File sharing: Guilty as charged?

New numbers on declining music sales could mean that MP3 trading really is hurting CD sales. But that still doesn't mean we should lock up the pirates.

Published August 23, 2002 7:23PM (EDT)

Does MP3 file trading hurt the music industry?

It's a question that has caused heated debate ever since Napster exploded on the scene in 1999. And as sales of recorded music have declined over the past two years, it's a question that has taken on ever-greater importance -- for the music business, Congress and music fans.

Up until recently, there has been little hard data to support anyone's claims that file trading is hurting -- or helping -- music sales. But at least one researcher, University of Texas (at Dallas) economist Stan Liebowitz, author of an upcoming book (set for publication Sept. 7) titled "Rethinking the Network Economy," is digging hard for quantitative answers.

In May, Liebowitz published a paper suggesting that the record industry would soon be seriously harmed by MP3s. But in June, by the time Salon caught up with him, he was questioning his own conclusions after having examined the numbers and finding little solid proof that file sharing was hurting CD sales.

Two months later, he's changed his mind again. Sort of. In an insightful, yet-to-be published paper that analyzes 30 years of record sales figures, Liebowitz argues that MP3s are in fact having a significant negative effect on the CD market. He acknowledges that new data could once again lead to new conclusions, but for now, Liebowitz says, "I've moved somewhat closer to the record company position."

Salon called Liebowitz at his home in Dallas to discuss his findings.

When we last spoke, you said you had yet to find proof of harm from MP3s. What's changed?

The one big piece of evidence that I didn't have when we talked before was a half-year year 2002 number [that appears to indicate a 9.8 percent decrease in album sales.] There has to be a caveat in here, which is that I don't know if this number is correct. It's a half-year number that I saw in USA Today, from SoundScan.

If it were the case that there was a 9.8 percent drop on albums, when you look at the historical record of the ups and downs of the CD industry, [that's] a bigger decline than we've seen in 30 years. It starts to look unusual.

How much bigger is the decline? Is it a significant drop or a slight depression?

I haven't figured out the percentage but it's definitely bigger than the other ones. Now, let me add another point. When we last spoke, we were talking about a 5 percent decline in sales and I said, Look, if this is a recession then a 5 percent decline isn't so unusual. At that time, I had assumed that record sales moved with income; during a recession, you could expect fewer records to be sold. When I actually ran the numbers, with income as a variable, it had a very small impact. It was what is known as statistically significant but it was so small that you could ignore it. So in fact, you couldn't conclude that because we're having a recession, you might expect a 5 percent reduction in record sales. That's the other prop I was leaning on [to show that MP3s are having an effect.] There's evidence that something different is going on.

But assuming SoundScan's figures are correct, your paper seems to hang on a matter of degree. If 2002 sales are down 9.8 percent, you argue, and if this continues, the decline will be the biggest in 30 years. But aren't there other possible reasons for the decline?

I mention that there are these supposed instances of doldrums in musical creativity and you read about them from time to time. But it's a hard thing, at the moment, to measure that.

But isn't it possible that the intersection of several other unprecedented factors wholly independent of MP3s could be causing the decline in sales?

That's right. It is certainly not conclusive, by any means, that there's real damage going on from MP3s. It could be that we're having a bit of doldrums in terms of taste; it could be that we're all using CDs now and nothing else so since they're a little more durable than other formats that could be part of it. But it is at least beginning to look like there is damage being caused. But remember, the original story was that there's so much MP3 downloading going on so we should see a really big impact fairly easy. And now we're seeing a medium impact, which still could be explained by other things -- but we can't discount the MP3 possibility.

If the record industry is somehow not able to stop the downloading, I think we'll know by 2003. We'll get the end of the 2002 year numbers when December's over. We'll see what actually happened. And I expect that by 2003, whatever's going to happen will have happened. This is a great experiment for people who are curious about issues like this. We'll eventually find out. So while it's premature to say this is the smoking gun that shows that harm is there, it is certainly more indicative of harm than what had been there with just the 2001 numbers.

In your paper you argue that MP3s will create a 20 percent decline in sales. How did you get this figure?

I may be going out on a limb in trying to do that but what I'm saying is, let's throw out the fact that cassettes are dying, because that seems to be happening on its own. If we remove that, and assume that half the computer owners have CD burners -- a number that I've seen -- you just double the decline that's already occurred. It should be less than that because the people who would be doing the most burning would be the ones who already have the burners. So that's where I come up with that number. That's not the death of the industry, but it's a severe decline.

Is this decline significant enough to justify new laws, like the Berman bill, which would give copyright owners the power to hack into people's computers to stop copying and trading?

