The House of Representatives’ Small Business Committee held hearings on Wednesday, May 24, 2000 regarding “new market possibilities for small music labels and entrepreneurs created by the Internet”. The Committee heard testimony from Chuck D from Public Enemy/Rapstation.com, Peter Harter from EMusic.com, Tom Silverman from Tommy Boy Records, and Ric Dube from Webnoize. Jenny and I attended the hearings, so here’s a quick synopsis.

The House of Representatives’ Small Business Committee held hearings on Wednesday, May 24, 2000 regarding “new market possibilities for small music labels and entrepreneurs created by the Internet”. The Committee heard testimony from Chuck D from Public Enemy/Rapstation.com, Peter Harter from EMusic.com, Tom Silverman from Tommy Boy Records, and Ric Dube from Webnoize. Jenny and I attended the hearings, so here’s a quick synopsis.

One of the biggest questions we had going into the this was, “Who called this hearing?” There’s no lobbying group for small labels, and Tortoise isn’t delivering boxes of names to Napster. As the hearing progressed, it was clear from the members’ questions that they were trying to sort out what kind of position the government should take on Napster. Sure, Metallica and the RIAA have had their say, but one has to wonder whether the extreme, doomsday scenario opinions held by artists and major record labels aren’t blowing the entire issue out of proportion.

The hearing room was packed — standing room only — and about 12 committee members attended, which was a pretty good turnout considering this was also the day that the House was voting on granting China permanent free trade status. After an opening statement by committee chair Jim Talent (R-MO) and a real-time demonstration of downloading a song from EMusic.com, the members heard testimony from the four witnesses.

Webnoize’s Rick Dube delivered a prepared speech that was mostly informational and full of open questions about the future of digital downloading and music distribution. He also presented the results of a recent Webnoize survey about Napster use. Of 4000 students surveyed that attend colleges in the Northeastern US, over 70% had at least tried Napster, and 57% use Napster on a weekly basis. These figures seemed to prick up the ears of committee members, affirming anecdotal evidence that Napster use is widespread amongst college students.

Tom Silverman from Tommy Boy talked about the issues from the independent label perspective. To be clear here, Tommy Boy has a promotion and distribution deal with Warner Brothers so it’s not a truly “independent” label, and Silverman is a member of the RIAA. Still, his comments as a label owner were relevant. Silverman had many concerns about the “culture of infringement”. He worried about how independent labels and artists will maintain control of their copyrighted material when programs like Napster allow for quick, easy, decentralized transfer of music. “Piracy, either via the Internet or through other means is so rampant,” he said, “my own artists don’t trust me with copies of their unreleased material” who fear that these files will show up on Napster before the release date. To back this up, Silverman added that his copy of one of his acts new singles has a voiceover that says ,”Property of Tom Silverman,” three times. “Without a doubt, the Internet provides a tremendous opportunity for small record labels such as Tommy Boy Records,” said Silverman, “however, as easy as it is for Tommy Boy to distribute music over the Internet, it is even easier for Internet users to copy Tommy Boy’s music and distribute it worldwide.”

Peter Harter tried to use EMusic.com as an example of how you can do both — use the power of the Internet to deliver downloadable music and still pay artists royalties. EMusic.com considers itself an online record label of sorts — it mostly licenses songs and albums from established artists and sells the MP3s for either 99 cents a song, or $8.99 for an album. Because they charge for downloads, EMusic.com is able to pay artists royalties based on sales and any performance royalties due through BMI, ASCAP or SESAC. Harter noted that the Internet has been a positive force of disintermediation. “With the emergence of the Internet the major labels, for the first time since their businesses were founded, have limited and diminishing control over the recording, distribution and marketing process. Literally anyone can now record, distribute and market the music they create.” But Harter also had some cautionary statements about using this new technology to share copyright-protected files, especially through decentralized programs like Napster. After suggesting that they consider themselves not an ISP but a PSP — a piracy service provider (ouch!) — Harter noted that Napster is a business model that threatens to upset the guidelines created by the Digital Millennium Copyright Act (DCMA). “The DCMA established the framework we need to keep innovative technology coming to the marketplace while still fairly compensating artists” and if the online music industry is to continue to grow, businesses — even Napster — have to work within these boundaries.

Then it was Chuck’s turn. Without notes, Chuck blasted the music industry, noting that the power of music distribution has been held for too long by a small number of people, thus stifling the flow of creative works into the marketplace. The Internet, he said, was like a shower of meteors on the heads of major label dinosaurs, and they’d better evolve or perish. The Internet will level the playing field, he said, and he looks forward to the time of one million artists and one million labels.

Chuck completely captivated the audience and the committee members with his slang-peppered testimony and hilarious asides. While this was amusing, it did have a negative effect as well. For the rest of the hearing, almost all the committee members’ questions were directed at Chuck. I only bring this up because a lot of committee members had some interesting questions, despite some obvious gaps in knowledge about how indie labels work, how bands on majors get paid, and how Napster works, and I wish that all of the testifiers had had a chance to address the issues.

Most of the questions centered on how bands and small labels would make money if copyrighted material could be pirated as easily as it is now. They asked Chuck , who strongly supports the notion that music should be free on the Internet, how artists would get paid. Chuck said that, in the future, artists will have to look to “ancillary areas” for money. “The era of the lazy artist is over” he proclaimed, suggesting that artists will need to be more creative in the ways that they are compensated their work — licensing songs to TV and movies, going on tour, building a “brand identity” and selling merchandise [for more about ancillary revenue streams, read our essay]. When pressed by committee members about this issue, Chuck dodged, saying, “I am working with an unnamed company right now on a model that will allow free downloads and compensation for artists.”

A second round of questions had to do with whether the panelists thought that the Napster debate had been blown out of proportion because of the intense media coverage and recent legal proceedings. Besides Chuck, who thinks that Napster is fine, the panelists had conflicting opinions about Napster. They recognized that Napster has gained such incredible popularity in a matter of months because of its fundamental simplicity and incredible capacity for music choices, and they wished that this technology could be adopted into a more legitimate business model. But they cautioned Committee members to take everything in perspective. Tom Silverman quoted the recent survey of independent retail stores within five miles of college campuses, which states that these stores have seen a 4 percent drop in sales from 1997 until March 2000, and those within five miles of colleges that have banned Napster have seen a 7 percent drop. While this may seem like more evidence that Napster is cutting into retail sales, a conclusion like that can’t be drawn from this survey. Harter noted that it failed to capture any changes in the buying habits of college kids, that perhaps they were ordering their CDs online through Amazon.com or CDNow or EMusic.com.

Committee members finally asked each panelist to make suggestions for legislation that would help small labels. Luckily everybody said there was no need for any legislation at this time. It’s too early in the life of the Internet, and especially the life of music distribution start-ups, to begin to legislate control. They noted that there are already rules on the books that address copyright and piracy, and any infringements should be sorted out in the courts.

Overall, the hearing was really interesting, both for the audience and for the committee members, who all expressed that the hearing was one of the most informative that they had ever attended. Mary Bono (R-CA, widow of Sonny), seemed to have the greatest interest in this issue, asking more questions than other members. The members thanked the panelists for their insight and noted that the information gathered during the hearing would be used to inform future debate. Chairman Talent mentioned the possibility of future hearings on copyright and online piracy, but there is nothing scheduled yet. In an effort to stay on top of these issues, we will post any future hearing information.