The Impact of File-sharing on Music Sales Stan Liebowitz University of Texas-Dallas Vienna, June 2010

Record Sales in the US

Recent US Sound Recording Revenues

What about Other Top Markets?

File-sharing. [substitution, sampling] Music got bad. Ordinary Business Fluctuation. (O/S) DVD sales growth. (O/S) Replacement of cassette tapes came to an end. (O/S) Retailer Inventory Improvements. (O/S) More Later Epidemic of Deafness. I examined these in detail in “WILL MP3 DOWNLOADS ANNIHILATE THE RECORD INDUSTRY? THE EVIDENCE SO FAR” in Advances in the Study of Entrepreneurship, Innovation & Economic Growth 2004, Possible Explanations of Music Decline

Academic Studies Finding Harm Peitz, M. and Waelbroeck, P. (2004) The effect of internet piracy on music sales: Crosssection evidence. Review of Economic Research on Copyright Issues 1(2): 71–79. Zentner, A. (2005) File sharing and international sales of copyrighted music: An empirical analysis with a panel of countries. Topics in Economic Analysis & Policy 5(1): Article 21. Liebowitz, S. J. (2006) File-sharing: Creative destruction or plain destruction. Journal of Law and Economics 49(1): 1–28. Michel, N. (2006) The Impact of Digital File Sharing on the Music Industry: An Empirical Analysis Topics in Economic Analysis & Policy, 6(1) Article 18 Rob, R. and Waldfogel, J. (2006) Piracy on the high C’s: Music downloading, sales displacement and social welfare in a survey of college students. Journal of Law and Economics 49(1): 29–62. Zentner, A. (2006) Measuring the effect of music downloads on music purchases. Journal of Law and Economics 49(1): 63–90. Hong, S. H. (2007) The recent growth of the internet and changes in household-level demand for entertainment, Information Economics and Policy, 2007 Liebowitz, S. J. (2008) Testing File-Sharing’s Impact by Examining Record Sales in Cities. Management Science, (4) Vol. 54 April, pp Blackburn, D. (2004) Online piracy and recorded music sales. Working Paper, Department of Economics, Harvard University.

Academic Studies Finding No Harm Oberholzer-Gee, Felix and Koleman Strumpf (2007) “The Effect of File Sharing on Record Sales: An Empirical Analysis” Journal of Political Economy, 115: Andersen Birgitte and Marion Frenz (2010) “Don’t blame the P2P file-sharers: The Impact of Free Music Downloads on the Purchase of Music CDs in Canada” Journal of Evolutionary Economics

Academic Studies Too Preliminary to Include Tanaka, Tatsou (2004). Does File-sharing Reduce CD sales?: A Case of Japan

The Andersen/Frenz paper “ downloading the equivalent of approximately one CD increases purchasing by about half of a CD.” – Conclusion after finishing a 3 year study for the Canadian Government. This level of increase implied that CD sales in Canada would be zero if it were not for file-sharing. Who can believe that?

New Andersen/Frenz Result Shortly after their implications were pointed out, a new conclusion: “on the whole, these two effects ‘cancel’ one another out, leading to no association between the number of P2P files downloaded and CD album sales.” – Published Version of Paper

Oberholzer-Gee and Strumpf had similar initial finding O/S in their original March 2004 paper they state: “In Table 13, we ask how the effect of file sharing varies across commercially more or less successful albums…For the top quartile, downloads have a relatively large positive effect”p. 23

Oberholzer-Gee/Strumpf (Cont.) The top quarter of Albums represented most of the industry sales. So file-sharing would have a “relatively large positive effect” on the entire record industry. After this was pointed out to them, the table and result disappeared from the next version of the paper. The result is still in the data, though.

Close Examination of O/S paper reveals many problems O/S conduct 4 tests (“quasi-experiments”) in addition to their main test. Their conclusions for each of these additional tests is proven false upon attempted replication. Many claimed facts are untrue. Some are discussed below. See “How reliable is the Oberholzer-Gee Strumpf paper on file-sharing” available on SSRN.COM. But these were not the ‘Main Test’ which depended on secret file-sharing data.

Whether German school kids are on vacation or not is the Key O/S Variable Reasons why German kids on vacation cannot have a serious impact American downloads – Time zone differences [<50%] – The small fraction of worldwide file-sharers who are German [7%] – The small fraction of German file-sharers who are school kids; [15%] – The small fraction of German school kids on vacation [1/3] – Only 5/7 of the days are school days – Almost 50% of music is not in English – Net result is that German school vacations will impact less than 1/10 th of 1% of files available to Americans. One second out of the 1496 seconds they find it took to download a song in their data set. This is discussed in “The Oberholzer- Gee/Strumpf Instrument fails the Laugh Test”

Problems also with their American Downloading Variable. Check the months that O/S analyze, Sept-Dec Very little change in downloading over those months.

O/S file-sharing measurements are very different than those of Big Champagne Further, the O/S difference in downloading by week varies by 40:1; for record sales 3:1.

