debate. Does piracy slow new products from being brought to market? If so, and if consumers care about new products—and there is compelling evidence they do—then in the longer run, stealing can have a devastating effect on both producers and consumers. What does the evidence show?

Quantifying the effect of piracy on sales is an inherently difficult question. First, piracy is an illegal behavior and therefore not readily documented in, say, government statistics. As a result, it is difficult to get data on volumes of unpaid consumption, particularly in ways that can be linked with volumes of paid consumption (more on this later in the column). A second and equally important difficulty is the usual scourge of empirical work in the field, that is, its non-experimental nature.

Broadly, what we know about music piracy is this: the rate of sales displacement is probably far less than 1: 1. Supporting this view is corroborating evidence that consumers steal music that, on average, they do not value very highly and would not otherwise purchase.

Still, the volume of unpaid consumption is quite high. So even with a small rate of sales displacement per instance of stealing, it is likely that stealing explains much if not all of the substantial reduction in music sales since Napster. That is, stealing appears to be responsible for much of the harm to the recorded music industry (for an overview, see Leibowitz3). Yet, that does not answer the whole question. Another crucial question is whether the reduction in revenue reduces the flow of new products to market.

Perhaps because this is a difficult question to study, there has been almost no research on the topic. Recorded music is the only industry that has experienced a massive reduction in revenue. This can play the role of an “experiment” to see whether the flow of new products declines following a weakening in effective copyright protection. However, it is only one experiment, and researchers do not have the option of rerunning it with slightly different circumstances, so getting definitive answers is challenging.

While some researchers have documented an increase in the number

the stable flow
of new products
appears to be a
puzzle when set
against the sharply
declining revenue.

of new recorded music products and independent labels since 2000, this evidence is ambiguous. Most of these products are consumed little if at all (for example, see Handke1, 2 and Oberholzer-Gee and Strumpf4).

It is tempting instead to ask how many products released each year sell more than, say, 5,000 copies. But not so fast! That approach is undermined entirely by the fact that stealing is on the rise, so that the meaning of selling a particular number of copies changes over time.

In recent work I took a new approach (see Waldfogel5, 6). I document the evolution of quality using critics’ lists of the best albums of various times periods (for example, best of the decade). Any album on one of these lists surpasses some threshold of importance. The number of albums on a list released in each year provides an index of the quantity of products passing a threshold over time. I “splice” nearly 100 such lists, and I can see how the ensuing overall index evolves over time, including—importantly— during the “experimental” period since Napster. The index tracks familiar trends in the history of popular music: it rises from 1960 to 1970, falls, then rises again in the early 1990s. It is falling from the mid-1990s until the 1999 introduction of Napster.

What happens next? Rather than
falling—as one might expect for an era
of sharply reduced revenue to record-
ed music—the downturn of the late
1990s ends, and the index is flat from
2000 to 2009. While it is of course pos-
sible that absent Napster, the index
would have risen sharply in a flower-
ing of creative output, it nevertheless
seems clear that there has been no
precipitous drop in the availability of
good new products.

the Debate Continues?

Beware of simple answers in debates about piracy. Our knowledge remains incomplete. Representatives of copyright-protected industries are understandably concerned about threats to their revenue from piracy. In some cases—for example, recorded music—they can point to compelling evidence that their revenues are down. That is, most evidence available so far shows harm to sellers from consumer theft.

On the longer-run question of continued supply, however, we know far less. Has the supply of quality music declined due to piracy? Probably not. Finding desirable intellectual property institutions—that properly balance the interests of various parties— requires attention to the interests of both producers and consumers. Reports of shrinking revenue in the copyright-protected industries are a cause for concern and further exploration, but they are not alone sufficient to guide policy-making.

 

References

1. handke, c. digital copying and the supply of sound recordings. Unpublished Manuscript, 2010; http:// www.acei2010.com/upload/acei/handke.pdf.

2. handke, c. Plain destruction or creative destruction? copyright erosion and the evolution of the record industry. Review of Economic Research on Copyright Issues 3, 2 (feb. 2006), 29–51.

3. liebowitz, S.J. file sharing: creative destruction or just plain destruction? Journal of Law and Economics 49, 1 (apr. 2006), 1–28.

4. oberholzer-gee, f. and Strumpf, k. file-sharing and copyright. NBER’s Innovation Policy and the Economy series 10. J. lerner and S. Stern, eds. Mit Press, 2009.

5. Waldfogel, J. bye, bye, miss american pie: the supply of new recorded music since napster. national bureau of economic research Working Paper 16882, March 2011b.

6. Waldfogel, J. Music piracy and its effects on demand, supply, and welfare. Innovation Policy and the Economy 12 (June 2011), J. lerner and S. Stern, eds.

 

Joel Waldfogel ( [e-mail]) is a professor and the frederick r. kappel chair in applied economics in the carlson School of Management at the University of Minnesota.