       of view of economic --

  6             MR. HERNSTADT:  You said is there some 

  7       kind of economic conclusion that he can draw 

  8       from the statute.

  9       A.    I don't know whether section 1201 

 10  defines property rights.

 11       Q.    Have you read section 1203?

 12       A.    No.  I read 1201 and 1202.

 13       Q.    From the point of view of economic 

 14  theory would a rule that said that someone who 

 15  removed the technological protection that a content 

 16  owner had protected their digital content with, 

 17  could be sued for an injunction or damages, would 

 18  such a rule provide a property right to the content 

 19  owner with respect to the maintenance of the 

 20  security?

 21             MR. HERNSTADT:  Objection.  Direct you 

 22       to answer that only insofar as you can put 

 23       some kind of an economic interpretation on 

 24       it.

 25       A.    I am having a real hard time with that 

  1                    Einhorn

  2  one.  There is a right there.  I don't know if I 

  3  would call it a property right.

  4       Q.    What is DeCSS as you understand it?

  5       A.    DeCSS is -- well, CSS is content 

  6  scrambling system and DeCSS is an algorithm, if I 

  7  may use that word, that allows the user to strip 

  8  the code protection off of a DVD so that the DVD 

  9  can be used on some system that is not empowered to 

 10  interact with the code.

 11       Q.    Assume if you would that DeCSS allows 

 12  users to decrypt encrypted DVDs and make the 

 13  digital content available for downloading or 

 14  replication on to unencrypted DVD; as an economist 

 15  what do you believe the impact of that would be on 

 16  plaintiff's revenues in the short-term?

 17             MR. HERNSTADT:  Objection to form.  That 

 18       is extremely vague.

 19       A.    It could go either way.

 20       Q.    What do you expect the impact would be 

 21  in the medium-term?

 22       A.    Either way.

 23       Q.    Long-term?

 24       A.    Either way.

 25       Q.    So that in either the short, medium or 

  1                    Einhorn

  2  long-term it is as likely as not that there would 

  3  be an adverse impact on plaintiff's revenues?

  4       A.    There certainly could.  That is 

  5  certainly conceivable, though arguable.  

  6  Conceivable.

  7       Q.    In your reading of the materials in this 

  8  case, did you come across the concept of regional 

  9  coding?

 10       A.    Yes.

 11       Q.    And do you understand, do you have an 

 12  understanding what regional coding is?

 13       A.    I have an understanding of what it is.

 14       Q.    What is your understanding of it in 

 15  terms of economic theory and the ability of 

 16  businesses to --

 17       A.    I didn't say anything about this in the 

 18  declaration.

 19             MR. HERNSTADT:  Objection to form.

 20       A.    This wasn't in my declaration in any 

 21  way, shape or form. 

 22             MR. HERNSTADT:  You can answer it if you 

 23       can.

 24       Q.    Do you understand from your, based on 

 25  your knowledge and reading, do you have an 

  1                    Einhorn

  2  understanding of the economic purpose of regional 

  3  coding?

  4       A.    Yes.

  5       Q.    What is your understanding of the 

  6  economic purpose of regional coding?

  7       A.    Regional coding, the reason is to raise 

  8  the price in different regions of the world to 

  9  enjoin people from what we will say is low 

 10  surveillance; from getting their hands in certain 

 11  places where property rights are -- where piracy is 

 12  not as well protected against, and charging higher 

 13  prices for the DVD, with the understanding that 

 14  these places in the world are, if you will, pirate 

 15  havens.  Where the DVD can be used to make illicit 

 16  copies. 

 17             So my understanding of regional coding 

 18  was that it was designed to price legitimate DVDs 

 19  higher in parts of the world where copying is 

 20  easier. 

 21       Q.    From the point of view of economic 

 22  theory, what would be the practical impact; from 

 23  the point of view of economic theory as you 

 24  understand it what would be the impact of the 

 25  premature availability of a film on the Internet on 

  1                    Einhorn

  2  an unencrypted form on the motion picture company's 

  3  ability to extract those higher per unit prices in 

  4  those foreign countries?

