Episode 449: The Hidden Digital Wealth In Your Pocket

Apr 5, 2013
Originally published on April 11, 2013 10:09 am

We have secondary markets for almost everything. If you no longer want that old record or CD, you can sell it to a thrift store, used record store, or on eBay.

But what about songs from your iTunes library you no longer want? Or ebooks you've purchased and don't want to keep? Do you have the right to resell these digital goods?

Today on the show, we've got the story of a company that wants to be the used record store for the digital age. Redigi launched in 2011 and quickly found themselves in court facing allegations of copyright infringement. The case involves a law from 1976, a phonorecord and a judge that quotes Star Trek.

For more on the legal case involving ReDigi check out our earlier posts:

For more on the legal issues involved in digital resale, we recommend the blogs of two guests featured in the show:

Music: Adele's "Rolling in the Deep" & "Someone Like You,"Peter Frampton's "Baby I Love Your Way," and LMFAO's "Party Rock." Find us: Twitter/ Facebook/Spotify/ Tumblr. Download the Planet Money iPhone App.

Copyright 2018 NPR. To see more, visit http://www.npr.org/.


You would be amazed at how many people are in a record store, in the afternoon, in the middle of a work day. This store's called Other Music. It's in the East Village of Manhattan. And we went there to check out their used music selection.


Josh Madell is the co-owner of the store. And he says even in this day and age - even in the age of the Internet and the iPod and digital music - you can still make good money selling used CDs.

JOSH MADELL: As you can see, this is actually - all these nice price, major label CDs that - you know, Talking Heads Teenage Fanclub. There's a lot of good stuff here - down to Hank Williams - you know, 8.99, cheaper than a download is a lot of times. It's just thrown in there. It's not wrapped. A lot of it's in - has a cracked case or no artwork.

KENNEY: Josh sells new music too. But he likes selling the old stuff because he says he makes more money off it. People come in with their CDs they don't want anymore. He gives them a couple of bucks for it. And then he doubles or triples the price and puts it up for sale.

SMITH: It's great for anyone who has old records or CDs laying around because you can make money off your old Hank Williams album. But it's even better for Josh because sometimes the person who just sold their album takes that money, turns around and buys even more music from him.

MADELL: Most of our customers trade for credit - most - I'd say most, probably more than half. We usually give people about 10 percent more if they're trading for store credit than if they're trading for cash.

KENNEY: This is an efficient marketplace except for one thing. There's a problem here. To find it, you have to ask people to dig into their bags.

Do you have, right now on you, any digital device for listening to music?

ARI MAZANOFF: Yes, I do - the iPod.

KENNEY: You have the iPod?


KENNEY: Can you take it out for me?

MAZANOFF: Sure. (Laughter) You're funny.

KENNEY: This is Ari Mazanoff (ph) - 50 years old from downtown Brooklyn.

So on your iPod, is there any music on there right now that you don't want anymore?

MAZANOFF: Yeah, I'm sure there's a few random things that...

KENNEY: Look through it. Tell me what you haven't listened to in a long time.

He goes through the artists and starts alphabetically.

MAZANOFF: Abbey Lincoln - who else? - Adele.

KENNEY: You just stuck your tongue out.

MAZANOFF: Yeah, it's just played so much that I'm over it.

KENNEY: Now, here's the problem. Ari owns Adele, but he doesn't want to listen to Adele.

SMITH: If he had purchased the album on CD or on a record or on a cassette, Ari could just resell it, just ten feet over at the counter. He'd get some money, and then he could buy some non-Adele music that he likes.

KENNEY: But Adele in her current form, a collection of digital MP3 files, is pretty much worthless. Josh, the owner of this store, he won't buy her - neither will any of the other used record stores in the city. You can't hock these MP3s on eBay.

SMITH: Ari's investment in Adele is lost. And he's not the only one. I mean, Adele sold almost 3 million digital copies of her album. That's millions of dollars worth of products that can never be sold again.

