Netflix's Move From DVDs To Streaming Shows The Massive Value Of First Sale Doctrine

from the those-exceptions-are-important dept

We’ve pointed out many times in the past that exceptions to copyright (such as fair use and the first sale doctrine) may actually be a lot more important than copyright itself in “promoting the progress.” For example, we’ve highlighted CCIA’s study that uses the identical methodology used by the entertainment industry to claim that copyright contributes $1.52 trillion to the economy to show that exceptions to copyright law (again, things like fair use and the first sale doctrine) contribute significantly more. However, have we ever really quantified specific exceptions? We recently covered how the movie studios were upset about Netflix, and demanding much higher fees for allowing streaming — and that actually highlights how damaging a loss of those copyright exceptions can be.

Edwad Epstein has a post over at pointing out the massive differences in costs facing Netflix between buying DVDs that it can rent by mail and licensing movies for streaming. The key issue: the first sale doctrine. If Netflix wants, it can buy DVDs from any particular source and then use them in its business. It need not get any licenses with the movie industry. Yet, for streaming, there is no first sale situation, so it needs to license. And the differences in costs to Netflix are substantial. Epstein notes that it costs Netflix about $15 to buy each DVD, but to license a single movie title the industry wants $16 million for a two year license.

Where Netflix can buy 10,000 copies of a major title for $150,000 to mail out, it will need to spend about $16 million to license it for streaming. Such a hundredfold increase in price can obviously be deleterious to profits especially since Netflix still has to maintain its mailing centers, and buy DVDs, for the subscribers who elect to continuing using the mail-in service either because they prefer DVDs? higher quality and features or they don?t have the apparatus to receive digital streaming.

First of all, $16 million for a single title? Yikes. Someone please tell me that’s only for the really big titles. But, even if the numbers are slightly off, think about the obvious impact here. When you make the product much more expensive, you’re definitely going to limit its availability to the public. Netflix will either choose to stream fewer movies or it will have to increase its own prices, creating a net loss for the public. In this case, the right of first sale allows Netflix to bring the cost of doing business down by an order of magnitude, since it is not wholly locked to the studios.

Of course, it’s a little more complicated than that. As we’ve seen with Redbox kiosk DVD rentals (and, to a lesser extent, Netflix), the movie studios have worked hard to get around first sale rights, by telling wholesalers not to supply DVDs to DVD rental companies if those companies won’t cough up some sort of revenue share plan. Those actions (which certainly seem to violate antitrust laws) suggest that the studios recognize how much value there is in killing first sale rights.

But as a society, this should concern us greatly. The move to digital actually allows the studios (and other content producers) to effectively kill off such first sale rights. We’ve seen this in other industries as well. There have long been questions about whether or not you can sell an iTunes song you legally purchased — and the video game industry has been so desperate to kill off the secondary market, that it’s quite excited about the move to digital.

This should be a concern for everyone, however. Studies have shown that a robust secondary (used) market actually helps drive the primary market and makes it larger. If you know you can resell something you bought, it makes you more willing to buy it (minimizing your risk) while also increasing the value of the product (since it can bring in some money on the back end). Yet, in the big content business’s short-sighted attempts to kill off the secondary market by going digital, they may do harm to the primary market as well.

Of course, the real issue is going to be that, one of these days, someone’s going to test the first sale rights on digital goods too, and I would imagine that there will be quite a giant lawsuit around that.

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Companies: netflix

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Comments on “Netflix's Move From DVDs To Streaming Shows The Massive Value Of First Sale Doctrine”

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bobb says:

The Average Schmuk On The Street

Does not pay any attention to things like first sale doctrine. Hell most don’t even know what it is until they Google it.

As our rights have been continually eroded over time with little push back from the TASOTS (The Average Schmuck On The Street)I don’t see this as making any difference.

ACTA and other rights restrictions just like the health care law is meant to take away your choices and control your behavior.

Get used to it.

streetlight (profile) says:

Maybe off topic: Netflix as streaming-only

I’ve been interested in getting a Roku box to view Neflix movies. We currently have the $9 – oops $10 – one disk plan, and I looked up about 50 movies I want to look at and NONE of them are available for streaming. Some have said that only 10% of Netflix’s library is available for streaming. That’s stuff they have now, not 28+ days from now.

How many other folks will find the streaming-only plan to be not very useful? How will the affect their profits?

Anonymous Coward says:

Re: Maybe off topic: Netflix as streaming-only

Well interestingly you get up to four streams for the $7.99 compared to the 1 steam and 1 dvd you get now. As far as the roku goes, do it.

