This account was offered to the House Appropriations Committee, Subcommittee on Commerce, Justice, State, the Judiciary, and related agencies, by Jack Valenti, Chairman and Chief Executive Officer of The Motion Picture Association of America (MPAA).
The economic worth of the copyright industries
The facts are these: the copyright industries are responsible for some five percent of the GDP of the United States. They gather in more international revenues than automobiles and auto parts, more than aircraft, more than agriculture. They are creating new jobs at three times the rate of the rest of the economy.
The movie industry alone has a surplus balance of trade with every single country in the world. No other American enterprise can make that statement. And all this at a time when the US is bleeding from some four hundred billion dollars in deficit balance of trade.
The peril of copying now and in future
Brooding over the global reach of the American movie and its persistent success in attracting consumers of every creed, culture and country is thievery: the theft of our movies in both analog and digital formats.
Let me explain. Videocassettes, the kind we all use and enjoy, are in the analog format. Worldwide, the US movie industry suffers revenue losses of more than three billion dollars annually through the theft of videocassettes. That is a most conservative estimate.
We are every day vigilant in combating this analog thievery because, like virtue, we are every day besieged. We are trying to restrain this pilfering so that its growth does not continue to rise to intolerable levels.
But it is digital piracy that gives movie producers multiple heartburn. It is digital thievery, which can disfigure and shred the future of American films. What we must understand is that digital is to analog as lightning is to the lightning-bug.
In analog, the pirate must be provisioned with equipment, dozens, even hundreds of slave-video recorders, because after repeated copying in analog on one machine, the finished product becomes increasingly unwatchable.
Not so in digital format. The one thousandth digital copy is as pure and pristine as the original. The copy never wears out. That durability, like that of the CD, provides the DVD (Digital Versatile Disc) with its grandest asset. At the same time, it provokes such anxiety within the movie industry because copying retains its high resolution.
Then there is the mysterious magic of being able, with a simple click of a mouse, to send a full-length movie hurtling with the speed of light (186,000 miles per second) to any part of this wracked and weary old planet. It is that uncomprehending fact of digital life that disturbs the sleep of the entire US film industry.
Movies have, until recently, been sheltered from the incessant pilfering visited on the music industry. Music on the Net has no graphics and can be brought down with normal computer modems: most songs are no more than three or four minutes.
Not so with movies chock full of full-motion graphics. With a normal 56K computer modem, it could take between twelve to twenty-four hours to take down a two-hour movie. One movie takes up the same space on a hard drive as do one hundred and fifty or more songs.
The buffer that has slowed a wide-spreading assault on movies in digital form is the languor with which American computer-homes have valued broadband access. With broadband access, a two-hour movie can be taken down, depending on the speed of the DSL line or cable modem, in twenty to forty minutes. (But the next generation Internet will be able to download a two-hour movie in some forty-five seconds!)
Only some 9.5 million American computer homes have current high-speed, large pipe connections to the Internet. But that interim distance will gradually evaporate as broadband grows, both in its speed-power and in the deployment of broadband to homes. Once that happens, all barriers to high-speed takedowns of movies will collapse. The avalanche will have begun. It is the certainty of that scenario which concerns every moviemaker and distributor in the land.
We are also besieged by a relatively new threat called Optical Disc Piracy. This new thievery design first reared its fraudulent head in China with VCD (Video Compact Disc), a cousin to DVD. Its quality is inferior to DVD, but cheaper to reproduce on far less costly machines. China, in response to our entreaties, has cracked down on pirates, forcing them offshore. The huge problem in China at this writing is the street vendor malady. We are working with the Chinese government to shrink this problem.
Meanwhile, mostly in Asia, organized thieves are busily involved in stealing our movies, reproducing them in high-quality digital format and distributing them everywhere. In 2001, the MPAs Anti-Piracy forces conducted seventy-four raids against facilities in China, Hong Kong, Indonesia, Malaysia, the Philippines, Taiwan and Thailand, happily engaged in manufacturing illegal copies of both VCD and DVD. Happily, that is, until our Anti-Piracy people, along with local law enforcement officers, moved in for the raid. In some cases arrests were made and in some case equipment confiscated. But not in all, because of porous attention by authorities in some countries to really crack down hard on these pirates. It is an ongoing problem for us.
