The debate over piracy is one that has no end. One one side you have Capgemeni's recent "value gap" study pegged piracy's impact on the U.K. music industry at 18% of its decline from its 2004 level. The majority of the decline, Capgemini estimated, was due to the unbundling of the album, or the substitution of a small number of digital tracks for an album.

But wait. A new Canadian study by academians Birgitte Andersen and Marion Frenz found that online piracy has no impact on CD purchases. (Download a PDF of the report here.) However, in the subset of Canadians who do use P2P services, file-sharing was found to increase CD purchasing (by 0.44 CDs per album download). The study assumes 29% of Canadians are P2P downloaders.

"In the aggregate, we are unable to discover any direct relationship between P2P filesharing and CD purchases in Canada. The analysis of the entire Canadian population does not uncover either a positive or negative relationship between the number of files downloaded from P2P networks and CDs purchased. That is, we find no direct evidence to suggest that the net effect of P2P file-sharing on CD purchasing is either positive or negative for Canada as a whole. ...

However, our analysis of the Canadian P2P file-sharing subpopulation suggests that there is a strong positive relationship between P2P file-sharing and CD purchasing. That is, among Canadians actually engaged in it, P2P file-sharing increases CD purchasing. We estimate that the effect of one additional P2P download per month is to increase music purchasing by 0.44 CDs per year."

Professor Stanley Liebowitz, who has studied the relationship between file-sharing and CD sales, commented on the Canadian study at his website (he refers to the authors as A/F):

"With these seemingly innocuous assumptions, the results of A/F imply that obtaining music illicitly should have increased record sales by 50% (since each illicit album increases sales by half a unit and there are as many illicit albums as legitimate sales). Contrary to the large increase in album sales predicted by A/F, album sales in Canada have fallen considerably since 1999. According to IFPI statistics unit sales were down 30% by 2005 whereas CRIA statistics indicate that unit sales were down by 20%. ...

To believe the results of A/F you must accept that sales have dropped by half in 6 years, due to some factor that no one can identify. Does this seem even remotely plausible? This would be such a steep decline in such a short period of time that it would seem impossible to not have a clearly identified cause. And A/F’s results rule out the possibility of other entertainment activities siphoning off record listeners."

So is online piracy a problem or isn't it? Judging from FCC Commissioner Deborah Tate's speech last week at Vanderbilt University, Washington D.C.'s perception is still that online piracy is a major problem. Commissioner Tate talked almost entirely about piracy -- online and physical -- and laid out numerous examples of piracy's negative impact on the entertainment industry and the economy as a whole. (Of course, Commissioner Tate knows what topic to focus on when in Music City.) Even though most of the figures could be questionable (e.g., sourced from trade groups like the RIAA and the IFPI), it was obvious that Commissioner Tate is dedicated to helping content owners fight online piracy.

Bonus reading: An April 2004 article at the New York Times about the well known Harvard/UNC study that found no link between file-sharing and CD sales.

Posted by Glenn at 8:46 PM | Link
|Academia||P2P|

Harvard Business School's Working Knowledge has an interview with Ramon Casadesus-Masanell, a professor at Harvard Business School. Along with Andres Hervas-Drane of the Universitat Autónoma de Barcelona, Casadesus-Masanell wrote a working paper tilted "Peer-to-Peer File Sharing and the Market for Digital Information Goods" that examines the interactions between iTunes and P2P networks. The researchers call into question labels' online pricing schemes and argues that labels should take P2P traffic into considering when setting online prices. It's a good interview, here's a sample:

"Record companies have attempted to renegotiate with Apple to set higher prices for new, more popular content. Our analysis suggests that this may be a bad idea because it is precisely for popular content that p2p is a better substitute for iTunes. Rare content, on the other hand, is where p2p does not seem to work well as there are fewer peers offering it. With this initiative, record companies seem to be applying traditional "brick-and-mortar thinking" in their competition against p2p. But this is surely the wrong mindset to deal with p2p.