KENNEY: John Ossenmacher is a digital music entrepreneur. He says multiply that by the entire record industry. And you are talking about a lot of money down the drain.

JOHN OSSENMACHER: You know, there are hundreds of billions of dollars of pent up digital wealth on people's computers.

KENNEY: Imagine if you could free that wealth - if you could sell your digital property. You could get money you could spend on new things.

SMITH: More movies, more books, more music, even more Adele.


ADELE: (Singing) I can't help feeling we could have had it all rolling in the deep. You had my heart inside of your hand...

KENNEY: Hello, and welcome to PLANET MONEY. I'm Caitlin Kenney.

SMITH: And I'm Robert Smith. Today, what would the world look like if you could tap into your pent-up digital wealth - if you could resell all those digital things you have laying around the house that you spent good money on in the first place.


ADELE: (Singing) But I've heard one on you. Now, I'm going to make your head burn...

KENNEY: Economists have a name for used record stores - secondary markets. I'm sure you've been to a ton of these - yard sales, flea markets, used car lots, thrift stores. The internet's full of them. You've got eBay and Craigslist - any place that you can get a deal by buying other people's stuff.

SMITH: It's a simple concept - secondary markets. But it has some powerful effects on our economy. I mean, for one, it gets products into the hands of people who actually want them. It's just simple efficiency, right? You pull the stuff out of the back of your closet and give it to someone who can make better use of it.

KENNEY: And it frees up money for people to buy more stuff. I mean, one of the most interesting effects that economists talk about when they talk about secondary markets is that they say it makes people more willing to buy things in the first place.

RICK SANDERS: Big-ticket items are a great examples of this. A car is the best example.

KENNEY: Rick Sanders is an intellectual property lawyer at Aaron and Sanders in Nashville, Tenn.

SANDERS: When you go buy a car - say you're going to buy a new car or even a slightly used car. You feel better about - you feel more - you feel a little more courageous about buying that car. It cost a lot of money, right? But you feel better about that because you know that if everything goes wrong - if you lose your job, if you have to move, you don't like the car - you can resell it. So when you - if you spend $30,000 on a car, you know you're not really spending $30,000. You're buying an asset that you can resell.

SMITH: This concept that you can always resell what you've bought in the first place, it's fundamental to the way the economy works. We're interacting all the time with secondary markets. So much so, we don't even think about it. So if you bought a house recently, chances are it was not new. It's a secondary market. The housing market is essentially one big used record store. What about your retirement accounts - stocks? I mean, it's hard to imagine every stock in your portfolio came from an IPO. Stocks are sold and resold again. The stock market is essentially a thrift store for used shares of companies - used stocks that people don't want anymore.

KENNEY: We live in a world of secondary markets. They're everywhere. And for the most part, they're uncontroversial - except for this one type of product. This one product type has always given us problems.


ADELE: (Singing) Never mind. I'll find someone like you. I wish nothing but the best for you. Don't forget me...

SMITH: Works of art, songs, books, movies - you can buy them. They're products, but they also get special protections. They're copyrighted.

KENNEY: And we've been fighting in the courts for over 100 years about what to do with copyrighted goods. I mean, is the owner the person who holds the copyright or the person who bought the copyrighted good? What are they allowed to do with it?

SMITH: Eventually, Congress settled the argument about what exactly you can do with a copyrighted good. It was 1976. And the Adele of the middle of the mid-'70s was Peter Frampton.


PETER FRAMPTON: (Singing) Oh, baby, I love your way every day, want to tell you love your way every day, want to be with you night and day...

SMITH: That was an awesome album. As we were saying, in 1976, Congress made the most recent revision to the Copyright Act.

KENNEY: And when it came to what you can do with your well-used, well-loved copy of Peter "Frampton Comes Alive!"...

SMITH: Love it.

KENNEY: ...The law hinged on this concept - something called the first sale doctrine.

SMITH: Bill Rosenblatt is the founder of GiantSteps Media Technology Strategies. And as a technology guy, he spends a lot of time thinking about the first sale doctrine.

