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UNITED STATES DISTRICT COURT
2 SOUTHERN DISTRICT OF NEW YORK
3 UNIVERSAL CITY STUDIOS, INC.; )
PARAMOUNT PICTURES CORPORATION; )
4 METRO-GOLDWYN-MAYER, INC.; )
TRISTAR PICTURES, INC.; )
5 COLUMBIA PICTURES INDUSTRIES, )
INC.; TIME WARNER ENTERTAINMENT )
6 CO., L.P.; DISNEY ENTERPRISES, )
INC.; and TWENTIETH CENTURY )
7 FOX FILM CORPORATION, )
)
8 Plaintiffs, )
)
9 vs. ) No. 00 Civ. 277
) (LAK) (RLE)
10 SHAWN C. REIMERDES; ERIC )
CORLEY A/K/A "EMMANUEL )
11 GOLDSTEIN"; ROMAN KAZAN; and )
2600 ENTERPRISES, INC., )
12 )
Defendants. )
13 --------------------------------)
14
15 DEPOSITION OF MICHAEL EINHORN
16 New York, New York
17 Friday, July 14, 2000
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Reported by:
24 Philip Rizzuti
JOB NO. 111053
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4 July 14, 2000
5 3:15 p.m.
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7 Deposition of MICHAEL EINHORN, held at
8 the offices of Proskauer Rose LLP, 1585
9 Broadway, New York, New York, pursuant to
10 notice, before Philip Rizzuti, a Notary
11 Public of the State of New York.
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2 A P P E A R A N C E S:
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4 PROSKAUER ROSE, LLP
5 Attorneys for Plaintiff
6 1585 Broadway
7 New York, New York 10036-8299
8 BY: CHARLES S. SIMS, ESQ.
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11 FRANKFURT GARBUS KLEIN & SELZ, PC
12 Attorneys for Defendants
13 488 Madison Avenue
14 New York, New York 10022
15 BY: EDWARD HERNSTADT, ESQ.
16 MARTIN GARBUS, ESQ.
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2 IT IS HEREBY STIPULATED AND AGREED,
3 by and between counsel for the respective
4 parties hereto, that the filing, sealing and
5 certification of the within deposition shall
6 be and the same are hereby waived;
7 IT IS FURTHER STIPULATED AND AGREED
8 that all objections, except as to the form
9 of the question, shall be reserved to the
10 time of the trial;
11 IT IS FURTHER STIPULATED AND AGREED
12 that the within deposition may be signed
13 before any Notary Public with the same force
14 and effect as if signed and sworn to before
15 the Court.
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1 Einhorn
2 M I C H A E L E I N H O R N, called as a
3 witness, having been duly sworn by a Notary
4 Public, was examined and testified as
5 follows:
6 EXAMINATION BY
7 MR. SIMS:
8 Q. State your name and address for the
9 record?
10
11
12
13 CONFIDENTIAL
14
15
16
17 Q. Have you ever been deposed before,
18 Mr. Einhorn?
19 A. No.
20 Q. Have you ever testified in court before?
21 A. No.
22 Q. Why don't you me through your academic
23 degrees from college onward?
24 A. I have a BA from Dartmouth, sum cum
25 laude 1974. I have got a masters in economics from
6
1 Einhorn
2 Yale that I earned in 1976. I have a Ph.D. that I
3 completed in 1981.
4 Q. Ph.D. from?
5 A. Yale.
6 Q. What positions have you held since 1981?
7 A. I was a member of technical staff of
8 Bell Laboratories. I was a professor -- assistant
9 professor of economics at Rutgers. I was an
10 economists at the antitrust division of the U.S.
11 Department of Justice.
12 Q. What years was the DOJ?
13 A. '91 to '97.
14 Q. Yes?
15 A. I was an economist at Broadcast Music
16 Inc.
17 Q. From when to when?
18 A. '97 to '99.
19 Q. What are you doing now?
20 A. I am now an independent consultant. I
21 am going to join the faculty of William Paterson
22 University in the fall of this year as a visiting
23 professor, and I am working on negotiating to be an
24 adjunct professor at Columbia where I am now a
25 research fellow.
7
1 Einhorn
2 Q. Do you have a contract offer to you in
3 hand from Columbia?
4 A. No.
5 Q. What led to your departure from BMI?
6 A. We severed relationships with each
7 other.
8 Q. What led to that?
9 A. Exactly what led to that?
10 Q. Yes.
11 A. I sent a memorandum to the chief
12 financial officer of BMI a month before my leaving
13 inquiring about a bonus that I believed I had been
14 promised when I joined BMI, and that bonus was paid
15 in the previous year without anyone telling me that
16 it should not have been. Then I sent a memorandum
17 inquiring why I was not paid that bonus a second
18 time, and shortly after that I was released.
19 Q. What was the nature of your work at BMI?
20 A. I was an economist. I was hired because
21 BMI was beginning to go through a rate court
22 proceeding per the terms of the 1994 consent decree
23 that they negotiated with the Department of
24 Justice, and they were hiring an economist for the
25 first time.
8
1 Einhorn
2 Q. That was with respect to a proceeding
3 involving the royalties due under some statute,
4 copyright owners from the networks?
5 MR. HERNSTADT: Objection to form.
6 Q. What was the nature of the proceeding?
7 A. I never got involved in any proceeding.
8 Q. I thought you mentioned the rate court?
9 A. I am sorry, the BMI per the terms of
10 the -- per the terms after modified the consent
11 decree. BMI is now under the surveillance of a
12 rate court which operates under the administration
13 of the Southern District of New York.
14 Q. And that rate --
15 A. That rate court, they thought they
16 needed an inside economist to assist them with that
17 rate court and with ongoing affairs with the
18 antitrust division.
19 Q. In fact you never submitted any
20 affidavits or submissions in desk with that rate
21 court?
22 A. No, I did not.
23 MR. HERNSTADT: Objection to form.
24 Q. At Bell Labs what were the years of
25 that position?
9
1 Einhorn
2 A. 1981 to 1984.
3 Q. Was that at the time when the telephone
4 rates were regulated by the Federal Trade
5 Commission?
6 A. Yes.
7 Q. What was your position?
8 A. Member of technical staff. I assisted
9 some folks who were in the pay telephone division
10 to prepare econometric forecasting models.
11 Q. Did those models ever entail any
12 consideration of the effect of theft of telephone
13 service on the telephone company?
14 A. No.
15 Q. While at the Department of Justice did
16 you work on any matters involving the entertainment
17 industry or entertainment industries?
18 A. I was involved in, with perhaps one
19 radio merger.
20 Q. Did you assist counsel in connection
21 with investigations?
22 A. Yes.
23 Q. And were any of those investigations of
24 the motion picture industry?
25 A. None at all.
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1 Einhorn
2 Q. Any of them of the home video industry?
3 A. None at all.
4 Q. Any of the sound recording industry?
5 A. None at all.
6 Q. What is the position you are going to
7 commence at William Paterson university?
8 A. Visiting professor.
9 Q. How many year or month position is?
10 A. This is a one year contract.
11 Q. Is William Paterson a four year or two
12 year college?
13 A. Four year college.
14 Q. Do you know what course you will be
15 teaching?
16 A. In the business department, introductory
17 and intermediate economics.
18 Q. Do you have any experience advising as
19 an economist in connection with copyright
20 litigation?
21 A. In two and a half years at BMI I was
22 involved with the attorneys there in a number of
23 different copyright issues where I was an advisor.
24 Q. Who were the attorneys that you worked
25 with?
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1 Einhorn
2 A. Marvin Berenson, Joseph Dimona. Judith
3 Saffer. There was Cary Howland-Cruse, and there
4 was Mark Ostrow.
5 Q. Any others?
6 A. That is it.
7 Q. And my question was whether you were,
8 you had experience in copyright litigation, I think
9 you said you had worked with them on some copyright
10 issues, were you involved in any copyright
11 litigation?
12 A. No.
13 MR. HERNSTADT: Objection to the form of
14 the question. You can answer it.
15 Q. Am I correct that BMI is an
16 organization that collectively licenses sound
17 recordings?
18 A. No.
19 Q. What is BMI?
20 A. They license musical compositions.
21 Q. To whom or to what categories of
22 businesses or individuals in the United States do
23 they license musical compositions?
24 A. About 80 percent of BMI's revenues,
25 about, comes from television, radio and cable. The
12
1 Einhorn
2 remainder comes from businesses, non-profit
3 institutions, and some foreign licensing.
4 Q. Have you undertaken any study in
5 connection with your agreement to testify here
6 today or at trial over the next few weeks?
7 MR. HERNSTADT: Objection to form.
8 Vague.
9 Q. Have you undertaken any research with
10 respect to your testimony here today?
11 A. Could you explain what research means?
12 Q. Yes. Have you conducted any survey of
13 any type?
14 A. I have conducted no survey.
15 Q. Let me ask it a different way: What
16 have you done to prepare for your deposition today?
17 A. I read through the depositions -- the
18 declarations.
19 Q. Which ones?
20 A. All of the ones on our side. I read
21 through Professor Fisher's declaration. I read
22 through Professor Fisher's deposition. I read
23 through the professor's testimony on Microsoft. I
24 read through -- you got to give me a chance to
25 think, because I am trying to give you the full
13
1 Einhorn
2 answer. I visited web-sites related to the DVD CCA
3 and LiViD. I spoke to Mr. Pavlovich on the
4 telephone.
5 Q. Do you know whether that was before or
6 after he was deposed?
7 A. If you tell me when he was deposed, I
8 answer your question.
9 Q. Did you speak to him about his
10 deposition?
11 A. No, not about his deposition.
12 Q. Yes?
13 A. I think I have everything there.
14 Q. Did you --
15 A. I also read through the Audio Home
16 Recording Act.
17 Q. You get an award for that.
18 A. And section 1201 of the DMCA, and I
19 think I got everything there.
20 Q. Did you read Judge Kaplan's opinion in
21 this case?
22 A. If I read it, it was at the beginning of
23 the experience when I first began to read some
24 stuff and -- if I read it. I may have read it at
25 the beginning or a couple of papers that I went
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2 through.
3 Q. Do you believe you read it or not?
4 A. I don't think I read it. I don't recall
5 reading it.
6 Q. With respect to the items that you
7 indicated above that you read, how did you obtain
8 them?
9 A. Mr. Garbus' office Xeroxed all the
10 depositions for me. I visited the web-sites
11 myself.
