What Filesharing Studies Really Say: Part 8 – Supply of Music Has Not Shrank Because of Napster

This is part 8 of the republication of my meta-analysis on what file-sharing studies really say.

[Originally published on ZeroPaid on May of 2012.]

Our investigation into what studies have been really saying all along has really unearthed a number of gems already – and we aren’t even half way there yet. Today, we take a look at one study that looked at how much music has been produced since the Napster era.

One of the arguments you hear from time to time is that if file-sharing is allowed to continue uninhibited, fewer people will be willing to produce music. This argument is several years old, but does it even hold any water? That’s what this next study seems to be looking to find out.

This study we are reviewing today is entitled “Bye, Bye, Miss American Pie? The Supply of New Recorded Music since Napster”. This study was published in 2011 by The Carlson School and Department of Economics University of Minnesota and NBER.

This study certainly has one of those abstracts that really says it all, so here it is:

In the decade since Napster, most observers have concluded that file-sharing undermines the protection that copyright affords recorded music. What matters for consumers, however, is not sellers’ revenue but whether the diminished appropriability will reduce the availability of new recorded works. The legal monopoly created by copyright is justified by its encouragement of the creation of new works, but there is little evidence on this relationship. The file-sharing era can be viewed as a large-scale experiment allowing us to check whether diminished appropriability stems the supply of new works. Using a novel dataset on the supply of new recorded music derived from retrospective critical assessments of music such best-of-the-decade lists, we compare post-Napster album supply to 1) its pre-Napster level, 2) pre-Napster trends, and 3) a possible control, new song supply following the iTunes Music Store’s revitalization of the single. We find no evidence that recent changes in appropriability have affected the quantity of new, acclaimed recorded music or new artists coming to market. We reconcile a stable flow of new works in the face of decreased demand with evidence on reduced costs of bringing works to market and a growing role of independent labels.

Game, set, match. The argument that because music has been posted online for free since Napster would mean no one would be producing music anymore is completely tossed out of the window. For the benefit of those who want to know more about the study, though, we’ll push ahead.

The study reviews the war between record labels and Napster and the subsequent war on file-sharing in general. One point of contention for me is this part:

Although it is still controversial in some circles, most observers agree that file sharing is responsible for much if not most of the reduction in revenue to the recorded music industry. To put this another way, most observers agree that technological change has sharply reduced the effective degree of protection that copyright affords since 1999.

I find this quite odd since most of the studies I’ve reviewed so far would disagree with the notion that file-sharing is to blame for reduced sales. Some studies say that there is a positive effect on music sales as a result of file-sharing and that there are other reasons for the decline in music sales (one example being the new-found competition between the music industry and the video game industry competing for the same pool of cash).

Another theme I tend to find with studies that make the comments that file-sharing is responsible for the decline of music sales is that they are frequently accompanied by little to no evidence. In this case, there was no citation as to why the author thought this. I don’t, however, content that technology has changed the way we view copyright laws. As we move forward over time, I think we need to loosen copyright laws to better equip future artists in dealing with the technology of today. Hampering them with archaic copyright laws that were clearly not designed for the era of the internet is not advisable if you ask me because it removes certain competitive abilities of these artists (for example, disallowing sampling would hinder the artists ability to make better music compared to artists living in countries that do allow a certain amount of sampling)

The study then went on to note the IFPI saying that file-sharing would hinder the ability for its members to bring new artists to market. The study also makes this comment:

Economists generally agree that monopolies are bad.7 Governments grant some of the basic textbook examples of monopolies for intellectual property, in the form of patents and copyrights. Their bad effects allowing prices above marginal costs and therefore restricting the supply of output are thought to be justified by their incentive effects on production. But apart from introspection and anecdotes, we don’t really know much about the effects of remuneration incentives on production in the music industry.

