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 DVDsí higher quality and features or they donít 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.

Filed Under: buying, copyright, dvds, first sale, licensing, movies, streaming
Companies: netflix

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  1. icon
    John Mitchell (profile), 12 Dec 2010 @ 8:53pm

    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.

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