12 MR. HERNSTADT: You mean declarations.
13 A. I am sorry, the declarations. They
14 Xeroxed Fisher's deposition. I visited the
15 web-sites myself where I obtained Fisher's
16 Microsoft stuff, and all the other web-site stuff I
17 visited myself and I realized the one last thing
18 that I have to tell you.
19 I also read the antitrust guidelines of
20 the U.S. Department of Justice regarding
21 intellectual property which was co-published,
22 co-produced by the U.S. Department of Justice and
23 the Federal Trade Commission.
24 Q. When you worked in the Department of
25 Justice did you work on Microsoft?
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2 A. No.
3 Q. Do you know when the antitrust
4 guidelines to which you referred were published?
5 A. 1994, 1995 I believe.
6 Q. Did counsel advise you to read those?
7 A. No.
8 Q. For how long were you an assistant
9 professor at Rutgers?
10 A. I became an assistant professor in 1985
11 and left the faculty in 1991.
12 Q. Did you teach any course relating to
13 copyright when you were there?
14 A. No.
15 Q. Did you teach any course in which you
16 had occasion to teach about markets in which the
17 marginal cost of any additional copy is essentially
18 zero?
19 A. No.
20 Q. Have you done any research into the
21 harm, if any, that would befall owners from the
22 widespread copy of their works?
23 MR. HERNSTADT: Objection to form.
24 Overbroad. You can answer if you can.
25 Q. Read back the question.
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2 (Record read.)
3 A. No, I have not.
4 Q. Have you done any research into the
5 problems of free riding?
6 MR. HERNSTADT: Objection to form.
7 A. I am sorry, when you say --
8 Q. Are you aware of a concept economists
9 use and refer to, namely the problem of free
10 riders?
11 A. Yes.
12 Q. Have you undertaken any research or
13 study in connection with the problems of free
14 riding or free riders in various industries?
15 MR. HERNSTADT: Objection to form.
16 A. I have not published a paper. I have
17 not written a paper, this is certainly something
18 that I would have, that I thought about, and talked
19 about with people, but never sat down to do a
20 formal piece of research -- may I go back to the
21 previous question regarding the copy.
22 Q. When I am done your counsel can ask any
23 questions he wants to ask?
24 MR. HERNSTADT: Mark that question and
25 then I will ask you what the question was.
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1 Einhorn
2 Q. Have you done any research or
3 conducted any study concerning the impact of the
4 availability of a free good on the number of
5 persons willing to pay for an identical good?
6 MR. HERNSTADT: Objection to form.
7 A. Once again I have published no papers,
8 nor did I ever submit a draft paper on that topic.
9 But these things are topics of conversation that I
10 have gotten involved in more than just a chatty
11 kind of, you know, in and out kind of way. So --
12 Q. Sorry?
13 A. It is something that has occupied my
14 professional attention, research usually means
15 some -- can sometimes mean have you published a
16 paper.
17 Q. Have you ever read any judge Richard
18 Posner on the subject of copyright?
19 A. No.
20 Q. Have you ever read any writings by
21 Steven Breier (phonetic) on the subject of
22 copyright?
23 A. No.
24 Q. By the way, are you engaged in any
25 litigation against BMI in connection with your
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1 Einhorn
2 departure from them?
3 A. No.
4 Q. Are you contemplating any?
5 A. No.
6 Q. Have you published any books?
7 A. I have edited three books. They were --
8 Q. What are the titles?
9 A. I don't remember the titles off the top
10 of my head. Do you have my CV --
11 Q. No, do you have a CV with you?
12 A. I don't have a CV with me.
13 RQ MR. SIMS: I would call for production
14 of one.
15 MR. HERNSTADT: We will get you one.
16 A. The titles, basically I would tell you
17 the -- there was a book on price caps in
18 telecommunications.
19 Q. Yes?
20 A. There was --
21 Q. Roughly wouldn't year?
22 A. 1986.
23 Q. Yes?
24 A. There was a book on restructure of the
25 electricity industry, and there was a book on
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2 transmission economics in the electricity industry.
3 Q. Were those books copyrighted?
4 A. Yes much.
5 Q. Did you hold the copyright in any of
6 them?
7 A. Which I had to give them all up of
8 course, but I had them originally.
9 Q. You sold the copyrights in exchange for
10 certain benefits from the publisher?
11 MR. HERNSTADT: Objection to form.
12 A. As a matter of fact I gave the
13 copyright over to the publisher.
14 Q. And did you obtain any direct financial
15 benefit from the publication of these books, either
16 by way of advances or royalties or other payments?
17 A. In the first case they paid me per
18 contract, and in the last case we didn't
19 generate -- second case we didn't generate enough
20 royalties to justify, to break our threshold. And
21 the last case they paid me after they lost their
22 judgment.
23 Q. Lost their judgment?
24 A. They lost -- I had to sue them.
25 Q. You didn't have to testify?
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2 A. It was a small claims case.
3 Q. Did you ever complain to either of those
4 three publishers about the form of the contract
5 notice that appeared in those books?
6 A. No.
7 Q. Do you remember what the form of the
8 copyright notice said?
9 A. No.
10 MR. SIMS: I want to mark as Einhorn
11 Exhibit 1, the first eight pages from a book
12 titled: Price Caps and Incentive
13 Regulations in Telecommunications. First
14 eight pages minus the dedication page, which
15 I am not interested in.
16 (Einhorn Exhibit 1, first eight pages
17 from a book titled Price Caps and Incentive
18 Regulations in Telecommunications, marked
19 for identification, as of this date.)
20 Q. Am I correct Mr. Einhorn that this is
21 the first few pages from the first book which you
22 identified a few moments ago?
23 A. Yes.
24 Q. Would you read if you would the
25 copyright notice into the record on I guess the
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2 fourth page that appears here?
3 A. "All rights reserved, no part of this
4 publication may be reproduced, stored in a
5 retrieval system or transmitted in any form or by
6 any means, mechanical photocopying, recording or
7 otherwise without the prior written permission of
8 the publisher, Kluwer Academic Publishers, 101
9 Philip Drive, Assinippi Park, Norwell,
10 Massachusetts 02061."
11 Q. From an economic point of view what was
12 the function of this copyright notice?
13 MR. HERNSTADT: Objection to form. If
14 you have an opinion as to the economic
15 purpose of it, the copyright notice.
16 A. To prevent copying.
17 Q. Am I correct that one function of a
18 notice like this would be to allow the copyright
19 owner to collect and enjoy the economic fruits of
20 its property?
21 MR. HERNSTADT: Objection to form. If
22 you have an opinion on that you can answer.
23 A. As a non-lawyer --
24 Q. I am asking you not as a lawyer, but an
25 economist?
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2 A. It would seem this is an appropriate
3 notice to allow them to collect for their
4 copyright.
5 Q. What was your first contact with any of
6 the attorneys at Frankfurt Garbus or any of the
7 defendants in this lawsuit?
8 A. I met -- I spoke with Robin Gross
9 sometime in the spring of this year in connection
10 with my professional research. And professional
11 interests. And in the course of time said that I
12 would try to catch up with her to see whether there
13 were any things in which -- where I could
14 justifiably cooperate with her in any manner, that
15 I felt comfortable cooperating with her.
16 I was in Washington last month and
17 stopped in to visit Terri Steel, who chatted about
18 the -- about copyright issues with me, and in the
19 course of time I learned about DeCSS.
20 Q. Who is Terri Steel?
21 A. Executive director of the Electronic
22 Frontier Foundation.
23 Q. You mentioned that you spoke with Robin
24 Gross in connection with professional research and
25 professional interest, am I correct?
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2 A. Yes.
3 Q. What was that professional research?
4 A. I contacted her originally because I was
5 doing some research into section 112 and 114 of the
6 Digital Millennium Copyright Act, which are matters
7 that are going to go before the copyright office
8 later this year. And I just wanted to know what
9 her positions were. If she intended to do anything
10 about it.
11 Q. Briefly what do the sections pertain to?
12 A. You are going to hate me for this --
13 Q. You got to two in two --
14 A. Section 114 is the big one, that
15 establishes the rules for collecting royalties for
16 digital audio transmissions of sound recordings in
17 interactive and non-interactive media. That is
18 a -- that section 114 is a modification of the
19 copyright act. Section 114 -- I am giving you the
20 copyright right modification.
21 Section 112 deals with ephemeral
22 reproductions. Ephemeral reproductions are
23 reproductions made by broadcast stations,
24 non-profit institutions, and government
25 institutions for a period of six months or less as
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2 back up reproductions that have been historically
3 exempt under the copyright act from making any
4 payments.
5 The big one is 114, because that added
6 the performance right in sound recordings.
7 Q. Does 114 provide any form of compulsory
8 license?
9 A. Yes.
10 Q. Does 112 afford any form of compulsory
11 license?
12 A. They have to figure out what they are
13 going to do with 112.
14 Q. 114 already has --
15 A. For eligible non-interactive
16 performances.
17 Q. How did your conversation that you just
18 referred to with Terri Steel eventuate in a
19 decision by you to testify here today?
20 A. I got home to my -- I checked my E-mail
21 two or three weeks ago, and got a message to call
22 Robin Gross which I did. And she discussed in
23 very -- she outlined there was a case about CSS,
24 would I be interested in looking at it. I said I
25 would have to think about it and learn about all
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2 the issues.
3 I thought about it for about 24 hours
4 and said there may be something here, but I have to
5 read some more, and then at that point she put me
6 in contact with Mr. Garbus and I began to read
7 about some of the issues at hand.
8 Q. Did you receive other than the materials
9 that you already identified, did you receive any
10 correspondence, letters, E-mails, from Mr. Garbus
11 or his colleagues?
12 A. I received no letters. The E-mails
13 were, if anything at all, administrative.
14 Q. Nothing about the substance of the case?
15 A. No.
16 Q. How many times have you met with
17 Mr. Garbus?
18 A. Once before today.
19 Q. When and for how long?
20 A. Monday, we physically met for maybe, oh,
21 maybe a half hour.
22 Q. Today how long did you meet with him
23 prior to the, his entrance into this room?
24 A. I don't think we met at all today, we
25 just said hello together.
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2 Q. Which other attorneys at Frankfurt
3 Garbus have you met with, if any?
4 A. David Atlas; Edward Hernstadt, and three
5 young fellows, I don't know their last names,
6 Jeremiah and a woman named Casey. They are all
7 attorneys; and there is one more that I met with
8 actually, but I don't remember his name.
