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

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

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?

Have a tip? Want to contact the author? You can do so by sending a PM via the forums or via e-mail at [email protected].

Drew Wilson
Drew Wilson is perhaps one of the more well-known file-sharing and technology news writers around. A journalist in the field since 2005, his work has had semi-regular appearances on social news websites and even occasional appearances on major news outlets as well. Drew founded freezenet.ca and still contributes to ZeroPaid. Twitter | Google Plus
alex K
alex K

I think you misinterpreted this bit: "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." 

 

I didn't read the study, but when they say per capita, they mean per person, not per album.  Right? 

Alex M
Alex M

> 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 isto 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.

 

Drew, you quote the above section as evidence that the study is using the flawed "one download = one lost sale" doctrine.  However, I don't see how that interpretation quite jives.  I agree, even if I value a song personally at greater than the price at which the song is available, that doesn't necessarily mean I'm going to buy it.  However, they seem to be taking a much more reasonable approach by using valuation as the basis for whether or not a shared song download might constitute an actual lost sale.

 

Whenever the one download equals one lost sale doctrine has been invoked in the past it is generally applied across the board with no attempt at determining sub-classes of users for which a share download may not mean a lost sale.

 

I think you're being a bit disingenuous by claiming that they universally fall into the flawed one download equals one lost sale camp.  They specifically made attempts to not be working from the same flawed assumption.  You should give them more credit for creating a reasonable competing methodology, based on valuation, in attempting to estimated what downloads may actually equate to lost sales.

DaveK
DaveK

>"What more do you want from the consumer?"

 

I would have thought that was transparently obvious by now.  They want to charge us over and over and over for the same thing.  Selling us all our old albums again on CDs as a business model was good for a few years, but it always bugged them that you paid for an album only once but could listen to it as many times as you wanted.  Their current stategy is to stop selling music to us and try to rent it instead.  If they could put electrodes in our brains and charge us every time we recall the memory of a tune we've once heard, they'd do that too.

 

dreampod
dreampod

I think you are misinterpreting what the data means a bit.  It isn't that the amount of sales lost due to piracy is insignificant (an issue for a different article) but rather the 'damage' caused by file sharing is being overestimated by 15 times assuming the study isn't using other dubious methods to inflate the 'cost'.  

 

An interesting 'study' using this data to point out the...dubious...nature of RIAA claims would be to look at how much revenue Itunes has 'cost' the studios by converting a big hit for a band that drives virtually all their sales from a $15 purchase to a $0.99.



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