Entertainment Law Initiative

Zach Horowitz, President and COO, Universal Music Group

9 February 2007

Thanks for the kind introduction, Ken. And thanks to the ELI for inviting me to speak today .

Those of you who know me know that I rarely make public speeches. For many years, I worked for Lew Wasserman - one of the great pioneers of the entertainment world. And his advice to me was always the same: Avoid the spotlight. It will only make your clothes fade.

I've spent pretty much my whole career following his advice.

Today I decided to briefly ignore Lew's advice to talk to you - because I believe in this organization and its mission;

And because there's no better place than an ELI lunch, surrounded by lawyers - to give a context to some of the recent initiatives of my company --Universal Music Group - particularly in the legal arena.

The fact is, I am one of you.

I started as a lawyer, and, like many of you, I got into this business because I loved music.

Growing up, I lived and breathed it.

I made weekly trips to the Rhino Records store on Westwood Blvd here in LA - the original store for those of you in the know - going through the b ins and debating the merits of one album or another with the clerks who worked there. Back then - before chat rooms or social networking sites - clerks were guides to pop culture.

I spent weekends going to concerts at clubs like Madame Wongs and Al's Bar to see the latest next great band.

At college I wrote music and concert reviews for the school newspaper.

At law school, one of my proudest accomplishments was getting the Stanford law library to subscribe to Billboard magazine. I was probably the only one at the school who ended up reading it.

I worked briefly at a law firm. But, when given a chance to work at a real live record company, where I could not only negotiate deals but watch them come to life - I jumped at the chance.

Now, after some two decades working for a music company, I still love music, and I still don't consider myself a "suit". A "sportsjacket" maybe. But not a suit.

I still marvel at the creative process even as I have learned to love the business side of the business.

From an early age, my dream was to forge a career in a field that reflected my passions as a person. That's why I chose the music business.

Today, others have that same dream.

And yet, with all the challenges facing our industry, it would seem that dream is at risk. Every week there is another story about music companies closing down or consolidating. About layoffs. About declining sales and profits.

Yet, even in the face of all these gloomy reports, I remain an optimist about the future.

Every survey tells us that more music is listened to by more people than ever before. The demand for what we discover, nurture, market, and sell has not dried up.

But we compete against those who give away our music for free. Who have no need or desire to invest in the content they distribute. And no concern that those who create will stop creating if they aren't paid for their work.

So how do we confront this challenge?

By empowering legitimate alternatives to compete with the illegal ones.

By working with our artists to leverage their brands and share in new revenue streams.

By developing new products and formats that give added value to our consumers.

By requiring compensation from those who seek to use our content to build their businesses.

And by exploiting the incredible opportunities of the internet, of wireless networks - and whatever new technological innovations bring to us - to get more music to more consumers, where they want it, how they want it, when they want it - and to be paid to do so.

This challenge is our obsession.

We, and so many other music companies, focus on it every day. It is the key to our survival.

Since this is the Entertainment Law Initiative and I'm speaking to a roomful of lawyers, I'm sure you already know that my company has probably enabled more litigators to renovate their homes than anyone else in the music business.

We aren't shy about using the courts to fight those who use our music illegally. Or that try to find crevices in the law to build businesses using our assets without our permission and without fair compensation.

But let me be very clear. No one at Universal believes that litigation is the answer to the problems confronting our business.

We are not litigating as an excuse to avoid innovating.

But sometimes you have to litigate to be able to innovate.

Litigation can level the playing field so that new, legitimate alternatives have an opportunity to gain traction.

When you have to go head-to-head with those building businesses with your assets without your consent, you have to protect what's yours with all the legal forces at your disposal. And doing so also inhibits bad actors from entering the fray, and leads other newcomers to make deals before launching a service that otherwise would skate over the line.

So, together with the rest of the music companies, we sued Napster and Aimster and - for the first time - debunked the myth that the Sony Betamax decision provided blanket immunity for lawless behavior on the Internet.

We sued MP3.com, and continued with the case long after all the other plaintiffs had settled. At trial, we established that willful copyright infringement on the internet could not hide behind a "fair use" defense - and it would carry a big price tag.

With the rest of the major music and film companies, we brought lawsuits against Grokster and Kazaa. This resulted in the United States Supreme Court unanimously recognizing a broad theory of copyright liability - inducement. The ruling redefined copyright law and led to one of the largest copyright settlements ever.

And with EMI we brought suit against Bertelsmann and the venture capitalists Hummer Winblad regarding their activities in connection with their investments in Napster. That case made very clear that there is no automatic protection for investors who contribute to and facilitate massive copyright infringement.

The P2P space is not the only place where our music is being unfairly exploited. So it's not the only place where we are litigating.

Many of you, I'm sure, read the widely reported comments of Universal's Chairman, Doug Morris, that we intend to pursue legal actions against social networking and user generated sites for copyright infringement. Those comments were directed at sites that use our content to build their businesses - sometimes worth hundreds of millions of dollars - without first obtaining our consent or working out fair compensation. And those comments helped to bring You Tube to the bargaining table without the necessity of litigation - not just with Universal, but with others as well.

And now, for exactly those reasons, Universal has begun to bring lawsuits against some of these sites - the first being Myspace, Grouper, and Bolt.

