The impact of digital piracy on music sales: a cross-country analysis.

• Author: Bender, Mark T.
• Position: Report

Introduction

The record industry has led listeners to believe that the recent rise in digital piracy has hurt music sales. Digital music piracy, or the unlawful downloading of copyrighted music, has been a controversial topic since 1998 when Shawn Fanning created Napster. Though the MP3 file, short for MPEG-1 Audio Layer-3, was originally developed in 1987, Napster represented the first mainstream and user-friendly program to transfer and download these files. Napster, a peer-to-peer (P2P) program, allowed online users to connect with one another and swap copyrighted music, videos, and other files contained on their computers, thus providing a way to get free music online. (1) Since music artists and record companies were uncompensated when consumers downloaded these music files, the act of downloading "free music" became known as digital music piracy. Market statistics compiled by the International Federation of the Phonographic Industry (IFPI) show that worldwide sales of music fell at the turn of the century and P2P networks were immediately blamed for the industry's bad fortunes.

According to the IFPI, the Recording Industry Association of America (RIAA), and many other record industry representatives, illegal music downloads have had a negative impact on recent music sales. (2) In an effort to prevent substantial losses, the recording industry took P2P software companies to court; threats of legal action were extended to individuals who downloaded music files illegally. This study is not designed to discuss the legal consequences of music piracy, nor question the legality of downloading music. Instead, it analyzes the impact that digital piracy might have on the music industry in terms of record sales. (3)

Digital music piracy is an example of end-user piracy, in which consumers can obtain music for their own personal enjoyment without physical transactions. End-user piracy can be more difficult to detect than commercial piracy since goods never physically exchange consumers' hands. The music industry is not alone in its difficulties with digital piracy; the movie and video game industries also claim that piracy has caused a substantial decrease in the sales of their products. (4) These entertainment industries account for a small, but valuable, percentage of the U.S. Gross Domestic Product (GDP), and play a large role in fulfilling the entertainment needs of individuals. A high consumer value is assigned to the entertainment industries and their products because those industries consume much of our leisure time. According to recent U.S. Census Bureau statistics on media usage and consumer spending, the average person in the United States spends $50.17 annually on recorded music and listens to approximately three hours of music (recorded and radio) daily. (5) The RIAA adds that the entertainment industry is valuable to the American economy because that industry enjoys a positive balance of trade. (6) Citing U.S. Department of Commerce statistics, the RIAA claims that the "copyright industries" account for six percent of the nation's GDP. (7) Furthermore, these various entertainment industries are essential to the growth of other industries such as advertisement, consumer electronics, and retail. (8) Thus, the impact of declining sales in the entertainment industry can easily have a negative impact on the economic well-being of other industries.

Digitalization has successfully transformed the image of the entertainment industry. Although judicial litigation found Napster liable for aiding in end-user piracy and subsequently caused it to sell off its assets in a bankruptcy auction, the online file-sharing service left a legacy of P2P technology which still exists today. (9) In recent years, other P2P networks have continued where Napster left off. Kazaa and Morpheus gained popularity after Napster's demise, continuing to allow users to trade music online. More recently, BitTorrent revolutionized P2P software by establishing a means whereby transferring large quantities of data can be achieved without the need for large amounts of storage space. As of June 2009, Morpheus (Version 5.4.0.1080) has been downloaded more than 173 million times from download.cnet.com. Limewire (Version 5.1.4), another popular P2P program, has been downloaded over 181 million times from the same website. (10)

Technology has aided the proliferation of digital piracy among computer users. Today, computers come packaged with CD burners and sufficient memory and speed to support the downloading and saving of music files. CD burners copy these MP3s to a physical CD so that they can be listened to in other consumer electronic devices. MP3 players have made the digital format of music a viable option when listening to music, and, as a substitute for the CD player, they have reduced the demand for CDs. In addition, broadband capabilities have shortened the time span needed to download a music file; downloading a song may now take only a minute when it once took over an hour. Thus, as technology progresses digital piracy becomes more efficient.

The impact of digital piracy on music sales is often disputed. On the one hand, by employing the economic concept of substitution effect, (11) one can theorize that music sales will decrease when music piracy occurs. If an individual can burn a CD for the mere cost of a blank disc, that copy influences the market for recordings, and can reduce the demand for purchasing CDs. On the other hand, there are those who argue that digital sampling does not have a negative effect on music sales. The work of economist Stan Liebowitz, for example, emphasizes the sampling (or exposure) effect which holds that consumers use P2P programs to sample music before they purchase the media. (12) As a consequence, file-sharing networks should make the music market more efficient. Consumers can learn about new artists while sampling digital media and subsequently purchase the recordings of these artists. As economists Martin Pietz and Patrick Waelbroeck point out, there are certain parameters in the purchasing of music that exist in which the sampling effect does occur and profits increase when consumers can make informed decisions due to sampling even though they could obtain the material for free. (13)

The opposite, however, might also hold true; consumers may become discouraged by bad music that they sample. Sampling theory implies that if an individual intended to buy the CD, downloading is simply used as a means of testing the CD before making the purchase. (14) Sampling is also attributed to the idea that consumers might experience a sense of guilt listening to music that they have not purchased. These users then want to support an artist who they like, or want to buy the entire CD since they already enjoy listening to one or two songs on it. Trying to find an entire CD online can often be difficult and consumers may believe that buying the album provides a higher utility at a lower opportunity cost than attempting to find songs online which might be of poorer quality.

Another effect in which file sharing can enhance one's desire to purchase music is known as the projected effect. While its actual relevance to the...