9 Q. I have been handed a declaration, it is
10 called a declaration, dated July 14th and signed by
11 Mr. Einhorn, which is roughly identical to what I
12 received yesterday at 5:30, but for a couple of
13 grammatical improvements that Mr. Einhorn has
14 provided. Let's mark this as Einhorn Exhibit 2.
15 (Einhorn Exhibit 2, declaration of
16 Einhorn, marked for identification, as of
17 this date.)
18 Q. Mr. Einhorn, who drafted this?
19 A. I did.
20 Q. Entirely?
21 A. Entirely.
22 Q. Did you discuss a previous version of
23 the text with counsel and make changes as a result
24 of those conversations?
25 A. I made one change as the result of
27
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2 conversation with counsel.
3 Q. Would you identify that change, please?
4 A. Yes. The one clause that I added and I
5 feel counsel was right here, was number 7.
6 Q. The entire paragraph or some portion of
7 it?
8 A. 7 --
9 Q. The entire paragraph 7?
10 A. Yes, the sentence.
11 Q. Were there sentences or clauses in a
12 prior version that were altered or deleted after
13 your conversations with counsel?
14 A. With counsel, no.
15 Q. You indicated before that you read what
16 you believe to be all of the declarations submitted
17 by defendants in this case?
18 A. I believe so.
19 Q. Do you know whether you read a
20 declaration of a professor -- I am sorry, a Louis
21 Kurlantzick?
22 A. Sure.
23 Q. Who gave that one to you?
24 A. All the declarations were given to me by
25 a young attorney in Mr. Garbus' office whose name
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2 is Josh. He had them Xeroxed for me and he gave
3 them to me. I don't remember his last name.
4 Q. Did anyone at Frankfurt Garbus or on
5 behalf of the defendants ask you whether you agreed
6 with the statements in the Kurlantzick declaration?
7 A. No one asked me if I agreed with them.
8 Q. Did anyone on behalf of the defendants
9 or at Frankfurt Garbus ask you if you would include
10 any of those statements in your declaration?
11 A. No. They did not.
12 Q. Have you retained any earlier drafts of
13 your declaration?
14 A. I believe that I saved right over it and
15 kept the same name.
16 MR. GARBUS: Without being rude, how
17 long do you think you are going to go?
18 MR. SIMS: It is not rude at all to
19 ask. My guess would be an hour and a half.
20 Q. Do you plan to, as far as you know,
21 Mr. Einhorn, testify at the trial of this matter?
22 A. I believe I am going to be asked to
23 testify.
24 Q. What is the economic arrangement, if
25 any, that you have made in connection with that
29
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2 testimony and your appearance here today?
3 A. I am appearing pro bono.
4 Q. What does paragraph 4 of your
5 declaration mean?
6 MR. HERNSTADT: Objection to form. You
7 can answer.
8 A. Policies that are established
9 inevitably have some strengths and weaknesses that
10 are associated with them. There is very rarely,
11 that is a perfect good or perfect bad. It is
12 appropriate in choosing the optimal policy course
13 to consider the benefits and the costs of any
14 associated alternative, and try to consider the
15 combination that maximizes what I will call net
16 social benefits.
17 Q. With respect to policies embodied in
18 legislation, who is it who is entitled, as far as
19 you understand it, to make those judgments?
20 MR. HERNSTADT: Objection to form, and
21 insofar as it calls for a legal conclusion.
22 A. Exactly right. I am speaking here as
23 an economist. I am testifying as an economist. I
24 sometimes understand that what might be the
25 economically rational policy may be a conflict with
30
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2 law.
3 Q. Take a look, if you would, sir, at the
4 statement in paragraph 5 of your declaration?
5 A. Okay.
6 Q. I take it that that statement is
7 generally true of everybody; is that correct?
8 MR. HERNSTADT: Objection to form.
9 MR. GARBUS: Everybody about the world
10 geography?
11 Q. That statement is generally true of
12 plaintiff's motion pictures?
13 A. I think that statement is true of any
14 good or service.
15 Q. What did you mean by the statement that
16 appears in paragraph 6?
17 MR. HERNSTADT: Objection to form.
18 A. Okay. What I mean here is that piracy
19 or the threat of piracy cannot be evaluated simply
20 in a vacuum that suggests a hypothetical
21 possibility, piracy. Rather I would suggest that
22 there are two things we must consider when we talk
23 about the threat of piracy that go beyond that
24 simple identification. First, we have to figure
25 out what other technologies the pirate can use.
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2 If we take away one piracy technology,
3 what else does he have at his disposal to use to
4 pirate. And where on that continuum of
5 technologies does the proscribed method lie in
6 terms of costs.
7 That is what I meant.
8 Q. I think you have testified that when you
9 worked for Bell Labs, you worked on pay telephone
10 issues; is that correct?
11 A. Primarily.
12 Q. Did the pay telephones that were -- what
13 is it that Bell Labs did with pay telephones, did
14 they build them or sell them or license, what is it
15 that Bell Labs did with respect to pay telephones.
16 MR. HERNSTADT: Objection.
17 A. They attempted to install them in
18 places that would lead to maximum amount of
19 revenue, and to determine where the right spots
20 would be to build out the infrastructure of pay
21 telephones. This is before of course the wireless
22 revolution, and they were trying to understand the
23 overall consumer demand for pay telephones, and the
24 determinates for the placement, and where the next
25 pay telephones should be.
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2 Q. Do you have an opinion as to whether
3 people have a right to speak?
4 A. I think people have a right to speak.
5 Q. Do you believe they have a right to
6 speak to their friends and neighbors?
7 MR. HERNSTADT: Objection to form.
8 A. Yes.
9 Q. To their children and parents?
10 A. Yes.
11 MR. HERNSTADT: Objection to form.
12 Q. Are you aware of whatever Bell
13 entities at that time that were deploying pay
14 telephones, had mechanisms on those phones so that
15 you had to put in money in order to -- to obligate
16 yourself to pay in order to make those telephone
17 calls?
18 MR. HERNSTADT: Objection.
19 A. Actually even back then most calls
20 were made without dropping a coin in.
21 Q. But were they free?
22 A. No.
23 Q. It was impossible back then to make a
24 phone call without either paying up front or
25 incurring an obligation to pay the cost of the
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2 call?
3 A. Quite right.
4 MR. HERNSTADT: Objection to form.
5 Q. Putting aside -- what were the
6 exceptions to that overall policy?
7 MR. HERNSTADT: Objection to form.
8 Q. If any?
9 MR. HERNSTADT: I think it misstates the
10 testimony.
11 A. I am not sure that Bell Telephone ever
12 gave away any free telephone calls.
13 Q. Was it your view that the imposition of
14 a charge in order to make a phone call was a
15 violation of any rights of consumers?
16 MR. HERNSTADT: Objection to the
17 question insofar as it calls for a legal
18 conclusion. You can answer it if you can.
19 A. I think that making people pay for
20 phone calls did not violate their legal rights.
21 Q. From an economic point of view did you
22 consider, did you have a judgment as to whether it
23 was rational from the point of view the phone
24 company to charge for the use of its service?
25 MR. HERNSTADT: I would like to put an
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2 objection to this whole line of questioning.
3 Totally irrelevant. But you can answer to
4 the best of your ability.
5 MR. GARBUS: Off the record again for
6 a moment.
7 (Recess taken.)
8 A. It is quite rational for AT&T to
9 charge people for telephone calls.
10 Q. And did you have some view then as to
11 whether complex American sophisticated business
12 organizations such as AT&T generally had a pretty
13 good idea of their own best interests economically?
14 A. They certainly did. Well --
15 Q. I mean to generalize the question;
16 wouldn't you agree as an economist that generally
17 speaking complex American business organizations
18 such as AT&T generally are a better judge of their
19 own best economic interest than outsiders?
20 MR. HERNSTADT: Objection to the
21 question as being ridiculous. But go ahead.
22 MR. SIMS: I would say it is a central
23 issue here.
24 A. I would say, what I have seen of so
25 many American organizations, they don't understand
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2 what is in their best interests. AT&T in fact is
3 notorious for not having gotten it right. Look how
4 they broke themselves up. You are picking on --
5 you are picking on a -- don't say AT&T, maybe
6 Microsoft understands their own interest, but AT&T
7 does not. That is the problem with AT&T.
8 Q. The question I asked was, whether
9 complex business organizations such as large
10 corporations in more than day American, generally
11 are better judges of their economic self interest
12 than consumers of their products?
13 MR. HERNSTADT: Objection to everything
14 about that question.
15 A. I can't guess on that one.
16 Q. Did AT&T and by that I mean to include
17 Bell Labs, invest in the security of the revenue
18 streams associated with the operation of the pay
19 telephones that they deployed.
20 MR. HERNSTADT: Objection to the form of
21 the question, unbelievably vague.
22 A. What I think you mean, was there some
23 kind of investment in policing, in the loosest
24 sense of the word of policing.
25 Q. Was there an investment in the physical
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2 security of the coin box?
3 A. Yes. I believe there was.
4 Q. Was the coin box to the best of your
5 recollection opened for individuals to pull money
6 out of?
7 A. I am quite sure it was not.
8 Q. Was there investment in some level of
9 assurance that people who were promising to pay,
10 would in fact pay?
11 MR. HERNSTADT: Objection to form.
12 A. I believe that people who used the
13 telephone either dropped the coins in the box or
14 paid for phone calls by credit card, collect, or
15 collect calls or third-party. And in each of those
16 cases I think there was an implied contract that
17 people were going to pay.
18 Q. Was there investment made in deterring
19 theft of phone service?
20 MR. HERNSTADT: How much further are you
21 going to go with this, you are going to --
22 MR. SIMS: Ten minutes.
23 MR. HERNSTADT: You are asking about
24 what Bell Labs did in 1984 to 199 --
25 MR. SIMS: I think the witness'
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2 declaration as I understand it is attempting
3 to say that the motion picture industry is
4 not entitled to what the phone company is
5 entitled to. I think I am entitled --
6 MR. HERNSTADT: Ask him if that is
7 what he said. It is not in the declaration
8 at all.
9 MR. SIMS: You want to take his
10 deposition when I am done, you may try.
11 MR. HERNSTADT: I will let this go a
12 little further, but it is so completely
13 irrelevant to this case what Bell was doing
14 in '81 to '94 --
15 MR. SIMS: I think there is a question
16 on the record.
17 (Record read.)
18 A. Yes.
19 Q. Do you think it was economically
20 rational to make that investment, as an economist?
