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First Sale Report Opens Old Rift: Stores vs. Studios

10 Sep, 2001 By: Joan Villa

More than 20 years after retailers won the right to rent video under the doctrine of First Sale, another showdown is brewing over digital First Sale rights following a Copyright Office report that may once again pitretailers and the Video Software Dealers Association against the studios.

The outcome could decide how much business is left for retailers and distributors in the digital age, say industry insiders. This new video landscape will hinge on whether Congress gives copyright owners more power to protect their product from piracy and, in the process, limits the scope of First Sale so legitimate retailers can’t rent or retransmit digital copies of movies.

“We have no intention of allowing the studios to do away with the First Sale doctrine,” says Ed Stead, Blockbuster’s executive v.p. and general counsel. “The purpose of copyright is to protect expression, not toeliminate competition.”

Stead supports the studios’ legitimate need to protect their films by ensuring that copyright owners get paid and that distribution quality isacceptable. However, “we’re going to make sure they don’t overreach that,” he adds.

Congress is expected to hold hearings this fall to decide whether to enact recent findings of the Copyright Office that would amend or leave intact the Digital Millennium Copyright Act (DMCA), governing digitaltransmissions of copyrighted works. The Aug. 29 report determined that the First Sale doctrine applies to digital downloads, thus allowing individuals or retailers who purchase and legally download a movie toview, sell or rent that copy as they would a VHS or DVD.

However, in a further interpretation criticized by the VSDA, the report also suggested Congress take no action to alter current copyright owner practices that control how downloads are used, which circumvent First Sale. Those include contracts, or “end-user” license agreements, thatrestrict reselling but offer consumers no choice — they must abide by the unilateral terms or lose the right to view the content. Another practice is “tethering,” an access control technology which ties the download toa particular computer and prevents a copy from playing on a different device.

“Given the relative infancy of digital rights management, it is premature to consider any legislative change at this time,” the report states, although it says in the future such management could affect “the operation” of First Sale rights.

Rather than being premature, “we think the time to address them is now,”counters Sean Bersell, VSDA’s v.p. of government affairs and member communications. “We’re concerned about copyright owners using technology that is designed to thwart piracy to thwart legitimate uses by lawful owners.”

Individual studios declined interview requests. However, Rich Taylor, v.p. of public affairs for the Motion Picture Association of America(MPAA), which represents the studios, concedes there are “marketplace details” for digital use that have yet to be addressed. Even so, theMPAA fully supports the Copyright Office conclusion. “The CopyrightOffice has correctly spelled out the reality of the digital environment, [and that is] when you duplicate in digital form you create multiple perfect copies of a work, and for obvious reasons that can be problematic to the copyright owner,” Taylor says.

The VSDA plans to act “aggressively” to prevent copyright holders fromcircumventing First Sale and to protect retailers’ access to all delivery methods, Bersell says.

Following the announcement last month of a five-studio consortium designed to download films to consumers via the Internet, knowninformally as MovieFly, Warner Home Video president Warren Lieberfarb said his studio plans to rent movies through a download that consumers can view as often as they want in a 24-hour period. The similar Fox-Disney deal announced last week will also offer a 24-hour viewing period.

Industry sources are concerned that studio downloads using access-control technology and end-user licenses would be in compliance with Copyright Office recommendations, but bypass First Sale andrestrict competition.

The VSDA has urged studios and retailers to meet and hammer out copyright questions rather than take opposing sides in front ofCongress. The proposed meetings would “develop business models to ensurethat consumers continue to have the price competition, product selection, variety of terms and customer service that are the hallmark of retailing,” according to VSDA president Bo Andersen.

“Why can’t Blockbuster, for example, download a movie, burn it to a DVD and rent or sell it to a customer — why shouldn’t that be a reasonabledistribution channel?” asks industry analyst Bob Alexander, president ofresearch firm Alexander & Associates. He believes that use is particularly viable for “deep” catalog that is slow to move in stores but could be downloaded, burned on a DVD, and rented or sold to meet customer demand. “If they can’t do that, then you’re restricting ademonstrated business opportunity where consumers will pay and suppliers will make a profit and stores will make a margin,” he adds.

Stead agrees that Blockbuster is simply fighting for its right to compete in a digital future. “It’s okay if the studio provides rental to the consumer as long as I also have the right to provide that rental to the consumer,” he says.

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