LGJ: First Sale, Re-Sale, Everything's on SALE!

Each week Mark Methenitis contributes Law of the Game on Joystiq ("LGJ"), a column on legal issues as they relate to video games:


While it seems like the rest of the known universe is busy talking about subprime mortgages and bailouts, the game industry and associated news outlets have been talking about sales. Specifically, they've been talking about resales, and how that's affected by the first sale doctrine. The most recent development has been talk of incentives to buy Gears of War 2 new, but even that's in the wake of the recent comments from Marty O'Donnell, which has been commented on in other columns on Joystiq. Of course, none of this quite gets to the root of the issue: What is this first sale doctrine and why does it exist? More importantly, assuming it applies to all kinds of software, is there another way to accomplish what we're doing now within those legal constraints?

So, let's start at square one. The first sale doctrine is a rule which says, in short, that once an item that is copyrighted is first sold, then the author no longer has the ability to prevent the resale of that item through copyright law. Without the first sale rule, a copyright holder could theoretically continue to control the item because copyright includes the right of distribution. The first sale doctrine, however, does not protect someone who bought an item if they're illegally reproducing it, for example. It only allows for the legitimate resale of the item itself. The courts have even recently held that this idea extends to demo CDs marked not for resale.

"Can you imagine needing permission from the copyright holder to re-sell something you bought? It would be a complete nightmare in implementation."



The whole idea behind the first sale doctrine was to make copyrighted material more like other goods, where the purchaser is free to resell the item. If I buy a car, there isn't a law that potentially keeps me from re-selling the car because the manufacturer said so. This was all part of the balance intellectual property law was created to achieve, and things worked pretty smoothly for quite some time with the traditional media. The advent of software, however, threw a big wrench into the system. This was also in an effort to simplify things. Could anyone imagine a world where you had to have permission from the copyright holder to re-sell something you bought? It would be a complete nightmare in implementation.

As you likely recall from previous columns, buying a piece of software is actually buying a license to use that software. Therefore, it's been argued that 'first sale' doesn't apply, and the End User License Agreement governs the terms by which the license can be resold or transferred. The courts have been split on this, some applying first sale and others not. Until such a time that the Supreme Court resolves the issue, there's at least some ambiguity on whether or not software is covered by first sale. If it is in fact not covered, then the idea that the EULA can restrict resale isn't that far fetched at all. Of course, the question of where the balance is with games will potentially enter into this decision to apply first sale, assuming courts haven't lost sight of the original intent of the doctrine.

"Games have the potential for higher resale values, and these larger margins let companies like GameStop thrive."



However, there is a significant conundrum for game makers that isn't as much of an issue for other media, and that's the initial cost of new product to the consumer. Most books, DVDs, and CDs have a relatively low cost for the initial copy, and thus even when they're resold, a relatively low resale value. Games, with higher new product prices, have the potential for higher resale values, and these larger margins let companies like GameStop thrive.

To illustrate this more simply, a DVD sells new for $20. A DVD reseller won't be able to re-sell the used for the full new price, so let's say that the maximum resale is 75%, or $15. Let's also assume the buyback rate is 50% of the new price, or $10. So, the reseller has made $5 per resale. Taking those same percentages, a new game that sells for $60 is resold for $45, with a $15 per game profit for the reseller. These items take up the same shelf space, so if you're reselling something, it's more profitable to move more games than it is DVDs.

What Marty O'Donnell is suggesting -- that game makers find a way to make money from resales -- isn't all that far-fetched and isn't nearly as potentially intrusive and dogmatic as it may sound. It surprises me that none of the console manufactuers have entered into game resale as a web-based enterprise with a mechanism to benefit the game makers as well as themselves. It could actually be a fairly simple process.

"It surprises me that none of the console manufacturers have entered into game resale as a web-based enterprise."



For example, let's take Microsoft. This model could work that you can buy new Xbox360 games anywhere, but then register with Xbox360Resale.com [Ed. Note: Not a real site]. If you want to resell a game through their system, you send the game and get some sort of credit you can use to get other used games from their library of all games on the Xbox360. There could even be incentives for newer, more popular games. Microsoft can then resell the game and pay a portion of the proceeds back to the developer and keep a portion for themselves. More importantly, as it's being reprocessed, it would be easier for the publishers to agree to provide extra manuals or resurfaced disks so that anything bought 'used' from this system was actually in good condition. The net cost to replace a disk or manual is comparatively low, and this would bolster the revenue stream to the publisher and developer long term.

If you think about this economically, it actually benefits the consumer. Let's say for a given game, 100,000 copies will sell no matter what. An additional 25,000 copies will sell if the price is at or below $40, and an aditional 25,000 copies will sell if the price is at or below $20. Let's also assume the developer and publisher need a gross sales income of $6,000,000 to break even and keep making games. The way things work now, they make that $6,000,000 from the initial retail sale, then companies like GameStop make the bulk of their money buying games from that initial 100,000 for $20 a copy and selling them for $40 for some period of time, then buying back for $10 and reselling for $20. Under the model I set out in the previous paragraph, the developer/publisher is getting a cut of the downstream revenue, so they may be able to offer the game new at $50 rather than $60, a net savings to the consumer without losing their breakeven point. Using the numbers above, the additional revenue from the second and third tier sales might gross $400,000, and less expenses, the publisher and developer's share might be $150,000, meaning that they would actually be better off than they were at their initial $60 price point with no resale share.

These are, of course, just examples. But it's a way to mitigate the resale's loss to the publisher while still operating within first sale constraints without moving everything to a 'download' system or something similar. In fact, I know of a number of logistics companies who would be able to handle just such an operation for a Microsoft or a Nintendo or a Sony, if any of those companies wanted to attempt such a model. If such a thing were announced, I can only imagine GameStop would likely try to make a similar move to avoid being pushed out of the market. Ultimately, we all want to be happy as consumers but also have the game developers be happy, profitable, and developing the games we enjoy.


Mark Methenitis is the Editor in Chief of the Law of the Game blog, which discusses legal issues in video games. Mr. Methenitis is also a licensed attorney in the state of Texas with The Vernon Law Group, PLLC and a member of the Texas Bar Assoc., American Bar Assoc., and the International Game Developers Assoc. Opinions expressed in this column are his own. Reach him at: lawofthegame [AAT] gmail [DAWT] com.

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This article was originally published on Joystiq.