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Saturday, December 20, 2008

"Can I resell my MP3s?": the post-sale life of digital goods

By Nate Anderson

"The Castaway" is not a very good book. Published in 1908, Hallie Ermine Rives' novel opens with these deeply unpromising sentences:

"A cool breeze slipped ahead of the dawn. It blew dim the calm Greek stars, stirred the intricate branches of olive trees inlaid in the rose-pearl facade of sky, bowed the tall, coral-lipped oleanders lining the rivulets, and crisped the soft wash of the gulf-tide. It lifted the strong bronze curls on the brow of a sleeping man who lay on the sea-beach covered with a goatskin."

A goatskin? Crisped the soft wash? The masochists among us can read more thanks to the magic of Google Books, but Rives' story isn't notable for its prose as much as for its legacy.

The original publisher printed a notice in one edition demanding that the book not be sold or resold for less than one dollar, ever, by anyone. The publisher ended up in court over this restriction, and the trial helped to produce the "first sale" doctrine that buyers have broad rights to do what they want (subject to other laws, of course) with something they have purchased. Without that trial, you might not have the right to resell that old video game you have lying around, and you might have trouble hawking your used CDs. Publishers don't tend to like secondary markets, as they usually get no cut of the revenues.

But the first sale doctrine, (relatively) straightforward in the physical world, has been complicated by the easy copyability of digital works, the rise of EULAs, and the use of DRM and activation systems. Did the Castaway decision also pave the way for you to sell your MP3s? And if not, what's the legal status of all that digital media the young people spend so much money on at iTunes and Amazon? Do they own it? Can they sell it? What about those Steam games? Can you resell that unopened copy of AutoCAD even though the EULA forbids it?

Welcome to the murky "post-sale" world in the digital age.

Hullabaloo over Bopaboo

This month saw some controversy over Bopaboo, a site that allows people to sell their MP3s online. First sale doctrine would seem to allow the sale of digital goods, but the Bopaboo business model requires people to upload their music to the site before it can be sold—in other words, to make a copy.

As Fred von Lohmann of the Electronic Frontier Foundation points out to Ars, first sale law does not provide anyone with the right to make additional copies. The new company would appear to be treading on ice of remarkable thinness here; although it has some technology in place to forbid people from selling multiple copies of the same song, it knows nothing about the origin of those songs (P2P? iTunes?) or whether they have been deleted after uploading.

This has been an issue for years—used book stores don't know if sellers have a photocopy of the entire text stashed away at home—but digital products make the copying so much simpler as to seem like almost another class of works. If Bopaboo has no mechanism for verifying deletions after an upload, it may find itself in the music industry's legal crosshairs.

Except for one thing: Bopaboo has gone to the music labels and is currently seeking licenses for what it's doing, with the goal of putting some kind of revenue sharing deal in place. In other words, it's seeking to give creators something they have long wished for: a piece of the secondary market.

Making money the second time around

It may seem axiomatic to consumers that a business or artisan makes its money only on the initial sale. The carpenter who built your dining table doesn't get a cut when you eventually hawk it on Craiglist, and Best Buy makes no money when you resell one of its computers to a friend. This may seem like the natural order of things, but the content industries generally hate it. The music and book businesses, in particular, have been vocal over the years about their displeasure with used record shops and secondhand book stores.

Rich Bengloff is the president of the American Association of Independent Music (A2IM) and he also sits on the board of the royalty-collection entity SoundExchange. He tells Ars that the industry isn't thrilled about used sales because they don't compensate creators and investors. When I ask how this differs from every other sale of used goods, Bengloff makes the point that, in other industries, there is often some money still to be made on used goods. Car dealers continue to earn revenue through service and maintenance, while carpenters may need to repair the table or restain it. With music, there's no maintenance or service or even degradation of the product, no chance at all to earn anything in the future from it.

Bengloff says that the music industry has come to grips with used CD stores, though grudgingly. "It exists and we have to be pragmatists," he says, which is made easier by the fact that used CD are still "used." Jewel cases may be scratched, CDs may have scuffs, and booklets may be bent or missing. Even if the industry can't share in the revenues, such stores aren't directly competing with new CD sellers, at least.

But digital resale shops would pose new challenges. Put simply, the product they offer is simply too good. "Used" versions of songs aren't actually "used" at all; they're perfect copies, as good as the day they traveled through the tubes and onto a user's machine the first time. So, if used copies of digital goods are sold at a lower price, consumers have no reason at all to use higher-priced services like iTunes or Amazon. If used copies are sold at the same price, the store doing the selling is now in direct competition with those other stores, even though it doesn't have to split any profit with labels or creators.

At the same time, digital resale shops may also offer some benefit to the industry. Because the business model of stores like Bopaboo ("great name," says Bengloff) may be dodgier than stores trafficking in physical goods, the labels have an opportunity to get a piece of the market in exchange for legal security. Bopaboo's decision to seek licenses for its behavior is (pun intended) music to the ears of the music industry.

What sayeth the law?

For some in the music business, the entire issue of selling MP3s has the whiff of betrayal about it. The music labels eventually released their music in formats without DRM, after all, trying to please the music-buying public, and what do they get for their trouble? The possibility of a secondary market where they might not profit at all.

Businesses have many strategies for mitigating the secondary market for their goods. One of the most common is the End User License Agreement (EULA), which in many software packages forbids the resale of the product. How is this possible? Because of the "L" in EULA, which indicates that the software package isn't sold, merely licensed. The developer, in fact, retains control over the licensed software, and it can dictate the terms of that license at will.

