Weekly Update

Resale value

Amazon has never been shy about throwing its weight around in its dealings with content rights owners, as any major publishing house can testify. So when news broke this week that Amazon has been issued a new patent on an electronic marketplace for second-hand digital content it immediately triggered speculation that the world’s largest e-retailer is about to jump feet-first into the highly contentious debate over the right to re-sell used e-books, digital music tracks, and movies.

“News that Amazon has received a patent for the resale of digital goods has justifiably caused a stir in the technology and publishing press,” used-music seller ReDigi said in a statement. “ReDigi believes the Amazon patent is further proof that the secondary market is the future of the digital space and that there is no turning back.”

ReDigi itself is currently embroiled in copyright litigation with Capitol Records (EMI) over the re-sale of iTunes music tracks. According to ReDigi, its cloud-based exchange merely “transfers” files from seller to buyer without creating a new copy, and therefore legally is no different from the physical transfer of a used CD from seller to buyer. It claims its service is protected by the first sale doctrine, which generally permits the legal owner of a copy of a work to dispose of that copy as he or she sees fit, including by resale, rental, loan, or gift.

Capitol maintains ReDigi’s “transfer-only” is bogus and that a copy by any other name is still a copy. And the first sale doctrine doesn’t say anything about the right to make a copy.

Whether Amazon really intends to take on the first sale fight as well remains to be seen. As I noted in a previous post, the system described in Amazon’s patent, need not rely on the first sale doctrine. Instead, it appears to contemplate at least the possibility that the right to re-sell a digital good would be licensed by the copyright owner and reflected in the original price, and that transactions in the secondary market would be monitored and metered:

In [one] implementation, the [Object Move Counter] and [Object Download Counter] may be set to a pre-determined maximum value at initialization, and decremented at each movement or download, respectively. Thus, instead of comparing against a threshold, movement or download is determined to be impermissible when the counter is zero. For example, if the ODC is initialized to one, upon download of the digital object the ODC is decremented to zero, indicating that downloads are no longer permissible. Furthermore, where unlimited movement is permissible until a digital object is downloaded, the OMC may be omitted and the ODC used to determine when a download or movement is impermissible. Taking the example above, if the ODC is greater than zero, moves remain permissible.

Whether content owners would ever actually agree to license something like that is a subject for another day. But the contrast between the ReDigi system and the system described in Amazon’s patent highlights a subtle but potentially crucial question for the future of the used-digital market: On what basis should “used” digital goods be valued relative to their “new” state?

Back in the day, I used to buy a lot of used vinyl records, because I was a student at the time and generally broke and used records were cheaper than new ones. The trade-off was you accepted a certain amount of wear and tear, resulting in a sub-optimal listening experience.

The precise amount of wear and tear, in fact, was crucial to setting the price of a used record. Before you would buy one, you pulled it out of the sleeve, held it up to the light and examined the grooves to determine their condition. You might even haggle with the shop owner to arrive at a better price based on the disc’s condition.

Ordinary supply and demand were also factors. Some titles might be out of print, and no longer available in the new market, leaving the used market as the only option.

Unlike a used vinyl record or a used hard-cover book, or even a used CD or DVD, a “used” digital file is a perfect substitute for a new one. And digital goods never really go “out of print” or become scarce. The price of a “used” iTunes track on ReDigi, therefore, is essentially arbitrary. While ReDigi’s market-making may be legal, it may not be economically rational.

Amazon seems to be contemplating a world in which digital goods retain some measurable residual value — such as finite number of remaining permissible transfers — that could, in principle at least, rationally be assigned a price.

If ReDigi is right, and “the secondary market is the future of the digital space,” figuring out a rational basis for pricing them will be an interesting exercise in economics.