A second-hand market for digital goods?
First Monday

A second-hand market for digital goods? by Francesca Musiani and Enoch Peserico



Abstract
Surprisingly little research has focused so far on the emergence of second-hand markets for the large and somewhat fuzzy class of objects usually labelled as “digital goods”, even though it is a niche that has recently attracted both considerable investments and considerable legal controversy. This article, offering far more questions than answers, argues why it is an interesting and complex research topic for interdisciplinary scholars of technology and society — and attempts to sketch in broad strokes the complex nexus of stakeholder interests, economic dynamics, judicial pressures, social factors and technological elements lying at its core.

Contents

Introduction
Ditties and databases
The writ and the wrench
The pirate’s first penny
Conclusions

 


 

Introduction

A large and ever-growing body of research explores the social, judicial, economic, historic and technical aspects of the commerce (and other forms of exchange) of digital goods (Amblee and Bui, 2007; Grandón, et al., 2011; Quah, 2003). Yet until now relatively little attention has been paid specifically to the second-hand market, even though it is a niche that has recently attracted both considerable investments and considerable legal controversy. This paper seeks to discuss the emergence of second-hand marketplaces for digital goods, and the reasons why it is an interesting and complex research topic for interdisciplinary scholars of technology and society.

In this context, it is natural to formulate questions typical for market and innovation studies (though the answers may not themselves be typical). Who are the stakeholders? How do they exert influence on each other and on the market? A more careful examination reveals several other, less immediate, potential lines of inquiry. Does any interesting dynamic emerge from the combination of digital and second-hand, that would not appear in the presence of one of the two attributes in isolation? Can we speak of the second-hand market for digital goods, essentially identifying in the digital nature of said goods the single, fundamental characteristic determining the behaviour of the market and its actors — or are there other crucial factors that may drastically differentiate the second-hand market of, say, videogames from that of professional software? This article, raising far more questions than it answers, attempts to sketch a very incomplete picture of this complex nexus of stakeholder interests, economic dynamics, judicial pressures, social factors and technological elements.

The main body of the paper is organized into three sections as follows. The first section argues that the “digital turn” of the cultural goods market in recent years is responsible for the unprecedented amount of techno-legal controversy linked to the existence of a corresponding second-hand market. The section addresses the qualitative differences between physical and digital goods that, for the latter, greatly reduce the potential of the primary market in the presence of a second-hand one; the section also addresses the extent to which differences between types of digital goods can translate into differences in terms of impact on the primary market. Drawing on two landmark judicial decisions, concerning software and music respectively, the second section examines the situation of juridical uncertainty that currently permeates the resale of digital goods. It examines how actors try to reduce as much as possible the influence of the law by means of technological and/or marketing solutions — creating the conditions for the law to become irrelevant to the feasibility (or lack thereof) of a second-hand digital market. The third and last section examines the impact that users have on the building of a second-hand digital market through their practices. In particular, it addresses those factors, which may be labelled as the first-penny effect, that strongly encourage users to opt either for the primary market or for “pirate’ practices to the detriment of the second-hand market.

 

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Ditties and databases

The second-hand market for music and movies dates back several decades, and that for books several millennia. It is then natural to ask why a high level of legal controversy has manifested only in the last few years (note that even the 1908 Bobbs-Merrill Co. v. Straus case that established the first sale doctrine in the U.S. ultimately involved the purchase and resale of new books; see Reese, 2002). One possibility is that only recently has a large portion of the market for music, movies and books “gone digital”.

Digital and physical goods sport several qualitative differences that can yield dramatically different economic dynamics. First of all, digital goods do not deteriorate with use. This makes their second-hand versions “as good as new” not only because their quality is just as high, but because their quality sports just as little variance — the digital second-hand market is not a “market for lemons” (Akerlof, 1970). Thus second-hand digital goods, unlike physical ones, are often perfect substitutes for their counterparts on the primary market. Second, digital goods are immaterial. This reduces emotional attachment to them (encouraging resale), and makes their transportation, for all practical purposes, both instantaneous and free. Coupled with the powerful indexing capabilities of modern search engines and with the fact that the actual “use-time” of a book, movie, or music recording is typically measured in hours (even if spread over several days, months or even years), all these factors have the potential of making it easy and practical for a digital book, movie or music recording to be resold and re-used literally dozens of times — with each sale on the second-hand market substituting one on the primary market. Thus, the existence of a second-hand market can, in principle, reduce the primary market to a truly minuscule fraction of its potential.

