andrew catellier

negativesign

Reselling Bits

Planet Money (a great podcast about economics) recently published an episode about the “hundreds of billions of dollars of pent-up digital wealth” (quote from John Ossenmacher, who thinks you should be able to sell unwanted MP3s), ReDigi and the difficulties of reselling music bought digitally—from the iTunes Store, Amazon Music or other sources.

In the podcast, Caitlyn Kenney and Robert Smith talked about the antiquated copyright laws currently governing the resale of copyrighted material and explain the lawsuit and trial against ReDigi.

The podcast didn’t talk about one other aspect of the story, though. The idea of reselling copyrighted digital assets is fundamentally flawed at an economic level. Here is my premise:

The price of a copyrighted asset is the sum total of the cost of the usage license and the distribution cost.

There’s a big disparity between the distribution costs for physical and digital copyrighted assets. The cost of distributing a physical asset includes packaging, media, and shipping. When a consumer buys a physical copy of the new Fall Out Boy album at a store, the consumer pays for the usage license and for distribution. The usage license travels along with the physical media, so the value of that license is available to whoever possesses the CD. The packaging and media are inherently valuable because they are physical goods that were refined from natural resources. Again, the value of the packaging and the media is available to whoever possesses them. However, the portion of the price that covered the distributor’s shipping cost is used up. If the consumer decides to sell the CD at a later point, the CD’s value is equal to the original price minus the shipping costs and wear and tear on the packaging and media. In this case there is still quite a bit of value left.

The cost of distributing a digital asset includes server storage space, bandwidth to deliver the asset, and personal storage space. When a consumer buys a digital copy of the new Fall Out Boy album on the iTunes store, the consumer pays for the usage license, distribution, and for storage on a playback device. Because the consumer can effortlessly and cheaply make exact and infinite copies of the digital album, it doesn’t make sense for the usage license to travel along with any of the copies. It’s logical that the usage license should stay with the consumer who purchased the digital album—upon purchase, the value of the usage license is used up. The “physical manifestation” of the digital album exists on storage that the consumer purchased separately. The storage device is inherently valuable because it is a physical good that was refined from natural resources, but the consumer will not sell the storage device or any portion of it when selling the digital album. The portion of the price that covered the distributor’s delivery bandwidth (or shipping) cost is used up.

Let’s recap. After buying a physical CD, there is residual value in the packaging, media and usage license. After buying a digital album, there is no residual value left. I believe the same principle applies to computer games and ebooks as well—reselling copyrighted assets with no physical media doesn’t make sense. My college microeconomics professor would take one look at ReDigi and facepalm.