Posted by anthonyberet on 12/11/05 17:37

http://judiciary.senate.gov/testimony.cfm?id=1624&wit_id=4689

September 28, 2005

Dear Chairman Specter and Ranking Member Leahy:

Thank you for holding this important and timely hearing on protecting
copyright and innovation in a “Post-Grokster” world. I greatly
appreciate your leadership and that of your Judiciary Committee
colleagues. We appreciate the opportunity to share eDonkey’s perspective
on this critical industry and consumer issue.

I. Preface

My name is Sam Yagan. I currently serve as President of MetaMachine,
Inc., developer and distributor of the industry-leading peer-to-peer
(P2P) file-sharing software application called eDonkey.

Prior to joining MetaMachine, I co-founded and served as CEO of the
educational publishing company SparkNotes, which Barnes & Noble, Inc.
acquired and now owns. I hold a Bachelors Degree in Applied Mathematics
from Harvard University and an MBA from Stanford University. My wife and
I live in Cambridge, Massachusetts.

I would like to preface my remarks with a few comments about my presence
before this committee: I have no specific agenda to advance. I am not a
P2P zealot. I generally turn down speaking engagements other than those
directly supporting the development of solutions to the ongoing
conflicts between content rights holders and technology developers. I
accepted your invitation because I hope that my deep commitment to
making peace with the entertainment industry, which I have already
communicated to the RIAA, will allow us to engage in a productive,
forward-looking dialogue without rehashing our past differences.

I have made public addresses just twice before today: at the Cato
Institute conference on “The Law and Economics of File Sharing” in June
2004 and at the U.S. Federal Trade Commission “P2P Workshop” in December
2004. I accepted those speaking invitations, as I accepted yours,
because they provided an opportunity to advocate for practical
market-based solutions to the problems facing rights holders and
technologists. To be clear: I am not testifying for personal publicity
or to promote eDonkey; rather I appear before you out of a sense of
obligation – a sincere hope that my experiences can help move this
discussion forward.

I hold no animosity toward entertainment industry executives or others
who have opposed the advancement of P2P technologies over the last few
years. Even those of us within the file-sharing industry have struggled
to understand these constantly evolving technologies and how they impact
other industries. However, given my relatively unique vantage point on
the cutting edge of technological development, I have grave concerns
about whether the rewards of entrepreneurship in the future will
outweigh the substantial risks associated with developing innovative new
technologies. Perhaps the most important message I hope to communicate
stems from my passion for entrepreneurship – please, try to empathize
with a young entrepreneur trying to innovate in a nascent industry. I
hope you will do all that you can to nurture and encourage that
entrepreneur and provide her an environment in which she 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 her
every thought, email, and business plan.

II. Background on MetaMachine, Inc., eDonkey, and Overnet

The names can get a bit confusing, so let me clarify the various names
associated with our business. We conduct business under our corporate
name, MetaMachine, Inc. We distribute our file-sharing software under
the brand name “eDonkey” (formerly known as “eDonkey2000”). This highly
advanced file-sharing application functions as a completely distributed,
self-organizing P2P software client and supports redistribution of all
file types running on Windows, Mac OS X, and Linux. The name “Overnet”
describes the underlying communication protocol that eDonkey clients, or
personal computer (PC) software programs, use to search other clients
and find files for downloading. Thus “Overnet” functions similarly to
“FastTrack” or “Gnutella.”

MetaMachine, Inc., a New York corporation founded in 2001 develops and
distributes eDonkey, which many research studies cite has having a
larger user base than any other P2P application. We incorporated
MetaMachine in the United States because we believed at the time, as we
continue to believe to this day, that software development was, is, and
should be a legal, respected, and encouraged activity in the United
States. We have succeeded in developing an innovative technology and a
global user base. By incorporating in the U.S., we agreed to abide by
the laws of this great nation and have generally made ourselves
available to government agencies, the press, and most importantly, the
entertainment industry. Unlike some of my colleagues, I have reached out
to the major labels and studios in hopes of finding partners to
collaborate in developing an innovative new channel for licensed
distribution of music and video content.

