1. Vienna Music Business Research Days The Econonics of Music File Sharing – A Literature Overview First Vienna Music Business Research Days University of Music and Performing Arts Vienna, 9-10 June 2010 Prof. Dr. Peter Tschmuck Institute of Culture Management and Culture Sciences University of Music and Performing Arts Vienna Karlsplatz 2/2/9 1010 Vienna phone: ++43-1-71155-3415 e-mail: Tschmuck@mdw.ac.atTschmuck@mdw.ac.at webpage: http://musicbusinessresearch.wordpress.comhttp://musicbusinessresearch.wordpress.com

2. Vienna Music Business Research Days Contents Introduction: A Typology of Music File Sharing Approaches Theoretical Approaches Survey Based Approaches Approaches Based on P2P File Sharing Usage Conclusion

3. Vienna Music Business Research Days A Typology of Music File Sharing Approaches

4. Vienna Music Business Research Days A Typology of Music File Sharing Approaches Theoretical Approaches (4) Survey Based Approaches (15) Approaches based on File Sharing Usage (4) Pure Survey Based Approaches (11) Theory and Survey Based Approaches (4) Based on Secondary Data (6) Based on Primary Data (5)

5. Vienna Music Business Research Days Theoretical Approaches

6. Vienna Music Business Research Days 1. Theoretical Approaches 1.1 Stan J. Liebowitz: File Sharing: Creative Destruction or just Plain Destruction? (2006) Main findings: (...) economic theory provides only a very thin foundation on which to support any expected impact of file sharing on sales of sound recordings other than negative one (p. 19). Method/assumptions: Model based on microecononic textbook wisdom. The substitution and sampling effects of file sharing have a negative impact on music purchases. Network effects are negligible and indirect appropriability is irrelevant.

7. Vienna Music Business Research Days 1. Theoretical Approaches 1.2 Ibrahiim Bayaan: Technology and the Music Industry (2004) Main findings: Technological advances such as file sharing (...) leads to more artists and more variety within the music industry (p. 1). Method/assumptions: Game theoretical monopoly model with two scenarios: (1) quality reponse and (2) legal response of the labels to file sharing. In both scenarios labels as well as signed artists are worse off, but unsigned artists are better off due to low production costs and self- marketing. However, a labels quality response leads to higher social welfare than a legal one. The worst scenario for consumers and society as a whole is where firms use legal methods to combat file-sharing (p. 17).

8. Vienna Music Business Research Days 1. Theoretical Approaches 1.3 Curien/Moreau: The Music Industry in the Digital Era (2005) Main findings: Record companies bear almost all of the negative effect of file sharing, whereas artists rather benefit from it. However, (...) record companies should better try to accommodate piracy by exploiting one of its main features: its ability to ensure a large scale diffusion of music at a very low cost (p. 20). Method/assumptions: Monopoly model with trade-off between record sales and purchases of concert tickets and other ancilliary good such as ringtones. If the live sector is large enough the whole industry is better off with piracy. Artists profit from concert revenues and labels if they are engaged in the live performance business.

9. Vienna Music Business Research Days 1. Theoretical Approaches 1.4 Peitz/Waelbroeck: Why the Music Industry May Gain From Free Downloading (2006) Main findings: In our model, profits increase for a certain set of parameters because consumers can make more informed purchasing decisions because of sampling and are willing to spend for the original although they could consume the download for free (p. 912). Method/assumptions: Multi-product monopoly model with a two-stage music consumers decision process. In comparion of a situation without file sharing vs. with file sharing, the model indicates (...) that a firm can obtain higher profits if downloading is possible p. 911). This holds only true (...) if there is sufficient taste heterogeneity (...) and sufficient product diversity (p. 912).

