Did file-sharing cause recording industry collapse? Economists say no

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For the last decade, the movie and music industries have engaged in a relentless struggle against Internet file sharing. One prominent theater of this global conflict has been the UK, which last year saw the passage of the Digital Economy Act. The law, if fully implemented, could allow Internet Service Providers to disconnect "persistent infringers" of the UK's copyright rules from the 'Net.

The zeal with which Hollywood and the recording industry have pursued this ISP-as-cop approach around the world has prompted some ISPs to cry foul. "The notion of disconnection without judicial oversight violates the presumption of innocence," warned the Australian DSL service iiNet in a recent position piece . "As the penalty for possibly minor economic loss (at the individual infringer level) removal of Internet access is, therefore, both inappropriate and disproportionate."

But even though the DEA is up for judicial review at the behest of the UK's top telcos, the impetus for similar laws continues unabated. That's because the content industry may lose a particular battle (eg, trying to force iiNet to punish file swappers), but it has won a key aspect of the war: the argument that file sharing has hobbled the music and movie business, hurt artists, and cost jobs is the master narrative of file sharing—the center of most government debates about the practice.

Now comes a paper from the London School of Economics that tries to do more than just challenge the DEA. It argues that everything Big Content says about file sharing is wrong. In fact, it suggests that file sharing is the future, and that revenue downturns can largely be explained by other forces.

"The music industry is performing better than is being claimed and declining sales can be explained by other factors in addition to illegal filesharing," say Bart Cammaerts and Bingchun Meng of LSE's Department of Media Studies. "The negative framing of the debate about file-sharing and copyright protection threatens to stifle the very same creative industry the Act aims to stimulate."

Downward economic pressure

There's no question that recorded music sales have declined over the last decade—down from over $26 billion in 2000 to under $16 billion last year. But the relentless focus on P2P sharing ignores other factors, these scholars contend. The most important of these is the gradual weakening of the consumer economy over the last decade, particularly over the last two years of global recession. And it's going to get worse.

IFPI

"Downward pressure on leisure expenditure is likely to continue to increase due to rising costs of living and unemployment and drastic rises in the costs of (public) services," says the report.

Having less money for entertainment has played a huge role in the decline of items like CDs. A 2004 US Consumer Expenditure Survey showed that even spending on CDs by people who had no computer (and were therefore unlikely to download and use BitTorrent) dropped by over 40 percent from 1999 through 2004.

"Household budgets for entertainment are relatively inelastic as competition for spending on culture and entertainment increases and there are shifts in household expenditure as well," the LSE study notes.

And if file-sharing wasn't the major cause of the revenue downturn, stepping up copyright enforcement is unlikely to return the industry to those heady days.

And while it is true that many consumers have turned to illegal file sharing in bad economic times, a 2007 Journal of Political Economy study found that most downloaders would not buy that content, even if they couldn't share it.

"Downloads have an effect on sales that is statistically indistinguishable from zero," the authors flatly concluded then. "Our estimates are inconsistent with claims that file sharing is the primary reason for the decline in music sales during our study period."

But a later 2010 meta-study by the same authors concluded that piracy did, in fact, account for a bit of the decline in music sales—around 20 percent. The other 80 percent could be chalked up to the sale of digital singles rather than whole albums and the rise of other media options like video games.

The new business model

Content industry analyses of the file sharing phenomenon tend to downplay key sources of income for musicians, the LSE report charges, most notably revenue from live concert performances. In 2009, for the first time, earnings from live music events outstripped music sales in the UK. The music recording industry was worth £1.36 billion (about $2.21 billion); the live music scene was estimated around around £1.54 billion. Ticket sales rose by 5.8 percent, "secondary ticketing revenues" shot up 15 percent, and receipts for related services at concerts came to £1.54 million. (This didn't help the music labels much because few profited from better live music sales; that is starting to change.)

Legal file sharing also grew by nine percent globally in 2009, along with an eight percent increase in performance rights revenue. "Growing from a small base, the value of the global market for digital music increased by 1,000% in the period 2004 to 2010, and by 2010 represented US$4.6 billion," the LSE paper observes.

So what is emerging is an increasingly "ephemeral" global music culture based not upon the purchasing of discrete physical packages of music, but on the discovery and subsequent promotion of musicians through file sharing. The big winner in this model is not the digital music file seller, but the touring band, whose music is easily discoverable on the 'Net. As with so much of the rest of the emerging world economy, the shift is away from buying things and towards purchasing services—in this case tickets to concerts and related activities.

"Some artists and music labels are making full use of filesharing and the participatory culture it sustains rather than rejecting it," Cammaerts and Meng note. "In the process, these artists and music labels are developing useful alternative models for revenue generation."

Not-so-marginal activities

The authors of the study acknowledge that these alternative models are not going to impress SONY and EMI. "Compared to the value of the mainstream music market, dominated by the 'big four', these are relatively marginal activities," they observe.

But they may become less marginal very soon. With world mobile data traffic set to explode by a factor of 26 by 2015, and with most people in the Middle East, Sub-Saharan Africa, and South/Southeast Asia expected to link to the mobile 'Net before they get electricity, file sharing could be poised for a second great leap forward, whether Big Content approves of it or not.

These millions of new Netizens are not going to have the money to buy digital music files. They're going to use BitTorrent. That will put more and more pressure on governments to decide whether they want to criminalize a huge portion of humanity, or encourage the market to adapt to the new "ephemeral" models described by this study and others.

Among other proposals these scholars want societies to consider is a "levy on blank media use and consumer recording equipment."

The tithe could be part of the price of an ISP connection—"a kind of 'license to download'. Debate should then re-focus on the alternative means of redistribution of the proceeds from such levies."

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