Music Industry

The Economic Impact of Copyright Law Evidence of the Effect of Free MusicDownloads on The purchase of music CDs in Canada
By
Dr George R Barker

Working PaperNo. 1, 2011
Centre for Law and Economics
ANU College of Law
Working Paper No. 1, 2011

ABSTRACT
Background
In this paper I examine evidence that suggest that to the extent the law offers greater protection of copyright in the online environment it may indeed have significant economic benefits.

The economic and social effects of stronger copyrightlaw enforcement in the digital economy are widely debated, with contradictory claims even at times originating from what one may consider the same sources. For example in introducing the Canadian Copyright Modernization Act on June 2, 2010, Minister of Industry in Canada, the Hon Tony Clement, said the bill would “modernize Canadian copyright law for the digital age while protecting and creating jobs, promoting innovation and attracting new investment to Canada.” The law strengthens copyright protection in Canada, offering greater deterrence of P2P file sharing, and presumably this is the mechanism by which the Minister predicts it will promote jobs, innovation and investment. In order to support its policy decisions regarding the copyright regime in Canada, however Industry Canada commissioned a survey by Decima Research in 2006 which was designed to measure the extent to which peer to peer (P2P) file‐sharing activities act as substitutes or complements to music purchases. Analysis of this data, again commissioned by Industry Canada and published on their website in a 2007 report entitled, “Don’t blame the P2P file‐sharers:the impact of freemusic downloads on the purchase of music CDs in Canada” indirectly at least contradicts the recent claims of Industry Canada’s Minister cited above that preventing P2P file sharers through copyright protection will promote jobs, innovation and investment. They also ran contrary to international consensus on the link between file sharing and music purchases. The authors of that study have since republished their work citing different conclusions. So what are we to believe?

In this report I analyse data fromthe Industry Canada commissioned Decima survey that was previously overlooked which provides strong evidence that if P2P file‐sharing were not available, three out of four file sharers would purchase music instead, either as CDs or from paid music sites. This report shows that efforts to combat file sharing will have a positive impact on the creative industry, helping to sustain and create jobsin Canada.


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Assessing the Economic Impact of Copyright Law: Evidence of the Effect of Free Music Downloads on The purchase of music CDs 

By
Dr George R Barker

Centre for Law and Economics
ANU College of Law
Working Paper No. 2
2012

ABSTRACT
This report examines data on the effects of Internet peer-to-peer (P2P) file sharing activities on music purchasing which was obtained from a survey commissioned by Industry Canada. The survey was designed to ―inform Industry Canada's policy development work 2 and ultimately therefore support better policy decisions regarding the copyright law in Canada. In order to support its policy decisions regarding the copyright regime in Canada, Industry Canada commissioned a survey by Decima Research in 2006 which was designed to measure the extent to which peer to peer (P2P) file-sharing activities act as substitutes or complements to music purchases. Given this purpose the Decima survey asked respondents to comment on their behaviour in the absence of P2P file-sharing, as follows:

Considering the songs that you downloaded for free through P2P networks during 2005
a) what would you have purchased at paid music sites if they were not available through P2P
b) what would you have purchased as part of a music CD if they were not available through P2P

After analyzing the answers to this question, I report on two key findings:
1. three out of every four respondents said that if P2P were not available they would have purchased some or all of the music which they downloaded; and
2. almost two-thirds of the ―hardcore‖ P2P downloaders (those who indicated in the survey that they only acquired music by P2P) said they would have purchased one-third of the tracks they downloaded if the songs were not available on P2P network. This is estimated to amount to an average additional expense of $168 per person, adding up to hundreds of millions of dollars in extra revenue for the music industry per year from this group alone.3

This analysis of survey data then suggests that P2P downloads have strong negative effects on legitimate music purchases and that P2P downloading acts as a substitute for legitimate music purchases. One might reasonably infer from this analysis that stronger copyright laws would substantially increase music purchases and music industry sales revenues and, by implication, increase artist income, industry employment, economic growth and government tax revenues in Canada. My analysis not only focuses on an important survey question which to date has not been analysed by the researchers hired by Industry Canada, it also contradicts the results of the original analysis of the data commissioned by Industry Canada, first published on Industry Canada’s website in a 2007 report entitled, “Don’t blame the P2P file-sharers: the impact of free music downloads on the purchase of music CDs in Canada”, and then subsequently republished with changes by the authors in the Journal of Evolutionary Economics in 2010.


