The First Sale Doctrine

by Krishna on September 20, 2011

One benefit of the Netflix spin-off of the DVD-rental only Qwikster company is that I learnt about the First Sale Doctrine. In short, it means that once you purchase a copyrighted material, you don’t have to ask the original copyright owner for permission to do what you want with the content, such as selling it or renting it out. This applies to things such as books and DVDs. This is an United States law and has some caveats; I am not sure how it applies to other jurisdictions.

So I was not aware of this. I often used to wonder how public libraries were allowed to rent out DVDs, and I thought that video rental stores paid royalties to the studios. But seems that there is a law. And so if you want to start a science fiction DVD rental store, all you have to do is buy copies of the DVDs and you don’t have to pay anything more to the movie maker.

Let us run the math. If you rent the same movie out to someone at least once per day, it can be watched 365 times a year. In that one year, the copyright owner still only gets a small cut of 1 DVD or Blu-Ray as opposed to a cut of the 365 views (or more counting the family members of the renters). By adjusting the DVD rental price or rental window (say 50c for 3 hours), the rental company can make serious profit while the original copyright owners do not make any further profit. Note that this is all legal and overboard.

But for some reason I don’t quite follow, it doesn’t apply to digital products. I can see the problem with making thousands of copies of a song and giving that away to friends. But suppose you have a single-use policy for your digital product, in that only one person is allowed to access your digital content at a time. Say, you have a digital copy of “Star Wars” and you upload it to a website, and at any time, only one person can watch it. How is that different from physically renting the “Star Wars” DVD to someone?

Yes, a lot more people can watch the movie and the rental company does not have to purchase as many DVDs. Suppose the First-Sale Doctrine was in effect for movies and songs? Well, a 2‑hour movie could be watched more than 4000 times a year (with a single-concurrent-use policy). That could seriously hammer the profits of the studios if they let companies like Netflix take advantage of the law. 🙂

Instead, what we could see in such a world is that the movie makers would directly get involved in streaming their videos. Because they don’t have any restriction in concurrent viewing (since they own the copyright), they can let anyone watch it anytime and charge a nominal per-viewing charge. Nobody seems to complain about Redbox’s $1 and $1.50 charge for DVDs and Blu-Rays and you have to physically go to a Redbox machine. So, one possible pricing scheme would be to use credits, say 50 credits for $9.99 with different movies having different credits. Like 1 credit for “Burke and Hare” and 3 credits for “Source Code”.

Of course, that is not what is happening now. Since the movie makers think that they have the law on their side when it comes to preventing people from sharing their videos (1 at a time!), they have this cat-and-mouse game going on with streaming companies like Netflix and Hulu. Since the US Congress and the EU has been mostly busy in tightening up IP rights over the last several years, I don’t think we are going to see legislative improvements. Instead most changes will be driven by market conditions including rampant piracy as technology improves.

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