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    IntroductionFifteen years ago the term file-sharing was unknown. Then Napster arrived in the second half of 1999 and grew to be an international sensation during 2000. The sound recording industry experienced a dramatic swoon in sales beginning in 2000, continuing unabated (with one informative exception) through 2010. The industry has blamed this sales decline on the rapid growth of file-sharing.

    Shortly after Napsters arrival, economists began to examine the likely impacts of file-sharing on the sound recording market. Further, as faster download speeds and the invention of BitTorrent allowed file-sharing to expand into movies, the impact on file- sharing on the movie industry also became a question that economists tried to answer.

    Although it is clear that pirated versions of products often substitute for the purchase of an original, and this effect is unambiguously harmful to the industry, there are other, more subtle effects possibly at work as well. Piracy could allow a consumer to discover new songs that then induce the consumer to go purchase an album that might otherwise have not been purchased, for example. This sampling effect, first proposed in Liebowitz (1985), makes the theory of piracy somewhat ambiguous.

    There are two separate questions that one can ask about the impact of piracy on the sales of products. First, does piracy actually harm the industries whose products are used without the permission of the copyright owner? Second, if it does harm the owners, how much does it harm them?

    Sales after the introduction of file-sharingThe changes that have taken place in the music business are so dramatic that it is almost impossible to deny that the sales of prerecorded music appear to have been devastated by some powerful factor or factors. Figure 1 reports the number of albums sold per person in the U.S. since 1973. For most of the first thirty years, sales progressed upward in a somewhat irregular fashion but then, just as Napster initiates the world into the habits of file-sharing, sales begin a fairly continuous and precipitous decline. Revenues (adjusted for inflation) follow a similar and even more precipitous path downward. A similar story is found for countries other than the U.S., with every leading country experiencing a major decline in sales (see Table 1).

    Although the growth of Internet piracy (file-sharing) is one obvious explanation for this decline in music sales, there were many claims, particularly in the early years of file- sharing, that some other factor or factors might have been responsible for this decline in record sales. These other possible factors, (e.g., the price of substitutes, recessions, format changes) were explored in Liebowitz (2004, 2006) who found no evidence to support any alternative explanation for the decline in sound recording sales.

    It is also worth noting that the birth of file-sharing would not be expected to lead to a one time drop in sales, but instead a decline that might take many years to reach its conclusion. That is because the impact of piracy would not be a function merely of the number of pirates, but also of the extent to which pirated files are substitutes for purchased files. For example,

    By:

    Stan J. LieBowitz

    The impact of internet piracy on sales and revenues of copyright owners

    This is an abdridged version of the full paper : Internet piracy: the estimated impact on sales in Handbook on the Digital Creative Economy Edited by Ruth Towse and Christian Handke, Edward Elgar, 2013

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    when MP3 files first appeared, they were not very good substitutes for CDs. Originally, MP3 files could only be played on computers and on MP3 players, which were quite uncommon before the iPod became available and could not be played in cars or stereo systems.

    A similar set of factors are at work for pirated versions of movies. Movies consist of much bigger digital files than do songs or even albums. This made the downloading of movies much more difficult and time consuming than was the case for downloading music. Thus, for an individual without broadband it was impractical to even try downloading a movie.

    The general industry evidence appears consistent with a hypothesis that piracy has hurt the movie industry, although the movie industry is somewhat more complex due to the various revenue streams generated by movies. Movies that are downloaded without permission are intended to be viewed at home or on a portable device such as a laptop. In other words, movies pirated online are very similar to a DVD. For most people, a pirated movie is not a very good substitute for viewing the movie in a theater because a theater almost always provides a more intense immersion in the movie.

    There may be some people seeing a movie at a theatre who do not value the movie theatre experience much differently from viewing the movie at home on television but only go to the theater because they wish to see a movie as soon as possible after it comes out. For these people, watching a DVD or pirated download might be a good substitute for viewing the movie in a theatre. Nevertheless, if, as seems likely, most viewers in movie theaters are there because they prefer the theatre experience then pirated downloads will not be a good substitute for seeing movies in theaters.

    The data in Figure 2 are consistent with this view. Figure 2 reports on inflation adjusted revenues for exhibition of movies in theatres (the lower line) and

    also the sales and rentals of prerecorded movies in the U.S. (the upper line). Box office revenues show a fairly smooth 47% increase from 1992 until 2002 although revenues have largely remained constant since 2002.Perhaps this leveling off of box office revenues after 2002, coming as it did after a ten year increase starting in the early 1990s, was due to piracy, but on this chart the change doesnt look particularly dramatic and the box office data in Figure 2 can at best, be merely suggestive of causation. The box office data may merely reflect changes in the quality of movies, or changes in substitute activities.

