The effect of P2P file-sharing depends on popularity

A fascinating paper from David Blackburn, a Harvard PhD student, on the economics of P2P file-sharing concludes that it does indeed depress music sales overall. But the effect is not felt evenly. The hits at the top of the charts lose sales, but the niche artists further down the popularity curve actually benefit from file-trading.

Blackburn does a little mathematical magic to simulate what would happen if file-trading were reduced by 30%. [As you read, visualize the powerlaw curve that I use as my blog's logo: "leftward" means towards the hits and greater sales.].

[From page 32] In this counterfactual world with 30% less file sharing, the lower 75% of the distribution of sales is shifted further to the left, while the top of the distribution increases its sales. This is what should be expected given the estimates from above. Artists who are unknown, and thus most helped by file sharing, are those artists who sell relatively few albums, whereas artists who are harmed by file sharing and thus gain from its removal, the popular ones, are the artists whose sales are relatively high.

This conclusion leads to further questions regarding the impacts that file sharing has had and will have on the recorded music industry. In particular, if file sharing essentially shifts sales away from established acts toward unknown acts, this has potentially very important implications for how talent is developed and distributed in the industry. As with the simple short-run effects of file sharing on sales, the direction of the impact is not clear. While one might guess that increasing the sales of new acts would lead to more investment in developing new talent, it is also possible that the investment in new acts is done as a fishing expedition to find artists who will sell millions of records. File sharing is reducing the probability that any act is able to sell millions of records, and if the success of the mega-star artists is what drives the investment in new acts, it might reduce the incentive to invest in new talent. This is, at its heart, an empirical question which is left to future work.

The data follows, but first a little explanation. The 1% line refers to the sales of the least popular albums; the 99% line is the sales of the most popular. The third column is the calculated sales if file-sharing were reduced by 30%. As you can see from the below, that would help the sales in the top 25% of popularity, and hurt those below. Which is another way of saying that file-trading seems to help those in the bottom three-quarters of popularity, probably for the reasons stated above.

Percentile | Actual Sales | Sales with 30% less file-sharing 
1%                73             70
5%                170            166
10%               281            277
25%               757            745
50%               2,852          2,851
75%               10,110         9,831
90%               26,531         26,934
95%               45,255         47,357
99%               133,983        165,054

The Long Tail implications of this are pretty clear. For the majority of artists further down the tail, free distribution is good marketing, with a net positive effect on sales. Which is yet another reminder that the rules are all too often made to protect the minority of artists at the top of the curve, not most artists overall.

Thanks to Miscellaneous Factz for the pointer.

Comments

[julian.bond]

I'm not sure shifting left and right is the right way to think of it. Another way is that the power curve is flattened so it falls in height at the left and rises at the right. The big question then is whether the area under the graph changes. If we accept Long Tail analysis that there's gold in the long tail then if you can exploit it, even a small improvement in sales in the tail will more than offset a fall in sales of the peak.

An analysis of all this I'd interested in is the effects of price elasticity. P2P file trading is not zero cost even though it may be zero monetary cost. Search, tidying, bandwidth and time all play a part. There's some price at which buying a good product offsets the effort cost of P2P trading. This is particularly significant for the long tail. If you can get a 192Kb Mp3 for $0.10 per track you'll be much less concerned about wasteing your money and more likely to buy stuff where you have no real previous idea if it's worth it. This actually re-inforces the idea that fixed pricing is wrong. The record companies *should* charge a premium for tracks in the peak where they've managed to create demand. But they should also cut the price dramatically for tracks in the long tail in order to maximise the area under the graph.

There's a further catch in here that doesn't always get mentioned. There is a considerable amount of trading on P2P of tracks that are either out of catalogue and completely unavailable anywhere else. Or where the music has never been released. The whole IDM, electronic dance area is full of this with bootlegs, remixes and private pressings swapped via P2P and completely unavailable anywhere else. So what effect does that have on sales of commercially available music? What if all that stuff was made available as a charged download (again, 192b MP3, no DRM) from a site that provided searching into it? There's a price point where the reduction in effort would mean people would use it.

[Barry Ritholtz]

Labels remain married to a business model which has little relevancy for most music consumers: Mass produced pop/rap/rock.

The study's findings are very consistent with what I believe the true goal of the recording industry is: To maintain a status quo where fat heads and manufactured pop artists dominate sales.

