Chairman Specter, Ranking Member Leahy, Senators, and staff: thank you for inviting me to testify this morning on this issue that will undoubtedly have broad and lasting ramifications for both the content and technology industries.
For the last three years, I have served as president of MetaMachine, the developer and distributor of the peer-to-peer file-sharing application eDonkey. From my vantage point I have witnessed and participated on the front lines of the confrontation between technology and content. I hope my experience on this cutting edge will be valuable to the Committee.
You might be curious about what kind of person would run a peer-to-peer company, so I'd like to tell you a little about my background. Prior to joining MetaMachine I co-founded and served as CEO of an educational publishing company called SparkNotes. In that role, I was a rights owner and my job was to sell physical content - not so different from the goals of the record labels and movie studios. I share this background with you to give you comfort that I am not an anarchist and I have no ax to grind with owners of intellectual property. I hold a bachelor's degree in Applied Mathematics from Harvard and an MBA from Stanford.
Before I get to the core of my opening statement, I'd like to make it clear to the Committee that we have replied to the RIAA's cease-and-desist letter and I have personally committed to Mr. Sherman - which I reiterate today - that we are in the process of complying with their request.
Therefore I am not here as an active participant in the future of P2P, but rather as one who has thrown in his towel and with no interest in replaying past issues. I hope that as a result of my pending etirement from the P2P industry, I can speak with more candor and that you will accept my testimony
not as pushing any self-serving agenda but merely as sharing with you my views on this Post-Grokster world.
I'd like to comment on three elements of the Grokster case that I find most important.
First: Because the Grokster standard requires divining a company's "intent," the decision was essentially a call to litigate. This is critical because most startup companies just don't have very much money. Whereas I could have managed to pay for a summary judgment hearing under Betamax, I simply couldn't afford the protracted litigation needed to prove my case in court under Grokster. Without that financial ability, exiting the business was our only option despite my confidence that we never induced infringement and that we would have prevailed under the Grokster standard.
Second: The court specifically cites that Grokster's marketing to "former Napster users indicates a principal, if not exclusive intent to bring about infringement." Is this really proof of intent to induce infringement? Does this mean that every advertiser that has advertised in the eDonkey software also has a similar intent? I should hope not, because last summer the campaigns of both President Bush and Senator Kerry ran advertisements on eDonkey. Were they really both courting the "swing infringement vote" or could they have had some other "intent?"
My final point on Grokster is that its inducement standard cannot serve as a long-term equilibrium. Imagine if since eDonkey's inception not only had we not made any statements inducing infringement - but also that we made no statements at all - and instead simply put up a website that read "eDonkey is a peer-to-peer file-sharing application." It seems to me that would not qualify as "affirmatively and actively inducing infringement." If we had never made any other statements would we be in the clear now? If so, new P2P applications will inevitably spring up and easily satisfy Grokster in this way. If we would not be in the clear than the effect of Grokster will go far beyond merely chilling innovation - it will almost certainly freeze it in its tracks.
I'd like to wrap-up by humbly stepping beyond my area of expertise and making four observations that may be beneficial as you continue your oversight:
First, encourage a market solution. I don't think anyone knows which specific outcome would be best to mandate, but I have limitless trust in our free market system to generate numerous new business models to take advantage of the tens of millions of Americans who use P2P to quench their thirst for content and other data. Imagine if for the last ten years we had been able to convert just 1% of the estimated tens of billions of shared files into paid downloads. There is a market solution to be found - it may well be one that fits in to the business model of the incumbent entertainment industry, but it also may not. It's not for anyone in this room to decide; only the market can.
Second, on this issue be especially aware of unintended consequences. With many P2P applications offshore or simply open sourced, the entities that
will end up being most devastated by Grokster will be those - like us - that set up shop in the US, abided by American laws, paid taxes, and, at least in
eDonkey's case, tried to license content from the entertainment industry. I fear that the winners in Grokster will not be the labels and the studios, but rather the offshore, underground, rogue P2P developers who will have just lost half a dozen of their biggest competitors.
Third, clarify the Court's decision in Grokster. As it is, many companies and would-be entrepreneurs simply cannot be sure of where they will stand with respect to the law. As you know, eBay recently acquired the P2P company Skype for more than two billion dollars. Note that Skype was founded offshore; it would be a real tragedy and a blow to our economy should all technology entrepreneurs take their innovations offshore.
And finally, I've started a few companies in my career and if I have one overriding passion it is for entrepreneurship - the driving force of our economy. I urge you to try to empathize with entrepreneurs trying to innovate in nascent industries. I hope you will do all that you can to
nurture and encourage entrepreneurs and provide them with a legal environment in which they can face the myriad challenges that startups do without the additional burden of having to wonder how a judge many years in the future will construe their every email, every phone call, and indeed every thought.