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Kevin Dean 20 January 2011 Property Rights and the Nature of Digital Goods Digital goods are an increasingly

important feature oftwenty-first century economies. A 2010 report from the International Federation of the Phonographic Industry notes that U.S. digital music sales went from a share of zero to 40% of the music market over the course of eight years.1More strikingly still, the Association of American Publishers reported in April 2011 that e-book sales in February of 2011 were the number-one format for all publishing categories, having grown 169.4% from January/February of 2010 to January/February of 2011.2 At the same time, industry fears about the effect of digitally enabled unauthorized copying of copyrighted works abound. The Phonographic Industry report also notes that overall music sales (physical and digital together) decreased for the tenth consecutive year in 2009.3The nature of digital goods is such that copyright is difficult to regulate with respect to these goods: they are infinitely replicable without loss of quality at a marginal cost of zero, andthey are effectively nonexcludable and non-rival because of the ease with which they are replicated and disseminated. By their nature, therefore, digital goods are essentially public goods but since they must be produced, sometimes at very high fixed cost, they are not treated as public goods by property rights regimes (I focus here on the US legal context). How does the nature of these digital goods affect how we ought to think about property rights with respect to digital goods? I answer this question with a view to Lockes philosophy of property, exploring how an approach to digital

IFPI, "IFPI Digital Music Report 2010: Music How, When, Where You Want It," International Federation of the Phonographic Industry (2010), 10. 2 Andi Sporkin, E-Books Rank as #1 Format Among All Trade Categories for the Month, April 14, 2011, (accessed April 26, 2011). 3 IFPI, 10.

Dean 2 property rights suitable to their public nature but preserving the property rights of producers is both necessary and possible. Literature Epstein argues in a paper published by the Manufacturers Institute that intellectual property regimes are necessary to promote an innovative economy, exhorting that we celebrate our immense social gains accruing from IP protections and that we shudder at the huge levels of IP piracy that threaten that progress.4His explicit argument is that IP in the form of patents, copyrights, and trade secrets encourages innovation and protects the social gains that result from it. These conventional arguments are more interesting when complemented by the implicit argument that IP and digital goods are indistinguishable from one another, so that what has worked for IP thus far works for digital goods as well so long as pirates are punished and the law enforced. At the same time, Epstein notes the theoretical and practical difficulty of any intellectual property regime, which has to rely on conceptions like non-obviousness or fixed in a tangible medium of expression that fit better in a course on applied metaphysics.5 He thus defends IP as an imperfect set of sensible compromises balancing the protection of existing IP with room for further innovation.6Other scholars note the benefits that would accrue from having better-defined rules in intellectual property clearly separating private from public usage rights, while defending the theoretical interchangeability of physical and intellectual property.7

4 5

Epstein, 7. Ibid. 6 Ibid. 7 See especially, David Fagundes, "Crystals in the Public Domain," Boston College Law Review 50, no. 139 (2009).

Dean 3 Danny Quah, on the other hand, views digital goods as a special class of good defined by their nature as nonrival, infinitely expansible, discrete, aspatial, and recombinant.8Specifically, digital goods can be copied infinitely many times without affecting their quality, accessed by one person without affecting anothers access (because of their expansibility, everyone can have her own copy), not directly constrained by physical resources, and cumulatively combinable so that multiple digital goods can be put together or built off of one another to produce entirely new goods.9 Quah argues that because of the nature of digital goods, they are not directly analogous enough to physical property to warrant using the same intellectual property framework that depends on being able to not only formulate, but also meaningfully enforce other IPRs. Indeed, to the extent that property rights are only useful if they are enforceable, the inherent accessibility of digital goods makes them problematic to treat as conventional intellectual property. Even conventional intellectual property has, before digital goods, always been tied to physical expression ortangible goods that do not share the particular nature of digital goods. As a consequence, Quah explores freely licensed Open Source digital production as a model potentially better suited to the form of digital goods. This analysis is of limited applicability, however, since Open Source is not monetized and unsuitable for use with a variety of digital goods. Richter, however, introduces blanket licensing as a viable alternative agreement for Internet service providers and producers of digital goods to make use of the existing uses and expectations of digital goods users.10 A blanket license is an agreement between an Internet Service Provider (ISP) and producers/owners of digital content. The ISP collects a fee from all of

