Written Testimony of Will Poole
Corporate Vice President, Microsoft Corporation

For the House Judiciary Committee

Subcommittee on Courts, the Internet and Intellectual Property

June 5, 2002

1 Mr. Chairman and members of the Subcommittee, my name is Will Poole, and I am Corporate Vice President in charge of Microsoft’s New Media Platforms Division.  I am grateful for the opportunity to appear before you today to present Microsoft’s views on the consumer benefits of digital rights management (DRM) technologies.

2 Microsoft is deeply committed to developing DRM solutions that protect content and personal privacy while expanding consumer choice, creating new opportunities for businesses, and promoting innovation.  In designing our DRM technologies, we take into account three broad types of digital content – personal information (such as individual medical and financial data), corporate information (such as legal and business documents), and commercial content (such as movies and music) – each with its own unique requirements for secure distribution and management.  To date, discussions around the need for DRM-related legislation have focused primarily on commercial content, and there specifically about filmed entertainment.  As we shift our focus to the future, it is critical that we pay attention to the DRM requirements of all types of digital content and that the needs of one industry do not supercede or usurp the needs of others.

3 Powerful, flexible DRM solutions are critical to maintaining the security and value of a wide variety of content through the digital ecosystem, not just movies and music.  Without a broad range of DRM tools, digital piracy will flourish, users will be reluctant to distribute sensitive information digitally, and the creation of new business models based on digital distribution will falter.  The ultimate victims of limited DRM options will be consumers, who will enjoy fewer opportunities to enjoy the many benefits of digitally distributed commercial content, or manage their own digital information securely, easily and inexpensively.

4 In recent years, the private sector has devoted substantial resources to – and has made tremendous progress in – improving the quality and breadth of DRM technologies.  Industry has strong incentives to develop innovative and flexible DRM technologies that can respond quickly to changing circumstances, and that can support diverse business models to satisfy varying consumer scenarios.  Contrary to some claims, our industry has already been remarkably successful – through the actions of both individual firms and multi-industry initiatives – in developing effective, user-friendly DRM technologies, many of which have already garnered broad consumer acceptance.  As these technologies mature, more and more businesses are discovering new applications for – and taking advantage of new business opportunities enabled with – DRM systems.

5 The title of today’s hearing recognizes that DRM technologies can benefit consumers.  Microsoft acknowledges, however, that industry needs to do a better job of educating the public about their benefits.  The problems that arise from unprotected digital content extend well beyond pirated movies and music and negatively affect the entire digital economy.  As more people become creators of digital goods and information for both personal and commercial purposes, the need for securing this IP becomes increasingly critical.  We in industry need to work harder at informing consumers about the central role IP plays in their lives, the rights they have in their own works, and the value it may represent to them.

6 Microsoft thanks the Subcommittee for its demonstrated interest in promoting consumer access to works through new technologies and for recognizing the important role DRM solutions will play in this area.  We urge you to continue to promote progress toward a vibrant Internet marketplace by encouraging private-sector solutions to the challenges that achieving this goal may present.  We also believe that regulatory action, if any, will be most effective where it does not dampen private-sector incentives for innovation, restrict competition, or make it more difficult or costly for industry to respond to DRM circumventions by hackers.  Broad regulatory mandates prompted by industry-specific concerns are particularly ill suited to the growing diversity of digital content, as well as emerging and changing industry needs and consumer expectations in this area.

7 The balance of this testimony explains these themes in greater detail and describes some of the ways in which Microsoft and our partners in the technology, consumer electronics, and entertainment industries are working to advance the development and deployment of state-of-the-art DRM solutions.

8 I.                               Microsoft and DRM technologies

9 The phrase “digital rights management” commonly refers to technical measures that help companies and individuals manage their rights in digital content.  In practice, the term is often applied broadly to almost any security measure that protects digital content, including access and copy control mechanisms. 

10 Microsoft is involved with DRM technologies in two distinct aspects of its business: As a user of DRM solutions to protect our own content; and as a developer of DRM tools for our partners and customers.