The crucial factor is the ratio between the total number of users of a digital good over time (the number of people who will eventually use it at one time or another), and the peak number of users (the maximum number of people simultaneously using it at any given time). In a nutshell, in the presence of an efficient second-hand digital market, the primary market need only provide a number of copies (that can then frictionlessly move between users) equal to the peak number of users; whereas in the absence of a second-hand digital market, the primary market would see a number of sales equal to the total number of users over time, with most buyers leaving their own copy “idle” most of the time. The ratio between the two quantities then corresponds to the potential reduction caused to the primary market by the presence of a second-hand one; and in the case of of e-books, videogames, movies or music recordings this ratio can be of an order of magnitude or even two — the second-hand market has the potential to effectively wipe out the primary one.

Who needs more copies? An e-book example.

Suppose a fantasy novel requires 24 hours of reading (i.e., one full day, most likely spread over several days or weeks) by the average buyer(s) (e.g., on average two readers per sold copy, each reader taking 12 hours). Let us say that the sales, on the primary market in the absence of a second-hand one, would peak at 140 copies/week, with a total of some 5,000 copies sold over a few years. This means that, at any given time, at most 140 copies/week are being “consumed”, i.e., on average, roughly 140/7 = 20 on any given day. Even if we assume that the peak reading hours (e.g., those in the evening) see a percentage of readers, say, five times larger than the average, at most 205 = 100 people will be reading the book simultaneously at any given time. Thus, once 100 digital copies of the novel have been sold on the primary market, those copies can “move around” satisfying all would-be readers of the novel — meaning that the presence of a digital second-hand market causes a 98 percent contraction (from 5,000 down to 100 copies) of the primary digital market.

Interestingly, very different numbers can be obtained for other types of digital goods protected by copyright. For example, most sport events (Burns, 2014) have a peak number of watchers that is very close to the total number of watchers over time: relatively few people watch a football match after it is over. Similarly, many types of professional software products, such as database management systems, remain constantly in use throughout their lifetime once bought. In these cases, the presence of a second-hand market would not drastically affect the primary market, since there would be relatively little demand and/or supply for second-hand goods. In this light, the different outcome of Capitol Records, LLC v. ReDigi Inc. (a 2013 U.S. case concerning second-hand digital music) compared to UsedSoft GmbH v. Oracle International Corp. (a 2012 EU case concerning second-hand database software licences) may ultimately be due less to the differences between U.S. and EU law, than to the intrinsic differences of music vs. database software as digital goods.

 

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The writ and the wrench

A detailed analysis of (even one of) UsedSoft v. Oracle and Capitol Records v. ReDigi is well beyond the scope of this paper. However, it is interesting to examine briefly the two rulings, as well as their implications. In the UsedSoft v. Oracle case the European Court of Justice ruled that whenever a party buys the right to indefinite use of a software product, even if under an explicitly non-transferable licensing agreement, that party is effectively “buying a copy” of the software — and thus, under EU Directive 2009/24 on legal protection of computer programs, can freely resell it or otherwise transfer it to a third party. In the Capitol Records v. ReDigi case the U.S. District Court for the Southern District of New York ruled that “moving” a digital music recording from one digital storage medium to another (by copying it to the new medium while erasing it from the old) is not “movement” but “creation” of a new physical phonorecord, and as such requires explicit permission of the copyright holder.

Both rulings appear, to say the least, somewhat stretched interpretations of the law. And because of this, they may well end up producing ripples (or shockwaves) in the legal ecosystem far beyond the cases at hand, and possibly far beyond the intentions of the respective courts. The notion that one requires explicit permission of the copyright holder to “move” digital music from one physical support to another could have dramatic impact on the entire cloud computing market, as testified by the amicus curiae brief Google attempted to file in the ReDigi case (Fenwick & West LLP, 2012). And “permanent licensing as sale” has profound repercussions e.g. on fiscal and procedural issues well outside the digital goods market — indeed, the remark by the German Hamm Court of Appeals that the UsedSoft v. Oracle case hinges on a lex specialis applicable only to software (Chan, 2014) may well be seen as an attempt to minimize such repercussions.

Crucially, both rulings also appear to leave significant technical loopholes. In hindsight, it would not have been difficult for Oracle to provide relatively short-term licenses to its products — software tends to have a life not exceeding a few years in any case. Alternatively, selling “Software as a Service”, an increasingly common trend in the IT industry, would also have circumvented the ruling of the EU court. Similarly, ReDigi has not ceased its operations, and is now attempting to evade the ruling of the U.S. court by having users employ ReDigi’s servers as the primary storage (i.e., the “phonorecord”) for their music. Users can then make and listen to “fair use” copies on local devices such as MP3 players, as explicitly allowed (at least for now!) by the music sale terms (Minow, 2013; Peckham, 2013). To resell a music piece, a user simply transfers ownership of the phonorecord to a different user, without the phonorecord ever changing physical location.

