Some excerpts/cut-outs from my thesis. This one is an overview of that worn old question: Is there a link between falling CD sales and file-sharing, and in that case – what does it look like?
Regarding the link between file-sharing and falling CD sales, there are various studies having different conclusions. A general conclusion is that CD sales started dropping simultaneously as unregulated file-sharing began to rise (initially with Napster in 2000).
However, a direct causal link is hard to establish, since there are so many other factors that could serve as an explanation to this drop: Changing consumption patterns (with the ascendance of video games, DVD:s, hardware etc. as new expenditures); shrinking profitability from CDs; a decline in the number of new titles; a cyclical slump after the boom of the 1990s; decreased diversity of radio playlists; and so on.
During 2003, several reports – repeatedly quoted in the media – indicated a definitive drop in music sales. Tellingly, many of these reports seem to coincide with the announcement by the content industry to start pursuing also end-users of file-sharing networks by legal means. In April 2004, IFPI reported a 7% decline in global music sales in 2003. Over the past three years a 20% total sales drop had occurred, the organisation claimed, and attributed the main part of this decline to Internet piracy (BBC 2004). According to an industry report from 2007, the Swedish music-, film- and games industries lost approximately £500 million due to illegal copying – a figure whose relevance can be questioned (it is highly estimative) but becomes telling in a historical perspective, when compared to the equivalent sum quoted in 2003: approximately £100 million (Söderberg 2008: 44).
Yet, more recent figures contradict this gloomy scenario: IFPI’s report on their global music sales in 2004 showed a retained stability in physical formats, a sharp increase in digital sales and the ‘best year-on-year industry performance for five years’ (IFPI 2005f). A German record industry statement similarly claimed that ‘the extremely negative sales development of the last years is clearly terminated’ (IFPI 2005d, my translation), predicting a stable, even increasing market tendency for 2005 and 2006. Nevertheless, the statement made clear that downloading remains a threat to the industry also in Germany.
A relatively often-quoted, quantitative economic study by Oberholzer-Gee & Strumpf (2004) argues that peer-to-peer file-sharing has had no measurable effect on music sales – according to these authors’ statistical model, even when using the most pessimistic parameters it takes around 5,000 downloads to reduce the sales of an album by a single copy. As for the entertainment industry, alas, the brash claims that file-sharing would be the primary reason for the recent decline in music sales are simply defied by this study as untrue. Its data is supported by an Economist article (Economist 2004), which refers to an internal music label study that found that between 2/3 and 3/4 of recent declines in music sales had nothing to do with Internet music downloads.
Generally, a direct causal link between widespread unauthorized file-sharing and falling CD sales is hard to establish. However, the two tendencies have coincided since the shift of the millennium. For a good general summary of research in this area, see Pollock (2006). An OECD report from June 2005 states that ‘it is very difficult to establish a basis to prove a causal relationship between the size of the drop in music sales and the rise of file sharing’. A Dutch study (Huygen et al. 2009) on the economic effects of file-sharing was commissioned by the government, and concluded that the economic implications of file-sharing for the level of welfare are, on balance, strongly positive in both short and long terms. Conversely, file-sharing was found to probably have resulted in a decline in sales of CDs, DVDs and games.
Blackburn (2004) analysed the mainstream output of CD sales and found that file-sharing had positive effects on the sales for relatively unknown artists, whereas it had negative impact on those who were already popular. He estimated that the best-selling quarter of albums was affected negatively, while the remaining three quarters were affected positively. However, since the top quarter represents such a high share of the accumulated sales, the aggregated effect on overall CD sales was negative.
Rob & Waldfogel’s (2004) survey of 400 U.S. American college students with regard to their purchasing habits and file-sharing habits showed that illegally downloaded music was valued significantly lower than purchased music and that their file-sharing habits had helped lower their music expenses with $25 per capita. Interestingly, in parallel with this, their file-sharing habits represented a consumer welfare benefit of $70 per capita; over twice the loss estimated in terms of reduced sales.
One of the more conclusive research findings comes from Andersen & Frenz (2007), who, in the context of Canada, found no direct evidence to suggest that the net effect of p2p file-sharing on CD purchasing would be either positive or negative. Instead, there was a strong positive relationship between file-sharing and CD purchasing. Although they were unable to discover any direct relationship between p2p file-sharing and CD purchases, their results suggest that people who are interested in entertainment goods (such as music) are also interested in DVDs, concerts, cinema/movies and video games. Thus, music and other entertainment goods are not substitutes; instead the relationship is linked to a life-style choice of certain groups of society (Andersen & Frenz 2007). Further, they found no ‘digital divide’ with respect to gender, as female file-sharers tended to be as active as male.
