This post is in response to the Kirtsaeng post regarding the first sale doctrine vs. importing copyrighted goods.? It seemed to me, from reading that story, that the first sale doctrine is under attack from lawmakers, who most likely are being lobbied aggressively by copyright owners - heavyweight firms from the music, movie and book industries.? As I describe below, the death of the first sale doctrine is turning into a major victory for content owners, allowing them to freely extract the maximum value from the value chain for copyrighted content, at a loss to consumers.
The First Sale Doctrine
Historically, the first sale doctrine has powered some well-known business plans to great success.? Blockbuster, RedBox, Netflix, and even the venerable public library have depended on this doctrine.? For those not familiar, this doctrine states that the copyright holder loses control over how the consumer uses the goods after the first sale.? The only thing that is forbidden is copying.? So, in effect, you can rent or re-sell a movie or book, but you can?t make copies and do the same.
Blockbuster and Netflix used this doctrine to their advantage, purchasing DVDs at retail prices and renting them many times over.? Because of the content owner?s inability to enforce price discrimination, and charge re-sellers more than end consumers, the owners? rights - and profits - were limited. ?The protection offered by the first sale doctrine effectively gave resellers and re-renters a low fixed cost and unlimited rights to rent copyrighted content for profit.
The Digital Age
Well, along came the digital age, and rampant illegal copying of copyrighted materials.? The music and movie industries took a big hit in sales, and worked hard to counteract the effects.? They invested in Digital Rights Management (DRM) software and hardware, and successfully got the Digital Millennium Copyright Act (DMCA) passed that makes it illegal to circumvent the DRM facilities.? Using these tools to limit the damage done by pirating, content owners began to raise prices to law-abiding consumers in order to make up for losses due to theft.
Back to Netflix.? They originally built their business model on a low, fixed monthly subscription price to view as many DVDs as people could watch and mail back and forth.? Their costs were held in check by a combination of the first sale doctrine and the speed of the U.S. mail.? Once they tried to switch to streaming digital content over the internet, however, these cost caps were no longer effective.? At first, because Netflix was a fledgling company with small market share, content owners allowed them to get reasonable prices for unlimited use of digital content, typically under short-term contracts of 1-3 years.? Once those contracts were up and needed to be renewed, however, the content owners were aware of the potential profits that Netflix could make, and upped the costs of licensing content.? Due to the lack of any legal protection, such as the first sale doctrine, Netflix lost all bargaining power.? Essentially, the content owners appear to have decided to squeeze all the value out of the value chain, and leave Netflix next to nothing.? The image below depicts the change in situation from DVDs by mail to Internet streaming:
A Loophole Closed
One company, named Zediva, tried to use a potential loophole in Copyright law to get around this stranglehold by the content owners, and rescue the effectiveness of the first sale doctrine.? They basically avoided copying content onto their own disk drives, but rather installed computer servers with physical DVDs in them, and streamed the DVD content over the internet.? Their lawyers reasoned that it was akin to a consumer renting a DVD and using the Internet as the playback device and remote control.?? The DVD could only be viewed by one person at a time, and no copies were made of the content.? It seemed like a way to regain the power of the first sale doctrine, except they lost in court when the Motion Picture Association of America (MPAA) sued them, stating:
?Unlike Netflix and other licensed online services, [Zediva's] business is based on infringing Plaintiffs? rights. Defendants transmit performances of Plaintiffs? copyrighted works to members of the public without Plaintiffs? authorization. Defendants thereby infringe Plaintiffs? exclusive rights to perform their works publicly.?
Public Libraries
Sadly, it?s not only profit-oriented firms such as Netflix suffering from this situation; the public library has also taken a tremendous hit as they attempt to keep up with modern times and lend digital books.? Basically, the only way that libraries can lend digital books is through a combination of DRM software from Adobe called Digital Editions (which prevents illegal copying), and the ?kindness? of content owners.? Libraries actually have no legal right to lend the digital books; they sign contracts with content owners that give them this ability.? However, in a now familiar-sounding situation, these contracts are not as low-cost as they used to be, when the first sale doctrine protected their rights to lend the books freely.? Libraries pay up to 300% more for digital rights than physical books, and must renew the contracts periodically or lose their ability to lend the books.
The New World we live in
There are more examples of how the first-sale doctrine is losing its effectiveness due to the digital age: for example, you can?t re-sell software that you have purchased.? What it boils down to is that, with digital content, you no longer ?own? your copy of the content, you are only licensing it.? And licenses have (sometime onerous) terms.? It?s unclear whether there is any rescue of consumer rights in sight, but I doubt it.? Content owners have been lobbying lawmakers aggressively for quite some time, with no sizable counterbalancing force.? What will be interesting to monitor going forward is if law enforcement authorities are successful in reducing illegal pirating of content, and if so, whether that will result in price decreases in legally obtained content.? Such a development would be good for consumers overall, as well as for firms like Netflix, but it remains to be seen of those savings would be passed on to consumers.? It might only serve to fuel bigger profits for content owners, who have suffered in the digital age, and would likely be looking to regain what they have lost.
Opinion
In my opinion, lawmakers need to pass some sort of digital consumer?s rights law to balance out this situation, something that would restore some of the power lost by no longer truly owning copies of copyrighted content.? I believe it?s possible to use the same DRM tools, in concert with digital content laws, to allow consumers to re-sell and re-rent digital media after the first sale.? ?Digital First-Sale Doctrine? anyone?
References
http://en.wikipedia.org/wiki/First-sale_doctrine
http://en.wikipedia.org/wiki/Digital_rights_management
http://en.wikipedia.org/wiki/Digital_Millennium_Copyright_Act
http://abovethecrowd.com/2011/09/18/understanding-why-netflix-changed-pricing/
http://www.wired.com/business/2011/03/zediva/
http://gigaom.com/video/zediva-shut-down/
http://www.thedigitalshift.com/2012/03/ebooks/librarians-feel-sticker-shock-as-price-for-random-house-ebooks-rise-as-much-as-300-percent/
http://www.cnn.com/2012/06/26/tech/web/ebook-lending-pew/index.html
http://freading.com/questions/index
http://www.llrx.com/features/deathcopyrightfirstsale.htm
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