A Heretical View of File Sharing

[Dave Farber <dave () farber net>]

A Heretical View of File Sharing

April 5, 2004
 By JOHN SCHWARTZ





The music industry says it repeatedly, with passion and
conviction: downloading hurts sales.

That statement is at the heart of the war on file sharing,
both of music and movies, and underpins lawsuits against
thousands of music fans, as well as legislation approved
last week by a House Judiciary subcommittee that would
create federal penalties for using what is known as
peer-to-peer technology to download copyrighted works. It
is also part of the reason that the Justice Department
introduced an intellectual-property task force last week
that plans to step up criminal prosecutions of copyright
infringers.

But what if the industry is wrong, and file sharing is not
hurting record sales?

It might seem counterintuitive, but that is the conclusion
reached by two economists who released a draft last week of
the first study that makes a rigorous economic comparison
of directly observed activity on file-sharing networks and
music buying.

"Downloads have an effect on sales which is statistically
indistinguishable from zero, despite rather precise
estimates," write its authors, Felix Oberholzer-Gee of the
Harvard Business School and Koleman S. Strumpf of the
University of North Carolina at Chapel Hill.

The industry has reacted with the kind of flustered
consternation that the White House might display if Richard
A. Clarke showed up at a Rose Garden tea party. Last week,
the Recording Industry Association of America sent out
three versions of a six-page response to the study.

The problem with the industry view, Professors
Oberholzer-Gee and Strumpf say, is that it is not supported
by solid evidence. Previous studies have failed because
they tend to depend on surveys, and the authors contend
that surveys of illegal activity are not trustworthy.
"Those who agree to have their Internet behavior discussed
or monitored are unlikely to be representative of all
Internet users," the authors wrote.

Instead, they analyzed the direct data of music downloaders
over a 17-week period in the fall of 2002, and compared
that activity with actual music purchases during that time.
Using complex mathematical formulas, they determined that
spikes in downloading had almost no discernible effect on
sales. Even under their worst-case example, "it would take
5,000 downloads to reduce the sales of an album by one
copy," they wrote. "After annualizing, this would imply a
yearly sales loss of two million albums, which is virtually
rounding error" given that 803 million records were sold in
2002. Sales dropped by 139 million albums from 2000 to
2002.

"While downloads occur on a vast scale, most users are
likely individuals who would not have bought the album even
in the absence of file sharing," the professors wrote.

In an interview, Professor Oberholzer-Gee said that
previous research assumed that every download could be
thought of as a lost sale. In fact, he said, most
downloaders were drawn to free music and were unlikely to
spend $18 on a CD.

"Say I offer you a free flight to Florida," he asks. "How
likely is it that you will go to Florida? It is very
likely, because the price is free." If there were no free
ticket, that trip to Florida would be much less likely, he
said. Similarly, free music might draw all kinds of people,
but "it doesn't mean that these people would buy CD's at
$18," he said.

The most popular albums bought are also the most popular
downloads, so the researchers looked for anomalous rises in
downloading activity that they might compare to sales
activity. They found one such spike, Professor
Oberholzer-Gee said, during a German school holiday that
occurred during the time they studied. Germany is second to
the United States in making files available for
downloading, supplying about 15 percent of online music
files, he said. During the vacation, students who were home
with time on their hands flooded the Internet with new
files, which in turn spurred new downloading activity. The
researchers then looked for any possible impact in the
subsequent weeks on sales of CD's.

Professor Oberholzer said that he had expected to find that
downloading resulted in some harm to the industry, and was
startled when he first ran the numbers in the spring of
2003. "I called Koleman and said, 'Something is not quite
right - there seems to be no effect between file sharing
and sales.' "

Amy Weiss, an industry spokeswoman, expressed incredulity
at what she deemed an "incomprehensible" study, and she
ridiculed the notion that a relatively small sample of
downloads could shed light on the universe of activity.

The industry response, titled "Downloading Hurts Sales,"
concludes: "If file sharing has no negative impact on the
purchasing patterns of the top selling records, how do you
account for the fact that, according to SoundScan, the
decrease of Top 10 selling albums in each of the last four
years is: 2000, 60 million units; 2001, 40 million units;
2002, 34 million units; 2003, 33 million units?"

Critics of the industry's stance have long suggested that
other factors might be contributing to the drop in sales,
including a slow economy, fewer new releases and a
consolidation of radio networks that has resulted in less
variety on the airwaves. Some market experts have also
suggested that record sales in the 1990's might have been
abnormally high as people bought CD's to replace their
vinyl record collections.

"The single-bullet theory employed by the R.I.A.A. has
always been considered by anyone with even a modicum of
economic knowledge to be pretty ambitious as spin," said
Joe Fleischer, the head of sales and marketing for
BigChampagne, a company that tracks music downloads and is
used by some record companies to measure the popularity of
songs for marketing purposes.

The industry response stresses that the new study has not
gone through the process of peer review. But the response
cites refuting statistics and analysis, much of it prepared
by market research consultants, that also have not gone
through peer review.

One consultant, Russ Crupnick, vice president of the NPD
Group, called the report "absolutely astounding." Asked to
explain how the professors' analysis might be mistaken, he
said he was still trying to understand the complex
document: "I am not the level of mathematician that the
professors purport to be."

Stan Liebowitz of the University of Texas at Dallas, author
of an essay cited by the industry, said the use of a German
holiday to judge American behavior was strained. Professor
Liebowitz argued in a paper in 2002 that file sharing did
not affect music sales, but said he had since changed his
mind.

The Liebowitz essay appeared in an economics journal edited
by Gary D. Libecap, a professor of economics at the
University of Arizona, who said that his publication was
not peer reviewed, though the articles in it were often
based on peer-reviewed work. Professor Libecap said he
attended a presentation by Professor Strumpf last week, and
said the file-sharing study "looks really good to me."

"This was really careful, empirical work," Professor
Libecap said.

The author of another report recommended by the industry
said that the two sets of data used by the researchers
should not be compared. "They can't get to that using the
two sets of data they are using - they aren't tracking
individual behavior," said Jayne Charneski, formerly of
Edison Media Research, who prepared a report last June that
she said showed that 7 percent of the marketplace consists
of people who download music and do not buy it. That number
is far lower than the authors of the new study estimated.
"There's a lot of research out there that's conducted with
an agenda in mind," said Ms. Charneski, now the head of
research for the record label EMI.

http://www.nytimes.com/2004/04/05/technology/05music.html?ex=1082149203&ei=1&en=64d59da1f3ee8310


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