11 As a leading software developer, Microsoft is also one of the world’s largest IP-based businesses.  Simply put, we generate the bulk of our revenue by developing and licensing IP to our customers.  Like most software developers, however, Microsoft suffers significant revenue losses from piracy.  The worldwide software piracy rate currently stands at 37 percent, meaning that more than one in every three copies of software in use today is used without a legal license.^[1]  The software industry loses more than $11 billion annually due to piracy.^[2]  Software piracy also impacts the broader economy: According to the Business Software Alliance, software piracy in 1998 resulted in over 100,000 lost jobs and nearly a billion dollars in lost income tax revenues in the United States alone.^[3]  If software piracy remains unabated, it will cost the U.S. economy over 175,000 jobs and $1.6 billion in lost income tax revenues by 2008.^[4]

12 Microsoft has always believed that as a content owner, we bear primary responsibility for protecting our own products.  Accordingly, we began experimenting with technical protections for our software as early as the mid-1980s.  Some of our initial efforts at technical protection were judged by the marketplace to be too unwieldy, and they frankly alienated some of our customers.  Microsoft responded by developing more user-friendly mechanisms that responded to consumer needs.  As a result of these efforts, we have learned a great deal about the possibilities and limitations of DRM systems – both in terms of what is technically feasible, and in terms of consumer expectations.  We have also learned that no DRM system, no matter how secure, will succeed in the marketplace unless it meets the needs of consumers in an un-intrusive, cost-effective manner.

13 Microsoft is also a leading developer of DRM solutions for use by third parties.  From the beginning, Microsoft’s core business has been developing software tools that help our partners and customers unlock the full power and potential of personal computers.  These tools have sparked rapid innovations throughout the digital ecosystem while helping people become more productive and exploit new avenues for communication and recreation.

14 In working to understand the specific DRM requirements of our partners and customers, Microsoft has come to realize that the need to protect content – or more precisely, “digital assets” – is one that extends far beyond the film and recording industries.  An extremely diverse range of industries and users – such as financial service providers, the medical and healthcare industries, legal service providers, various government agencies, as well as large and small businesses across countless other sectors of the economy – today generate digital assets as a core part of their business and often have a compelling need to protect these assets against public disclosure, misuse, or theft.

15 And equally importantly, many consumers generate their own digital content – ranging from financial records to photographs to their individual medical histories – which they rightfully desire to ensure can be used only in accordance with their wishes.  Safeguarding such private aspects of consumers’ lives is an increasingly vexing problem in a digitally connected world.  DRM technologies offer the hope of protecting consumers’ privacy and opening new avenues for the securely managed use of personal information.

16 At the same time, the specific digital assets to which DRM technologies may be applied differ tremendously in terms of their characteristics and use, the business models within which they are used and distributed, and the expectations with which consumers approach these assets.  An attorney’s confidential client memo, a recording company’s master audio recording, a government’s tax records, an amateur photographer’s images, and a publisher’s new bestseller may each require DRM protection.  At the same time, the ways in which these digital assets are distributed and used – and the types of misuse to which they are most susceptible – will vary enormously.  To ensure that the efficiencies of digital distribution can be exploited throughout the economy, it is essential that users have access to sufficiently flexible DRM tools to meet their specific needs.

17 II.                            DRM technologies – the private sector in action

18 The ultimate success of DRM systems within the broader digital environment will depend not only on the strength of their security, but also on their ease of use, applicability to multiple types of content, ability to integrate easily with existing industry systems, support for flexible business models, and their ability to recover from a hack or compromise.  Despite occasional claims to the contrary, the private sector has made enormous progress in developing DRM solutions that meet these goals.  Examples include Conditional Access systems used by hundreds of millions of cable and satellite customers worldwide, copy protection systems employed on every DVD player, and software DRM solutions that are available in hundreds of millions of computers.

19 For its part, Microsoft strives to develop powerful, flexible and consumer-friendly DRM tools, and we work closely with a wide range of industry partners to deploy these DRM systems in valuable and innovative ways.  We also actively participate in several cross-industry initiatives to develop broad-based DRM solutions. 

20 A.     Microsoft DRM tools

21 Microsoft’s flagship DRM technology is Windows Media Rights Manager, an end-to-end DRM solution that lets content owners deliver music, video, and other media content online in a secure format.  Rights Manager gives content owners the ability to determine a wide range of delivery options, including start and expiration times; the number of times a file can be played; whether a file can be burned onto a CD; and whether the file may be copied onto a portable player or other device.  In this way, Rights Manager supports a broad array of content distribution business models, such as previews, rentals, subscription, purchase, try-before-you-buy, and other models – all of which are employed under the control of the content owner/distributor.

22 Companies around the world have partnered with Microsoft to deploy Windows Media Rights Manager in their own businesses, making it the most widely used technology for securely distributing digital media online.  First launched in 1999 and now in its second generation, Windows Media Rights Manager has been used in over 11 million transactions for secure video and audio and is supported on over 350 million media players.  Over 275 companies have licensed Rights Manager to create secure online distribution systems, more than 130 software developers have licensed Rights Manager to support playback of secure audio and video, and over 60 devices are currently on the market that support Windows Media.  All of the major music labels have used Rights Manager to deliver digital music online, and Microsoft has partnered with several companies that now offer top-quality online audio and video subscription services based on Rights Manager.