In fact, seven of the top ten major P2P software companies have chosen
to locate outside of the U.S. We must all keep this geographical issue
in mind when assessing the practical benefits of any proposed
legislation. First, we must consider if the legislation will affect
entities outside U.S. jurisdiction; second, we must consider the
possible costs of pushing technology entrepreneurs offshore.

I hope America can continue to support innovation, both creative and
technological, based on the free-market drivers of capitalism rather
than attempting to control and guide technological innovation in a
centralized manner that may unintentionally drive innovation underground
and offshore.

III. Outreach: Our Good Faith Effort

I have spent an immense amount of energy trying to acquire licensed
content from the major rights holders. As noted in my preface, I also
spoke at the June 2004 Cato Institute conference on file sharing and
provided testimony at the December 2004 Federal Trade Commission (FTC)
Workshop on P2P in support of licensing content for authorized P2P
distribution. In my comments at both of these events I pleaded with
content owners to engage with us in productive dialogue.

Our company also participated with nine other companies in the
Distributed Computing Industry Association’s (DCIA) P2P Revenue Engine
(P2PRE) project, which focused on providing a robust solution for major
entertainment content rights holders to securely market their
copyrighted works via a P2P distribution channel. Although we had no way
of knowing whether the P2PRE would work, we embraced the opportunity to
experiment with a receptive partner in the entertainment industry.

For that project, we developed technical plans and business models, not
only to secure and monetize licensed content entered into P2P
distribution by rights holders or their authorized agents, but also to
address their greatest concern: the redistribution of unlicensed content
that has been entered into the P2P environment from unprotected CDs and
DVDs directly by consumers. The P2PRE project held multiple meetings
with major music labels and publishers as well as movie studios, and at
one point, received verbal commitments from major entertainment firms to
proceed with proof-of-concept technical testing and market trials.

The firms later rescinded these approvals, however, with the private
explanation that to proceed in collaboration with eDonkey on a business
solution, or even to appear to be doing so, could jeopardize the case of
the petitioners in the pending MGM v. Grokster litigation.

I also reached out to major labels outside of the context of the DCIA’s
P2PRE. eDonkey sought to enter into constructive negotiations with major
labels and studios to license content for distribution by means of
innovative P2P business models. I had lengthy conversations with two
major music labels and came close to striking a deal with one of them.
Our negotiations ended when they required me to do things with the
eDonkey application that I simply could not do technologically,
ethically, or without taking on even more legal exposure.

I should note that we participated in all of the above talks against the
advice of our counsel who urged us not to engage in such dialogue out of
fear that comments I would make at these meetings might hurt our case in
any future litigation.

In the meantime, however, we began to license audio and video content
from small, progressive, independent rights holders directly and through
innovative new companies that have begun to emerge, such as INTENT
MediaWorks, Shared Media Licensing, and Altnet.

I can point to two successful campaigns that we ran directly with
artists. In one case, we worked with Rock and Roll Hall of Famer Steve
Winwood to promote the release of his new album About Time. We promoted
a video of Mr. Winwood performing the song at a live venue as well as a
video of him recording the track in his studio. We also worked with a
band called Bishop Allen, which we promoted very heavily in the eDonkey
application, contributing to its sales of tens of thousands of CDs as
well as its brief appearance on Amazon’s top ten in sales.

As a graduate student at Stanford University, I conducted a study on
possible new business models for the music industry given the advent of
file sharing and in particular looked at independent bands and their use
of P2P as a distribution mechanism. Without exception, every independent
band I interviewed begged for increased distribution – gladly willing to
distribute promotional music for free in the hopes of gaining fans and
widespread popularity. In fact, after file-sharing, the technique most
cited by independent bands for acquiring fans was taping signs to
lampposts. I find it difficult to refute the fact that many independent
bands thrive on the distribution offered by P2P application, even in its
current “open” form.

IV. Our Mission

eDonkey’s mission has always been to create cutting-edge technology for
the distribution and storage of digital content. We foresaw numerous
legitimate uses including distribution of content by rights holders and
redundant data storage for corporate and individual users. For example,
we held extensive conversations with one radio producer who wished to
link to archived versions of his radio show. Rather than shoulder the
distribution costs himself, we wanted to link directly to a file
resident in an eDonkey client.