At the end of the day, optimal pricing is an empirical question that cannot be answered without access to proprietary data that is outside our reach. Our model, however, highlights a few factors that should be taken into consideration in the determination of optimal price. Most importantly, our research demonstrates that record companies should explicitly consider the competition from p2p networks when making pricing decisions; this is something that they do not appear to be doing presently. ...

Our analysis reveals that, contrary to intuition, prices low enough to 'kill' p2p are not optimal in large markets. The industry is better off setting higher prices and attracting those consumers ready to pay due to congestion. Coexistence with p2p, however, does result in lower prices than would otherwise be observed. We also find that legal attacks result in less sharing, harming p2p networks and helping sustain high prices"

Posted by Glenn at 10:58 AM | Link
|Academia|

Knowledge@Wharton, an online journal of the Wharton School of Business at the University of Pennsylvania, just released an article titled "From Confrontation to Experimentation: The Music Industry Is Playing a New Tune."

Wharton business and public policy professor Joel Waldfogel says the industry's challenge is to "change values about music." Jeffrey Babin of Wharton Global Consulting Practicum says the industry "is doing what it should" and gives three examples: EMI's collaboration with The Firm, Universal Music Group's tiered CD pricing scheme and Sony BMG's Jessica Simpson MP3.

Multiple business channels are seen as a strength. The article gives a short list of favored models, including music subscriptions, new labels, hybrid models (i.e. ad-supported, free music services) and DRM-free digital music ("it would eliminate a lot of interoperability issues").

Good article. My major complaint: The industry has been embraced experimental business models for years and has done so concurrently with its lawsuits against P2P users. There were a lot of new ideas being tried out before the Grokster decision. Labels (Warp, Def Jux) opened their own download stores. They've experimented with bundling extra items with digital albums and with staggering the street dates of digital and CD releases. They've been very aggressive in using the Internet to market artists.

Continue reading "Wharton On The Music Industry" »

Posted by Glenn at 2:39 PM | Link
|Academia|

An article in the Harvard Business School's Working Knowledge looks at Universal Music Group's initiative to lower CD prices and comes up with some negative criticism. The article, "Low Prices = More Customers? Not Always," was written by Hermann Simon, Frank F. Bilstein, and Frank Luby. Lower prices, they argue, don't always lead to an increase in sales large enough to justify the decrease.

"Because price cuts seem to offer the easiest way to lavish special treatment on customers, companies find the temptation hard to resist. But resist they should. Proactive price cuts don't make you different, nor do they make you better off. They make you poorer, unless you have the evidence, the data, and the math to prove otherwise."

The article features a case study of UMG's JumpStart program, which dropped wholesale prices of most CDs by 25-30%. Market share was gained, but profit dropped. Why? Not all retailers went along with the program, and sales didn't increase enough to cover the drop in price. The Working Knowledge article points out that a lower margin product is also liable to lose shelf space to other products.

"UMG also fell victim to the law of unexpected consequences. In our experience, managers often neglect to ask the question of whether their price changes will contaminate their future dealings with distributors and customers. Nor do they ask how someone could use their price cut as a weapon against them. The New York Times reported that the cut in suggested retail prices, combined with a less steep cut in wholesale prices, could cause retailers to shift shelf space away from CDs to other products. At the time of the price cuts, Wal-­Mart had already planned to reduce the space it devoted to music by 15 percent because of slow sales and low profits, the story said. UMG also shifted its marketing dollars away from in-­store promotions and toward advertising directly to consumers. This move could accelerate the demise of smaller and specialty chains. These developments are rather ironic when you consider that Doug Morris, Universal Music's CEO and chairman, said upon announcing the price cuts that 'we are making a bold move to bring people back to music stores.'"

The article's recommendations after the jump.

Continue reading "A Study on Lower Music Prices" »

Posted by Glenn at 2:19 PM | Link
|Academia||Universal Music Group|