Problems with their main test “The first-stage estimates imply that a one-standard- deviation increase in the number of [German] children on vacation boosts [American] weekly album downloads by slightly more than one-half of their mean.” (O/S, 2007, page 23) “Half Their Mean” is another way of saying 50%. So, when some German kids go on vacation, American File-sharing goes up by 50%. Believable?

When 9.8 million German students go back to school, the O/S result says American file-sharing would decrease by 150%. It gets even better. Are you willing to believe that?

Words of Wisdom Aldous Huxley: facts do not cease to exist because they are ignored. John Adams: Facts are stubborn things; and whatever may be our wishes, our inclinations, the dictates of our passions, they cannot alter the state of facts and evidence. Mark Twain: Get your facts first, and then you can distort them as much as you want.

“Music sales have been flat or even rising in major markets with a quickly growing file-sharing population”. O/S p 39, 2007.

“The number of file sharing users in the U.S. drops twelve percent over the summer (estimated from BigChampagne, 2006) because college students are away from their high- speed campus Internet connections.” O/S p. 36, 2007.

“there is clear evidence that income from complements has risen in recent years. For example, concert sales have increased more than music sales have fallen.” O/S p. 25, 2009.

“If we also consider the sale of iPods as a revenue stream, the industry is now 66% larger than in 1997.” p. 21, 2009

“an important group of papers reports that file-sharing does not hurt sales at all (Tanaka, 2004; Bhattacharjee et al., 2007;... ” P16, 2009

“Unfortunately, neither the Rob and Waldfogel study nor Zentner’s work allows inferences about the total impact of file sharing on record sales because neither paper studies a representative sample of file sharers.” 2007 p5

“Rob and Waldfogel (2006) find an average displacement effect of 20% but report that file sharing had no impact on hit albums.” p. 16

“Rob and Waldfogel (2006) find an average displacement effect of 20% but report that file sharing had no impact on hit albums.” p. 16, 2009

The Inventory Claim “What other factors can explain the decline in music sales? A first reason is the change in how music is distributed. Between 1999 and 2003, more than 14 percent of music sales shifted from record stores to more efficient discount retailers such as Wal-Mart, possibly reducing inventories.” O/S 2007, p 39. Although this claim was ludicrous on its face, I also pointed out that inventory data from NARM showed that inventories did not even drop.

O/S replied: “Liebowitz’ statistics on inventories …do not address the question at hand since Wal-Mart's inventories are not included (Wal-Mart is not a member of [NARM]”).

Hiding the Data “Mr. Strumpf says that he has always been candid with Mr. Liebowitz about the impossibility of sharing the data. He showed The Chronicle an April 2004 e- mail message in which he told Mr. Liebowitz about both the legal concerns and about his promise to OpenNap not to distribute the data.” – Chronicle of Higher Education; July 17, 2008

From the Future of Music Conference May 02, 2004 Jim Griffen: Koleman, why won't you share numbers? Koleman Strumpf: I was all for opening it, but university counsel told us not to. This stuff will all be made available to anyone, eventually. As soon as the legal environment quiets down, everything will be given out. Mr. Strumpf says that he has always been candid with Mr. Liebowitz about the impossibility of sharing the data Chronicle of Higher Education; July 17, 2008

“ This year, Mr. Strumpf told Handelsblatt that he and Mr. Oberholzer-Gee had signed a confidentiality agreement with their OpenNap source that prevented the sharing of the data.” Chronicle of Higher Education; July 17, 2008 “Mr. Strumpf declined to show a copy to Handelsblatt or to The Chronicle.” Chronicle of Higher Education; July 17, 2008

“An important question is whether our sample is representative of data on all P2P networks…On the basis of these tests, we conclude that our sample is representative” (O/S, 2007, p. 7)

“For example, in 2005 retail music sales rose in four of the five largest national markets.” p 39, 2007.

Moreover, it is difficult for musicians to earn substantial income from recorded music sales, regardless of the success of their album. This is in part due to the nature of recorded music contracts (Passman, 2000). Passman doesn’t say this. If albums sells well enough the musicians earn plenty of money. Passman does say that it is difficult for moderately successful bands to do well.

“in the United States the entire drop in 2005 album sales is due to losses at a single firm, the recently merged Sony-BMG, which has experienced severe postmerger integration difficulties.” P40, UMG2.92% SONYBMG-13.58% WMG-1.87% EMI-7.45% OTHERS-27.09% Table 8: Unit Sales Changes

“While album sales have generally fallen since 2000, the number of albums being created has exploded…Even if file sharing were the reason that sales have fallen, the new technology does not appear to have exacted a toll on the quantity of music produced.” P 23, O/S 2009

“Obviously, it would be nice to adjust output for differences in quality, but we are not aware of any research that has tackled this question.” The age of “Vanity Albums” 97,000 new albums in – 18,000 sold less than 1 copy – 81,000 sold less than 100, generally much less. Only 19,000 were from the major labels. 4.3% of albums from majors sold more than 15,000 units for majors;.2% for indies.