We faced the common challenge of building a business that required both
content and users. Without users we could not get the attention of the
content rights holders and without content, we obviously could not
market content to users. To remedy the content issue, we not only
partnered with existing distributors of independent music and film, but
at one point we actually tried to start our own film distribution
business called Transmission Films. In this business we acquired the
rights to distribution over 100 independent films.

I would like to reiterate this fact: We were rights holders trying to
generate revenue from the sale of licensed content on our very own
eDonkey application! With our own library of films and partnerships with
other distributors, we hoped to prove the efficiency of our application
and qualify ourselves as worthy of having serious discussions with the
major entertainment rights aggregators.

V. Industry Dynamics

We compete with other P2P distributors primarily on ease-of-use, quality
of search results, and speed of downloads. We have succeeded by
improving the look-and-feel of our user interface, making it cleaner,
simpler, and more easily navigable. We have also improved the
functionality of the eDonkey software through a series of new releases
that have provided for more comprehensive searches of available content,
better displays of search results, faster delivery of selected searches,
more features to help organize content, and greater reliability in terms
of the integrity of files delivered in response to search queries.

We have received favorable consumer response according to recent studies
released by industry data resource BigChampagne and research firm
CacheLogic. Our user numbers have steadily increased in absolute terms
as well as in terms of market share.

According to BigChampagne, the average number of P2P users online at any
given time has grown by more than forty-one percent (41%) during the
past year – now nearly ten million (10,000,000) – and according to
CacheLogic, eDonkey’s global market share has increased to approximately
fifty percent (50%).

A recent study conducted by intelligent broadband network equipment
maker Sandvine, confirms that eDonkey continues to lead P2P file-sharing
software programs in France and Germany, which currently reflect the
highest broadband usage of any nations, and are significant to our
discussion here because they may represent relevant future trends for
the U.S. market. According to Sandvine, in Germany, eDonkey handles
about seventy-two percent (72%) of all file-sharing traffic, while
BitTorrent consumes about sixteen (16%). eDonkey captures eighty percent
(80%) of all French P2P traffic with BitTorrent trailing behind
FastTrack and Gnutella.

In Europe, where broadband adoption has steadily outpaced the United
States, upstream traffic represents up to eighty-five percent (85%) of
all bandwidth consumed on broadband provider networks. Downstream P2P
traffic represents about sixty percent (60%) of all bandwidth consumed.
In contrast, file sharing in the UK and North America consumes about
forty-eight (48%) of total downstream bandwidth and seventy-six percent
(76%) of upstream traffic.

VI. The MGM v. Grokster Decision

In its MGM v. Grokster decision, the US Supreme Court vacated the Ninth
Circuit’s summary judgment that had been in favor of respondents
Grokster and StreamCast. The circuit court had relied on the “Betamax
Doctrine” established in the 1984 Sony v. Universal case to conclude
that there had been no contributory infringement because P2P software
programs Grokster and Morpheus could be used for substantial
non-infringing uses.

A. Ruling Summary

The High Court remanded the case to the lower courts for reconsideration
of the petitioners’ motion for summary judgment, additional fact
finding, and possibly a trial.

It also attempted to preserve balance while introducing a new
“Inducement Doctrine” by seeking to explain that one infringes copyright
in a contributory fashion by intentionally inducing or encouraging
direct infringement:

"We hold that one who distributes a device with the object of promoting
its use to infringe copyright, as shown by the clear expression or other
affirmative steps taken to foster infringement, is liable for the
resulting acts of infringement by third parties," Justice Souter wrote
in the Court’s opinion.

In other words, the Court attempted to clarify that while a technology
in and of itself, as well as its dissemination, may qualify as “legal”
generally or in the abstract, an implementation of it may become part of
an unlawful "inducement of infringement" scheme if designed or executed
with the intention of causing infringement.

