Sometimes it is a Wolf - PDF Free Download

Sometimes it is a Wolf GMU Tullock Big Idea February 2011 Stan Liebowitz University of Texas at Dallas

The Future of Copyright Industries Technology is responsible for copyright: it separated creations from the creators: writing, printing, and so forth. The Internet is an innovation in distribution; as such it should disrupt markets while improving welfare [Creative Destruction]; Piracy is a disruptive force separate from innovation. Weakens property rights. The Internet has led to an explosion of piracy; Piracy was not inherent in the Internet, however. Music has been the early target.

Some previous New Technologies also appeared capable of promoting piracy. Xerox Machines Video Recorders Cassette Tapes

Photocopying Didn t cause harm because publishers could collect revenues from users indirectly. Libraries were charged higher prices for journals. Known as indirect appropriability. Liebowitz, JPE 1985.

Video Recorders I say to you that the VCR is to the American film producer and the American public as the Boston strangler is to the woman home alone. Jack Valenti, head of MPAA, 1982. Prerecorded movies enhanced the movie business model and have been the majority of revenues for some time now. To be fair, Prerecorded movies were not the focus of the Betamax case or Valenti s comment. TV recording was.

Cassette Tapes At present severe economic damage [is being done] to the property rights of owners of copyrights in sound recordings and musical compositions the industry simply has no out Unless something meaningful is done to respond to the problem, the industry itself is at risk. Alan Greenspan Testimony on the Home Recording Act. Hearings before the Subcommittee on Patents, Copyrights and Trademarks, October 25, 1983.

Bad Timing. Sales of sound recordings began a steep decade-long expansion not long after this testimony (ending a four year decline).

What about MP3s on the Internet? This is a very different story. This time it is a wolf.

A Simple (often ignored) aspect of Scientific Methodology Size Matters Size per unit of time The bigger the cause the bigger the effect, making it easier to measure the relationship.

Franklin on volcanoes and climate: Hence the surface was early frozen. Hence the first snows remained on it unmelted, and received continual additions. whether it was the vast quantity of smoke, long continuing to issue during the summer from Hecla in Iceland, and that other volcano which arose out of the sea near that island, which smoke might be spread by various winds, over the northern part of the world, is yet uncertain. Meteorological imaginations and conjectures read before the Literary and Philosophical Society of Manchester on December 22, 1784

Tambora 1815

The famous Year Without a Summer or the Poverty Year Snow in June in NY; lake and river ice in July and August in Pennsylvania. Crop Failures throughout Northern Hemisphere. Worst famine of the Century.

When two enormous and unusual events occur in proximity to each other There is a high likelihood they are related. Either they both have the same underlying cause. Or one event causes the other.

Sound Recordings File-sharing is to Piracy what Tambora was to Volcanic Activity. Took very little time for tens of millions of users. Size and speed. Theoretical linkage between piracy and record sales is easy to understand: Copies substitute for the purchase of originals. If piracy harms record sales, sales should have fallen dramatically.

8 7 6 5 4 3 2 1 Unit Album Sales in the US US History of Album Sales (incl dig singles) Predicted Sales (based on historic growth) Napster Begins Actual Sales Albums Sold Per Person 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Decline in Sound Recording Revenues 20000 18000 16000 14000 12000 10000 8000 6000 4000 2000 0 Total Revenue, Inflation Adjusted, US Data from RIAA based on retail list price. CPI from BLS. 1999 2009

What about Other Top Markets? Trade (Wholesale) Revenue Change, 1999-2009 (inc ringtn) 1999 Revenues (inflation adjusted 2009$) Nominal 2009 Revenues % Change USA 10,826.22 4,562.30-57.86% Japan 499,209.03 370,979.74-25.69% UK 1,464.48 928.80-36.58% Germany 2,036.83 1,046.40-48.63% France 1,379.22 622.76-54.85% Canada 1,165.96 430.21-63.10% Australia 908.72 470.23-48.25% Italy 604.22 162.05-73.18% Spain 599.83 151.06-74.82% Netherlands 345.42 156.11-54.81% Switzerland 376.45 186.07-50.57%

Enormous Cause: File-Sharing Enormous Effect: Virtual decimation of the Industry. A reversal of a thirty year trend upward. This is true for all major countries, each of which had large file-sharing populations.

But there are many who insist that the decline is Not due to File-Sharing

Substitution v Sampling Substitution of a copy for the purchase of an original obviously damages industry revenues. It is claimed there is a potential countervailing effect: Sampling the trying out of new music on the Internet and then purchasing it. Two problems: Why purchase when you already have the product?

