July 13, 2004

The Honorable

United States Senate

Senate Office Building

Washington, DC 20510

Dear Senator :

It is no secret that the intellectual property assets of our nation are under assault, as never before. That is why we support S. 2560, an effective, bipartisan bill drafted by Senators Hatch and Leahy and introduced two weeks ago. The bill is aimed at ensuring the vibrancy of both our creative community and our technology community.

S. 2560, introduced by Senators Hatch, Leahy, Boxer, L. Graham and both Majority Leader Frist and Democratic Leader Daschle - is timely, warranted legislation. We urge you to support it. It is intended to target bad actors only – those who have built business models to get away with stealing the creative work of predominantly American artists. The bill finds the right balance to protect both technology AND content innovators.

Let me back up and set the context necessary for appreciating the true significance of this legislation.

Global sales of recorded music – dominated by our country – quadrupled from 1980 to 1999. Then, almost on a dime, that trend line reversed, with sales figures falling by about a third to the mid point of last year. Before the launch of lawsuits by the industry last fall against those induced to steal music online, we were spiraling down with no sense of a floor.

Why? There are a variety of factors, but the most critical are the twin challenges of physical and online piracy. Physical piracy has been a problem as long as music has been recorded, and has climbed to staggering levels. But it is the relatively new online piracy that has had a truly devastating impact in a short amount of time, which makes action to combat it crucial. And the most virulent form of online piracy is file sharing on P2P (peer to peer) networks.

An independent study conducted last summer noted that over 97% of the files “shared” using these file-sharing networks are illegal.

The infringement is remarkably pervasive. A recent academic study estimated that almost a billion illegal downloads take place each and every month. Four of the top ten downloaded applications on the Internet are P2P programs operated by companies who purposefully set them up to be used for illegal conduct. Popular for sure… but lawbreaking nonetheless.

Let me be clear. There is nothing inherently evil about P2P. On the contrary, it’s a magnificent technology. But it has been hijacked by some unscrupulous operators who have constructed a business model predicated on the taking of property financed by my member companies.

That taking has consequences, human and creative. My companies make money almost exclusively from the sale of our creative product. We don’t have a performance right on radio and therefore derive no income from radio play. We don’t make money from artist tours or merchandise. We don’t make money from endorsements of other products. We just sell recorded music.

We take profits from sales – when we’re good and lucky enough to get them - and plow money back into the search for that next great talent who will thrill music fans around the globe. When we think we have found that talent, we invest huge amounts to sign, nurture, promote and distribute their creative product. Our economic vitality is based on generating hits – finding special talents that enjoy strong commercial appeal.

In 2000, the top ten hits sold 60 million units in the U.S. Seven of the ten sold more than 5 million units each; every one of them sold at least 3 million units. Then the slide kicked in. Last year, in 2003, the top ten hits were cut almost in half, to 33 million units. Just two of the ten sold more than 5 million units; five of those top ten hits sold less than 3 million units.

In our business, the hits are what allow investment in genres that do not accumulate great sales, such as jazz, classical, bluegrass, and the blues. By decimating the sale of hits, online piracy has devastated investment in an entire industry and in the development of great future cultural contributions.

Some have suggested P2P drives sales – or has little impact on sales. And pigs fly. The absurdity of that notion is made plain by the sales pattern of “hits.” If you can get something for free, without consequence, buying it becomes less attractive. It’s as simple as that.

The revenue collapse has been staggering. Jobs in my industry are down by about a third over the last several years – and the exercise to cut costs is ongoing. Families have suffered. As troubling, if not more so, artist rosters have had to be slashed. Fewer dreams are being funded. This creative product is lost forever. Many of our greatest performers took years to catch on before their careers took off. In today’s world, those performers are being cut before they have a chance to delight fans and realize their own dreams.

These rogue P2P companies make money by advertising and by bundling spyware in their applications. Their interest is to generate as many eyeballs as they possibly can. They do that by inducing American kids – and others – to break the law by stealing the work of creators. The more eyeballs the better. That the lure to draw those eyeballs is our music is of no consequence to them, though of enormous consequence to us. They resist going legitimate because they know that a pay-for model can’t compete on the same level with free. They won’t go legitimate unless and until they have no alternative - until the game is up.

I invite you to look at these services. They are seductive. They intentionally invite theft. They are havens for pornographers that project their filth into your homes when your kids innocently seek to find their favorite artists. They compromise computer security. They facilitate the unintended disclosure of personal documentation – resumes, tax and credit card data, medical returns and more. And their warnings – about privacy abuse, security, pornography and copyright - are anything but conspicuous. No objective review of these services can possibly conclude that they have any pretense of legitimacy.

Do these illegitimate services compensate artists? No. Songwriters? No. Pay taxes on the value of product? No. Compensate the record label in any way? No. Invest in the generation of new art? No.

They are scam artists of the highest order – hiding behind a veil of new technology and the aura of innovation. They are illegitimate – and they are destroying the investment basis in new art. A country – and an economy – that has as its core respect for property, cannot tolerate grand theft of this order.

By anomaly, we can’t get at these operators directly in the courts.