Geist (2005) points out that the recording industry seems to rely on an assumption that demand for CDs would be something that would remain eternally strong in itself, regardless of changing socioeconomic and technical surroundings. Furthermore, seeing Internet piracy as the primary reason for the decline in sales, and ignoring the range of other plausible reasons that can be found, would be a simplistic reaction to a complex problem (which any good economist or sociologist would argue is akin to reductionism). Geist lists a range of such ‘other reasons’: the growth of DVD sales, which he sees as ‘surely related to the decline in CD sales and the shrinking shelf space allocated to CDs by music retailers,’ together with the agglomeration of retailers and focus on “mainstream” titles mainly typified by Wal-Mart, as well as shrinking profitability from CDs, and a decline in the number of new titles (Geist 2005).
Geist notes that U.S. census data indicates that the number of hours people spend listening to music is declining. Instead, people now spend increasing amounts of time talking on mobile phones, playing video games, watching movies and using the Internet. Moreover, Oberholzer-Gee and Strumpf (2004: 24) point out that movies, software, and video games also are subject to being actively downloaded; yet these industries have continued to grow since the advent of file sharing. It is also important to note, they add, that drops in record sales occurred also in the late 1970s and early 1980s, and that CD sales in the 1990s may have been abnormally high as individuals replaced older formats with CDs.
There have been periods of boom in the 1920s, 40s, late 50s, 60s and 90s – all of which were followed by periods of slump in the 30s, late 40s and early 50s, 70s, and now today (Freedman 2003). Then as well as now, Lessig (2004: 69) notes, technology was seen as the problem to which bans and legislation were the answer; a mode of regulation that is seen to be imposed from the outside. Freedman (2003) refers to Simon Frith when asserting that the music industry, when faced with technological uncertainty or declining sales, historically tends to turn to ‘discourses concerning copyright and intellectual property as a means of controlling its environment and adapting to changing market conditions’ (Freedman 2003: 175). As this tends to be the case for the industrial organisation of sales of units of musical and audiovisual content (noted historically with the introduction of the VCR), the video games industry has taken a more lateral approach, where the solution has either been to restrict the hardware by proprietary formats like cartridges and specially engineered consoles or by effectively allowing for a significant degree of home-copying alongside selling computer games and software on duplicable floppy discs and (later on) CD-ROMs. Liebowitz (2005) correspondingly lists several economic studies on software piracy where ‘the existence of unauthorized users creates additional value to the purchasers of legitimate copies and thus might increase the profits of the seller’ (Liebowitz 2005: 9). Gayer & Shy (2004) and Curien & Moreau (2005) are recent attempts at formulating a more holistic model of the impact of file-sharing on revenues from artworks (music, software) by accounting for various such network effects.
Freedman (2003) lists the two typical counter-efforts as being litigation and the development of new (proprietary) services. These latter services, harnessing the network effects, can include subscription services, financing by advertising, sales of extraneous products (concerts, merchandise etc.) and price discrimination (leveraging different prices on different parts or versions of the content) (Söderberg 2008: 187; Anderson 2008).
One of the main proponents within the field of econometrics, Stan Liebowitz (2006), argues that of the various plausible factors for explaining the drop in CD sales in the last 10 years, file-sharing would most likely be the main one. He bases this in a comparison of various music genres where the genres exposed to high volumes of file-sharing also show a larger drop in sales. In another analysis (Liebowitz 2005) he dismisses the claims that the recent drop in CD sales would be attributable to changes in prices and incomes or from increased competition from DVDs and video games. Although he consequently eschews the extreme notion that every mp3 downloaded would substitute a song sold, he is a strong proponent of the notion that, despite positive ‘network effects’ that might arise out of the general levels of increased digital circulation, this nevertheless fails to make up for the clear drop in CD sales that has consistently continued since the year 2000. ‘In fact the alternative to file-sharing might not be the purchase of CDs, but instead might be the activity of listening to radio’ (Liebowitz 2005: 12). In Liebowitz’s analysis, the incentive to buy CDs drops significantly when exposed to the same songs, albeit in lower technical quality, online and for free.
