Fact: worldwide sales of recorded music have declined significantly over the last decade. Fact: there has also been an increase in the use of P2P file-sharing technologies over the last decade.
While there is an obvious correlation here, the question which should be addressed is whether there is causation as well. One of the first lessons in microeconomics is that correlation does not imply causation, or put simply, just because two variables are observed to move together (positively or negatively), this doesn’t imply one is causing the other to move.
While it is somewhat obvious that illegal downloading could reduce sales, we also need to keep in mind that, with certain assumptions in place, downloading could actually increase sales. Consumers could sample music before proceeding to make legitimate purchases, for example. Or maybe downloading could create a buzz which ultimately generates higher sales than in the absence of this induced demand. Theoretically speaking, the effect downloading has on sales could be in either direction.
Therefore the question about which effect prevails becomes an empirical one. To date, however, statistical analyses have failed to reach a consensus on this question. A seminal Harvard study that appeared in the prestigious Journal of Political Economy found no evidence of sales displacement effects from music downloading using US data over a 17 week window in late 2002.
Of course the time-frame of analysis of the Harvard study was only 17 weeks and the unit of analysis was specific songs/albums. So while there might be inconclusive evidence of sales displacement at the micro-level (i.e. downloads of song/album vs. sales of song/album), overall levels of downloading might still very well have displaced the overall level of sales.
This is an entirely reasonable proposition but when considering the ‘bigger picture’ there are a number of other important factors which also enter into the (statistical) equation and need to be addressed before definitive statements can be made.
When considering declining sales over the last 10 to 15 years, we need to recognise that much has changed about the way people consume music, mainly due to the internet. Since the arrival of iTunes in 2002, consumers now have the ability to easily purchase individual songs rather than complete albums, which may have reduced revenues if consumers were only ever interested in one or two songs on an album.
Another reason for the decline in sales might be related to the arrival and adoption of subscription-based streaming services like Spotify and Pandora. Of course, YouTube also offers another means by which to consume music which doesn’t require any payment, per se, and is paid for with advertising revenues.
Beyond simply changing music consumption habits, the internet also provides a myriad of substitute activities for the act of listening to music itself. Social networking and online gaming would be two examples but there are countless other activities which could also substitute music consumption. The point is that there may have been a fundamental shift in “tastes” for how music is consumed and a shift away from purchased music consumption in the more global sense.
Even if people are purchasing less music due to downloading, the effect on artists’ incomes and the incentives for musicians to create music would seem the most fundamental questions to address in this debate. First year economics teaches us that if marginal costs are close to zero (as is arguably the case with the digital distribution of music), price reductions increase overall welfare.
However, the flip side of the argument is that there is now less incentive for artists to create. But has this actually been proven to be the case? There is emerging evidence that the answer is no. Moreover, live performance incomes appear to be increasing and there is evidence that increased downloading has been the driver of this.
Perhaps the most important consideration of the consumer in the debate is the issue of music pricing – particularly in Australia where the so-called “Australia tax” sees consumers paying an average of 50% more than their US counterparts.
If demand has actually dropped for whatever reason, prices should fall to reflect this. Instead they have been maintained at high levels which are not likely to be profit/revenue maximising. Hence, the music industry’s attempt to hold onto unrealistic pricing points may also have led to the declining sales in many respects.
This is the first of our five-part series looking at the contemporary music industry. Click the links below to read the others: