Secondhand Downloads: will used e-books and digital games be for sale?

By Joshua Brustein, Bloomberg

Should consumers be allowed to resell digital songs, books, or video games once you’re done with your downloads? If it sounds unlikely, just remember that businesses trafficking in second-hand records and books were once considered controversial before society came to accept them as normal—at least up until the Internet undermined the logic of resale. The next several years should be key to whether a similar industry emerges for digital goods.

The issue came up recently while I was reporting a piece about the future of Gamestop, a used video game chain that holds the dubious distinction of being the most-shorted stock in the Standard & Poor’s 500-stock index. One of the reasons for the pessimism is the widespread belief that GameStop will fade away once the industry completes its inevitable transition to digital downloads instead of discs.

Executives at GameStop believe they can change that by inventing a way to sell used version of digital games, and at least one startup is trying to do the same for digital music. But unlike the established economics of secondhand CDs, DVDs, and game discs, the mechanics of selling used digital media are murky at best and not clearly legal. The issue is working its way through the courts and might end up in front of Congress later this year.

The question centers on a part of copyright law known as the first-sale doctrine, an early 20th century provision that prevents rights holders from seeking to stop the sale, trade, or lending of legally acquired property. You can thank first sale for making it legal to run a used record store, found a public library, or lend a DVD to a friend.

In 2011, a startup called ReDigi tested the limits of the law when it launched a service enabling people to resell songs bought through iTunes. Once a song is transferred, usually at a lower price than the original download, the original owner permanently loses access. The proceeds are split between the company that holds the copyright, the person who sold the downloaded song, and ReDigi.

ReDigi makes the same argument for music that GameStop has made when publishers complained about the used video game trade: If people can resell their old media, they will spend the proceeds on new stuff, and everyone ends up better off. By this logic, the unplayed songs in someone’s iTunes library are an untapped hoard of cash waiting to flow into the coffers of record companies.

This is not an argument that has persuaded those who supposedly stand to benefit. A House Judiciary subcommittee held hearings last June on potential reforms to copyright law, and several media companies warned against expanding first-sale doctrine to cover purely digital goods. “Doing so is not only unnecessary, it would radically alter the nature and purpose of the doctrine,” Matthew Glotzer, then a senior vice president of Fox Entertainment Group, told the committee.

The big difference is that digital media items don’t get old. Used books or albums are worth less than new copies because they deteriorate with use, and it takes some effort to pass each copy from person to person. A “used” digital file, though, is exactly as valuable as the original and just as easy to distribute. The U.S. Copyright Office has already recognized that digital goods are fundamentally different from physical ones—first-sale doctrine, it has said, works only because of the specific nature of physical objects.

John Villasenor, a professor of electrical engineering and public policy at University of California, Los Angeles, lays out a scenario in which a short-term online lending library is established for songs. People could share their music collections, and the original owner would lose access whenever someone else listened to any song he contributed. If a million people joined such a service, everyone would probably have access to any song at any time, because there would always be an unused version lying around online. “If this approach were carried to its maximally efficient extreme, a recording artist could only sell a number of copies of a song equal to the maximum number of people listening to it at any one time,” Villasenor told the committee. In effect, this hypothetical lending library would function a lot like the file-sharing service Napster, perhaps the least-popular institution in the history of the music industry.

Capitol Records quickly sued ReDigi for allegedly breaking copyright law, and a 2013 ruling by U.S. District Court Judge Richard Sullivan agreed. In his decision, Sullivan accused ReDigi of ignoring the laws of nature. First-sale doctrine allows people who have purchased a product to distribute it, he wrote, but it doesn’t let them make unauthorized copies. Moving digital files from one person’s computer to another, the judge argued, requires copying: “It is simply impossible that the same ‘material object’ can be transferred over the Internet.” Immediately deleting the original version doesn’t change that.

John Ossenmacher, founder and chief executive of ReDigi, claims that Judge Sullivan doesn’t understand the physics involved. ReDigi, he contends, has actually figured out a way to move physical bits across the Internet. “We came out of MIT, we’re smart guys,” Ossenmacher says. His startup has continued to operate on a small scale since the ruling and plans to appeal once various issues related to the initial case are resolved.

Ossenmacher argues that copyright law already allows a service such as ReDigi—the law doesn’t change just because a company uses a different form of media. He thinks any reform should simply reaffirm that digital media shouldn’t be held to different standards. Puzzling over this question would be a part of any overhaul of the Copyright Act, which some members of Congress have hinted at trying to attempt this year.

But the question of used digital media may become moot before it ever takes hold.

A transaction that looks like the sale of digital books or movies is often, in legal terms, a licensing agreement between a copyright holder and an individual user. Sure, downloading a book on a Kindle feels just like buying a paperback in a bookstore. But the digital transaction deviates from an actual sale and often includes restrictions on how the file can be distributed. Public libraries, for one, have complained that the licensing agreements for digital books make it impossible to operate as they have always done with physical copies.

Sherwin Siy, the vice president of legal affairs for digital consumer advocacy group Public Knowledge, thinks that legislators should establish new rules making it clear that transactions that feel like sales—such as those that include clicking a “buy” button—legally result it the actual transfer of ownership. “The most prominent representation of the transaction should hold,” he told the House committee last June.

Clever legal wrangling aside, the idea of owning the media you consume is being weakened in the digital age. The shift to streaming music and movies and borrowed e-books takes advantage of subscription service models that grant access without ownership for a monthly fee. ReDigi, for example, allows people to sell only songs purchased on iTunes—and song downloads fell 12% in 2014. Streaming music, meanwhile, increased 54 percent as users abandoned iTunes for such services as Spotify, RDio, and Pandora. Netflix is ascendant in video, and services such as Scribd, Oyster, and Kindle Unlimited are trying to offer a Netflix-like experience for books. It’s not clear that the trend away from ownership and toward access through subscription is good for people who write books or sing songs for a living. But it would ease the specific fears concerning the threat of used digital media.

Video games are moving to subscription slower than books, movies, or music. In the meantime, GameStop executives are trying to persuade publishers to cooperate in the development of some version of a used marketplace. Many people are skeptical that the company can make a convincing case to the game publishers. Ossenmacher, who hopes to take ReDigi into used games at some point, isn’t one of them. “Everybody knows that what GameStop created was genius,” he says. “It made gaming affordable to everybody, and I don’t think they want to see that go away.” – BLOOMBERG