If Liebowitz (2005) thus makes an exponent of the theory that downloaded mp3 files essentially substitute CD purchases (this standpoint could be crudely summarised as: “even if only one in twenty downloads substitute a sale, for every twenty CDs freely downloaded, the fact remains that one less is sold”), while the competing theory (at least in the field of econometrics) states that downloads instead lead to higher exposure or sampling of music, which might then be purchased (Liebowitz 2005; Andersen & Frenz 2007). This latter theory can be further expanded to answer for network effects if one takes a more holistic view on the entertainment industry, where the general exposure generated by file-sharing makes it increasingly likely that the artists get remunerated in alternative ways (through merchandising, DVDs, radio/TV airplay, concert tickets or sponsorship deals), something that for example Silva & Ramello (2000) have argued for, and what seems to have become a mainstream view in recent years.
Another, more rarely mentioned argument is that shorter playlists on radio would lead to lesser diversity within the range of commercially profitable music. In America, notably, the ascendancy of the Clear Channel Corporation, and recent mergers of other channels, has drastically lessened the diversity of local programming (DiCola 2006). Some people assign this tendency to digitization, but with the increasing output of niche programming through digital broadcasting it could be argued that there are trends pointing in the other direction as well. Many also point to the potentials in another central branch of the global entertainment industry: the concert and events industry, which appears to have suffered more from the concentration in corporate ownership (most notably due to Ticketmaster and Clear Channel; see Cave 2004) than from file-sharing. Performance is here seen as a built-in system to reward authors in ways other than through copyright. Claims have been made that concerts therefore have become more economically important for artists than before (Pollara Inc. & Omnia Communications 2004). It is now a well-established argument that live appearances are becoming a more dependable source of profit for many artists than record sales (Sullivan 2008). Moreover, within music publishing, a Danish study (Pedersen 2006; see also Lessig 2006) has showed how a larger host of artists are beginning to see their works published and getting shares from collecting societies – at the expense of more commercially successful artists. This echoes Blackburn’s findings (2004) that digitization favours less well-known artists. In an era of generally decreasing record company revenues, some remuneration still appears to happen, however seemingly favouring the less commercially prominent artists/producers.
In addition, companies like the Sony Corporation make significant profits from selling hardware and blank media (CD-R, DVD-R etc.), products which actually benefit from the file-sharing lifestyle. Distinguishing the ‘copyfight’ dialectic as one between file-sharers and a vague, opaque ‘entertainment industry’ hence makes less sense than specifying that it is primarily the “content creation” branches within this broader industry that are the most galvanized anti-file-sharing forces. Their focus on “content” augments the polarisation, and serves as a rhetorical device to equate all leisurely use of the Internet with safer, commercially established models. An example is the use of the phrase ‘illegal downloading’. This serves to contrast the file-sharing activity (which is in fact multidirectional) with a norm of safe, unidirectional flows, bounded within a strictly commercialsed realm. The limits of this realm are constituted by technical means like DRM and ‘trusted computing’ and by rhetorical means sanctioning such modes as “safer” than others.
As a reaction to this, Oberholzer-Gee & Strumpf (2004: 24) acknowledge a possible consumer backlash against record industry tactics. They point out to what they perceive as a movement to boycott music sales from the major labels, as discussed, for example, at websites like boycott-riaa.com and dontbuycds.org – clear examples of an outspoken politicisation of consumer behaviour.
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 Sales of music downloads via the Internet and mobile phones are furthermore stated to have made ‘their first mark on the global market in 2004’ (IFPI 2005f) – possibly this is another key as to why some reports were reporting diminishing interest for illegal downloading services during this year; the onset of newer, unmonitored networks paired with an expansion of legal alternatives would make a reasonable explanation to the dwindling of FastTrack and Gnutella.
 Which is unique in that it was based on data directly from file-sharing servers (the authors directly observed 1.75 million downloads during 17 weeks in the autumn of 2002) instead of (as many other surveys) telephone interviews.
 Cont’d: ‘Sales of CDs, as well as the success of licensed on-line music services are likely to have been affected to some degree by a variety of other factors, for example physical piracy and CD burning, competition from other, newer entertainment products and faltering consumer spending in some markets.’ (OECD 2005: 11)
 The Guardian’s Victor Keegan pokes fun at this mode of reasoning: ‘[IFPI] is still putting it around that illegal music downloads outnumbered tracks sold by a factor of 20:1 last year, as if that bore any relation to lost sales. Only a tiny proportion can in any realistic way be attributed to downloads. Or do they think that CD sales should be something like 20 times higher?’ (Keegan 2008). This sarcastic approach can be said to be typical for the more libertarian stance which inverts the disciplinarian/martinet approach historically displayed by representatives of the entertainment industry and exposes the absurdity of any such fundamentalism.
 Dominant satellite radio stations XM and Sirius announced a merger on 19/2 2007 (Ellis & La Monica 2007).