File sharing is good for you (and the music industry)

A lot of people assume that file sharing is a bad thing for artists and their recording labels. This independent study done for Industry Canada, by Birgitte Andersen and Marion Frenz, suggests exactly the opposite: file sharing increases exposure and can increase record sales. Below is the abstract, and after that some interesting post-study commentary – all of which is good food for thought as the Conservatives introduce changes to the Copyright Act, which many feel will pander to the already-highly-profitable music industry.

The Impact of Music Downloads and P2P File-Sharing: Abstract

The primary objective of this paper is to determine how the downloading of music files through Internet peer-to-peer (P2P) networks influences music purchasing in Canada. P2P networks permit members to transfer digitally-stored information to one another over the Internet; popular examples include BearShare, LimeWire and eMule. Using representative survey data from the Canadian population collected by Decima Research on behalf of Industry Canada, we attempt to quantify this economic relationship, while accounting for other factors that influence music purchasing. We undertake a variety of econometric estimations for the population of Canadians who engage in P2P file-sharing (P2P “downloaders”), as well as for the whole Canadian population. To our knowledge, this is the first study on P2P file-sharing that analyzes original and representative microeconomic survey data from the Canadian population. Few previous studies have analyzed representative microeconomic data, for Canada or any other country.The existing literature identifies two competing effects associated with the P2P music file-sharing: the sampling and substitution effects. The sampling effect is characterized both by individuals downloading music in order to listen to it before buying it as well as by individuals downloading music that is not available in stores, while the substitution effect is characterized by individuals downloading music instead of purchasing it. In this paper, we further disentangle the sampling effect by adding a market segmentation effect, characterized by individuals engaging in P2P file-sharing because they do not want to purchase the entire bundle of songs on a CD.

Our review of existing econometric studies suggests that P2P file-sharing tends to decrease music purchasing. However, we find the opposite, namely that P2P file-sharing tends to increase rather than decrease music purchasing.

Among Canadians who engage in P2P file-sharing, our results suggest that for every 12 P2P downloaded songs, music purchases increase by 0.44 CDs. That is, downloading the equivalent of approximately one CD increases purchasing by about half of a CD. We are unable to find evidence of any relationship between P2P file-sharing and purchases of electronically-delivered music tracks (e.g., songs from iTunes). With respect to the other effects, roughly half of all P2P tracks were downloaded because individuals wanted to hear songs before buying them or because they wanted to avoid purchasing the whole bundle of songs on the associated CDs and roughly one quarter were downloaded because they were not available for purchase. Our results indicate that only the effect capturing songs downloaded because they were not available for purchase influenced music purchasing, a 1 percent increase in such downloads being associated with nearly a 4 percent increase in CD purchases.

We find evidence that purchases of other forms of entertainment such as cinema and concert tickets, and video games tend to increase with music purchases. It has been argued in the literature that the increase in the number of entertainment substitutes has led to a decline in music purchasing, but our results do not support this hypothesis. As expected, we find that reported interest in music is very strongly associated with music purchases. Finally, our results suggest that household income is not important in explaining music purchases.

The study came under attack by one writer who held the opposite view (see this post). Andersen responded at length (here) but what caught my eye was this great comment on the post from someone at UNCTAD(*):

The recorded music industry is rapidly undergoing a process of Schumpeterian creative destruction (Kozul-Wright, Z. and Jenner, P., “Creative Destruction in the Music Industry and the Copyright“, forthcoming). It is facetious to believe in perfect substitutability between downloaded (authorized or unauthorized) musical content and record sales. There is little empirical basis for such an assumption (see Oberholzer-Gee and Strump, 2004). Music consumers are rapidly switching from purchasing records (CDs and other more traditional formats) to a variety of alternative digital formats, such as mobile music devices and other digital formats (such as single track downloads, album downloads, music video online downloads, streams, master recording ring tones, full track audio download to mobile, ringback tunes, music video downloads to mobile and subscription income.).

