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The impact of internet file-sharing on the purchase of music CDs in Canada

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Abstract

This paper re-examines data from a survey commissioned by Industry Canada on the effects of internet peer-to-peer (P2P) file sharing activities on music purchasing behaviour. The survey was designed to “inform Industry Canada's policy development work” (Quote from project Description from Industry Canada’s website at http://www.ic.gc.ca/eic/site/ic1.nsf/eng/01464.html downloaded 23 January 2012) and the need for copyright law reform in Canada in light of the technological innovation posed by P2P file sharing. The Journal of Evolutionary Economics published a study of the Industry Canada data by Andersen and Frenz (AF) in 2010 which claimed to show “… no association between the number of P2P files downloaded and CD album sales (Andersen and Frenz 2010 ibid p 374),” and “… that P2P file-sharing is not to blame for the decline in CD markets. Music markets are not simply undermined by free music downloading and P2P file-sharing (Ibid p375).” Our paper corrects a number of fundamental errors in this analysis of AF, in particular the fact AF biased their results by excluding from their analysis the group of consumers who had completely stopped purchasing CDs (potentially because of P2P activity) prior to 2005. This is the very group who were most responsive, or likely to have substituted P2P downloading for CD purchases. We use longitudinal analysis of how reported changes in P2P downloading by individuals related to their reported changes in CD demand between 2004 and 2005 to better test the hypothesis of whether P2P downloading may reduce CD demand. Contrary to AF’s results we find negative and generally statistically significant partial correlations between CD purchases and P2P downloads under a number of specifications and sample definitions. The range of these estimated correlations is between −0.047 and −0.061. This implies that a 10 % growth in P2P downloads is associated with between a 0.47 and 0.61 % decline in CD purchases. Our estimated relationships between CD sales and P2P downloads are broadly consistent with market sales data up to the time of the Industry Canada survey, unlike AF.

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Notes

  1. Blaug (2005) at p.69

  2. Id., p.72. Also see S.G. Medema (1995).

  3. Idris (2005), p.27

  4. Deborah Spar, Ruling the Waves: From the Compass to the Internet, a History of Business and Politics along the Technological Frontier, 2001, p.14.

  5. Spar, supra, pp. 371, 374.

  6. Harold Demsetz, “Creativity and the Economics of the Copyright Controversy”, 6(2) Review of Economic Research on Copyright Issues 5 at p.11 (2009).

  7. See Landes and Posner (2003), who argue that “information is a scarce good, just like land” (p. 374).

  8. Quote from project Description from Industry Canada’s website at http://www.ic.gc.ca/eic/site/ic1.nsf/eng/01464.html downloaded 23 January 2012

  9. See description of P2P file sharing in the next section

  10. Andersen and Frenz 2010 ibid p 374

  11. Ibid p375

  12. See A&M Records v. Napster, Inc., 239 F.3 d 1004 (9th Cir.) 2001.

  13. See MGM Studios, Inc. v. Grokster, Ltd. 545 U.S. 913 (2005), a United States Supreme Court decision in which the court unanimously held that defendant P2P file-sharing companies Grokster and StreamCast (maker of Morpheus file-sharing software) could be sued for inducing copyright infringement for acts taken in the course of marketing file-sharing software. The plaintiffs were a consortium of twenty-eight of the largest entertainment companies (led by Metro-Goldwyn-Mayer studios).

  14. See Universal Music Australia Pty Ltd v. Sharman License Holdings Ltd [2005] FCA 1242 (5 September 2005), available at http://www.austlii.edu.au/au/cases/cth/federal_ct/2005/1242.html.

  15. See isoHunt decision.

  16. See http://www.mtv.com/news/1537233/kazaa-settles-with-music-industry-for-100-million-promises-to-go-legit/

  17. Andersen and Frenz 2010 ibid p 374

  18. Ibid p375

  19. Andersen and Frenz (2007)

  20. See Andersen and Frenz (2010, p.726)

  21. See Andersen and Frenz (2007, p.17)

  22. Ibid p.17

  23. If the γ coefficients vary between the years, then all of the covariates could be included in the first-difference estimation depicted in Eq. (6).

  24. The differences in the logs could alternatively be written as logs of the ratios (i.e., \( \Delta ln{q}_i^{CD}= ln\left(\raisebox{1ex}{${q}_{2005}^{CD}$}\!\left/ \!\raisebox{-1ex}{${q}_{2004}^{CD}$}\right.\right)\ \mathrm{and}\ \Delta ln{q}_i^{P2P}= ln\left(\raisebox{1ex}{${q}_{2005}^{P2P}$}\!\left/ \!\raisebox{-1ex}{${q}_{2004}^{P2P}$}\right.\right) \). The coefficient can be interpreted as the relationship in the rate of increase between the two variables.

  25. Like Andersen and Frenz we add a value of one to the quantities of CD purchases and P2P downloads before taking natural logarithms. This means that the log value of someone with CD purchases or P2P downloads is zero.

  26. Our preferred specification is clearly to exclude these four observations. All four of these individuals reported downloading an average of exactly 500 music tracks per month in one or both of the years. These are approximately 20-times the number of monthly downloads of those who engaged in this behaviour in our sample. If these four observations are not legitimate outliers, then the regression results should be minimally affected by the exclusion of just 0.2 % of the original sample. The fact that the relationship between P2P downloads and CD purchases is weaker when these observations are included suggests that the behaviour of these high-downloading individuals is fundamentally different from the rest of the population.

  27. Supplementary analysis shows that this point estimate and significance level are nearly identical if we compute the marginal effects for censored CD purchases. The estimated marginal effect is again −0.061 for the growth in P2P downloads, if we allow CD purchases to be censored at zero.

  28. Andersen and Frenz 2010 ibid p.374

  29. Ibid p.375

  30. CD unit sales fell by 19 % from 2000 to 2006 according to Music Canada statistics see http://www.musiccanada.com/statistic.aspx

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Acknowledgments

We are grateful to Music Canada for facilitating this research and to Professor Stan Liebowitz for comments on earlier versions of the paper. We also thank the editor and anonymous referee of this journal for valuable feedback on an earlier draft of this manuscript. The final views expressed in this paper solely reflect those of the authors.

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Authors and Affiliations

  1. ANU College of Law, Australian National University, Canberra, ACT 0200, Australia

    George Barker

  2. Department of Economics, Faculty of Business and Law, Auckland University of Technology, Auckland, New Zealand

    Tim Maloney

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Correspondence to George Barker.

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Barker, G., Maloney, T. The impact of internet file-sharing on the purchase of music CDs in Canada. J Evol Econ 25, 821–848 (2015). https://doi.org/10.1007/s00191-015-0416-6

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