Secondary Markets and Digital Media

Curator's Note

A secondary market exists whenever a good is available for purchase through channels not part of that good’s “official” distribution. Such markets provide two important economic functions. First, they increase the value of ownership. By enabling consumers to liquidate goods, they reduce the risk involved with purchase and allow for goods to function as investments. Second, they employ demand-driven, differential pricing that is better able to maximize economic returns and market penetration than the supply-side pricing of primary markets. Though the increased economic activity benefits the economy as a whole, greater market penetration can also benefit a producer if that good is either a gateway  to other purchases (an iPad or XBox) or part of a franchise whose value partially derives from exposure (a pop song or Marvel comic).

Despite the benefits secondary markets offer, however, most entertainment industries have viewed them as competitors, not collaborators. Hollywood companies in particular have seen the profits derived from secondary markets as a kind of theft and have attempted to restrain them. The turn to digital media thus represents a unique opportunity for these companies, as the digital media ecosystem offers the potential for the elimination of  secondary markets altogether.

This elimination occurs partly through DRM, which—though typically presented as a response to piracy—also prevents secondary markets. By requiring purchases to be linked to an account, media producers rule out any subsequent sale or trade. This technical limitation is supported by legal restrictions, embedded in TOS, which delimit acceptable use.

A less obvious threat to secondary markets has to do with supply. The current digital ecosystem employs a model of unlimited product supply. Under demand-based pricing, unlimited supply of a perfectly durable good should eventually drive prices down close to nothing. The possibility of an alternative DRM that enables secondary sales is thus ruled out in advance, since unlimited supply would result in near value-less content in both primary and secondary markets.

Unless the digital media ecosystem changes radically—embracing both limited supply and more flexible DRM—there will be no secondary market for digital media. Media producers will claim this as a victory. But it is unclear whether in the long run the lack of a secondary market will benefit producers or result in reduced economic activity and downward pricing pressure as the value of media ownership decreases. 


Thought provoking stuff. I do, however, wonder about the impact of employee turnover, in particular the increasing influx of Millennials into the entertainment industry's managerial ranks, on the understanding of digital technology as a secondary market. Of course, this generation's experience with digital technology is itself fragmented, some having come of age with digital exchange programs such as Napster and others inheriting its legacy with iTunes digital purchases. Will the very divisions between primary and secondary markets become more elusive, what with individuals streaming YouTube videos in the background of their web-browsers as alternatives to purchasing individual tracks? 

Lately I've been most intrigued about the applications such as Spotify, which essentially allow free membership to play unlimited amounts of music, with sparse advertisements in between, as long as you're at your own WiFi connected laptop/computer. Paid memberships allow one to take the application, and their music libraries offline and onto their mobile devices. In a world where it's easier to connect wirelessly to the internet, these members are essentially receiving free, unlimited music. Advertising has taken a larger role on these 'free' websites, serving as the sole profit maker. Seeing as how the music library on Spotify has many of the mainstream songs available at the fingertips of its users, one can imagine the producers and labels being satisfied with their shares of the profits from advertising and the paid memberships. Are the violent days of piracy wars coming to an end due to this new compromise? 

The idea that there can be a secondary market for digital media is intriguing. Having traded in the secondary market only with non-digital media objects such as books and CDs, I wonder what the secondary market for digital media would look like. I see the point you make about how the prices of digital media items would be driven down to almost nothing in the current model of unlimited supply. I'm all for more flexible DRM, but I wonder if limited supply would solely help with reasonable circulation of good in the hypothetical secondary market for digital media. Wouldn't it be possible, for example, for some buyers to monopolize and drive up the prices? Like it happens sometimes with limited-supply luxury items?

If secondary markets were eliminated sometime in the future, I believe there would be drastic economic changes for the media market. If people no longer perceive a sense of investment when purchasing goods, it is logical to think that they would subsequently purchase less goods.

However, I do not see secondary markets elimination in the near future, as they are beneficial for the supply end of the market. If goods are constantly available through secondary markets, then demand is always met. I see how Hollywood companies in particular could be against this because of issues of piracy, but in cases such as the above video, there is no illegal action taking place. Rather, it is simply the liquidation and trade of goods from person to person. Though this decreases the amount of people purchasing goods from primary markets, it is done so in a legal manner. Getting rid of old CDs, DVDs, and books allows others who want them the opportunity to purchase them.

On another note, the policies regarding software like iTunes that require an account be linked to certain streamed files in order to acquire rights to own and view movies as well as own and listen to music is a viable, fool-proof system. Rather, the issue I see that Hollywood companies should be the most concerned with is piracy. Illegally downloading is unjustifiable as it literally breaks the law, and I believe it is a stronger cause for the downfall of purchasing from primary markets than secondary markets are. In this way, it seems the blame is somewhat misplaced on secondary markets. 

Melissa, you raise some good points about Hollywood companies, but I'm afraid I have to disagree with your analysis. Whether or not secondary sales of physical media products are legal (and you're right that most of them currently are), many big media companies have, at various historical moments, sought to restrict them. Major Hollywood studios did when it came to VHS (something Frederick Wasser recounts in his excellent Veni, Vidi, Video). Software companies are increasingly trying to do so now, sometimes even crossing legal lines in the process (see Blizzard's recent trouble with the Korean government over Diablo III).

It should, however, be noted that when it comes to secondary sales of digital media, the relevant legal issues are still being worked out. The DMCA deliberately lacks a provision extending first sale doctrine to digital products; it would thus seem that secondary sales are not legal in the U.S. A recent ruling by the Court of Justice of the EU, however, would seem to protect such a right (for software, at least) in Europe. In any case, as the technology and business enivroment evolves, so too will the law, so we can expect a lot of development in this area over the next decade.

When the DMCA was drafted, the major legal reason for denying the right of resale for digital products was that such sale requires selling a copy of the product, not the product itself. To legally sell a copy, one would need to possess the copyright. Since consumers do not possess that, secondary sales would involve copyright infringment. Over the last two years, however, as DRM has become more robust and has become increasingly deployed through "walled" services, such as Amazon Instant Play, the iTunes store, and Ultraviolet, consumers no longer appear to be buying copies (even when files are deposited on their harddrives). They are buying access rights. Thus the original reason for restricting secondary sale may not be relevant. Within the "walled service," secondary sale could be possible without requiring copying (technically, one would be reselling an access right rather than the product itself). I expect will we see some lawsuits around this in the near future (does someone have the right, for instance, to sell their itunes account?). When these happen, rest assured: copyright holders will submit briefs arguing against secondary sale rights.

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