The Court rejected the "actual knowledge of specific infringement"
reading of Betamax. But it also tried to retain from Betamax that absent
other evidence of intent, mere distribution of a product that has
substantial non-infringing uses, even with knowledge of infringing uses
should – theoretically at least – not expose a distributor to
contributory liability. Beyond that, Justices seemed to lack agreement
regarding the limits and applications of Betamax.

Justice Ginsburg, joined by Chief Justice Rehnquist and Justice Kennedy,
favored a narrower interpretation of the Betamax safe harbor: defendants
need to satisfy a relatively heavy evidentiary burden to earn such
shelter. Justice Breyer, joined by Justices Stevens and O'Connor,
favored a broader interpretation: the heavier evidentiary demand that
would result from Justice Ginsburg's stricter interpretation of Betamax
would increase legal uncertainty and risk, and would have a chilling
effect on technological innovation.

B. Parties’ Actions

Should the parties in Grokster not reach a settlement, the case, now
remanded to a lower court for more fact finding, will likely result in
further questions that appeals courts, including perhaps the Supreme
Court, will need to answer.

According to published reports, StreamCast may further argue its case in
the lower courts, while Grokster will likely exit the business by
negotiating settlement terms with the major music labels and movie
studios, presumably then supporting the conversion of its traffic to an
entertainment industry sanctioned digital distribution service.

As reported, the music label plaintiffs have now also expanded their
legal campaign against the current major P2P software developers by
sending cease-and-desist letters to seven of the leading companies,
including MetaMachine.

These letters threaten imminent litigation – not only against the
companies, but also against their executives and directors – based on
the music industry’s interpretation of the MGM v. Grokster ruling unless
the firms immediately take steps to eliminate infringement. The major
movie studio plaintiffs last week announced a new thirty million dollar
($30,000,000) initiative to combat infringement through technological
solutions as well as their support for the music industry’s actions.

C. General Effects

Grokster's narrow holding supposedly meant that a technology firm could
lose the benefit of a Betamax safe harbor if it makes a product capable
of infringing and non-infringing uses but then affirmatively and
repeatedly encourages users of its product to infringe. This sounds
perfectly reasonable in theory. But in practice, the case has already
reshaped the contours of the debate between copyright holders and
developers of new technology far beyond such a supposedly intended
limitation. In particular, the Court has offered no objective standard
for the definition and measurement of such inducement. As a result,
virtually every P2P distributor, including MetaMachine, cannot know with
certainty how a court of law will judge its past actions.

The decision left undefined the specifics of a "safe harbor" for
developers and distributors of new content distribution technologies,
deferred difficult related issues for future cases, (perhaps
inadvertently) encouraged more litigation, and made it harder to work
secondary liability cases through to clean outcomes. The latest round of
cease-and-desist letters and the reactions to them by the major P2P
distributors prove the point perfectly.

Grokster represented a relatively easy case given what the Court viewed
as clear evidence of egregious intent to induce infringement. Other
cases will present harder liability questions to the extent that they
present more balanced or nuanced fact patterns; in so doing they will
almost certainly expose gaps, conflicts, and ambiguities in relevant
legal doctrines. In particular, the case will undoubtedly come before
the Court where a distributor makes no statement of “encouragement”
whatsoever. I cannot resist the mental exercise: If eDonkey had simply
written on its website from day one, “eDonkey is a P2P file-sharing
client” would we know for sure that we had avoided “affirmatively and
actively” inducing infringement? If so, then these sites will spring up
immediately; if not, then the effect of Grokster will go beyond
chilling, perhaps to the point of freezing innovation in its tracks.

Many technology companies, including eDonkey, whose products can be used
for infringement will simply find themselves unable to continue
operations in a Post-Grokster world -- not necessarily because they
would lose under the new Grokster standard, but rather because they
literally cannot afford the costs of mounting a legal defense. Companies
like eDonkey must face the reality that confronting unimaginably larger
opponents that can outspend small, under-funded technology companies to
death makes the question of “legal” or “illegal” a moot point.

