OneHouse Speak Senate Testimony
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Senate Testimony  

I testifed before the U.S. Senate Judiciary Committee on July 11, 2000, along with Hank Barry (Napster), Michael Robertson (MP3.com), Fred Erlich (Sony), Gene Kan (Gnutella), Lars Ulrich (Metallica), Gene Hoffman and Roger McGuinn (Byrds):

This was my written Senate testimony:




Jim Griffin
Founder and CEO
Cherry Lane Digital & OneHouse LLC's
Los Angeles, CA


Mr. Chairman and Members of the Committee:

My name is James Hazen Griffin. I am the Chief Executive Officer of Cherry Lane Digital, part of the Cherry Lane Music Group created by world-renowned musicologist Milton Okun. At Cherry Lane Digital we hope to absorb the uncertainty of our clients regarding the change inherent in entertainment technology. I serve as co-chairman along with Jeremiah Chechik of Evolab, the Evolutionary Laboratory, where we are focused on the wireless delivery of media. Before my involvement with these companies, I started in 1993 and ran for five years the technology department at Geffen Records.

I am also a founder and leader of the Pho group, approximately a thousand people connected electronically and through over a dozen meals held weekly around the world. The Pho group takes no position on these issues, but is instead a catalyst for discussion on issues such as those we are addressing here today. In addition, I write a column in every issue of the magazine Business 2.0.

Counsel accompanying me here today is Phil Corwin, a partner at the Washington, D.C., firm of Butera & Andrews. This appearance would be considerably less coherent without Mr. Corwin's guidance and that of the Senate Judiciary Committee's staff, and I thank all these people along with you for the opportunity to appear today and address these issues, which I believe to be of Paramount and Universal importance, to name just two of the studios that will be affected by them.

The Pho group and my advisors and associates have contributed mightily to my comments today, but they are not to blame for its presentation and my nervousness and perhaps resultant failure to fully articulate them.

Your foresight in convening these hearings is to be commended, as there is and always will be enormous change in the delivery of entertainment and all intellectual works, whether music, movies, books or other forms of art.

Essentially, my remarks are a brief presentation centered around a half-dozen fundamental points:

No one is here to defend free music, but music can and should be made to feel free, even when it is not free.

Few will suggest music should be free, as this would be absurd from either a business or emotional point of view. Indeed, if it were truly free, there wouldn't be much more of it, as any economist can tell you, and any artist will readily verify. I am certain there are some here today who will.

However, as certainly as it must not be free, I suggest that it is our obligation and our opportunity to insofar as possible make it feel free, at least at the moment we decide to use it.

The delivery of music is approaching zero marginal cost - the cost of enabling each listen after the first. For some, this is a terrifying prospect, as their income may have depended upon charging a price much higher than marginal cost, say $18 for a disc that costs no more than a dollar to reproduce.

For others, this is not at all terrifying. To Mel Karmizan, who runs CBS radio and its Infinity broadcast stations, it is expected. He makes music played on CBS stations feel free to its listeners, though they pay indirectly each time they patronize an advertiser. Likewise, Jerry Seinfeld feels free to his viewers, none of whom can remember paying, though they all do. If we suggested to either of these gentleman that they encrypt and protect from non-paying eyes and ears their words and images, they would laugh, as this would reduce the income they receive.

Indeed, for those who pay a subscription fee to watch MTV or listen to an audio service, though they pay directly, each decision to listen or watch returns more value for fees already paid, making the use of music or movies a positive economic act/

Today, it can be truly said that music behaves more like Thomas Jefferson's candle - which when lit with another candle diminishes the flame of the first not at all - than it does like an object subject to the laws of supply and demand.

To the music listener who shares music, there is no consumption, as there is no less music after playing it than there was beforehand. The supply of boxes containing music is decremented not at all, and arguably the demand is increased.

These are the new clothes the music industry must wear if it is to grow to the $100 billion business it wishes from the $40 billion business it is.