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The Effect of File Sharing on Record SalesAn Empirical Analysis*

Felix Oberholzer & Koleman Strumpf

March 2004

Abstract

A longstanding economic question is the appropriate level of protection for intellectual property. The Internet has drastically lowered the cost of copying information goods and provides a natural crucible to assess the implications of reduced protection. We consider the specific case of file sharing and its effect on the legal sales of music. A dataset containing 0.01% of the world’s downloads is matched to U.S. sales data for a large number of albums. To establish causality, downloads are instrumented using technical features related to file sharing, such as network congestion or song length, as well as international school holidays. Downloads have an effect on sales which is statistically indistinguishable from zero, despite rather precise estimates. Moreover, these estimates are of moderate economic significance and are inconsistent with claims that file sharing is the primary reason for the recent decline in music sales.

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The Impact of Music Downloads and P2P File-Sharing on the Purchase of Music: A Study for Industry Canada

by
Birgitte Andersen & Marion Frenz

Description: Industry Canada undertook a music file sharing study during 2006-07 to measure the extent to which music downloads over peer-to-peer file sharing networks, for which the sound recording industry receives no remuneration, affect music purchasing activity in Canada. The data used for this analysis are from a Decima Research survey conducted between April and June, 2006, on behalf of Industry Canada. The report, prepared by University of London researchers, Birgitte Andersen and Marion Frenz, found that music downloads have a positive effect on music purchases among Canadian downloaders but that there is no effect taken over the entire population aged 15 and over.

Abstract
The primary objective of this paper is to determine how the downloading of music files through Internet peer-to-peer (P2P) networks influences music purchasing in Canada. P2P networks permit members to transfer digitally-stored information to one another over the Internet; popular examples include BearShare, LimeWire and eMule. Using representative survey data from the Canadian population collected by Decima Research on behalf of Industry Canada, we attempt to quantify this economic relationship, while accounting for other factors that influence music purchasing. We undertake a variety of econometric estimations for the population of Canadians who engage in P2P file-sharing (P2P "downloaders"), as well as for the whole Canadian population. To our knowledge, this is the first study on P2P file-sharing that analyzes original and representative microeconomic survey data from the Canadian population. Few previous studies have analyzed representative microeconomic data, for Canada or any other country.

The existing literature identifies two competing effects associated with the P2P music file-sharing: the sampling and substitution effects. The sampling effect is characterized both by individuals downloading music in order to listen to it before buying it as well as by individuals downloading music that is not available in stores, while the substitution effect is characterized by individuals downloading music instead of purchasing it. In this paper, we further disentangle the sampling effect by adding a market segmentation effect, characterized by individuals engaging in P2P file-sharing because they do not want to purchase the entire bundle of songs on a CD.

Our review of existing econometric studies suggests that P2P file-sharing tends to decrease music purchasing. However, we find the opposite, namely that P2P file-sharing tends to increase rather than decrease music purchasing.
Among Canadians who engage in P2P file-sharing, our results suggest that for every 12 P2P downloaded songs, music purchases increase by 0.44 CDs. That is, downloading the equivalent of approximately one CD increases purchasing by about half of a CD. We are unable to find evidence of any relationship between P2P file-sharing and purchases of electronically-delivered music tracks (e.g., songs from iTunes). With respect to the other effects, roughly half of all P2P tracks were downloaded because individuals wanted to hear songs before buying them or because they wanted to avoid purchasing the whole bundle of songs on the associated CDs and roughly one quarter were downloaded because they were not available for purchase. Our results indicate that only the effect capturing songs downloaded because they were not available for purchase influenced music purchasing, a 1 percent increase in such downloads being associated with nearly a 4 percent increase in CD purchases.

We find evidence that purchases of other forms of entertainment such as cinema and concert tickets, and video games tend to increase with music purchases. It has been argued in the literature that the increase in the number of entertainment substitutes has led to a decline in music purchasing, but our results do not support this hypothesis. As expected, we find that reported interest in music is very strongly associated with music purchases. Finally, our results suggest that household income is not important in explaining music purchases.

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A review of “The Impact of Music Downloads and P2P File-Sharing on the Purchase of Music: A Study for Industry Canada”

By Dr George Barker & Dr Richard Tooth

Summary

This paper reviews a report commissioned by Industry Canada entitled “The Impact of Music Downloads and P2P File-Sharing on the Purchase of Music: A Study for Industry Canada” by Andersen and Fenz 2007 (“the report”). The report concludes that:

that P2P filesharing tends to increase rather than decrease music purchasing.

In summary we find the errors in the report to be so serious as to completely undermine the conclusion it draws which renders much of the additional commentary and interpretation derived from it in the media (and the blog columnists) quite misleading.

Although Industry Canada has posted a disclaimer that the opinions in the study do not necessarily reflect the policies or opinions of Industry Canada, Industry Canada was responsible for commissioning the work, selecting the researchers and posting the results prior to a peer review on its website. Given the serious and easily identifiable weaknesses in the paper outlined below, Industry Canada, should accept responsibility for the consequent confusion caused by the results.

