Two seemingly unrelated bits of news are focusing attention on the value of physical CDs vs. digital downloads: Universal Music Group announced the reduction of their CD prices effective October 1, and an iTunes customer is testing the legality of reselling a digital music file purchased over the Internet:

George Hotelling wants to know. In a move that could spark a novel legal test of Internet music resale rights, the Web developer in Ann Arbor, Mich., on Tuesday night put a digital song he purchased online at Apple Computer's iTunes Music Store up for auction on eBay.

Hotelling said he isn't all that concerned about getting his money back for the Devin Vasquez remake of Frankie Smith's song "Double Dutch Bus," which cost him 99 cents. Instead, he said he's using the attempted sale to probe some thorny consumer issues stemming from commercial online music services, in particular, technology known as digital rights management that's used to prevent unauthorized copying. In that spirit, he's promised to donate anything above his purchase price to the Electronic Frontier Foundation (EFF), an activist Internet legal group.

....While momentum is building for digital music distribution, legal experts said Hotelling's auction highlights the fact that there are still some kinks to be worked out.

"It underscores the fact that when you purchase digital music online today, you may be getting quite a bit less for your money than when you purchase a CD in a store," said Fred von Lohmann, a senior staff attorney at the EFF. "If you buy it in a store, it would be absolutely crystal clear that you could auction it on eBay."

By contrast, von Lohmann said it's unclear whether Hotelling's auction is legal or whether it's allowed under Apple's terms-of-service contract for iTunes Music Store sales.

"It's a little bit of a murky area," he said. "It would make a pretty interesting law school exam question."

The terms-of-service contract, which is eight printed pages long, mentions little about the rules that guide the resale of songs. It does state, however, that the use of iTunes songs is for "personal, noncommercial use."

....Von Lohmann said the resale issue could point to other unresolved legal questions that relate to commercial music downloads that are only now coming into view. For example, he pointed to the rights of online music consumers to loan or donate songs they download online.

In addition, there seem to be no rules that govern the rights of an owner of a second-hand digital song, he said. "If you were to win that auction and get that song, you have no relationship with Apple," von Lohmann said. "You didn't agree to the terms of service. What governs the song after you've repurchased it?" [CNET]

With the retail price for physical CDs coming down to around $10 - the price of a typical album on iTunes - this forces a more direct comparison between downloads and physical CDs, which, with better sound quality (no compression), full packaging including art, liner notes and jewel case, and unquestionable ownership rights including resale, jump back on top as the better deal. Will the other labels match UMG in reducing CD prices? (almost certainly), and will the digital sellers reduce their prices to again undercut physical CDs, which offer more at the same price?