    Examining differences between box office revenues and DVD/VHS sales/rentals, however, largely controls for factors such as movie quality or the impact of movie substitutes because these factors affect both the theatrical and prerecorded revenue channels. Figure 3 has removed box office revenues from the sales and rentals of videos. Looked at in this way, video revenues from the sales, paid downloads, rentals, and paid streams of DVDs, relative to box office receipts, have fallen quite significantly after 2005, with a decline of approximately 43%. This is a very large decline in a short period of time, and it is a decline relative to box office revenues, and box office revenues, has been estimated to have been negatively impacted by piracy as well. This stronger decline in prerecorded movie sales and rentals is consistent with a view that piracy would have a larger impact on this revenue stream than on revenues from theatrical exhibition. Still, these are merely preliminary assessments. Economists have conducted more sophisticated studies directly testing whether file-sharing led to a decline in sound recording sales or movie revenues, and I will discuss the results of those academic studies in the next sections.

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    Figure 1: US album sales (including digital singles)

    Figure 2: Box office and video sales and rentals Figure 3: Video revenues minus box office

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    Analyses of the sound recording marketIn September of 2011 I completed a research paper that examined all the peer reviewed papers I could find on the subject of piracys impact on the sound recording industry. Prior to my article, results from different studies were not easily compared since they were measured in different ways. My purpose was to examine the studies that found harm, since they all agreed in the direction of the impact of piracy, and to put their results into a common metric to see how consistent they were in terms of how large a negative impact was due to piracy. The common metric that I used was the share of the total industry decline that was estimated to be due to filesharing.

    As is easily seen in Table 1, the size of the decline is dramatically different in different years, is different for the U.S. versus the rest of the world, and is even dif-ferent depending on whether we are measuring units (albums) or revenues. Thus the findings of the various studies of the impact of piracy on music will need to be taken in the context of the time and location of their measurements. The standard econometric for-mulation for measuring the impact of file-sharing can be represented as:

    (1)

    where RS stands for record (album) sales, FS for the amount of file-sharing and Z is an array of other covariates intended to control for factors related to record sales. Most studies use the results from the above regression to estimate the decline in sales due to file-sharing as a percentage of the sales of records

    so they might conclude with a sta-tement such as file-sharing led to a ten percent decline in record sales. Because the impact of piracy is expected to change over time, two studies with different results do not necessarily disagree with each other if they are based on different time periods or different geographic regions.

    The metric I propose merely transposes the prior measurement by measuring the decline in sales due to file-sharing as a percentage of the overall decline that had occurred from the start of the file-sharing era. It

    can be represented as:

    (2)

    I then applied this metric to all the studies that had found some degree of harm from piracy on the recor-ding industry. There were twelve such studies, ten of them published and two of them working papers. They can be found in Table 2.

    The first column of the table lists the author(s) of each publication and the date of publication. The second column lists the share of the decline in record sales that can be attributed to piracy. As seen in the second column, after the authors names, most of the studies in Table 2 have results indicating that the entire enormous decline that has occurred in the record industry (see Table 1) is due to piracy. Results grea-ter than 100% mean that sales would have increased, except for piracy.

    Seven of these studies have results indicating that the entire decline (or more) in sales is due to file-sha-ring. Another study has two results, with one of those results consistent with the full decline being due to file-sharing and the other result about a third of the decline. Two other studies indicate that file-sharing is responsible for either about half or two thirds of the decline and one study finds the smallest result, between 20% and 40% of the decline. It is clear that the average of these studies is not the 20% typical estimate that has been claimed by a different survey article (Oberholzer-Gee and Strumpf, 2009) since only one of the twelve studies has a result as low as 20%.

    There are no published articles in academic jour-nals that find a positive impact of file-sharing on sound recording sales, although there is a study (Ander-sen and Frenz, 2007), conducted for a Canadian Ministry, which concludes that file-sharing has a positive impact on sound recording sales. There are two published studies that do not find that file-sharing harms sales. These are Oberholzer-Gee and Strumpf (2007) and a revised version of the Canadian Ministry study using the identical data, Andersen and Frenz (2010). Obviously, when studies find no impact of

    Table 1: Decline in sales after 1999

    Table 2: Share of decline due to file-sharing

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    file-sharing on sound recording sales there is no need to discuss metrics, since all of the metrics will be zero. I do not consider either of these papers to be parti-cularly convincing. Although there have sometimes been claims that other published studies also find no impact of piracy on sales, Liebowitz (2011) has investigated those claims and found them to be a misreading of the literature.