10. Vienna Music Business Research Days Critical Remarks on Theoretical Approaches Theoretical models rely on stark premises and assumptions, which are not very realistic. Liebowitz (2006) assumes a negative impact of the file sharings sampling effect on record sales. Bayaan (2004), Curien/Moreau (2005), Peitz/Waelbroeck (2006) assume profit maximising monopolist. Instead, the music industrys is characterized by an oligopolistic market structure and monopolistic competition. Therefore, firms try to maximise their market shares and market power. We need more elaborated models of oligopoly and monopolistic competition, which have to be empirically tested.

11. Vienna Music Business Research Days Secondary Data Based Survey Approaches

12. Vienna Music Business Research Days 2.1 Pure Survey Based Approaches Using Secondary Data 2.1.1 Stan J. Liebowitz: Testing File-Sharings Impact on Music Album Sales in Cities (2006) Main findings: [F]ile-sharing is responsible for a reduction in sales that is larger than the sales decline that occurred and that file-sharing aborted what otherwise would have been a growth in sales. (p. 15). Database: U.S. census data on Internet and computer use in 1998, 2000, 2001, and 2003 for 100 metropolitan areas; NielsenSound Scan data for weekly album sales. Method: Regression of Internet penetration (as proxy) and album sales and deduction of an entertainment effect. Conclusion: Without file sharing the per capita record sales would have been 3.63 units instead of the actual 2.44 units in 2003 (-1.19 units per capita and year).

13. Vienna Music Business Research Days 2.1 Pure Survey Based Approaches Using Secondary Data 2.1.2 Eric S. Boorstin: Music Sales in the Age of File Sharing (2004) Main findings: For younger people, Internet access predicts a decrease in sales. For older people, Internet access predicts an increase in sales. The overall effect of Internet access is positive. (…) This strongly suggests that file sharing is not the cause of the recent decline in the record industry. (p. 57). Database: U.S. census data on Internet and computer use in 1998, 2000, and 2001, for 99 metropolitan areas; NielsenSound Scan data for weekly album sales. Method: Regression of Internet penetration (as proxy) and album sales, differentiating age groups. Conclusion: Age group 5-14: insignificantly negative impact Age group 15 to 24: significantly negative impact Age groups older than 24: significantly positive impact

14. Vienna Music Business Research Days 2.1 Pure Survey Based Approaches Using Secondary Data 2.1.3 Alejandro Zentner: Measuring the Effect of File Sharing on Music Purchases (2006) Main findings: (...) peer-to-peer usage reduces the probability of buying music by 30%. (p. 63). Database: Consumer mail survey data by Forrester Research from October 2001, which is representative for 7 European countries (France, Germany, Italy, Netherlands, Spain, Sweden and the U.K.). Method: Regression of Internet broadband access (as proxy) and reported music purchases by respondents. Conclusion: [I]f 15 percent of the population downloads music, if downloaders are twice as likely to buy music than nondownloaders, and if – conditional on buying – downloaders and nondownloaders buy the same quantity of units, then sales in 2002 would have been 7.8 percent higher (p. 86).

15. Vienna Music Business Research Days 2.1 Pure Survey Based Approaches Using Secondary Data 2.1.4 Wendy Chi: Does File Sharing Crowd Out Copyrighted Goods? (2008) Main findings: Illegal downloads positively affect physical and non- physical music purchases, since the sampling effect dominates the substitution effect. Database: Consumer mail survey data by Forrester Research for 2004- 2006, which is representative for the U.S. and Canada. Method: Regression of church attendance and receiving parking tickets (as proxies) and reported music purchases by respondents. Conclusion: The probability of making legal music purchases among illegal-downloaders greatly exceeds the probability of legal music purchases among non-illegal downloaders (p. 14).

