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Testimony
of Mike
Farrace, Senior Vice President, Digital Business Tower
Records /Books /Video, MTS., Inc. 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.
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