File-Sharing, Profits, and Innovation
Has file-sharing diminished music industry profits and musical innovation?
These are the central questions of a new working paper by Felix Oberholzer-Gee and Koleman Strumpf. Their answers: no and no.
Here are two of their key charts concerning the first question.
This one shows a marked increase in concert prices since file-sharing took off.
And this one shows that including concert revenues and iPod sales more than makes up for declines in record sales.
Their explanation: iPods, concerts, and recordings are “complementary” goods.
Even if file sharing displaces sales, the weaker copyright regime need not undermine the incentives to produce new works if artists and entertainment companies can shift their earnings from selling music, games and movies to selling complements to these products. An interesting example is concerts…concerts and merchandising have become an important source of income for major artists (Connolly and Krueger, 2006). Concerts and new recordings are complements. A recording becomes more enjoyable if one can reminisce about the time at the concert, and knowing the songs in advance might make the concert more enjoyable. In the presence of complementary goods, file sharing will have two opposing effects (for a formal model, see Mortimer and Sorenson, 2005). As the effective price of music falls close to zero, a larger number of consumers will be familiar with an album, driving up the demand for concerts. At the same time, artists have weaker incentives to tour because concerts are a less effective way to increase revenues from a new recording if a large fraction of the audience shares files. Which of these effects is more important? Figure 6 shows that concert prices rose much more quickly than the CPI, and the difference appears to have widened since the advent of file sharing (Krueger, 2005). More detailed evidence on the link between file sharing and concerts comes from Mortimer and Sorenson (2005). Studying 2,135 artists over a ten-year period, they also conclude that the demand for concerts increased due to file sharing. One way to see this is to ask how many CDs an artist needs to sell to produce $20 of concert revenue. This number fell from 8.47 in the pre-Napster era to 6.36 in the 1999 to 2002 period. Not surprisingly, artists responded to these incentives by touring more frequently. Overall, the shift in relative prices and activities led to a sharp increase in income for the typical artist included in the authors’ dataset. As these results show, income from the sale of complements can more than compensate artists for any harm that file sharing might do to their primary activity.
Has file-sharing reduced the incentives for musicians to create new works? The numbers say no:
“Overall production figures for the creative industries appear to be consistent with this view that file sharing has not discouraged artists and publishers. While album sales have generally fallen since 2000, the number of albums being created has exploded. In 2000, 35,516 albums were released. Seven years later, 79,695 albums (including 25,159 digital albums) were published (Nielsen SoundScan, 2008).”
Their explanation: most musicians have for a long time thought that “making it” (becoming a star) is like winning the lottery. They become musicians anyway. File-sharing doesn’t change that, or the need to have a second job.
And, for everybody else, it might leave us more room in our wallets to go to concerts and a wider selection of interesting new musics from which to select.
The broader lesson: understanding the structural transformations occurring in the music world requires looking beyond record sales, a theme in this NYT article on the release of The Beatles: Rock Band, and this one on the increasing importance of music publishing.