16. Vienna Music Business Research Days 2.1 Pure Survey Based Approaches Using Secondary Data 2.1.5 Andersen/Frenz: The Impact of Music Downloads and the P2P File-Sharing on the Purchase of Music (2007/08) Main findings: The study suggests (...) that for every 12 P2P downloaded songs, music purchases increase by 0.44 CDs. (...) P2P file sharing tends to increase rather than decrease music purchasing (p. 3). Database: Representative survey of the Canadian population aged 15 and older collected by Decima Research for Industry Canada. Method: Direct regression of file sharing behavior and music purchases by differentiating sub-effects of music sampling. Conclusion: They found (...) a positive and statistically significant relationship between the number of music tracks downloaded via P2P networks and the number of CDs purchased. (p. 27).

17. Vienna Music Business Research Days 2.1 Pure Survey Based Approaches Using Secondary Data 2.1.6 Holland Mortimer/Sorensen: Supply Responses to Digital Distribution: Recorded Music and Live Performances (2005) Main findings: The advent of file sharing in 1999 appears (...) to have eroded the profitability of selling record albums, but (...) may have similtaneously boosted demand for live performances. Database: Pollstar data for concert activities in the U.S. (1990-2003); SoundScan data for weekly album sales (1993-2003). Method: Comparison of the impact of concert performances on record sales before and after the emergence of Napster. Conclusion: (...) For artists, the decline in revenues from recorded music after 1998 is striking, but appears to have been more than offset by a concomitant increase in concert revenue. Total industry revenues, on the other hand, have not fully recovered, despite the increasing contribution of concert revenue to the total (p. 32).

18. Vienna Music Business Research Days Critical Remarks on Secondary Data Based Survey Approaches It is very disputed if (broadband) Internet access/penetration is a useful proxy for music file sharing. But also other proxies (church attendence and receiving parking tickets) are very questionable. The contradictional results of Liebowitz (2006) and Boorstin (2004) show that the estimation results strongly depend on the variables included in the regression. However, direct regression of music purchases and download activity leads also to biased results. Indirect measures such as the impact of record sales on concert ticket sales do not highlight the relationship between file sharing and music purchases.

19. Vienna Music Business Research Days Primary Data Based Survey Approaches

20. Vienna Music Business Research Days 2.2 Pure Survey Based Approaches Using Primary Data 2.2.1 Bounie et al.: Pirates or Explorers? (2005) Main findings: [T]here exist two populations of music consumers: people who sample music a lot (explorers) and those who do not sample (the pirates) (p. 1). Database: Online survey of 352 students of two French graduate schools from May 26 to June 3, 2004. Method: Statistical comparison of explorers and pirates in their music consumption behavior. Conclusion: If the explorers increase their music purchases by the same percentage as the pirates decrease them, this would lead to an overall positive effect of file sharing on CD sales. However, if the pirates decrease their purchases by 50% more than the explorers increase their purchase, overall CD sales started to decline.

21. Vienna Music Business Research Days 2.2 Pure Survey Based Approaches Using Primary Data 2.2.2 Rob and Waldfogel: Music Downloading, Sales Displacement, and Social Welfare (2006) Main findings: They document (...) that downloading reduces music purchases, by roughly one fifth of a sale for each recent download and possibly much more (p. 29). Database: One survey of 412 students from four U.S. colleges and a second survey of 92 students of University of Pennsylvania. Method: The authors asked for music consumption behavior and the students valuation of music. Conclusion: Although the record sales decrease by 20% due to file sharing, there is a highly positive impact on social welfare. Downloading increases consumer welfare by $70 per capita for sample individuals (p. 27).

22. Vienna Music Business Research Days 2.2 Pure Survey Based Approaches Using Primary Data 2.2.3 Seonmi Lee: The Effect of File Sharing on Consumers Purchasing Pattern (2006) Main findings: (...) consumers would not consider price on purchasing CDs when they are able to obtain free music, and consequently consumers react less to price after the appearence of file sharing (p. 22). Database: Survey of about 500 students from Korean University in Seoul. Method: Price sensibility study with jointly manipulation of free music availability on the Internet and price of a CD. Conclusion: The current level for CDs is too high. Instead of price setting, the labels should concentrate more on non-price factors such as various CD characteristics to attract consumers.

