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Answering the Multi-Billion-Dollar Question: Important Lessons For Companies Seeking to Protect Creative Property Effectively in the Twenty-First Century


Monday, Jan. 08, 2007

The growing trend of recording and home entertainment industries' shift toward online distribution of their content continues. Tower Records closed its doors. Google acquired online video upstart YouTube. Increasingly, more TV shows and movies are available for download through Apple's iTunes and its competitors. Netflix began not only distributing DVDs by mail, but also directly buying independently made movies at film festivals, for instant distribution. Even the stodgy Blockbuster has been employing a Netflix-like online DVD-distribution model, and there's a lesser-known book equivalent of Netflix,

With the growing obsolescence of brick-and-mortar stores that deal exclusively in music, movies, or video games, and radically simplified online distribution, the focus for industries has shifted to creation and promotion.

But the most important, and increasingly challenging, element for the industry is revenue capture. How can companies and individual artists protect the revenue from their creative property?

In this column, I'll explain a number of strategies that may work. I'll also add a note about books - which remain a special case, but not as special as one might think.

The First Sale Doctrine Must Die

First, I believe content companies will have to effectively modify - through federal legislation -- the traditional first-sale doctrine in copyright law.

This doctrine holds that once a product has been bought, it can be legally resold by the purchaser - on and on, through its whole useful life, with no further payment to the copyright holder. Now, for music and movies, that useful life may last forever, and the number of potential buyers can be huge.

Accordingly, companies must at least explore means to ensure that they can reap revenue from multiple users, or even from a single user's multiple uses of their content. To gain the ability to protect that approach through the law, requires junking the first-sale doctrine.

Consider Netflix: A DVD is bought once for the cover price, then sent out until it wears out. This is a huge windfall to Netflix, wholly enabled by the first-sale doctrine.

(Granted, before the Internet, neighborhood DVD stores already had this effect, but Netflix added vast economies of scale and far greater ease of access.) Under a new law, a company like Netflix might have to, instead, send per-user payments back to the company that owned each movie being rented.

The situation is somewhat fairer, at least, when Netflix buys a movie directly from a filmmaker at a festival -- but only if Netflix isn't the only potential buyer Ironically, if Netflix were to compete with other buyers, then in the end, the indie filmmakers who sell movies directly to Netflix and its competitors, could be treated much more fairly than studios who release DVDs priced for individual consumers' use, and find them ending up on Netflix.

Models that impose per-use charges could make pricing more efficient. In addition, they have the advantage of obvious fairness to the creator - who is paid based on how many people are entertained, and how often. This fairness, importantly, can be used to promote such models to the public.

The only question is whether consumers will accept a model other than the first-sale model. Instead, they may continue to view the first-sale model as inherently more fair. After all, to my knowledge, it's been the only model offered (ever since the advent of phonograph recordings for sale a century ago). Moreover, and largely as a result, consumers' concept of ownership resides in physical objects -- such as records, CDs, or DVDs -- not in viewings or experiences.

Oddly, content is, in a way, a service in the form of a good: It is bought as an object, but then it entertains us just as a live performer might. The challenge for capturing more revenue is convincing users to see content more as a service, than a good. That perspective might then convince uses to give up their stake in the first-sale doctrine, in exchange for a fairer pricing system.

Competition with Copyright Infringing Outlets Must Be Low in Price and Immediate

What about the movie industry's greatest fear - more widespread peer-to-peer movie access?

Here, the solution, I believe, must be largely not legal, but business-oriented. Suing shallow-pocketed individuals who are among your potential customers is unwise. Shutting down a given site only leads to another, smarter one cropping up. Encrypting content through "lockware" - though somewhat effective -- can be hacked.

Also, legal remedies don't work well against sites without centralized servers, and those as to which there isn't evidence of an intent to aid copyright infringement. Contrast Napster, which was proud about users' "napping" copyrighted material, with YouTube, which ends up hosting copyrighted material but has focused its image on user-created content, made alliances with copyright holders, and removed copious amounts of potentially infringing content.

