Monday, November 05, 2007

Canada Leads Again: P2P Study

The effect of peer to peer (P2P) swapping has been asserted to pose an existential threat to the entertainment industries. In the recent documentary, "Good Copy, Bad Copy," an IFPI official asserted that thousands of jobs have been lost due to P2P. But no evidence (causal or not) for that assertion was offered, and no time period was mentioned. Intuitively and anecdotally, it would seem that there is a loss of sales when massive numbers of people are downloading copyrighted works without permission. The closure of record stores in New York City alone is there for all too see: no more HMV, no more Tower Records. There is a Virgin Megastore in Times Square, but that's about it.

But there can be many reasons for a decline in a business, one of which is terrible product, overpricing, refusal to make product available to consumers in a form they want (e.g., single downloads versus CDs) or in the medium they want (online downloads versus hard copy). And then, there is the problem of quantifying losses in a market that has changed rapidly from hard copy to online: how can one assert, for example, that the old hard copy market is harmed by digital downloads if people are no longer interested in hard copy?

There have been studies of the effect of P2P done by the copyrighted industries for political purposes. The conclusions drawn by those studies have been predictably disputed along partisan lines. That's why a new independent study, conducted on behalf of the Canadian government (Industry Canada) without a political purpose is so important. Its not the first -- an earlier one (here) -- was done for the Canadian Heritage ministry). Here is a link to the new study, which is consistent with the Canadian Heritage report. Here is the abstract to the report:

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.

1 comment:

K Matthew Dames said...

Increasingly, there are a number of non-partisan studies that help put the download debate into a context different than what has been the customary industry frame. We posted about one of these in February.

"With no clear theoretical prediction, the effect of file sharing on sales is an empirical question. Most of what we know about the effects of file sharing is based on surveys. …

"Rather than relying on surveys, this study is the first to use observations of actual file-sharing behavior of a large population to assess the impact of downloads on sales. … We match audio downloads of users in the United States to a representative set of commercially relevant albums for which we have concurrent weekly sales, resulting in a database of over 10,000 album-weeks. This allows us to directly study the relationship between downloads and sales. …

"We find that file sharing has had only a limited effect on record sales. After we instrument for downloads, the estimated effect of file sharing on sales is not statistically distinguishable from zero.

"On the basis of all specifications presented in this paper, even our least precise results, we can reject the hypothesis that file sharing cost the industry more than 24.1 million albums annually (3 percent of sales and less than one-third of the observed decline in 2002)."

Felix Oberholzer-Gee and Koleman Strumpf. The Effect of File Sharing on Record Sales: An Empirical Analysis. Journal of Political Economy. February 2007.

URL: http://tinyurl.com/2r674q