2. This is because in the music world, like so many others, service is replacing product.

The economy that affects the jobs of steelworkers and artists alike is changing in fundamental ways, and like so many industries, the artist's world is transitioning from product to service.

Essentially, we are learning that the answers lie in new business models, not technology-based solutions. The video industry that once emphasized control now sees greater value in growing the crowd.

The best forms of copy protection are new business models that destroy the motive to copy, not its mechanism. A wireless flat-fee/advertising-supported jukebox of unlimited capacity would strip us of our desire to make MP3 files. We are transitioning, as my friend John Perry Barlow likes to say, from an economy of nouns to one of verbs. An economy that emphasizes the wine, not the bottle.

Digitization and data networks liberate content from control over its quantity and destination, in much the same way that broadcast of radio and television remove control over the number and location of listeners or viewers. Control over quantity and destination are customary requisites for establishing pricing schedules that leverage maximum price over marginal cost.

If control is lost, price falls and hovers at or near marginal cost of delivery. For example, if DeBeers lost control over the distribution of diamonds, their price would drop dramatically. Absent DeBeers' control, the price of diamonds would obey the standard laws of supply and demand and command a lower price in the market.

Digital service relationships, on the other hand, can and do flourish in an environment where there is no control and the audience is left to grow virally. With the service provider serving as a gatekeeper to the growing audience, profit can follow. Service relationships, such as those established by radio or television stations, emphasize repeat visits and informal or formal "data mining" to extract full value from the business affiliation.

The Net of the future will continue to exhibit flat-fee/flat-free pull, where we choose to monetize our presence by tolerating advertisements or by paying a subscription fee to banish the ads and the loss of privacy. We've already seen online services such as America On-line adopt the flat-fee model, as have telephone companies such as Sprint and AT&T. Where these companies once billed us for our activities and their duration, we now enjoy a smorgasbord of communication for one price.

At its most rational, consumer behavior suggests they believe media should be priced at or near marginal cost of delivery, which is closer to zero than 99 cents. This is the price to which they have grown accustomed in radio, television, newspapers, magazines, and so on. Where media can be controlled, such as concert seats or difficult-to-replicate analog items, consumers are more likely to be compelled to accept a wide disparity between price and marginal cost, but uncontrolled media generally move at or near marginal cost.

Even if we can control the destiny of songs, we give up control over quantity and commoditization, creating a singles business where none has ever proved profitable. Even singles at a dollar apiece reduce album-related income because debundled consumers will skim the cream off a market built on bundled pricing. For years we've promoted singles and sold albums.

At its most irrational, by the way, consumer behavior suggests the obvious: We are often doing business with teenagers! This should be little surprise because it is teenagers we target with the music. It's as if we were complaining that they should like our dinosaur books more than those silly Pokemon cards -- value is in the eye of the beholder, and the beholder is distracted and empowered in ways our experience cannot appreciate.

Regardless, we must realize that our digits will flow like water from their source to their destination. Whether disintermediated from broadcast or networks or disk duplication or kids plugging into listening posts or whatever, our reality is that our inability to control has a dramatic effect on pricing and our business plans.

Great music was made long before music the product was even conceived. Music the product is a relatively modern invention, and has been part of music for only a blip in history.

Promoting ubiquitous music as a service creates the right business model -- with the permission of the appropriate rights holders (which may or may not include the artist, and may or may not include the music listener). When we move away from the package we liberate the content to seek larger audiences, and serving as gatekeeper to that ever-growing crowd is the key to viral success.

Even product-based business will thrive from entertainment the service. By creating a flat-fee buffet instead of the current tax on trying new things ($15 to see if you might like more than one song from that new band), we'll likely see merchandise and concert tickets and all manner of ancillary income increase. At the same time, we can grow the bundled subscription revenues to support the financial licensing needs of the industry.

It's time to set a price for the interactive license and administer it. The consumer wants option value without the disk, and in an increasingly mobile and wireless world this is not an unreasonable request, certainly no more unreasonable than wanting to watch a local network television station via my DirecTV satellite dish (which Congress mercifully recently enabled over the objections of the local network television station, which copyrights the content).