21 A. Based on my surmise, yes, I think it was
22 rational. On a surmise, not as an economist, on a
23 surmise.
24 Q. When AT&T deployed its resources to
25 deter and defeat piracy of pay phone service, did
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2 they consider the costs to the pirate --
3 MR. HERNSTADT: Objection to form --
4 Q. -- in proceeding along that course?
5 MR. HERNSTADT: Objection to form.
6 Assumes facts not in evidence.
7 A. I have no idea.
8 Q. What is the relationship of the
9 statement you make in paragraph 6 to the issues in
10 this case, as you understand it?
11 MR. HERNSTADT: Hold on a second. I
12 would like to take a look at paragraph 6
13 again, okay.
14 A. I think that some suggestion has been
15 made that the DeCSS technology facilitates piracy
16 and I think any time a charge like that is aired,
17 the next logical step is to figure out exactly how
18 that piracy is going to be done and what kind of
19 materials are going to be used to make -- to use
20 the appointed method to make the illegal copies.
21 So what I want to do here would be to go
22 through and say, well, just, what, you know, take
23 me through the steps here. What I would say to
24 myself, take me through the steps, Mr. Einhorn, of
25 how you get from this charge that there is a
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2 possibility hypothetical possibility of piracy and
3 how you get there from that position at alpha over
4 to the omega that says this poses a realistic, and
5 I emphasize that word, realistic piracy threat.
6 Q. Have you made any study with respect to
7 whether the availability of DeCSS on the
8 plaintiff's web-site or its availability through
9 the plaintiff's web-site --
10 MR. HERNSTADT: You mean plaintiffs or
11 defendants?
12 MR. HERNSTADT: Defendants.
13 Q. Have you made any study as to
14 the connection, if any, between the availability of
15 the DeCSS on or through defendant's web-sites,
16 whether it could or has led to the copying without
17 consent of encrypted motion pictures on DVD?
18 MR. HERNSTADT: Objection to form.
19 Facts not in evidence.
20 A. I have made no study of consumer
21 behavior.
22 Q. Have you used DeCSS?
23 A. Never.
24 Q. Have you downloaded it?
25 A. No.
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1 Einhorn
2 Q. Why not?
3 MR. HERNSTADT: Objection to the form.
4 A. I don't have a DVD player yet. I
5 don't have a DVD player. It would serve me no
6 purpose.
7 Q. Does your background and training and
8 experience as an economist provide you with the
9 means of assessing the likelihood that the
10 availability of DeCSS on or through defendant's
11 web-site will lead to the copying of plaintiff's
12 motion pictures from encrypted DVD?
13 MR. HERNSTADT: Objection.
14 A. I don't think my ability as an
15 economist helps me at all. If I may go further
16 here, what I mean by that is I must, as I
17 understand the question, there are a number of
18 different costs and technologies that I have to
19 understand that do not come from the realm of
20 economics; that economists are not academically
21 trained to understand, and it is from this realm of
22 shall we call it telecommunications science that
23 the answers may lie.
24 I can review what telecommunications
25 folks may say and form my opinion based on what
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2 they say.
3 Q. Focussing for a moment on paragraph 6 of
4 your declaration, do you know whether when Bell
5 Labs was assessing the threat of theft of pay
6 telephone service, they associated the cost of the
7 pirate as well as alternative technologies at the
8 pirates disposal?
9 MR. HERNSTADT: Objection to form.
10 A. I worked as an economist at Bell Labs.
11 I didn't see any of this sort of administrative
12 stuff.
13 Q. Is it your view as an economist that
14 AT&T could not properly assess the threat of piracy
15 for its pay telephone system without considering
16 the associated costs to those who they thought
17 might steal their service?
18 MR. HERNSTADT: Objection to the
19 question. You may answer.
20 A. I don't know a thing about it. I
21 didn't come near that end of the business.
22 Q. Is it your view as an economist that it
23 would have been irrational for them to take action
24 and make investments to deter phone service theft
25 without considering the associated costs to the
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1 Einhorn
2 pirate as well as alternative technologies at the
3 pirates disposal?
4 MR. HERNSTADT: Objection. No
5 foundation. You may answer if you can.
6 A. Given my very limited understanding of
7 how I understand this kind of, this issue. The
8 nature of pay telecommunications is such that there
9 are no really good, or there were no really good
10 pay telephone technologies to pay telephone piracy,
11 and that therefore such a determination would have
12 been what a mathematician may call a null sell.
13 That is to say a pirate who wants to rip
14 off the phone company -- limited understanding
15 here -- would go to the pay telephone, and if he
16 didn't have that, he would be, I think, back then,
17 pretty much out of luck to continue long-term
18 piracy of pay telephones.
19 But again I simply don't know how these,
20 how pirate technologies work, so it is hard to
21 answer.
22 Q. Do you have any expertise with respect
23 to the cost associated with decrypting a DVD with
24 DeCSS?
25 A. Do I have any expertise?
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2 Q. Yes, with respect to that?
3 A. To the cost?
4 Q. Yes?
5 A. No.
6 Q. Do you have any expertise with respect
7 to the cost associated with uploading that
8 decrypted file to the Internet for downloading?
9 A. All the information I have is based
10 on --
11 Q. Things you read?
12 A. Depositions or declarations.
13 Q. So you have no knowledge yourself?
14 A. No.
15 Q. Do you have a knowledge as an economist
16 about the costs associated with downloading a
17 decrypted motion picture which is stored on the
18 Internet in digital form?
19 A. I do not have any personal expertise.
20 Q. I turn your attention to paragraph 8 of
21 your declaration?
22 MR. HERNSTADT: If we can take five --
23 MR. SIMS: Let takes five now.
24 (Recess taken.)
25 Q. What, Mr. Einhorn, does paragraph 8
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2 mean -- what do you mean by paragraph 8, that is
3 the question on the table?
4 MR. HERNSTADT: Objection to form. It
5 means what it says. It says what it says,
6 the words are there, if you would like him
7 to explain it.
8 A. Can I give examples of this?
9 Q. I withdraw the question. In what way
10 are copyright owners compensated in the United
11 States for illegal sales displacement?
12 MR. HERNSTADT: Read that back, please.
13 (Record read.)
14 MR. HERNSTADT: Objection in so far as
15 it calls for legal conclusion.
16 A. I said for legal and illegal sales
17 displacement, I can't distinguish between the two
18 of them. When books and professional journals are
19 sold to libraries, they are made available to
20 libraries at higher prices, including your
21 publisher, Kluwer, will sell them at higher prices
22 to libraries with the understanding that the
23 material inside will be copied by other people.
24 Now, whether the people who do the
25 copying are doing everything in a legal fashion I
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1 Einhorn
2 don't know. But the library implicitly makes the
3 publisher whole by paying a higher price. That is
4 example number 1.
5 Example 2 is video cassettes that are
6 made available to stores like Blockbuster Video and
7 Hollywood video, are made available to these stores
8 at higher prices than they are made available to
9 the consumers who buy them for end use, because it
10 is surely understood that the rental of these
11 cassettes can displace sales, again, through either
12 rentals or illegal copying.
13 And the third example is the case of
14 digital audio recorders back in 1992 which
15 Congress -- which the Recording Industry
16 Association of America contended was going to
17 create copying that was going to displace record
18 sales, and Congress passed a law that said that we
19 will affix taxes on to the recorders and the tapes
20 for the purpose of implicitly covering the defrayed
21 or the forgone lost copyright royalties, and those
22 royalties taxes are put into an account in the U.S.
23 treasury and dispensed by the copyright office
24 under section 1004 of section 10 -- of chapter 10
25 of the title 17.
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2 So those are three examples I think of
3 where technologies that do have the potential of
4 displacing sales through certain kinds of ways,
5 legal or illegal, in some way we make copyright
6 holders whole for their efforts.
7 Q. Is it fair to say that your position is
8 that some copyright owners are compensated for some
9 illegal sales displacement in some circumstances;
10 is that the extent of your position on that point?
11 MR. HERNSTADT: Objection to the form.
12 A. I would have to say I would be a fool
13 if I believed that copyright owners were always
14 compensated for piracy. So I have to say it is
15 some, because if I said all, I would be an idiot.
16 Q. So the statement in the first line of
17 paragraph 8 of your declaration?
18 A. As it stands on the page is a gross
19 overstatement; is that correct?
20 MR. HERNSTADT: Objection to the form.
21 A. I don't know whether it is an
22 overstatement or not, but I would be happy to
23 clarify for you.
24 Q. You don't mean, do you, that copyright
25 owners are compensated for all illegal sales
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2 displacement in the United States?
3 MR. HERNSTADT: Objection to form. I
4 think the thing to do is to read the
5 statement in --
6 MR. SIMS: I am going to ask
7 questions.
8 MR. HERNSTADT: Fine. I will instruct
9 you that you should probably read this into
10 the record as part of your answer, because
11 that question implied something that is not
12 in the document itself.
13 MR. SIMS: Reread the question,
14 please.
15 (Record read.)
16 A. I don't think I ever said that.
17 Q. I am not asking whether you ever said it
18 and I will phrase the question this way, do you
19 agree with me that copyright owners are not
20 compensated for all illegal sales displacement in
21 the United States?
22 A. Yes.
23 MR. SIMS: Let the record show that the
24 witness is nodding to the attorney.
25 A. Yes.
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2 Q. You would agree with me that copyright
3 owners are probably not compensated for most
4 illegal sales displacement in the United States?
5 A. I have no way of knowing.
6 Q. Have you thought at all about what has
7 been happening over the last six months with
8 respect to Napster and --
9 A. Yes.
10 Q. And do you believe for example, that the
11 sound recording companies, record companies, are
12 being compensated for the full amount of illegal
13 sales displacement occurring on Napster?
14 MR. HERNSTADT: Objection to form,
15 assumes a fact not in evidence.
16 A. It is a very difficult question to
17 answer. I will tell you why, because I have to see
18 and I have not seen what is the estimate of sales
19 displacement. Sales have gone down, if -- there
20 are at -- at some point sales have gone down
21 hypothetically from a hundred to something less. I
22 have to see where that displacement is, and I have
23 not. I have not seen the evidence. I have seen
24 stuff on your web-site --
25 MR. HERNSTADT: Specify.
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2 A. Not your web-site, either the RIAA or
3 the Proskauer web-site, from a lady, I forget her
4 name.
