April 24, 2014

avatar

The Decline of DVD-by-Mail, or Further Thoughts on the Digital Death of Copyright’s First Sale Doctrine

Netflix reported a second-quarter profit last week as customer demand continues to drive a transition in the company’s primary delivery model from DVD-by-mail to Internet streaming. According to The New York Times, “[t]he company’s net losses among DVD-by-mail subscriptions outpaced its gains in net streaming subscriptions in the United States, reflecting the continued challenge of converting from a physical disc business to one predominately online.” The company, of which I am a longtime subscriber and fan, has famously struggled with the business implications of this transition since it began offering streaming service in 2007. (Remember the Qwickster debacle?) Those business implications derive in some interesting ways from copyright law.

The DVD-by-mail model, on which Netflix built its success, was enabled by the first sale doctrine, which cuts off a copyright owner’s distribution right with respect to a particular copy of a copyrighted work when that copy is first sold. Because of the first sale doctrine, Netflix was not required to get permission from movie studios to set up its business. In the early days, Netflix simply bought DVDs—lots of them—from whatever retailers were selling them and then rented those DVDs to its customers. If the movie studios didn’t like that, well, too bad.

Over time, as its customer base grew, Netflix did enter into direct purchasing and revenue sharing agreements with studios, but it wasn’t copyright law that required it to do so—at least not directly. Netflix agreed to play ball with the studios in part to get more reliable access to larger numbers of DVDs. If Netflix could have lawfully acquired enough DVDs to supply customer demand without bargaining with the studios, it would have had the right under copyright law to rent every last one, forever, without remitting a dime in copyright licensing fees. Eventually, though, it became clear to both Netflix and the studios that streaming was the wave of the future. And delivering movies by stream to remote customers is not covered by the first sale doctrine.

Unlike the DVD-by-mail model, Netflix streaming implicates the movie studios’ public performance right in their copyrighted works. The law right now is a little unclear on this point, the question being under what circumstances streaming to the home is a transmission “to the public” within the meaning of the Copyright Act.  (James Grimmelmann has a great rundown of the cases and their tortured logic here.) So Netflix is transitioning from an operating model that is clearly covered by an exception to copyright law to one that (very probably) requires permission for every content delivery.  Whether the customer is watching a DVD or streaming, the customer’s experience is the same (assuming a good broadband connection), but the copyright calculus for the business delivering the content is different depending on the delivery medium. Under the streaming delivery model, Netflix has been negotiating licensing agreements to secure public performance rights, which it never had to do under the DVD-by-mail model. Sooner or later, the legal issues around the definition of public performance in the context of streaming-to-the-home will get worked out. In the meantime, Netflix has become a licensee, and the payments to copyright owners are flowing.

Comments

  1. paul says:

    All of this goes to show the bankruptcy of the current copyright model. If Netflix had a pile of DVDs and jukeboxes in their offices, and physically kept track of who was “renting” each particular DVD and having it remotely played for them, the effect would be the same, but first-sale issues might still obviate a license. (Yes, I know, litigation and judges. But really, what is it about transmitting something over a wire that suddenly renders it completely different?)

  2. willard says:

    You didn’t mention the two biggest reasons why I am giving up on Netflix, a company I used to love:

    1. The discs that Netflix gets from the studios are consumer-unfriendly: no DVD extras and most recently commercials through which one cannot fast forward. Netflix is offering deficient products in order to save a few cents – but that decision makes it physical products undesirable.

    2. The streaming movies available through Netflix are incredibly lame.

    In short, the studios desire to control how and when people watch movies is just going to drive customers away from Netflix to the torrent sites.

  3. Richard says:

    This is not to give ideas, but could rental of a DVD disc be disallowed in the circumstance that a disc contains both video and an item of software? (From what one understands, the first sale doctrine does not apply to PC-type software.)

    • Annemarie Bridy says:

      I suppose it could, though it seems that the shift away from physical media for all types of digital content distribution removes the impetus for such a clever little workaround. (The first sale doctrine does apply, by the way, in very limited circumstances involving lending of PC-type software by nonprofit libraries and nonprofit educational institutions.) I would argue that bundling or mixing content that cannot lawfully be rented along with content that can lawfully be rented, for the sole purpose of “locking up” the content that can lawfully be rented, is copyright misuse. This question about gaming the first sale doctrine by bundling covered subject matter with uncovered subject matter shades into issues the Supreme Court considered–and split on–in Costco v. Omega. The copyright misuse piece of that case is currently pending before the Ninth Circuit. The district court, which got the case back on remand from the Supreme Court, decided that it was copyright misuse for Omega to use a tiny copyrighted insignia on the back of a watch to prevent import and resale of Omega watches manufactured and first sold by Omega abroad.

  4. Richard says:

    DVD discs have sometimes included software in order to facilitate the usage of certain “extra” content. In such a case, it is possible to view the movie without using the software. Another situation that may have happened is including a software executable that launches the DVD player software on a PC (assuming that DVD player software is available) when the DVD is inserted, probably to facilitate ease of use. On the other hand, including a proprietary “hello world” program (for example) with the hope of disallowing disc rental would obviously not have the same advantages for users that software for using “extra” content would have.

    • Annemarie Bridy says:

      It’s important to remember in this context that the functional elements of software programs are not protected by copyright.