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

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This section presents and discusses the results of the regression estimations testing our hypotheses developed in Section 2. The set of regression equations is designed to analyze a range of variables determining CD album and paid electronically-delivered music purchases based on the whole of the Canadian population (see Section 3 and Table 3.3 for an overview of the variables). In this section we also integrate a distinct analysis and discussion on a sub-set of the survey that is based on all those respondents who declared that they participated in P2P file-sharing. We analyze this sub-set separately because it enables us to include a wider range of variables that are derived from sections of the survey only applicable to respondents who were downloaders. These additional variables are included and commented on in sub-sections of the relevant hypotheses introduced in Section 2.

We focus on the results obtained from our negative binomial and Probit estimations. The negative binomial model is chosen over alternative models for the following reasons: (i) the model specification is the most appropriate in terms of the dependent variable and (ii) the negative binomial model has the highest model fit. Similarly, Probit estimation exhibits the best fit in models where the dependent variable is the purchases of electronically-delivered music tracks.⁶ OLS, Poisson and Logit estimation were undertaken as part of our sensitivity analysis; some results are discussed in footnotes in order to qualify our findings, but the full set of results is presented in the appendices.

The effect of P2P file-sharing on music purchasing

Our results regarding the effect of P2P file-sharing and music downloading on music purchases are mixed.

Hypothesis 2a asserted that P2P file-sharing would be negatively associated with music purchasing. In other words, we expect some form of displacement effect.

In the aggregate, we are unable to find direct evidence that P2P file-sharing either increases or decreases CD purchases in Canada. That is, in our analysis of the whole Canadian population we are unable to find any relationship between the number of P2P music tracks that were downloaded and the number CD purchases (Table 4.1 and Appendix 4).⁷

In Table 4.1 the P2P file-sharing variable is a binary variable coded as one if the participant engaged in P2P file-sharing and coded as zero otherwise. In Appendix 4, similar results are presented using the number of P2P downloads instead of the binary variable. Again, we are unable to find any influence of P2P file-sharing on music purchasing.⁸

Among Canadians engaged in P2P file-sharing, we find a positive and statistically significant relationship between the number of music tracks downloaded via P2P networks and the number of CDs purchased (Table 4.3).⁹ For an increase in the average number of P2P downloads per month of 2.718282, the number of CD purchases per year will increase by 1.212. For an increase in the average number of P2P downloads per month of 1 (ie., 2.718282/2.718282), the number of CD purchases per year will increase by (1.212/2.718282 =) 0.44. This suggests that there is some form of music creation effect derived from P2P file-sharing, discussed below.

With respect to the effect of P2P file-sharing on purchases of electronically-delivered music tracks, our results are mixed. In the aggregate, we find some evidence of a positive and statistically significant relationship in one of our Probit regressions (Table 4.2). However, we do not find any statistically significant relationship between P2P file-sharing and electronic music purchasing when using only the sub-sample of P2P downloaders (see Table 4.4).

We also find that both the P2P file-sharing group and the entire population show a positive and statistically significant association between ripping CDs and CD purchases. For the entire population, there is also a positive and significant effect on CD purchasing from individuals downloading via private web sites (see Table 4.1). However, the number of individuals copying MP3 files has a statistically significant negative effect on CD purchasing, as illustrated in the results of Table 4.1.

We now evaluate the 'market sampling' versus the 'market substitution' effects attributed to P2P file-sharing. As discussed and outlined in Section 2 above, we separate the sampling effect in this discussion into market segmentation and market creation effects.

As shown above, individuals who participate in P2P file-sharing because they find CD albums to be too expensive also purchase fewer CDs. This is illustrated by the negative impact the 'album too expensive' variable has on CD purchases (M.E.=-0.032; p<0.01; see Table 4.3). Here, the size of the estimate evaluated at its mean of 40 percent (see Appendix 3) suggests that individuals who increased P2P file-sharing (i.e. Downloading from P2P networks) by 1 percent because they considered an 'album too expensive' purchased 3.2 percent fewer CDs.

Turning to the market segmentation effect, we find no relationship between the variable 'not whole album' (i.e. Where individuals report engaging in P2P file-sharing because of an unwillingness to purchasing the whole album) and CD purchasing.

Our discussion now turns to the market creation effect and Hypothesis 2b, which states that people engage in P2P file-sharing and music downloading because they wish to hear music before buying it. We are unable to find any relationship between the variable 'Hear before buying' and CD purchases, either for the Canadian population as a whole or for the P2P file-sharing subpopulation.¹⁰

With respect to a market creation effect, our results show that people who participate in P2P file-sharing because the music is 'not available elsewhere' also tend to purchase more CDs (M.E.=0.036; p<0.01; see Table 4.3). This might be interpreted as indirect evidence of a positive relationship between exploring music through P2P file-sharing and CD purchases.