5 Q. Hillary Rosen.
6 A. No, a marketing analyst. I forget the
7 name, where she did some research that shows that a
8 good number of people who use Napster in her mind
9 are using it to displace record sales. This seems
10 interesting. I have not yet reviewed Mr. Latanaro
11 or Mr. Fader (phonetic) on their comparable
12 studies. I have seen some studies, some statements
13 from record store owners that purport to show that
14 Napster is displacing their sales of physical
15 records. I think that is bogus.
16 I really have not seen, you know, the
17 bottom line. I have not seen where the
18 displacement is in Napster to understand whether
19 this thing is facilitating net piracy or not. I
20 mean "net" as compared with "gross".
21 Q. You do not presently have the opinion,
22 am I correct, that the music companies have been
23 fully compensated for illegal sales displacement of
24 the recordings in the United States from all
25 causes?
50
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2 MR. HERNSTADT: Object to the form. I
3 did not get the nots, read it back.
4 (Record read.)
5 A. Being familiar as best I can as an
6 economist with the legal structures of copyright, I
7 am going to tell you honestly, I am out on this
8 one. I am a agnostic. I just have not formed --
9 done the work that I need to do.
10 Q. Are you aware that there are areas in
11 the United States and throughout the world where
12 there are unconsented sales of videotapes of
13 plaintiff's films that have been made without their
14 permission?
15 MR. HERNSTADT: Objection to the form.
16 Assumes facts not in evidence.
17 A. I have come across that statement in
18 declarations that I have read in the past week or
19 so, I have never experienced a firsthand
20 activity -- certainly I never bought any, but I
21 never seen it in the market, foreign market.
22 Q. Have you ever seen any on Eighth Avenue
23 near the bus station?
24 A. Frankly, I walk --
25 Q. Video cassettes?
51
1 Einhorn
2 A. Die pay attention. I would be afraid to
3 go near them, because I don't trust the quality.
4 Q. There is a reference in paragraph 8 to
5 the existing rights of consumers, researchers and
6 others, what existing rights are you referring to?
7 A. This is number 8?
8 Q. Yes, the last half line or so of
9 paragraph 8?
10 A. Yes, okay. --
11 MR. HERNSTADT: Objection to the form of
12 the question. He.
13 MR. SIMS: I was asking what he was
14 referring to.
15 A. For one thing, regarding consumer
16 rights, we are talking here about what I will call
17 first use rights; once I buy a piece of property,
18 it is my property, and how I use, how I choose to
19 dispose of that is usually something that the
20 copyright law allows me to do in my own personal
21 way, up to and including the point of being allowed
22 to resell.
23 My records -- despite the fact that that
24 resale may indeed displace the sale of a new copy,
25 and I am legally empowered to do that because there
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2 are certain rights that I have in my embedded
3 property that the law upholds. That is what I am
4 talking about with consumers.
5 With researchers is the right of
6 computer scientists to work on open source code in
7 a way that will advance their profession, both as a
8 very narrow and technical profession, but also I
9 hope will enable the open source systems to become
10 increasingly deployable on PCs throughout the
11 world.
12 So I am talking here about, in specific,
13 the rights to do research on open source software
14 and to enable it to come to higher levels.
15 Q. Do you have an opinion as an economist
16 with respect to whether a system of property rights
17 encourages investment in the development of
18 property?
19 MR. HERNSTADT: Objection to form.
20 A. Property rights encourage investment.
21 Q. And are you familiar with economic
22 papers and analyses with respect to systems in
23 which there are no property rights and whether
24 there is sub optimal investment under those
25 systems?
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2 MR. HERNSTADT: Objection to form.
3 A. I am quite aware of most -- most of my
4 exposure to this issue came through the reading of
5 economic history and one of the reasons why
6 economic historians believe the industrial, one of
7 the reasons why it was possible for the industrial
8 revolution to take off in England, was there
9 because there was a firm system of copyrights.
10 Without having reviewed this issue in
11 any truly scholarly fashion, let me say that I am
12 inclined to agree that you must have a system of
13 property rights to establish the structure on which
14 an economy and go forward to secure for investors
15 the right to appropriate the legitimate profits of
16 their investments.
17 Q. What is the relationship that you see
18 between what you state in paragraph 9 of your
19 declaration and the issues in this lawsuit?
20 A. Okay. Obviously when I talk about
21 legitimate computer scientist in the advancements
22 of their profession, I am talking about the people
23 who work on the open source software movement.
24 That is the legitimate work that I am talking
25 about.
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2 When I say technology policies that
3 require them to apply for licenses, et cetera, what
4 I am talking here, if they have to go to the DVD
5 CCA and get licenses from them to license their
6 work, or license their use of descrambling
7 technology, and if there are restrictions on them
8 sharing results, and if they have to post a
9 liquidated damages clause of one million dollars
10 for any possible violation.
11 I am concerned there that in an open
12 community of researchers where people all chip in
13 their efforts pro bono, I am concerned that that
14 kind of arrangement can have a chilling effect,
15 because there is no one organizational or corporate
16 entity that is able to foot these responsibilities
17 or these tabs.
18 The movement is so open-ended, who could
19 possibly sign a contract -- who could possibly
20 oblige a group of scientist to the acceptance of a
21 liquidated damages clause; who is empowered to make
22 that kind of obligation.
23 Q. Do you know any scientist who want --
24 who is presently engaged in studying or wants to
25 study CSS?
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1 Einhorn
2 A. Yes, by scientist, I mean, maybe I am
3 using the wrong word here, I mean commuter science,
4 not physicist.
5 Q. Can you name one computer scientist who
6 presently wants to study a 40 bit encryption system
7 known as CSS?
8 A. Maybe I am getting something wrong here,
9 but I got the impression that people like Andrew
10 Apple and Chris DiBono and Matt Pavlovich and other
11 people whose -- Edward Felton and other people
12 whose declarations I read were all, and maybe I am
13 showing my lack of understanding of the word
14 computer scientist here, but I thought these guys
15 were -- could all be lumped together to be computer
16 scientists.
17 Q. Do you know, do you have any firsthand
18 knowledge as to whether or not they are engaged or
19 want to be engaged in the study of CSS?
20 A. The only thing that I know of them is
21 their -- is through the declarations.
22 Q. Do you know whether or not a DVD CCA has
23 licensed any consumer electronics or computer
24 companies to manufacture LINUX based DVD players?
25 MR. HERNSTADT: Objection to form.
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1 Einhorn
2 Assumes facts not in evidence.
3 A. I made a phone call about this two
4 days ago, my understanding is that at this point
5 the DVD CCA has not licensed -- I am sorry, they
6 may have licensed one group, they may have licensed
7 a group that has a technology called LS DVD. But
8 my understanding of how far -- that this group has
9 come along is so sketchy, that I don't know if they
10 have a license. I don't if they have gone along
11 any further than just having a license, my
12 understanding is that they barely have anything
13 else organized -- think of certainly indicated that
14 they want a license. Whether they have formally
15 gone ahead and gotten a license, I don't know.
16 Q. You don't know whether anyone has a
17 license?
18 A. I believe that the group that provides
19 LS DVD now has a license.
20 Q. How do you know that or why do you
21 believe that?
22 A. I read it in some declaration that there
23 were two groups, LS DVD and LiViD, and I don't
24 remember which declaration.
25 Q. Do you know whether there are any
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2 companies with the name of Intermedia or Intervideo
3 and Sigma that have obtained licenses for the
4 manufacture of LINUX based DVD players; the
5 question is do you know one way or the other?
6 A. I don't know of the names of any
7 particulars who became licensed.
8 Q. Do you know whether any corporations you
9 referred to groups, do you know whether any
10 business corporations have in fact obtained
11 licenses for the manufacture and production of
12 LINUX based DVD players?
13 A. I have asked if there was a corporation
14 that was behind getting licenses and I was told
15 there was a beard and there was somebody behind and
16 no one knows who it is.
17 Q. Who did you have this conversation with?
18 A. Matt Pavlovich.
19 Q. Who is he?
20 A. He is the -- he has his own organization
21 now called Debian, D-E-B-I-A-N, and his work is
22 involved primarily with bringing a LiViD player to
23 fruition.
24 Q. So other than the conversation you had
25 with Mr. Pavlovich which probably the judge will
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2 consider to be hearsay, do you have any other
3 information about whether or not there is any LINUX
4 based DVD player that has been licensed for
5 manufacture our production?
6 A. The only other thing that I know about
7 LINUX in connection with a license provided by the
8 DVD CCA is through a technology known as LS DVD,
9 and that is where my knowledge stops.
10 I visited the CCA web-site to learn more
11 about it, and they did not list the names of their
12 licensees of the people who now license their
13 technology.
14 Q. Do you know whether any computer
15 scientist has asked the DVD CCA or any other
16 licensing agent or technology owner for permission
17 to undertake research with respect to CSS?
18 MR. HERNSTADT: Read that back, please.
19 Objection to form.
20 (Record read.)
21 A. I don't know to what -- I don't know
22 to the full -- I do not know the interactions
23 between the computer research community and the CCA
24 and what they are --
25 Q. Okay. Focussing on paragraph 11 of your
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2 declaration. If as a result of DeCSS, what you
3 referred to as the open source community, creates a
4 LiViD DVD player that would be freely available to
5 home PCs, what would you expect as an economist the
6 impact of that to be on the market for licensed
7 LINUX DVD players?
8 MR. HERNSTADT: Objection to form.
9 Assumes facts not in evidence.
10 A. It could go either way. It could
11 stimulate demand or it could repress it.
12 Q. If the DVD CCA concluded that the
13 availability of LINUX DVD players freely available
14 to home PCs would be harmful to the market for
15 licensed players, do you have any basis for
16 disagreeing with their conclusion?
17 MR. HERNSTADT: Objection to form.
18 Assumes facts not in evidence. Vague. No
19 foundation. You may answer if you can.
20 A. Yes. I could see reasons -- can I
21 give an example of why --
22 Q. Can you read the question again, please.
23 The question was whether you can see reasons. The
24 question is whether you have information at present
25 to believe their judgement is incorrect?
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2 A. Yes, I do.
3 Q. Please provide me the information you
4 have?
5 A. We are talking here about a licensed DVD
6 player, okay --
7 Q. The question is -- we got here when I
8 asked you whether the availability of an unlicensed
9 LINUX DVD player, what effect that would have on
10 the market for licensed LINUX DVD players; you said
11 you couldn't tell, you were agnostic on that?