    Even if these two studies are added into the mix, it is still the case that the results from a majority of studies imply that file-sharing is responsible for the entire decline in sales. This result is also consis-tent with the evidence from proposed alternative hypotheses to explain the decline in sound recording sales. Liebowitz (2004) and Liebowitz (2006) carefully examined these alternative explanations and found that they were largely lacking in empirical support and the intervening years have only strengthened that conclusion. With no support for other possible explanations for the decline in record sales, logical consistency would lead to a conclusion that file-sha-ring was responsible for the entire decline, which is what the majority of economic studies have found, once the proper metrics are used.

    Economic studies of movie piracyThere are good theoretical reasons to believe that the impact of piracy on the movie industry is likely to be more completely affected only by the negative substitution impact than was the case for music. The reason behind this belief is that individuals watch mo-vies only a small number of times, unlike music, where individuals may listen to a particular song dozens or hundreds of times. Because individual movies tend to be seen only a small number of times, often only one time, watching a pirated version of a movie will often be the only viewing of the movie required by an indi-vidual, thus eliminating the possibility, for movies that are only going to be seen once, of the pirated movie leading to a later purchase (the sampling effect).

    There are not quite as many research papers ana-lyzing the impact of piracy on movies, and the task is somewhat more difficult because there are two main revenue streams: theatrical exhibition and sales/rentals of prerecorded movies.

    I have found seven articles, with four being publis-hed, that examine the impact of piracy on either box office receipts, prerecorded video sales/rentals, or both. These studies are listed in Table 3.

    Every one of these studies finds a negative im-pact of piracy on the movie industry. The second column reports on whether the study attempted to measure the impact of piracy on box office receipts, or prerecorded sales, or both. Three of the studies focused on box office only, whereas four of the studies focused on both box office and prerecorded movies. Further columns indica-te the time period of the data used in the analysis, the countries from which the data are taken, the results, and whether the paper has been published

    Theory implies that the impact of piracy is likely to be greater for prerecorded movies than for box office, but that doesnt mean that the impact of piracy on box office revenues would be expected to be zero. In fact, all except two of these studies find that piracy decreases box office revenues. This result may in part be due to the fact that viewers interested in the latest movie are forced to see it in the theater unless they download it illegally since movie studios wait for several months after the theatrical release before the movie is made available in prerecorded form. The two studies that fail to find a negative impact on box office do find a negative impact on the sale of prerecorded movies.

    Note as well that although the studies are finding a negative impact of piracy on box office revenues, box office revenues have not been falling, as seen in Figure 2. This means, assuming that the econometric re-sults are correct, that box office revenues, instead of remaining relatively constant since 2002, would have increased if not for the impact of piracy. It is not necessary for revenues to decline when piracy is having a destructive impact on industry revenues.

    ConclusionWe have looked at music and movies, and the re-sults are fairly unambiguous and really not all that surprising: Internet piracy harms producers of these products. The degree of harm has been quite large in music. On average, the findings for music are that the entire decline in sales since 1999 is due to piracy, and these values tend to be in the vicinity of 50%-70% when dollars are measured in inflation adjusted units. The negative impacts of piracy on movies is not as easily put into a simple number, but all the academic studies of which I am aware find that piracy hurts sales. Given that prerecorded movie revenues have fal-len by almost 45% relative to box office receipts, it is quite possible that the harm to movies is almost in the same league as the harm to music, although that is still something of a conjecture at this time. What does seem fair to say is that the harm to these industries from Internet piracy is very large.

    Table 3: Academic studies on movie piracy

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    ReferencesAndersen, Birgitte and Marion Frenz (Released in 2007 although undated) The Impact of Music Downloads and P2P File-Sharing on the Purchase of Music: A Study for Industry Canada.

    Andersen, Birgitte and Marion Frenz (2010) Dont blame the P2P file-sharers: The Impact of Free Music Downloads on the Purchase of Music CDs in Canada Journal of Evolutionary Economics Vol 20, No 5, Pp 715-740.

    Blackburn, D. (2004) Online piracy and recorded music sales. Wor-king Paper, Department of Economics, Harvard University.

