Testing File-Sharing’s Impact by Examining Record Sales in Cities

The transmission of digitized music files, particularly on filesharing networks, is having a profound impact on the consumption and production of music. Although previous forms of copying have been found to often have benign effects on copyright owners, the rise in file -sharing has coincided with a steep decline in the sale of sound recordings. This paper attempts to empirically examine whether file -sharing has caused the decline in record sales. It examines the size and pattern of file-sharing and its theoretical impact on record sales. Using a data set for 99 American cities containing information on Internet use, record sales, and other demographic variables, an econometric analys is is undertaken to explain the change in record sales before and after file sharing. The results imply that file -sharing has caused the entire decline in record sales that has occurred and also appears to have vitiated what otherwise would have been fairly robust growth in the industry. Looking at sales in individual musical genres reinforces the primary conclusions. The record industry’s risky strategy of assiduous ly fighting filesharing, therefore, appears to have a rational basis. 1 Thank Annie Hung for research assistance. 1 Napster began a revolution in music listening. The very language used by music consumers has changed. Phrases such as “ripping and burning,” “Ipods,” and even “MP3” (which predates Napster) can be traced to behavior engendered by Napster. Although Napster was effectively shut down as an unauthorized file-sharing service within two years of its birth (and the fate of Grokster is unclear after the recent Supreme ruling against it), its progeny live on. File-sharing is merely the most recent example in a long line of technologies that have lowered the cost of unauthorized copying by individuals. Some of these earlier technologies were photocopying, introduced in 1959 by Xerox, audio taping, when almost everyone had dual cassette recorders built to make copies, video taping, and of course, computer discs and networks which allowed computer software to be copied. Each of previous copying technologies engendered cries of alarm from the copyright industries affected. But the evidence of harm was not forthcoming. An analysis by Liebowitz (1985) concluded that photocopying had a net beneficial impact upon the publishing industry. After home video taping was permitted by the Supreme Court’s Betamax decision, a new market for prerecorded movies emerged which now provides the movie industry with revenues far in excess of box office revenues, even though real box office revenues per capita have more than doubled since the decision. 1 To be fair to the industry, an alternative technology supported by the industry, read-only laserdiscs, did not allow potential pirating, and in the absence of VCRs might have brought all the playback advantages of the VCR without the possibility of copying. Early in its history the software industry expressed similar concerns about unauthorized copying and experimented with anti-piracy devices such as mechanical dongles or discs. The industry soon decided that, for applications aimed at business users at least, the anti-piracy devices did more harm than 1 Box office gross was $9.49 billion in 2003 according to the Motion Picture Association of America. According to Vogel, the movie studios net slightly less than 50% of the box office. According the Adams Media Research, revenues to the studios from the sale and rental of DVDs was $11.38 billion, and from VHS tapes $2.56 billion. Thus revenues earned by the movie studios from prerecorded movies are approximately three times as great as that from theatrical releases.