November 22, 2011

"We must move consumers in mass numbers toward collecting movies digitally". "Kevin Tsujihara, president of Warner Home Entertainment" may feel he has no other choice. "Purchases provide margins for the studios that are typically three times greater than rentals" explains Brooks Barnes (*) and "rental services have severely cut into purchases".

Unfortunately for Kevin Tsujihara, consumers do have a choice. "It remains far, far easier for DVD-buying consumers to pirate a digital copy of their movie", according to "Richard Greenfield, an analyst for BTIG Capital". Were Steve Jobs still among us to bind our honesty with the superior simplicity of his services, even though Apple iTunes takes so big a bite off music companies!

Kevin Tsujihara hopes he can turn his Flixster service into a new iTunes and who can criticize him for trying? What he should realize though is that the music industry continues down the path to willful self-destruction, sucking other content industries into a black hole of its own creation.

Collectors by nature are highly acquisitive and it is no wonder Kevin Tsujihara wants to collect them and their personal data. "If Warner sees that a user has bought five of its eight Harry Potter films, the studio can try to sell the other three". But what would be the impact on the art market if the law were to force Sotheby and other auction houses to close so as to prevent collectors to cash out?

This is exactly what the Recording Industry Association of America wants to achieve for music. Ben Sisario tells us it has "sent ReDigi a cease and desist letter, accusing it of copyright infringement" for its new "secondhand marketplace for digital music" (**).

Yes, yes, I understand my assimilating Sotheby to a flea market might raise some eyebrows. Indeed the gulf in price and status between a record and a painting justify entirely different venues. But not all paintings sell for millions and nowadays no undue privilege should attached itself to nobility.

Let no one object that, contrary to industrial recordings, art rises in value overtime. Art collectors know their investment is not guaranteed. Popular artists may go out of fashion and even established masters may have to be discounted for the sake of a sale.

The only receivable difference is therefore that each art object is unique while nothing distinguishes two copies of the same song.

However, if a consumer to whom Kevin Tsujihara sells a Flixster movie cannot prove she now owns something distinct from the Warner digital master, the sale is a sham and Kevin Tsujihara a fraudster. What the consumer receives for her money is nothing but the right to watch a movie, in other words a rental. If so, why pay a premium?

True, Flickster allows the consumer to watch the same movie as many times as she wishes without having to pay each time. I never said every rental business model must be the same. Flickster is no Netflix. Yet the two services compete in the same lower margin market segment.

If Kevin Tsujihara wants to claim he sells digital movies, he must therefore find a way to distinguish two copies of the same song. Of course he also knows this is necessary to combat digital piracy since one must be able to recognize a bootlegged copy from a legal one.

This is difficult but not impossible. For any watermark embedded in a legal file, count on experts to find how to excise it without diminishing the quality of the signal. But if this enables the pirate to free the file from its digital rights management, it does not turn it into a second legal copy.

I strongly suspect Kevin Tsujihara has some such solution. But then he better object to the RIAA's threats against ReDigi. For obviously distinguishable digital copies are no different than physical CD's, to which the "First Sale" doctrine applies (1). Once a consumer buys a CD, not only she can listen to it for free as long as she wants but she can resell it for cash and bequeath it at will. This is precisely DeRigi's response (2).

The law is clear despite its many scars from past pronaocratic battles, e.g. treating movies and songs in different ways. But it suffers from a programming bug (3). It defines the digital 'copy' to be the physical medium on which the bits reside. What is legal then is to sell this physical medium. As "transferring a digital file from one party to another usually involves making a copy of it" on another storage device, it may well be illegal.

Lawyers love such bugs. As a software engineer, I like to squash them. What if ReDigi asked its users to procure USB keys? Under fair use, a would-be seller may transfer the record to his key. DeRigi may then buy both the seller's and the buyer's keys. Notice the purchase did not move the music to a new medium. Using fair use again, DeRigi may transfer its "seller's key" unto its "buyer's key". It then sells the latter back to the buyer.

Obviously DeRigi can make this complex series of legal steps seamless and user friendly. The key to my scheme is that files may be legally moved from medium to medium within the scope of a single, clear, legal ownership. Even if this falls under what "Jason M. Schultz, an assistant professor of law", calls "largely untested in the courts", will the RIAA dare question it? Will it want to kill all cloud storage services, starting with Google Music?

Make no mistake. The threat DeRigi represents for the RIAA has little to do with giving digital pirates a convenient fence. It is mortal nevertheless.

Most collectors spend a tiny fraction of their time enjoying their possessions. If they could offload them as soon as they are done to buy them back any time they want, why would they tie their money down? For the price of what they can peruse at one time, they can enjoy the whole collection.

This supposes two conditions, that the circulating stock be big enough to satisfy demand and that the goods be impervious to usage. The latter is the present benefit of digitization. The former is the result of scale. DeRigi is not yet there but imagine Google Music offered the same service. The market for digital goods would shrink one hundredfold, from the number of collectors down to the number of their simultaneous enjoyments (4).

It is easier said than done. It may not work as well as advertised. But it has been done before, with physical currency and bank demand accounts.

Shouldn't DeRigi then fear Google Music more than the RIAA? Not a bit. For Google Music also sells "first hand" digital music. "[ReDigi] also plans to open a similar market for e-books". CEO John Ossenmacher can be certain Amazon will not expand its used book selling service to the Kindle.

There are fences to defeat though. Not DeRigi, but Amazon and Google, which collect collectors' personal data for free, Kevin Tsujihara's dream!

Philippe Coueignoux

• (*) ... A Bid to Get Film Lovers Not to Rent, by Brooks Barnes (New York Times) - Nov 12, 2011
• (**) . Site to Resell Music Files Has Critics, by Ben Sisario (New York Times) - Nov 15, 2011
• (1) see the statute of the First Sale Doctrine in the US
• (2) see DeRigi's position, as downloaded from its site on 11/18/2011
• (3) for a comparison between software and law, see my introduction on how to read the law for programmers
• (4) the division by 100 is my personal, purely speculative estimate. But even a very conservative division by 10 would be catastrophic.