Holland Mortimer’s and Sorensen’s working paper does not directly address the relationship between file sharing and record sales, but the authors indirectly show that file sharing affected the trade-off between sales of recorded music and concert revenues. They come to the conclusion that the advent of file sharing in 1999 appears “(…) to have eroded the profitability of selling record albums.” However, these changes “(…) may have similtaneously boosted demand for live performances. (…) For artists, the decline in revenues from recorded music after 1998 is striking, but appears to have been more than offset by a concomitant increase in concert revenue. Total industry revenues, on the other hand, have not fully recovered, despite the increasing contribution of concert revenue to the total” (Holland Mortimer and Sorensen 2005: 32).
More can be read here.
The study was based on the one hand on Pollstar data covering nearly all concert activities in the U.S. ranging from small concert venues to stadium events in the years from 1990-2003, and, on the other hand, on SoundScan data for weekly CD sales in the years 1993 to 2003. The combined data set included 2,135 recording and touring artists from 1993 to the end of 2002. However, since CD sales for this time for some artists are missing, those artists were discarded from the dataset, which left a sample of 1,806 artists. In addition, all CD sales were augmented with award-winning information from the Recordings Industry Association of America (RIAA) in order to account for historival CD sales prior to SoundScan tracking service in 1993.
Since the authors did not have detailed data on file sharing, they relied on variations over time and across artists, i.e. they tested if the impact of concert activity on record sales before and after the emergence of Napster in 1999 significantly altered.
The tested model was based on very stark assumptions. The key assumption was that only consumers who obtain the album also attend concerts of their favourite artists; i.e. consumers will not attend a concert without first listening to the album. In addition, the authors assumed that only albums with positive expected profits get produced. This assumption is very questionable, since most of the albums produced cannot break even. A third assumption was that artists can only tour if they also sell records, which is also very unrealistic. And finally, it was assumed that album prices are set only by the labels (out of the artists’ control) and that prices are stable depite the advent of file sharing, which is also questionable.
In the empirical part of the paper, the authors tested their predictions of the model. First, they measured the impact of concert performances on CD sales and tried to find out whether the magnitude of the spillover changed after file sharing became widespread. With a simple regression model they showed that concert events are stongly correlated with the increase of record sales in the geographical area the concert was held. The sales effect, therefore, was strongest in the week of the concert and in the week following the concert. However, the increase in CD sales surrounding a concert was significantly lower in 1999-2002 than in 1993-1998. The authors, therefore, found a shrinking spillover effect of CD sales on concerts after the advent of music file sharing. Overall, the negative effect is 48.9%. The authors found negative effects for all music genres ranging from -35.8% for Urban/Rap to -80.9% for Jazz/Latin. The effect was higher for younger acts (-58.6%) than for older ones (-35.8%). In addition, in markets with a high broadband penetration the concert spillover effect was lowered after 1999 by 64.9%, whereas in markets with a lower broadband penetration the negative effect was only -32.0%.
In a second step the changes in demand for concerts were tested. The results indicated that “(…) a 100 percent increase in the number of CDs sold within six months prior to a concert event is associated with a 16 percent increase in concert revenue. After 1999, this number increases to 21 percent, and the difference is statistically significant” (Holland Mortimer and Sorensen 2005: 25). The authors also asked how many additional CDs must be sold in order to generate one additional sale of a US$ 20 concert ticket. Whereas in the period from 1993-1998 8.47 additional CDs had to be sold, from 1999-2002 this number decreased to 6.36, a change of about -25%.
Further the change in the supply of live performances was analysed. Overall, the artists were more likely to tour in the time span of 1999-2002 than before. However, there were no significant differences in the probability of touring across cities with high versus low broadband penetration.
According to the authors, the question of whether file sharing reduced the supply of new artists and new albums was difficult to test, since it is difficult to count new artists and albums accurately due to a lack of available data. Instead, they gathered a list of all artists with albums for sale on amazon.com in early 2005. Using this weak database, the authors found that “[f]or every genre, the number of new artists and new albums peaks sharply in 2000 and is followed by a steep decline from 2001-2004.” However, the authors were “(…) reluctant to draw any strong conclusion from these broad patterns, because (a) we have no clear explanation for the dramatic spike in 2000, and (b) there are obviously many other factors we are not controlling for” (Holland Mortimer and Sorensen 2005: 28).
In addition, the authors were also not able to answer the question of whether artists reduce efforts on album production, since artists’ effort levels cannot easily be observed or measured; therefore, they could not directly test whether the artists shifted their efforts away from recorded music toward live performances.
To sum up, the advent of file sharing in 1999 appears “(…) to have eroded the profitability of selling record albums.” However, these changes “(…) may have similtaneously boosted demand for live performances. (…) For artists, the decline in revenues from recorded music after 1998 is striking, but appears to have been more than offset by a concomitant increase in concert revenue. Total industry revenues, on the other hand, have not fully recovered, despite the increasing contribution of concert revenue to the total” (Holland Mortimer and Sorensen 2005: 32).
As the authors remarked several times, the study did not primarily address the question of whether file sharing hurts record sales, but they wanted to measure the trade-off between record sales and concert revenues induced by file sharing. The results showed that there is a considerable trade-off in favor of concert revenues. However, the results hold only true, if we accept several stark and questionable assumptions: (1) that consumers will not attend a concert without first listening to the album; (2) that only albums with positive expected profits get produced; (3) that artists can only tour if they also sell records; (4) that album prices are set only by the labels and prices are stable depite the advent of file sharing. The authors admitted that opposite predictions could be delivered if only one of these asumptions is weakened, and instead, a more complex (and realistic) demand model is introduced.
According to these restrictions, we have to be very careful to interpret Holland Mortimers/Sorensen’s findings. Their findings neither measured a direct impact of file sharing on record sales nor unambiguously observed a reduction of supply of new artists and new albums due to file sharing. The only reliable finding of the study was that after 1999 there was a significant shift from record sales to concert revenues. Whether or not this can be attributed to the advent of file sharing by the introduction of Napster is a question that is not satisfactorily answered by this study. However, Holland Mortimer and Sorensen (2005) eventually showed that music file sharing is not the disease but a symptom of a structural break in the music industry. Or as Dejean (2008: 343) put it: “As a result the revenue transferred from record company to artist as revealed by Mortimer and Sorensen (2005) appears as a consequence of this major change.”
Dejean, Sylvain, 2008, What can we learn from empirical studies about piracy? CESifo Working paper, Faculté des Sciences Economiques, University of Rennes 1.
Holland Mortimer, Julie and Alan Sorensen, 2005, Supply Responses to Digital Distribution: Recorded Music and Live Performances. Working paper, Harvard and Stanford University.
In part 12 Bounie et al. try to answer the question if the music file sharers are “Pirates or Explorers?”