Most everything the Labels fear from the internet is geared towards the opposite model: widely distributed, many varied artists that have little need of major label machinery. They have their own eclectic following, they self-promote, they garner most of their revenues from performing --not CD sales.

That P2P does not threaten the vast majority of artists only validates that point.

Good luck getting the toothpaste back into the tube . . .

[Karmakin]

I still say that by going on sales in a post-P2P world you're only seeing part of the story, namely that used CD sales are not counted in any by-artist numbers that I've ever seen.

One thing that I've not seen anywhere is a study on retail CD pricing. From my own experience, it's kind of like a rollercoaster ride. You have moderate prices in the first 6 months, then the prices drop to get rid of the excess stock. Then after 2 years or so, it goes to the "library" at the back of the store where the price jumps substantially (more than a new CD, to be honest)

And it's with that jump where they lose a lot of money to used-CD places, who usually have those CDs in stock, and substantially cheaper (think maybe 25-50% of the price..of newer CDs often you may be paying 75-90%, not so much worth it).

[Rich K]

Unrelated, but noticed today Johnny Cash, on heels of movie Walk the Line, is the number one artist on Rhapsody, not possible without long-tail-enabling music service.....

[Shaye Horwitz]

Bottom three quarters? Are you sure? That chart doesn't have figures for 70%, 60%, 51% . . . but 50% was just barely breaking even as it was, while 75% had a fairly substantial difference. Seems more like it helps "just" the bottom half.

[Adrian]

The benefit on the bottom is quite small, though According to these data, filesharing increases the sales for bottom 75% by 1-3%, while decreasing the sales for top 1% by 20%. Are we even sure than the 1-3% increase is statistically significant?

[Hunter McDaniel]

Unlimited filesharing may flatten the curve somewhat, but the overall shape will remain. The blogosphere is a good model for what I believe would happen. This simply reflects the re-inforcing nature of fame and reputation.

So we are always going to have big acts - but will they continue to be the product of mass-marketing, which depends of copyright protections to recoup the marketing cost - or will they be arise naturally from word-of-mouth and recommendations from trusted sources? To put it another way - do we need the record companies as intermediaries to filter the good acts from the bad, or are we capable of doing that on our own?

[Peter Brunton]

In response to Julian Bond's comment, I'd like to point out www.mp3search.ru and www.allofmp3.com, both of which sell tracks at 192BPS for $0.10, or in the region of. AllofMp3 has a particularly interesting price scheme; you choose your format and bitrate, and they make the files for you, then you pay a cost based on how many megabytes you are downloading. Music bought by the kilo as it were. The other interesting feature of AllofMp3 is that it allows you to listen to an entire album as much as you like, but at a low bitrate (24BPS, mono) before buying, completely negating the need for file sharing. Mp3Search goes for the more direct option of charging 10 cents a track and applying a discount when you buy a full album.

[Will Page]

Artists as price makers, not takers…

Why ….should an artist pay for all the costs of recording the record and then after they've paid for all of that, the record company ends up owning it? Good question to ask when trying to work out what the future holds for the major labels. My response would be that they will be forced to transform themselves into a service for the artist, at the discretion of the artist and paid for by the artist. In short, the artist will move from price taker to price maker as it has been empowered with so many routes to create and distribute music without label assistance. Now, the twist to this particular ‘tail’ is that I feel this is going to happen for hit artists too - like Mick Hucknall (Simply Red) who decided to turn down every major label offer to make his latest album on his own.

Record deals are notoriously one sided, but with sales slumping, the chances of a hit record turning a profit is slim for the label and slimmer still for the artist. I’ve even seen anecdotal evidence of albums which have made it to Number 5 in the UK album charts, yet end up loss making once you’ve factored in the upfront excessive press up of copies and the speed in which sales tail off. Consequently, I think it’s in the interest of artists at the head and tail to consider going solo, own their work, and treating major labels as a service should they wish to do business with them. This will lead to a rapid collapse of the ridiculous contract designs which exist in the industry, like the classic producer being paid off ‘gross’ (with an incentive to overrun) and the artist being paid off ‘net’ (with an incentive to make the record in as short a time as possible).

If anything, P2P has to be welcomes as it will lead to the collapse of a bad business model and make room for the possible construction of a better one …one where the 'incentive' is to make the best record possible, for example.

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[nazzy]

I used to be of the same opinion, but then I saw this presentation video by Dick Hardt:

[steve]

share files online without a software client

[Contactos]

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