3. Digits will become ubiquitous and will increasingly arrive just-in-time, and in a customized way. They will eventually cease to be distributed digitally through downloads or transferred in analog boxes.

The arrival of wireless digital access will someday permit just-in-time, customized access to music, movies, books and other media content. These digits and the content they carry will be streams, not downloads.

The capital markets enthusiastically support the growth of connectivity by whatever means, including wireless, copper cable, and fiber optic. Connectivity becomes an assumption, not a complicated arrangement. Our American obsession with wires and set-top boxes ignores belies the fact that China and Africa and others are not wiring, they're skipping ahead, leap-frogging to wireless, ubiquitous connectivity.

It's a commonly held assumption that digital distribution will replace the analog distribution system that traditionally delivers services and information-based products. In the music industry, for example, there is much talk about the future of downloading music singles for a dollar apiece - or free - in MP3 or some other digital format.

More likely, however, the notion of offering music or other data, such as Websites or movies or newspapers, to be downloaded and stored will give way to business models that emphasize the widespread availability of content. When we can access all the bits we want, wherever we are, whenever we want them, we won't want to carry them around. Delivery on a disk or fixed storage of any kind will atrophy, as consumers tire of digital-asset management lessons and content providers become annoyed at giving those lessons.

Products we once could only conceive of as tangible are now fully functional services without form, ubiquitously delivered just-in-time at marginal cost and customized for each use and user. Put more simply, the ability to decide what I want and get it where and when I want it.

Economists call it option value. What it means to you is that this content is available at your option. Conversely, the song you hear on the radio or video you see on MTV isn't at your option, and is priced accordingly. We pay a price for the ability to have option value over something. A movie or song broadcast ephemerally has low economic cost to the viewer, but on a prerecorded cassette it draws a premium for its option value. The entertainment business refers to it as the difference between a performance license (inexpensive, compulsory, generally embodied in a radio or television broadcast) and a mechanical license (relatively expensive, discretionary, and generally a box containing a disc or tape).

Today, however, consumers have access to a multiplicity of recording devices, some real products we plug into the wall (such as the Replay or TiVo devices or standard audio or video recorders), others are software services downloaded or accessed over the Web. They are buffers, repositories of digits that hold them for your later use, cached to enable you to summon them at will.

These products and services offer consumers option value over streams, the ability to retain an ephemeral performance and use it when and where they want to do so.

In other words, these buffers transform push into pull. They take content pushed aimlessly by broadcasters and make it content you pull when you want it, and if you don't want the commercials, you click a button and they disappear. They buffer or cache the output of the broadcast and allow consumers the ability to retain the content and use it virtually at will.

Ultimately, the only purpose of the buffers and caches we rely upon today, such as diskettes and compact discs and DVDs, is to overcome real or perceived supply inefficiency.

Buffers and storage are determinative factors of our media interaction today, but long-term they are obsolete, the equivalent of today's floppy disk - or disk of any kind. Disks are like traveler's checks in an era of automatic teller machines. Who amongst us didn't rely upon traveler's checks when we absolutely, positively had to have the money we needed to feed and shelter ourselves in a foreign land? Today, with the just-in-time efficiency of customized cash available with the swipe of a plastic card, I know few who bother.

In the final analysis, products, hard drives, and downloads disconnect, depriving the audience - and the creator - of a relationship bonded with continuous access. Every streamed use, however, is an opportunity to grow a closer, better relationship between artist and fan.

4. History proves this analysis by analogy.

A. 1920's

Radio was the first Napster, just as Gutenberg made simple the task of printing previously difficult papal indulgences. Radio meant that we could no longer control the quantity or destiny of the music, or sporting event, or church service, once broadcast.

The New Economy is anything but new. Like a recently purchased vehicle, it's new to us. But let there be no illusion: This economy has been around the block a few times. Sadly, we put out to pasture decades ago those who could teach us now. There are few old-timers remaining to bear witness to the truth: The Roaring '20s make our 2,000 days in the throes of dot-com fever look tame by comparison.

