On September 3rd News.com reported that web developer George Hotelling was attempting to sell a song downloaded from Apple’s iTunes music service. Although this and most subsequent news reports focused on the selling of songs, the actual transaction that ended up taking place was not simply the sale of a song but the sale of an iTunes user account, including one file previously purchased via that account.

Hotelling’s transaction did not violate the iTunes Terms of Service Agreement. Although the agreement states in section 8(a) that “You should not reveal your Account information to anyone else or use anyone else’s Account,” this is a suggestion for maintaining account security rather than a prohibition of the transferral of user accounts. More importantly, the transferral of the single AAC file which had been purchased through the account did not violate any of the Usage Rules in section 9(b). Some might claim that this transferral was a “commercial use” of the file and thus not authorized by the Usage Rules, but Hotelling was just giving Elder access to the data necessary to make full use of the user account he had purchased.

Although Hotelling did not violate the terms of his agreement with Apple, it is conceivable that Apple or another party might challenge the transaction in court. There are three factors which should be considered when deciding whether to allow such transactions: market efficiency, consumer choice, and incentives to create new music.

Extending copyright owners’ exclusive rights of distribution by disallowing a secondhand market in iTunes accounts and downloads would have a negative impact on market efficiency. In an efficient market everyone who wants to buy a product buys it. I could be unwilling to pay $12 for a new paperback of a book I am only mildly interested in, but willing to pay $4 for it in a secondhand store. The secondhand market ensures that this transaction can occur. This benefits me, since I am able to obtain the book at a price I am willing and able to pay, benefits the used book seller, since they are able to sell something which they owned and wanted to sell, and, perhaps indirectly, benefits the author by further spreading his ideas and increasing his fame (if the book is good). Secondhand markets also allow the further dissemination of discontinued products. If Apple were to decide that it was no longer worthwhile to offer iTunes by The Fat Boys, Fat Boys fans should to be able to buy an “All You Can Eat” AAC file secondhand. We ought not interfere in the efficient functioning of the market without good reason.

An efficient market allows different consumers to pay different prices. It also allows consumers to choose from a variety of distribution models, depending on what fits their needs. If I want to see Citizen Kane, I have a number of choices. I can buy the DVD. I can rent the DVD. I can purchase a single viewing through a pay-per-view television service. I can subscribe to a premium cable channel specializing in classic films. In the future I may have even more choices available to me. By prohibiting the resale of iTunes accounts and downloads, we may be prematurely foreclosing consumer choices not yet available. For instance, I can imagine music experts in particular genres opening iTunes accounts, using their expertise to select and sequence the 100 best songs of a particular genre, and then reselling these accounts for $120, making $21 in profit. Why would we want to disallow such a service, when it clearly provides some value to consumers and allows music experts to profit from their knowledge? Likewise, the rental of iTunes, like the rental of movies, might create a new market fulfilling the desires of consumers who don’t care to keep media on a long-term basis (though it is unclear how this could be achieved given the technical barriers Apple has erected).

Of course, market efficiency and consumer choice wouldn’t mean much if no new music were being recorded. If we accept the Founding Fathers’ assertion that creators need the financial incentives provided by copyright to continue creating, then we need to take care not to destroy those incentives. The transmission of downloads as part of the resale process would, like any digital transmission, involve copying and thus would infringe upon the copyright owners’ exclusive rights of reproduction. Fortunately, this is unlikely to nullify the creators’ incentives. Although some consumers may choose to buy accounts and downloads on a secondhand market, thus denying creators profits from those sales, the ease and convenience with which consumers can buy directly from Apple means that such losses will be marginal. The fact that the secondhand market for CDs has not destroyed the incentives for musicians to record new albums, despite the fact that used CDs can be bought at discounts far larger than the 50% discount Elder received, would seem to support this conclusion. Copyright owners might claim that the ease and low cost of digital transmissions mean that secondhand markets in digital goods will have a much larger impact, but there is no evidence to support this. “Firsthand” markets in digital works will have these same advantages, and in fact may dominate secondhand markets even more than in the off-line world, due to the network effects commonly observed in on-line businesses.