  5             MR. HERNSTADT:  Objection.  Based on 

  6       facts that are not in evidence.  Lack of 

  7       foundation.  Incomplete hypothetical.

  8       A.    That could go either way.  Word gets 

  9  out, there is a hot film.  Hey, did you see it on 

 10  the Internet, no, I did not.  It is coming.

 11       Q.    Would you agree that the availability of 

 12  digital motion pictures on the Internet in 

 13  decrypted form, which can be downloaded without 

 14  permission or payment, would likely have some 

 15  adverse impact on the revenues that copyright 

 16  owners obtained on the world wide web?

 17             MR. HERNSTADT:  Objection.  Lack of 

 18       foundation, incomplete hypothetical.

 19       A.    It is conceivable.

 20       Q.    Do you have a view as to whether it is 

 21  more or less likely than any other impact?

 22       A.    No, I don't have a view. 

 23             MR. HERNSTADT:  Same objection.

 24       Q.    Turn back to Einhorn Exhibit 3, the 

 25  Fisher declaration?

  1                    Einhorn

  2       A.    Yes.

  3       Q.    Look if you would at paragraph 9, 

  4  Professor Fisher's declaration, do you agree with 

  5  that statement?

  6             MR. HERNSTADT:  Wait for a second until 

  7       I get a chance to look at it too.

  8       Q.    Could you eliminate the word likewise 

  9  in answering the question.

 10       A.    Let me give you my --

 11             MR. HERNSTADT:  Your question is does he 

 12       agree with that statement.

 13       Q.    As a matter of economic theory do you 

 14  agree with the statement made in paragraph 9 of the 

 15  Fisher declaration that any expectation that the 

 16  film companies have to develop a legitimate market 

 17  on the Internet for the delivery of their films 

 18  will be significantly thwarted by the presence of 

 19  unauthorized product available at little or no 

 20  charge to the consumer. 

 21             MR. HERNSTADT:  Objection to form.  

 22       Lacks foundation.  You may answer.

 23       A.    I rather say could instead of will.  I 

 24  think there is certainly a possibility that is 

 25  true.

  1                    Einhorn

  2       Q.    Would you agree that economic theory 

  3  suggests that there would be an adverse impact?

  4       A.    Not necessarily.

  5       Q.    Mr. Einhorn, what are the factors that 

  6  lead you to say that the availability of films 

  7  available on the Internet for free or little charge 

  8  would not impact the motion picture companies 

  9  ability to develop a legitimate market on the 

 10  Internet for the delivery of films in which they 

 11  would charge?

 12             MR. HERNSTADT:  Objection.  Misstates 

 13       his testimony.  I don't think you can answer 

 14       that question as it is stated.  You are 

 15       asking him to give factors as to an answer 

 16       that did 23409 give you. 

 17             MR. SIMS:  He said not necessarily.  I 

 18       am asking him what factors lead him to that 

 19       judgment.

 20             MR. HERNSTADT:  You can answer that 

 21       question.

 22       A.    The factor that leads me to that 

 23  judgment is my concern right now that nobody in 

 24  this country has a DVD, very few people in this 

 25  country have DVD hooked up to computers.  Very few 

  1                    Einhorn

  2  people in this country --

  3       Q.    Go to the upper westside, every other 

  4  apartment has two of them?

  5       A.    We are not talking about the upper 

  6  westside though.  We are talking about a country 

  7  where 99 percent of the population has 56 kilobit 

  8  modems --

  9       Q.    What information do you have on the 

 10  percentage of computers sold by Compac or Dell or 

 11  anybody else that have or lack DVD players; do you 

 12  have any information about that?

 13       A.    No.  Now, in answer to your first 

 14  question -- repeat that first question. 

 15             MR. HERNSTADT:  The factors that lead 

 16       you to say not necessarily.