Acoustic became electric during the '20s with far more savage impact on the economy of art than we see now with electric becoming digital.

Radio was followed almost immediately by television. In 1925 the image of a revolving windmill was broadcast, and by 1928 the first patent was filed for color television.

Music and movies and books not only survived the 1920's, they thrived because of them, not in spite of them. Where radio was once viewed as a threat to the music business, it is now viewed as a necessity to success, and television and then cable television and the video cassette recorder have proven no different.

We recognized this and acted accordingly: There is a blanket, compulsory license applicable where control is difficult or impossible (i.e., broadcast, performance, satellite, etc.), and for the same reasons I am suggesting here it should be applied to electric becoming digital. These systems produce a known cost and easy licensing. Blanket, compulsory licenses imposed by Congress were the outcome of the recent DirecTV/DBS/DSS debate over rebroadcasting the copyrighted material of network broadcast stations, and in my opinion they will and should be applied to interactive use.

At some point, there will be so many digital licensees and so many digital licenses and so many digital licensors that we will likely agree to lower the overhead of negotiations and establishing a simple rate and an easy way to pay. The Digital Millenium Copyright Act itself offers a similar analogy in our world, because it promises (but has not yet delivered) one simple rate with automatic licensing.

Ironically, today we live in a world of blanket, compulsory enforcement (there is one organization per industry enforcing the laws on behalf of every company in roughly the same way) instead of blanket, compulsory licensing.

B. Video cassette recorder

The entertainment industry must learn from its mistakes. In the 1970's, Universal City Studios fought the introduction of the videocassette recorder. Universal felt that losing control of the quantity and destiny of content would lead to ruinous damages for information purveyors, and took Sony to court as the primary manufacturer. The case went all the way to the United States Supreme Court, but fortunately Sony won. Today, Sony shares with Universal the rich revenue stream provided by videocassette distribution, and most television companies participate in the VCR+ system that makes videotaping easier.

Print purveyors took a similar view in the early days of the Web. Many that previously feared copying today offer a one-click button to "send this story to a friend."

C. Sports

Sports team owners were once certain that televising sporting events would be the death of their sport -- why go to the game if you can watch it on television, our business is selling stadium seats -- who now could not and would not survive without it.

It is legend that Ronald Reagan was one of the very first sports broadcast pirates, recreating games in a booth after reading them over a wire service. Ultimately we've come to realize that not only was there no threat to Reagan's game broadcasts, but they actually grew the size of the crowd, and served an important purpose that we once confused with theft. Little wonder we now encourage broadcasts from the ballpark.

D. Biology

Whenever I wade deep into law and technology, I find an analogy helps shed light on the otherwise incomprehensible. Biology fuses the wondrous with the incalculable, and it is instructive where methodology fails. Our rising level of digitization is like the Mississippi River during a flood, with whole towns and small cities disintermediated by water seeking the shortest path from source to destination.

Every day I find evidence of this flood, but technological or legal sandbags will not stop the deluge. As they say, the water eventually finds its way to the sewer and floods your home anyway. Technology has no switch, no lever to throw, no way to reverse the course that history and fate have chosen for intellectual property. Napster, Gnutella, and their progeny are the first flood waves to crest the berm. These peer-to-peer file-sharing systems were born to swap music, but are already finding use for movies, photographs, and other rich media content.

Intelligent storage is also part of this flood. The video business has its TiVo, Replay, and other devices that buffer push-based content and make it feel interactive to the viewer, allowing pull at push prices (flat-fee or flat-free), and without the commercials if you prefer. Audio versions of TiVo and Replay will likely arrive soon, permitting users to fill jukeboxes from digital and analog broadcast stations.

Technology does not have a switch, there is not a way to decide to go back. We can pass laws and we can hire lawyers to enforce them and they can employ technologists to enable their legal vision, but ultimately control of art is shifting from push (instigated by the artists and their enabling companies) to pull (at the will and at the instigation of art lovers).