But, of course, these workarounds appear feasible only a posteriori, in reaction to the specific justification given by the courts for their decisions. It seems quite possible, even likely, for any actor undertaking these or similar measures to be confronted with other “interpretations” of the law by the courts imposing new constraints; in a vicious circle where each new ruling encourages new technical workarounds, which in turn move the courts to new rulings. This is a problematic situation for those actors who consider the most crucial aspect of any judicial system to be legal certainty — the law must provide those subject to it with the ability to predict the outcome of their conduct. A system where the law governing the outcome of a certain situation is effectively (re)written after the fact by the courts (rather than before the fact by the legislative body) exposes every actor on the market to a level of risk with substantial monetary costs and discourages investment and innovation.

Thus, in this context, many technical actors have come to perceive judicial regulation as a risk rather than a safeguard, a minefield rather than a bulwark. It is then not surprising that they are changing the battlefield into one where the deciding weapon is not the uncertain writ but the trustworthy wrenchi.e., they are progressively turning from written law (the writ) to other devices, from markets to technical architectures (the wrench), to exert norm-making prerogatives (Lessig, 2006).

For example, one of the reasons for the success of Apple on the digital music market may lie in the fact that Apple is verticalizing its offer, selling to its customers not only the music itself, but also the software and hardware tools with which to access it. Apple spent considerable engineering and marketing effort on these tools to maximize the ease and attractiveness of “consuming” (listening to, recommending, backing up etc.) music from Apple’s own music distribution channel. By contrast, the effort spent on maximizing the ease and attractiveness of “consuming” music from other channels appears virtually non-existent. Even if Apple takes no active measures to ban other channels from its devices, the result is a “soft” lock-in for all but a tiny fraction of Apple’s device users, that very effectively cuts off those users from any second-hand digital music market.

Unsurprisingly, if we turn to the digital market for books, we see a very similar scenario. The two most widely sold e-book readers, the Kindle and the Nook, are sold respectively by Amazon and Barnes & Noble, the largest vendors of e-books (Book Industry Study Group, 2013). On both devices, it appears far easier to “consume” e-books obtained from the “official” channels of the respective e-book vendor than from other sources. And, indeed, both e-book readers are sold at prices that appear remarkably low when compared to other devices of similar technological content, suggesting that Amazon and Barnes & Noble profit mostly indirectly from their sales. As in the case of digital music, this creates an environment where it would be extremely difficult for a second-hand digital market to thrive regardless of the position of the law.

 

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The pirate’s first penny

From the previous sections, it emerges that users are the crucial term of the digital second-hand market equation. As often happens in processes of technical innovation, their role is not merely a passive one, of consumers herded into buying a given product, but of (at times involuntary) co-producers of this innovation (Cardon, 2006).

Users certainly have an impact as political actors influencing the law-making process. However, there are wide gaps of time and knowledge (which the ever-increasing rate of technological progress can only widen in the future) both between the desires of users and the law-making process, and, as we have just argued, between the law-making process and the actual dynamics of the digital second-hand market — placing the latter effectively beyond the reach of users as traditional political actors.

Far more profound is the active impact of users through their practices. One of the best known examples is that of “piracy” through file-sharing software or websites (Braga and Caruso, 2013). Despite intense campaigning by a number of powerful organizations, and despite harsh law packages (so harsh in fact that, in at least one case, they have been deemed unconstitutional in their respective countries due to violation of fundamental rights) [1], the current state of music, video, and e-book piracy is that essentially any title with a modicum of popularity can be found on the Internet and downloaded without payment of any sort, even by users of little computer-savvy. If piracy serves as an example, should the second-hand market for digital goods become sufficiently “fashionable”, it could well end up flourishing regardless of writ or wrench: making it illegal would simply drive it underground, while trying to discourage it by making it less accessible would simply encourage third-party development of new access solutions.

In addition to offering an example of the impact of users’ practices, piracy is worth mentioning for a second reason: it could play a direct, pivotal role in the sustainability (or lack thereof) of a second-hand market for digital goods. On the one hand, the widespread precedent of piracy could make users more resilient to attempts by the law or by copyright holders to hamper such a market through memetic, judicial or technological means. On the other hand, the second-hand market for digital goods risks being “squeezed” between the primary market and piracy networks.