12 A. Yes.
13 Q. My question is if the DVD CCA is not
14 agnostic, if they have a judgment that it would be
15 harmful to the market for licensed players, what
16 information do you have that their judgment of
17 their interest is wrong?
18 MR. HERNSTADT: Objection. Not in
19 evidence.
20 A. The information that I have is my
21 judgment as an economist, and the capacity for
22 economists sometimes to perceive effects that other
23 people don't perceive. We like to think of the
24 world as being myopic. And I think people who --
25 if they were to make, assert that position, they
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2 perhaps would be myopic. Let me explain to you
3 why.
4 DVD players will be sold only insofar as
5 there are DVDs out there that can be used, and the
6 more DVDs that are out there, the more likely it is
7 that people will buy DVD players. The only reason
8 why you buy a player is to get your hands on the
9 DVD. So, how do I imagine this; if I had a world
10 where you had DVD players sold only by licensed
11 corporations, and these were fairly -- perhaps very
12 good machines, but fairly expensive. A very small
13 fraction of the population may buy them.
14 They may be great machines, but so
15 expensive that we may find that the DVD industry is
16 not taking off. Like Apple software not taking off
17 because they don't have the base of technology that
18 wants to use it.
19 Enter the LiViD player available for
20 free, available to people like me who wouldn't want
21 to spend a lot of money for a DVD, but might
22 download it for a cheap price. Once you have this
23 thing built out and you got penetration conceivably
24 across 100 percent of the households that have a
25 computer, if it is free, then you got a base of
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2 people who will use DVDs and you have widened, if
3 you will, the operating system.
4 Once that operating system is widened,
5 you have what are called network effects. People
6 that make DVDs can build for the bigger operating
7 system. This could be wonderful for the LS DVD
8 business, particularly if they make a better
9 player, because then they are going to get the
10 build out from the cheap's like me, but still have
11 the high end folks who are going to run to them,
12 and more likely to buy from them because the DVDs
13 are out there.
14 Q. What in your judgment is the
15 relationship between the statement you make in
16 paragraph 12 and the claims and defenses in this
17 lawsuit?
18 MR. HERNSTADT: Objection to form.
19 A. LINUX is an operating system. It is
20 an open source operating system. It is an
21 operating system that has swept over the low end
22 server market in the past two to three years and is
23 now making its way into hand held devices as well.
24 Major problem, it ain't making it on the home PC
25 right now as I estimate it. Maybe 4 or 5 percent,
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2 no more, of Intel powered PCs are on the LINUX
3 operating system.
4 You know, personally, the thought that
5 we will eventually go over to an open source
6 operating system is encouraging, because all
7 programmers can write to it and all software will
8 be compatible with it. So then I ask myself, what
9 do I have to do as an economist to recommend what
10 policy steps are necessary to make this operating
11 system more prevalent in American homes.
12 One thing that I would like to do is do
13 exactly what the U.S. Department of Justice is
14 doing, to work on those strategies used by the
15 monopolist here to illegally protect its power.
16 But there is something else that I want to do; that
17 is make it possible for the LINUX operating system
18 to be viable in the minds of most consumers.
19 If LINUX is going to survive in the
20 consumer market it has to have software
21 applications written to it. One of the reasons why
22 MacIntosh doesn't do as well as Windows, it is a
23 superior operating system, but it doesn't have the
24 software applications written to it that Windows
25 does.
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2 So I regard the LINUX DVD or the LiViD
3 DVD as a very important software application that
4 would enable many consumers to make the jump over
5 from the Windows system to a LINUX system. Let me
6 say it another way. If you didn't have a DVD
7 player that was accessible to them at a low price,
8 I don't see how LINUX would make it into the home
9 PC market if Microsoft has the capacity to provide
10 that very same application.
11 Q. And am I correct that your personal
12 interest in the displacement of some of Microsoft's
13 market share in the home PC market by an open
14 source system underlies your view that it ought to
15 be permissible to decrypt videos that are presently
16 encrypted with CSS, and play them eventually on
17 LINUX based machines?
18 MR. HERNSTADT: Objection to form.
19 Refers to statements and facts not in
20 evidence, he has expressed no personal
21 view --
22 A. No way. This requires us backing up
23 considerably more than looking at this as an
24 antitrust issue, this point that I made is, can be
25 explored here, but there are a lot of other things
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2 that I would have to consider first that are
3 fundamentally, fundamentally part of economic
4 analysis, as I put in the first part of my
5 declaration, that have to be considered long before
6 we jump to point 12.
7 This is something that can be considered
8 at the end, but I would certainly not suggest that
9 a system -- hypothetically, if there were a system
10 that out and out displaced sales of Hollywood
11 movies, and profited illegal pirates, if there were
12 such a system and if that could be shown somehow to
13 hurt Microsoft, I would be on your side, and say
14 let -- we are going to have let Microsoft off the
15 hook here, I cannot advocate this policy solely as
16 way of taming, the, as a means of taming Microsoft,
17 we would have to rely upon other legal matters in
18 which to do it.
19 Q. Would you agree that there is some
20 relationship between the availability of decrypted
21 digital motion pictures on the Internet and the
22 revenues that plaintiff's can obtain from their
23 motion pictures?
24 MR. HERNSTADT: Objection to form.
25 Vague.
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2 A. Theoretical relationship or empirical
3 relationship.
4 Q. First theoretical?
5 A. I can imagine in a world, sometime out
6 there, I can imagine this, a state maybe 20 years
7 from now, 30 years from now, where it is
8 conceivable that movies can be pirated in some
9 means, and that piracy will -- could hurt movie
10 studios. Whether that form of piracy -- well, I
11 will call it high tech piracy.
12 That certainly is imaginable. But at
13 the present, seeing the numbers that I have seen in
14 front of me, admittedly as an economist and not as
15 a telecommunications engineer, I don't see how it
16 is possible.
17 Q. Let me restate the question. Because I
18 don't think I got an answer to it. Do you believe
19 as an economist based on your experience that there
20 is a relationship between the availability of a
21 film in a decrypted form on the Internet, available
22 for downloading, and the revenues that the
23 copyright owner can obtain for that film?
24 MR. HERNSTADT: Objection to the
25 question, incomplete hypothetical and vague.
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2 A. There is no relationship that I have
3 ever observed here.
4 Q. What does economic theory as you
5 understand it posit about whether or not the
6 availability of a free good has an effect on the
7 revenues that a proprietor will obtain for sales of
8 the goods?
9 A. Well, I will answer that question.
10 Economic theory says --
11 Q. That is the question that I have been
12 posing for five minutes?
13 A. Economic theory says that if there is a
14 free good that is made available to consumers, that
15 free good may attract sales away from people who
16 would otherwise buy the more expensive good.
17 Q. And for a good that is made available
18 not only through sales, but in various ways,
19 through rentals, licenses, sales, other means as
20 well, does the relationship still hold true, namely
21 that the availability of a free good will have an
22 adverse impact on the total revenues that could be
23 obtained in the various ways that the copyright or
24 property owner obtains them?
25 MR. HERNSTADT: Objection to the form.
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2 Misstates the testimony.
3 A. You got to distinct between having a
4 bad effect on revenues and displacement of sales.
5 Q. I didn't asked about displacement?
6 MR. HERNSTADT: You asked a question,
7 putting words into his mouth he did not
8 utter.
9 MR. SIMS: I asked a question.
10 MR. HERNSTADT: You said --
11 A. It may hurt revenues and it may help
12 revenues. I gave you an example I think about 15
13 minutes age regarding the LS DVD of where free
14 goods can sometimes help revenues, and I will
15 reiterate that example.
16 Q. I have not asked for that. I asked as a
17 matter of economic theory, what economic theory
18 teaches about the likely impact of the availability
19 of a free good on the revenues available through
20 exploitation of the good by sale or by license?
21 MR. HERNSTADT: Is this a question on
22 economic theory?
23 MR. SIMS: Yes.
24 A. I will generally answer your question.
25 I will generally say that economic theory will say
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2 that free goods may either hurt or harm -- either
3 harm or benefit certain companies that sell other
4 goods that are roughly in the same market. There
5 can be sales displacement; there can be economic
6 harm; there also can be under some instances
7 economic gain for the parties who are purportedly
8 displaced. They still may be better off in the
9 end.
10 Q. Paragraph 13 of your declaration refers
11 to Professor Fisher's declaration. Let me put a
12 document in front of you and ask whether this is
13 the document, I am going to mark this as Einhorn
14 Exhibit 3. Declaration of Franklin M. Fisher.
15 (Einhorn Exhibit 3, declaration of
16 Franklin M. Fisher, marked for
17 identification, as of this date.)
18 Q. Is this the declaration to which you
19 referred in paragraph 15 of your declaration?
20 A. This is the declaration.
21 Q. Why don't you direct me, if you would,
22 to statements made by Mr. Fisher, professor Fisher
23 which you believe to lack awareness of some
24 fundamentally technology and copy institutions?
25 A. I found those more in his deposition.
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2 Q. Are there any in the declaration that
3 you found --
4 MR. HERNSTADT: Take your time and go
5 through the declaration and tell us when you
6 find one.
7 A. Let me first focus on the declaration.
8 Q. Okay?
9 A. Professor Fisher's declaration
10 fundamentally sets out that if a good is available
11 for free, it will hurt -- displace sales and
12 provide harm -- or harm people who would otherwise
13 have made that good available at a positive price.
14 This is generally very quite often true.
15 But ignores the possibility of the network effects
16 that I described that involve the interrelationship
17 between DVD players and DVD movies. Remember that
18 by giving away the player, you do not necessarily
19 harm the people who sell the movies. And by
20 enabling the player to -- by maximizing the base of
21 people who have DVD players, you maximize the base
22 of consumers who may use the movie.
23 But he doesn't recognize here, he is
24 talking about certain products, but fails to make
25 the extension to the kind of market that we are
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2 dealing with where you have a two part process, a
3 player and the movie. Once you deal with two
4 goods, razor blades and racers and camera and film,
5 the analysis gets tougher than merely suggesting,
6 give the stuff away for free and you are going to
7 hurt people, you are going to hurt the sellers.
8 Wonderful example from telephone. For
9 the longest time AT&T, my old company, put
10 telephones into people's houses at a reduced price.
11 They charge for the telephone less than the cost to
12 provide service. That is to say the cost of them
13 stringing in the wire, they took a loss. They took
14 a loss on the phone. But they took a loss because
15 they knew they were going to make it back in
16 telephone calls. And the same way by reducing the
17 price of one product, we may establish the economic
18 base for other products to come in for higher
19 revenues. He doesn't get into that full analysis
20 of the problem.
