The Impact of Music Downloads and P2P File-Sharing: Introduction

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The technological revolution in information and communication technologies (ICT) and micro-electronics, including the emergence of a digital technological paradigm, has changed the economic status of creative expressions, such as music.

The economic status of music changes once it can be separated from the tangible object (for example, paper-sheet, magnetic tape, LP, CD) or person or location (for example performance venue) in which it is originally fixed. Technological change in printing, sound and play-back equipment, recording, broadcasting, television, the Internet and the invention of compressed digital formats such as the MP3 have facilitated such separation. Thus, the consumption of music is no longer limited by time and place of production.

When such separation occurs, the opportunities for increasing profits emerging from reproduction become the focus of business strategies. In such cases, profits become much more closely tied to the organization and management of copyrights (music royalties) in copyright-based markets (Andersen, Kozul-Wright and Kozul-Wright 2007). Assessing the economic nature of intangibles themselves, it can be claimed that creative expressions and other associated intangible knowledge-based assets are taking on a greater market scope in today's globalizing world (Rivera-Batiz and Romer 1991, Varian 2000). Music has some of the qualities of a public good since it can be consumed or enjoyed jointly; its value does not diminish by use; it incurs significant fixed costs in development; and, it can be reproduced very cheaply (this characteristic is usually referred to as the 'non-rival' aspect of a public good). But, unlike a public good, it is possible for the creator of an expression to exclude others from using it by using a copyright, and, thereby, opening the possibility for wider commercial exploitation.

However, it is here that technological change not only enables possibilities for profit and the creation of a sustainable industry, but also challenges and sometimes even undermines this economic status of the musical expression (Gallaway and Kinnear 2001, Romer 2002). When music is provided as a service through a live performance, the problems of joint consumption and (imperfect) excludability are reasonably easy to manage. The market is restricted and the market-control on the creative expression is reasonably secure.

Problems occur when music more easily acquires the properties of a non-rival public good/product via the evolution of (i) new sound and picture recording and playing technologies (for example, magnetic tapes, LPs, CDs, high fidelity stereos, video, digital audio technology), as well as (ii) new broadcasting and public performance techniques (for example, radio, television, cable, satellite, Internet). This opens up the possibility for widespread unauthorized copying. The low cost of (re)producing an intangible expression such as music in the digital MP3 age means that its market can be uncertain and fragile, quickly undermined by copying and downloading. This makes any investment in activities that rely heavily on intangible expressions and other intangible assets inherently risky (Landes and Posner 1989). This is particularly apparent with cultural products, such as a music sound recording or a film, where the investments made in establishing and promoting an artist are very specific and where short product cycles mean profitability relies on explosive but ephemeral market growth.

Some countries have strengthened copyright legislation and enforcement policies in response to the changing information environment. However, the extent to which P2P file-sharing and music downloading activities displace/substitute or increase/stimulate music purchasing is uncertain.

Objective and outline of paper

The primary objective of this paper is to determine what influence P2P file-sharing and music downloading activities have on the purchasing of CDs and paid electronically-delivered music, based on quantitative analysis of representative survey data from the Canadian population.¹ The focus is in particular on whether such downloading and P2P file-sharing displaces (substitutes) or increases/stimulates music purchases. P2P file-sharing is a phenomenon characterized by the exchange of digital information between two members of a network connected via the Internet; any digitally stored information can be exchanged via P2P networks, but this paper is concerned only with the exchange of music files.² Music downloading activities are here considered distinctly from the sharing of music files through P2P networks; for example, downloading music free of charge from promotional websites or from non-commercial websites is treated in this paper as music downloading.

The analyses aim to assess the behavioural patterns associated with music consumption, as well as the motivations behind such behaviour. It is difficult to precisely capture the magnitude of a possible displacement/stimulus of music purchases resultant from P2P file-sharing. Underlying processes are dynamic and evolving rapidly over time. This paper attempts to provide insights into the dynamics of how P2P file-sharing and music downloading affect music purchasing.

The paper analyzes Canadian survey data³ and results are representative of the Canadian population aged 15 and older. To our knowledge, this is the first empirical study to employ representative microeconomic data. Most previous studies examining the impact of P2P file-sharing on music purchasing/sales have employed macroeconomic (i.e. aggregated) data.

The paper is organized in the following way. Section 2 of this paper reviews the theoretical and empirical literature and develops the relevant hypotheses. Section 3 introduces the survey data and variables to test the hypotheses developed in Section 2. In this section we also introduce the estimation models used to test the hypotheses and discuss their relative strengths vis-à-vis alternative techniques. Section 4 discusses the results of the estimations in the context of the hypotheses developed in Section 2. The paper concludes in Section 5.

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