As sales of recorded music drop precipitously, the music industry has pointed a blaming finger at the dramatic growth of file sharing among individuals who search, share, and download music files from each other. Surely if consumers can get their favorite songs for free, the reasoning goes, they’re not making tracks to the nearest record store to pay $18 for a CD.
Think again, says Felix Oberholzer-Gee, associate professor at Harvard Business School. In a recent study, Oberholzer-Gee found that sharing digital music files has no effect on CD sales. “It’s a finding that surprised us,” he says. “We just couldn’t document a negative relationship between file sharing and music sales.”
Oberholzer-Gee and co-author Koleman Strumpf of the University of North Carolina accessed data directly from file-sharing servers and observed 1.75 million downloads during a 17-week period in fall 2002. “Our key advantage is that we have much better data than anybody else who worked in this subject,” says Oberholzer-Gee. Most other research on the market impact of file sharing has relied on survey data. Asking people to self-report about what is, after all, illegal activity almost never produces reliably truthful answers, he says.
Oberholzer-Gee and Strumpf’s study used statistical models to compare downloads of songs from 680 popular albums in a variety of styles with the actual sales of those albums, as reported to Nielsen SoundScan, the industry’s leading sales tracker. The researchers statistically analyzed whether the sale of an album declined more strongly in relation to the frequency and volume of downloaded songs from that album. In one week, for instance, they saw a spike in downloads of songs from the soundtrack to the film “Eight Mile.” They would chart sales data for that CD in the following weeks to see if the download activity caused sales to decline.
It didn’t, they were stunned to find. “This is where we cannot document any relationship between file sharing and subsequent sales,” says Oberholzer-Gee, calling the effect “statistically indistinguishable from zero.”
Music to record industry’s ears?
In fact, the study found that for the most popular albums – the top 25 percent that had more than 600,000 sales – file sharing actually boosts sales. For every 150 songs downloaded, the study showed, sales jumped by one CD. For the least popular 25 percent of the sample, “we found a more pronounced negative effect,” says Oberholzer-Gee. Despite predictions that the Internet would level the playing field of the music industry, giving consumers equal access to obscure, independently produced artists as to chart-topping pop darlings, music downloads parallels music sales.
“When you look at what the music people are sharing online, it’s very much like looking at radio,” he says. Not coincidentally, the early days of music radio brought similar fears that consumers would not purchase records they could listen to for free.
For the record industry, Oberholzer-Gee argues, this research brings great news. “[File sharing] is not as dangerous as many have believed. The music industry’s ability to influence what people listen to seems almost unbroken,” says Oberholzer-Gee, adding that the study found that industry marketing – video play on MTV, for instance – seems to affect downloads as well as CD sales.
Still, the duo’s research has not been music to the industry’s ears. The Recording Industry Association of America, the U.S. music industry trade group, has rejected the study’s findings and clings to its assertion that file sharing is chipping away at CD sales, which are, undeniably, suffering.
Oberholzer-Gee poses several theories on the slack pace of music sales, from what he calls the “CD replacement boom” winding down as older listeners finish replacing their vinyl with CDs, to the poor economic climate, to the rising price of CDs. Despite his and Strumpf’s initial surprise at the results of their study, he says, it makes clear economic sense that every download does not displace a CD sale.
“Observing that people consume lots and lots at a price of zero dollars makes sense to an economist,” he says. If someone offered him a free plane ticket to Florida, he offers, he’d be poolside in a heartbeat. For $250 roundtrip, he’d think harder about how much he wanted to fly south. “At $18, we’re being lots more selective than at zero dollars.”
Emotions meet economics
Although he is a music fan, Oberholzer-Gee says that economic inquiry rather than musical passion drove this research. As the proliferation of digital media – and the ease of disseminating it – drives the discussion of property rights into the courts, economists are taking notice. The fine line between granting sufficient protection of intellectual property to spur creation yet not such stringent protection that market forces will be choked is as important to economists as to lawyers, he says.
One such lawyer looking closely at property rights in the digital age is Jonathan Zittrain, the Berkman Assistant Professor for Entrepreneurial Legal Studies at Harvard Law School and co-director of the Law School’s Berkman Center for Internet and Society. He gives the study high marks for bringing rigorous empirical research to what he calls an important public policy issue. “Making generalizations about Internet use is tricky, and Felix has identified and dealt with the pitfalls in a way well suited to peer scrutiny – while still accessible to industry, government, and the public, all of whom have important interests within the battles over digital property protection,” says Zittrain.
Oberholzer-Gee is also hopeful that the study’s robust data will inform the music industry as it struggles to tame the digital media beast. Until now, the industry has resorted to shots in the dark.
“One of the motivations to do this study was that the debate is emotionally very charged,” he says, in part because of the scarcity of factual data on the subject. “We were struck by the fact that so much is at stake and yet we knew so little. It’s very important to get this right.”