23. Vienna Music Business Research Days 2.2 Pure Survey Based Approaches Using Primary Data 2.2.4 Tin Cheuk Leung: Should the Music Industry Sue Its Own Customers? (2008) Main findings: When students pirate 10% more music through P2P web sites, they buy 0.7% fewer iTunes songs and 0.4 fewer CDs (p. 22). Database: Survey of 884 undergraduates of the University of Minnesota. Method: Conjoint survey, in which concrete choices had to be made from 3 options for music listening associated with high/low costs of music consumption and high/low risks of being fined for file sharing. Conclusion: Students share more music and buy more iTunes songs when they own an iPod. Students download less music when punishment is more severe.

24. Vienna Music Business Research Days 2.2 Pure Survey Based Approaches Using Primary Data 2.2.5 Huygen et al.: Ups and Downs. Economic and Cultural Effects of File Sharing on Music, Film and Games (2009) Main findings: The authors found a substitution rate of one digital music track less for every 15 to 20 downloads, which (…) result in lost revenue of at most EUR 100 million in the Netherlands (p. 105). Database: Representative survey of 1,500 Dutch Internet users. Method: Structured questionnaire investigating entertainment consumption and the repondents valuation of music, film, and games. Conclusion: Though, there is a negative impact on music sales, revenues from live performances and merchandising increase dramatically. Overall, the welfare gains of file sharing totalled around annually EUR 200 million in the Netherlands.

25. Vienna Music Business Research Days Critical Remarks on Primary Data Based Survey Approaches Most of the studies rely on a non-representative sample of high school and college students. Students either tend to play down their file sharing behavior, since it is illegal, or exaggerate the activity because it is hip. Thus, there could be positive and negative bias dependent on the survey setting. Leungs conjoint analysis setting is too artificial and so complex that respondents got problems to understand, what they have to do. The Dutch study is representative and apart from some minor problems in the questionnaire, the results seem to be reliable.

26. Vienna Music Business Research Days Theory and Survey Based Approaches

27. Vienna Music Business Research Days 2.3 Theory and Survey Based Approaches 2.3.1 Gopal et al.: Do Artists Benefit from Online Music Sharing? (2006) Main findings: With the advent of sharing technology, which lowers sampling costs, the authors found that (...) consumers become aware of more new albums that they like, leading to more artists and albums being ranked on the charts (p. 1526). Database: A pilot study of 76 graduate students and a main survey of 200 students in the U.S. Method: Sampling model for music of superstars vs. unknown artists; surveying the sampling and buying behavior of respondents. Conclusion: File sharing decreased sampling costs, and this would lead more consumers to buy music they sampled. The superstar status is threatened by file sharing, and decreasing sampling costs by file sharing leads to the erosion of superstardom.

28. Vienna Music Business Research Days 2.3 Theory and Survey Based Approaches 2.3.2 Norbert J. Michel: The Impact of Digital File Sharing on the Music Industry (2005) Main findings: (...) file sharing decreased CD sales by about 4 percent, though the estimate is statistically insignificant (p. 30). Database: Consumer Expenditure Survey (CEX) data by the U.S. Bureau of Labor Statistics, including information on computer ownership and record purchases reported by respondents. Method: Empirical test of a demand model for music and a game theoretical bargaining model to analyse the profit sharing arrangements between record labels and artists. Conclusion: The model predicts that despite the decreasing quality difference between original (CD) and copy (MP3), the artists profit share also decreases. However, due to decreasing costs, the income gains are captured by the artists.

29. Vienna Music Business Research Days 2.3 Theory and Survey Based Approaches 2.3.3 Seung-Hyun Hong: Measuring the Effect of Napster on Recorded Music Sales (2009) Main findings: The (...) decrease in total record sales from the pre- Napster period to the post-Napster periods amounts to $832.24 million. This suggests that 39.6% of sales decline could be attributable to the presence of Napster (p. 21). Database: CEX data, including information on Internet service fees and record purchases reported by respondents. Method: Difference-in-difference matching method in order to test the impact of Internet access before and after the advent of Napster. Conclusion: The estimations show statically insignificant results for all age groups except for the age group of the 6-17 years old children who account for 20% or US$ 196 million of the decline in record sales from June 1999 until June 2001.

