Testimony from June 15, 1999

Prepared Testimony from Gene Hoffman, E-Music

Mr. Start Up Goes To Washington
I am 23 years old and about to get married.  EMusic, formerly known as the GoodNoise Corporation, was founded in Silicon Valley in January 1998 by Bob Kohn and myself in the living room of my home.  Through funding of our own, from friends and family and through some angel investors we quickly got underway to build the market leading company for downloading music over the Internet.  We became a public company in May of 1998 by taking over the corporate shell of a firm already traded on the Over the Counter Exchange or OTC.  In March we closed a round of private financing that brought in over thirty million dollars from well established institutional investors.   And just two weeks ago we changed our name from GoodNoise to EMusic when we moved from the OTC to NASDAQ where we are listed as EMUS.  All this time we have built up one of the largest and the commercially viable licensed collections of music of all genres available for download.  It is an exciting industry and many new and old companies are entering the digital music space daily.  We have tripled our staff from 20 in March to 60 this month and we will continue to grow rapidly.  How much longer will we remain a small start up?  At the rapid pace that we have moved so far, it may not be very long at all!

And with the market moving so fast, one may ask why does a start up have the time or focus to come to Washington to help shape public policy?

Too often many high tech executives and their firms dismiss the importance of public policy.  This has been changing over the recent years as more and more companies become engaged with government.  The Technology Network (TechNet) is one good example of how industry has organized itself to help shape public policy and in the wake of the New Economy.  Trade associations like the Information Technology Association of America (ITAA) provide an excellent vehicle for companies to come together to work on issues of common interest.  However, most of the firms involved in public policy are either large firms or at least companies that have been around for a while.  Rarely do you see a small, new company get engaged.  One example of that would be Netscape Communications.  Netscape lobbied the California legislature concerning digital signatures in January 1995 – seven months before its now famous IPO.  Netscape also came to Washington DC in May 1995 to lobby Congress on the now infamous Communications Decency Act (CDA). There are two reasons why a start up like Netscape got involved in public policy: (1) Netscape’s management was seasoned – Jim Clark, Jim Barksdale and Roberta Katz, among others, had all touched upon significant regulatory issues during their careers at other firms such as McCaw Cellular (now AT&T Wireless), Federal Express, and Silicon Graphics; (2) Netscape’s product changed the software industry, communications and society with the commercialization of the web  browser and the unleashing of the Internet’s potential.

Not every start up has one or both of these characteristics.  And I am certainly not “seasoned” in the same sense as someone of Mr. Barksdale’s caliber.  However, I can say that I have been around the block a few times, even at my young age.  In my previous two jobs, I lobbied the Federal Trade Commission on privacy and advertising issues in 1996, and lobbied the Department of Commerce on export controls on encryption and the Federal Government generally on privacy issues in 1996 and 1997.  Also, EMusic’s Chairman and co-founder, Bob Kohn, has been a senior executive at many firms that have had to deal with litigation and regulation matters ranging from antitrust, to copyright infringement, to software piracy.  Many of our other senior executives come from the entertainment industry where they saw government regulation of content in the 1980s and 1990s with, for example, parental advisory labels on music and the V-chip.

Bottom line: a start up is more likely than not to not succeed if it does not pay attention to public policy.  In fact, one of the legends of the Internet, Vint Cerf, may have put it best.  Just last week at the Federal Trade Commission’s Workshop on Consumer Protection in the Global Electronic Market, Vint Cerf said that engineering innovation and technology used to drive the market, but that today it is public policy that shapes business and the economy.  If the father of the Internet believes that public policy is this important, every entrepreneur, young and old should certainly pay more attention to public policy issues.  In fact, I pay more and more attention to public policy as I move from one start up to the next.  While 19 years old and in college at The University of North Carolina, Chapel Hill, I started a company called PrivNet.  Privacy and encryption issues became central to my business.  I took part in a 1996 Federal Trade Commission workshop on privacy, demonstrating how PrivNet’s products enabled users to protect their privacy by blocking cookies from being downloaded from websites to one’s computer.  PrivNet’s products also empowered consumers to control whether or not they saw advertising banners.  In late 1996 I sold PrivNet to Pretty Good Privacy, Inc., and moved to Silicon Valley.  PGP, now infamous for its work on easy to use encryption for individuals and their email, had many export control issues with the US government.  We dealt with the Department of Commerce and other agencies as well as the Congress on a regular basis.  We even hired our own in-house lobbyist who has stayed on with the company that acquired PGP in late 1997.  After having been through two start ups, I am living proof that Vint Cerf is dead on.  I would not be a successful entrepreneur and businessperson without having had paid attention to public policy all these years.

