Statement of Cary Sherman Chairman and CEO Recording Industry Association of America before the Subcommittee on Communications and

Technology Committee on Energy and Commerce U.S. House of Representatives on The Future of Audio
June 6, 2012 Good morning Chairman Walden, Ranking Member Eshoo, and Members of the Subcommittee. Thank you for inviting me to testify this morning on The Future of Audio. My name is Cary Sherman and I am Chairman and CEO of the Recording Industry Association of America. We represent Americas major music labels. Im glad to be here today, because I believe that the recording industry, and the music industry in general, has a great story to tell. The bottom line is that the music industry today has transformed how it does business, and we expect the industry to continue to evolve, enabling new artists to prosper and allowing consumers to enjoy their works in many different ways. Today, the music business earns more than half of its revenues from an array of digital formats. Thats right, CDs are no longer the primary format for the music business or the primary way the industry generates revenues. Digital is not just our future, it is our present. In 2004, the first year we had any meaningful digital revenues, the industry earned a grand total of $190 million from digital services. Last year, we hit nearly $3.5 billion. Quite a change. We often hear the complaint that we need to get a new business model. Wellour companies have done just that: You want DRM-free downloads? Weve got that: iTunes, AmazonMP3, eMusic, 7digital. You want to pay a modest monthly fee for all the music you can ever listen to on your computer or smart phone? Weve got that: Rhapsody, Spotify, MOG, Rdio, Music Unlimited, rara.com, Zune Music Pass. You want free, ad-supported video and audio streaming? Weve got that: Spotify, YouTube, Vevo, Myspace Music, AOLMusic.

You want music bundled with your mobile phone? Weve got that: Muve Music, Metro PCS/Rhapsody You want to store all your music in the cloud, so you can access it from wherever you might be? Weve got that: iTunes Match, and more deals in the works. You want specialized digital radio services that offer you the niche kind of music you like to hear? Weve got that: Pandora, SiriusXM, Last.fm, Yahoo!Music, AOLMusic, and over750 more such services. You want online simulcasts of AM/FM radio stations? That is available too: iHeartRadio, WJLK-FM 994.3 (The Point), KPWR-FM (Power 106), WXLC-FM (102.3 XLC), and over 750 more online radio stations fully licensed through our sister organization SoundExchange.

There are over 500 digital services authorized by our member companies worldwide offering 20 million authorized tracks. ALL of these business models have been embraced and authorized by major and independent music companies. And were not stopping there. One of our highest priorities at RIAA is to develop the infrastructure that will make it faster and easier for entrepreneurs to offer even more innovative business models to music fans. Just last month, we announced, along with my colleague David Israelite of NMPA and digital music services, a groundbreaking licensing agreement that will make it easier for digital services to clear publishing rights for five categories of new business models. Were also working on new industry-wide databases and royalty distribution systems to make royalty payment functions more efficient; and licensing reform to update the statutory mechanism for the old mechanical licensing system. We are intent on working with our Internet and publishing partners to simplify and expedite the licensing process. It probably goes without saying that we are seeking out and embracing these new structures and offerings under the continuing threat of rampant piracy. In fact, were less than half the size we used to be: down to $7 billion in 2011 from nearly $15 billion in 1999. Certainly, piracy does not account for that entire loss. But nearly every academic study, and nearly every economist not to mention common sense has concluded that illegal downloading has hurt us badly. What kind of harm? Massive layoffs, of course. But also less money to invest in artists. That means fewer artists on our rosters, fewer people who can make a living from music, fewer songs permeating through our culture that help form a piece of our national identity. In fact, according to Bureau of Labor Statistics data from the Federal government, the number of people who identify themselves as musicians has declined over the last decade, conspicuously tracking the decline of the industry. Piracy is not just a parochial

corporate problem. This is an issue that affects many industries, our economy, our culture, tens of thousands of creative individuals, and most importantly, the consumers who enjoy the music we create. When it comes to protecting or enforcing creative rights, the effort is often caricatured as a quixotic game of whack-a-mole that only enriches the lawyers. But fresh evidence is emerging that strategic copyright protection combined with robust legal digital offerings can put money into the pockets of artists and songwriters and the companies who invest in them. For example, most people are familiar with Limewire, which was the worlds most popular peer-to-peer (P2P) file-sharing service. Between 2007 and 2010, about 2/3 of filesharers on the Internet used the service. At the end of October 2010, a federal court finally shut them down for inducing massive copyright infringement. The very next month, digital sales of music improved and theyve remained higher ever since. While this may not be the sole cause, it is not a coincidence. Just a couple of months ago, market research firm NPD released a survey showing that more than half of the people who had used Limewire did NOT go to another illegal music site to get their music after the shutdown, thanks to the availability of all those authorized services I mentioned. Government enforcement of criminal copyright laws to protect our nations economic interests is also vitally important. The indictment of Megaupload has had a tremendous impact on other such rogue cyberlocker sites. The governments action sends a signal that the United States will not tolerate the use of the Internet for criminal activity that violates our laws. We continue to believe that the best and single most important anti-piracy strategy remains innovation experimenting and working with our technology and Internet partners on consumer-friendly new business models. But enforcing our constitutional property rights is also a necessary part of the equation. So how are we approaching protecting our rights these days? For the most part, by forging voluntary, marketplace agreements with others in the Internet ecosystem under which everyone plays a part in addressing the problem. Just last year, we announced a voluntary program with ISPs that will be implemented later this year to address illegal downloads on P2P networks. We also helped craft an agreement with major credit card companies and payment processors on voluntary best practices to reduce sales of counterfeit and pirated goods. And just last month, major advertisers and ad agencies announced a series of voluntary best practices so that their valuable brands are not associated with rogue Internet sites that offer illegal goods, and advertisers dont inadvertently enrich rogue website operators. We hope other intermediaries like search engines will follow suit in negotiating voluntary marketplace best practices to prevent directing users to sites that are dedicated to violating property rights.