To put it simply, do long copyright terms really provide enough incentive to create when it promises to restrict the flow of music? I have to admit, I’m like the author in this case. I really don’t know. I’ll put on my music producer cap here for a moment and think about it. Do I think about creating music and say to myself, “I really want to produce this song because if I create something unique and different, I’ll be granted full monopoly rights for the rest of my life!” or do I think about creating music and say to myself, “Let’s make something that sounds cool and hope others like it too!”? I can’t speak for every music producer, but I’m personally leaning towards the latter option. Of course, that could be my personal weird nature of enjoying the process of making music and the fact that I make music because I enjoy it.

The study continues on with building the evidence. The study comments:

At first blush the obvious way to measure the supply of recorded music is with the number of songs or albums available. By extension, the new supply is the number of new songs or albums available in, say, a given year. Oberholzer-Gee and Strumpf (2009) and Handke (2006, 2010) point to evidence that the number of albums released in the US and Germany and that the number of labels operating in Germany have not declined in the past decade to argue that file sharing has not interrupted supply. While this evidence is quite interesting, one might be concerned about that the great skew in the sales distribution undermines proportionality and perhaps even the monotonicity between titles and welfare. According to SoundScan, there were 97,751 new albums released in 2009, but only 2050 sold over 5000 units.10 Thus, the amount of surplus generated is not proportional to the number of products made available, so the number of products provides an incomplete measure of the welfare effects of supply. And while the evidence on the number of recording labels operating is quite interesting more on this below at section IV it is not by itself a measure of the amount of surplus that recorded music generates for consumers or producers.

What is somewhat satisfying already is that this study isn’t simply grabbing one statistic, looking at one unit of measure, then coming to a conclusion one way or another. There’s more depth to this study then a single statistic. This, I think, helps lend this study some credibility here. Later on in the study, there is also the following comments:

The basic data for this study are professional critics’ retrospective rankings of songs and albums from multiple years, such as “best-of-the-decade” lists. For these lists, the staff of a magazine or website produce a list of the best albums (or songs) of the past decade, or quarter century, or all time. That is, experts evaluate music from different years, subjecting all of it to a time-constant quality threshold for list inclusion. Prominent examples include Rolling Stone’s 2004 list of the 500 best albums or Pitchfork Media’s list of best 200 albums of the 2000s (see the Appendix Table 1 for a full list of the sources and their coverage). We have 88 different rankings (and ratings), 64 covering albums and the remainder covering songs. All of the rankings are from Anglophone countries (the US, England, Canada, and Ireland).

It has always bothered me that when there is discussion about how well the music industry does, a lot of statistics are based on what is in the top 40 mainstream, discounting everything else in the process. If an artist refuses to sign on to a major record label, doesn’t make the top ten best selling album of all time, why doesn’t that album count anyway? Are we not ignoring a large portion of the music industry when we do this? I would imagine that when we are talking about how much music is being created in the first place in the entire industry, just looking at top ten lists is not a very useful measure for whether or not quantity of music being produced is in decline. The study does note that there is bias in this and discusses the emergence of alternative lists including lists found online like BestEver and RateYourMusic.com.

After discussing how legitimate various sources are in ranking music, the study then makes these comments:

Of our 64 album indices, 58 extend at least a few years into the post-Napster period. A glance at the various album indices gives little definitive indication of whether supply declines following Napster. Some appear to rise while others appear to fall. If each of the indices contains noise along with signal, we can get more information out of the indices by averaging them. However, indices vary substantially in the number of works included and, as a result, in their year-to-year variability as well.

So, in other words, but this measure, we have data scattered all over the map. Having completely random data points have a tendency to not be helpful for statistical purposes, so I can see why an average line wouldn’t be helpful if one were charting this on a graph.

One thing I have noticed – and it may be partly why this is a thick 50 page study – is the numerous angles and approaches this author takes when trying to measure music quantity shifts after Napster was introduced. Sometimes, the author would find scattered data, sometimes, the data was skewed in an unsatisfactory way, the author found a downward trend after Napster at one point, but when it was compared to before Napster, the trend was merely continuing before Napster was introduced. You could almost feel the frustration from the pages as the creator of the study looked at all these different methods of measurement only to wind up with results that were not statistically satisfactory. In fact, you could get a sense of the study going back to the drawing board when you get almost half way through the study:

The evidence thus far indicates no decline in the volume of new recorded music products forthcoming since Napster. It is possible, however, that the new music is coming from artists who were established prior to Napster. While products still come to market, it is possible that new artists are not establishing careers.

