Record industry executives hold it as an article of faith that the advent of file-sharing Web sites like Napster and Kazaa was largely responsible for a stunning decline in the sales of recorded music. From 1999 to 2003, after all, the number of compact discs and other forms of recorded music shipped in the United States plunged 31 percent.
Sure, other factors–including the stubbornly high price of CDs, a recession that cut into discretionary spending, a plethora of unappealing pop acts and the intense competition for the entertainment dollar–may have contributed. “But there’s no question that file sharing has an enormous impact on sales,” said Mitch Bainwol, chairman and chief executive of the Recording Industry Association of America, based in Washington. “The most basic notion of economics is this notion of perfect substitution. You have two products that are in essence substitutes, so the market drives toward the freebies.”
The association has buttressed this Econ 101 lesson with consumer surveys showing that the industry’s core audience would rather download tunes free than pay for them. In November 2002, Peter D. Hart Research Associates found that when 19- to 24-year-olds were asked about a song they liked, 32 percent said they would download it, while only 9 percent said they would buy it.
From the outset, however, economists have been skeptical that every free download represented a lost sale. And several years after the explosion, and subsequent implosion, of the original Napster, academics have begun to plug data about free downloading into complex equations and theoretical frameworks.
Stan Liebowitz, an economist of the University of Texas at Dallas who has synthesized much of the research, sees economists as generally coming to an agreement. “I think the consensus is going to be that file sharing and downloading is going to be harmful to sales of music,” he said. The question is, how much?
Two professors at the Wharton School at the University of Pennsylvania, Joel Waldfogel and Rafael Rob, measured the downloading and CD-buying behavior of students at the University of Pennsylvania, Hunter College in New York and City College of New York. In a working paper published recently by the National Bureau of Economic Research, they concluded that students each spent $126 on the best-selling CDs without downloading and $101 with downloading. While conceding that their research did not cover a representative sample, they concluded that every 10 downloads of music resulted in 1 to 2 lost sales.
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