Danny Quah, "Digital Goods and the New Economy," in Centre for Economic Performance Discussion Papers (London: Centre for Economic Performance, 2003),, 13. 9 Quah, 16-19. 10 Wolf Richter, "The Future of Music in the Peer-to-Peer Web Position Paper," in Seventeenth Annual WWW Conference (Beijing, 2008), 1.

Dean 4 its network subscribers, who are then free to share digital content across the network. Using the fees collected, the ISP or either a privately or publicly created collecting agency pays content producers based on the popularity of their good on the network. The blanket license model thus pays producers for their work while allowing sharing of the work across licensed Internet networks. Priest also lists blanket licensing as a possible model, but warns that it is largely untested in practice.11 He discusses three possible business model innovations he suggests could address the problem of encouraging production of digital goods while taking account of their replicable nature: retail subscriptions, an ad-supported model, and blanket licensing.12 Priest advocates a voluntary blanket licensing model that arises in the marketplace as one business model competing among the others, while Richter advocates a compulsory blanket model, implemented as the single form of licensing through political choice, for the advantages that blanket licensing has over the privatization of otherwise public space on the Internet.13 Digital Goods as Property Lockes theory of property is based on the natural right of laborers to the fruits of their labor. His theory of value imputes ownership of a thing on the person who mixes his or her labor with that thing.14 The first problem in creating a digital property regime more suitable to the nature of digital goods than the current one is thus how to pay producers for the value of their labor. Digital Rights Management (DRM) schemes, which attempt to technologically prevent copying digital goods and so make them excludable and thus not public goods, have been clear

Eric Priest, "Why Emerging Business Models and Not Copyright Law are the Key to Monetising Content Online," in Copyright Law, Digital Content and the Internet in the AsiaPacific, ed. Brian Fitzgerald, Fuping Gao, Damien O'Brien and Sampsung Xiaoxiang Shi (Sydney: Sydney University Press, 2008), 22. 12 Priest, 11-22. 13 Priest, 23; Richter, 3. 14 John Locke, "Second Treatise," in Two Treatises of Government, ed. Peter Laslett (Cambridge: Cambridge University Press, 1988), 27.

Dean 5 failures, providing at best a speedbump to potential copyright infringers and at worst encouraging more infringement by alienating otherwise paying customers.15 The problem of securing the fruits of labor to those who perform it in producing digital goods is in part a collective action problem: if a producer releases his content at a price, each person who buys it from him has the option either to share with others over peer-to-peer(P2P) networks or to keep the good to herself. If many consumers demand the good, one or a few can split the initial cost and provide it to others for free. In a single iteration of this game, the incentive is for those willing and able to pay to do so, and not to share it with those unwilling or unable to pay. Yet, if we recognize that in practice, this game is (1) an iterated one, with many consumers and many different digital goods, and (2) affected with ideological or social views about paying for online content, then the current state of the world is better explained. For a robust P2P system to develop takes only a single person obtaining a good leaked in some way for free to provide it to others for free, or a person willing to pay (maybe with help from some friends) for a music album or e-book who believes she should not have had to pay, to provide it for free to others, knowing that people like herself will in turn provide other such goods. Precisely because it requires small costs and effort for people to provide a seed of a digital good for an infinite number of others to download and copy at will, without affecting the first persons access to the good or the quality of any of the copies, digital goods are stolen or pirated flippantly and with extreme ease. In turn, since physical goods do not present the same problem, just as more traditional kinds of intellectual property are usually tied to physical expression and thus also less problematic, the nature of digital goods presents a unique problem for the allocation of property rights to ensure that the right conferred on producers by their labor is respected.


