Filesharing - A Study for Industry - University of London

The Impact of Music Downloads and P2P File-Sharing on the Purchase of Music: A Study for Industry Canada
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by Birgitte Andersen and Marion Frenz
Department of Management
University of London
Malet Street
Bloomsbury
LONDON
WC1E 7HX
England UK

THE VIEWS EXPRESSED ARE THOSE OF THE AUTHORS.
NO RESPONSIBILITY FOR THEM SHOULD BE ATTRIBUTED TO INDUSTRY CANADA.

Abstract:
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The primary objective of this paper is to determine how the downloading of music
files through Internet peer-to-peer (P2P) networks influences music purchasing in
Canada. P2P networks permit members to transfer digitally-stored information to one
another over the Internet; popular examples include BearShare, LimeWire and eMule.
Using representative survey data from the Canadian population collected by Decima
Research on behalf of Industry Canada, we attempt to quantify this economic
relationship, while accounting for other factors that influence music purchasing. We
undertake a variety of econometric estimations for the population of Canadians who
engage in P2P file-sharing (P2P “downloaders”), as well as for the whole Canadian
population. To our knowledge, this is the first study on P2P file-sharing that analyzes
original and representative microeconomic survey data from the Canadian population.
Few previous studies have analyzed representative microeconomic data, for Canada
or any other country.

The existing literature identifies two competing effects associated with the P2P music
file-sharing: the sampling and substitution effects. The sampling effect is
characterized both by individuals downloading music in order to listen to it before
buying it as well as by individuals downloading music that is not available in stores,
while the substitution effect is characterized by individuals downloading music
instead of purchasing it. In this paper, we further disentangle the sampling effect by
adding a market segmentation effect, characterized by individuals engaging in P2P
file-sharing because they do not want to purchase the entire bundle of songs on a CD.
Our review of existing econometric studies suggests that P2P file-sharing tends to
decrease music purchasing. However, we find the opposite, namely that P2P filesharing
tends to increase rather than decrease music purchasing.

Among Canadians who engage in P2P file-sharing, our results suggest that for every
12 P2P downloaded songs, music purchases increase by 0.44 CDs. That is,
downloading the equivalent of approximately one CD increases purchasing by about
half of a CD. We are unable to find evidence of any relationship between P2P filesharing
and purchases of electronically-delivered music tracks (e.g., songs from
iTunes). With respect to the other effects, roughly half of all P2P tracks were
downloaded because individuals wanted to hear songs before buying them or because
they wanted to avoid purchasing the whole bundle of songs on the associated CDs and
roughly one quarter were downloaded because they were not available for purchase.
Our results indicate that only the effect capturing songs downloaded because they
were not available for purchase influenced music purchasing, a 1 percent increase in
such downloads being associated with nearly a 4 percent increase in CD purchases.
We find evidence that purchases of other forms of entertainment such as cinema and
concert tickets, and video games tend to increase with music purchases.

It has been argued in the literature that the increase in the number of entertainment
substitutes has led to a decline in music purchasing, but our results do not support
this hypothesis.

As expected, we find that reported interest in music is very strongly associated with
music purchases.

Finally, our results suggest that household income is not important
in explaining music purchases.