Exploring Issues of Importance to the Internet Economy
I have been using computers and logging on to the Internet since 1988.  I have been using the revolutionizing open source operating system Linux since 1993.  I am an early adopter.  While new technologies come and go, some of the most important public policy issues remain in process over long spans of time.  New companies can bring a fresh perspective to these issues and help them evolve toward a solution or at least a compromise.  Given the central role encryption plays in the New Economy I will focus on encryption as an exemplary substantive issue.  This issue, among others, illustrates how the private sector and the government need to continue their work on developing effective public policy so that the New Economy can continue to flourish.

Export controls on high technology have been around for several decades – they come from an era before I was even born.  There are very important reasons why they exist but economics and technology have outstripped them.  Congress has demonstrated significant leadership in recent years by hosting hearings on export controls on encryption, considering legislation, and by bringing industry leaders together with law enforcement and national security officials to try to hammer out their differences.  While encryption is a complex issue, I can point out one salient fact that bears directly on its intersection with the Internet Economy – this New Economy.  US industry warned Congress and this Administration that US export controls would only drive the development of strong encryption products overseas.  Indeed, firms in Canada, Ireland, the UK, Germany, Japan, China, Australia, South Africa, Sweden, Switzerland, France, and Russia, to name a few countries have exploited the artificial market vacuum created by US export controls laws.  Many firms market their products rather glibly as not subject to US export controls.  Entrepreneurs have seized electronic distribution of software and the global marketplace to compete with US firms and to take hold of market share.  Just as Amazon.com has used the Internet to disintermediate the brick and mortar book store industry, non-US crypto firms can use the Internet to change the balance of power with the established US mass market software and hardware firms.  Overseas firms harness the worldwide community of software developers and security experts to create, hack, rewrite and improve their code.  They may not have the internal resources of a Microsoft or an IBM,but they can leverage the Internet to collaborate with the best engineering minds, to create, test and market a product.  And they can use the Internet to sell their product into the US, as there are no import controls.  Thus, the same qualities that comprise the Internet and that enable all the explosive economic growth during the past five years are the same elements that undermine the effectiveness and practicality of US export controls on encryption.

Moreover, as entrepreneurism and market leadership is driven overseas, the US economy and security is at risk.  Most encryption technology is developed and owned by non-US firms.  Therefore, who can the US government go to for help when it wants to understand how a bad actor uses such non-US products to defeat US law enforcement?  Also, US industry and consumers now have to rely on technical standards and products that are not made here.  Can we trust our information to technology that we may not completely understand?  Canada’s government understands this dilemma all too well.  Several years ago when its native firm Entrust wanted to export robust 128 bit encryption, the Canadian government made a departure from its long standing policy of having export controls that were harmonious with those of the US.  Canada declared that its economic security drives its national security; Canadian firms had to be able to compete in the global market so that its firms could continue to develop market leading technologies and products.

US export controls on encryption remind me of a quote from Douglass Rushkoff, author of the 1994 book “Cyberia.”  Rushkoff said that “[o]ur fear of technology is really a fear of empowerment.  We now have the ability to design the reality we live in, and we have to step up to the occasion.”  By trying to force encryption back into some genie’s bottle, by trying to skew the development of the free market with controls that would benefit vendors who supported key escrow with export relief, by ignoring overseas developments, the public policy of the Administration demonstrated its fear of technology.  Fundamentally, the Internet is, in the words of Ithiel de Sola Pool, a “technology of freedom.”  The lesson I have taken away from working on the issue of encryption is that US public policy should empower people to lead the market.