We recommend the report be removed from circulation by Industry Canada pending its own independent review of the study. It is in the interests of Industry Canada’s reputation that this review be conducted by reputable researchers (e.g. the editors of a major econometric journal such as Econometrica), and that the results of that review be published by Industry Canada in terms that are easily understandable by a wider audience, even if, as we would expect, the independent review finds the key conclusions of the study to be unsupported.

We recommend that greater care should be taken in the selection and subsequent publication of research that may have policy implications.

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Debating the Industry Canada P2P Study

Monday November 19, 2007

@michaelgeist

Industry Canada's release earlier this month of an independent study on the impact of P2P file sharing generated considerable public interest and some debate from economists around the world who were provided with complete access to all the raw data. First out of the blocks was Stan Liebowitz, a Texas economics professor who immediately pronounced that "without going into details of the study we can ask whether this result is even remotely plausible" and that "the result is so counterintuitive that I think it fails the laugh test." While those comments generated headlines, once Liebowitz had a chance to actually view the study and the data, he dropped that language and acknowledged that some of the initial criticism was too harsh. His primary criticism is that:

the authors present two sets of results, one for the entire sample and one just for downloaders. It makes little or no sense to look only at downloaders and when they do so the authors find a result that is not only implausible but is actually is impossible to be true, given their data. When the appropriate full sample is used the results are still likely to be biased upward because the authors do not fully account for the impact of music interest, which impacts both downloading and purchasing.

Birgitte Andersen, one of the authors of the study, has now posted a response to Liebowitz.

Andersen responds that Liebowitz's analysis has a weak empirical underpinning, emphasizing that the IC study features micro-economic data rather than Liebowitz's macro-economic data. Andersen notes that:

Macro data can describe a situation or some relationships at the aggregate level, but such data are limited when it comes to shedding light on explanations of the situation. For this we need micro-data, as we need to understand how the micro behaviour underpin the creation of the situation at the aggregate level.

Andersen continues by addressing Liebowitz's criticisms, characterizing some of the content on his site as "hugely misleading."

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Everything in the music industry is up! (except those plastic discs)

October 19, 2007

@www.longtail.com

At a speech last week I was asked a question that has come up every day since the Radiohead (and Madonna, NIN, Prince, etc, etc) announcement: What's going to happen to the music industry?

To which I answered "Which music industry?" You don't mean just the one that sells CDs, do you? Because it's a big mistake to equate the major labels and their plastic disc business with the industry as a whole. Indeed, when you stand back and look at all of music, things don't look so bad at all.

Indeed, it appears that every single part of the music industry except the sale of compact discs is up.

• Concerts and merchandise: UP (+4%)
• Digital tracks: UP (+46%)
• Ringtones: UP (+86% last year, but probably just single-digit percent this year)
• Licensing for commercials, TV shows, movies and videogames: UP (Warner Music saw licensing grow by about $20 million over the past year)
• Even vinyl singles (think DJs): UP (more than doubled in the UK)
• And, if you include the iPod in the music industry, as I'd argue a fair-minded analysis would: UP, UP, UP! (+31% this year)

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Music file sharers also buy more CDs, report says

Last Updated: Monday, November 5, 2007 | 6:55 PM ET

CBC News

Contrary to what the music industry has been suggesting, people who download music through file sharing are also more likely to buy CDs, according to a government study.

The report found that for every track downloaded using peer-to-peer (P2P) software, file sharers purchased 0.44 more CDs a year than those who did not use the software.

"There is a strong positive relationship between P2P file-sharing and CD purchasing," the report said. "That is, among Canadians actually engaged in it, P2P file-sharing increases CD purchasing."

The report, prepared by University of London researchers Birgitte Andersen and Marion Frenz for Industry Canada, stands in stark contrast to positions from recording industry associations, which blame downloading of music — a legal grey area in Canada — for declining CD sales.

The Canadian Recording Industry Association said that in 2007 to the end of July, wholesale sales of CDs, music DVDs and other "physical" music formats fell 20 per cent to $183 million, from $230 million a year earlier. That decline followed on a 48 per cent drop in retail sales of physical formats since the advent of widespread file-swapping in 1999. The association blamed piracy and counterfeiting for the lost sales.

The Industry Canada report, which used data from a Decima Research survey conducted between April and June 2006, also found that when the entire general Canadian population was examined, there was no evidence to suggest that downloads were harming CD sales.

"The analysis of the entire Canadian population does not uncover either a positive or negative relationship between the number of files downloaded from P2P networks and CDs purchased," the report said.

People who bought music electronically, such as through Apple Inc.'s iTunes store, were also more likely to buy music on CDs, the report said.

Also, people who bought a high number of DVDs, video games, movie and concert tickets also purchased a higher number of CDs, indicating that other media were not detracting from CD sales, as has also been suggested by music industry associations.

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