Digital File-Sharing: What Has Been/Will Be Its Impact?

Stan J. LiebowitzSchool of Management

University of Texas at Dallas

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How Much File-sharing Takes Place?

2004 Sales of songs (assumes 11 per CD) 759,383,333Webnoize 2001 1,000,000,000Idate high statement for all of 2003 5,000,000,000Idate low statement for all of 2003 1,000,000,000NPD for 2004 233,355,727

Estimates of monthly music files 'shared' in US

Plenty, according to estimates

As little as 1/3 the size of the legitimate market, as much as 6 times as large.

Large variation in estimates is disturbing, however.

What has happened to Record Sales

Figure 1x: LP Albums Sold per capita

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So far in 2005, down 8%

Is file-sharing to blame?It is consistent with our theoretical expectations.

The timing of the two events is consistent with causation. It would be a remarkable coincidence if there were no relationship.

No other suggested factor is consistent with the decline

GDP – rose during period.

Price of CDs – virtually constant until 2004, when it fell.

Quality of music – no evidence of decline.

Alternative forms of entertainment (DVDs, video games and so forth) – these did not change in a way that could explain the decline in record sales.

No Change in Substitute Markets in the Period around 1999

Figure 2: Movies and VideoGames

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Normalized Videogame Revenue Per CapitaNormalized Box Office Per Capita

Source: Ebrain and MPAA

Change in DVD market?Looks like this might be it.

Figure 4: Growth in Pre-Recorded Movie Sales and Rentals

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Real Per Capita $ Sales of PreRecorded Movies (right axis)

Source: Adams Media Research (2003$)

Sales Rose, but Rentals FellOverall, it can’t explain the CD decline

Figure 4: Growth in Pre-Recorded Movie Sales and Rentals

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Real Per Capita $ on Sales and Rentals of PreRecorded MoviesReal Per Capita $ Sales of PreRecorded Movies (right axis)

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Doesn’t the uptick in 2004 Sales run counter to this hypothesis?

Figure 3: Measures of File-sharing Activity

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Pew SurveysComScore Media MetrixBhattacharjee et. al.Big Champagne

RIAA announces (June 25) and then begins lawsuits (September 8).

Increase occurred only during first six months.

File-sharing declined in the first six months, most likely due to RIAA lawsuits.

Additional Evidence

Big Champage -4.4%ComScore -36.3%PEW -28.8%

Table 3: Estimated Change in File Sharing, first half of 2003 to first

half 2004

1. The aforementioned negative relationship between record sales and file-sharing in 2004 actually supports hypothesis.

2. Records stay on sales charts for a shorter period since file-sharing began. Consistent with substitution (harm) hypothesis, not with sampling. “Modeling Product Lifecycle on a Ranked List: An

Application to Music Albums on Billboard Charts” Bhattacharjee, Gopal, Lertwachara, Marsden.

Additional EvidenceIt has been claimed (Oberholzer/Strumpf Grokster Amici

brief) that genres of music least likely to have been downloaded have shared in sales decline, which would be inconsistent with downloading causing the harm.

Although genre evidence is not terribly reliable, this claim is false (although I show sales relative to radio, same results hold just for sales).

classical jazz/smooth jazz country1999 8.07416 5.456752232 5.821572582000 6.979109 5.269958006 6.096209572001 8.414178 5.538243224 6.361193892002 8.590823 5.495995581 7.410973082003 10.55179 6.110928962 6.7954023

Table 5: Ratio of sales to radio listenership

Conclusion:

No reason to believe that the decline is due to anything but file-sharing.

Are record industry fortunes a precursor for movies and other digital industries?

I think the answer is likely to be “yes.” The small size of music files has made them the first impacted by file-sharing.

What about legitimate downloads and Apple’s iPod?Fairly trivial impact on sales so far. Most of the music on

iPods is not purchased from online stores such as iTunes.

These downloads are included in statistics already reported.

Additional (Regression) Results • Blackburn (Harvard Dissertation) examines relationship between songs heavily

downloaded and CDs sales. Finds that popular CDs are badly hurt with large overall negative effect.

• Hong (Stanford dissertation): examines CD sales to families with and without Internet access. Concludes that file-sharing accounts for a large minority of sales decline.

• Liebowitz, examines how the share of Internet users in cities is related to changes in CD sales. Finds file-sharing decreases sales by large amount.

• Peitz and Waelbroeck: examine how Internet use in countries relates to changes in CD sales; find large decline from file sharing.

• Rob and Waldfogel: Analyze surveys of student. Conclude that file-sharing decreases sales (Each 2 downloads turn into a lost sale).

• Zentner (Chicago Dissertation): examine how Internet use in countries relates to changes in CD sales; also examines whether Internet use by individuals increases or decreases their purchases of CDs. Finds downloading is hurts sales.

• Oberholzer and Strumpf : examine relationship between songs heavily downloaded and CDs sales. File-sharing has either a zero or + impact, depending on which version you read.