Company-to-company suits and approaches may still work, however. If there were a statute modifying the first-sale doctrine, then a suit to force Netflix to pay per-use royalties to copyright holders could be quite effective. It is hard to imagine Netflix refusing to comply, and Netflix actually has physical assets that can be seized. (The same is true for, of course.)

In terms of business strategy, I believe that Napster taught (or should have taught) companies one huge lesson: People get extremely aggravated by artificial restrictions on distribution, and by prices failing to drop when distribution becomes effectively free because it can occur online, not through brick-and-mortar stores.

Social acceptance, especially among Generation Y, of peer-to-peer music "trading" grew in part, I believe, because cheap, legal downloading of music was painfully slow to come. Content businesses must ensure that illegal options are not the only ones, or - importantly - by far the most convenient ones.

Inherently, illegal options will be cheaper, but to make legal options attractive, they need to at least incorporate that price-drop that everyone knows should accompany digital - rather than brick-and-mortar - distribution.

The Napster experience has implications for the movie and book industries, too. The film industry should, at least in limited circumstances, move toward simultaneous DVD/Pay-per-view theatrical distribution. Otherwise, the industry may inadvertently offer those who would use illegal services or buy pirated copies a rationalization and, in their eyes, even a justification for their actions.

I recognize, of course, that the current system of sequentially releasing the theatrical version of a movie before the DVD version maximizes revenue in the short term - as does the system of sequential hardback/paperback book distribution. But I believe keeping customers happy, and inducing them not to resort to illegal alternatives out of frustration with artificial distribution restrictions, is a strong consideration, too. Artificially inflated prices that result from such restrictions may be profitable over the short term, but not necessarily over the long term. When the content consumers crave is complete, they want it to be released at a fair price, in as many formats as possible. Thwarting that desire, over the long run, may prove to be unwise.

I believe that artificially holding back certain content, in particular, may anger people even more than holding back other products. It is in part through books, movies and music that we define ourselves and give meaning to our lives. Withholding products thus means withholding ideas -- sparks that could otherwise have lit up the imagination. Withholding nonfiction films and book means withholding critical information. Can failing, for example, to make an important Iraq war documentary instantly available on DVD when an election is imminent, be justified?

The Book Industry Should Transition to Paperback Originals and Also Eliminate the First-Sale Doctrine

I've only briefly mentioned the book industry, but it's of particular interest to me, as an author. I support the shift to paperback originals, for the same reason I support limited simultaneous theatrical/DVD release: Both remove artificial restraints on content distribution.

I also have come to support an end of the first-sale doctrine for books, even though it concerns me that libraries will be hurt. I would support lower prices or exemptions for libraries, but in the end, it is so much fairer to price books on a per-reader basis, that I'm persuaded the first-sale doctrine must go.

Of course, my goal in advocating an end to the first-sale doctrine is not to get as much revenue for authors as possible - for example, I wrote a column noting that I don't think authors should necessarily profit from Google's project to make their books searchable online. Rather, it's to better match the revenue from a particular book, to the genuine demand out there for it.

Until and unless eBooks become prevalent, modifying the first-sale doctrine would have only one effect, but it's a big one: The modification to the statute would force used bookstores and subscription-based book distributors (including, eBay, and to funnel some of their revenue back to publishers, and, thus, to authors. That would make the market more efficient in matching revenue to demand.

Julie Hilden, a FindLaw columnist, graduated from Yale Law School in 1992. She practiced First Amendment law at the D.C. law firm of Williams & Connolly from 1996-99. Hilden is also a novelist. In reviewing Hilden's novel, 3, Kirkus Reviews praised Hilden's "rather uncanny abilities," and Counterpunch called it "a must read.... a work of art." Hilden's website,, includes free MP3 and text downloads of the novel's first chapter.

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