John Ossenmacher and Larry Rudolph are not philosophers, but the company they started produces a lot of deep questions. ReDigi.com, as they named it in 2010, was founded upon the belief that digital goods should be treated like physical goods. That means buyers of e-products—music, books, games, movies, software, apps, whatever—should be able to resell their purchases at will.
But on Monday, a U.S. district court judge in Manhattan disagreed, ruling that that ReDigi had infringed on the copyrights of Capitol Records through its website for used digital music, redigi.com. The judge noted that the court could not "condone the wholesale application of the first sale defense to the digital sphere, particularly when Congress itself has declined to take that step." He did not yet decide on damages. But the takeaway is that ReDigi’s long-term fate—along with the larger possibility of used digital markets—is now up in the air.
A century ago, a U.S. Supreme Court case established the idea of a "first-sale doctrine," which essentially holds that a vendor loses rights to a product after sale to the consumer. Why should it matter, Ossenmacher asks, that products are composed of electronic bits rather than vinyl or paper? Why can’t we have markets in used digital goods?
But the idea of ReDigi actually began with a question asked some years back by Ossenmacher’s daughter, who wondered why it was so difficult to give her digital music library to charity. And indeed, some of the judicial concern over used digital markets hinges on how you sell a digital good rather than whether it’s ethical. Logic and the law suggest that a digital good that’s unauthorized—a song ripped from a CD, say, or downloaded via Bit Torrent—shouldn’t be eligible for resale.
From the start, Larry Rudolph, ReDigi’s technology architect, focused on creating a method that he thought ensured verifiable legal downloads: Once an eligible song or book was put up for sale, it wasn’t copied by ReDigi and then deleted from your files. Instead, it was effectively "migrated" in a way that’s akin to how banks move money in digital transactions. (The judge disagreed; this was still a new copy, he reasoned.) In any event, ReDigi envisioned that in time all of its users’ digital goods would be located in the cloud, so buyers and sellers would never actually move a book or song. They would merely transfer the title the way we transfer titles to houses.
Even without the legal challenges, Redigi faced an uphill battle. First the company had to convince content creators and distributors that secondary digital markets wouldn’t completely undermine sales of new digital goods. Ossenmacher in fact believes that exactly the opposite will occur—that the used market drives the new market. Much of the money spent on new video games, he asserts, comes from gamers selling their used stuff at places like GameStop. The new-car market depends on trade-ins, too. Ossenmacher is convinced that a portion of the revenue from selling used books and songs would be redirected to buying new books and songs. And there is evidence from research that this might hold true. According to Carnegie Mellon economist Rahul Telang, creating secondary markets can slightly erode sales (and increase prices) of new products—as was the case when Amazon entered the used book market. But a crucial point, Telang notes, is that a used market tends to benefit consumers and increase total demand.
"There’s $40 billion to $45 billion a year being downloaded in the U.S. on games, books, movies. If we add software, that number gets even bigger," Ossenmacher says. "Those digital goods are now just sitting on computers." If his company were to unleash the value of personal content libraries, he maintains that the digital commerce business would profit handsomely.
And that includes everyone. From its inception, ReDigi offered a gratuity of 10% to 20% of the purchase price to artists and producers whenever their used goods were sold, which was meant to offset any drop in the sales of new content. If it’s sold again, they get another gratuity. It was a revolutionary idea baked into a Machiavellian gambit: Nothing forces ReDigi to pay the gratuity. On the other hand, it could help the company woo industry allies, and held the tantalizing possibility of the model becoming an industry standard that rewards content creators not once, but in perpetuity.
But all this was predicated on ReDigi remaining the market leader in digital reselling—an eventuality that now seems in doubt. The company has a slew of patents pending on its technology, but so does Apple, which recently revealed an interest in selling used digital products. (Amazon, too, has skin in the game: The company was awarded a patent in February for creating a market in used digital goods.) So, while it’s conceivable that the legal landscape for ReDigi might someday be cleared through a legal appeal, the company also faces a crowd of powerful competitors.
To Jason Schultz, a law professor at UC Berkeley who observed the ReDigi hearing in district court last year, it’s likely this case is merely the beginning of a broad legal and commercial effort to test the nature and limits of e-commerce. At the moment, the digital marketplace is built upon the notion that consumers license a song or book, rather than actually possess it through ownership. "But the idea that you don’t own anything—contrary to the reality of you buying something, listening to it, and walking around with it?" says Schultz. "Then we’re in a very bad world." It’s hard to disagree. Used digital markets seem both logical and inevitable. They’re not necessarily a good thing for large corporations like Capitol Records. But they’re almost certainly a beneficial development for consumers, and could be a potentially significant source of income for content creators, who are already deprived of untold millions through illegal downloads. ReDigi may not be the best answer to that problem, but neither is the status quo. Perhaps at some point soon, new digital technology will not only lead to new digital businesses, but new digital laws, too.
[Image: Flickr user Photo Extremist]