We also tested several hypotheses regarding the differences in coefficients related to the 'market substitution effect', 'market creation effect', and 'market segmentation effect' (as reviewed just above and the effects are also defined in the text next to hypothesis 2b and 2c in Section 2). We did this in order to shed light on whether we could make inferences about which one of the effects is strongest. We did this by testing some linear hypotheses of equal parameters using the results from the negative binomial model reported in Table 4.3.

First, we tested in detail for all market creation (i.e. 'not available elsewhere' and 'hear before buying') and market segmentation (i.e. 'not whole album') effects against the market substitution variable 'album too expensive'. Testing the hypothesis that 'album too expensive' is significantly different from 'not available elsewhere', we found that the parameters were statistically different at the 1 percent significance level (F=14.97; p<0.01). Furthermore, testing the hypothesis that 'album too expensive' is significantly different from 'not whole album', we found that the parameters were not statistically different at the one percent significance level (F=0.84). And, testing the hypothesis that 'album too expensive' is significantly different from 'hear before buying', we found that the parameters were statistically different at the one percent significance level (F=6.17; p<0.01).

Second, we tested for the entire market creation effect (i.e. 'not available elsewhere' + 'hear before buying') versus the market substitution effect 'Album too expensive'. Here we tested the hypothesis that ('not available elsewhere' + 'hear before buying') is significantly different from 'album too expensive'. We found that the parameters were statistically different at the one percent significance level (F=14.59; p<0.01).

Third, and finally, we tested for the total of the market creation effect combined with the market segmentation effect (i.e. 'not available elsewhere' + 'hear before buying' + 'not whole album') against the market substitution effect 'album too expensive'. Here, we tested the hypothesis that ('not available elsewhere' + 'hear before buying' + 'not whole album') is significantly different from 'album too expensive'. We found that the parameters were statistically different at the one percent significance level (F=6.80; p<0.01).

Focusing on our second group of tests (market creation versus substitution) and the relative sizes of the various estimates, we can conclude that results indicate that the negative CD 'market substitution effect' is balanced out by the much more positive overall 'market creation effect' from P2P file-sharing. This is in line with the arguments put forward by Blackburn (2004), Gopal, Bhattacharjee and Sanders (2006), Bounie (2005) discussed in Section 2.

Turning to purchases of paid electronically-delivered music markets, neither the market substitution effect (which in the context of MP3 market would mean that people who participate in P2P file-sharing because the CD album is too expensive also purchase more paid electronically-delivered music tracks) nor market segmentation effects are statistically significant.¹¹

The effect of music price on music consumption

While Hypothesis 1 predicts that the price of CDs is negatively associated with the number of CD albums purchased, we find no statistically significant relationship for the entire population (Table 4.1 and Appendix 4). That is, we find no direct evidence that CD price influences CD purchases.¹² Thus, our results suggest that people have different music price elasticities, even within the same CD price category. This finding is in line with the findings reported by Liebowitz (2004). Given that he too finds that CD prices have remained stable over the last 30 years, this implies that a change in CD purchasing must be explained by a range of other factors to which we turn later.

However, for the subpopulation of P2P file-sharers we find a statistically significant negative relationship between the variable 'Album too expensive' (the variable capturing whether the perception that CD prices were too high motivated P2P activity) and CD purchases (Table 4.3). We interpret this as indirect evidence that CD purchasing does depend on price, among those who engage in P2P file-sharing.

No analysis was done regarding the effects of paid electronically-delivered music prices on purchases for the following reasons. Only 166 participants out of all participants answered the relevant question and 16 participants among the P2P file-sharers. Moreover, as the price of paid electronically-delivered music is much lower than the price of CDs, any change in the price of paid electronically-delivered music is unlikely to affect music demand. In this respect, we believe the key concern is about a link between paying for electronic music tracks versus not paying for them (see below).

Moreover, we look at the relationship between CD prices and the purchase of electronically-delivered music. Table 4.2 shows results for the entire population and Table 4.4 shows results for the P2P file-sharing subpopulation. In accordance with Hypothesis 2a we expect that the price of CD albums is positively associated with paid electronically-delivered music purchases, i.e. the more expensive CD albums are perceived to be the greater the number of purchased paid electronically-delivered music tracks. In the case of the entire population (Table 4.2), we find no statistically significant relationship. However, for the P2P file-sharer group (see Table 4.4) there is negative support for this hypothesis, the price of CDs being negatively associated with the number of paid electronically-delivered music tracks purchased (M.E.=-0.017; p<0.01). Thus, respondents who experienced a higher CD price purchased fewer electronically-delivered music tracks. This seems counter-intuitive. One reason could be that the two markets are so separate that no cross-price elasticity between them exists.

The effect of entertainment substitutes and complements on music consumption

With respect to Hypothesis 2d, which states that there is a negative relationship between purchasing competing entertainment goods and CD purchases, we find a positive rather than the anticipated negative relationship.