More ominously, just recently, with the sturdy aid of the FBI, a factory was raided in New Jersey that was illegally reproducing DVDs. This was the first time we have located a US site dealing in illegitimate DVDs. But it wont be the last.
Viant, a Boston-based consulting firm, has estimated that some 350,000+ movies are being downloaded from the Internet every day all of them illegal. I report quite joyously that we are receiving first class assistance from the FBI, the US Secret Service, the Department of Justice, and the US Customs Service, as well as local US Attorneys offices.
The first front: protecting copyright in the courts
We have to insist that copyright laws cannot be casually regarded, for if those laws are shrunk or loosened, the entire fabric of costly creative works is in deep trouble. We have moved swiftly and decisively against all those Web sites and other services that harbor and inspire the theft of movies.
We brought one of the first cases under the Digital Millennium Copyright Act (DMCA) to halt the distribution of DVD hacking software on the Web. We took on sites like Scour, iCrave, RecordTV, all of which were either promoting the takedown of illegal movies or, as iCrave did, sucking up Canadian and US television signals illegitimately and rebroadcasting them to the world via the iCrave Web site, along with their own advertisements.
iCrave was promptly shut down by the courts, but its clones will not go away. Scour and RecordTV are no longer functioning. But we are now in a new round of litigation with the likes of Morpheus, KaZaA and Grokster, all commonly described as next-generation Napster services.
Put simply, whenever a new site appears whose prime allurement is the illicit availability of movies, illegitimately file-shared or readied for download, it is our intention to move with celerity to bring them to the courtroom. This includes, where appropriate, close coordination with and support for law enforcement agencies, like the Department of Justice, the FBI, the Customs Service, the Postal Service, the Secret Service, and others, in their efforts to provide criminal enforcement of the nations copyright laws.
As a part of our copyright enforcement efforts, we are using Ranger, a sophisticated search engine, to track down movies illegitimately on the Web. Once Ranger sniffs out an illegal site, we send cease and desist letters to the Internet Service Provider whose customer is engaging in the infringing activity or, where possible, to the site itself. In 2001, we dispatched 54,000 such letters to 1,680 ISPs around the world.
Keeping up with this sort of illegal activity is no easy task, particularly given the ascending growth of on-campus illegitimate downloads of brand new movies. Students operating off their universitys broadband, high-speed, state-of-the-art computer networks have a merry old time uploading and bringing down movies, all without paying for them and all with fine fidelity to sight, sound and color.
Were not talking about old, classic films. These are new films, many of which are still in theatres: Ice Age, The Rookie, Harry Potter, Lord of the Rings, Beautiful Mind, Panic Room, Monsters, Inc, We Were Soldiers, Snow Dogs and the list goes drearily on.
Just a few months ago we learned that one of Americas most prestigious and pre-eminent universities, vexed by the burden of heavy persistent student use of its computer system, actually set up a special server for Gnutella, a well known and mightily used site for file-sharing (file-sharing is a discreet description for taking films which dont belong to you). This astonishing action was taken by this University to relieve the swollen student use of its computer system.
I swiftly dispatched an unambiguous letter to the President of that University chiding him for a disreputable plausibility which collided with the moral compact that informs a stable, free, democratic society. The University, to its credit, immediately cancelled the server.
But I must say that such good news is short-lived these days. I recently read that a closed peer-to-peer network of some nine thousand computers had been established on the high-speed local area network of another of our nations distinguished public universities. Similar systems are reportedly springing up on the university networks at public institutions around the country.
And I do not mean to suggest that this problem is limited to universities. The recent search warrants executed by the Department of Justice and the Customs Service against the Drink-or-Die hacker group included not only individuals at universities, but also at well-known corporations. My music colleagues can tell you about a recent case involving a consulting firm that had set up a dedicated MP3 server for its employees to share music files. This problem does not appear to be getting any smaller.