Priest, 7-8.

Dean 6 Adam Moore presents a Lockean theory of intellectual property that fails to account for digital goods in contradistinction to other kinds of intellectual property.16 Moores theory is premised on the Lockean notion of original acquisition of un-owned objects, which he dubs no harm, no foul.17The argument originates in Lockes argument in the Second Treatise, For this Labour being the unquestionable Property of the Labourer, no Man but he can have a right to what that is once joyned to, at least where there is enough, and as good left in common for others.18Moore uses this Lockean property framework to criticize utilitarian notions of intellectual property rights19 and to defend a strictly contract-based view of intellectual property rights (IPRs). A content creator is free to contract out her IP to others subject to her own conditions involving what, if any, aspects of fair use, economic rights, or rights of expression in other formats (i.e. physical expression of an intellectual property right) the buyer has a right to.20 Moores approach, published in 1997-1998, however, looks to be even paler in the face of the current state of technology and the nature of digital goods than do existing intellectual property laws, which allow more automatic legal rights of fair use than would Moores contractual IPR regime. At the same time, Open Source, copyleft, Creative Commons, and other such voluntary open licensing schemes, as Epstein notes,21 often rely on the copyright framework and employ a contractual model that looks not especially far-removed, if less stringent, from Moores Lockean model. Priest, indeed, in his analysis of models that could be suitable for monetizing digital goods for content producers, relies specifically on voluntarily

Adam D. Moore, "A Lockean Theory of Intellectual Property," Hamline Law Review 21 (1997-1998): 65-108. 17 Ibid, 78. 18 Locke, 27. 19 He argues, not entirely without reason, that utilitarian approaches to intellectual property would often undermine intellectual property, at least as presently (1997-8) conceived 20 Moore, 91. 21 Epstein, 13.

Dean 7 adopted business models competing in a market context an approach that Epstein, citing the Berkman Center at Harvard and the International Chamber of Commerce, also endorses.22 Richter warns, however, that this market for licensing approaches carries the possibility of fragmented digital goods providers, probably across social media platforms, that may not provide interoperability between platforms and, relatedly, which may not then reduce illegal file-sharing successfully.23 Assuredly, recalling Quah, the inherent accessibility and expansibility of digital goods makes even such copyleft contracts, and especially Moores more restrictive contracting, problematic. If the creator of a digital good releases that good to others, whatever contractual preferences he has are liable to be nearly completely ineffective if he wishes to sell his digital product widely with strict terms of non-sharing on each purchaser. If downloadable sharing is allowed, say, among users on a particular social media platform, or for a monthly fee on a subscription service, the problem of shirking contractual obligations is not solved at all. The legal challenge of trying to enforce copyright law without either government intervention to reform how producers are paid for their content or widespread successful private innovation to the same effect further illustrate that the public good nature of digital goods requires forming property rights for these goods in a way that takes advantage of, rather than attempting to stifle, sharing them across digital networks. The Grokster case, for example, effectively shut down a peer-to-peer file sharing service for inducing copyright infringement by providing the software means to sharing copyrighted digital goods (music, in particular).24 Peer-

22 23

Priest, 23; Epstein, 14. Richter, 3. 24 Metro Goldwyn-Mayer Studios Inc. et al. v. Grokster, Ltd., et al., 545 U.S. 913 (Supreme Court of the United States, 2005).

