A Heretical View of File Sharing
By JOHN SCHWARTZ
he 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. | Advertisement
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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. Special Offer: Home Delivery of The Times from $2.90/week.
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