The original illegitimate version of Napster (as distinguished from the new Napster which is a legitimate licensed service) was forced by the courts to eliminate unlicensed copyrighted songs from its service because it had central servers. Napster exercised “control” and, therefore, was held responsible for the infringement it facilitated. Some companies read the Napster decision carefully, and purposefully crafted a de-centralized system that intentionally offloads the risks, costs and liability it should bear to the users it lures to its service. A District Court in California ruled that these new services were not liable despite the obvious profit-by-infringement business model, and invited Congress to address the loophole. (The decision is being appealed.)

From a user experience, there is no meaningful distinction between centralized and de-centralized file sharing. From a victim experience, the impact is the same. In both cases, it’s identical to someone walking into a store, taking some CDs off the shelf, and walking out of the store without paying for them. Yet the courts have applied the law in a manner that this essentially meaningless distinction allows these parasitic inducers to perpetrate their fraud.

And so, Congress should accept the court’s invitation and act. Senators Hatch and Leahy have taken the lead in doing so.

To date, much attention in the policy arena has been focused on process questions relating to the lawsuits my industry was forced to initiate. Importantly, the new legislation puts the spotlight exactly where it belongs – squarely on the bad actors that intentionally induce the illegal behavior.

My industry can continue to sue users, many of them kids, to establish deterrence and educate the public. But the real villains are not the kids. The real villains are those profiteers who offload liability on these kids and are laughing all the way to the bank as American courts struggle to apply existing law (or misapply it) to this abuse of good technology.

Wouldn’t it be preferable to put these bad actors in the vise of the law? Isn’t it time to end this charade? Isn’t it time to stand up for the fundamental American value of property?

That’s where S. 2560 comes into the picture.

Instead of seeking to target a technology, we believe the bill rightly goes after bad behavior. It seeks to isolate bad actors that intentionally induce others to break the law. I’m not a lawyer, but intentional inducement is a high standard that is difficult to meet, consistent with the 1984 Sony Betamax case, and would not come anywhere near companies who simply produce devices that can be used for either legitimate or illegitimate purposes. S. 2560 requires purposeful action, deliberate and intentional conduct to induce others to break the law. It’s common sense. It’s the premise behind aiding and abetting under the criminal laws. It’s a moral behavioral test that targets the bad guys, not legitimate commercial actors.

In Sony, the lower court found that Sony Corp., the maker of the Betamax, did not induce a violation of the law by consumers who used it to copy videos. Sony made a machine that was capable of copying, but did not induce users to use it for illegal purposes. Sony, Apple and other legitimate participants in the marketplace, remain safe under this bill. And that’s why we support it.

There has been concern expressed by the consumer electronics industry and some others that this legislation is overly broad as drafted and could have some unintended consequences. We would support any version of this bill that the sponsors develop, should they choose to do so, to assure that any valid concerns are addressed. But doing nothing to address this problem – or opposing any initiative aimed at resolving the massive P2P piracy problem against the operators who are profiting – should not be an acceptable proposition.

Therefore, when you hear criticisms of this bill, I’d encourage you to ask a simple question: Is the criticism about the core purpose – getting at bad actors that are destroying the funding of new creativity – or is the criticism about definition? If it’s about who gets caught in the net, then I’d suggest the response to the critics should be to seek their suggestions for improving the definition.

The recent letter signed by a group of interests seeking a hearing (which we too support) is a case in point. It states:

“While we agree with the need to penalize those who intentionally cause

Those who accept the core purpose of the bill ought to come forth with constructive and concrete suggestions, not hypothetical and peripheral concerns. Why? The men and women of the music community and their families – and other content creators – deserve action. We can’t afford paralysis.

The bill does not mandate any technological fix, though you should know that technology does exist to filter out copyrighted works on these networks. This technology is in use in other applications – it’s no longer conceptual. If these P2P networks adopt such a filter, the sharing then becomes legitimate, while the stealing that masquerades as sharing ends.

Ironically, these P2P operators who hide behind the protective cover of “technology,” resist deploying existing technological answers to solve this problem. They resist modernization because it undercuts their business model. There’s a price to going legitimate. But you can make it harder for them to resist doing the right thing – without imposing a mandate. And that’s by raising the price for not going legitimate.

The legislation before the Judiciary Committee does not stifle innovation. It inspires it. It will unleash a wave of investment in legitimate P2P networks and alternative distribution approaches that want to go the right way – a model that respects property.

I write you today to urge you to act. Today it’s about music. Tomorrow it will be about movies, software and games. Just last week we learned that pirated software hit nearly $29 billion globally in 2003 – 60% of legal sales- with much of the blame attributed to illegal P2P file sharing.

If we don’t value intellectual property, we are compromising our country’s economic future and the foundation of property rights that underlies our great capitalist system.

In the end, this debate is not about digital versus plastic or old versus new or technology versus content. It’s about the delivery of digital music online – and whether Congress will accept a business model based on thievery or insist on the rule of law.

So please look carefully at this legislation. And please do not let perfection be the enemy of the good or tangential excuses be the enemy of common sense defense of property rights. Too much is at stake.

We need your help.

I’m available if you have any questions.

Sincerely,

Mitch Bainwol