BILL ROSENBLATT: Which says that once you buy a copyrighted work, or you obtain it legally - someone gives it to you or you buy it or whatever - it's yours to do with as you wish. The publisher no longer has any control or say in what you do. You can sell it to someone else. You can give it away, lend it. You use it as a doorstop, use it as a Frisbee - whatever you want. And the publisher has no say.

SMITH: And this worked fine for a while, as long as the music came in a form that worked as a doorstop or as a frisbee. It worked fine in 1976. But now no one is quite sure whether this law - this concept applies to invisible things like MP3s.

ROSENBLATT: The law around first sale and digital goods, such as your e-books, your MP3 music files and so forth, is very much unsettled.

KENNEY: The only way to figure out whether this law of the first sale doctrine could apply to the contents of your iPod was for someone to try it - to test it out.

OSSENMACHER: ReDigi is the world's first marketplace where consumers can lawfully buy and sell used digital goods.

KENNEY: This is John Ossenmacher, who we heard at the beginning of the show, talking about that pent-up digital wealth we all have. He started a company to free that wealth - to free up Adele and other digital copyrighted works. His company's called ReDigi. And they're essentially creating a secondary market - a used record store for the digital age.

OSSENMACHER: We see it very, very clearly that a copyright good is a copyright good. And a buyer of those copyright goods are entitled to certain protections under the law whether it's first sale doctrine or other items. And those apply to digital just as much as they apply to any other format because of how those systems work. And so we're pretty adamant about that.

KENNEY: All right, so let's show you how this works. And let's stop picking on Adele here. Robert, you got your iPhone over there. Got anything on there that you don't like - you don't want anymore?

SMITH: OK, let me look. Ok, how about - I would love to sell this thing.


LMFAO: (Singing) Party rockers in the house tonight...

KENNEY: This song? This song is great. (Singing) Everybody just have a good time.

SMITH: (Singing) And we going to make you lose your mind.

KENNEY: (Laughter).

SMITH: I know. It's super catchy. Here, let me turn this off.


SMITH: But I got it for my kids. And we danced around to it.

KENNEY: Yeah, yeah, yeah, that's what they all say. Like, he loves this song.

SMITH: And now it's totally overplayed. And I just don't want it any more.

KENNEY: OK. All right, fine, it's your choice. It's up to you. So say you want to sell "Party Rock Anthem" by LMFAO. I can't imagine why, but you do. And it's up to you.


KENNEY: So the way ReDigi designed their technology is this. You sign up for their service, download their software. And you say, I want to sell this MP3. And they do this crazy forensic analysis on it to figure out where you got the song from - whether it's legal, illegal if you paid for it. And actually, that makes me think, Robert, where did you get that song from?

SMITH: I got it from iTunes. I probably paid - I don't know. This was back when it was popular. I probably paid a $1.29 for it.

KENNEY: OK, perfect because you can only sell songs you bought digitally in the first place. So ReDigi would offer you about 69 cents for that song.

SMITH: Yeah, and so that's about half the money I paid for it, which is awesome, yeah.

KENNEY: Yeah - but, but, but there is a catch here. If you want to sell that song, you have to delete every other copy you have of it. Otherwise, ReDigi won't let you sell it. And it goes further than that. Once you have that software installed on your machine, they can basically spy on you. If you try to go to your closet and grab some bootleg version of "Party Rock Anthem" that you'd been squirreling away, try to put it back on your computer, they'll say, uh-uh, you've got to delete that.

SMITH: Well, I understand it because this gets to the heart of how digital music is different than a used cassette or a used record. If I sell a used record, I don't have it anymore, obviously. Like, it's gone. It's been transferred. Now, ReDigi tries to create this same thing with digital music. It just basically makes sure that once you sell it, you've sold it for good. It's totally gone - same way a record is.

KENNEY: So ReDigi, they've got their business plan. They've got their technology set. They open in late October, 2011. A couple of weeks later, they get a letter from the Recording Industry Association of America, the RIAA - a cease and desist letter. And then Capitol Records sued them for copyright infringement.

