Digital File-Sharing: What Has Been/Will Be Its Impact? Stan J. Liebowitz School of Management University of Texas at Dallas Copyright Society Meetings For Additional Details Go to Or just google “Liebowitz”

How Much File-sharing Takes Place? 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 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

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

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

Doesn’t the uptick in 2004 Sales run counter to this hypothesis? Increase occurred only during first six months. File-sharing declined in the first six months, most likely due to RIAA lawsuits.

Additional Evidence 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 Evidence It 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).

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.