Introduction – The „Double Dutch Bus“
At the beginning of September 2003 U.S. citizen George Hotelling offered the digital music file „Double Dutch Bus“ for auction on eBay. Originally, he had bought the song at iTunes for the usual price of 99 US-cents. After a while the auction had gained popularity and the bids for the music file had risen to 15.000 dollars, which Hotelling wanted to donate to the Electronic Frontier Foundation (EFF, a consumer interest group in the digital arena). Only a few days later, eBay cancelled the auction explaining its „downloadable media policy“ prohibits any listing of items or products to be delivered electronically through the Internet. Hotelling argued he just wanted to sell his legally acquired property – the music file – as others sell CDs. He assured he would transfer the music file and delete the original afterwards. iTunes – advertising with the slogan „You own the Music“ – stated it would in principle be legal to sell a purchased file, but technically unfeasible.

Following last year‚s incident, eBay.com has recently announced the introduction of a new category called „digital downloads“, within which pre-approved sellers can offer digital media items, such as music files. These sellers must prove that they either are the holder of the copyright or have contractual permission from the rights owner to resell the listed media items. Furthermore, the transfer of the digital media item must take place in the secure environment of the seller, to which the buyer will be redirected after the auction is completed.

Primary or secondary market?
The question arising from the above background is, whether the new category „digital downloads“ constitutes a real secondary market or merely an auction-based primary market. To put it simply: Can George Hotelling at last sell his iTunes song? The answer is no.

In the note to the press announcement eBay clearly states: „A buyer of downloadable media through eBay cannot re-list or resell the media on eBay.“ With this restriction, eBay is explicitly excluding consumers from the opportunity to resell purchased items. Furthermore, the common consumer will not be able to meet the different criteria, which must be fulfilled by the „pre-approved sellers“. Presumably, only commercial power-sellers will have the opportunity to offer digital media items within the category „digital downloads“. A secondary market in the sense of a C2C-market will not emerge under these conditions.

The rationale behind secondary markets
As mentioned above, secondary markets for digital media have not emerged so far. However, do we also need such markets for digital media? From an economic perspective, there are several reasons why secondary markets are generally desirable (see Reese 2003):
  • Secondary markets lead to more competition in the market, as the supplier of the primary market has to compete with its own products offered on the secondary market. Without this competition, primary market suppliers have an incentive to offer products at higher prices resulting in a lower level of economic welfare.
  • A secondary market leads to a better allocation of items among consumers. From an individual, but also from a macro-economic perspective, it is only reasonable to sell property, which is not to be used anymore and which other consumers are willing to pay for.
  • Secondary markets extend the affordability of media items to the public. „Used“ or older media items are typically being sold at lower prices leading to a situation of natural price discrimination. People, who can afford it, purchase items earlier on the primary market and people with a lower willingness to pay are able to buy media items on the secondary market.
  • Secondary markets extend the availability of media items. For instance, media items can be accessed through a secondary market long after they are „out of print“ or withdrawn from primary markets.

Legal requirements for secondary markets
Most American and European music download services explicitly exclude the option for consumers to resell media items in their terms of sale. Thus, consumers who purchase physical media items, such as CDs, and those who acquire digital media items by downloading are treated differently.

The reason why consumers can resell physical media items, lies in a principle, which in U.S. copyright law is called the first sale doctrine, but also exists in a similar form in EU copyright law. Originally, copyright holders are given an exclusive right to
(re-)distribute media items. However, this exclusive right is limited by law, in order to balance the interests between copyright holders and consumers, who purchase media items. Once sold to consumers for the first time, the exclusive right of the copyright holder to (re-)distribute the media item concerned exhausts. As a consequence, owners of CDs, DVDs or books can resell or give away their property without asking the copyright holder for permission.

After the introduction of the Digital Millenium Copyright Act (DMCA) and the European Copyright Directive (EUCD) legal experts have argued whether the First Sale Doctrine and the corresponding European principle are applicable not only to physical media but also to the online world. The DMCA does not explicitly state a non-applicability, whereas the EUCD implicitly does with its „right of making available to the public„. Hereby the EUCD generally classifies all types of content made available in digital networks as a service and not as a product, with the consequence that it cannot be resold. Thus, under European copyright law content on a website or in a newsgroup is treated the same way as music files downloaded at iTunes. Nevertheless, the latter have more similarities to physical media items, regarding economic characteristics such as exclusiveness and rivalry in consumption due to copy protection.

There are two legal options under which secondary markets can emerge:
  • Music or other media download providers, such as iTunes, grant permission to resell media items within their terms of sale. However, this option is very unlikely, because providers are giving away market power, as media items offered on the secondary market cannibalize their own primary market (see Coase 1972).
  • The first sale doctrine and its corresponding principle in European copyright law must be applicable not only to physical media items, but also to downloadable media items. Against the prevailing opinion, some legal experts argue that the principle of first sale must be applicable to downloaded media items as long their economic characteristics are similar or equal to physical items such as books or CDs.

