Downloads of music: Customers or Pirates?

Not only does online music piracy not negatively impact actual CD sales, but in certain cases, it may even increase them.

These were the surprising conclusions made public in March by Felix Oberholzer-Gee, a professor at Harvard Business School, and Koleman Strumpf, a co-author from the University of North Carolina in Chapel Hill. The music business was rocked by their study, “The Effect of File Sharing on Record Sales,” to an extent not seen since the Beatles’ British invasion.

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All of the recording execs were not exactly singing “Yeah, yeah, yeah,” though. They criticized the team’s methodology, which involved tracking 1.75 million downloads over 17 weeks in 2002, poring over server logs from OpenNap (an open source Napster server), and comparing the Nielsen SoundScan sales of nearly 700 albums. They were convinced that illegal downloading and file sharing had cost them billions of dollars after four years of declining music sales. Strumpf and Oberholzer came to the nearly nonexistent relationship between the two.

How is that possible? Researchers surmise that adolescents and college students, who are “money-poor but time-rich,” are the primary users of peer-to-peer networks for downloading music since they wouldn’t have purchased the songs they downloaded. Therefore, those downloads cannot be considered as lost record sales by the music business. As it happens, the music business may benefit somewhat from illicit downloading in relation to another significant market sector known as “samplers” (Oberholzer and Strumpf). This is the older audience that downloads one or two songs before purchasing the music if they enjoy it.

Remarkably, data that seemed to validate this notion was released in the first half of this year: sales of music increased along with the amount of illegal music downloads.

The music business faces significant strategic ramifications if the research findings are accurate. Should the music business go after “samplers” to entice people to buy more music, rather than launching a high-profile campaign against pirates? Should peer-to-peer services be viewed by the industry as marketing tools rather than as the enemy? Is it OK for online and in-store prices to differ? What happens if downloading an entire CD illegally is just as simple with broadband as downloading a single or two tracks? Feliz Oberholzer-Gee, an HBS professor, recently discussed similar concerns with Working Knowledge.

Sean Silverthorne: When the draft of your article with Koleman Strumpf was released around three months ago, it created a lot of controversy both within and outside of the entertainment sector. What do you think the responses have been thus far?

Felix Gee Oberholzer: There are two noteworthy recent developments. Our research offers the first concrete proof that the recent drop in music sales cannot be attributed to file sharing. Furthermore, for the past two quarters, file sharing has grown in popularity and music sales have soared. The number of people sharing files simultaneously has increased from around 4 million in early 2003 to up to 9 million, according to BigChampagne.com, an Internet monitoring company.

Even the Recording Industry Association of America (RIAA) has acknowledged that file sharing is just “one factor, along with economic conditions and competing forms of entertainment that is displacing legitimate sales” in light of our findings and these emerging developments. Though change comes gradually, the business is reconsidering its stance.

Let’s discuss strategy. What are the recording firms’ current tactics to counter the unauthorized downloading that is causing them to lose their property rights? And how successful has that tactic been? Is it appropriate, for instance, to sue prospective clients?

A: Filing lawsuits against prospective clients is not precisely a must in a competent CRM manual. Above all, the RIAA’s litigation strategy is desperate and reeks of panicked shortsightedness.