23 One of these Microsoft partners is Intertainer, which uses Windows Media technology to offer a secure online video-on-demand (VOD) service.  The Intertainer service allows subscribers to access premium content from Universal Pictures, MGM, Warner Bros., and other leading film studios at VHS quality over common DSL and cable modem connections.  Pressplay, the leading music subscription service created by Universal Music and Sony Music, uses Microsoft’s technologies to offer convenient and secure music downloads.  Likewise, CinemaNow uses a customized Windows Media-based VOD content distribution and management system to securely deliver nearly 2 million video streams per month.  These are just three of dozens of companies that are successfully using DRM technologies from Microsoft, IBM, and others to provide consumers with easy, inexpensive online access to the very best entertainment content.  That said, the adoption of powerful and flexible DRM technologies already on the market has been surprisingly slow in some major content sectors – a factor that has arguably fueled the growth of digital piracy over some peer-to-peer networks and other channels.

24 Microsoft also offers a DRM solution for the secure distribution of eBooks.  Launched in August 2000, Microsoft’s eBooks DRM is used by more than 20 eBookstores worldwide.  Several leading publishers and online booksellers – including BarnesandNoble.com – have selected Microsoft’s eBooks DRM and Microsoft Reader as their preferred eBooks platform.

25 In addition to music, film, and books, Microsoft also uses its DRM technologies to protect our own most valuable assets: Windows and Office.  Both product lines now use “activation” technology to reduce piracy, which is particularly crucial in overseas markets where copyright laws are less well understood and enforced.  Tens of millions of our customers have successfully installed and used the latest versions of Windows and Office, illustrating that DRM technologies can be applied to mass-market digital products in a way that reasonably balances the needs of copyright holders and end users.

26 Despite our successes to date, we still have much work to do in this dynamic technology area.  We have invested over $200 million to date in these areas, and have substantial ongoing efforts – possibly the most extensive DRM research and development investments in the industry.  We are currently working on the next generation of DRM that will protect an extremely broad range of personal and commercial digital assets in a secure environment that provides a seamless and rich consumer experience.

27 B.     Cross-industry initiatives

28 In addition to our in-house DRM development efforts and our collaborative work with partners, Microsoft actively participates in several standards organizations and other cross-industry initiatives.  While some of these standards bodies – such as the World Wide Web Consortium (W3) and the Internet Engineering Task Force (IETF) – have not yet taken up the issue of DRM interoperability, a handful of cross-industry initiatives are making important contributions to this effort. 

29 One such organization is the Moving Picture Experts Group (MPEG), a working group of the International Standards Organization charged with developing standards for digital audio and video.  Since its launch in 1988, MPEG has produced MPEG-1, the standard on which Video CD and MP3 are based, MPEG-2, the standard on which DVDs and digital TV set-top boxes are based, and several others. 

30 Among the technologies that MPEG is evaluating for standardization is XrML, a “meta-language” for specifying rights that will greatly enhance DRM interoperability.  XrML, which was invented at Xerox Palo Alto Research Center (PARC) over ten years ago and submitted to MPEG by ContentGuard, provides a universal method for securely specifying and managing rights associated with all kinds of digital content and services.^[5]  The goal of XrML is to provide a flexible, extensible, and interoperable standard that meets everyone’s needs regardless of industry, platform, format, media type, or business model.^[6]  Microsoft is a strong proponent of interoperability standards for DRM, and we see great potential in XrML in particular.

31 Microsoft is also a member of the Copy Protection Technical Working Group (CPTWG), a cross-industry group launched in 1996 that includes representatives from the PC industry, the consumer electronics industry, and the major film studios.  In 1998, the CPTWG helped to facilitate creation of the Content Scramble System (CSS) technology that is now used by every major U.S. film studio to protect DVDs against unauthorized copying. 

32 C.     DRM solutions – a diverse range of options

33 All told, industry has invested hundreds of millions of dollars into developing an array of powerful, flexible and user-friendly DRM solutions.  This broad range of options is both valuable and necessary, for no single technology or solution can possibly fulfill the remarkably diverse requirements of the digital marketplace. 

