First sale and digital content

First sale and digital content

Billy Barnes is a JD candidate at the University of Toronto.

Normally when a consumer purchases a copyrighted work embodied in a tangible object (e.g., a book or a CD) they are completely free to lend or resell that object without the permission of the rightsholder. In the United States, this is called the doctrine of first sale and it has been recognized for over a century. Business practices, prices, and consumer expectations all reflect the assumption that sale of a book is just a regular property transaction. This article discusses how this changes when we switch from tangible objects to digital distribution.

Downloading a book for a Kindle or a song from iTunes is not the same as purchasing it in a store. As we all know, what you pay for when you "buy" an electronic book is a limited, non-transferable licence to reproduce and read that book. There are no used e-book stores. Digital content can only be sold by authorized vendors. Of course, some of the characteristics of tangible objects (reselling, lending, gifting) can be emulated by DRM, but for the purpose of this article I will assume that digital content can only be legally consumed by the purchaser. I will also focus on the e-book example even though the same ideas apply to other forms of content.

There are many reasons behind the first sale doctrine; a recent episode of the IP Colloquium lists three. First, it reduces transaction costs by allowing people to lend or resell their tangible objects without the permission of the rightsholder. Without first sale, the purchaser of a textbook would have two choices at the end of a semester: keep the unneeded book, or get permission from the author to resell it. Second, it creates a secondary market where the work can be purchased for less. This allows people who might not otherwise be able to afford the work to purchase it, rent it, or borrow it. It also creates some price competition for the original copies. Third, it helps ensure that works are available from multiple sources and continue to be available even if they have been orphaned.

When applied to digital content, these three reasons may be irrelevant. The transaction costs explanation assumes a tangible object that the consumer will eventually want to dispose of and resources (dead trees) being spent on manufacturing a new object when a perfectly good one is sitting on a shelf somewhere. Neither of these are true of an e-book.

Of course, I left out the primary reason to get rid of old textbooks: money. However, the affordability justification may also be suspect when applied to digital content. One of the reasons textbooks are so expensive is that publishers know that students will resell it at the end of the term. In theory, though, if they could sell the book to each student, they could make more money by charging less. The biggest worry here is the lack of competition. Sticking with the textbook example, students are a captive audience. However, if the profit margin is too high on a product (e.g., a digital textbook that is profitable at $20 being sold for $100) then competition will naturally appear. The IP Colloquium episode discusses the possibility of more targeted pricing in a world without the first sale doctrine. For example, a textbook could be sold at a lower cost to law students than to firms (a low margin sale being better than no sale at all).

The third justification (maintenance of a market) might need to be addressed by orphan works legislation. However, given the ease with which an inventory of digital content can be maintained, there is no need for a book to go "out-of-print". Further, given the variety of e-book formats, it is likely that a book will be sold through multiple distributors (Apple, Amazon, Sony, etc) and unlikely that all of them will go out of business without transferring their licences.

Even though a workable system for distributing digital content could be created without the first sale doctrine, it casts a long shadow. The assumption of the doctrine dictates the environment in which content is currently sold in two important ways: price and consumer expectations. The price of a book, CD, or DVD must cover the potential lost sales to everyone to whom the object is lent. Consumers are used to receiving certain property rights for that price. In a way, these rights are bought back by the publishers when they lower the price for a digital download. At the same time, publishers gain by removing the guess work out of pricing an item: if a publisher guesses a book will be read by four people and sets a $20 price, then they lose if it was read by 5 and they could have sold it to each of them for $5. The first sale rule doesn't make sense in a world of digital downloads, but that shouldn't be a problem once the initial price-setting phase is over.