30. Vienna Music Business Research Days 2.3 Theory and Survey Based Approaches 2.3.4 Peitz/Waelbroeck: The Effect of Internet Piracy on Music Sales (2004) Main findings: (...) music downloading could have caused a 20% reduction in music sales worldwide between 1998-2002 (p. 78). Database: IFPI world report data of 2003 for 16 countries, which represent 90% of the world market value; number of downloads collected by IPSOS-REID market research. Method: Regression of music sales and number of downloads as proxy for Internet music piracy. Conclusion: Although the number of downloads does not reflect the intensity of file sharing activity, the authors believe that their proxy is better than Internet penetration, since it overvalues the negative impact on music sales.

31. Vienna Music Business Research Days Critical Remarks on Theory and Survey Based Approaches One study relies on a non-representative sample of U.S. graduate students. However, the theoretical model of sampling seems to be very useful. The very complex elaborated demand models by Michel and Hong cannot be empirically tested without strong and restrictive assumptions. Computer ownership and Internet penetration seem to be insuffient proxies for file sharing, as Peitz and Waelbroeck showed. Peitz/Waelbroeck do not directly measure file sharing, but the quantities of music files downloades, which could lead to a bias in the results.

32. Vienna Music Business Research Days Approaches Based on Empirical Data from P2P File Sharing Usage

33. Vienna Music Business Research Days 3. File Sharing Usage Approaches 3.1 Tatsuo Tanaka: Does File Sharing Reduce Music CD Sales? (2004) Main findings: Tanaka (...) did not find any negative effect of file sharing on CD sales (p. 8). Database: Download figures from Winny, the decentralized and most popular file sharing network in Japan; CD sales of the top-30 list in Japan from June to November 2004 – a total of 261 CDs. Method: Regression of CD sales and Japanese songs, which are mainly consumed by middle-aged non-file sharers; survey of 501 students from the Keio University in Tokyo asking for the music consumption behavior since high school. Conclusion: Neither the micro data based estimation results nor the students survey indicated a negative impact of music file sharing on record sales.

34. Vienna Music Business Research Days 3. File Sharing Usage Approaches 3.2 Bhattacharjee et al.: The Effect of Digital Sharing Technologies on Music Markets (2007) Main findings: File sharing (...) has no statistically significant effect on [chart] survival. (p. 1361). Database: Sharing activity on WinMX network over a period of 60 weeks during 2002 and 2003; Billboard Top-100 charts for 1995-2004 – a sample of 300 albums. Method: Measuring chart survival of albums before and after file sharing emerged. The RIAA announcement to sue indiviual file sharers was used as an exogeneous shock and instrument variable. Conclusion: Less popular albums were negatively affected by file sharing than popular album that did not suffer any negative on chart success by file sharing. File sharing has (…) beneficial sampling and word-of-mouth effects (p. 1372).

35. Vienna Music Business Research Days 3. File Sharing Usage Approaches 3.3 David Blackburn: On-line Piracy and Recorded Music Sales Main findings: (...) file sharing is reducing the sales of ex ante popular artists while redistributing some of these lost sales to smaller, less well known artists (p. 41). Database: SoundScan data for Billboard Top-200 albums from 09/2002 to 09/2003; information on file sharing activity from BigChampagne. This results in a sample of 197 albums. Method: Two stage least square approach to measure the impact of file sharing on record sales, with the RIAA announcement to sue indiviual file sharers as instrument variable. Conclusion: [T]he estimates suggest that a 30% across-the-board reduction in the number of files shared would have resulted in an additional 66 million albums sold in 2003, an inrease of approximately $330 million in profits (p. 6).