34 Each of the major DRM technologies in use today has its unique strengths and will be more or less useful depending on the context.  For instance, some content owners favor hardware-based DRM systems because the protection mechanism is embedded within the hardware itself.  Examples of hardware-based DRM solutions include DirectTV smartcards and many cable conditional access systems.  The CSS technology used to protect DVDs, by comparison, is an example of a hybrid software/hardware protection mechanism.  With CSS, DVD players are programmed to inspect DVDs for an embedded code, which interacts with the hardware to determine whether the user may play or copy the DVD content.  Although hardware-based and hybrid systems are widely used, once the protection mechanism is compromised, they are typically lost forever and cannot be renewed.  Because any DRM system is vulnerable to attack at some level – as demonstrated by the widely publicized hacks of DVDs – this can be a significant drawback.

35 One of the primary advantages of software-based DRM such as Windows Media Rights Manager, by contrast, is its built-in renewability.  Like most content protection technologies, Rights Manager uses encryption to prevent unauthorized access to digital content.  In the event this protection is compromised, however, Rights Manager gives content owners the ability to isolate the intrusion by dynamically renewing the protections that apply to all other copies of that content.  This feature of dynamic renewability enables content owners to respond quickly to security breaches and thereby to stay one step ahead of hackers.

36 There has also been some discussion of the role of digital watermarks.  Although watermarks can play a role in an end-to-end DRM solution (indeed, Microsoft is investing key research efforts in new watermark techniques), watermarks alone do not protect content and in Microsoft’s judgment cannot be used to solve the “analog hole” problem described further below.  Moreover, watermarks vary in how and where they might be used – for instance, audio is different than video – and each has it own technical challenges.  Watermarks could be useful in forensic investigations to help track down sources of piracy leaks, as watermarks can carry specific information identifying the means of content distribution.  However, because watermarks by definition do not affect the appearance or sound of watermarked content, they are susceptible to removal by hackers without significant damage to the content.  Attempts to build after-the-fact protection or enforcement schemes around video watermark detection have many problems and in our view are unlikely to succeed.

37 We believe that renewable, robust DRM encryption provides the best mechanism for actually protecting digital content and reducing piracy while also securing digital privacy.  Accordingly, all of Microsoft’s DRM tools are based upon a foundation of content security through encryption. 

38 At the end of the day, content owners themselves must determine what type of DRM is best suited for their particular needs.  Fortunately, the marketplace already provides an array of flexible DRM solutions that meet a broad range of user requirements, cost constraints, and business models.  Microsoft strongly supports this process and pledges to continue to do its part to promote innovation in the development and rapid deployment of DRM technologies.

39 D.     Additional areas in which DRM may play a role

40 As the preceding overview illustrates, the private sector has actively responded to the market demand for powerful, flexible DRM technologies, and content owners can now choose from a broad range of innovative, consumer-friendly DRM solutions.  The MPAA and several studios have highlighted three particular areas of importance to their specific businesses, discrete issues in which they believe DRM technologies may also play a role.  These areas are unencrypted digital TV broadcasts, the so-called “analog hole,” and P2P piracy.  Microsoft is actively engaged in working toward a solution in each of these areas. 

41 Unencrypted digital TV broadcasts.  At present, available DRM technologies can protect four of the five channels through which digital content is most commonly distributed: cable, DSL, satellite, and physical media (such as CDs and DVDs).  The only digital distribution channel that existing DRM technologies are not available to protect is that small fraction of digital content that enters the home through unencrypted over-the-air digital TV broadcasts.  Because FCC regulations require this programming to be broadcast in the clear, viewers currently have the ability to make copies of this programming (using, for example, a VCR or DVD burner).  The concern is that some viewers may then unlawfully redistribute these copies to the public at large.  Because this programming can feasibly be made secure only after it reaches the consumer’s television but before it is redistributed, developing an easy-to-use, cost-effective DRM solution to such unlawful redistribution has proven to be challenging.

42 This issue is currently being explored by the Broadcast Protection Discussion Group (BPDG), a subgroup of the CPTWG.  Microsoft is actively involved in the BPDG and believes that discussions within the BPDG have been constructive in helping to clarify the requirements and needs of the various stakeholders.  We however share the concerns expressed by many of those participating in the process about the rigor with which the process has been driven and by which technology is evaluated in this forum.  Particularly, we believe all stakeholders are best served by a process that is transparent, that employs evaluation criteria that are fair, objective, and clearly stated, and that ensures that such criteria are openly published to enable any company that wishes to create products for receiving digital TV signals to obtain and study the applicable technical requirements.  We do not believe any single technology should be “selected” or “mandated” by this process.  We also look forward to advancing these discussions in a forum in which final decisions can be made and requirements defined and promulgated, as these are beyond the scope of the BPDG charter.  Finally, we feel it would be regrettable if the multi-industry progress that has been made on this issue were prejudiced in favor of a process that did not reflect true industry-wide support.