In the past, Fox (which owns Myspace) and Sony Pictures (which owns Grouper) have been highly vocal in advocating the protection of intellectual property and the rights of content creators. So it's particularly disappointing and surprising that they are now trying to rationalize the massive copyright infringement taking place on their sites by attempting to contort and distort the safe harbor provisions of the DMCA. This is legally wrong - which we will prove in court. It defies fairness. And it shows a surprising disdain for the effort and expense involved in the content our artists create.

What if the situation were reversed, and it was Universal Music, not Fox, that owned a social networking site. And that site was exhibiting Fox movies in their entirety, potentially to millions of people, prior to the films' release dates, cannibalizing sales and disrupting marketing plans, without Fox's consent and without any compensation to Fox.

I guarantee you that Fox would be rushing to the courthouse to stop it.

Yet that is exactly what happened to us on Myspace.

One of our biggest releases of last year - Jay Z's comeback album -was posted on the site multiple times before its release date, in its entirety, on demand, to potentially millions of listeners - for free - without our consent. And that's just one example of the thousands of infringements taking place on both MySpace and Grouper.

We appreciate that there are benefits, from time to time, in voluntarily working with these kinds of sites to expose our artists and their music. But that has to be our choice, not the whim of a third party.

We'd much prefer to work out arrangements with these sites where we are fairly compensated for the use of our content, as we have with YouTube and many others. But when third parties appropriate our music to build their businesses, and refuse to pay us, they leave us no remedy but the Courts if we are to have a healthy industry.

But litigation, while occasionally necessary, will not turn around our business. That turnaround can only come from empowering new business models, developing new revenue streams, and harnessing the opportunities that the digital age presents.We must embrace the new realities of the business, which means shedding the old ways of making deals, and the old ways of marketing and distributing content. And we must find new ways to listen to our consumers and address their needs.

At Universal, and at so many other music companies, that is exactly what is happening. We make our music available to hundreds of services, presenting new and exciting ways for fans to enjoy listening. We experiment with every conceivable legal business model. And we exploit the very technologies that have threatened our business so that we can create a robust future for ourselves and our artists.

As the market leader, selling almost one of every three albums sold in the US, if Universal doesn't lead the way in a number of these areas, we are shirking our responsibilities.

Universal was the first record company to reduce its prices in the physical world, dropping our everyday wholesale prices across the board by 25% - in recognition of the changing realities at retail, and consumer demand.

We negotiated landmark deals to share in revenue streams from the budding video-on-demand business. We were forced to actually pull our videos off of AOL's and Yahoo's music sites before those services came to recognize the true value of our videos to their business models. But the result was that, for the first time ever, content creators are paid when their videos are streamed. And share in the advertising revenues the services generate from their use of our videos.

We pioneered what we believe to be the industry's most artist friendly contractual provisions for sharing digital income - eliminating free goods, packaging, new media and other deductions.

And we were the first to announce that we would share with our artists the monies coming in from legal settlements with the P2P services, even if our contracts with the artists don't legally require us to do so. These are the right things to do. And they help encourage our artists to actively support our efforts in the digital area.

And in another first for our industry, we convinced Microsoft to pay us and our artists a royalty on every Zune music player sold - in addition to the royalty on tracks sold at their store. It's a groundbreaking precedent that recognizes that it's the music that overwhelmingly drives sales of these portable players. And it is all the more important since so much of the music carried on these players is never paid for at all.

Our negotiations with AOL, Yahoo and Zune are templates for the way we are structuring deals going forward - monetizing our content in ways unimaginable just a few years ago.

And while we are on the subject of online music stores, I'd be remiss in not making a comment about the recent proposal by the owner of one such store who has his own ideas about how the record companies can sell more music online. One thing I can guarantee you is that every record company wants to sell as much music as possible, in as many places as possible. Whether the best way to achieve that goal is to eliminate all DRMs or to allow full interoperability can be a matter of debate. But I'd suggest a healthy degree of skepticism, and suspicion about motive, when a company with over a 75% market share in this area -and an overwhelming desire to keep that dominant position - suddenly is pushing a solution that it says will have the effect of driving more sales to its competitors. Because there just may be some other agenda behind the proposed solution.

There is no denying these are challenging times for the music business. But in the midst of all of this it is innovation that will catalyze growth and opportunity.

Thomas Edison once said: Opportunity is missed by most people because it is dressed in overalls and looks like hard work.

Yes we have lots of hard work to do. But the opportunities have never been greater. Cool new devices that play our music. Novel platforms that carry it. Innovative business models that allow labels and artists to share new revenue streams . From a la carte and over-the-air downloads, paid subscription services and ad supported models - and everything in between - from mobile to the internet - there have never been so many new and exciting ways to give consumers what they want-when and where they want it.

We need to be smart. And nimble. And willing to take chances.

But if we are, we will see an explosion of revenue and income from this business that will shock even the most bullish optimists.

It is particularly relevant that I'm making this speech before the Entertainment Law Initiative in a room full of litigators, transactional lawyers and law students - like the ones who were recognized earlier today for their award winning articles.

It is up to people like you to help define the parameters and create the paradigm - so the new deals and models work for everyone involved.

You are all a critical part of the fight for this industry's future. Together, I hope we can forge the agreements and solutions that will enable the music industry to not only survive - but flourish - in this brave new digital world.

Thank you.