Felix Oberholzer-Gee of Harvard Business and Koleman Strumpf of UNC recently noted that the music industry is wrong when it says file sharing is hurting the sales of physical media.
"Downloads have an effect on sales which is statistically indistinguishable from zero, despite rather precise estimates," write its authors, Felix Oberholzer-Gee of the Harvard Business School and Koleman S. Strumpf of the University of North Carolina at Chapel Hill.
The industry has reacted with the kind of flustered consternation that the White House might display if Richard A. Clarke showed up at a Rose Garden tea party. Last week, the Recording Industry Association of America sent out three versions of a six-page response to the study.
The problem with the industry view, Professors Oberholzer-Gee and Strumpf say, is that it is not supported by solid evidence. Previous studies have failed because they tend to depend on surveys, and the authors contend that surveys of illegal activity are not trustworthy. "Those who agree to have their Internet behavior discussed or monitored are unlikely to be representative of all Internet users," the authors wrote.
Instead, they analyzed the direct data of music downloaders over a 17-week period in the fall of 2002, and compared that activity with actual music purchases during that time. Using complex mathematical formulas, they determined that spikes in downloading had almost no discernible effect on sales. Even under their worst-case example, "it would take 5,000 downloads to reduce the sales of an album by one copy," they wrote. "After annualizing, this would imply a yearly sales loss of two million albums, which is virtually rounding error" given that 803 million records were sold in 2002. Sales dropped by 139 million albums from 2000 to 2002.
"While downloads occur on a vast scale, most users are likely individuals who would not have bought the album even in the absence of file sharing," the professors wrote.
In an interview, Professor Oberholzer-Gee said that previous research assumed that every download could be thought of as a lost sale. In fact, he said, most downloaders were drawn to free music and were unlikely to spend $18 on a CD.
"Say I offer you a free flight to Florida," he asks. "How likely is it that you will go to Florida? It is very likely, because the price is free." If there were no free ticket, that trip to Florida would be much less likely, he said. Similarly, free music might draw all kinds of people, but "it doesn't mean that these people would buy CD's at $18," he said.
The most popular albums bought are also the most popular downloads, so the researchers looked for anomalous rises in downloading activity that they might compare to sales activity. They found one such spike, Professor Oberholzer-Gee said, during a German school holiday that occurred during the time they studied. Germany is second to the United States in making files available for downloading, supplying about 15 percent of online music files, he said. During the vacation, students who were home with time on their hands flooded the Internet with new files, which in turn spurred new downloading activity. The researchers then looked for any possible impact in the subsequent weeks on sales of CD's.
With the music business attacking downloaders one wonders if they intend to sell music to anyone older than 25. Over and over I hear friends ranging from 35 to 60 complaining there isn't any new interesting music available. Some are finding music in Europe and others have developed tastes which are served by minor players (Jazz, Classical, Folk, etc), but there is very little in the way of mass market music aimed at the slightly older masses.
Over the past few years my measurements have indicated that network piracy is rare over the age of 25 for a variety of reasons (dissecting them requires deeper work). It seems obvious to take an under-served market that doesn't "steal" music and serve them. My guess is the industry is leaving several billion on the table because they have completely lost focus.
These guys are every bit as clueless as the dot.bomb folks.
I started wondering about this after having tested it on a friend's Windows XP box. The experience was detailed on this page and was - in a word - substandard. In talking with others I have only heard from two (out of many Windows users questioned) who had tried the site. The Alexa numbers (assuming they are in the ballpark) show that buymusic needs to rethink what they are doing.