43 The “analog hole.”  Virtually all DRM solutions can protect digital content only so long as that content remains in digital form.  If the content is converted to analog form – or is originally broadcast in analog form – any protection that has been applied to that content is usually lost.  Although the ability of digital devices to support analog conversion has legitimate, pro-consumer rationales, such as the playback of a digital camcorder tape on a standard television, the loss of content protection that this conversion entails means that such devices might also facilitate piracy.

44 Achieving a balanced approach to the analog hole has no easy, short-term solution.  Millions of consumers already own at least one, and often many, digital devices with analog inputs and outputs, and tens of thousands more of these devices are being sold every day around the world.  Virtually any existing device can be used to create unprotected analog or digital copies of content.  And given that current TVs are likely to last for another 10 years or longer, even if a watermark or other DRM technology were incorporated into new TVs, it would not address the analog hole for the hundreds of millions of TVs and camcorders already on store shelves and in consumers’ homes worldwide.  Moreover, the use of watermarks may also present problems in terms of usability, product cost, battery life, etc.  Perhaps most importantly, once a watermarking scheme is reverse-engineered, a non-compliant device or software can play content without heeding any information in watermarks.

45 Nevertheless, Microsoft remains firmly committed to working with all relevant stakeholders in devising an effective means to protect future generations of content so that it can be distributed and displayed in secure digital formats all the way from Hollywood to consumers’ living rooms.

46 P2P piracy.  Peer-to-peer (P2P) networking offers tremendous potential for the future of an online digital economy.  Beyond the many efficiencies that P2P architectures can provide for the distribution of digital goods, the self-selecting nature of many P2P networks offers immense opportunities for business to quickly and inexpensively identify and exploit discrete consumer markets with great precision.  In essence, participants in a P2P network self-select around some common interest.  Commercial entities, not-for-profit organizations, and many other types of organizations expend enormous resources trying to identify and communicate with people that share an interest in what they offer.  P2P networks represent an opportunity to most efficiently bring these groups together.

47 It is equally clear, however, that certain P2P networks can also be misused to facilitate piracy.  Microsoft has first-hand experience of this unfortunate fact: Illegal copies of Microsoft products are commonplace on some P2P networks, and their number is likely to grow as broadband’s reach expands.  The challenge for industry is to steer otherwise lawful consumers away from these pirate P2P networks and towards legitimate online services and distribution channels.

48 DRM technologies may provide at least part of the answer to this challenge.  For instance, this Subcommittee will hear today from CenterSpan Communications, which has successfully embedded the Windows Media DRM architecture onto its P2P-based Scour network.  Scour’s DRM solution preserves the strengths of the basic P2P computing architecture while ensuring that content owners who offer their works on the Scour network can maintain the security and integrity of their works. 

49 Nevertheless, DRM technologies alone cannot solve the piracy problem.  As Microsoft and others in the industry learned from their technical protection efforts in the 1980s, using DRM protections as an anti-piracy club, without adequate regard for consumer convenience and expectations, risks alienating lawful consumers and impeding the growth of legitimate distribution channels.  Instead, content owners must combine the effective use of DRM tools with new business models that give consumers realistic and attractive alternatives to piracy.  Digital distribution mechanisms and P2P networks have tremendous operational cost advantages, which – if combined with high-volume availability, top-tier content and easy access for consumers at appropriate price points – are just as important to combating piracy as technological solutions.  In short, if it is roughly as easy for people to buy something legitimately as to obtain it illegally, most people will opt for the legal alternative.

50 III.                         Conclusion

51 DRM solutions will play an increasingly central role in securing all forms of digital assets, both those that are intended to be distributed to mass audiences and those that are intended to remain private with their creator.  Microsoft is fully committed to developing powerful, flexible DRM technologies that protect both content and personal privacy while promoting innovation, opportunity, and consumer interests.  The private sector has made great progress in providing a diverse array of highly effective DRM solutions – solutions that many companies already use to offer secure, high-quality content over digital distribution channels.  The primary beneficiaries of these technologies, however, are consumers who receive more convenient options, a greater variety of high-quality content, and improved personal privacy.

52 We at Microsoft recognize that industry needs to work harder at educating the public about the uses and benefits of DRM technologies, and about the importance of IP protection in their own lives.  We appreciate the leadership this Subcommittee has demonstrated in this area and the value that its oversight provides in keeping industry focused on the broader social and economic importance of DRM technologies.  We encourage this Subcommittee to continue its efforts to promote private-sector solutions.  Finally, we believe that regulatory action, if any, will be most effective where it promotes continued market innovation and competition, and does not focus solely on the needs of any one of the increasingly interdependent technology, consumer electronics, and entertainment industries.