Large multinational copyright aggregators have rapidly become more
aggressive in threatening lawsuits alleging secondary infringement based
on inducement theories. Because the question of intent is highly
fact-dependent and discovery rules will afford plaintiffs wide latitude
to seek probative evidence, it will be much more difficult for defendant
technology companies to win an early-phase summary judgment in these
cases. The small, innovative ones will no longer be able to afford to
defend themselves in the face of the far greater financial resources
plaintiffs can throw into the fight.

On its face, the inducement doctrine may sound sensible, but as a
practical matter this standard makes it impossible for defendant
technology companies to win an early-phase summary judgment when sued
for giving rise to infringement. The “Betamax Doctrine” provided a
bright line rule for lawful technologies – if a new distribution
technology was "capable of substantial non-infringing use," its
developers and distributors could innovate without the courts looking
over their shoulders; they did not have to worry about predicting the
behavior of their customers. Challenges to new technologies could be
wrapped up relatively quickly by applying the well-defined standards of
Betamax.

Perhaps the most disconcerting argument in the Court’s decision – and a
good example of the massive confusion facing technology companies in the
wake of Grokster – is one of the Court’s examples that supposedly
evidences the respondents’ intent to induce:

“First, each of the respondents showed itself to be aiming to satisfy a
known source of demand for copyright infringement, the market comprising
former Napster users. Respondents’ efforts to supply services to former
Napster users indicate a principal, if not exclusive, intent to bring
about infringement.”

Now try to imagine the consequences. If marketing to former Napster
users is evidence of intent to induce infringement, could a potential
advertiser be held liable for marketing to eDonkey users? I hope not –
and the Senators on the committee should hope not. During the 2004
presidential campaign, eDonkey ran advertisements for both President
Bush and Senator Kerry. Perhaps they were both courting the swing
“Infringement Vote?”

The Grokster decision blurs that bright line. By opening up the question
of whether the developer or distributor of a new technology had the
"intent" to "induce" infringement, the Court made sure that company
e-mails, advertising, and any other evidence may now be discovered in an
exhausting trial proceeding, even if the technology itself has the
potential substantial lawful use.

While the incumbent entertainment companies have no obligation to evolve
their business models, I strongly believe that neither should the
government defend their existing models. The government does not have
the expertise to predict the way in which the industry should evolve nor
can it possibly control the steady march of technology. It seems highly
likely that the technological advances of the last twenty years will
have a tremendous impact on the way the entertainment industry does
business – but the industry participants should bear the burden of
figuring out what shape that takes through negotiation and competition.
Imagine if the government had decided that the automobile presented an
unacceptable technological challenge to the horse-and-buggy industry and
introduced legislation protecting whip manufacturers.

D. Its Impact on the eDonkey Business Model

To understand the impact of MGM v. Grokster on eDonkey, one must first
understand our business model.

We generate revenues in four ways: First, by distributing software and
advertisements to our users; second, by selling an upgrade of the
eDonkey software to our users; third, by licensing our software to other
companies (such as those in the Voice-Over-IP market); and fourth, by
collecting royalties on content sold through the eDonkey application. I
will focus on this last point, obviously the most relevant to this hearing.

Analysts estimate the potential market for the online distribution of
licensed music and movie content to reach billions of dollars. Compare
that to the total revenue generated by the entire P2P industry and it
becomes immediately obvious that anyone in the P2P industry would much
prefer to be selling digital music than selling banner advertisements.
Digital Rights Management (DRM) may – or may not – be the answer, but it
seems well deserving of a legitimate opportunity to succeed. Advances in
DRM and payment processing solutions have made it possible for “open”
P2P environments, such as eDonkey, to support the secure distribution of
licensed copyrighted works – in fact, we already do distribute
independent content, as described above.

In the file-sharing environment that we envisioned, rights holders would
have the DRM tools and support services to manage key aspects of every
transaction – and to monetize them through a variety of means such as
advertising, sponsorships, cross promotion, packaging, subscriptions,
and paid downloads. In fact rights holders could control distribution
not only of works they placed into P2P distribution, but also the works
that consumers placed there independently. Unfortunately, before
licensing content to us, the labels demanded that we control the
activity of our users – something that we could not do even if we wanted
to given the purely decentralized nature of the eDonkey software.