Dean 8 to-peer file-sharing, predictably, nevertheless continues quite unabated (despite the Grokster case, another involving Napster, and others). Indeed, given the choice between freely sharing such files and paying for them, the economic incentive is clearly to share them, including when a person is willing to pay but at a lower cost than that at which a product is offered. An additional reason that consumers tend to download for free when possible is that many digital goods are experience goods: a consumer cannot tell if what he is purchasing is worthwhile to him at the price offered until he has tried the good iTunes, indeed, recently expanded the length of its audio previews for music downloads, presumably in an attempt to provide a more useful measure to consumers of whether they were about to purchase something they really wanted.25 In the context of digital experience goods, as Chellapa and Shivendu point out, a seller cannot very easily give a buyer a complete trial experience with a potential purchase without the buyer thereby having the product in full, and thus likely others also having the product as a result.The nature of digital goods demands that producers of these goods who want to make money from them adapt to an environment in which they are very easily made publicly accessible. In turn, I argue, the law must adapt to treatproperty rights for these goods in a way that comports with their expansibility and nonrivalry. At the same time, with Locke as the starting point, any intellectual property system for digital goodsmust ensure, as far as can be done, that the product of ones labor is ones own, and that one is then free to exchange such product as she wishes. Further guiding our notions of a reasoned property system for digital goods, we might add a Smithian conception of an efficient


Ramnath K. Chellapa and Shivendu Shivendu, "Managing Piracy: Pricing and Sampling Strategies for Digital Experience Goods in Vertically Segmented Markets," Information Systems Research 16, no. 4 (2005), 401.

Dean 9 division of labor and allocation of resources. This economic efficiency is not obtained by the high transaction costs of enforcing a legal framework divorced from many peoples actual practices.Thus, applying to digital goods the Lockean premise that laboring on an unclaimed object makes it ones own, creating a new digital good should entitle the creator to ownership of it (he claims the idea, arrangement of code, musical arrangement, etc., from the commons of all such possible creations). Yet, neither the owner of a good nor the law has a good way to emulate a traditional private-good property framework for this digital property, even when these goods emulate physical goods (such as CDs, books, and journals) normally subject to traditional intellectual property laws. Hence, non-commercial Open Source production, commercializing digital goods via voluntary or compulsory blanket licenses, and other such business and policy innovations are the choices facing societies increasingly imbued with digital production and consumption. One way for the current legal framework to deal with this issue is to treat digital goods as private goods, but allow for certain exceptionsfor fair use that may prevent the law from condemning certain productive uses of others intellectual property. A U.S. District Court recently rejected a settlement between Google and copyright owners of the many books Google tried to digitize and make searchable, with small snippets of text available for anyone to read from their search results.26 The case reveals the hollowness of using the fair use component of the present intellectual property framework to allow for certain non-infringing uses of copyrighted material. Googles project, according to Judge Chin, would have substantial benefits. He cites among those who would gain from the digitization project: libraries, schools, researchers, disadvantaged populations, individuals with disabilities (by facilitating conversion

The Authors Guild et al. v. Google Inc., 05 Civ. 8136 (DC) (United States District Court Southern District of New York, 3 22, 2011).

Dean 10 into audio-book and Braille format), authors, and publishers, as well as anyone interested in the revitalized preservation of old books falling apart and buried in library stacks.27 Nevertheless, Google unwisely did not seek authorization from copyright holders prior to embarking on its digitization project, resulting in a slew of infringements. Yet, the judge rejected the settlement agreement drawn out by Google and the group of authors and publishers who sued the company, which would have provided for Google compensating the authors and publishers for its past infringement, and then would have authorized Google with certain non-exclusive rights to sell the digital books it has produced in exchange for sharing proceeds with the copyright owners.28 The judge rejected the settlement because it contained new rules about unclaimed copyrights he felt best left for Congress to decide upon, and because it gave Google rights to sell digital access to books beyond the scope of the dispute at hand (which was about noncommercial digitization). Googles claim was that fair-use doctrine, which provides for limited uses of portions of a copyrighted work such as for scholarship, commentary, news reporting, parody, criticism, and other such uses, allowed them to provide a search tool of book text that would reveal small previews of the book text without any intention of selling full access to copyrighted texts. According the U.S. Copyright Office, The distinction between fair use and infringement may be unclear and not easily defined The Copyright Office can neither determine if a certain use may be considered fair nor advise on possible copyright violations, and suggests always asking copyright owners for permission to use any portion of their works or consulting an attorney.29 That is, of course, an infuriatingly vague set of law for anyone interested in exercising fair use, and the Google case demonstrates the inadequacy of fair use as a


The Authors Guild, 3. The Authors Guild, 21. 29 U.S. Copyright Office, Fair Use, November 2009, (accessed May 5, 2011).

