Author: David Newhoff

This week, I sat on a panel at Harvard University as part of on-going series of roundtable discussions hosted by the USPTO about a variety of copyright issues in the digital age. The topic of our conversation was whether first sale doctrine ought to be expanded in the digital age. In case you don’t speak lawyer, first sale doctrine has its roots in the 1908 case Bobbs-Merrill v. Strauss, and in simple terms, it set the precedent that allows you to resell a physical copy of a work protected by copyright. In the original case, the publisher of a novel wished to exert control over the price of copies being sold by the retailer. The court found that once the publisher received its initial compensation (i.e. wholesale price) for the books, that it no longer had a copyright interest in the copies sold and, therefore, the retailer had the right to dispose of the goods as it saw fit. Ever since this decision, you and I have been free buy and sell in a secondary market of used books, record albums, DVDs, etc., and that’s been a good thing for all of us and has never harmed the primary market for these works.

Presently, first sale does not apply to content that we obtain strictly via download (e.g. a song from iTunes), although there are certain interests — some altruistic and others opportunistic — who argue that the doctrine ought to be expanded to include these types of files. There are several topics related to the larger question of expansion, but one that came up in discussion at the panel, I thought was worth writing about here; and that is whether most consumers realize that clicking the “Buy” button for digital downloads of music or filmed entertainment doesn’t quite mean what they think it means. When you click “Buy” and download that new album, what you’re actually paying for is a limited license that gives you the right to store and play those files on a limited number of devices. Admittedly, this is a little different from our usual notion of “buying” something, and some members of the panel discussion asked whether any entity has a responsibility to educate the consumer or perhaps change these buttons to reflect the real nature of the transaction.

Maybe.  But here’s the thing…

When we bought CDs or record albums, we bought limited licenses then, too, but we didn’t really think about it in those terms because the limit of the license was tied to the inherent limitation of the physical objects on which the music was recorded. In other words, buy an LP of TRex’s The Slider, and unless you start mass producing bootleg dubs, you’re pretty well limited to listening to the record, giving it to someone, or selling it in a secondary market transaction like a yard sale or eBay. Moreover, even if you made bootleg dubs using older tech like cassette tapes, these would be inferior in quality to the vinyl original. But in a digital file paradigm like we have now, a copy is a clone and not inferior to the source file, and so the rights holder had to come up with a new structure for offering the customer a similar kind of limited license while still providing flexibility. I don’t think consumers have ever been confused that the retail price of an album did not pay for a license to broadcast or redistribute the music in some other form. In that sense, nothing has changed except a licensing structure that coincides with the absence of physical media in these new transactions.

I would argue that flexibility is greater than it ever was (e.g. you can download one song at a time), the purchase price is remarkably cheap, and that we consumers seem to generally like the idea of having music, movies, books, and TV shows at our disposal without the need to install more shelves in our homes. For $1.29 I can listen to a song anywhere in the home or office, on my phone while cycling, in the car, or even copy it legally onto a CD to make a mix for a party.  And even if we only factor for inflation, that $1.29 in pre-Internet dollars is about $2.35, so we’re getting a pretty good deal in terms of access and pricing compared to the days of content distributed solely on physical media.

Tech-utopians like to wave a banner that says “New Tech! New Models!” with regard to content consumption in the digital age, but this restructured licensing relationship between consumer and producer is a new model that maintains the correct relationship between consumer and producer. We’re buying the rights to enjoy and use the works, not the rights to redistribute those works; and given the nature of the technology, one limitation has to include proscribing resale, partly because there is no such thing as a used digital file.  One of the trade-offs we make for better convenience and flexibility with prices as low as they already are, is that we forego the option to sell these files in a secondary market that would actually threaten the primary market. And because this is consistent with where consumer trends are going anyway, the question of educating folks about the “Buy” button may be moot.

iTunes for music makes a good example for discussion, but even that model is already being supplanted by on-demand streaming services like Spotify. Digital downloads are quickly becoming an obsolete notion as consumers, especially younger ones, demonstrate that their interest in “owning” works is dwindling in favor of streaming services supported either by advertising or subscriptions. Netflix for films is looking bright, and we see new services like Oyster, calling itself “Netflix for books.” Industry and policy efforts should be focused on getting the economics right for these models because the natural progression is for the consumer to use the web as a big jukebox. We just have a few kinks to work out with regard to whose feeding quarters into the machine.

The trend we’re likely to see continue will be a bifurcation of consumer consumption in that we’ll stream the lion’s share of what we watch, read, and listen to, but we might simultaneously rekindle or maintain an interest in high-quality physical media for keeping the things we really love on our shelves. I don’t think, for instance, that it’s just a hipster thing to rediscover vinyl for music. Maybe one of them will want to pay a premium for my copy of The Slider, assuming I’m willing to sell it.

FOOD FOR THOUGHT:  Just as an exercise with regard to the economics of digital resale for the consumer, consider the following:   Imagine you consume on the high end of average and that you’ve legally paid for 100 songs a year from iTunes since it launched in 2003. Now you have about 1,100 downloaded songs and you want to shed as many as half of these, which is a high estimate for music you wanted to buy in the first place.  At an average 29 cents per track from a reselling middle-man like a ReDigi, you’d get back about $160 if you sold all 550 tracks. That’s about $14.50 per year since the day you started buying digital downloads, and that recovery is roughly on par with selling that copy of Fifty Shades of Grey at the next yard sale. Now, was it really about getting a quarter for the used book, or did you just want stuff out of the house?