Such arrangements have been attacked in court on various grounds. One of the most common has concerned used software sales. The well-known Vernor v. Autodesk case in 2007 came about after Tim Vernor's eBay account was disabled after repeated complaints from Autodesk over Vernor's reselling of its software. Vernor pointed out that he had never agreed to the EULA in question, since he bought and resold his copies without ever opening, installing, or running the software (all points at which the EULA might appear). The court ruled in Vernor's favor, as it also did in the Softman case a few years earlier.

But these cases don't address the EULA issue head-on; they simply bypass it altogether. The question of EULA validity remains an open one. Von Lohmann of the EFF argues that the position of software companies is simply untenable here. Microsoft might swear on a stack of Bill Gates biographies that it has never, ever sold a piece of software in its corporate life, but functionally, it's hard to see the difference. Most software is sold once, can generally run forever, can be put to any use the customer wants; how is that not a sale?

These arguments lay behind the recent Augusto case, where Universal music claimed that its early release promotional CDs were licensed, not gifted or sold, and that therefore Universal could ban any resale of the discs. (Most promo CDs have such a warning against resale prominently stamped on the packaging and the disc.) Any denizen of used CD shops knows that promo CDs are resold on a regular basis with little that the label can do about it, but when eBay made the practice both national and widespread, companies like Universal tried to crack down.

In June 2008, the court affirmed Augusto's right to sell the discs after pointing out that the discs arrived unsolicited through the mail and were therefore "gifts" under federal law. Once more, the key issue of the "license" was not fully explored, though, since the receiver had never signed or viewed such a license before receiving the discs.

In some cases, courts do go along with the license idea. The Wall Data case in the Ninth Circuit (PDF decision, short summary) was one such decision. The Los Angeles Sheriff had licensed 3,633 copies of a software package from Wall Data, then went ahead and installed it onto 6,007 computers. the Sheriff's Department used a login system to monitor the numbers of copies actually being used at the same time, and the system would not allow more than 3,633 copies to run simultaneously.

Wall Data sued, claiming that this violated the terms of the license. The Sheriff's Department asserted that it was an "owner" of the software, since ownership grants additional rights under the law. The court disagreed, saying that the Sheriff was certainly a licensee.

"Generally," wrote the court, "if the copyright owner makes it clear that she or he is granting only a license to the copy of software and imposes significant restrictions on the purchaser's ability to redistribute or transfer that copy, the purchaser is considered a licensee, not an owner, of the software." Wall Data won.

It's these sorts of mixed decisions that led von Lohmann to say that we don't "have anything approaching complete clarity" on these post-sale and licensing issues in the digital world.

Code trumps law

But all such issues involving licenses and secondary markets can simply be bypassed by a more recent technique: using DRM or various activation schemes to make the sale of used goods difficult. Using this approach, software companies can admit to "selling" software and can admit that the first sale doctrine applies, yet they can functionally limit the doctrine's utility. Code trumps law.

First sale has nothing to say about these kinds of limits; so long as the item in question can be resold by the purchaser, the law does nothing to require that the resold copy be usable. Spore's user account system and DRM proved controversial for just this reason.

Most companies are reticent to lock down the software too much for fear of a backlash. Many follow the model of Microsoft, which uses activation but is generally quite lenient to anyone that makes the effort to call in and obtain a new activation code after a certain number of hardware changes. But, legally, there's nothing that requires this.

It's one of the side "benefits" of using DRM. While DRM has never done much to keep movies, music, or games out of the hands of warez sites and torrent search engines, it can work surprisingly well to limit the secondary market for products. Once a product has been ripped, camcorded, or cracked, pirates can swap it easily and millions of times. With users who try to stay legal and sell only used copies of games, music, and movies that they have purchased, the DRM scheme needs to be bypassed in each case, by each user. It also makes criminals of those who do break the DRM in order to sell their files.

Not that licensing, DRM, and central control are always bad. Anyone who has used Steam or Xbox Live or Netflix's on-demand movie service knows that not fully owning or controlling products doesn't have to be a terrible thing. When licenses and content exist in the cloud, users can often access their files from anywhere, using any machine, and have full access to their accounts.

But try selling that game you bought on Steam.

Who deserves a cut?

Whether the secondary market is good or bad depends on where you're seated. To Bengloff, it looks like a way for two, five, ten, twenty, or a hundred people to enjoy the same content, even though creators only profit once. To von Lohmann, who takes a consumer perspective, a secondary market is wonderful.

In this view, a secondary market always limits the monopoly power of someone's exclusive rights. A book publisher has the exclusive right to control copies of a new title, for instance, and no one can get that book from any other source. Sure, people can shop around at various bookstores, but all those stores have to ultimately buy the book from the publisher at whatever price the publisher sets. The existence of used book stores means that publishers can't raise prices for hot titles arbitrarily high. That's great for consumers.

But for creators, it can look a little scary, especially as used products have become simple to find on eBay, Amazon, Bookfinder, and other such sites. Bengloff worries that labels, especially indies, settle for less of a return on their investment because "it's art" they're dealing in, and they love the material. But they still need to make money. With talk now of opening more secondary markets for digital goods like MP3s, the industry senses a threat.

When intellectual property is being resold at the same quality as new material, that doesn't sound like a "used" business to Bengloff.

And until courts begin to weigh in on these issues with consistency, "used" digital goods will continue to be controversial.

Original here

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