This “squeeze” effect could be particularly pronounced for goods such as e-books or individual music recordings. Their small monetary cost is generally dwarfed by the hassle of credit card payment, by fraud and privacy issues, and by the psychological burden of knowing that some price is being paid. In some sense, it’s the first penny that counts: there is a significantly greater difference between not paying at all and paying only one cent, than between paying one cent and paying a few euros or dollars. Symmetrically, there is a greater psychological barrier between a sale that is completely uncontested and one that sees at least some FUD [2], than between the latter and acquisition through piracy — given that “consuming” e-books and music recordings is relatively safe regardless of their provenance and that the risk of judicial repercussions is imperceptible. These factors strongly encourage users to opt either for the primary market (with no doubts whatsoever about the legality or morality of their purchase, with maximum sympathy and support from copyright holders) or for piracy (avoiding expenses, avoiding risks connected to credit card payments, preserving privacy) — eschewing the second-hand market as having all the disadvantages and none of the advantages of the other two choices.

Once again, the situation could be radically different for different types of digital goods, such as professional software. A much higher price on the primary market makes the achievable savings a significant incentive to opt for the second-hand market, whenever it exists. And the use of tools of uncertified or even illegal provenance often leads, in a professional environment, to risks (both technical and judicial) of sufficient magnitude to make piracy not worthwhile.

 

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Conclusions

Second-hand markets for digital goods are still a relatively unexplored research terrain. This paper suggests that any comprehensive study of them would have to deal with a considerable level of complexity along (at least) three major dimensions.

The first dimension is that of the goods themselves. It would be tempting to assume that the market dynamics of digital goods are determined solely by their “digital” nature. But different types of digital goods exhibit substantial differences in a number of crucial parameters, such as cost, ratio between total and peak users, and real or perceived risk in employing a copy of illicit provenance — and these differences can produce drastically different dynamics. For example, in the case of digital music recordings the second-hand market could have a far larger impact on the primary one than in the case of professional software; at the same time a second-hand market for digital music recordings appears far more susceptible than one for professional software to being “squeezed” between the primary market and piracy.

A second dimension of complexity is that of the many groups of actors involved, and their respective roles. The rapid pace of technology handicaps law-makers (and users as “traditional” political actors) in their attempts at regulation, as it is extremely difficult to anticipate the effects of a regulatory device a few years into the future. This leaves the law in the hands of courts, producing an a posteriori regulation that appears highly unsatisfying to technical operators — who then attempt to eschew the law in favour of technology or marketing as norm-making tools. And in the end it may well be the users who play the decisive role through their practices: gullible consumerism, informed choices, or creative hijackings of the technologies involved (Akrich, 1998).

A third dimension is that of the multiple planes (judicial, economic, social, and technological) in which goods and actors exert influence on each other. While some actors or goods may be more visible on some planes than in others, that of the second-hand market for digital goods appears an area of study in which interactions on the different planes are extremely hard to decouple, and in many cases even to distinguish clearly — e.g., is the first-penny effect social, or economic?

In fact, there may well be other dimensions to the problem. And even in regards to the three above, this article only brushes the tip of the iceberg, offering far more questions than answers. Obtaining a clear understanding of second-hand markets for digital goods and of their future evolution thus appears an extremely challenging endeavour — but at the same time and by the same token, fertile research ground for years to come. End of article

 

About the authors

Francesca Musiani is a Researcher at the Institute for Communication Sciences, National Centre for Scientific Research (ISCC-CNRS), Paris, France.
E–mail: francesca [dot] musiani [at] cnrs [dot] fr

Enoch Peserico is a Research Scientist at the Department of Information Engineering (DEI), University of Padova, Italy.
E–mail: enoch [at] dei [dot] unipd [dot] it

 

Notes

1. The French Hadopi (High Authority for the Distribution of Works and Protection of Rights on the Internet, Haute Autorité pour la Diffusion des Œuvres et la Protection des droits sur Internet) calls for the “three-strikes” or graduated response method, terminating the Internet access of individuals that (allegedly and) repeatedly violate copyright. The first version of the Hadopi law was considered unconstitutional, and a second version approved and implemented, amidst great controversy (Gueydier and Musiani, forthcoming). Its American equivalents, the SOPA/PIPA (Stop Online Piracy Act/Protect IP Act) bills, originally included the removal of Domain Name System records pointing to a Web site hosting allegedly infringing content. The bills were deemed unconstitutional by a number of legal scholars, and were the subject of wide civil society mobilizations, to the point that their legislative iter has been interrupted in 2011 and not resumed since (Lemley, et al., 2011).

2. “Fear, Uncertainty and Doubt”: voices claiming unlawfulness, unfairness, or potential risks, often as part of a deliberate defamation strategy (Harris, 1998).

 

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Editorial history

Received 10 August 2014; revised 24 September 2014; accepted 25 September 2014.


Creative Commons License
This paper is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

A second-hand market for digital goods?
by Francesca Musiani and Enoch Peserico.
First Monday, Volume 19, Number 11 - 3 November 2014
http://www.firstmonday.org/ojs/index.php/fm/article/view/5493/4156
doi: http://dx.doi.org/10.5211.5493





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