E. Two Divergent Paths

Increasingly, as a result of MGM v. Grokster, P2P development will
likely progress down two separate paths.

One will be the corporate, profit-motivated enterprises, which likely
will be forced to comply with contractual terms stipulated by major
entertainment rights aggregators such as reverting to centralized
indexed searches, implementing various types of filtering, operating
closed networks, and offering conventional industry-sanctioned business
models like the current centralized paid download stores and tethered
subscription models.

A challenge will be to retain the “old P2P’s” appeal to the consumer –
as a terrific facilitator of music discovery, including some amount of
free music for listening before purchasing, and for participating in a
vibrant community based on sharing musical preferences.

What may get lost or ignored in this step backwards technologically is
that P2P poses a different set of risks and benefits. Because it is a
different “market” for music, it may well call for a different market
solution.

In previous discussions with music labels, I have often gotten the sense
that they perceived themselves to be negotiating against me. I have
always believed that conversations with the labels should sound more
like partnership discussions where the content owners and the
distributors collaborate to develop a product offering that will be
accepted by consumers and succeed in the marketplace.

It is not that I wanted more liberal business rules solely for my
benefit – if we came up with a set of business rules that we loved but
the consumer did not, the consumer could simply go elsewhere – to eMule,
perhaps (more on this below).

The other subset will comprise the individuals, basic researchers,
hobbyists, and hackers, who will continue to explore technological
advances, although probably not publicly in the United States for fear
of ruinous litigation prosecuted by the entertainment industry.
Undoubtedly, the next generation of open P2P applications will travel
even further down the road of anonymity and secrecy. They will come with
more data security (encryption) and more user anonymity than anything
currently available.

This will present several problems. First, it may well provide a place
for users of the current P2P applications to flee, should we be unable
to persuade them to convert to the new “closed” applications. Second
these users will be harder than ever to locate and it will be harder
than ever to prove what files these individuals are sharing – making
infringement litigation virtually impossible. Third, these applications
will likely be open-source (meaning no one owns them) and will be coded
by people all around the world without any accountability.

It may be worth noting that MetaMachine never sought to go down this
road because we believe that these features do not further the many
legitimate uses of the eDonkey software – rather, they simply aid and
abet the infringing uses that we have taken proactive measures to
discourage.

VII. C & D Letter

The tenor of our conversations with content owners took a turn for the
worse when MetaMachine received one of the previously described
cease-and-desist letters from the Recording Industry Association of
America (RIAA). This threat of imminent litigation from the major music
labels, coming in light of the Supreme Court’s ambiguous ruling led us
to conclude that, regardless of the virtue and lawfulness of our
intentions and practices and our confidence that we never intentionally
induced infringing activity, we did not have the resources to endure the
protracted litigation that the RIAA letter presaged.

Because we cannot afford to fight a lawsuit – even one we think we would
win – we have instead prepared to convert eDonkey’s user base to an
online content retailer operating in a “closed” P2P environment. I
expect such a transaction to take place as soon as we can reach a
settlement with the RIAA. We hope that the RIAA and other rights holders
will be happy with our decision to comply with their request and will
appreciate our cooperation to convert eDonkey users to a sanctioned P2P
environment.

A. Its Impact on Innovation in the P2P World

I believe that all of the existing open P2P companies in the United
States will cease operation in coming months. Instead of creating new
technologies, these companies will focus their energies on imitating the
well-established retail models of iTunes, Rhapsody, and the new Napster.
I would hardly define that as innovation.

It’s hard to imagine future “open decentralized” P2P companies opening
shop as American corporations. That will be unfortunate because some of
the benefits of companies operating in the U.S. are that they are easy
for entertainment rights holders to access, they can be held to the
contracts they sign, and they can be made available to provide input to
Congress. I predict that, unfortunately, innovation in this area will
come to a halt.

Note that this poses grave dangers. Perhaps the hottest P2P company (or
any technology company for that matter) of the moment is Skype, which
eBay recently acquired for more than two billion dollars. Where was
Skype founded? Not in the United States. That represents hundreds of
millions of tax dollars that will not be collected by federal, state,
and local governments. Where are the Skypes of tomorrow being founded?
Your best bet is to look offshore.