21 Q. Is there any statement in here that you
22 think is incorrect, or he doesn't address things
23 that you --
24 A. I said sketchy. I didn't say that he
25 was incorrect here. The only thing that I thought
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2 was possibly incorrect in the literal sense of the
3 board, is I don't think professor Kurlantzick,
4 number 6, professor says that -- Professor
5 Kurlantzick claims three things. My reading of the
6 Kurlantzick declaration only confirms I think that
7 Professor Kurlantzick only believes one thing.
8 That is the middle one, concludes that persons who
9 may get such material at little or no cost would
10 not necessarily have purchased the legitimate
11 product at a higher cost.
12 I don't think anything else in here is
13 factual incorrect, I think I used the word, I am
14 sure I used the word sketchy. Sketchy meaning it
15 is impressionistic, it is catchers catch can, but
16 doesn't go through the requisite analysis that I
17 would have used here on the problem. The other
18 thing that we, I also see here is a difficulty, is
19 while he does talk of this effect, he has not
20 related this to the problem at hand.
21 He has talked about the piracy, and what
22 piracy and what low prices can do, but has not
23 established in my mind a very clear connection
24 between the particular matter at hand, DeCSS and
25 the piracy issues that it poses, vis a vis piracy
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2 in general. It would be -- people like who would
3 analogize MP3 and Napster and try to draw their
4 assessments of one technology based on their
5 assessments of the other.
6 You can establish this theory of piracy,
7 but then at some point you got to go in and apply
8 it to the particular market at hand here and the
9 particular market at hand here is a far more
10 complex market than the kind of market that says
11 push down the price of one good and you harm
12 everybody else that has the copyright.
13 Q. Do you think it is economically rational
14 to try to secure intellectual property against
15 widespread digital copying?
16 MR. HERNSTADT: Objection to the form of
17 the question. Lack of foundation. You may
18 answer if you understand what he is saying.
19 A. It would be economically rational
20 to -- sure, it would be certainly rational to worry
21 about it, sure.
22 Q. And are you aware that plaintiffs began
23 marketing motion pictures on DVDs in an encrypted
24 form sometime within the last five years?
25 A. Yes, I believe that to be correct.
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2 Q. And as an economist, what do you expect
3 would have been the -- strike that.
4 As an economist, what do you expect
5 would be the impact on their ability to collect
6 revenues for their films made available on DVDs if
7 those DVDs had no encryption capability.
8 MR. HERNSTADT: Objection to form. Lack
9 of foundation, you may answer if you can.
10 A. I can't, because do you make the
11 pirated stuff available over the Internet. Do you
12 make it available -- where do you make it
13 available. Do you sell it on the street.
14 Q. The question I asked was, if the motion
15 picture companies had released DVDs without any
16 encryption, what as an economist do you think the
17 impact of that would be on their long-term ability
18 to collect revenues?
19 A. That would probably hurt them.
20 Q. How would it hurt them?
21 A. I said probably hurt them.
22 Q. How would it probably hurt them; what as
23 an economist are the reasons that lead you to
24 believe that would probably hurt them?
25 A. There would be two effects that would
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2 take place. One of which is that people would make
3 copies of popular movies and sell them illegally to
4 others who would willingly buy them. And for every
5 such sale there might be, not necessarily will be,
6 but might be a displacement of an original copy,
7 and I say because, because if the original was $25
8 and the replacement is $5, if I buy the replacement
9 it doesn't mean that I would have bought the
10 original at 25.
11 So I say there might be a displacement
12 of original copy, if there is a kind of person that
13 is going to buy it originally, but gets the pirated
14 good.
15 Q. Does economic doctrine suggest to you
16 that there would also be a displacement of some
17 theatrical revenue?
18 A. Yes, but I have not have not finished my
19 point on the other side.
20 Q. Yes?
21 A. The other side is that DVD are a new
22 industry, just taking off, and one of the things
23 that really matters to someone who is selling DVDs
24 is to have the base of appliances out there that
25 use DVDs. Now, my bet is that some fraction of
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2 DVDs were available hypothetically at 5 or $6,
3 pirated admittedly, what that would do is encourage
4 sales and what some people would do, is more people
5 might buy DVD players.
6 So in the end what you may see is a
7 displacement of specific sales in some movies, but
8 simultaneously a more rapid build out of the DVD
9 infrastructure and conceivably for all the movies
10 that you can't buy on the corner of 42nd and
11 eighth, conceivably you will have other people who
12 will buy other movies from Hollywood because they
13 have a DVD player.
14 MR. HERNSTADT: Can we take five
15 minutes. Off the record.
16 (Recess taken.)
17 Q. Do you have an opinion as an economist
18 as to whether the ability of plaintiffs to recover
19 revenues for their works are at greater risk if
20 digital copying is practicable than they were
21 earlier when only VHS copying -- when VHS copying
22 was the only mode of duplication of their works?
23 MR. HERNSTADT: Objection to form. Lack
24 of foundation. Assumes facts not in
25 evidence, you may answer.
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2 A. When you say more at risk, you mean
3 the likelihood of a published unit is more likely
4 to be copied in a digital regime.
5 Q. No, the question is whether the
6 availability of -- let me rephrase the question.
7 Does the -- does the -- do you have an opinion as
8 an economist whether the introduction of
9 plaintiff's motion pictures in digital form poses
10 additional risk to their ability to exploit their
11 property that did not exist before the availability
12 of those films in digital form?
13 MR. HERNSTADT: Same objection.
14 A. At this point digital copying poses
15 less of a risk.
16 Q. Let me restate the question, because I
17 don't think I have gotten an answer to it.
18 The question is whether once digital
19 technology became available and plaintiff's
20 distributed their films in digital format, whether
21 that carried additional risks that they didn't
22 theretofore face.
23 MR. HERNSTADT: Same objection.
24 A. Yes. I believe there are additional
25 risks.
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2 Q. Thank you?
3 A. Associated with digital technology, yes.
4 Q. And do you believe it is rational for
5 them to seek technological means to protect against
6 those risk and reduce those risk?
7 MR. HERNSTADT: Objection, his opinion
8 as an economist.
9 MR. SIMS: Yes.
10 A. It is rational.
11 Q. Do you understand what property rights
12 are?
13 A. Yes.
14 Q. From the point of view of economic
15 theory, not legal?
16 A. Yes.
17 Q. Is it fair to say that from the point of
18 view of economic theory, that section 1201 to 1203
19 of the DMCA, give the plaintiffs, among others,
20 property rights with respect to the ability to
21 deploy digital films in an encrypted mode?
22 MR. HERNSTADT: Objection to the form of
23 the question. Particularly since he said he
24 only read 1201, I am going to direct
25 Dr. Einhorn not to answer if the only answer
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2 is a legal interpretation of the statute.
3 Otherwise you --
4 MR. SIMS: I asked him from the point
5 of view of economic --
6 MR. HERNSTADT: You said is there some
7 kind of economic conclusion that he can draw
8 from the statute.
9 A. I don't know whether section 1201
10 defines property rights.
11 Q. Have you read section 1203?
12 A. No. I read 1201 and 1202.
13 Q. From the point of view of economic
14 theory would a rule that said that someone who
15 removed the technological protection that a content
16 owner had protected their digital content with,
17 could be sued for an injunction or damages, would
18 such a rule provide a property right to the content
19 owner with respect to the maintenance of the
20 security?
21 MR. HERNSTADT: Objection. Direct you
22 to answer that only insofar as you can put
23 some kind of an economic interpretation on
24 it.
25 A. I am having a real hard time with that
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2 one. There is a right there. I don't know if I
3 would call it a property right.
4 Q. What is DeCSS as you understand it?
5 A. DeCSS is -- well, CSS is content
6 scrambling system and DeCSS is an algorithm, if I
7 may use that word, that allows the user to strip
8 the code protection off of a DVD so that the DVD
9 can be used on some system that is not empowered to
10 interact with the code.
11 Q. Assume if you would that DeCSS allows
12 users to decrypt encrypted DVDs and make the
13 digital content available for downloading or
14 replication on to unencrypted DVD; as an economist
15 what do you believe the impact of that would be on
16 plaintiff's revenues in the short-term?
17 MR. HERNSTADT: Objection to form. That
18 is extremely vague.
19 A. It could go either way.
20 Q. What do you expect the impact would be
21 in the medium-term?
22 A. Either way.
23 Q. Long-term?
24 A. Either way.
25 Q. So that in either the short, medium or
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2 long-term it is as likely as not that there would
3 be an adverse impact on plaintiff's revenues?
4 A. There certainly could. That is
5 certainly conceivable, though arguable.
6 Conceivable.
7 Q. In your reading of the materials in this
8 case, did you come across the concept of regional
9 coding?
10 A. Yes.
11 Q. And do you understand, do you have an
12 understanding what regional coding is?
13 A. I have an understanding of what it is.
14 Q. What is your understanding of it in
15 terms of economic theory and the ability of
16 businesses to --
17 A. I didn't say anything about this in the
18 declaration.
19 MR. HERNSTADT: Objection to form.
20 A. This wasn't in my declaration in any
21 way, shape or form.
22 MR. HERNSTADT: You can answer it if you
23 can.
24 Q. Do you understand from your, based on
25 your knowledge and reading, do you have an
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2 understanding of the economic purpose of regional
3 coding?
4 A. Yes.
5 Q. What is your understanding of the
6 economic purpose of regional coding?
7 A. Regional coding, the reason is to raise
8 the price in different regions of the world to
9 enjoin people from what we will say is low
10 surveillance; from getting their hands in certain
11 places where property rights are -- where piracy is
12 not as well protected against, and charging higher
13 prices for the DVD, with the understanding that
14 these places in the world are, if you will, pirate
15 havens. Where the DVD can be used to make illicit
16 copies.
17 So my understanding of regional coding
18 was that it was designed to price legitimate DVDs
19 higher in parts of the world where copying is
20 easier.
21 Q. From the point of view of economic
22 theory, what would be the practical impact; from
23 the point of view of economic theory as you
24 understand it what would be the impact of the
25 premature availability of a film on the Internet on
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2 an unencrypted form on the motion picture company's
3 ability to extract those higher per unit prices in
4 those foreign countries?
5 MR. HERNSTADT: Objection. Based on
6 facts that are not in evidence. Lack of
7 foundation. Incomplete hypothetical.
