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Amazon.com, Inc. (AMZN), eBay Inc. (EBAY): The Coming Revolution in Digital Content Reselling

Digital content reselling may seem like an oxymoron, but technology and legal developments may soon make the reselling of digital content of all types, audio, video and apps, easier than putting something on eBay Inc (NASDAQ:EBAY). Amazon.com, Inc. (NASDAQ:AMZN) and Apple, Inc. (NASDAQ:AAPL) have both filed patents for the digital swap meets of the future.

Amazon.com Inc. (AMZN)

Creative license

Most of the digital content we download to our electronic devices cannot be legally sold or transferred to anyone else. Unlike a good old fashioned book or CD, users are pretty much stuck with the digital content they “own”, forever. Since digital content never degrades, digital content providers such as music, video and software producers insisted on this provision as a condition of digital distribution.

It may seem unfair not to be able to sell something you own, but in fact, most digital content downloaded from iTunes or Google (NASDAQ:GOOG) Play or Amazon.com, Inc. (NASDAQ:AMZN) is only licensed to you. The license is a form of contract that you entered into when you clicked that Download button, whether you read the fine print of the end user license agreement (EULA) or not.

Even for content that is not protected by some form of digital rights management (DRM), the typical EULA specifies that the purchaser of the license is entitled to use the content only for personal, non-commercial purposes. In most cases, the user is not authorized to sell or transfer the content, even if it’s feasible to do so, and in many cases it’s not feasible.

Although Apple instituted a DRM-free system for digital music in the U.S., Apple continues to use its Fairplay DRM system to prevent copying of TV and film content. Like apps, these can only be installed on a limited number of devices belonging to the licensed user. Amazon imposes similar restrictions on Kindle books. Even Google Inc. (NASDAQ:GOOG) enforces license verification for apps through Google Play, which prevents transfer of apps to unauthorized devices and may even prevent an authorized user from using an app on a device if it isn’t connected to the Internet.

Turning the system on its ear

In late January, Amazon received a patent for “An electronic marketplace for used digital objects” and on March 7 the US Patent Office published Apple’s patent application for “Techniques . . . for managing access to a digital content item . . . to be transferred from one user to another.”

What the patents of Amazon.com, Inc. (NASDAQ:AMZN) and Apple do is allow a licensed user to relinquish the license and content back to a distributor such as Apple and provide for various mechanisms where the content could be transferred to a new purchaser. In effect, digital marketplaces could be created for the used content which would bring buyers and sellers together. The key is that the content distributors maintain ultimate control over the licensed content and ensure that the process doesn’t devolve into unlimited copying and piracy. Only one user at a time would be allowed to “own” a particular licensed content.

Does is really make sense to resell digital content, since it never wears out or degrades? I’ve been struggling to come up with a plausible business case for this that content providers would agree to. It’s clear that content users would like to be able to trade or resell content that is no longer wanted, but there would need to be some form of discount involved with the transaction in order to attract prospective buyers away from “new” content.

It’s not clear why content creators would ever agree to discounted selling of “used” digital content without some form of a value reduction mechanism that would justify offering a discount. Perhaps one approach would be to offer a transferable limited use license. This would provide a built in mechanism for devaluing the content, while at the same time offering a reasonable value proposition for the consumer. For instance, you might buy a transferable license for a video good for 10 views only. The more the video is watched, the less valuable the license would become, but it could be sold in the open market at any time.

The motivation for content distributors like Apple, Google, Amazon.com, Inc. (NASDAQ:AMZN) of such a system is that it would increase the number of transactions hosted by the distributors’ servers, and presumably boost revenues through the added transaction fees. And of course, the content providers would get their cut as well. You may wonder if this is just a glorified form of renting. It is, but it’s more flexible in that it allows consumers to pay proportionally to their actual usage.

Last quarter, Apple generated about $3.7 billion in revenue from iTunes and App Store sales, up 22% year-over-year, and Google generated about $800 million from Google Play, up over 100% year-over-year. For all of 2012, Amazon generated about $20 billion in media revenues, up 15% year-over-year. In all three, the exact amount of revenue from digital content is unknown, but it’s apparent that it’s a growing business for all three companies.

Legal monkey wrench

Even though content creators are protected by copyright law and the contract law behind licensing, every once in a while they’re dealt a blow by the American legal system. In a recent case decided on March 19 of this year, the court sided with Supap Kirtsaeng in Kirtsaeng v. John Wiley & Sons, Inc. Kirtsaeng had created a lucrative business importing used textbooks into the United States, and Wiley tried to put a stop to it. The Court upheld Kirtsaeng’s right of first sale, which means that once a copyrighted work is purchased, the work can legally be resold without obligation to the copyright holder. Copyright law only bans unauthorized duplication and sale of the copyrighted work.

If the U.S. court system ever decided that digital content consumers should be accorded a similar right of first sale, the contemplated online markets for “used” content would be the ideal way (from the content creators’ standpoint) to accommodate that right while blocking illicit replication of the digital content. The U.S. courts would probably see that as a suitable solution that protects the rights of all concerned. Thus, companies such as Amazon.com, Inc. (NASDAQ:AMZN) and Apple may be pursuing these digital marketplaces as a kind of insurance against any legal monkey wrench that might be hurled into their burgeoning digital content businesses.

The article The Coming Revolution in Digital Content Reselling originally appeared on Fool.com and is written by Mark Hibben.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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