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Over the past few weeks, I’ve spent a lot of time thinking about library circulation, and where it’s heading as collections are increasingly accessed via networks rather than shelves. I’d like to kick some of these ideas out to the world; first, a brief history of a related context I know quite well, the video store. Draw your own conclusions, and I’ll lay out some of my own ~~tomorrow~~ when I can get them down…

When movies were first released on videocassette in the mid-1970′s, the assumption was that individual film lovers would buy them for personal use and build home libraries. Until that point, one could only watch a movie on a pay-per-viewing model (i.e. by paying for a seat at a theatrical showing), and since a VCR owner could watch a purchased movie countless times, individual cassettes were priced at dozens of times the going rate for a box-office ticket.

While a handful of enthusiasts did begin to build home libraries, home video didn’t become a mass phenomenon until a different model emerged. Beginning with a handful of entrepreneurs, video store owners began sinking substantial up-front resources into buying inventories of movies, then recouping that investment (and hopefully a profit) by charging a rental fee every time a customer borrowed that movie. Successful storeowners plowed profits into more locations and broader collections, and built a thriving industry between home viewers and movie studios by enabling home viewers to have limited access to items they couldn’t or wouldn’t purchase on their own.

This “circulating library” model was opposed by the movie studios, who were never satisfied with the loss of control of their intellectual property (and their ability to monetize it) after its “first sale” to the video storeowner. Thus, in the late 1980′s a new model emerged, largely facilitated by a company called Rentrak that offered video stores a license-based rather than purchase-based business model. Rentrak would supply a store with as many copies of a given movie as the storeowner wanted at a minimal cost, collecting a percentage of each rental transaction (as monitored by Rentrak’s software on the store’s computers). This enabled video stores to offer guaranteed availability of new releases, limited only by physical shelf space – remember the wall containing shelf after shelf of a given movie (replaced the following week by that week’s new release, and so on) that became common in the early 1990′s? Video stores, particularly large chains, shifted to a hybrid business model, relying on licensing agreements for new releases and already-purchased cassettes for the back catalog.

In 2002, Netflix was pitched as a hyper-efficient version of this hybrid video store. Much has been made of the elimination of the physical store in the Netflix model, but the real breakthrough lay in convincing patrons to manage all of their rental choices well in advance of the moment of delivery. By shifting from a store full of movies waiting to be checked out to a “queue” of customer requests that would be steadily filled, Netflix gained the ability to efficiently manage its inventory and anticipate demand across a nation of viewers. Licensing agreements for mainstream blockbusters allowed Netflix to print additional copies of DVDs as needed (while sending the movie studio a set fee per transaction, a la RentTrak), while the back catalog of DVDs owned by Netflix was managed much more efficiently than any video store could – as soon as a movie was returned, it could immediately be sent out to the next customer in line, spending far less time idle on the shelf.

Though generally assumed to have killed the physical video store, the Netflix model will face its own challenges in the near future. A strategy presentation recently posted online by CEO Reed Hastings estimates that the business of shipping physical DVDs via mail only has a few more years left before being entirely overtaken by online streaming of movies direct to TVs, computers, phones and tablets. Thus, Netflix is working to shift its resources toward its already-successful streaming options, which represent the purest form yet of the licensing model; users who pay a particular monthly rate are entitled to stream a specific number of hours of video per month, and every viewing of a movie by a Netflix user results in a payment to the rightsholder. Netflix (and any other streaming provider) pays no upfront cost to host a streaming video file, but does pay a relatively substantial amount for every stream.

Comments 3 Comments so far. Leave a comment below.

Jonathan Rochkind,

June 16, 2010 at 12:42 pm

So here’s one interesting thing about that story to me.

“since a VCR owner could watch a purchased movie countless times, individual cassettes were priced at dozens of times the going rate for a box-office ticket.”

Then, as you recount, the rental model took over anyway.

As a result of the rental model, the price for actually BUYING a movie dropped substantially, videotapes (and now DVDs) are NOT any longer sold to consumers at dozens of times the price of a box-office ticket, but at maybe 2-4 times, typically. Presumably because once the rental model took over, it was clear that those higher prices were unrealistic for consumer purchase (really, they always were).

Now one thing I’ve never understood the legal basis of. Video rental stores (and netflix too?) still pay a MUCH higher price for copies than the consumer price, closer to that dozens-of-times-the-price.

While this might seem “fair”, since many people are going to watch that copy — I don’t know how (or if?) the publishers are able to _require_ rental stores to do this. I thought the “first sale doctrine” applied to videos, and I thought the first sale doctrine said once you buy something, you are allowed to rent it out without a license. (Printing additional copies yourself like you say Netflix does still requires a license).

One reason this is interesting to libraries is that the first sale doctrine is exactly what lets us libraries buy one copy of a book and then loan it out without a license to do that. (While some libraries pay special higher “library prices” for books, it’s never been clear to me if this is legally enforceable either; the first sale doctrine should protect our ability to buy a standard consumer copy and lend it out).

Now the first sale doctrine does NOT apply to software, typically. Which is one reason why libraries are having so much trouble figuring out how to provide e-books to patrons at any kind of reasonable cost. But I know it applies to books, and I thought it applies to videos, which is why I’m confused about why libraries are willing to pay special higher “library prices” for certain books, and why video rental stores are willing to pay much higher rental store prices for purchase of videos.

- Josh Greenberg,
  
  June 16, 2010 at 1:20 pm
  
  Hey, Jonathan…there is in fact no way for rightsholders to require circulating institutions to pay a higher price for physical media; it’s first sale all the way. When studios dropped the price of a cassette down into the $20′s, and then a DVD even lower, they were making a bet that the revenues from individual sale would surpass the losses from video stores (in essence, they shifted from video stores to consumers as their main customer, gritting their teeth and bearing the existence of video rental beyond their control) – and they were right, at least in the late 90′s.
  
  When a circulating institution pays a premium for something, it’s either because of some value-added service (shelf-ready, pre-catalogued, etc) or because a relationship with a particular distributor trumps specific savings. If they’re buying physical media, there’s no such thing as a library-required channel.
  
  Now, when you move into the realm of licensed content and contract law takes over from property law, first sale and a bunch of other things go out the window. As you can imagine, that’s where I’m headed, hence starting with the highly-resonant tale above.
  
Stephen Francoeur,

June 17, 2010 at 10:45 am

I’m wondering how a library’s need to have DVDs and videocassettes purchased at higher prices that include performance rights figures into this discussion.

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