Dean 11 serious way of governing digital property rights. Specifically, as the matter applies to digital goods, Google would have created an online library, which could have served as a massive compendium of world knowledge accessible to anyone with an Internet connection, but instead which no one was actually to be authorized to read in order for Google to comply with fair use. At the same time, recalling Locke, the authors and publishers no doubt have a right to that which they have produced, so there is little question that Googles actions constituted infringement under current law. The problem, indeed, is that the possibilities of digital technology are in many cases consigned to always remain common and uncultivated, unavailable for exploitation for anyone or everyones benefit, under current IP law.30 Justice Stevens wrote in Sony Corp. of America v. Universal City Studios, Inc., From its beginning, the law of copyright has developed in response to significant changes in technology. Indeed, it was the invention of a new form of copying equipment the printing press that gave rise to the original need for copyright protection.31 Judge Chin also places the responsibility on Congress to deal with at least a portion of the issues that arise in the Google case, particularly what to do about orphan works, whose copyright owners either cannot be contacted or are unknown and without contact information.32 Both Justice Stevens and Judge Chin, then, recognize that legislative public policy provides a needed forum for taking up the challenges facing current IP law presented by new technological capabilities. Digital goods have the potential to facilitate massive social gains, not only in entertainment and information but in the pursuit of goals such as more responsive government,

Locke, 34. The Authors Guild, 23; Sony Corporation of America v. Universal City Studios, Inc., 464 U.S. 417 (Supreme Court of the United States, 1984). 32 The Authors Guild, 22.


Dean 12 the alleviation of poverty and social disadvantages33, the more efficient functioning of markets, among others, only at the limitation of what software producers are willing and able to invent. Subjecting them, therefore, to limited access under grants of temporary (and increasingly less than temporary) intellectual property monopolies can have severely negative consequences: indeed, partially because these legal promises of monetization through private exchange are difficult to enforce under the current state of technology. Conclusion To the question of how the nature of digital goods affects how we ought to govern property rights to these goods, the answer to which we arrive is that property rights to digital goods must maintain the goals (protecting the right of an individual to own her labor, protecting incentives to produce as well as access to consume) of traditional intellectual property rights while being tailored to the fact that digital goods are characteristically public goods. Richter proposes a potential political solution in the form of compulsory blanket licensing. In this approach, content providers who wish to sell digital goods must license them with competing Internet Service Providers (ISPs), who will charge a content fee to consumers as part of their subscription package and then collect data on usage rates for different digital products and pay providers accordingly. As such, content producers will have the right to license their goods to whichever networks they would like, but there would be no legal right to claim that each user of the good must pay directly for it and keep it privately. This approach contrasts with Priest and, in some sense, Epsteins approach of competing private licensing models, which may include voluntary blanket licensing, so that if a single approach is chosen, it is chosen by winning out in


See for example, Simone Cecchini and Christopher Scott, "Can Information and Communications Technology Applications Contribute to Poverty Reduction? Lessons from Rural India," Information Technology for Development 10, no. 2 (April 2003).

