Senate Committee on the Judiciary

Online Entertainment and Copyright Law

April 3, 2001

Good morning. My name is Mike Farrace, and, among other things, I'm responsible for digital business at Tower Records. Tower started out as a single store selling records in Sacramento, California in 1960. Today, we own and operate 189 stores in 17 countries not counting franchises, and we sell books and movies as well as music.

We’re famous for a couple of things: great selection and knowing what we’re talking about. Every record in stock and every kid roaming the sales floor represent investments in customer satisfaction. We stock an amazing variety of recordings, and the people we employ are there because they love records. We open early, stay up late, make our stores beautiful and work our tails off to make music lovers happy.

We find out what people want, and we sell it to them the way they want it. Our stores have been in the thick of every musical revolution since 1960. We’ve managed at least 13 physical configurations of audio playback media and at least four video formats during that period. We’ve sold vinyl albums and 45s, Eight Tracks, Four Tracks, Reel to Reel, Cassettes, Compact Disks, Digital Compact Cassettes, MiniDiscs, CDR, Enhanced CD, CD ROMs Mini CDs and probably a few formats I’ve forgotten. We were the first U.S. music retailer in Japan, the first to publish our own magazine, and the first traditional reseller with an online record store. We were among the very first to embrace LaserDisk and later DVD. Sometimes these investments turn out to be great. Sometimes they don’t. But we keep trying because that’s what we do. We’ve never been shy.

We're where the record labels turn when they’re trying to break new music, which is the hardest job of all. We've done many thousands of promotions in support of bands in almost every conceivable genre of recorded sound, including ones for Don Henley and Alanis Morrisette. All the in-store performances, display contests we run, and crazy things we've asked our stores to do have helped sell a lot of records, and helped establish careers for these artists.

While, without a doubt, we are completely dependent on the artist and the customer for our livelihood, because of the way the record business works, we are also dependent on labels and distributors. We’ve had many battles over all kinds of things with our suppliers. We’ve gone toe to toe about terms and support. We’ve wrestled over more complex issues, like whether “12 CDs for a penny” record clubs are really fair play, or whether embedding a hyperlink on a CD, which is a couple of clicks from a reseller that isn’t us, and is sometimes the supplier, isn’t just a bit devious, and unfair.

Of course, the record companies could probably add a few pet peeves about us. But together, we manage. In the best of times, it’s a privilege to be a partner in the chain to creative works that please so many people, and a pleasure to work with the people that create and distribute it.

We've been a good partner so far in the music industry, and we want to continue to be a good partner in the digital age.

Five years ago, someone I knew sent me a digital song file. I was convinced we were on the threshold of one of the most invigorating and fulfilling periods in retailing history. The promise of instant access, portability like we never imagined, rich multimedia add-ons and all the rest was irresistible. If our core values included giving the customer the best possible experience, this was the chance of a lifetime.

We started working with new digital companies, (one of which – Liquid Audio – is present here today), to integrate digital sound files into our physical goods systems. In the last five years, we’ve used over a dozen audio codecs and four digital rights management systems. We have seen at least a half-dozen secure bonafide digital delivery mechanisms and have implemented two.

As a result, we can add secure, watermarked digital files to a shopping basket containing physical goods and can accept a wide range of payment forms. We can provide samples on virtually every song in our database. We provide reports ranging from basic sales and traffic to incredibly detailed user behavior statistics where we have our customer’s permission. We use digital special ordering and sampling in some stores and will continue to roll out even more services in the coming months. We have a system that works. We’ve been selling downloads for almost four years and while the technology continues to improve, the rocket science part is over. We've shown record companies that we're willing to work with them on digital distribution. The only thing missing is a big press conference to announce we have all the content.

So far we've had something around 100,000 downloads available for both sale or promotion from a handful of companies including Liquid Audio, EMI, Warner and Sony. But as a retailer, I don't think my digital offering is very attractive. First of all, there isn't much of a selection. There are tens of millions of songs available on compact disk around the world, and only a small percentage have been authorized for digital sale. Our Internet experience has taught us that selection equals sales. Our first online store in 1995 started with just 20,000 titles. All things being equal, sales increased consistently with selection. Today, towerrecords.com offers well over 500,000 titles – something like 5 million songs. We want the digital equivalent of that.

Second, the suppliers use disparate delivery systems, each one unique, requiring the download of special software and the use of a specific digital rights management provider. It’s like requiring the retailer to have a different cash register for each distributor not to mention a plethora of separate steps and confirmation emails to the unfortunate customer who actually wants multiple songs from more than one company.

We’ve always played by the rules, but today we’re puzzled by the rules. Particularly worrisome is that some companies require personal data from our customers. They insist on actually possessing the names, and only a few will promise not to solicit these customers immediately or in the future. We're trying it, but we're worried about violating our own privacy policy, damaging our relationship with our customers, and maybe even result in Tower violating the law. Tower Records is a 100% permission-based company. We never send emails to our customers without their permission, and feel that either requiring customers to submit their personal data to access the recording or enticing them while we are conducting a transaction is unfair.

We have the same concerns about the rules our customers are being asked to agree to. First off, these End User License Agreements aren't even available to our customers until after they've bought the music. Some of the first ones we saw were pretty horrible, and had some outrageous restrictions that made customers feel like untrustworthy thieves. These "click through" agreements are very awkward and confusing to consumers and create service issues for resellers. This control over usage is enforced by technological locks that are the digital equivalent of preventing anyone from reading a book unless they make a payment to the copyright owner every time they open it. It’s like having someone else standing behind our cash register, taking control of the customer relationship that we have cultivated, and which is core to our commitment.

The bottom line is that we're pretty frustrated by the progress that's been made so far. We're sympathetic to the record company worries about piracy in cyberspace. We understand their fear of losing control of assets. We think part is fear that it will endanger their profitable and durable physical goods distribution system. And believe me, we understand that too.

But many of the barriers that prevent access to an exhaustive inventory of sound are perplexing, and frankly, lead us to question the motives of our suppliers. We're starting to worry that maybe all the talk and activity about protecting the music is not just about controlling copyright infringement, but is really about controlling lawful use and hiding plans for cutting retailers out of the marketplace. A lot of the deals the record companies seem most interested in pursuing are with each other, or with companies that they all buy a piece of – like MusicNet. They tell us they want us in this business, but they don't follow up with products that we would want to sell or that our customers would want to buy. Instead, Bertelsman buys CDNow which has a strategic relationship with Time Warner which wants to cross license movies with Sony which has a subscription service project with Universal (called Duet) which has a joint venture called “GetMusic” with BMG. That's four out of five of my major music suppliers, and the fifth one, no offense to Ken Berry at EMI, has been for sale all year.

OK. My suppliers have the right to get into retailing. Tower isn't afraid to compete with retailers. We think we're pretty good. But we don't think it's fair to let these companies use their power over us to steal our customers and ultimately steal our business. Retailers need rules that protect competition. I'm speaking just for Tower today, but if you ask Pam Horovitz at NARM, which is the association that represents music retailers, she'll tell you that all retailers just want a level playing field that let's them decide how to market and sell music. That's what I think our government wants also.

I would have liked to have been accompanied here today by representatives of two trade associations Tower belongs to: National Association of Recording Merchandisers and Video Software Dealers Association. NARM and VSDA have been active before the Copyright Office and Department of Commerce in presenting the legal issues involved in this intersection of copyright law, antitrust law, and consumer rights. Each has prepared a written statement on the topic of today’s hearing, and I respectfully request that their statements be included in the record of this hearing.

I thank you for inviting me to testify here today.