What makes this problem even more vexing and complex is its international dimension. Just a few months ago, in Taiwan, a new Web site called Movies88.com came online, offering on-demand video streaming of brand new movies, all without permission of their owners, for a mere one dollar per movie. All the while, they steadfastly claimed that they were protected by the Taiwanese copyright laws.
Fortunately, they were not. With the co-operation of the Taiwanese government, this site has now been shut down. But this case underscores the difficulty in enforcing copyright on global networks, like the Internet. The process is aptly compared to the game of Whack-a-Mole a site like Movies88.com will come down in one place, only to pop up somewhere else.
Who is to say, when a site like this reappears, it wont reappear in a country whose laws do not, in fact, protect copyright. This is why the work of the USTR, the State Department, and others in securing adequate minimum protections for copyright across the globe is so critical. This is no small problem, and no one-dimensional solution will address it.
The second front: legitimate alternatives to digital thievery
Movie producers and distributors are in fact filled with optimism over the prospect of the Internet as another new delivery system to dispatch their movies to consumers at a fair and reasonable price (fair and reasonable to be defined by the consumer). And, of course, those very consumers are the ultimate beneficiaries of these new distribution channels, as they will enjoy more choices for accessing the movies they want in high-quality digital format.
For studios to resist or to turn away from that new Internet delivery system would be fiscal lunacy. Why? Because the movie-making cost has risen to nerve-shattering heights. In 2001, the total cost to the major studios of making and marketing their films was, on the average, some seventy-nine million dollars per film!
Only two in ten movies ever retrieves its total investment from domestic US theatrical exhibition. Each film must journey through various marketplace sequences airlines, home video, satellite delivery, premium and basic cable, over the air TV stations and internationally in order to break even or make a profit.
As we speak, every one of the MPAA member companies is engaged in one or more of several ventures to make online digital video-on-demand a reality. They are moving forward with these ventures even in the absence of a proven market and even with broadband penetration at relatively low levels (and languishing in its growth by some accounts). Why?
Two reasons. First, they are hopeful that these ventures will be met with the same excitement and consumer embrace that we have seen with the DVD, which has quickly become the fastest growing consumer electronics platform in history. Second, and even more importantly, they are moving forward in this direction because, as I have said before, I believe (and I pray we are right) that ninety-nine per cent of the American public are not hackers. Given the choice between a legal alternative for watching movies and stealing, I believe the vast majority will choose the legitimate alternative, but only if we do not allow lawlessness to become mainstream.
The third front: guarding the life of movies
In testimony before the Judiciary and Commerce Committees I have outlined a number of specific goals relative to the development and adoption of technology standards by the Information Technology (IT), consumer electronics (CE) and copyright communities.
These include the adoption of a broadcast flag to prevent unencrypted over-the-air digital television broadcasts from being redistributed on the Internet; adoption and implementation of technology to plug the analog hole whereby protected content is stripped of its protection through the digital-to-analog or analog-to-digital conversion process, and the adoption and implementation of technology to limit the rising tide of unauthorized peer-to-peer file distribution of copyrighted works, of which I have spoken.
The attainment of these goals is key to the viability of a legitimate marketplace for the online digital distribution of motion pictures, and we look forward to continuing to work with the IT and CE industries, as well as your colleagues on the Judiciary and Commerce Committees, to achieve a successful outcome on this front.
The future of the Internet as a new delivery system
The question is thus raised: what is it that this Subcommittee can do to protect Americas greatest trade export and to further the development of a legitimate marketplace for online digital entertainment for the benefit of the consumer?
The answer is this: your work is key to both the first and second fronts in the defense of copyright which I just described. Your role in the first front the enforcement front should be clear to all. Copyright law is only as good as its enforcement, and federal resources for criminal law enforcement, both inside the United States and working with their counterparts overseas, are an important part of the overall copyright enforcement landscape.