36. Vienna Music Business Research Days 3. File Sharing Usage Approaches 3.3 Oberholzer-Gee/Strumpf: The Effect of File Sharing on Record Sales (2007) Main findings: (...) there is no statistically significant effect of file sharing on sales (p. 39). Database: SoundScan sales for the second half of 2002; logfiles of two OpenNap servers between Sep 8 and Dec 31, 2002 - 680 albums. Method: Model of download behavior correlated with a demand model derived from SoundScan data with school holidays in Germany as instrument variable. Conclusion: [W]e can reject a null that P2P caused a sales decline greater than 24.1 million. (...) [W]e conclude that the impact could not have been larger than 6.0 million albums. While file sharers downloaded billions of files in 2002, the consequences for the industry amounted to no more than 0.7% of sales. (p. 39).

37. Vienna Music Business Research Days Critical Remarks on File Sharing Usage Approaches Data collection from file sharing networks seems to be an appropriate way to measure the impact on album sales if the same album titles are compared. The sample of file sharing activity has to be large enough to be representative for the whole file sharing universe. This is questionable for Tanaka (2004) and Bhattacharjee (2007). An instrument variable is necessary to overcome the problem of endogeneity. Especially Oberholzer-Gee/Strumpfs choice of German school holiday is critized by Liebowitz (2007).

38. Vienna Music Business Research Days Summary and Conclusion

39. Vienna Music Business Research Days Summary 14 out of 22 studies identify a (highly) negative impact of file sharing on music/record sales, ranging from small decreases of a few percent up to -30%. 5 out of 22 studies identify a positive impact of file sharing on music/ record sales, since the sampling effect dominates the substitution effect. 3 out of 22 studies find no statistically significant effect of file sharing on music/record sales, claiming other explanations for the recession in the record industry. Blackburn, at first glance, supports Oberholzer-Gee/Strumpfs findings, but in differentiating superstar albums from albums of unknown artists, he found a highly negative effect for the former in favor of the latter. However, the overall effect of file sharing on music/record sales in quite strongly negative.

40. Vienna Music Business Research Days Conclusion (1) The contradictionary results of music file sharing studies can be explained by different theoretical assumptions and empirical research methods applied. There are different terms used and measured in the studies: piracy, file sharing, downloading, unauthorized copying, free music consumption, which denote different users behavior. Also the impact is measured on different bases: record sales, music sales, CD sales or purchases. In some cases the analysis is restricted to albums only, whereas in other studies all physical and non-physical formats are included. In order to come to a reliable conclusion, a conceptual framework has to be established to evaluate the different outcomes.

41. Vienna Music Business Research Days Conclusion (2) File sharing research has to overcome the narrow view of single correlations and causalities. It is only a first step to measure the trade-off between music and concert ticket sales or to assess the impact of file sharing on the consumers or social welfare. We should broaden our view to the phenomenon called the digital revolution in the music industry – after the Jazz revolution in the 1920s and the Rock n Roll-revolution in the 1950s. We can learn from these historic structural breaks that technological, social, legal, and economic change go hand in hand and completely alter the logics of production, distribution, and reception of music. Instead of calculating more or less elaborated regressions, we need a mix of quantitative and qualitative methods to empirically comprehend what is currently going on in the music industry.

42. Vienna Music Business Research Days Thank you for your attention !!!

43. Vienna Music Business Research Days The Econonics of Music File Sharing – A Literature Overview First Vienna Music Business Research Days University of Music and Performing Arts Vienna, 9-10 June 2010 Prof. Dr. Peter Tschmuck Institute of Culture Management and Culture Sciences University of Music and Performing Arts Vienna Karlsplatz 2/2/9 1010 Vienna phone: ++43-1-71155-3415 e-mail: Tschmuck@mdw.ac.atTschmuck@mdw.ac.at webpage: http://musicbusinessresearch.wordpress.comhttp://musicbusinessresearch.wordpress.com