The Effect of File Sharing on Record Sales

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The Effect of File Sharing on Record Sales
An Empirical Analysis
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Felix Oberholzer Koleman Strumpf
Harvard Business School UNC Chapel Hill
foberholzer@hbs.edu cigar@unc.edu
March 2004
Abstract
A longstanding economic question is the appropriate level of protection for intellectual property. The Internet has drastically lowered the cost of copying information goods and provides a natural crucible to assess the implications of reduced protection. We consider the specific case of file sharing and its effect on the legal sales of music. A dataset containing 0.01% of the world’s downloads is matched to U.S. sales data for a large number of albums. To establish causality, downloads are instrumented using technical features related to file sharing, such as network congestion or song length, as well as international school holidays. Downloads have an effect on sales which is statistically indistinguishable from zero, despite rather precise estimates. Moreover, these estimates are of moderate economic significance and are inconsistent with claims that file sharing is the primary reason for the recent decline in music sales.

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We thank Shane Greenstein and participants at the 2004 AEA meeting for valuable comments and suggestions. We also acknowledge Sarah Woolverton for her tireless efforts to improve the quality of our song matching algorithm and Christina Hsiung Chen for research assistance. The CMJ Network, Nathaniel Leibowitz, and Nevil Brownlee generously provided us with auxiliary data. Oberholzer-Gee gratefully acknowledges the financial support of the George F. Baker Foundation. Aural support from Massive Attack, Sigur Ros and The Mountain Goats is gratefully acknowledged. 1 I. Introduction

File sharing has become one of the most common on-line activities. File sharing occurs in networks which allow individuals to share, search for, and download files from one another. A key property of these networks is that sharing files is largely non-rivalrous because the original owner retains his copy of a downloaded file. This makes the cost of sharing quite low. Moreover, there are network externalities, since more individuals imply a greater selection of files.

These features fueled the dramatic growth of file sharing, particularly of copyrighted music recordings. While few participated in file sharing prior to 1999 (the founding year of the now defunct Napster), there were more than three million simultaneous users sharing over a half a billion files on the most popular network (FastTrack/KaZaA) in 2003. Each week there are more than one billion downloads of music files alone. Participation in file sharing has also grown. Over 60 million Americans above the age of twelve have downloaded music (Ipsos-Reid, 2002b). File sharing is heavily skewed to youth. While a majority of Americans under eighteen have downloaded and half of those are heavy users, only a fifth of those aged 35-44 have downloaded files (Edison Media Research, 2003). Among U.S. adults at least eighteen years old, the number of downloaders has about doubled since 2000 (Pew Internet Project, 2000 and 2003). Because physical distance is largely irrelevant in file sharing, individuals from virtually every country in the world participate.

There is tremendous interest in understanding the economic effects of file sharing. As file sharing becomes easier and faster, a greater variety of information goods, including movies and software, are likely to be downloaded. The effects of such downloads are likely to parallel the experience to date with sales of recorded music. According to the RIAA (2002), the number of CD’s shipped in the U.S. fell from 940 million to 800 million--or 15%--between 2000 and 2002 (though shipments continued to rise during the 2 first two years of popular file sharing, 1999-2000). The record industry has claimed this decline is due to file sharing.

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Such causality, however, is unclear....
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