What Filesharing Studies Really Say: Part 5 – Producers Lose Less Than $2 Per Album

This is part 5 of the republication of my meta-analysis on what file-sharing studies really say.

[Originally published on ZeroPaid on May of 2012]

We are more than a quarter of the way through our series of studies that evaluate filesharing. In the next study we are reviewing, we look at a study that has stuff that we might not completely agree with, but does introduce an insightful point about “consumer deadweight loss” thanks to the iTunes era.

The study is entitled “Music file sharing and sales displacement in the iTunes era”. It was published in 2010 by The Wharton School, University of Pennsylvania.

The abstract discusses the angle the author was approaching this study:

The iTunes Music Store has grown quickly since its appearance in 2003, and digital music now accounts for a third of US recorded music sales. Using two new surveys of University of Pennsylvania undergraduates in 2009 and 2010, we ask how music file sharing and sales displacement operate in the iTunes era, when the alternative to file sharing is purchasing individual songs, rather than entire albums.

The study notes that digital music purchases account for 32% of all recorded music sales in the US in 2008, three quarters of which were purchased on iTunes. The paper goes on to inquire the following:

This paper asks whether the availability of a convenient and widely adopted outlet for purchasing a la carte digital songs has affected either the volume of unpaid consumption or the rate of displacement of paid by unpaid consumption. In 2002 a consumer faced a choice between stealing, say, three songs and buying a 12-song CD that contained a few songs he or she wanted bundled with 9 more that he or she did not. Since 2003, consumers have faced a song-by-song choice between stealing and a la carte purchase for about $0.99.

Obviously, this excerpt alone also shows that the author seemingly has negative views given his confusion between “stolen” and “copyright infringement”, but this confusion is common amongst those who are no fans of file-sharing to begin with.

regardless, we read on to find the following:

The question of whether file sharing depresses sales is the question of whether the songs obtained via file sharing would otherwise have been purchased (along the demand
curve with valuations above p). If they are the songs with valuations above the price, then file sharing displaces sales. If they are songs with valuations below the price and would otherwise not have been consumed then file sharing does not displace sales.

In other words, if a consumer downloaded a song that he or she would never have bought in the first place, then there is technically no lost sale involved. It certainly ties in with the theory expressed by previous studies that there is music sampling involved in file-sharing. The author does acknowledge the point that file-sharing can, in fact, stimulate music sales:

File sharing may also shift the demand curve out and can, in principle, stimulate legal purchases, via a few different mechanisms. First, because music is an experience good, it is possible that file sharing allows consumers to sample which, in turn, informs them about what to purchase. That is, sampling may be an inducement to purchase. In addition to the possibility that file sharing overcomes information problems, the sampling of a particular song may stimulate demand for other songs by the artist.

An important point of this study is, however, this:

After Napster but prior to the availability of a legal a la carte option, consumers faced a choice between buying a CD containing roughly 12 songs for $15 and obtaining songs (illegally) individually at a zero price. To make matters worse for the legal option, of the 12 songs on the CD, typically only a few were known to the consumer prior to purchase.

So, there is this sort of “unpacking” of the album. Instead of the full album being for sale, there is a per-song availability now which is an important market shift to be sure.

Next, the study discusses the fact that a survey was gathered. In particular, the survey covered exclusively mainstream music at the time specifically, the top 50 songs. The study made the following comments on their results:

In this section we ask two questions of the data. First, how do the valuations for shared songs compare with valuations of purchased songs? The purpose of the question is to determine whether consumers are downloading high valuation songs (in which case file sharing would cause substantial sales displacement) or low-valuation songs, in which file sharing might not depress sales. Second, we examine displacement directly, asking whether respondents who possess more stolen songs purchase fewer songs.

This part is very important. It is specifically using a “1 download means 1 lost sale”. Yes, a 2010 study is using this highly questionable theory. Comparing directly between unauthorized copies on the consumers hard drive and authorized copies seems like a rather flimsy analysis in and of itself given that it fails to take in to account the possibility that the consumer both downloaded an unauthorized copy and an authorized copy. If the purchase was made, does that still count as a lost sale? In my opinion, that’s a no because the purchase was made. What more do you want from the consumer?

To say all of this another way, using the high end of displacement estimates, file sharing raises per capita consumer surplus by $10.36. Of this, $1.86 is producers’ lost revenue, and $8.50 is reduced deadweight loss. At the other end of our displacement estimates, we find that file sharing raises per capita consumer surplus by $11.91, of which $1.00 is revenue lost by sellers and $10.91 is reduced deadweight loss.

Consumer deadweight loss suggests music that would never have been purchased in the first place. In other words, those songs on the album that you never really liked in the first place would fall into the category of “deadweight loss”. So, with the hypothetical album of 12 songs charged at $15. Even if you counted all the unauthorized downloaded songs as lost sale (which hugely inflates the number far beyond what any reality would be given how file-sharing has been known to encourage sales – seemingly forgotten when calculating this), the amount hypothetically lost per album would amount to between $1.00 and $1.86 for every $15.

I don’t see how that amount can be categorized as anything beyond simply “the cost of doing business”. I wonder how much money is lost when a label is misprinted or a CD case is cracked on shipment or even what happens when there is a shipping mistake somewhere along the line. I think a dollar lost is hardly the epidemic proportions the music industry would have us believe – and this is using the flawed methodology of one download means one lost sale. Is single dollar really worth destroying the internet, suppressing free speech and killing innovation over?

Drew Wilson on Twitter: @icecube85 and Google+.

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