The first half of our investigative reporting was interesting and this second half is certainly not disappointing either. This next study discusses a simple argument many have made before – the media industry needs to adapt to a new business model designed for the modern digital era.
Adapt or die. The media industry is like an injured dinosaur. Copyright laws are simply being built to maintain an old business model that just doesn’t work today. These are just a small sample in a long list of arguments that point to a lack of adaptation by the media industry. Like many other arguments that don’t look good for the industry, this argument has a study back this up too.
This study is called “The Impact of Illegal Peer-to-Peer File Sharing on the Media Industry”. It was published in 2010 in the California Management Review.
Like a lot of other studies we’ve already reviewed, the study discusses the increase in music sales in the 1990’s, but then a decline in CD sales after this time period. Then, citing industry quotes, saying that the major players in the industry blames file-sharing for the decline. The study further comments:
While the media industry blames Internet file sharing for large economic losses, there is little consensus in prior research on its impact on industry revenues. Some studies attribute the downturn in music sales almost entirely to piracy, while others find that the economic impact of illegal file downloads on media sales is negligible. In the latter case, the drop in sales may be triggered by a decline in quality of new music or change in the way people listen to music (e.g., more streaming and fewer CD purchases). Another stream of research indicates that listeners’ ability to sample files for free on P2P networks may
increase music sales.
When I initially did the research and gathering these studies, the only studies I found that said that file-sharing was to blame for losses in music sales were published in 2002 and earlier. In other words, a time period when there was little data available on the phenomenon of file-sharing. Since these studies were so old, we discounted them on the basis of trying to find up to date information. Finding information less than a decade old seemed advantageous. The results we’ve seen so far in the series pretty much speaks for themselves – very pointed questions on whether file-sharing was really to blame and an ease in finding alternative explanations on the fall of music sales including increased competition from other industries like the gaming industry, a switch from an album market to a singles market, the halting of the practice of price fixing in the same period and, as this study suggests, a switch from purchased music to streaming music to name a portion of reasons why there was a decline in music CD sales.
The study then discusses what is being investigated:
In view of this controversy, we conducted empirical tests to ascertain whether the financial market perceives the industry’s efforts to tighten and enforce copyright legislation as having positive consequences for the long-term profitability and survival of member firms.
The study looked at shareholder reaction and revenue streams as a result of litigation to name two points of interest. Later on in the study, the study listed reasons why file-sharing may not be detrimental:
a majority of those who download media files may be unwilling or unable to purchase them. Preventing free downloads by such users results in lower social benefits without any increase in revenue for media providers. Further, large media companies may historically have stifled creativity by having excessive influence on deciding what types of works get produced and marketed as well as maintained artificially high pricesâ€”e.g., by paying radio stations to play certain numbers, selling more expensive albums rather than the
single tracks desired by music fans, and promoting more popular artists at the cost of those with niche followings (and smaller potential profits). Lower search, promotion, and distribution costs associated with the Internet may loosen the stranglehold of large companies and promote creativity while providing works that better cater to diverse consumer tastes at competitive prices.
We’re easily able to corroborate a number of these comments with previous studies we’ve covered already in this series so far. For example, we’ve seen studies that said that file-sharers can discover new music while others are downloading content they are either unable to or not willing to pay money for in the first place. Those factors would lower perceived losses in the industry. Another point we’ve seen agreement is the effect of price fixing on CD’s in the early 2000s. The study continues at length on the positive influences file-sharing plays on music sales.
The study also goes on to discuss the monopolistic control a small handful of companies have had on the entire music and movie industries. Again, judging by previous studies alone, there are no surprises given that, economically speaking, a monopoly makes a market inefficient. The study also reviews what the distribution models of these industries (ala bricks and mortar stores, selling music on a CD, etc.) as well as touch on disruptive technology. The study also reviews the roll of Napster and how it changed things in the market. Again, nothing really new here. In the midst of the review, the study notes the following:
While the media industry has successfully lobbied Congress for increased legal protection and higher penalties for infringement, some legal scholars have questioned the need for copyright protection in an industry where search and distribution costs are low and users are prepared to bear them.
Certainly, with what we’ve seen in this series so far, there are serious questions on why the industry is even pursuing activities such as litigation when they are proven ineffective so far as the original goal of providing a deterrence for the whole file-sharing community is concerned.
