The right to resell: a ticking time bomb over digital goods

It’s easy to borrow a book from the library, rent a DVD or sell CDs to a local record store. Why, then, is it so hard to do the same when this content is in digital form? One reason is that laws that govern how we sell our stuff aren’t very compatible with digital content. As awareness of these issues builds, a war is brewing – with retailers and publishers on one side, and libraries, consumers, and startups on the other.

When you purchase a digital music track, e-book, digital movie or other type of downloaded content, you aren’t actually buying it, as you would a printed book or CD.  Instead, you’re licensing it, in the same way that you license software.  This means that you get rights to that content that the publisher defines in a license agreement, instead of those granted to you by copyright law.

Digital content licenses typically give users the right to play or read the content.  But what if you want to sell, lend, or give away your digital files?  Under U.S. copyright law, you’re allowed to do this for physical media products, thanks to a concept called the First Sale doctrine.  First Sale says that the publisher has no control over what you do with a media product once you buy it.  Used bookstores, video rental stores, and libraries all owe their existence to First Sale.

Yet current U.S. legal convention dictates that in most cases, First Sale doesn’t apply to digital files.  Very few publishers or retailers give you the right to transfer your files to others.  As a practical matter, “Digital First Sale” would mean that you could transfer ownership of your files to others legally as long as you delete your own copies – including backups, copies in cloud storage, and so on.  This implies one of two things: either you are trusted to delete their copies, or there must be a robust, legally mandated mechanism that does it automatically.

Digital First Sale: Not Now, Maybe Later

The U.S. Copyright Office wrote a report on Digital First Sale in 2001 that described an automatic “forward-and-delete” mechanism, but it determined that it would not be practical to require this by law, nor should people be trusted to delete all of their copies; therefore it recommended maintaining the status quo.

Why is this issue becoming a big deal now?  One reason, ironically, is that most downloaded music files and some e-books are now DRM-free.  If a digital file is encrypted with DRM, then First Sale is usually a moot point: you send copies of the file to friends, but they can’t use in on their devices.  With DRM-free files, you can send your files to other users, who can play or read them; but the licensing agreements under which you bought them probably forbid this.

Amazon in particular is quite explicit about this.  The Amazon Kindle Store Terms of Use, for example, give you rights to e-books “solely for your personal, non-commercial use” and state that “Kindle Content is licensed, not sold, to you by the Content Provider.”

First Battlefield: Record Labels and Retailers vs. ReDigi

A startup called ReDigi is testing this law by offering a service that allows people to resell “used” digital music files.  Its software includes the type of forward-and-delete function that the Copyright Office contemplated, though it only works with music purchased from iTunes and Amazon.

ReDigi was (unsurprisingly) sued by one of the major record companies, though it has sought to mollify others by offering them a slice of revenue from each transaction.  Yet this puts the company in a strange place: on the one hand, they claim to be enabling a form of First Sale, but on the other hand, they’re undermining the core idea of First Sale by seeking permission from record labels and giving them a piece of the action.

The forces arrayed against ReDigi are formidable.  Digital files are perfect copies: they don’t have scratches, dog-eared pages, or cracked jewel cases.  Retailers don’t want to be undercut by resellers that will force prices down: imagine iTunes’s reaction if “used” files could be sold on eBay.  Publishers don’t want to lose revenue to secondary markets either.  In other words, both the media and content retail industries are dead set against Digital First Sale.

Second Battlefield: Libraries vs. Publishers

The other growing storm over Digital First Sale is library lending of e-books.  Public libraries currently “lend” e-books by distributing them with DRM so that they expire after the libraries’ lending periods.  Yet while First Sale enables libraries to acquire whatever printed titles they want to lend, publishers get to decide which of their titles they will license for e-book lending and on what terms.

One problem with this is that publishers have divergent e-book lending policies.  Macmillan and Simon & Schuster don’t allow e-book lending of their titles at all. HarperCollins provoked outrage from the library community by putting a limit of 26 “lends” on each title, apparently to mimic the shelf life of hardcopy books before they wear out.

The law gives libraries no leverage against publishers in this situation.  Furthermore, libraries are now facing competition from the private sector: for example, Amazon’s(s amzn) Kindle Owners Lending Library (KOLL) allows Amazon Prime members to “borrow” one e-book at a time at no charge.  Availability of e-books through public libraries is likely to deteriorate further into both chaos and irrelevance if nothing is done.

To break the impasse, libraries are pushing for Digital First Sale rights in the law.  Libraries recently joined together with other, better-heeled entities in a lobbying group called the Owners’ Rights Initiative (ORI).  The ORI, which launched back in October, is a “strange bedfellows” coalition of library trade associations, companies such as Chegg (used textbooks) and Redbox (DVD/Blu-ray kiosks) that could expand into resale of digital content, several companies that sell used IT equipment, and last but not least, eBay.  The ORI’s slogan is “You bought it, you own it.”

Digital music resale and library e-book lending are just two of what will undoubtedly be many digital content distribution models that will touch on the issue of Digital First Sale – a law that, like other aspects of copyright, seems increasingly irrelevant as content moves from physical products to formless bits.  As the controversies and lawsuits grow, the inadequacy of the status quo will be increasingly clear.

Bill Rosenblatt is an authority on digital rights management and President of GiantSteps Media Technology Strategies