Indeed, overall earnings of the industry are on the increase, not on the decrease (PWC, 2007). The broader music sector, is now worth more than $US 130 billion globally. Its economic importance extends far further than the recorded music sector, ranging from radio advertising revenue, record company revenues, musical instrument sale, live music sector, music retail sectors, portable digital payers, to music publishing (IFPI, 2007). The so called “demise of the music industry” is highly contentious; indeed and completely disingenuous, for example, Price Waterhouse Cooper argues that the media industry, including music, is in a strongest position since 2000; and predicts a 7.3 per cent growth annually up to $ 1.8 trillion in 2009 (PWC, 2005).

PWCooper (PWC) estimates that the broad entertainment and information sector already accounts for over one trillion us dollars globally and is likely to rise to $ 1.8 trillion by 2009 (PWC, 2006). While sales of recorded music (physical retail) have been on a declining trend since 2002, the sales of digital content have been on a notable increase (by 60 per cent since 2006, IFPI, 2007).

To hold file sharing uniquely responsible for the decline in record sales i.e., largely unauthorized downloading, is basically erroneous and far too simplistic. Moreover, such an assertion indicates a lack of understanding of the dynamics of the current process of creative destruction and transformation to the digital paradigm in the “recorded” music industry. The word “recorded” itself denotes a kind of backward looking perspective, as it may no longer be the primary technological format for the rapidly converging music-ICTs-entertainment-telecommunications industry in the third millennium.

However, it may not be possible to fully “test” this hypothesis econometrically, as we are really comparing apples and oranges. There is no reason to assume that the downloaders would have necessarily bought the equivalent volumes of products in records, CDs or other physical music formats. This assumption can be highly misleading and steers the whole debate in the wrong direction. The implication of such reasoning would be to hinder or even halt the process of technical change and innovation in the music industry, which is not only unadvisable but impossible.

Our own research would support the arguments made in the Andersen and Frenz Study , 2007, that indeed there may be a significant positive relationship between file sharing and purchase or greater use of various other formats containing music content (although not necessarily record sales per se). According to IFPI, legal downloads have risen significantly over the last 5 years and IPR-related earnings have also been on a significant increase at this time (IFPI, 2007; HFA, 2007). While record sales have declined, that does not imply that the entire industry in the decline. Indeed, other segments have risen in volume and in earnings, more than offsetting the decline in record /CD sales (IFPI, 2007; PWC, 2006; Kozul-Wright and Jenner, forthcoming).

The more recent, healthy overall industry earnings indicate the opposite of Liebowitz’ assertion that …”file-sharing appears to have caused the entire decline in record sales and appears to have vitiated what otherwise would have been a growth in the industry” (Liebowitz, 2007). There is no empirical basis for such a facetious assertion. Additionally, there may be many other reasons for decline in record sales (the white elephant in the room), other than increase in file sharing (e.g., transformation to the digital technological paradigm, excessively high prices of CDs, i.e., excessive mark up, standardized quality, decline in purchasing power for luxury goods, lower degrees of choice and diversity, etc).

File sharing and downloading not only increases market exposure but significantly reduces marketing and advertising costs. File sharing, as the imminent dominant mode of music consumption, is proving to be more “efficient” than simply purchasing pre-recorded music. Owing to diffusion of technical change, it is far cheaper, as it reduces the costs of intermediation and allows consumers greater choice over listening patterns; facilitating the growth of demand-driven patterns of consumption thereby enabling greater consumer participation, and more interactive modes of consumption. Global consumers as well as new producers can benefit greatly from the new P2P file sharing technologies that should be facilitated and legalised, rather than hindered.

Improved new technologies cannot be suppressed simply because they threaten vested industry interests. That would be against the logic of the market and the well known dynamics of technical change and innovation, as analysed by Schumpeter over 40 years ago. It is precisely this feature of innovation-led creative destruction that characterizes capitalist markets; explain their resilience, dynamism and ultimate superiority over other forms of production and consumption.

Zeljka Kozul-Wright,
UNCTAD
Geneva, November, 20, 2007.

*These views do not necessarily express those of the United Nations”