SMITH: At this point, we should say that we tried to call the record companies who signed their name to that official letter. None of them agreed to speak with us. So we will do them the favor of sort of summing up an argument on their behalf.

KENNEY: It comes down to this. Why in the world would I go on iTunes and pay a $1.29 for "Party Rock Anthem" by LMFAO when I can just buy your copy that you put up on ReDigi for 69 cents.

SMITH: Yeah, it's bad for business basically. Now, of course, in the parlance of the legal system, the record companies had a more technical argument. They said ReDigi was unlawfully copying and distributing the copyrighted content and that the first sale doctrine does not apply with the way ReDigi's technology works.

KENNEY: The case went to court in 2012 - federal court, the Southern District of New York, the honorable Richard J. Sullivan presiding. I read the transcript, and it veers pretty quickly from questions about the law and legal precedent to these big existential questions. What does it mean for something to exist? What is a piece of music? Is there a there there?

SMITH: The kind of questions that someone - I'm not saying who - someone might ask while stoned. You know, is anything real anymore?

KENNEY: If you copy something, is it the same thing or something else?

SMITH: And what is a book? Is a book a bunch of pages - a bunch of paper with ink on it? Or is it the ideas inside the book?

KENNEY: Yeah, man.

SMITH: Just like any great stoner argument, this court case eventually found its way to a debate over the philosophy of "Star Trek." Seriously, the judge in the case cited "Star Trek."

KENNEY: It's in the transcript. We are now going to have a professional read from that transcript - NPR's own legal correspondent Nina Totenberg.

NINA TOTENBERG, BYLINE: (Reading) Judge Sullivan - I kept thinking about this. I'm not a Trekkie. But I kept thinking it's the difference between Captain Kirk going from the Enterprise to the planet through that transporter thing, where he's not duplicated, to the cloning where there's a good and bad Captain Kirk, where they're both running around. I think one is a copy, and the other is - the other was transported. And it's only one Captain Kirk.

SMITH: Whoa.

KENNEY: (Laughter) And the lawyer for the record company says, you know, it's not Star Trek. And then - and this is my favorite part - the judge says, wouldn't it be cool if it were? (Laughter).

SMITH: It's in the transcript. It's in the transcript. And, you know, they had to resort to these frankly science fiction analogies because the law - as it's written in 1976, the law has pretty much ceased to be helpful anymore. The law refers to music by a term you do not hear much anymore - a phonorecord. As in, oh, excuse me, Mr. DJ, could you please turn that phonorecord up? This was a chance for Judge Sullivan to bring copyright law into the modern age, to finally tell all of us - tens of millions of Americans - what exactly do you own. All those MP3s and e-books, what can you do with them? This was his moment.

KENNEY: Judge Sullivan looked at the law, looked at ReDigi, looked at the future and said...

SMITH: (Reading) Because this is a court of law and not a congressional subcommittee or technology blog, the issues are narrow, technical and purely legal.

KENNEY: Unquote. He basically said if the law is old-fashioned, I'm going to make an old-fashioned decision. If you want to sell the old Adele songs languishing on your iPod, you have to sell the iPod itself - the box, the physical thing. That is what you own. That is what is protected by first sale.

SMITH: It was kind of an amazing decision, but it's right here. The judge used the old term in the law, phonorecord, and he says that the first sale doctrine only applies to the sale of the actual phonorecord - the physical object, the, quote, "computer hard disk," iPod or other memory device onto which the file was originally downloaded.

KENNEY: Even if you send an MP3 to ReDigi and even if they erase it from your computer, Judge Sullivan says that's another phonorecord. It's moving one song from one box to another box. Two boxes equal two phonorecords.

SMITH: You can imagine whenever you start talking about phonorecords and the actual physical boxes, the high-tech world is just stunned. They just hit their heads. Jason Schultz is a professor of law at UC Berkeley. He used to be with the Electronic Frontier Foundation. They concern themselves with digital privacy and digital rights issues. He could not believe the judge was throwing around 35-year-old terms.

