What Filesharing Studies Really Say: Part 13 – Lower Prices Decrease Filesharing and Increases Sales

This is part 13 of the re-publication of my meta-analysis on what filesharing studies really say.

[Originally published on ZeroPaid on May of 2012.]

We’re approaching the final stretch in our long-running series of what file-sharing studies really say. This study discusses the price of content and what affect it would have on file-sharing.

The study is entitled “Estimating consumer preferences for online music services” and was published in 2010 in the journal Applied Economics. We should note that this study is mainly done in Korea, but I personally don’t see why it can’t apply globally as this is seemingly basic market knowledge.

The study begins by explaining it’s aim as follows:

In this study, we analyse consumer preferences with regard to attributes of online music services. Based on estimated quantitative information about those preferences, we conduct a simulation to analyse the effects of legal action and pricing strategies policy agencies and the music industry might pursue.

Like numerous studies we’ve reviewed in this series, this study notes that while the industry blames a drop in music sales to file-sharing, data shows that record labels benefit from file-sharing due to the increase in ability to sample new music. Furthermore, the study notes:

Buxmann et al. (2005) find that lowering prices may be a more effective strategy than restrictive measures such as lawsuits to enable the music industry to overcome flagging sales.

So, an actual contradiction to the previous study we covered which recommends the continuation of litigation when there is a viable business alternative offered. This study disagrees and says that price point is actually more beneficial than litigation.

The study describes how it collected the data with the following:

We used conjoint analysis to obtain the data. Because there are many P2P networks and online music services in Korea, consumers can obtain digital music files in various ways and that poses a difficulty for using a revealed preference approach. Accordingly, we concluded that a stated preference approach, especially conjoint analysis, would be best for meeting our purposes. In conjoint analysis, levels of attributes describing a good, service or policy are combined to build hypothetical alternatives. Respondents then state their preferences for hypothetical alternatives and statistical models are used to analyse the responses.

We obtained the data from a survey carried out in July 2006 among 224 respondents ranging in age from 20 to 59 years and living in Seoul, Republic of Korea. We divided Seoul into four blocks and implemented random sampling. To improve reliability, the survey was conducted through personal interviews. We restricted the dataset to consumers who had experience in downloading digital music through an online music service or a P2P network.

So, another survey. The study then notes that the price on a per-song basis is about 450—540 won while a subscription service is about 35 000 won a month. In US dollars, that’s about 39 cents to 47 cents per track or $30.64 USD per month on a subscription service. Of course, the thing to remember is that the cost of living and average wages are probably different in this part of the world so whether these people are getting a good deal or not is depending on numerous other factors as well.

The survey found that search and download times are very important. If you can find something quickly and download it quickly, that’s a very good thing to have. Another finding is that the willingness of consumers t use unauthorized file-sharing depends on the ability to find something, download rates and the risk of getting caught. Not exactly surprising as far as I’m concerned.

What is of interest is the following (note: WTP means Willingness to Pay):

The mean estimate of WTP for downloading one digital music file is 70.2 won/month ($0.074). Since the WTP for downloading one music file is markedly less than the actual price 350 – 540 won ($0.37 – 0.57) offered by legal online music services, we can infer that Korean consumers have obtained digital music files for nothing until now and that situation is reflected in the estimated WTP. Therefore, such consumers have an incentive to obtain music files illegally from P2P networks from the viewpoint of price and this result can explain why Korea is home to so many P2P networks and users.

So, what this suggests is that price point might drive people to unauthorized filesharing.

Additionally, the study notes previous attempts to suppress file-sharing by use of flooding file-sharing networks with fake files. the study then ran a simulation and found something rather interesting:

In all these results, the share held by Group A is quite large and that of Group C is small. This seems to reflect the fact that WTP for downloading one music file is quite smaller than the actual price of music, a finding that coincides with the existence of numerous P2P networks and users in Korea.

In another finding, the study found the following (note: transactional cost is referring to the time it takes to find and download an unauthorized copy of a song):

cutting the price of digital music files is more effective than increasing transaction costs if we want to increase the number of consumers who purchase the music whether illegal file sharing is possible or not.

the conclusion, therefore, is quite fascinating:

The results show that the Korean consumer’s estimated WTP for downloading one music file is remarkably less than the actual price of a file. Therefore, from the point of view of price, consumers have an incentive to obtain music files illegally from P2P sites, and that result can explain the existence of numerous illegal P2P networks and users in the country. Korean consumers are sensitive to lengthening the time it normally takes to search for and download one music file. The results also show that Koreans are not sensitive to increasing the extent (variety) of music available at online music services, but they are very sensitive to the prospect of being penalized (i.e., having legal action taken against them) for illegal music file sharing

The simulation results show that increasing the transaction costs of illegal file sharing is an effective way to inhibit illegal file sharing. This result justifies taking legal action against users of file sharing and implies that online music companies should try to make searching for music on their sites more convenient and minimize download times. The results also show that increasing transaction costs does not affect the number of potential consumers who will consider buying digital music online. To increase the pool of potential consumers, online music companies should consider a pricing strategy. To some degree, then, lowering the price of digital files may benefit onlinemusic companies. Yet, the combination of increasing transaction costs and lowering prices shows a greater effect in reducing the number of people engaged in illegal file sharing and augmenting the number of potential online music customers. Therefore, this result argues for a government agency to take legal steps and for music providers to experiment with lower prices, together.

In other words, while making file-sharing more difficult for users may be effective, it will not necessarily bring more customers to the music stores. However, lowering the prices of music, on the other hand, will garner more music sales. It is, as far as this study is concerned, theoretically possible that lowering prices and pursuing litigation tactics and flooding file-sharing with fakes could be the most effective way to prevent people from downloading music from unauthorized sources.

So, I think that, as far as this study is concerned, it depends entirely on what you want to accomplish in the market. If you merely want to curtail file-sharing, then lowering prices of the authorized sources and disrupting file-sharing is the way to go. If you want people buying your product, then simply lowering the price of the authorized copy is the way to go. Litigation and cracking down on filesharing, in and of itself, won’t necessarily create customers.

Drew Wilson on Twitter: @icecube85 and Google+.

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