Piracy and record sales

The RIAA's justification for its strong-arm tactics against alleged file sharers is simple: file sharing acts as a substitute for music purchases and is directly and primarily responsible for plummetting CD sales (which are down 14 percent from last year). I've argued in the past that the entire drop can't be blamed on piracy, and one Harvard study suggested that piracy is having no effect at all.

This week, Billboard published an article about a study commissioned by the Canadian government that investigated the connection between file sharing and CD sales. The surprising conclusion: the most active file traders on P2P networks actually buy more CDs than their less active counterparts. This seems to suggest that the recording industry should abandon its crackdown and embrace P2P networks.

But wait: economist Stanley Leibowitz at the University of Texas, Dallas, has posted a well-reasoned critique of the Canadians' methodology. Essentially, the more active file sharers are the same people who are most interested in music, and therefore the most likely to be buying large volumes of CDs. So, of course you'll see an increase in both measurements--CD purchases and file-trading activity--simultaneously among the same users. To correct for this "simultaneity effect," you have to measure the overall volume of file sharing over time across all types of users--casual to extreme music fans--and compare it with CD sales over the same period. If you do that, Leibowitz claims, you'll see a direct correlation between file sharing and reduced CD sales.

Another problem that seems obvious to me: by focusing on P2P networks, these studies (and the RIAA) ignore other types of file sharing that I think are much more prevalent, such as burned CDs and flash drives. Ten years ago, very few CD collections included music recorded on CD-Rs. Today, almost every collection does.

Also, these studies strike me a bit like investigating why the horse escaped and arguing whether it's because somebody left the barn door open by accident or on purpose. The industry knows its predicament--it's very easy for customers to get recorded music for free. The interesting question is how (and whether) they can adjust their business models to stay viable and relevant under these new conditions.