Nor is Sampling clearly beneficial to record sales Many Economists assume that better matching of tastes to products, through sampling, increases sales. This is wrong. Very Old comprehensive exam question about candy bars. More intuitive: better records are records that you listen to more often. If so, you don t need as many.

Further, if file-sharing didn t cause the decline, then what did? The leading candidates: Converting old LPs and Cassettes into CDs came to an end. Increase in DVD sales. Increase in Videogame sales. Music got crummy. Bad Economy. Spending so much on ipods, nothing left for music. Outbreak of Deafness. These alternatives are almost always afterthoughts, given no real analysis.

I have examined these claims None hold up very well.

Librarying Clear Implication: Share of old music declines when librarying stops or slows. Table 9 1999 2000 2001 2002 2003 2004 2005 2006 % sales catalogue USA 34% 34% 36% 37% 35% 36% 37% 38% % sales 'deep' catalogue USA 24% 24% 25% 26% 25% 25% 25% 27% No support in this evidence. Think about how large librarying would have needed to be to explain a decline this size.

Prerecorded Video (not just DVDs) $120.00 $100.00 $80.00 $60.00 $40.00 $20.00 $0.00 Figure 2: Real Prerecorded Video $ Per Capita 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

$70.00 $60.00 $50.00 $40.00 $30.00 $20.00 $10.00 $0.00 VideoGames 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Figure 3: Real (2009$) per capita $ on videogame hardware/software

Is this not enough evidence? Econometrics to the Rescue!

The Majority of Academic Studies Find Harm Peitz, M. and Waelbroeck, P. (2004) The effect of internet piracy on music sales: Crosssection evidence. Review of Economic Research on Copyright Issues 1(2): 71 79. Zentner, A. (2005) File sharing and international sales of copyrighted music: An empirical analysis with a panel of countries. Topics in Economic Analysis & Policy 5(1): Article 21. Liebowitz, S. J. (2006) File-sharing: Creative destruction or plain destruction. Journal of Law and Economics 49(1): 1 28. Michel, N. (2006) The Impact of Digital File Sharing on the Music Industry: An Empirical Analysis Topics in Economic Analysis & Policy, 6(1) Article 18 Rob, R. and Waldfogel, J. (2006) Piracy on the high C s: Music downloading, sales displacement and social welfare in a survey of college students. Journal of Law and Economics 49(1): 29 62. Zentner, A. (2006) Measuring the effect of music downloads on music purchases. Journal of Law and Economics 49(1): 63 90. Hong, S. H. (2007) The recent growth of the internet and changes in household-level demand for entertainment, Information Economics and Policy, 2007 Liebowitz, S. J. (2008) Testing File-Sharing s Impact by Examining Record Sales in Cities. Management Science, (4) Vol. 54 April, pp. 852-859. Waldfogel, Joel (2010) Music file sharing and sales displacement in the itunes era Information Economics and Policy Volume 22, Issue 4, December 2010, Pages 306-314. Blackburn, D. (2004) Online piracy and recorded music sales. Working Paper, Department of Economics, Harvard University. Zentner, A., (2009) Ten Years of File Sharing and its Effect on International Sales of Copyrighted Music: An Empirical Analysis Using a Panel of Countries

But 2 studies do not

Andersen and Frenz (Cdn Govt) downloading the equivalent of approximately one CD increases purchasing by about half of a CD. Conclusion after finishing a 3 year study for the Canadian Government. Their data indicate the average file sharer downloads 24 CD equivalents a year. Their econometric results imply that this would increase sales by 12 CDs per year. They find that File Sharers make up ~ 50% of population. This means file sharing increases sales by 6 CDs per person per year for the entire population. Pretty cool, given that Canadians only purchase 2 CDs per year! Without file sharing, sales would be 4CDs (that is a minus sign) per person per year.

At least Andersen and Frenz were upfront. They didn t hide their result. They made the data available to others. Their published version changed the result to zero.