JASON SCHULTZ: The word phonorecord speaks of the 1976 Copyright Act more than probably any other word in the act itself. It tells you what era they were in. And so the fact that the judge fixates on that word and on the definition of that word, it raises questions about whether that's the right approach to figuring out what the future of digital music and movies and books should look like.

SMITH: And obviously this did not go over well with ReDigi. You know, a judge throwing out their entire business plan. They're going to appeal the ruling. And they've already redesigned their software to hopefully get around some of these issues.

KENNEY: But the big, deep questions here about ownership and who owns what in the modern age, they haven't been resolved. Jason Schultz says anybody who wants to be in the secondary market business for digital goods - I mean, maybe it's Amazon. They applied for a patent to do something like this. Or maybe eBay wants to resell digital music - or even your corner library that wants to lend out e-books. They're all paying attention to this ruling.

SCHULTZ: All of these things depend on the first sale doctrine. So this case potentially kills them all off for the digital world and allows the copyright owner to say, well, if you ever want to read this book or see this movie or listen to this song, you have to come back to me, the original company, and get it from me. You can't get it from anyone else. And that's a monopoly that Congress never intended to create. They always intended to give a monopoly to the copyright owner for the first sale but then, after that, to have competition for downstream sales. And this decision potentially shifts those skills completely in the favor of the copyright owner.

SMITH: You know, Caitlin, after hearing this story and after reading some of the transcript, you know, I've come to believe that maybe the legal system is just way too slow to keep up with the way technology is changing and the questions posed by that technology.

KENNEY: Yeah, I mean, I talked to a lot of people about this. And it came up again and again. How do you keep the law and the courts up to date when things are progressing so rapidly? I mean, even with this case, when I think about it, I think, you know, we, as consumers, in a way we're already kind of moving past these ideas of ownership and transferring ownership and what it means to download and own files. I think about myself personally. I don't have any physical music anymore. And I've even lately stopped really buying songs on iTunes. I'm streaming everything I want to listen to now from Pandora and from Spotify. And I know not everyone is like me, but there is a huge shift in the culture towards streaming.

SMITH: And the nice thing about streaming is that it shifts the debate that we've been talking about here from who owns what to a more subtle question, which is who gets paid for what. So the record companies and Pandora and Spotify and the musical artists, they can still hire their lawyers. They can still fight over who gets which percentage of money that comes from advertisings or subscription. But as a consumer, I just don't have to worry about the legal questions anymore. You know, can I resell this? Can I copy that? I just make a decision about whether I'm willing to listen to ads, or I'm willing to pay for a stream. And then I can just get the music I want when I want it. And then there is, like, this added benefit to no longer owning music - to just listening to streaming, which is you're listening along. You're rocking out. You're letting the computer decide what to play for you. And then all of a sudden, you hear it.


SMITH: It's like, oh, I know this song. I know all the words this song. And even if you don't own the song any more, you can still love it.


LMFAO: Let's go. (Singing) Party rockers in the house tonight. Everybody, just have a good time.

SMITH: As always, we love to hear what you think of PLANET MONEY. And we always encourage you to send story ideas. Drop us a line - planetmoney@npr.org. Or comment on our blog npr.org/money.

KENNEY: Also on the blog, we're going to have some links. Rick Sanders and Bill Rosenblatt, who you heard from in this show, they've done a ton of great blogging about this case and about these issues in general. They have lots more to say about it. We'll put links to their blogs up there, so you can check that stuff out too. I'm Caitlin Kenney.

SMITH: And I'm Robert Smith. Thanks for listening.


LMFAO: Shuffling, shuffling. (Singing) Party rockers in the house tonight. Everybody, just have a good time. And we going make you lose your mind. Everybody, just have a good time. Clap. Party rockers in the house tonight. Everybody, just have a good time. Transcript provided by NPR, Copyright NPR.