At the same time, more and more individual developers of innovative P2P
applications will go offshore and underground and become harder to find.
Let me share an experience MetaMachine had in fighting these unlawful
developers, as it may foreshadow similar challenges that other P2P
software providers, and therefore the entertainment industry, will face
as they attempt to transition their current file-sharing traffic to
closed online content reselling operations.

Some of you may have heard of an offshore underground P2P application
called eMule. Our software’s name is eDonkey, of course, not eMule. The
vast majority of intellectual property attorneys from whom we sought
counsel have advised us that in theory we have a good trademark
infringement case against eMule’s distributors (yes, we face our own
problems protecting our intellectual property!) I even have plenty of
proof of marketplace confusion. Few consumers understand the difference
– even many technology industry insiders do not really understand the
distinction. Not only have the eMule distributors adopted a confusingly
similar name, but they also designed their application to communicate
with our eDonkey clients using our protocol.

In other words, eMule clients basically camouflage themselves as eDonkey
clients in order to download files from eDonkey users. As a result,
eMule computers actually usurp some of the bandwidth that should be
allocated to eDonkey file transfers, degrading the experience of eDonkey
users. So, have we had any success trying to stop them? Is there any
company to sue? Is there even a single official representative of eMule
with whom to negotiate? No. I have no doubt the RIAA will have better
luck finding them than we have, but it surely will not be quite as easy
as finding me.

VIII. Issues to Consider for Potential Legislation

The Supreme Court’s decision has exacerbated the protracted conflict
between major entertainment companies and current-generation P2P
software developers. As a result of the high Court’s ruling, all sides
have focused their energies on legal maneuvering rather than continuing
the dialogue we started before the decision came down. Indeed, many of
the incumbent P2P companies have made hasty arrangements for expedited
exits either from their businesses entirely or have sought refuge
outside of the United States. News reports suggest that Ares Galaxy has
“open-sourced” its source code, potentially paving the way for new
“darknets” to form.

P2P copyright infringement can not only be dramatically reduced, but P2P
also has the potential to serve as a more robust and efficient
distribution channel than its predecessors for a greater diversity of
content offered in a larger variety of ways. But to do so will require
leading entertainment companies, P2P software distributors, and
technology solutions providers to collaborate rather than litigate or
retreat from participating in fear of litigation. It will require more
than vainly trying to funnel tens of millions of users into closed P2P
environments unless those new P2P applications meet consumers’ needs.
Third-party firms need to be allowed to demonstrate that they can
provide adequate safeguards and entertainment content rights holders
need to license their works for P2P distribution. Beyond that, P2P can
also become an advanced communications medium and collaboration platform.

I cannot fathom how many paid downloads we could have sold on eDonkey if
the record labels had granted us licenses to sell their content. Imagine
if P2P developers could have converted a mere one percent (1%) of all
downloads that have occurred in their applications over the last eight
(8) years. If we accept the entertainment industry’s claims that tens of
billions of P2P file transfers have occurred then we have missed out on
hundreds of millions of transactions that could have – should have –
been consummated.

A. Defer to the Marketplace

We believe that business and technical solutions should be encouraged in
the private sector and that a request for any necessary enabling
legislation should come only as a last resort and only based on a
consensus among affected parties.

Global decentralization of the Internet has reached the point where it
will be virtually impossible to stop the proliferation of P2P
file-sharing technology or prevent its continuing evolution to higher
levels of efficiency. The channel has already proven to provide a highly
efficient medium for legitimately marketing copyrighted works through
P2P applications.

I cannot predict what models will be well-received by consumers. Just as
when any new product comes into the market, any viable new P2P business
model must succeed in the marketplace. The consumers – not me, not the
entertainment executives, and not Congress – will determine what works
and what does not. In order to maximize the likelihood of converting
existing P2P user bases, I urge everyone involved to be willing to
experiment and take risks with different business models. I am
infinitely confident in the ability of America’s entrepreneurs to come
up with one or more solutions that work – but it is going to take more
than one bite at the apple. I sincerely hope the entertainment companies
will endorse several different ideas in order to most successfully
preempt the flow of existing P2P users to noncompliant rogue applications.

