Something that is changing as the media industries shift to distributing products digitally is the means through which media companies make money. Back in the day, companies like music labels and book publishers earned income by selling copies of their products – CDs and books – to the public. These kinds of sales, in the form of pre-recorded videotapes and DVDs, were also one of several different income streams for movie and television studios. As we all know, these industries are shifting to distributing their products electronically. We “buy” songs, movies, and books through iTunes, Apple’s App Store, or Amazon and then download them onto devices such as laptops, tablets, and e-readers. This has, of course, initiated a long series of squabbles about pricing, which has been addressed other places on this blog. However, another important aspect of this shift is that when these companies move to digital, the nature of what they’re selling changes. Most electronic products are licensed, rather than sold outright. And that presents some interesting tensions and conundrums, some of which are highlighted by a recent Supreme Court decision and some recent business moves by Amazon and Apple.
Products that are sold are covered by something called the first sale doctrine. Basically: you bought it, you own it, and you can do what ever you want with it. The seller has no control, and no right to any profit, beyond the first sale of that copy. In the case of a book, for example, you can put it on a shelf and keep it forever, tear it apart for paper mache, give it away, or resell it and keep the money. The recent Court decision in Kirtsaeng vs. John Wiley & Sons illustrates this principle. Basically, the case was about something that a student named Supap Kirtsaeng was doing to help pay for school. Mr. Kirtsaeng’s family was in Thailand. So, he’d have family and friends buy textbooks there, where their price is much lower than in the U.S. and ship them to him in California. He would resell them for more than the purchase price plus shipping, thus ensuring himself a profit, but less than what the books cost in the U.S., thus ensuring a market among cash-strapped U.S. students. (Pricing the same books differently in different markets is called market segmentation. Companies do it because, in some coutries, students can’t afford the U.S. prices. The companies lower the prices to make them competitive in those markets.) According to Eduardo Porter of The New York Times, Kirtsaeng had a successful business model. He reportedly made about $900,000 (¶ 8). The textbook publisher, however, felt that he was infringing on it’s copyright by essentially importing the books without its permisson and undercutting pricing segmentation. The court just ruled that what Kirtsaeng did wasn’t a copyright violation. He and his friends and family bought the books legally in Thailand. They could do what they wanted with them. Although they couldn’t copy the books and sell the copies, they could resell the books in the U.S..
However, when a product is licensed the company that sold it to you and owns the copyright can impose more restrictions on what you can do with that copy. This was perhaps most obvious in the early days of iTunes, when the labels – in an attempt to limit piracy – insisted that their songs be sold with DRM that made it difficult for purchasers to play the music on anything other than a iPod or other Apple product (which had the effect of handing a monopoly on digital music sales to Steve Jobs with a big, shiny bow on top, but that’s a story for another day). Another dramatic example occurred back in 2009 when Amazon discovered that a mistake had been made and that the company that was selling electronic versions of a pair of George Orwell novels through their system didn’t actually have the rights to do so. It deleted the books from the e-readers of the people who had already purchased them. They refunded the money, but it hadn’t really occurred to most users that the company could make something they’d purchased in good faith “disappear” without notice. (And of all the books ever written in all the world, the very last one you’d want to make disappear without notice is 1984.) Amazon has promised not to do this again and today, the restrictions of licensing are often less obtrusive. However, one limitation that is common to most electronic sales is that the first buyer can’t resell them. You can take an old CD you don’t want anymore to a used record shop (if you can find one) and sell it. You can take a textbook that you’re finished with and sell it back to the bookstore. You can’t do this with an electronic version of an album or an e-textbook. (This is, of course, one of the reasons textbook publishers are enthusiastic about e-versions. With paper copies, they make the most money the first year that a book comes out. After that, a goodly portion of the books that are sold are used. Under the first-copy doctrine, the publishers don’t get a cut of any of those sales. But since you can’t sell used versions of electronic textbooks, they get to sell new copies to each crop of students.)
This distinction, however, has recently come into question. Several companies have set up or are working on systems that allow people to re-sell digital goods. An example is an online music store called ReDigi that allows users to buy and sell (legally purchased) music files. They’ve been sued by the music company EMI on the grounds that it infringes on their copyright. The process of trading files the requires that they be copied, which is one fo the things that copyright law generally forbids. The court hasn’t ruled yet, so no one knows whether they’ll be allowed to keep going or not. (In chess, it’s said that a game moves “out of book,” when one of the players tries a move that’s never been recorded before. They’re off the map, out of the box. It’s a phrase and idea I love. In legal terms, that’s where we are with this stuff.)
Even more suggestive is the news that both Apple and Amazon have taken out patents for systems that would allow for the exchange of used digital goods. Music and book publishers, of course, are aghast. History suggests that neither Amazon or Apple care one whit. They could make money by taking a commission from the trade of e-goods, and it would provide another feature to lure consumers into their online eco-systems, contributing to further profits down the road. (Publishers threw a fit when Amazon put in the button to sell used copies of books through their Marketplace right on the page where you could by new ones. Their objections didn’t stop ‘em then and are unlikely to stop ‘em now if Amazon sees a profit in it. Those companies play hardball.) The systems Amazon and Apple have proposed allow for only one copy of any digital file to be in existence at one time, thereby potenitally skirting the objections that EMI raised about ReDigi. Again, it’s unclear whether this is covered under the first sale doctrine or whether it would be considered a copyright violation – we’re out of book. But these companies have both the resources and the chutzpah to try and find out.
If it is found that either ReDigi or the new Apple/Amazon model is legal, we could see a whole new model when it comes to the digital media marketplace.