Technological requirements for secondary markets
In order to enable consumers to resell digital media items, certain technological requirements have to be met. The digital media item must be exclusive in a way that it cannot be used anymore by the seller after being resold. Instead of copying the digital media item, it must be forwarded and deleted.

Apart from the functions to copy-protect and manage the media items, also the transfer of the items in the manner of „forward and delete“ can be basically implemented with DRM systems. In order to do so, two main technological problems have to be solved:
  • The option to resell – as part of the terms of sale or licence agreement – has to be modelled with Rights Expression Languages (RELs) in order to be processed by DRM systems. Compared to the fairly complex concept of fair use due to many exceptions, the task of modelling the first sale doctrine can be regarded as quite simple.
  • As far as users want to interchange media items between different DRM platforms, problems of interoperability arise. From a technological point of view, this problem could be solved (see Mulligan and Burstein 2003). However, different interests of competing market players can hinder or delay agreements on industry-wide standards and the goal of interoperability.

Threat of efficiency
As described in the rationale behind secondary markets, the right to resell digital media items would be to the consumers‚ advantage for several reasons. Nevertheless, a potential right of consumers to resell has to be balanced with the interests of the copyright holders. Compared to a secondary market for physical media, such as CD auctions on eBay, a secondary market for digital media can be significantly more efficient, due to electronic transmission and automatic delivery. Additionally, digital goods are not subject to physical „wear and tear“, which makes „used“ goods a perfect substitute for „new“ goods. The devaluation of a media item only depends on the topicality of the content, which is the same for both „new“ and „used“ media items.

In comparison to a secondary market for physical media, the increased efficiency of a secondary market for digital media items can lead to a situation where every single media item can be traded among consumers significantly faster. Thus, the potential revenue from primary market sales could erode at the expense of the authors‚ interests. Such a market could regulate itself, as providers could ask for higher prices to include all future usage of each individual media item. Another solution to balance the consumers‚ right to resell with the interests of copyright holders could lie in DRM. For instance, an artificial „resell delay“ could slow down the circulating rate of a „too efficient“ secondary market in favour of an increased demand for items on the primary market. By adjusting the period of an obligatory „resell delay“, the market power can be shifted slightly (but not entirely!) to the primary market. Such a scenario would resemble the current situation on markets for physical media items, where the sellers on the primary markets usually have an advantage over the competitors on the secondary markets leading to significant differences in prices.

Bottom Line
This article described the rationale behind secondary markets, which have not emerged in the digital era so far. Furthermore, legal and technological requirements for such markets were analysed. From the consumers‚ perspective secondary markets for digital media are desirable for several reasons. Unfortunately, the aspects regarding the right to resell have been neglected too long, as the public and scientific discussion focussed on the appropriate balance of DRM and Fair Use (especially private copying). Nevertheless, the right to resell goods is an essential consumer right and – not least – one of the pillars of the social market economy. The non-existence of secondary markets for digital media can lead to an unbalanced and non-efficient supply of goods. The more the whole media market is shifting from physical to digital media, the more impact a non-existence of secondary markets in the digital era will have.

Secondary markets can be facilitated with DRM systems as soon as similar P2P-alike distribution mechanisms such as „Superdistribution“ are technologically feasible. Nevertheless, the threat of efficiency of such markets could possibly erode sales on the primary market. Therefore, the consumers‚ right to resell must be balanced with the interests of copyright holders. Perhaps, a solution to readjust this balance could lie in DRM repeating a quote from Charles Clark: „The Answer to the Machine is in the Machine“.

Sources
  • Coase, R. H. (1972): Durability and Monopoly. Journal of Law and Economics, Vol. 15, No. 1, pp. 143-149.
  • eBay Downloadable Media Policy:http://pages.ebay.com/help/policies/downloadable.html
  • eBay Press Announcement:http://www2.ebay.com/aw/marketing.shtml#2004-07-12154524
  • iTunes Case Study, Berkman Center for Internet & Society at Harvard Law School, Cambridge, Massachusetts:http://cyber.law.harvard.edu/media/itunes
  • Mulligan, Deirdre K.; Burstein, Aaron (2003): Implementing Copyright Limitations in Rights Expression Languages. Digital Rights Management: Revised Papers / ACM CCS-9 Workshop, DRM 2002, Washington, DC, USA, November 18, 2002; Feigenbaum, Joan (Ed.), Berlin 2003, pp. 137-154.
  • Reese, R. Anthony (2003): The First Sale Doctrine in the Era of Digital Networks. Boston College Law Review, Vol. 44, No. 2, pp. 577-652.

About the author: Lutz Niehüser is a research assistant at the chair for information systems at the European Business School, Oestrich-Winkel, Germany. His research focuses on impacts of digitization on media industry‚s strategy and on economic consequences due to the application of Digital Rights Management. Currently he is working on his dissertation with the focus on „Secondary Markets for Digital Media based on Digital Rights Management“. Contact: Lutz.Niehueser@ebs.de

Status: first posted 19/08/04; included in INDICARE Monitor Vol. 1, No 3, 27 August 2004; licensed under Creative Commons
URL: http://www.indicare.org/tiki-read_article.php?articleId=33