The study also discusses the various pieces of legislation introduced including The Copyright Act of 1976, The Communications Act of 1984, an amendment to copyright in 1989, Audio Home Recording Act (AHRA) of 1992, The No Electronic Theft (NET) Act of 1997, the Digital Millennium Copyright Act of 1998, and The Family Entertainment and Copyright Act of 2005. Various copyright bodies like WIPO and pending legislation were also discussed like the Pirate Act. Numerous legal cases like the Betamax case were also reviewed.
Later on, what seems like a mundane financial exercise on the surface was actually a little interesting. The study looked at the efficient market hypothesis and compared it to the litigation campaign. What it found was quite interesting indeed:
Our results show a positive, abnormal stock price change on the event date on average. This price change is statistically significant for both parametric and nonparametric tests as well as for both methods of computing abnormal returns.43 Mean CAR on the event date, although statistically significant, is small in magnitude (approximately one quarter of 1%) probably because the potential benefits of each lawsuit may not accrue to all of our sample firms, and because several sample firms (e.g., GE) have major operations in lines of business outside of media. The price changes are generally insignificant in the pre- and post announcement windows. Separate tests conducted over the three types of events (lawsuits filed against individuals and firms, and enactment of legislation) suggest that the stock price reaction to each type of event is of similar magnitude, i.e., of the order of a quarter percent.45 These results are consistent with the contention that current and past efforts by the media industry to check illegal file sharing over P2P networks through stricter copyright laws and lawsuits against violators have a significant positive impact on expected long-term profitability and economic viability of major media firms.
So, in short, every time a batch of lawsuits went out, the stock bumped up a little temporarily. When a new piece of anti-piracy legislation was passed, the stocks of these companies went up a little. Not a lot, but there was a noted difference even if it was insignificant. I think that actually speaks to one motivating factor of these lawsuits. If the stock needed to be up a little, file a few thousand more lawsuits and the stock prices of these companies go up. An interesting explanation for the lobbying and lawsuits indeed. Nothing really sustainable, but a short term gain in the stock markets.
The study then went on to discuss a potentially successful business model, saying the following:
A successful future business strategy for media firms would focus on an integrated approach to monetizing access to musical and video works (as opposed to only selling CDs or DVDs) coupled with combating infringement of copyright violations through tightening legislation
In other words – get a viable business model that is reasonable that consumers can accept, then sue the blistering [expletive] out of the violators after. Cory Doctorow once advocated this even. Of course, the industry has yet to put forth a viable and reasonable business model which makes the litigation pointless. Does the industry have an attractive alternative to piracy? No. Then forget about the lawsuit campaign until they do. This last point is further driven home later in the study:
As previously mentioned, the media industry’s enforcement efforts have so far been directed at dissuading unauthorized file sharing through lawsuits against P2P software creators and users together with restricting copying and playback through DRM technology. While the industry has been successful in shutting down several P2P networks, its strategy has been largely unsuccessful in deterring illegal file sharing.
Not surprisingly, the study concludes with the following:
the new technology has the potential to expand demand by enabling users to access
media products anywhere on a variety of devices, sample new products, and use them creatively and as part of a broader social experience. The media industry needs to develop new business models to capture hitherto untapped revenue streams arising from new technology and to better cater to changing customer tastes.
Our empirical analysis suggests that the media industry should continue its current legal strategy to deter unauthorized file sharing. Additionally, the industry must discover new ways to monetize its products and create value. We presented several business strategies that permit media firms to fight unauthorized file sharing over P2P networks and utilize recent technological advances to cater to changing customer tastes. These include changing social norms in the Internet community (which currently regards the sharing of copyright-protected
material over P2P networks as morally permissible) through educational campaigns, simplifying the process of obtaining copyright permission to encourage legal use of copyright-protected artistic works, and adopting new business models to monetize access to artistic works in a changing business environment.
Even though this study does advocate the continuation of litigation, it recommended that the media industry also adapt to allow better access to copyrighted works as well as something to entice potential customers away from unauthorized sources to authorized sources. Unfortunately, in practice, we’ve never really seen a comprehensive global strategy to better sell or otherwise allow access to various works that plays off of a wide range of musical tastes. At best, there’s a few small pockets of walled gardens like Pandora (only for US users) and Spotify (few select countries). I think this is certainly insufficient to be considered an enticing alternative to piracy. If the industry can’t adapt, then, as we’ve seen in this study, it kind of renders litigation and government lobbying rather pointless.