    Bounie, David, Marc Bourreau and Patrick Waelbroeck (2006) Pira-cy and The Demand For Films: Analysis Of Piracy Behavior in French Universities Review of Economic Research on Copyright Issues, 2006, vol. 3(2), pp. 15-27.

    Danaher, Brett and Joel Waldfogel (2011) Reel Piracy: The Effect of Online Film Piracy on International Box Office Sales

    De Vany, Arthur S. and W. David Walls (2007) Estimating the Effects of Movie Piracy on Box-office Revenue Review of Industrial Organi-zation Volume 30, Number 4, 291-301.

    Hennig-Thurau, Thorsten, Victor Henning, & Henrik Sattler (2007) Consumer File Sharing of Motion Pictures, Journal of Marketing, 1 Vol. 71, 118.

    Hong, S. H. (2007) The recent growth of the internet and changes in household-level demand for entertainment, Information Econo-mics and Policy, 2007.

    Hong, S. H. (forthcoming) Measuring the Effect of Napster on Recorded Music Sales: Difference-in-differences Estimates under Compositional Changes Journal of Applied Econometrics.

    Liebowitz, Stan J., (1985) Copying and Indirect Appropriability: Photocopying of Journals, Journal of Political Economy, 93-5 October 1985, Pp. 945-957.

    Liebowitz, Stan J., (2004) Will MP3 downloads Annihilate the Record Industry? The Evidence so Far Advances in the Study of Entrepreneurship, Innovation, and Economic Growth,V. 15, pp. 229-260.

    Liebowitz, Stan. J., (2006) File-Sharing: Creative Destruction or Plain Destruction? Journal of Law and Economics 49(1): 128.

    Liebowitz, Stan. J., (2008) Testing File-Sharings Impact by Examining Record Sales in Cities. Management Science, (4) Vol. 54 April, pp. 852-859.

    Ma, Liye, Alan Montgomery, Param Vir Singh, and Michael D. Smith (2011) The Effect of Pre-Release Movie Piracy on Box-Office Revenue Working Paper.

    Michel, N. (2006) The Impact of Digital File Sharing on the Music Industry: An Empirical Analysis Topics in Economic Analysis & Policy, 6(1) Article 18

    Oberholzer-Gee, Felix and Koleman Strumpf (2007) The Effect of File Sharing on Record Sales: An Empirical Analysis Journal of Political Economy, 115:1 1-42.

    Oberholzer-Gee, Felix and Koleman Strumpf (2009). FileSharing and Copyright. NBERs Innovation Policy and the Economy series, volume 10, ed. Joshua Lerner and Scott Stern, University of Chicago Press.

    Peitz, M. and Waelbroeck, P. (2004) The effect of internet piracy on music sales: Crosssection evidence. Review of Economic Research on Copyright Issues 1(2): 7179.

    Rob, R. and Waldfogel, J. (2006) Piracy on the high Cs: Music down-loading, sales displacement and social welfare in a survey of college students Journal of Law and Economics 49(1): 2962.

    Rob, R. and Waldfogel, J. (2007) Piracy on the Silver Screen The Journal of Industrial Economics Volume LV September 2007 No. 3: 379-395.

    Waldfogel, Joel (2010) Music file sharing and sales displacement in the iTunes era Information Economics and Policy (2010) Volume: 22, Issue: 4, Pages: 306-314.

    Zentner, A. (2005) File sharing and international sales of copyrigh-ted music: An empirical analysis with a panel of countries Topics in Economic Analysis & Policy 5(1): Article 21.

    Zentner, A. (2006) Measuring the effect of music downloads on music purchases Journal of Law and Economics 49(1): 6390.

    Zentner, A., (2009) Ten Years of File Sharing and its Effect on International Sales of Copyrighted Music: An Empirical Analysis Using a Panel of Countries Available at SSRN: http://ssrn.com/abstract=1724444.

    Zentner, A., (2010) Measuring the Impact of File Sharing on the Movie Industry: An Empirical Analysis Using a Panel of Countries, Working Paper.

    ABouT ThE AuThor

    Stan J. LiebowitzStan Liebowitz, who received his

    PhD from uCLA, is the Ashbel Smith

    Professor of managerial Economics

    at the Jindal School of the university

    of Texas at Dallas. he is best known

    for his work examining the effects of

    new technologies on markets. Some

    of this work is related to copyright

    issues, such as piracy, and how new

    technologies, such as file-sharing

    systems, alter the functioning of

    markets.

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