Liebowitz’s article “Testing File-Sharing’s Impact on Music Album Sales in Cities” was available as an extended working paper version in 2008 (Liebowitz 2008a), before it was published in the journal Management Science in the same year (Liebowitz 2008b). However, it was originally made available as a working paper in September 2005 (Liebowitz 2005) and in a revised version in April 2006 (Liebowitz 2006).
In his study Liebowitz examined the extent to which file sharing had caused the decline in sound recording sales in the U.S. from 1998 to 2003. Since no direct measures of file sharing exist, Internet penetration was used as a proxy for file sharing. This assumption implies that the higher the Internet penetration the higher is the level of music file sharing.
However, the author is aware of the problems involved in using Internet access as a proxy variable. “First, Internet penetration reflects the number of users, not their intensity for frequency of use. (…) Second, Internet penetration is likely to reflect all net-based forms of ‘piracy’, including transmitting songs by email or instant messaging. (…) Finally, the Internet can also be a form of entertainment competing with sound recordings for the attention of the entertainment consumer” (2008a: 3). Nevertheless, the author believed that his methodology could overcome all of these shortcomings.
Thus, he went back to the year 1998 before Napster put music file sharing on the map. He then calculated the change of file sharing between 1998 and 2003 as a product of Internet use and file sharing propensity in 2003. Therefore, the number of Internet users was taken as a proxy for file sharing. This leads to the following equation:
ΔRS = β IUt + γΔZ + Δu
ΔRS stands for the change in record sales; IUtfor the Internet use in 2003; Z is a vector of other explanatory variables; and u is not further explained – maybe it stays for a dummy variable. In the regression analysis the size of β is of interest. It decribes the file sharing impact on record sales as well as a potential impact from the Internt as a new and growing form of alternative entertainment. Therefore, the “entertainment effect” also had to be determined in order to subtract it from β to get the net effect of file sharing on record sales.
Liebowitz’s study was based on a methodology that was first proposed by Boorstin in 2004 in his senior thesis at Princeton. It combines Nielsen SoundScan data on album sales, U.S. census data on Internet and Computer use in 1998, 2000, 2001, and 2003 for 100 metropolitan areas, Nielsen Media Research data on television viewing and Arbitron data on radio listenership. The last two data sets were used to examine the impact of Internet use on alternative forms of entertainment.
The regression results, after omitting metropolitan areas with poor data coverage, showed “(…) that cities with the largest share of Internet users experience the largest decline in per capita record sales. The typical coefficient, approximately -2.43 (…), implies that an Internet usage of 50% would reduce sales by 1.21 units per person per year, which is quite large relative to the 2000 sales level of 2.86 albums per capita” (2008a: 10).
Since the “entertainment effect” is also included in this result, it had to be measured as well in order to calculate a net effect. Although it is not possible to directly measure the impact of Internet activity on other entertainment forms, Liebowitz used a less direct approach to calculate the effect for two entertainment activities – radio and TV consumption. Therefore, radio usage and TV watching were the dependent variables of Internet access, separated into dialup and broadband access. According to this regression analysis, Internet use lowered TV watching by about 12.5% and radio listing by 6.6% between 1998 and 2003. This allowed Liebowitz to conclude that“[i]f the entertainment diversion impact of the Internet on radio (television) is a reasonable proxy for its impact on sound recordings then the changes in Internet penetration over this time period, independent of file-sharing, would be predicted to cause a decline in record sales of 6.6% (12.5%)” (2008a: 13). For the younger generation a higher rate has to be assumed, since young people have a greater propensity to buy CDs.
“Since an overall impact of Internet use on record sales has been calculated, as well as an entertainment impact of the Internet on record sales, it is possible to estimate the file-sharing impact of the Internet by subtracting the latter from the former” (2008a: 14). Liebowitz, therefore, chose a mid-scenario for calculating this impact, with the overall impact of the Internet on record sales being about 1.55 units per capita minus the decline in sales due to entertainment diversion of the Internet of about 0.37 units per capita ultimately resulting in a net effect of 1.19 units per capita.
This loss due to Internet use and file sharing, respectively, means that in the absence of file sharing the per capita record sales would have been 3.63 units instead of the actual 2.44 units in 2003. Liebowitz thus concluded that “file-sharing is responsible for a reduction in sales that is larger than the sales decline that occurred and that file-sharing aborted what otherwise would have been a growth in sales.” (2008a: 15). And further: “The findings in this paper appear to confirm the worst nightmares of the recording industry” (2008a: 16).
Boorstin, Eric S., 2004, Music Sales in the Age of File Sharing. Senior Thesis, Department of Economics, Princeton University, submitted April 7, 2004.
Liebowitz, Stan J., 2005, Testing File-Sharing’s Impact by Examining Record Sales in Cities. CAPRI Publication 05-02.
Liebowitz, Stan J., 2006, Testing File-Sharing’s Impact by Examining Record Sales in Cities. Working paper, University of Texas at Dallas, School of Management.
Liebowitz, Stan J. 2008a, Testing File-Sharing’s Impact on Music Album Sales in Cities. Working paper, University of Texas at Dallas, School of Management.
Liebowitz, Stan J. 2008b, “Testing File-Sharing’s Impact on Music Album Sales in Cities.” Management Science, Vol. 53, No. 4 (April 2008), pp. 852-859.
In part 5 of this series I will discuss Stan J. Liebowitz’ theoretical discussion on music file sharing: “File Sharing: Creative Destruction or just Plain Destruction?”
 In comparison, the net impact of Internet use on record sales in the low-scenario is 0.57 units per capita, whereas in the high-scenario the net effect is 1.65 units per capita. (see Liebowitz 2008: 858).