8 A. That could go either way. Word gets
9 out, there is a hot film. Hey, did you see it on
10 the Internet, no, I did not. It is coming.
11 Q. Would you agree that the availability of
12 digital motion pictures on the Internet in
13 decrypted form, which can be downloaded without
14 permission or payment, would likely have some
15 adverse impact on the revenues that copyright
16 owners obtained on the world wide web?
17 MR. HERNSTADT: Objection. Lack of
18 foundation, incomplete hypothetical.
19 A. It is conceivable.
20 Q. Do you have a view as to whether it is
21 more or less likely than any other impact?
22 A. No, I don't have a view.
23 MR. HERNSTADT: Same objection.
24 Q. Turn back to Einhorn Exhibit 3, the
25 Fisher declaration?
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1 Einhorn
2 A. Yes.
3 Q. Look if you would at paragraph 9,
4 Professor Fisher's declaration, do you agree with
5 that statement?
6 MR. HERNSTADT: Wait for a second until
7 I get a chance to look at it too.
8 Q. Could you eliminate the word likewise
9 in answering the question.
10 A. Let me give you my --
11 MR. HERNSTADT: Your question is does he
12 agree with that statement.
13 Q. As a matter of economic theory do you
14 agree with the statement made in paragraph 9 of the
15 Fisher declaration that any expectation that the
16 film companies have to develop a legitimate market
17 on the Internet for the delivery of their films
18 will be significantly thwarted by the presence of
19 unauthorized product available at little or no
20 charge to the consumer.
21 MR. HERNSTADT: Objection to form.
22 Lacks foundation. You may answer.
23 A. I rather say could instead of will. I
24 think there is certainly a possibility that is
25 true.
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2 Q. Would you agree that economic theory
3 suggests that there would be an adverse impact?
4 A. Not necessarily.
5 Q. Mr. Einhorn, what are the factors that
6 lead you to say that the availability of films
7 available on the Internet for free or little charge
8 would not impact the motion picture companies
9 ability to develop a legitimate market on the
10 Internet for the delivery of films in which they
11 would charge?
12 MR. HERNSTADT: Objection. Misstates
13 his testimony. I don't think you can answer
14 that question as it is stated. You are
15 asking him to give factors as to an answer
16 that did 23409 give you.
17 MR. SIMS: He said not necessarily. I
18 am asking him what factors lead him to that
19 judgment.
20 MR. HERNSTADT: You can answer that
21 question.
22 A. The factor that leads me to that
23 judgment is my concern right now that nobody in
24 this country has a DVD, very few people in this
25 country have DVD hooked up to computers. Very few
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2 people in this country --
3 Q. Go to the upper westside, every other
4 apartment has two of them?
5 A. We are not talking about the upper
6 westside though. We are talking about a country
7 where 99 percent of the population has 56 kilobit
8 modems --
9 Q. What information do you have on the
10 percentage of computers sold by Compac or Dell or
11 anybody else that have or lack DVD players; do you
12 have any information about that?
13 A. No. Now, in answer to your first
14 question -- repeat that first question.
15 MR. HERNSTADT: The factors that lead
16 you to say not necessarily.
17 A. The issue here is that a certain
18 number -- you want to have a base of people who use
19 DVDs, and that base obliges them to buy DVD
20 players. The decision to buy a player depends in
21 large part on how many DVDs you can buy with it or
22 you can use with it. If it is the case that all
23 DVDs are priced conceivably at $30 a DVD, and that
24 only those people -- some people buy DVD players to
25 enable them to buy DVDs at $30. It is conceivable
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2 that the network of DVD users will not build out in
3 the manner that it might build out if certain DVDs
4 were available for some people at lower prices.
5 Q. Mr. Einhorn, the answer you have just
6 given me focuses on the -- I suppose on the total
7 revenues of any given motion picture company rather
8 than on the revenues for any one motion picture; is
9 that correct?
10 MR. HERNSTADT: Objection to the form of
11 the question.
12 A. Yes. I think that the revenues might
13 wash each other out. But when I talk about total
14 DVDs, I am talking about -- I would suspect that
15 people who have DVDs are equally willing to get
16 their hands on any popular movie from any studio.
17 Q. Let's focus for a moment on any one DVD,
18 let's call it the Matrix. The question is does
19 the --
20 MR. HERNSTADT: Are you going to provide
21 us with copies of the Matrix now?
22 MR. SIMS: No.
23 Q. From the point of view of economic
24 theory, would the availability of unauthorized
25 copies of the Matrix on the Internet in decrypted
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2 form likely have an adverse impact on the ability
3 of its owner to realize profits if it wanted to get
4 into the business of digitally making the Matrix
5 available?
6 MR. HERNSTADT: Objection to the form of
7 the.
8 Q. Over the Internet.
9 MR. HERNSTADT: Compound, facts not in
10 evidence, incomplete hypothetical. You may
11 answer.
12 A. I am inclined to think that the
13 Matrix, which is a blockbuster movie, it would
14 be -- sales would be displaced on the Internet, and
15 I am inclined to think that if digital pirated
16 material were made available the box office
17 revenues of the Matrix and conceivably the VCR,
18 conceivably the VCR revenues on the Matrix, but
19 more so the box office would probably be hurt.
20 There would be a displacement there on
21 any one movie of a blockbuster nature. I would be
22 concerned if there were a successful pirated
23 digital technology, I would be concerned about
24 that.
25 MR. SIMS: Nothing further.
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2 EXAMINATION BY
3 MR. HERNSTADT:
4 MR. HERNSTADT: Read back the question
5 that I marked:
6 (The following section was read.)
7 Q. Have you done any research into the
8 harm, if any, that would befall owners from the
9 widespread copy of their works.
10 MR. HERNSTADT: Objection to form.
11 Overbroad. You can answer if you can.
12 Q. Read back the question.
13 (Record read.)
14 A. No, I have not.
15 Q. Have you done any research into the
16 problems of free riding?
17 MR. HERNSTADT: Objection to form.
18 A. I am sorry, when you say --
19 Q. Are you aware of a concept economists
20 use and refer to, namely the problem of free
21 riders?
22 A. Yes.
23 Q. Have you undertaken any research or
24 study in connection with the problems of free
25 riding or free riders in various industries?
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2 MR. HERNSTADT: Objection to form.
3 A. I have not published a paper. I have
4 not written a paper, this is certainly something
5 that I would have, that I thought about, and talked
6 about with people, but never sat down to do a
7 formal piece of research -- may I go back to the
8 previous question regarding the copy.
9 Q. When I am done your counsel can ask any
10 questions he wants to ask?
11 (End of quoted section).
12 Q. Dr. Einhorn, the question was just read
13 to you. Is there anything that you want to add to
14 the answer?
15 A. Yes. Let me be more precise about the
16 word research. I have never published a paper. I
17 have never written a draft of a paper submitted for
18 publication on the topic. I have discussed these
19 matters in some way other than an informal chat,
20 where certain ideas were thrown about and where I
21 did read articles. But never went to the point of
22 actually writing anything up.
23 So it is usually -- usually people think
24 in academics as research when you put your pen to
25 the pad. In that respect I never wrote anything on
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2 the issue that was posed. I certainly talked about
3 it in more than just an informal lunch time
4 conversation.
5 EXAMINATION BY
6 MR. SIMS:
7 Q. You never presented a paper?
8 A. On the harm done to copyright owners?
9 Q. Yes.
10 A. No.
11 Q. Have you been on any panels or
12 symposiums dealing with the subject of --
13 A. There is no symposium that I have been
14 on that has examined the harm done to copyright
15 owners by copyright infringement.
16 Q. You never performed any calculations or
17 graphs on the subject?
18 A. What I have done is written some work on
19 the Digital Millennium Copyright Act, section 114,
20 which assessed the affects of various copyright
21 rules. But I have never made any kinds of
22 calculations on the effects of illegal -- on the
23 effects of illegal piracy.
24 Q. Did the writing that you just relate to
25 relate to 112?
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2 A. No, 114.
3 MR. SIMS: Nothing further.
4 MR. HERNSTADT: One last question.
5 Two last questions.
6 EXAMINATION BY
7 MR. HERNSTADT:
8 Q. Did you read the deposition of Lou
9 Kurlantzick?
10 A. Yes.
11 Q. Do you agree with him?
12 A. He is quite correct --
13 Q. Yes or no, do you agree with what he
14 says?
15 A. I agree, yes.
16 MR. SIMS: You agree with anything that
17 Dr. Kurlantzick said.
18 THE WITNESS: As I understand what he
19 said, is that prices -- that free goods may
20 displace the sale of goods with prices, and
21 there may be more price -- there may be more
22 goods sold at zero price than at a positive
23 price, and that that stimulation should be
24 recognized so that not every sale that is
25 zero priced necessarily equals the sale at a
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2 positive price.
3 MR. SIMS: The deposition is over.
4 (Time noted 6:20 p.m.)
5 ____________________
6 MICHAEL EINHORN
7
8 Subscribed and sworn to before me
9 this ___ day of __________, 2000.
10
11 _________________________________
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3 STATE OF NEW YORK )
4 : ss.
5 COUNTY OF NEW YORK )
6
7 I, Philip Rizzuti, a Notary Public
8 within and for the State of New York, do
9 hereby certify:
10 That MICHAEL EINHORN, the witness
11 whose deposition is hereinbefore set forth,
12 was duly sworn by me and that such
13 deposition is a true record of the testimony
14 given by the witness.
15 I further certify that I am not
16 related to any of the parties to this action
17 by blood or marriage, and that I am in no
18 way interested in the outcome of this
19 matter.
20 IN WITNESS WHEREOF, I have hereunto
21 set my hand this 14th day of July, 2000.
22
23 _____________________
24 PHILIP RIZZUTI
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2 --------------------- I N D E X -------------------
3 WITNESS EXAMINATION BY PAGE
4 MICHAEL EINHORN Mr. Sims 5, 91
5 Mr. Hernstadt 89, 92
6
7 --------------- INFORMATION REQUESTS --------------
8 REQUESTS: 18
9
10 ---------------------- EXHIBITS -------------------
11 EINHORN FOR ID.
12 Einhorn Exhibit 1, first eight pages from
13 a book titled Price Caps and Incentive
14 Regulations in Telecommunications 20
15 Einhorn Exhibit 2, declaration of Einhorn 26
16 Einhorn Exhibit 3, declaration of Franklin M.
17 Fisher 69
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