Do Free Downloads = Lost Sales?

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Very timely academic discussion of the impact of P2P downloading on the music industry in the Sunday New York Times. 

This past week, we discussed how several bands have been using P2P as a promotional vehicle for new CDs. Wilco’s frontman Jeff Tweedy said "The internet is like radio for us", The release of Eminem’s 8 mile high on P2p, as well as U2′s "How To Dismantle an Atomic Bomb."  All three managed to use P2P to drive sales of their new CDs.

For now, they are supplementing their label’s promotional activity; How long will it be before they start supplanting their labels altogether?

Here is the ubiquitous excerpt:

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"From the outset, however, economists have been skeptical that every free download represented a lost sale. And several years after the explosion, and subsequent implosion, of the original Napster, academics have begun to plug data about free downloading into complex equations and theoretical frameworks.

Stan Liebowitz, an economist of the University of Texas at Dallas who has synthesized much of the research, sees economists as generally coming to an agreement. "I think the consensus is going to be that file sharing and downloading is going to be harmful to sales of music," he said. The question is, how much?

Two professors at the Wharton School at the University of Pennsylvania, Joel Waldfogel and Rafael Rob, measured the downloading and CD-buying behavior of students at the University of Pennsylvania, Hunter College in New York and City College of New York. In a working paper published recently by the National Bureau of Economic Research, they concluded that students each spent $126 on the best-selling CD’s without downloading and $101 with downloading. While conceding that their research did not cover a representative sample, they concluded that every 10 downloads of music resulted in 1 to 2 lost sales.

Why such a small correlation? Many downloads represent transactions that would not have taken place at the asking price. As part of the study, the professors asked students to place a dollar value on CD’s they bought and on CD’s they effectively obtained free. The average valuation of downloaded hit CD’s was only $8.81 – far below the retail price. "If they were downloading things they would not have purchased, that would tend not to reduce industry revenue and not to increase displacement," Professor Waldfogel said.

Source:
Does a Free Download Equal a Lost Sale?
Daniel Gross
New York Times, November 21, 2004

http://www.nytimes.com/2004/11/21/business/yourmoney/21view.html

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