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.