A Shot Across the Bows of Software Developers?
Stephen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
On July 3rd, the Court of Justice of the European Union made a ruling with potentially giant ramifications for the software industry. Oracle (NASDAQ: ORCL) sued a German company that resells software licenses, UsedSoft, on the grounds that UsedSoft was violating copyright law for reselling Oracle software that customers had downloaded from the internet.
Physical copies of software that are sold on CD-ROMs or DVDs are legally permitted to be resold because of a concept called “first sale” or “exhaustion,” which basically states that after the first sale of the product the owner of the copyright has exhausted their interest. This is why GameStop (NYSE: GME) is able to sell used video games without being sued by game developers. Previously, the principle of exhaustion did not apply to software that was acquired digitally. The argument was that a buyer of digital software was only buying a license to use the software, and license agreements always include a “no-resale” clause.
The EU’s highest court dismissed this argument, stating that exclusive distribution rights are also exhausted after digital first sales. While courts in the United States have historically upheld no-resale clauses in licensing agreements, this recent development in Europe makes me think it’s only a matter of time before there is another serious challenge in American courts. A similar result in the U.S. would likely be great news for the consumer and equally bad news for software developers. The scope of the ruling still needs to be tested in future cases, but one can imagine some major impacts.
Smartphone apps could fall under this ruling, permitting consumers to resell apps they don't want anymore. This would be bad news for app developers, but not necessarily for Apple (NASDAQ: AAPL) who can facilitate the used app market and take a small cut of each transaction. It would be a stretch, but the same principle could be applied to media purchased on iTunes as well.
One company that really needs to keep an eye on this is Microsoft (NASDAQ: MSFT), whose crown jewel Office Suite and other Enterprise software can now be digitally bought and resold in Europe. New startups can turn to secondary markets to acquire all the software they need instead of purchasing from Microsoft. Mr. Softy’s best defense is its cloud-based Enterprise solutions, but it must make a compelling case for businesses to go with a software rental model instead of buying on the cheap through another distributor.
The video game industry is another potential victim. There’s been great debate over the impact of the used game market on new game sales, and while hard numbers are difficult to come by, used game sales are likely a contributor to overall decreased industry sales. Video game companies have made various attempts to devalue used games to encourage consumers to buy new. For example, the latest edition of the popular game series Mass Effect required a one-time-use product code to access online features. Anyone who purchased a used copy of the game would not have access to this content. The growing popularity of digital distribution for games has been of some benefit to the industry, but this ruling might permit a virtual GameStop where players can sell or buy games once they are done playing. An interesting idea for publishers would be to move their products to the cloud and alter the payment structure to a rental model. This would incentivize game companies to create compelling and lengthy game experiences, which would build goodwill with their customers.
The European Court ruling is only a week old and only time will tell how this ultimately plays out. As a consumer I am interested in the possible benefits from price competition, as well as the increased pressure for innovation on those companies like Microsoft that may have to compete with cheaper copies of their own products. As an investor I am looking ahead to see which companies may be pinched and which may prosper from this development. I eager to hear your thoughts on this topic, so please leave a comment.
drfrank1 owns shares of MSFT. The Motley Fool owns shares of Apple, GameStop, Microsoft, and Oracle. Motley Fool newsletter services recommend Apple and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.