As far as profits are concerned, think about it this way. It costs NetFlix something like .05 cents an hour/stream, it costs them 90 cents to send you a disc round trip. That is why they limit how many disc you can get in a month.

I don’t know where the 16 million came from, but last I heard it was 600K per year for a movie.

Anonymous Coward says:

Re: Re: Maybe off topic: Netflix as streaming-only

I shoudl have mentioned I am a roku owner and a custom installer. As far as netflix devices go my favorites are
1. Roku (has lots of extras, for instance I run a home movie server.
2. Wii(i like being able to point)
3. Computer(doesn’t sit on lap well)
4. Disc Player(not very good search)
5. Xbox (I shouldn’t have to pay a fee to use my toy)
Unranked Ps3(never played with one)

average_joe says:

Re: Maybe off topic: Netflix as streaming-only

I guess it depends on taste. Netflix streaming has more stuff than I could ever watch–and it’s tons of stuff I want to watch. The DVDs are great for new releases or some TV shows, but in general, I’m just as happy watching the old stuff over streaming.

I just got two Roku boxes a couple of weeks ago and I absolutely love them. I’m ordering another one tomorrow (free shipping this weekend from Roku). I’d say look at what’s available and decide whether you like the selection. Between Roku, Hulu, and Amazon on Demand, my TV needs are more than met.


Re: Re: Maybe off topic: Netflix as streaming-only

If you decide you want to watch something and it’s not available in streaming form, then you’re just out of luck.

That’s the problem with ANY format shift. Some things might be left behind because they aren’t considered popular enough or whatever other excuses can you can come up with.

Netflix is a rental service. If I can’t control what I watch, then I might as well be subscribing to cable.

dbin78 (profile) says:

Re: Maybe off topic: Netflix as streaming-only

I changed to the streaming only plan. I had the plan you have with one disk and always had the disk for months on end. Streaming might not be for everyone though; people need to understand you will not get new releases and that movies will come in and out of streaming ability. Being a fan of independent film and documentaries the streaming works great for me.

Duke (profile) says:

Re: Re: $15 for DVD? HUH?

This is the basic principle of the “first sale doctrine” in US law (from my understanding of it). It means that once you own copyrighted material (and there is a ‘first sale’) you can legally resell, rent, loan etc. it without needing to have any sort of interaction with the copyright owner.

This is, perhaps, why the rental market is rather different here in the UK; there is no Netflix etc., and the attempt to set something similar up didn’t last long – but Blockbuster (which recently folded in the US) seems to be going strong, presumably through lack of competition.

Interestingly, this is pretty much the complete opposite of EU law on the subject, where renting and loaning *are* restricted by copyright (the ‘first sale’ idea wouldn’t work anyway as the data copyrighted cannot be owned or sold – at least in the UK). There is even a thing called the “Artist’s Resale Right” that means anyone selling certain physical objects in which there is copyright, in a certain way, must pay a royalty to the copyright owner.

John Mitchell (profile) says:

Re: $15 for DVD? HUH?

Perfectly legal — an has been forever. Often called the “first sale doctrine,” it is currently codified in two sections of the Copyright Act. Section 202 says that copies and copyrights are two separate things, and selling one does not convey the other. Section 109(a) says that the owner of a copy lawfully made under the Copyright Act is entitled, without the consent of the copyright owner, to transfer title or possession to anyone. Section 106, which confers the copyright in distribution, makes it “subject to” section 109, so the right of the owner to rent, lend, sell or give away the disc trumps the rights of the copyright owner. But it is provides a huge benefit to copyright owners. I mean, how much would you really pay for a new car if you had to have the manufacturer’s permission to trade it in, sell it, let someone else borrow it, or let the junk dealer pick it up? I’m willing to pay $15 bucks in part because I am free to part with it.

Anonymous Coward says:

I want to know something.

Right now, format shifting is 100% legal, the location of the DVD is irrelevant so long as netflix accounts for every DVD it owns and is not allowing the same DVD to be used by 2 customers at the same time. Courts have also said that a DVR at home or a DVR at the cable company is 100% legal.

Why cant Netflix buy DVD’s from Wall-mart assign a unique key for each DVD it owns, put them in a giant DVR and stream that data to its customers. Thus when a customer locks a unique copy of a given dvd for streaming he is simply using his rights to content shift and remote DVR.

