Can a Used E-Book Market Survive the Legal Attacks?

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There's a potentially huge marketplace being born—for legitimate second-hand e-books, used digital music, and other pre-owned stuff made up of bits. And wouldn't it be nice to get a few bucks for that Psy album you bought so impulsively on iTunes last year?

The question is whether such a marketplace can survive the legal challenges to its existence.

Pre-owned digital content is trickier than an old CD: It's clearly against the law to sell a copy, and how else do you sell the song without actually selling the iPod or laptop on which it resides?

The startup ReDigi believed it had solved that riddle by creating a marketplace that keeps its digital goods in the cloud, where it is effectively the right of ownership that is bought and sold.

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ReDigi has been up and running as a kind of eBay for digital music since 2011, and it's planning to relaunch with a heavy emphasis on e-books in late summer, according to founder John Ossenmacher. But this spring it had a setback. A judge ruled that ReDigi infringed the rights of Capitol Records by facilitating the resale of copied digital music.

For Ossenmacher it comes down to a simple idea. "When you buy something you have the right to resell it," he said. The law calls that the first-sale doctrine. The other side of that coin is that you have no right to sell a reproduction. And Judge Richard Sullivan's March 30 ruling instead found that the service ReDigi provides "infringes Capitol's reproduction rights under any description of the technology." In short, it made illegal copies available for sale—the same bottom-line complaint that the Recording Industry Association of America made in its original cease-and-desist letter to ReDigi.

Ossenmacher blames himself. "We didn't do as good a job as we could have explaining what we do," he said. ReDigi's system goes to great lengths to ensure that copyright owners are protected, he said. "We don't take anything into our system without a legal pedigree."

In any case, that ruling, which ReDigi is appealing, was for version 1.0, and Ossenmacher said the newer version addresses the judge's concerns. (Capitol Records did not return a call for comment.)

Under ReDigi 2.0, a song purchased on iTunes goes directly to the buyer's space in the ReDigi cloud, and there it remains, with an arrow pointing to the rightful owner, who can make a legal copy for personal use. If she decides to resell and finds a buyer via ReDigi, she foregoes the right to the file, and the software scours her system for the song to ensure there are no illicit copies.

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Is it possible to beat the system and make illegitimate copies? Sure, but the reality is that most of the music circulating today are illicit copies. (Market tracker NPD Group reports that just 37 percent of music acquired by Americans in 2009 was paid for.)

"A used-content market doesn't change the ease or difficulty with which one can circumvent copyright protections," said Arun Sundararajan, a professor of information, operations and management sciences with NYU's Stern School of Business.

As content has gone digital, Sundararajan said, content creators and publishers have changed the rules, which used to be guided by copyright law. Now they're determined by the endless contracts consumers never read but must assent to before buying a 99-cent tune. "These contracts are more restrictive—they're really circumventing copyright law, and consumers don't seem to notice." Indeed, many of these contracts say you don't buy the content at all (never mind the "Buy It Now" directive), but are merely licensing it. And the first-sale doctrine does not apply to licensing.

Said Ossenmacher: "It's been a nice ride for the industry. They've done a good job of convincing the public that they're the law."

Failed Strategy

Sundararajan sees the recording industry's strategy as folly. "Their overprotective stance toward copyright has been to their detriment ever since Napster in 1999. And it's been a failure."

A more enlightened position, he suggests, would be to view the possibility of resale as adding to products' appeal. "It could be a driver of value for digital content," he said.

"In our market testing," Ossenmacher said, "we've learned that users will spend more money as well as try out a new album or e-book that they normally wouldn't purchase if there is a used marketplace available. ... ReDigi removes the risk of trying something new."

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But if a used e-book is in every way as good as the new, why will anyone buy new? Ossenmacher said for one, the supply is limited by the number of resellers, and secondly, publishers could offer extras and incentives for first purchase that are unavailable for secondhand—just as Hollywood offers DVD extras that are unavailable on Netflix.

Amazon may see the wisdom of resale—or it may simply see the writing on the wall. The online retail behemoth recently won a patent for a "secondary market for digital objects." Apple has been awarded a similar one.

Still, the Old Guard may want to shut the likes of ReDigi down, and may send an army of lawyers to do so. And with a legal structure written for a pre-digital era, they may succeed.

"The law is always behind," said Chicago-based copyright attorney Jon Perala. "The Copyright Act didn't even provide protection for phonograph records until 1972."

"It's up to Congress to bring the law up to date," he said.

The director of the U.S. Copyright Office, Maria Pallante, agrees, recently testifying before Congress that it's time for "the next great copyright act," and that lawmakers must consider "what does and does not belong under a copyright owner's control in the digital age."

Sundararajan adds, "I've been frustrated for the last decade by the failure to create a unified set of guidelines for digital products."

Where there has been legislative action, he said, it's been exclusively in the interests of industry. "The full focus has been piracy prevention and not protection of consumer rights."

By CNBC's Matt Twomey. Follow him on Twitter @Matt_Twomey.