Some claims from other academic experts

Music sales have been flat or even rising in major markets with a quickly growing filesharing population. No reference given. Trade (Wholesale) Revenue Change, 1999-2009 (inc ringtn) 1999 Revenues (inflation adjusted 2009$) Nominal 2009 Revenues % Change USA 10,826.22 4,562.30-57.86% Japan 499,209.03 370,979.74-25.69% UK 1,464.48 928.80-36.58% Germany 2,036.83 1,046.40-48.63% France 1,379.22 622.76-54.85% Canada 1,165.96 430.21-63.10% Australia 908.72 470.23-48.25% Italy 604.22 162.05-73.18% Spain 599.83 151.06-74.82% Netherlands 345.42 156.11-54.81% Switzerland 376.45 186.07-50.57%

there is clear evidence that income from complements has risen in recent years. For example, concert sales have increased more than music sales have fallen. No reference given. 25000 20000 Total Revenue, Inflation Adjusted, US Real Concert Revenue (Pollstar) Real Recording Revenue in 2009$ (RIAA) 15000 10000 5000 0 1999 2007 2009

an important group of papers reports that file-sharing does not hurt sales at all (Tanaka, 2004; Bhattacharjee et al., 2007;... It is not correct to say that our work shows file sharing is unrelated to changes in sales, said the Management Science paper s lead author, Sudip Bhattacharjee, in an e-mail message to The Chronicle. [Glenn 2010 Dispute Over File Sharing s Harm to Music Sales Plays Again Chronicle of Higher Education, July 17.].

Liebowitz statistics on inventories do not address the question at hand since Wal-Mart's inventories are not included (Wal-Mart is not a member of [NARM] ).

For example, in 2005 retail music sales rose in four of the five largest national markets. No reference. T2: 2004-05 market changes album units change real retail revenue USA -7.90% -5.30% Japan 3.02% 1.94% UK -0.82% -5.46% Germany -3.60% -1.56% France -5.24% -4.24% Canada -5.33% -4.32% Australia -4.30% -12.33% Italy -4.84% -1.73% Spain -8.71% -8.47% Netherlands -13.10% -18.27%

in the United States the entire drop in 2005 album sales is due to losses at a single firm, the recently merged Sony-BMG, No Reference Table 8: 2004-2005 Unit Sales Changes UMG 2.92% SONYBMG -13.58% WMG -1.87% EMI -7.45% OTHERS -27.09%

The number of file sharing users in the U.S. drops twelve percent over the summer (estimated from BigChampagne, 2006) because college students are away from their highspeed campus Internet connections..

Who made these statements? These quotes are all from Professor s Oberholzer-Gee and Strumpf, who have the most famous file-sharing paper of all. There are important errors in their main regression results as well as their secondary statistical tests (see my 2010 and 2007 papers on SSRN). But it actually gets a little worse.

Hiding Data Mr. Strumpf says that he has always been candid with Mr. Liebowitz about the impossibility of sharing the data. He showed The Chronicle an April 2004 e-mail message in which he told Mr. Liebowitz about both the legal concerns and about his promise to OpenNap not to distribute the data. Chronicle of Higher Education; July 17, 2008

From the Future of Music Conference May 02, 2004 Jim Griffen: Koleman, why won't you share numbers? Koleman Strumpf: I was all for opening it, but university counsel told us not to. This stuff will all be made available to anyone, eventually. As soon as the legal environment quiets down, everything will be given out. http://web.archive.org/web/20040804095120/http:/cdbaby.net/fo m/000004.html

This year, Mr. Strumpf told Handelsblatt that he and Mr. Oberholzer-Gee had signed a confidentiality agreement with their OpenNap source that prevented the sharing of the data. Mr. Strumpf declined to show a copy to Handelsblatt or to The Chronicle. Chronicle of Higher Education; July 17, 2008

What is to be done? New Business Models! Some models try to figure out how the industry can monetize the usage of its products. Many theoretical models purporting to figure out ways that ptp can be turned into an asset to the industry. These models are often extremely naïve.

Change the Product to ancillaries that can be monetized. If there was a good substitute that could generate similar levels of revenues for artists it might be the best alternative. But it is not the first best solution. It may not be a close second best. Switch to concerts. Some say firms should switch from selling music to selling t-shirts and autographs.

Sell the Audience: Give Music Away and rely on Advertising Television stops program at key moments and inserts ads. Can you imagine doing that within a song? Radio already does this between songs. None of that revenue goes to artists, however. To work, Internet providers must replace radio, have equally disruptive and frequent advertising, and lower radio costs to accommodate sound recording costs. Radio has been in its own slump since 2004, although up in 2010.

Fairy Tale Models These tend to be theoretical models from IS/Computer types. Convince file-sharers that they should pay by giving them a piece of the revenues if they convince other users downstream to pay. File-sharers are supposed to voluntarily agree to a system that makes them collectively and on average worse off.

What have we learned? Piracy does have the negative impact that common sense tends to imply. Does econometrics add anything to our knowledge? Be glad you are not in the music business. If you are in the software, book, video, or other information industries, think long and hard about your future. Or, Get serious about limiting Internet piracy.

The End