B. A Similar Precedent

I am not here to tell the entertainment companies how to run their
businesses – indeed, I do not claim to have all the answers. But I did
run a content business for three years prior to working at eDonkey. I
was one of a handful of senior executives who held the title of
Publisher at Barnes & Noble, Inc. As such, I was in the business of
selling content and, not surprisingly, I faced many of the same
challenges that the executives at the major labels and studios face
today. In closing, I will share a story from my experience there –
again, not because I have all the answers, but because I hope that my
experience might at least illuminate the conversation we are having at
this hearing.

My job at Barnes & Noble was to sell as many SparkNotes study guides – I
am talking about physical, printed, books, of course – as possible. But
prior to my company’s joining Barnes & Noble, we had been giving this
content away for free on our website. I vividly recall a meeting on one
of my very first days at Barnes & Noble when my boss – a very senior
executive at B&N – suggested that we either take down the website or
start charging for access to the website. His rationale – perfectly
logical and reasonable – was that we could not possibly sell books in
our retail stores if we were giving away the same content online. I
disagreed vehemently, arguing that we should use the website to drive
sales of books. I do not think I actually convinced him, but he let me
make the call and we kept the website free.

Sure enough, among a customer base that absolutely knew that they could
get the exact same content for free from our website, sales of the
physical books beat all of our expectations. I have had countless
conversations since then – with journalists, professors, friends – who
have asked how it could possibly happen that people would spend money to
buy what they could get online, legally, for free. Of course, the answer
was that the books were a slightly different product – they offered a
different type of convenience and portability than the free web content
did. Dasani and Aquafina are also great examples that you can compete
with “free.” Perhaps in the ultimate sign that our model worked, our
biggest competitor, Cliffs Notes, recently began offering its content
free on its website. Too little, too late, though, as by that time
SparkNotes’ brand recognition far exceeded that of the once venerable
Cliffs Notes.

The point of this story is to provide an example of extremely liberal
business rules governing the use of digital content that turned out to
be highly profitable to the rights holder, in this case, Barnes & Noble.
When I advocate for rules that allow users to listen to an audio file
quite a large number of times for free – it is not out of any
“religious” belief that content should be free. I speak from experience
that you can make money by giving some content away for free.

C. Recommended Approach

There may well be no more need for legislation in light of the recent
Grokster decision – I honestly do not know the position of the
entertainment industry on this issue. To the extent that you do consider
legislation, I have a few ideas on what that legislation should cover,
though I will refrain from making any specific policy recommendations:

1. Clarify the Supreme Court’s ruling in Grokster. I cannot emphasize
enough how important this is to entrepreneurs. It is one thing for low
wage jobs to start going overseas; it would be quite another for
companies to follow Skype’s lead and take their innovations offshore to
avoid the ambiguities of Grokster.

2. Make sure that the legislation will have the practical consequences
you desire. This is more for the sake of the entertainment industry, of
course. You have to assume that open source projects will grow in
popularity and that data encryption and user anonymity will make it
impossible to determine who is sharing what on the next generation of
P2P applications. If it won’t have the desired effect, then it may not
be worth legislating.

3. Encourage a market solution. Tens of millions of consumers are
thirsting for the content created and distributed by the major labels
and studios – there will be – there must be – numerous business models
that will generate immense profits from these individuals. It may be the
incumbent business model or it may be a modification to that model. Or
it might be a different model all together. I firmly believe that no
legislation will serve us well unless it facilitates creative market
solutions rather than mandates a specific outcome.

Although we have determined that we will likely not be directly taking
part in the upcoming evolution of the P2P industry, MetaMachine wishes
those who are continuing to address the P2P copyright infringement
problem as much success as possible. We pledge our personal support to
your ongoing oversight efforts, and offer whatever assistance we can
provide the Committee as individual concerned citizens with respect to
such efforts.

Respectfully,

Sam Yagan
President
MetaMachine, Inc

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