5. There will be a renaissance of creative expression.

Technology's deepest impact will be from enabling the digital delivery of art, such as music, movies, books, and other intellectual property. The effects will go deeper than just changing the way we listen to popular music. Currently, we kill art regularly due to our need to balance the costs of distribution with its rewards. Once delivery is digitized, art need never die, and new art can come to life that might not otherwise find an audience.

The enabling effects of digitization will not be found in today's or yesterday's stars or big names. After all, they achieved worldwide delivery and distribution.

The primary effects of digitization are three:

A. Dead art will come back to life, and in the future art need never die.

Today, it is necessary that we kill most art to ensure that some can live. Like a gardener who prunes a rose bush, we kill some art to enable others.

Entertainment studios routinely discontinue music products. They must determine where the cost of distribution exceeds the rewards, and act to keep the rewards greater than the costs.

Once digitized with the costs of delivery commoditized to a marginal cost near zero, no art will be said to have delivery costs in excess of its rewards, and it is likely we will not only bring dead art out of the vaults and back to life, but we will find that art will never die in a digital future.

B. New art

Likewise, we abort new art even more often than we kill it. Everytime we turn away a new artist, what we mean to say is that we've decided that the costs of distributing their art will exceed the rewards.

We are essentially a college admission committee, denying an opportunity to dozens for the same of the few we admit.

Once commoditized with a minimal delivery cost, digital art can find a life it might never have otherwise found. We can enable new artists to find their audience where once distribution costs prohibited many such bold and noble experiments.

C. Unusual art

The rock band Nirvana, for example, might like to release every concert the band ever performed, but in an analog world of distribution this is impractical.

Now these bands can make available their entire repertoire of music, and so we will likely see in the future that we are able to purchase any Rolling Stones concern every performed, or watch any baseball game played and kept in an archive.

6. In the alternative, this could condemn billions of people to access to knowledge conditioned only on their ability to pay.

Friction was a very useful tool in allocating access to art. Riding my bicycle to the library overcame the friction that others would pay to defeat. If the delivery of intellectual property is to become truly friction-free, new models must evolve to restore and preserve balance in access to art.

Digital "lending institutions" must evolve and flourish, spreading entertainment and information, replacing product with service. We must promise our children that like us they deserve to hear any song, read any book, watch any movie - regardless of their ability to pay.

The potential of every individual is at stake. Will their parents' wallet determine the music they hear, the books they read, the movies and video they watch?

Ultimately, digital delivery may prove as problematic as it is enabling. Once digitized, art can be liberated, but equally if not more tempting is the idea of making access conditional through encryption. If we choose the course of predicating access to intellectual property on ability to pay, a class-based society of information haves and have-nots will emerge.

Sadly, those with access will find the content pool diminished unless we open access to all, through digital libraries and ad-based services that make a mockery of content as product.

Once replicated, books - and by extension - movies, and music are available to everyone. As a child, I became addicted to books and music that librarians and others were happy to supply, regardless of my ability to pay.

I was encouraged to borrow any book or record in existence with the promise that if it was unavailable locally, other libraries would lend it to my library. I was promised access to any intellectual property I might seek.

Librarians schooled me in what could now be called the instruments of piracy. The library was the first place I saw a photocopy machine and a tape recorder. Use of these copying tools was openly encouraged and taught by those who also made change for the nickels needed to feed the copy machine.

No one called us pirates. None dared - though our actions violated any corporate interpretation of copyright laws, we were considered the opposite of scofflaws. We were scholars.

The fine balance between scholarship and piracy eludes us today in our relentless struggle to monetize the digital delivery of art and other intellectual property. Devoid of contextual motive, we now declare illegal and immoral any use of digits outside their predefined, technically based rule set.

Quite the opposite of the situation in my youth, it can now be said that some digits (and the knowledge they embody) are off-limits, and those limits are based purely on my ability to pay.

The digital delivery of intellectual property is our generation's nuclear power. We can either liberate knowledge through its friction-free delivery, or we can develop these same tools to condition access to art on ability to pay.



 


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