In my own mind, I don't think a 20 percent decline warrants letting them override the other laws we have out there saying that you're not supposed to tamper with people's computers. That's my own view.

If [file-trading] was going to kill the record industry, you could understand why the record industry would be willing to go to any lengths to get [the Berman bill] passed. They also might be willing to do that for 20 percent if they're not paying the costs. But is society willing to impose a law like this on the public to protect the industry from a 20 percent decline?

If the industry wants to prosecute 18-year-old kids, they can make that decision. But I suspect I wouldn't be in favor of that if the government is going to be prosecuting 18-year-old kids. You don't want to, in my mind, create a situation in which we're saying that a large proportion of our population are criminals unless you think that there's some really strong reason to do that.

People can debate whether, say, criminalizing marijuana and making so many people violate the law is good or bad, but at least you have to understand what the costs and benefits are. And at least the people who are in favor of criminalizing it think it's a terrible, terrible thing. If you're going to do that [with file-trading], you have to ask if in fact there's a terrible thing going on. Is a 20 percent decline enough of a problem to say that we should go after these kids? If the record industry wants to foot the bill, because they think the benefits are greater than the costs, fine. But I don't want my district attorney spending my money going after 18-year-old kids who are downloading if it's only going to cause a 20 percent decline in sales for the industry.

When we last spoke, you said that a key historical sign would come from whether the introduction of audiocassettes had a negative effect on music sales. Your analysis here argues that tapes had no effect on sales, and if anything, sales went up when cassettes were introduced. What makes you think MP3s will be different?

The net effect of tapes was positive. But it doesn't mean that it wouldn't have been more positive if people weren't making more copies. [What is clear is that] there's no evidence in the data that the tapes caused a decline.

MP3s wouldn't do the same thing. The reason cassettes led to growth was that before cassettes existed, you didn't have portable music. You couldn't play recorded music in your car, and you couldn't play it walking around, in a Walkman. It was the little cassette that basically allowed you to do that. To be technically correct, there were 8-track players prior to cassettes. But they didn't have quite the same penetration. My theory as to what went on is that [the rise in cassettes] coincides almost perfectly with the penetration rate of the portable, Walkman-type of thing. So it opened up this whole new market, which overwhelmed any copying that went on.

You mention that price doesn't matter because album prices have tracked with inflation for the last 30 years: A 10-song recording today costs as much as it did in the '70s. This runs counter to the public perception that CDs are wildly over-priced, and I'm wondering if people think CDs are expensive because other musical components such as CD players have decreased in price, while CDs have not ...

It's possible, but the technology in creating stereos is not necessarily related to the technology used to create CDs. If you take a look at the book "Entertainment Industry Economics," the author goes through the cost of a CD, and in his older editions, he goes through the cost of an LP or a cassette. And the majority of the cost is not the production of the actual physical item. That may go down, but the majority of the costs are the other costs: publicizing albums, finding talent. There's no reason to think that those are going down because they're not technology-based. The small part, technology, is 15 percent of the item and that may be going down, but it doesn't have much of an impact. It's really amazing how prices have tracked so closely with inflation. It's almost as if the industry just bumps up prices with the inflation rate.

You also point out in your paper that there's been no differentiation in price when it comes to music, which is radically different from most markets for other products, such as TVs, for example, which come in a variety of sizes and prices. Do you think the industry needs to abandon this business model? Could this be a solution to the problem of MP3s?

I don't know if that's necessary but one of the things that the entertainment industry has always been really good at is differentiating products. With movies, you have the theater, the tapes, the pay-per-view, the HBO, then the TV. To me, the interesting thing is that historically, the record industry hasn't done much differentiation. What you might have expected was, say, a CD that was half the price of current high-quality CDs that just has a lower sampling rate. With MP3s, for example, when you rip a CD, you have a choice about whether you want to have CD-quality or near-CD quality or FM-radio-quality. When you're playing music on low-quality stereos, you wouldn't really hear the difference. So one of the things the industry could do with their downloads is have different prices. People with high-quality stereos aren't going to want to put the low quality material on, and the people who have lower quality stereos, with speakers that are incapable of producing the frequencies that let you hear the difference, then they'll buy the cheap ones. That would a way to broaden the market and increase their revenues. In a way it's surprising that the industry hasn't done that. And as they are trying to figure out their models for online sales, that would be one way of doing it.

How willing do you think the industry is to make such changes?

That depends on the individuals involved. But the fact of the matter is that if they're too rigid, they'll get replaced by some start-up that's not. That much is certain. You can't be terribly inefficient, terribly rigid and hang on.

By Damien Cave

Damien Cave is an associate editor at Rolling Stone and a contributing writer at Salon.

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