 17       A.    The issue here is that a certain 

 18  number -- you want to have a base of people who use 

 19  DVDs, and that base obliges them to buy DVD 

 20  players.  The decision to buy a player depends in 

 21  large part on how many DVDs you can buy with it or 

 22  you can use with it.  If it is the case that all 

 23  DVDs are priced conceivably at $30 a DVD, and that 

 24  only those people -- some people buy DVD players to 

 25  enable them to buy DVDs at $30.  It is conceivable 

  1                    Einhorn

  2  that the network of DVD users will not build out in 

  3  the manner that it might build out if certain DVDs 

  4  were available for some people at lower prices.

  5       Q.    Mr. Einhorn, the answer you have just 

  6  given me focuses on the -- I suppose on the total 

  7  revenues of any given motion picture company rather 

  8  than on the revenues for any one motion picture; is 

  9  that correct?

 10             MR. HERNSTADT:  Objection to the form of 

 11       the question.

 12       A.    Yes.  I think that the revenues might 

 13  wash each other out.  But when I talk about total 

 14  DVDs, I am talking about -- I would suspect that 

 15  people who have DVDs are equally willing to get 

 16  their hands on any popular movie from any studio.

 17       Q.    Let's focus for a moment on any one DVD, 

 18  let's call it the Matrix.  The question is does 

 19  the --

 20             MR. HERNSTADT:  Are you going to provide 

 21       us with copies of the Matrix now?  

 22             MR. SIMS:  No.

 23       Q.    From the point of view of economic 

 24  theory, would the availability of unauthorized 

 25  copies of the Matrix on the Internet in decrypted 

  1                    Einhorn

  2  form likely have an adverse impact on the ability 

  3  of its owner to realize profits if it wanted to get 

  4  into the business of digitally making the Matrix 

  5  available?

  6             MR. HERNSTADT:  Objection to the form of 

  7       the.

  8       Q.    Over the Internet. 

  9             MR. HERNSTADT:  Compound, facts not in 

 10       evidence, incomplete hypothetical.  You may 

 11       answer.

 12       A.    I am inclined to think that the 

 13  Matrix, which is a blockbuster movie, it would 

 14  be -- sales would be displaced on the Internet, and 

 15  I am inclined to think that if digital pirated 

 16  material were made available the box office 

 17  revenues of the Matrix and conceivably the VCR, 

 18  conceivably the VCR revenues on the Matrix, but 

 19  more so the box office would probably be hurt. 

 20             There would be a displacement there on 

 21  any one movie of a blockbuster nature.  I would be 

 22  concerned if there were a successful pirated 

 23  digital technology, I would be concerned about 

 24  that. 

 25             MR. SIMS:  Nothing further.

  1                    Einhorn



  4             MR. HERNSTADT:  Read back the question 

  5       that I marked:

  6             (The following section was read.)

  7       Q.    Have you done any research into the 

  8  harm, if any, that would befall owners from the 

  9  widespread copy of their works.

 10             MR. HERNSTADT:  Objection to form.  

 11       Overbroad.  You can answer if you can.

 12       Q.    Read back the question. 

 13             (Record read.)

 14       A.    No, I have not.

 15       Q.    Have you done any research into the 

 16  problems of free riding?

 17             MR. HERNSTADT:  Objection to form.

 18       A.    I am sorry, when you say --

 19       Q.    Are you aware of a concept economists 

 20  use and refer to, namely the problem of free 

 21  riders?

 22       A.    Yes.

 23       Q.    Have you undertaken any research or 

 24  study in connection with the problems of free 

 25  riding or free riders in various industries?

  1                    Einhorn

  2             MR. HERNSTADT:  Objection to form.

  3       A.    I have not published a paper.  I have 

  4  not written a paper, this is certainly something 

  5  that I would have, that I thought about, and talked 

  6  about with people, but never sat down to do a 

  7  formal piece of research -- may I go back to the 

  8  previous question regarding the copy.

  9       Q.    When I am done your counsel can ask any 

 10  questions he wants to ask?

 11             (End of quoted section).

 12       Q.    Dr. Einhorn, the question was just read 

 13  to you.  Is there anything that you want to add to 

 14  the answer?