Finally, Most equipment that can handle Netfilx can also play DVD’s. Thus its equipment that is authorized to decode DVD’s. The DVD need not be physically located inside the player for the player to use its software decoding ability’s and as such (at least till someone buys out the DVD lobby) You could just transmit the encrypted file and let the player decode the data.

Now the price on the other hand makes some sense, Netflix has X customers, of those y% will watch a given movie. Netflix has spent large amounts of money to figure out what its customers like and can use that data to say that hit movie will most likly be enjoyed by Z amount of people.

Hollywood takes this and says, if we rented via blockbuster we would earn x, to earn the same value of x we demand 15 million.

All it will take is some creative accounting, a tracking system, and paying “shoppers” to run out and by lots of DVD’s of a given movie from retailers (most of whom will not have a contract with the studio) and you can get around the licence issue.

I say Netflix needs to come up with how much it would cost to do this, take that to Hollywood, and tell them, “We’ll just buy copys at retail if you attempt to charge such insane prices.”

David Sanger (profile) says:

The argument (perhaps from the studios) that it would not be fair for Netflix to buy just one dvd of a movie and then stream it tens of thousands of times, does make some sense.

But a reasonable solution could be that if they buy (license) say, 10,000 copies at the dvd price, then they can stream up to 10,000 simultaneous showings of a movie.

It wouldn’t be too much of a hardship for viewers to understand that all the available films are being watched at some particular time and Netflix could manage their purchased to meet demand just like they do now with physical dvds.

BigKeithO (profile) says:

Re: Re:

This is what my local library does with eBooks. It does drive me a little insane to see an eBook is “checked out” when you want it and you have to wait for it to be “returned” before you can have it.

I do agree that it would be cheaper for Netflix and the customer this way and should increase the streaming selection. The lesser of two evils?

Rich Fiscus (profile) says:

Re: Comparing Apples to Bicycle Tires

In a word, yes. The first sale doctrine is a legal principle based derived from a cornerstone of modern democracy (private property ownership). The business models which are failing are side effects of the limitations inherent in outdated technology. The validity of the legal principle hasn’t changed. The limitations of technology clearly have.

Anonymous Coward says:

The difference between physical DVD purchase and streaming is pretty wide. The legal aspects are rather significant.

Why to TV stations not just go to Blockbuster, rent a DVD, and broadcast it? After all, they are making only a single broadcast? The answer lies in the distribution rights granted when you purchase a DVD, and all the rights that exist under law for both the rights holders and the buyers.

The physical discs limit the number of plays per unit (maybe 5 or 6 cycles per month), where steaming is limited only by the ability to stream. While a DVD might get 30 plays in it’s life, streaming could be for tens of millions of people. It is a different product, and different delivery method.

When you look at the potential in streaming (an unlimited number of views on any day), the actual license fee is low.

What I don’t get is this: If you read Epstein’s piece closely, you will realize that the problem isn’t licensing fees, but rather that Netflix is moving into a market place where they actually have competition with a lower price structure, and that their legacy DVD distribution system is what hurts them the most. If anything, they appear to be suffering the classic market disruption, and the only way out is to move from their relatively safe little pool into an ocean filled with sharks.

Netflix streaming will end up competing with the studios, the broadcasters, the cable movie channels, PPV providers, and a myriad of those technologies that are coming to bring content to your home. It is a typical middle man squeeze, Netflix is a middle man aggregation business that only works when there is not a cheaper option. With streaming, there is a cheaper option, and studios (and TV networks) can go “customer direct” with no need to deal with Netflix.

I am surprised that nobody at TD noticed this.

BigKeithO (profile) says:

Re: Re:

We’ve noticed. I’m surprised no one in the movie industry has noticed this. Why haven’t they done it yet?

Would Netflix be willing to face the inevitable lawsuit when they rip all of the DVD’s in their collection and stream them out to customers? If they had 20,000 copies of a DVD and limited the stream to 20,000 IP’s at a time would they fall on the legal side of the law? Would first sale protect them then? I would assume not or they have done this already.

Jim (user link) says:

Re: Re:

Great points, AC. I’ve been thinking about it too, and I think it may ultimately be Netflix’s Achilles’ heel. Their streaming technology is relatively easy and cheap to copy (at least compared to their physical dist infrastructure). Netlix has little significant proprietary technology. And Netflix is ultimately completely dependent on companies that have government-backed monopoly rights (a.k.a. “copyrights”) for the content Netflix MUST have. Those copyright holders will demand the maximum “rents” from Netflix. An economist might tell you that those rents will keep going up until just before the point where it makes no sense for Netflix to be in business. In other words, the monopolists will take every crumb off the table, leaving Netflix with just enough calories to live. Anyway, that’s my story and I’m stickig with it.

nasch (profile) says:

Re: Re:

I would rather deal with just Netflix than separately with however many studios I’m interested in watching movies from. If you want to watch a movie but aren’t sure which one (a common scenario for streamers) how much of a hassle would it be to first decide what studio you want to browse and then look for movies from that studio? Who is going to do that?