These voluntary programs are not a panacea. No program ever will be. And sometimes, the Congress must step in to assure that our property rights, and U.S. economic interests, are being protected. Especially against sites overseas whose business model is the theft of U.S. works. But collectively, we think these collaborative efforts will make a difference. They are the product of outreach, and a lot of conversation over several years not only with these intermediaries, but also with public interest groups who want to figure out how to address online problems while ensuring the reasonable preservation of a free and open Internet. We need to engage in the same sort of outreach directly with the tech and Internet communities, and I am committed to doing that because, in the end, we all have an interest in an Internet that is open and accessible, but not lawless. Speaking of working together, I would be remiss if I didnt take this opportunity to once again point out a glaring inequity when it comes to compensating creators. The bottom line is that every platform that (legally) plays music pays to do so except for one. AM/FM radio stations use music to draw billions of dollars in advertising revenue for themselves, but they dont pay a cent to artists, musicians and sound recording owners who make the music they use. Internet radio, cable music channels, and satellite radio all compensate artists and labels for the music they play, while promoting artists at the same time. All other copyrighted works, without exception, receive payment for their use, regardless of promotion. Radio stations in every other developed country in the world compensate artists and labels for the use of music, regardless of promotion. This extraordinary government subsidy for U.S. broadcasters at the expense of U.S. music creators is due to an unfair and unfortunate anomaly in our law that has persisted for decades, and must be addressed. I do think many of us in the music industry find it frustrating that, instead of working with us to find a fair resolution to this issue, broadcasters are more focused on getting the government to mandate the insertion of an FM chip in mobile devices that was rejected by an intergovernmental advisory group. We suspect that the broadcasters real agenda is to get an FM chip installed or activated in every U.S. cell phone, regardless of consumer demand, to prevent being overtaken by the popularity of Internet radio services on those devices, such as the one by our partners at Pandora. Pandora and others are making great strides with consumers on these devices, and challenging traditional broadcasters in the home, in the car and on the move. They are giving consumers what they want, based on consumer demand, and paying artists and record companies while they do it. Certainly, broadcasters like ClearChannel also offer Internet radio services like iHeartRadio that are available on cell phones and that go head to head against other Internet radio services on all mobile devices. Those services do have to pay artists and labels. But it is the old line, old-fashioned terrestrial service, the one that is exempted and subsidized, the one that does not pay artists and labels for the use of

music, that broadcasters want to require on all mobile devices. That does not sound like moving forward to me. These issues are important. But in the end, what gives us hope and optimism is that music matters, perhaps now more than ever. Music is often the hub of your smart phone experience, it is the backbone and soundtrack to many TV shows, it is the focal point of conversation in social media. Of the top ten most followed people on Twitter, seven are music artists. Of the top six videos on YouTube, five are music. Music remains a centrifugal force in culture and commerce, and its only going to get stronger. Its worth creating, and its worth protecting. My conclusion? The music industry is on an exciting and promising trajectory right now. Whether you are with a major label or an indie, or you just have a dream and are trying to find an audience on your own, online and mobile services give artists and the people who invest in them a chance to succeed. And a broad array of authorized music services are giving music fans what they want, and how they want it. Weve still got a lot of work to do to get piracy under control, and we need the help of other industry sectors in the Internet ecosystem to get there, especially search engines, who have yet to dedicate themselves like others in that ecosystem have to protecting against theft. But were seeing the results of more than a decade of adapting to the digital environment finally start to come to fruition. Our companies have been working with an enormous number of partners to embrace every opportunity, to license every viable kind of digital music service and make them attractive and successful, and they deserve great credit for the transformation of their business models. We will continue to work with anyone dedicated to the legal consumption of music. We believe that we have a vibrant digital future, and relying on your help to protect our rights, we look forward to marketplace solutions to get there. Thank you.

TYPE OF SERVICE

SERVICES IN THE U.S. MARKET

DRM-Free Digital Downloads

Subscriptions: All You Can Eat on Your Computer or Device

Free On-Demand Audio and Video Streaming

Music Bundled with Mobile Phones

Access Your Collection From the Cloud

Specialized Digital Radio

Online Simulcasts of AM/FM Radio Stations

7Digital AmazonMP3 eMusic iTunes MOG Music Unlimited rara.com Rdio Rhapsody Spotify Zune Music Pass AOLMusic MySpace Music Spotify Vevo YouTube Metro PCS/Rhapsody Muve Music iTunes Match and more on the way AOLMusic Last.fm Pandora Sirius XM Slacker Yahoo! Music and over 750 more iHeartRadio KPWR-FM (Power 106) WJLK-FM (94.3 The Point) WXLC-FM (102.3 XLC) and over 750 more