The courts ought to uphold the Hotelling-Elder transaction were it to be challenged. To not to do so would negatively impact market efficiency and consumer choice, and the danger of hurting creators’ incentives is negligible. Note, however, that this balance is possible due to the technical barriers that Apple has erected, which resulted in Hotelling selling his entire iTunes account to Elder. Were the system coded differently, allowing resale might severely damage incentives (for example, if Hotelling could still use his copy of the AAC file after selling his account). The general question of whether or not resale of digital goods should be allowed must be answered in the context of specific systems such as iTunes and the details of their contractual agreements and technological protections. Requiring that all such digital distribution systems guarantee the right of first sale, without waiting to see what variety of systems become available and considering how each system affects the factors discussed above, would be a mistake.

On March 6, 2003, in the midst of a growing public outcry against unsolicited computer email (“Spam”), Sen. Mark Dayton (D, MN) introduced S.563, the “Computer Owners’ Bill of Rights,” which was referred to the Senate Committee on Commerce, Science, and Transportation.

The following is the opening statement I would have read, had I been called as a witness to testify before the Committee during its initial hearing on S.563.

Thank you, Mr. Chairman, for the opportunity to address the Committee regarding S.563, the “Computer Owners’ Bill of Rights.” Senator Dayton’s bill would attempt to ensure standard levels of technical support for computer users and give users a standard, federally enforced way to “opt out” of receiving spam.

There is no doubt that the state of support available for consumer-level hardware and software is abysmal. It seems natural to establish a certain baseline of support that consumers can expect when they purchase computer equipment or software, just as there standards for safety in the automobile industry. Even if there is no enforced regulation of consumer technical support, guidelines regarding self-reporting of compliance with government-established standards might help consumers to make informed decisions when choosing which products to buy.

There is also no doubt that the amount of spam flooding Americans’ inboxes is growing unmanageable. A national registry of email addresses would seem to be a natural extension of the extremely popular National Do Not Call Registry. Currently consumers must opt-out of each marketer’s list separately, if they are even able to opt out at all.

Unfortunately, in my expert opinion Mr. Dayton’s bill, while well-intentioned, is unworkable. Unlike automobiles, computer hardware and software are used in such a multitude of ways that it is inadvisable to attempt to set forth rules about how they should be supported. Any guidelines are likely to quickly go out of date given the rapid evolution of computer technologies. Moreover it is unclear what the requirements will be for noncommercial software creators, such as the networks of volunteers that create the Linux operating system and the Apache web server. Support for this type of open-source software, despite its highly decentralized nature, is often quite good, but it is not clear how it could meet standards developed for commercial software organizations. Thus such standards might not only mislead consumers, but also hurt innovation in the open-source and free software sectors.

Of greater concern, however, is the feasibility of a national “do not spam” registry. Email does not work like telephone calls, and creating such a registry is not simply a matter of extending the Do Not Call Registry to cover email. First of all, email lacks the audit trail that phone calls have. Phone companies keep track of every call made for billing purposes, and can unambiguously determine if a telemarketing company has violated the terms of the Do Not Call Registry. This is emphatically not the case for emails. The most egregious spammers forge email headers to make this type of audit difficult or impossible. Though legitimate marketing organizations are unlikely to engage in these practices, legitimate organizations are not responsible for the bulk of spam. Moreover, just the existence of such a database might actually increase the flow of spam. If criminals successfully compromised the registry, illegal spamming organizations could be provided with a wealth of legitimate email addresses. Even if the addresses were encrypted, spammers could use the encrypted data to check the legitimacy of addresses harvesting from the Internet.

I hope that the Committee will avoid the temptation to subscribe to the quick fixes proposed by Senator Dayton’s bill. If however the bill does go forward, I would like to ask Mr. Dayton to consider two changes. First, I would like to see Section 3 of the bill amended to acknowledge the existence of noncommercial software organizations, and to clearly state that separate standards will be established for these organizations. Second, I would like to see a prohibition on the forging of email headers added to Section 5, to prevent the already widespread falsification that is likely to make a “do not spam” registry ineffective. Thank you for your time.