So, the author calculates when artists are starting to produce music in general and still wound up finding nothing to substantiate the claim that Napster is causing some sort of collapse of music quantity being available.

So, in discussion, what was examined was the fall of cost in the process of creating music. An interesting note was made when discussing the fall of the cost of music production:

The cost reductions have accelerated since Napster: Software such as Pro Tools turns an inexpensive personal computer into a home recording studio. A starter version of the software sells for about $100.

This is an important point to make because if the barrier of entry into the market as a producer falls, that would invariably lead to an increase of people being able to bring new music to market. Why spend tens of thousands or hundreds of thousands of dollars when one could buy a piece of software for a few hundred dollars, mix, remix, record, produce and make the music available online? If the artist doesn’t have the cash for the most expensive rout, then the cheaper rout is a very easy option because it can mean the difference between putting music out there and simply not making music at all. As if to further this point, the study then says:

Since Napster, the process of musical discover has changed substantially. While radio listening is in decline, consumers now learn about new music from a variety of web sources, including Pandora, MySpace, and YouTube. According to the 2010 “Infinite Dial” study conducted by Edison Research and Arbitron, the Internet was by far the most popular medium that consumers age 12-34 used first to learn about new music.

So, there is an excellent easy to access medium and that medium has an audience. That medium is the Internet. What more could an artist ask for when expressing themselves? The rise of small and/or independent labels was certainly also noted:

The data provide support for the idea that independent labels are playing an increasing role. While the share of the top 100 on independent labels was 50 percent in both the 1980s and the 1990s, it rose to 60 percent in the period since 1999.31 This difference (between the 2000s and the previous two decades) is significant at the 5 percent level in a onesided test (p-val =0.04). The ascendance of independent labels has been noted elsewhere. Leeds (2005) writes of the independent labels’ success in the face of the majors’ difficult times:

Even as the recording industry staggers through another year of declining sales over all, there are new signs that a democratization of music made possible by the Internet is shifting the industry’s balance of power. …But no factor is more significant than the Internet, which has shaken up industry sales patterns and, perhaps more important, upended the traditional hierarchy of outlets that can promote music. Buzz about an underground act can spread like a virus, allowing a band to capture national acclaim before it even has a recording contract, as was the case this year with Clap Your Hands Say Yeah, an indie rock band.

The heightened role of independent labels suggests a simple reconciliation of the continued supply of music despite financial distress at major labels: it appears that entities other than the major labels are bringing forth a higher share of music in the period since Napster.

The study ultimately concludes:

File sharing has presented a great challenge to the recording industry. It is clear to most observers that file sharing has undermined the effective copyright protection afforded to recorded music. In spite of this, the supply of recorded music appears not to have fallen off much since Napster, and there is at least suggestive evidence that independent music labels, which operate with lower breakeven thresholds, are playing an increased role in bringing new works to market.

But, as was suggested earlier, the minor decline was merely a continuing trend since before Napster anyway. In any event, if there was a decline, there is no evidence to suggest Napster, and file-sharing in general, caused it. Also, if there is a decline, it’s not substantial as pointed out in conclusion.

Overall, if this doesn’t put to bed the claim that file-sharing is causing a huge decline in artists being brought to market, I don’t know what will. This is, in my mind, an extremely definitive piece of evidence that says file-sharing is not causing a decline in the quantity of music. Just like in decades past, artists are still creating music. I would argue that in the decades from now, artists will still be creating music. Even if (and that’s a pretty big “if” judging by the evidence we found previously in this series) there is a drop in revenue, I don’t think that will deter true artists from making music.

Drew Wilson on Twitter: @icecube85 and Google+.

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