Ensuring effective copyright enforcement, in turn, has a very important effect on our success on the second front in the defense of copyright providing viable alternatives to piracy. The reason is simple: no legitimate business can succeed in an environment of unbridled lawlessness. Just as Greshams Law teaches that cheap money drives out good money, pirated content drives out legitimate content, particularly where digital technology renders the two substantial equivalents.
This is why the biggest threat to viable alternatives to piracy is unchecked and rampant piracy itself. Federal law enforcement plays an important role in ensuring that such piracy does not invade the mainstream of our society and render moribund nascent and consumer-friendly alternatives to lawlessness.
We have worked closely with the Congress to ensure that our laws empower federal law enforcement to protect copyright in the digital environment and to help preserve the vitality of Americas creative industries. And we have worked closely with law enforcement in that process. As I mentioned, we are receiving first class assistance from all the agencies concerned.
We have been pleased that the Administration has placed increasing priority on cyber-crime enforcement in particular, as copyright piracy is one of the most pervasive forms of cyber-crime. In our view, greater attention by law enforcement to Internet cases is needed to ensure adequate copyright protections.
The Department of Justice and Customs Service are to be applauded for their recent efforts in carrying out Operation Buccaneer a massive sting operation against the prominent Drink-or-Die hacker group, which spanned six countries and resulted in the execution of more than seventy search warrants, including at the offices of major corporations and some of this nations most prestigious universities.
All in all, more than one hundred computers were seized with some fifty terabytes (trillions of bytes) of data. One system seized had more than five thousand movies on it. In fact, I understand a single defendant who pleaded guilty in February admitted to charges that involved uploading more than fifteen thousand movie, software, video game and music titles, causing damages conservatively estimated at more than 2.5 million dollars. I understand that a fourth guilty plea was entered just weeks ago, with more to come.
This is exactly the type of thing we should encourage our law enforcement agencies to do more of. It sends the clear deterrent message that theft is theft, whether conducted online or off. Your Committee plays a very important role in promoting this type of message through funding for cybercrime enforcement and through oversight of the various Federal law enforcement agencies. I hope Operation Buccaneer is just a start, and that we will see a continued increase in federal online enforcement of intellectual property rights. I hope your Committee will encourage just such a result.
We enthusiastically embrace the announcement last year by the Department of Justice of the establishment of ten specialized Computer Hacking and Intellectual Property (CHIPs) units within individual US Attorneys offices to focus on cybercrime prosecutions, including copyright and trademark violations. We believe the single biggest impact the Appropriations Committee can make on intellectual property and cyber-crime enforcement is to ensure that adequate resources are available to these units to prosecute cases, as well as to the on-the-ground enforcement agencies to investigate and bring more cases to the US Attorneys offices.
Last year Congress approved a specific earmark of funds for cybercrime and intellectual property enforcement. This money has made possible the establishment of the CHIPs units and cases like the Drink-or-Die case. We would like to work with you again this year to provide a continuing earmark of funds for cybercrime enforcement.
Fighting piracy outside the United States is also an extremely high priority. Although the MPAA expends tremendous resources in operating anti-piracy programs in over eighty countries worldwide, we also rely on US federal agencies to help us combat piracy outside the United States.
The US Trade Representatives Office, the State Department, the US Copyright Office, the Commerce Department, the Patent and Trademark Office, Customs, Justice, the FBI all play critical roles. In helping to engage the co-operation of foreign governments, these agencies utilize all the skills and tools at their disposal from enforcing trade agreements, to diplomatic advocacy, to training and direct co-operation with foreign enforcement officials.
These agencies are all that stand between us and anarchy in the international marketplace. Ensuring that they have the resources to continue to dedicate to the fight against intellectual property theft outside the United States is also a high priority.
I close with Mr. Churchills exhortation: Truth is incontrovertible; panic may ignore it, malice may distort it, ignorance may deride it, but there it is.
A singular truth exists in the movie industry: If you cant protect what you own, you dont own anything.