 15       A.    Yes.  Let me be more precise about the 

 16  word research.  I have never published a paper.  I 

 17  have never written a draft of a paper submitted for 

 18  publication on the topic.  I have discussed these 

 19  matters in some way other than an informal chat, 

 20  where certain ideas were thrown about and where I 

 21  did read articles.  But never went to the point of 

 22  actually writing anything up. 

 23             So it is usually -- usually people think 

 24  in academics as research when you put your pen to 

 25  the pad.  In that respect I never wrote anything on 

  1                    Einhorn

  2  the issue that was posed.  I certainly talked about 

  3  it in more than just an informal lunch time 

  4  conversation.  


  6  MR. SIMS:  

  7       Q.    You never presented a paper?

  8       A.    On the harm done to copyright owners?

  9       Q.    Yes.

 10       A.    No.

 11       Q.    Have you been on any panels or 

 12  symposiums dealing with the subject of --

 13       A.    There is no symposium that I have been 

 14  on that has examined the harm done to copyright 

 15  owners by copyright infringement.

 16       Q.    You never performed any calculations or 

 17  graphs on the subject?

 18       A.    What I have done is written some work on 

 19  the Digital Millennium Copyright Act, section 114, 

 20  which assessed the affects of various copyright 

 21  rules.  But I have never made any kinds of 

 22  calculations on the effects of illegal -- on the 

 23  effects of illegal piracy.

 24       Q.    Did the writing that you just relate to 

 25  relate to 112?

  1                    Einhorn

  2       A.    No, 114. 

  3             MR. SIMS:  Nothing further.  

  4             MR. HERNSTADT:  One last question.  

  5       Two last questions.



  8       Q.    Did you read the deposition of Lou 

  9  Kurlantzick?

 10       A.    Yes.

 11       Q.    Do you agree with him?

 12       A.    He is quite correct --

 13       Q.    Yes or no, do you agree with what he 

 14  says?

 15       A.    I agree, yes. 

 16             MR. SIMS:  You agree with anything that 

 17       Dr. Kurlantzick said.

 18             THE WITNESS:  As I understand what he 

 19       said, is that prices -- that free goods may 

 20       displace the sale of goods with prices, and 

 21       there may be more price -- there may be more 

 22       goods sold at zero price than at a positive 

 23       price, and that that stimulation should be 

 24       recognized so that not every sale that is 

 25       zero priced necessarily equals the sale at a 

  1                    Einhorn

  2       positive price. 

  3             MR. SIMS:  The deposition is over. 

  4             (Time noted 6:20 p.m.)

  5                              ____________________

  6                              MICHAEL EINHORN 


  8  Subscribed and sworn to before me

  9  this ___ day of __________, 2000.


 11  _________________________________
















  2                 C E R T I F I C A T E


  4                       : ss.  



  7             I, Philip Rizzuti, a Notary Public 

  8       within and for the State of New York, do 

  9       hereby certify:

 10             That MICHAEL EINHORN, the witness 

 11       whose deposition is hereinbefore set forth, 

 12       was duly sworn by me and that such 

 13       deposition is a true record of the testimony 

 14       given by the witness.

 15             I further certify that I am not 

 16       related to any of the parties to this action 

 17       by blood or marriage, and that I am in no 

 18       way interested in the outcome of this 

 19       matter.

 20             IN WITNESS WHEREOF, I have hereunto 

 21       set my hand this 14th day of July, 2000.


 23                              _____________________

 24                                 PHILIP RIZZUTI



  2  --------------------- I N D E X -------------------

  3  WITNESS             EXAMINATION BY           PAGE

  4  MICHAEL EINHORN      Mr. Sims               5, 91

  5                       Mr. Hernstadt          89, 92


  7  --------------- INFORMATION REQUESTS --------------

  8  REQUESTS:  18


 10  ---------------------- EXHIBITS ------------------- 

 11  EINHORN                                     FOR ID. 

 12  Einhorn Exhibit 1, first eight pages from 

 13  a book titled Price Caps and Incentive 

 14  Regulations in Telecommunications              20

 15  Einhorn Exhibit 2, declaration of Einhorn      26

 16  Einhorn Exhibit 3, declaration of Franklin M. 

 17  Fisher                                         69









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