Dean 13 the marketplace. The problem that persists in the private models approach is that the legal infrastructure must, in Epsteins words, be neutral between these different private licensing models.34 If the evidence provided here sufficiently shows that any digital property approach must comport with current user behavior and demands, however, this competing licenses approach must also involve a legal change that recognizes the public character of digital goods. It is difficult to imagine how such a legal change would not effectively eliminate copyright protections on digital goods, however, if it does not include an alternative method of defining who has the right to use which digital goods and in what way that comports with current reality. The lesson of this analysis is akin to that which Hernando de Soto describes in The Mystery of Capitalabout U.S. homesteading law. In 1862, President Lincoln signed the Homestead Act, which reformed American property law to simplify the requirements for obtaining legal title to lands West of the Mississippi for people living on and working that land. What de Soto points out is that when Congress passed the celebrated Homestead Act it was only sanctioning what settlers had already done by themselves.35 The law prior to the Homestead Act had treated the usual practice of homesteaders as illegal, although many of these homesteaders settled without legal title because the legal system for obtaining such title was obtuse and disconnected from the needs of those whom it was meant to serve. Thus, the legal system, by embracing the illegal but otherwise reasonable behavior of homesteading settlers, legitimized itself, becoming the rule for most people in the United States rather than the exception.36 The public-good nature of digital goods makes completely legal behavior under the present U.S. legal arrangements the exception rather than the rule with respect to these goods.

Epstein, 14. Hernando de Soto, The Mystery of Capital (New York: Basic Books, 2000), 147-148. 36 Ibid, 148.


Dean 14 Whether policymakers find a way to facilitate privately competing digital licensing models without punishing consumers for using existing technology, or whether they choose a single licensing model as the law of the land, digital technology need not be a bastion of illegality or uncompensated piracy. There are workable ways of governing digital goods as property while recognizing that the defining features of digital products suggest that the present method of treating them as traditional intellectual property is economically, socially, and legally (if not politically) insufficient.

Works Cited Cecchini, Simone, and Christopher Scott. "Can Information and Communications Technology Applications Contribute to Poverty Reduction? Lessons from Rural India." Information Technology for Development 10, no. 2 (April 2003).

Dean 15 Chellapa, Ramnath K., and Shivendu Shivendu. "Managing Piracy: Pricing and Sampling Strategies for Digital Experience Goods in Vertically Segmented Markets." Information Systems Research 16, no. 4 (2005). de Soto, Hernando. The Mystery of Capital. New York: Basic Books, 2000. Epstein, Richard. "Intellectual Property for the Technological Age." The Manufacturing Institute, 2006. Fagundes, David. "Crystals in the Public Domain." Boston College Law Review 50, no. 139 (2009). IFPI. "IFPI Digital Music Report 2010: Music How, When, Where You Want It." International Federation of the Phonographic Industry, 2010. Locke, John. "Second Treatise." In Two Treatises of Government, by John Locke, edited by Peter Laslett. Cambridge: Cambridge University Press, 1988. Metro Goldwyn-Mayer Studios Inc. et al. v. Grokster, Ltd., et al. 545 U.S. 913 (Supreme Court of the United States, 2005). Moore, Adam D. "A Lockean Theory of Intellectual Property." Hamline Law Review 21 (19971998): 65-108. Priest, Eric. "Why Emerging Business Models and Not Copyright Law are the Key to Monetising Content Online." In Copyright Law, Digital Content and the Internet in the Asia-Pacific, edited by Brian Fitzgerald, Fuping Gao, Damien O'Brien and Sampsung Xiaoxiang Shi. Sydney: Sydney University Press, 2008. Quah, Danny. "Digital Goods and the New Economy." Centre for Economic Performance Discussion Papers. London: Centre for Economic Performance, 2003.

Dean 16 Richter, Wolf. "The Future of Music in the Peer-to-Peer Web Position Paper." Seventeenth Annual WWW Conference. Beijing, 2008. Sony Corporation of America v. Universal City Studios, Inc. 464 U.S. 417 (Supreme Court of the United States, 1984). Sporkin, Andi. E-Books Rank as #1 Format Among All Trade Categories for the Month. April 14, 2011. (accessed April 26, 2011). The Authors Guild et al. v. Google Inc. 05 Civ. 8136 (DC) (United States District Court Southern District of New York, 3 22, 2011). U.S. Copyright Office. Fair Use. November 2009. (accessed May 5, 2011).