What Does the Public Policy of the New Economy Mean For Young Americans?
Looking at the faces of the school children who have joined us here today from Michigan and Pennsylvania, how can the US government embrace the New Economy with an event such as the High Tech Summit, and yet have policies that curtail creativity and entrepreneurship?  New Economy issues are not just about growing companies and providing solutions to consumers; at a deeper level the public policy that shapes the New Economy will direct the involvement of Generation X and the generations that follow in political and business leadership.  Essentially, I am asking this Committee to think about how public policy inspires or dissuades young people from having an interest in politics and how the US Government works.  I hear many politicians state that they want to find a way to bring young people back into the political process.  While Bill Gates’ experience of being a Hill page may have something to do with his becoming a multibillionaire, this Government ought to really examine how its positions on issues ranging from content controls, to encryption, to privacy, to copyright, to antitrust, to education, to stock options, to research + development funding, to bandwidth and access, among others, intersect with our nation’s youth – with the next wave of entrepreneurs and information economy workers.

The Internet has enabled kids in junior high school and even younger to build their own high-tech start ups and to work for established high-tech firms.  Instead of having a paper route in grade school, Johnny or Jane now email their work assignments to their managers at high-tech firms.  These kids and millions more are the so-called power users of the medium.  They are the early adopters of change and innovation; often they see market trends before others do.  Their opinion of how public policy shapes the New Economy should not be ignored or taken for granted.

Now I am not naïve enough to think that the problems that are out there in cyberspace – malevolent hackers, child pornographers, cyberstalkers, information terrorists – cannot be dealt with without placing some controls on the Internet.  (I will probably be flamed for saying something like that!)  Platitudes are annoying, but the more things change, the more they stay the same.  Yes there are bad actors out there in cyberspace.  But there are bad actors in every medium and public policy is still contending with them.  As early as the late 1950s and early 1960s, experts deemed television to be a vast wasteland.  The Government created the Corporation for Public Broadcasting in an attempt to create good content in hopes of attracting viewers away from the assumed less-than-desirable content that was being produced to suit perceived market demand.  Government has regulated broadcast content to shield minors from excessive sex, violence and profanity.  And recently President Clinton has proposed new controls to contend with violence in computer video games and other media.  It seems to me that government and industry, old and new, are destined to work together on these issues on an ongoing, evolutionary basis.  For if violent content in television was identified as an issue to be addressed over forty years ago and it is still being addressed today, how can one expect government or industry to resolve the issue of violence in computer games or other new media at all or in a shorter period of time?

There is a lot more history to this issue than I can comment on here; all I hope to offer is a perspective of proportionality and practicality.  As a businessperson, you learn very quickly to focus on what you can accomplish and do so successfully.  High technology public policy may have to track this model more than it has in the past in order to become more effective.  Overbroad measures not only are likely to fail to achieve their goals, but they are also likely to disenchant and disillusion young people as such measures illustrate big government that is ineffective in dealing with high-technology issues.  Fortunately, not all government activity in the high technology area is this way.  From its work on Uniform National Standards on Securities Litigation, to the e-rate, to R&D tax credits,  to Research and Experimentation funding for universities, to digital signatures, to Internet taxation, the Congress has demonstrated its effectiveness on high tech issues.  With more involvement from industry, especially start ups and young people, I think that the government will be best able to address issues like content control, intellectual property frameworks, and export controls on encryption going forward.

Conclusion
There is a theme that I would like to leave with you today.  The New Economy enables young people – students – to become productive members of society as entrepreneurs and professionals – even in junior high, high school and of course college.  No longer does one necessarily have to pursue a traditional path to have a successful career or to contribute back to society and to the nation’s economy.  Good government public policy should enable and empower people to be better.  Government has played a significant role in the creation and operation of the Internet and the New Economy.  A businessperson ignores the rich history of government leadership at his peril; if one looks at the issues before us today, it is hard to say that there is no role for government.  From copyright law enforcement internationally, to reforming securities industry rules, to taxation of ecommerce, to privacy and consumer protection, to trade disputes with the EU, to technology neutral copyright policy, industry needs to work with all levels of government – Federal, State, local and non-US national and sub-national governments as well as the international governmental institutions.  If the valuation of the New Economy is as high as it is, the stakes of good public policy are very significant as well.  As a manager of three start ups, as a young entrepreneur, I cannot afford to discount the role public policy plays in shaping the New Economy.  I have a duty and obligation to my co-workers, shareholders and customers to be aware of all risks and opportunities.  Public policy certainly provides for both in many ways.

Thank you for your time and it is an honor to be with you here today.