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Based on my experiences and understanding, I think you are correct concerning the product being downloaded vs. sent on cd. With PP they are anal about the whole delivery confirmation thing and thus the digital product does not provide as such. I think if you offered in via the cd you would be safe as far as PP is concerned as you would actually be selling a tangible/deliverable product.
The other thing to consider is that neither PP or ebay tend to get involved or do anything unless something is reported by another user. Maybe a competitor saw what your friend had going listing it as downloadable and reported it to ebay?
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