The results in Table 4.1 suggest that there is strong evidence that people who buy a high number of DVDs, videogames, cinema tickets and concert tickets also purchase a high number of CD albums. The same is the case if we view P2P file-sharers in isolation (although not significant for DVDs). This complementary effect of the entertainment goods also contradicts the 'mainstream' argument suggesting that price or time make entertainment goods substitutes. Rather, our results suggest that people who are interested in entertainment goods (such as music) are also interested in DVDs, concerts, cinema/movies and video games. Thus, music and entertainment is a life-style of certain groups of society.

These results are also supported with respect to the paid electronically-delivered music (Tables 4.2 and 4.4), although they are only statistically significant for purchase of cinema tickets. Thus, there is some indication that people who visit the cinema more frequently also purchase more paid electronically-delivered music.

Finally, and as suggested in Hypothesis H2d, people who own an MP3 player appear to be less likely to purchase CD albums (M.E.=-1.851; p<0.10).

The effect of consumer income on music consumption

Our third hypothesis, Hypothesis 3, states that the level of income is positively associated with the sales of music CD albums. In our estimations this hypothesis is not supported. We find no statistically significant relationship between the income variables and CD album or purchases of paid electronically-delivered music tracks shown in Tables 4.1 and 4.2. We, therefore, conclude that music purchasing in general takes up a too low share of peoples' income to have any effect on purchasing behaviour.

The effect of consumer music taste on music consumption

Hypothesis 4 states that people with a stronger taste for music purchase more CD albums and more paid electronically-delivered music. This is tested using two sets of proxy-variables: first, the level of music interest and second, the perceived change in quality of available music.

We find this hypothesis supported with respect to music interest (see Tables 4.1, 4.2, 4.3 and 4.4). People who declared that they had a 'very strong interest' or 'somewhat strong interest' in music compared with people who declared that they had a 'very low interest' in music purchased significantly more CD albums. Also, it was only the 'very strong interest' or 'somewhat strong interest' variables which had a statistically significant impact on the increased CD and paid electronically-delivered music purchases. (This was however not tested in the Probit or Logit models as we had problems of multicollinearity and too few observations to include all variables. See footnote text under Table 4.4)

The effect of perceived music quality was not significant for CD purchasing. However, our results for the entire Canadian population who perceived an increase in music quality over the last year prior to the survey reported higher purchases of electronic music from pay-sites (Table 4.2) and, equally, P2P file-sharing individuals who reported a perceived drop in the quality of music, purchased fewer paid electronically-delivered music tracks (Table 4.4).

The effect of demographic factors and the digital divide

Our final hypothesis, Hypothesis 5, suggests that people who are at the upper end of the digital divide, for example people with high internet skills, buy more electronic music tracks from pay-sites. Results shown in Table 4.2 support this hypothesis. People who rated their own Internet skills as 'very skilled' (M.E.=0.263; p<0.01), 'skilled' (M.E.=0.278; p<0.01), 'somewhat skilled' (M.E.=0.145; p<0.01) or 'not very skilled' (M.E.=0.185; p<0.01) were more likely to purchase MP3s compared to the base group 'not at all skilled'. With respect to CD sales (see Table 4.1), we find that there is a negative association between the level of skills and the number of CD albums purchased (e.g. Internet skilled M.E.=-3.416; p<0.01), again supporting the digital divide discussion in Section 2.

The results are not significant in the case where the estimations are based on the sub-set of P2P file-sharers, as shown in Tables 4.3 and 4.4. This could be due to the fact that the group is somewhat skilled altogether, even if some of the participants report that they have lower skills. In other words, the group they compare themselves to may exhibit higher levels of Internet skills per se, and their level of skills is higher compared to the overall Canadian population.

The remaining variables examine the effects of other demographic factors on the purchase of CDs and paid electronically-delivered music tracks. In the aggregate, age variables are only found to be statistically significant in the results shown in Table 4.1. Here, the base group is the 65 and plus category. In this category significantly fewer people purchased CDs compared to all other age groups. There is also some indication that men are more likely to purchase CDs. However, the opposite is the case for paid electronically-delivered music markets where there is an indication that women are more likely to purchase (M.E=0.046; p<0.05). Finally, we find that people living in Quebec appear to purchase more music albums compared to the rest of Canada (M.E.=-1.862; p<0.01). However, the results for the entire Canadian population found in Table 4.2 show that there is no indication that a difference in paid electronically-delivered music purchases depends on the regional variable (Quebec compared to the rest of Canada). Table 4.4 based on the sub-sample of P2P file-shares suggest that people living in Quebec are more likely to purchase paid electronically-delivered music tracks (M.E.=-0.164; p<0.01).

Overall, our demographic variables show some indication of a digital-divide in Canada with respect to Internet skills, age and region. However, there is no digital divide with respect to gender and Canadian females are relatively active downloaders of paid electronically-delivered music tracks.

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