Is downloading MP3s really damaging the music industry? A study by Harvard Business School deflates the RIAA’s propaganda, showing that sales are not negatively affected by downloading.

Published by The Guardian, 22 Jul ’04

New research suggesting that file sharing has no impact upon sales of CDs has, not surprisingly, angered the music industry.

As far as the music industry is concerned, the message is clear: file sharing is killing it. “Research clearly illustrates that the illegal use of music on the internet is damaging the entire UK music industry,” said Peter Jamieson, the chairman of the BPI (British Phonographic Industry). Even Apple’s chief executive, Steve Jobs, agrees. “iTunes really competes with piracy, not the other services,” he said at the iTunes Music Store Europe launch last month. “Piracy is the big enemy – the market has shrunk in France and Germany and seen zero growth in the UK.”

Yet despite the industry’s belief that file sharing is anathema to record sales, a recent study has shown that it may not be so clear cut. “Downloads have an effect on sales that is statistically indistinguishable from zero,” the controversial report claims, even going so far as to suggest that for popular albums, “the impact of file sharing on sales is likely to be positive”.

The study, by Felix Oberholzer-Gee, Associate Professor in the strategy unit at Harvard Business School, and Koleman Strumpf, Associate Professor in the economics department at the University of North Carolina, analyses sales and download data, and its conclusions contradict the established music industry line.

During the last quarter of 2002, the pair gathered data from two peer-to-peer file sharing servers on the OpenNap network and matched individual downloads to the weekly sales figures of 680 chart albums.

“Our hypothesis was that if downloads are killing music, then albums that are downloaded more intensively should sell less,” says Strumpf. But, after adjusting for the effects of popularity, they discovered that file sharing has “no statistically significant effect” on sales.

An economist with a love of music, Strumpf has been interested in file sharing since the Napster trial in 2000, but was not impressed by the evidence presented in court.

“I read through the studies that were used during the trial, and they were really horrible,” he says. Many of the surveys concluded, incorrectly according to Strumpf, that people who download more buy less.

“The fact that there’s a correlation does not imply that downloading is the root cause of these people buying less. File sharing is done primarily by teenagers and college kids because they have a lot of time on their hands but they don’t have a lot of money. If we got rid of file sharing tomorrow, it doesn’t necessarily mean these kids would be buying any more music.”

Another problem is that asking someone about their illegal activities, particularly in the US where they risk prosecution, is unlikely to result in honest or accurate answers.

But Oberholzer-Gee and Strumpf are not without critics. “We consider it a very flawed study,” says Matt Phillips, a BPI spokesperson. Both the BPI and the International Federation for the Phonographic Industries (IFPI) have criticised the study for including the Christmas period when people are buying CDs as gifts.

“It’s very straightforward to address these kinds of criticisms,” says Strumpf. “We got rid of the Christmas season and just looked at the first half of our data. We still find the same effect.”

So, if downloading hasn’t caused the slump in sales, what has? There are several factors that could be involved, but the easiest explanation is the popularity of DVDs.

“Over the period 1999 to 2003, DVD prices fell by 25% and the price of players fell in the US from over $1,000 to almost nothing,” says Strumpf. “At the same time, CD prices went up by 10%. Combined DVD and VHS tape sales went up by 500m, while CD sales fell by 200m, so a possible explanation is that people were spending on DVDs instead of CDs.”

It is clear that more work needs to be done before the market effect of downloading is fully understood, but Strumpf was unsure whether they would be able to conduct further work.

“The problem is getting hold of sales figures. Getting data on file sharing is hard, but it’s possible. However, I imagine it’s going to be difficult for us to get sales data in the future because of the views of the record industry towards us.”

Prior to Oberholzer-Gee and Strumpf’s report, there were no empirical studies based on actual file sharing behaviour, and the music industries in the US and the UK have based their policies on, at best, incomplete research. At worst, the surveys and analyses they quote are misleading and inaccurate.

Yet still the RIAA has sued its customers – an action Strumpf calls “one of the stupidest things in the world to do”. The BPI has stated it is “prepared to go that route if forced”.

Some even question whether the fall in sales the RIAA quotes is real, or a product of a creative redefinition of the word “sale”. Even if it is real, there is one final fly in the ointment that can’t easily be explained away: during the past nine months, CD sales in America have increased by 7%, despite continued growth in file sharing.

As Strumpf says: “If file sharing is killing record sales, why are records starting to sell better?”