March 29, 2004 3:58 PM PST

Music sharing doesn't kill CD sales, study says

A study of file-sharing's effects on music sales says online music trading appears to have had little part in the recent slide in CD sales.

For the study, released Monday, researchers at Harvard University and the University of North Carolina tracked music downloads over 17 weeks in 2002, matching data on file transfers with actual market performance of the songs and albums being downloaded. Even high levels of file-swapping seemed to translate into an effect on album sales that was "statistically indistinguishable from zero," they wrote.

"We find that file sharing has only had a limited effect on record sales," the study's authors wrote. "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 study, the most detailed economic modeling survey to use data obtained directly from file-sharing networks, is sure to rekindle debates over the effects of widely used software such as Kazaa or Morpheus on an ailing record business.

Big record labels have seen their sales slide precipitously in the past several years, and have blamed the falling revenue in large part on rampant free music downloads online. Others have pointed to additional factors, such as lower household spending during the recession, and increased competition from other entertainment forms such as DVDs and video games, each of which have grown over the same time period.

Executives at file-sharing companies welcomed the survey, saying it should help persuade reluctant record company executives to use peer-to-peer networks as distribution channels for music

"We welcome sound research into the developing peer-to-peer industry, and this study appears to have covered some interesting ground," said Nikki Hemming, chief executive officer of Kazaa parent Sharman Networks. "Consider the possibilities if the record industry actually cooperated with companies like us instead of fighting."

The study, performed by Harvard Business School associate professor Felix Oberholzer and University of North Carolina, Chapel Hill associate professor Koleman Strumpf, used logs from two OpenNap servers in late 2002 to observe about 1.75 million downloads over their 17 week sample period.

That sample revealed interesting behavioral, as well as economic, data. Researchers found that the average user logged in only twice during that period, downloading about 17 songs. Some people vastly overshot that average, however--one user apparently logged in 71 times, downloading more than 5,000 songs.

The two professors narrowed their sample base by choosing a random sample of 500 albums from the sales charts of various music genres, and then compared the sales of these albums to the number of associated downloads.

Even in the most pessimistic version of their model, they found that it would take about 5,000 downloads to displace sales of just one physical CD, the authors wrote. Despite the huge scale of downloading worldwide, that would be only a tiny contribution to the overall slide in album sales over the past several years, they said.

Moreover, their data seemed to show that downloads could even have a slight positive effect on the sales of the top albums, the researchers said.

The study is unlikely to be the last word on the issue. Previous studies have been released showing that file sharing had both positive and negative effects on music sales.

The Recording Industry Association of America was quick to dismiss the results as inconsistent with earlier findings.

"Countless well-respected groups and analysts, including Edison Research, Forrester, and the University of Texas, among others, have all determined that illegal file sharing has adversely impacted the sales of CDs," RIAA spokeswoman Amy Weiss said in a statement. "Our own surveys show that those who are downloading more are buying less."

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Its Economics, not Piracy
What the RIAA consistently fails to consider are the economics of their primary market, teens. Whereas in the late 60's and 70's the cost of an LP Album was consistent with what the typical teen might earn mowing a lawn or babysitting, today's CD prices require 3 to four lawn mowings, or 4 or 5 nights babysitting. In terms of real economic cost music is pricing itself out of the core demographic.

The combined effects of fewer CD sales, and the concommitant lack of "word of mouth" exposure, means that teens are reluctant to buy an album that has just one good song on it, unwilling to trust that the rest of the CD makes up the value ratio. Not surprisingly the sales of "Greatest Hits" CDs and other collections are doing better by comparison in part because of the reduced risk of getting a "lousy" CD.

--Chuck
Posted by cmcmanis (17 comments )
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You are correct, and...
If new technological advances result in lowering the cost of the product (e.g.- CD's cost drastically less to produce than cassettes, don't they?) then why do we pay more for CD's than the same album on cassette? If they want to stimulate sales they should not just lower a CD a couple of dollars, lower it to equal with cassettes. Especially in a bad economy like we have now, give us a break! And if a newer technology came out, would it automatically be jumped up to $30 or something? What is the -inherent- value of the album itself?
Posted by (1 comment )
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In the 70s I bought my LPs for 20-25 Dutch Guilders.
Now I buy my CDs for about 10-15 Euros.

That means the price has risen about 2-3 euros at most. That's 20% in 40 years!

I'm sorry Chuck but your claim that CDs are too expensive when compared to the past is simply not true. Price-wise they're not doing too bad when compared to the past.

The problem isn't about price, it's about how easy it is to get and use the music. To buy a physical CD I have to go to the store, hope that they stock what I want, buy it, return home, put it in the CD player. To buy music online I have to go to a webstore, hope that they stock what I want, buy it, load it into my mediaplayer and hope there isn't some copy protection on it, then hope the file is in a format supported, then hope that it's of good quality.
To download music I simply use a decent search engine, download the file, I now know that it doesn't have DRM, I know it's of the right format and I know it's of good quality.

If music companies were to give me the same options I have on any search engine, I wouldn't need to "pirate". Then if music companies were to realize that selling downloads cuts their operating cost to about 10% of that of CD sales and price their items accordingly I'm quite sure their sales would skyrocket.
Posted by Kumerian (1 comment )
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The price of a cd is smaller than a cassette, but the price of an mp3 is almost nothing. The real problem the music industry has is that the bottom just fell out of its market and it will never come back. Nevertheless, music companies insist on using lawsuits to attack their potential audience. This is the equivalent of sticking their thumb in the ****. The ocean is large and it's not going away.
Posted by allanm051 (5 comments )
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Did the researchers take into account that people exchanged large volumes of music offline via laptop/external hard drives? I knew plenty of people that would dump their entire hardrives of music onto other peoples computers. In fact, I wouldn't be surprised if that is how most music is/was shared and transferred.

Once people started becoming scared that they would get in trouble for downloading, the second best things was to get it from a friend who wasn't. People with any kind of decent knowledge of computers understand the relatively small risk of getting caught involved with downloading and they became the people that hooked everyone else up, and then those people hooked their friends up, and their friends up and so on and so fourth.

The other point that backs up my claim is the inconvenience of downloading music. Those p2p networks were difficult to sort through and it was common to have to download albums song by song. Sometime you'd have to label them because they'd have strange or incorrect names. For those too impatient to go through that sometimes tedious process (and slow, as dial up was much more common at the time), it was simply easier to wait until someone else did it, and copy it.

As a little funny blurb, I'd also like to point out that in my opinion, the very same people who were tech savvy, patient, and on the computer for vast periods of time to download and label music were also usually lacking at social skills. Sharing music could be seen as an advantage to the disadvantaged in regards to building social relationships. Whether it was a promise to burn a CD or share files on AIM or hook laptops/external harddrives to each other, the sharing of music was acknowledged as a favor.

This study really does an injustice to the file sharing debate. If you could copy and paste diamonds the way you can music, i'd both expect the diamond industry to dry up, and traditional physical thievery of diamonds to go down. What I mean is, you're field of vision as to what is being stolen is limited to the source, not the replications down the path.
Posted by seanmart08 (1 comment )
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