No, there will be a successful middleman/aggregator, and it won’t be studio-controlled, because they would just F it up. Netflix is in a great position for continued success IMO.

bdhoro (profile) says:

Its ok.. they're fighting a losing fight.

I mean… who cares how much more money they think they’ll make from going digital. The fact is, if its priced more expensive than people think its worth, they will download it illegally for free, foregoing any profits the industry believes they deserve.

I generally use the rule, download illegally first, and if the game/movie/show is really good enough to want to spend money on for some higher quality, I consider buying it. Truth is normally I don’t get to that point as most of these things aren’t worth the hard drive space they take up.

Thomas (profile) says:

antitrust laws..

are not something the entertainment industry worries about; they slip enough dirty money under the table to Congress and the regulatory agencies to keep them quiet. And with the DOJ being taken over by entertainment industry lawyers, the chances of them being prosecuted for pretty much anyting is about equal to the prospects for lasting peace in the Middle East. They already have enough influence at Homeland Security, so why should they worry about such things as antitrust?

16 million for streaming per movie?????? they are so greedy it’s unbelievable.

I don’t bother with Netflix – I just watch it on Cable or if it’s really good I buy the DVD.

Anonymous Coward says:

Re: antitrust laws..

Thomas, I have to say that you haven’t thought your stand through very well.

16 million for streaming a movie, all day, every day, for 2 years. That is about $22,000 per day, for essentially an unlimited number of viewers.

Second, if you are watching it on cable, well,you are still paying for it. You pay the cable company, and the cable company pays to carry the channels, and the channels pay for the content. So at the end of the day, you aren’t sticking it to the man, you are just paying him in a different way at a different time.

nasch (profile) says:

Re: Re: antitrust laws..

16 million for streaming a movie, all day, every day, for 2 years. That is about $22,000 per day, for essentially an unlimited number of viewers.

For one movie. That doesn’t strike you as an enormous amount of money? To stream 10,000 titles (less than half their library I think) would cost $220 million a day. 80 billion dollars per year. You see the problem?

sand (profile) says:

Netflix ++

There’s not much comfort in the copyright law (below), it’s not a first sale issue but rather one of public performance. But there is comfort in the fact that the market hates a margin. And the last time I checked, horizontal price fixing is still a Sherman Act violation.

? 106. Exclusive rights in copyrighted works38
Subject to sections 107 through 122, the owner of copyright under this title has the exclusive rights to do and to authorize any of the following: …..

(4) in the case of literary, musical, dramatic, and choreographic works, pantomimes, and motion pictures and other audiovisual works, to perform the copyrighted work publicly;

Jimr (profile) says:

16 Million sounds like a lot

Back in the glory days of Block Buster I read they would spend about $30 Million to purchase two movies to rent in each store. So for $16 million for the right to stream it does not sound to bad. You just need a large enough market to justify it. If they start to be see digital downloads the size of old block busters physical distribution then they could make lots of money. Makes it virtually impossible for a start up to enter the market with such high start up costs.

Given the unabashed greed of the movie industry I though they would want even a better deal like $16 Million PLUS 98.99% of Netflix’s gross.

Anonymous Coward says:

I was just pondering this over the weekend. I recently purchased a used copy of Boarderlands from Gamestop at a greatly reduced cost. I played the game over the weekend and really enjoyed it. I enjoyed it enough that I am actually considering buying some of the DLC for it. I would have never purchased this game for the full price of 59.99 and therefore never purchased any of its DLC. Just an example of the secodndary market drives the primary market. If they kill of the secondary market I guarantee that will translate into less money for them in the long run. ‘Penny wise pound foolish’

needy says:

using the internet for digital downloads is fine as long as it is done sensibly and priced right for consumers. this is something the entertainment industries, in the stupidity and prehistoric thinking have been fighting against for a long time now. however, from what a friend tells me, some manufacturers are selling disks with just half a game on, the other half has to be downloaded from the ‘net. what if you have no internet? what if you dont want to play games on-line? i think this is very bad practice, lacking the sense needed i previously mentioned. when you buy a car, you dont expect to then buy the wheels as separate items so you can drive it, do you?

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