Our series in to the various studies done on file-sharing has certainly been an informative endeavor so far. In our sixth installment of this series, we look at one study that argues that lowering prices, not enforcing copyright, is the key to success.
This particular study is entitled “Unauthorized file-sharing and the pricing of digital content” and was published in 2004 in the journal “Economic Letters”.
Part of the abstract states the following:
This paper considers the effects on pricing of digital content from unauthorized file-sharing. Producers must not only consider copyright protection, but also the effect on transaction costs from unauthorized file-sharing.
So, this is another interesting angle in the whole copyright and file-sharing. What action should one have in pricing and how much effort should be put into enforcement?
The study first notes that degradation of music quality is negligible as copies are passed down. Moreover, the study also makes the following note:
The number of files illegally supplied on the Internet increases along with market sales: a hit song is very easy to search and download by file-sharing, whereas for rarer music it is almost impossible. Even before P2P technology, such a phenomenon existed, but its impact was relatively minor.
The thing to remember was that this study is done in 2004, so private BitTorrent websites weren’t really around at the time.
The paper then notes an interesting move done by record labels and decided to act on it:
Facing unauthorized file-sharing, recording companies have recently begun online sales, which have been more successful than they had imagined initially. The reason for this success is based on the fact that they can set much lower prices, due to low distribution and zero package costs online, opposed to those of retail shops. As a result, online prices are lowered to a competitive level versus costs from unauthorized file-sharing.3 This paper considers pricing of digital content obtained at online stores or by unauthorized file-sharing.
Now, normally, this is the part where I dissect the data and calculations, but I think there is no shame in admitting that complex mathematics and mathematical proofs are a little out of my league here. Let’s just say, it get’s to the point where this stuff starts looking more like someone tortured a calculator and the calculator, in the process, threw up chunks of data. Case in point:
At the risk of sounding like an idiot, I’ll just say that the authors are probably really smart in math.
In any event, the study says that distribution costs should be used in determining prices. If it costs a lot of money to distribute the content, then the prices should be high. Since, on the internet, the distribution cost is practically zero online (when compared to shipping physical discs hundreds of miles), then the prices should probably drop.
The study makes the following conclusion:
A producer is allowed to monopolize content by copyright for a given period of time in promoting the social welfare. Supposing that the period without unauthorized file-sharing is optimal, should we permit a longer and a more powerful monopolization by the producer? In considering this, we must realize that a strict enforcement of a copyright law cannot be acceptable in terms of its side-effects on privacy, as well as being impossible on the Internet due to its costs. Given these facts, a content producer must act optimally. This paper considered that in terms of pricing.
So, in short, when approaching file-sharing while selling music, consider a low price when distributing online. Since trying to spy on the internet and drag people to court is not the biggest bang for you buck, the solution falls back on the price.
I think the depressing part in all of this is the fact that the record labels, for years, didn’t seem to get this message. Now, we have all this lobbying going on (as we’ve seen in previous studies in this series, all the litigation campaigns in years past, and now with the surveillance and censorship regimes that we see today. I think, in a long-winded fashion, a lot of these corporations have proven why this study was probably right all along. Had they adopted a more forward thinking business model in the past, imagine how much money that wouldn’t have gone pretty much to waste in the last 8 years.