A widely discussed study on music file sharing is Felix Oberholzer-Gee’s and Koleman Strumpf’s paper ”The Effect of File Sharing on Record Sales: An Empirical Analysis”, which was originally made accessable online to the public as a Harvard Business School working paper in 2004 and was eventually published, after revisions, in the Journal of Political Economy 2007.
For their research Oberholzer-Gee/Strumpf used primary P2P data in the form of logfiles of two OpenNap servers, free software descendents of Napster. They observed a sample of 1.75 million file downloads between September 8 and Decembre 31, 2002, which was representative of the file transfers on the major P2P networks during our study. However, the authors restricted their analysis to audio files downloaded in the U.S. For record sales, Oberholzer-Gee/Strumpf focused on a representative sample of albums sold in U.S. retail stores in the second half of 2002 based on Nielsen SoundScan data. They draw a genre-based, stratified random sample of 680 releases including 10,271 songs. These data was now matched with the 260,889 music files user in the U.S. exchanged during the study period. This led to 47,709 downloads of music titles, which were available on CD at the same time.
In the following, the authors tested the hypothesis if P2P file sharing is responsible for the decline of record sales. However, an econometric test is faced with the endogeneity problem. In order to measure a causality between two variables (in our case music downloads and record sales) they have to be independent and there must not be a third variable, which influences both. E.g. a marketing campaign for an album might increase popularity in the shops as well as in file sharing network. To avoid a loop of causality, exogenous variables have to be introduced that affect downloading behavior but not purchasing. Oberholzer-Gee/Strumpf, therefore, used the school holidays in Germany as an instrument, assuming that the impact the availability of music files in way not correlated with U.S. album sales.
Based of these variables, the authors modelled the download behavior in order to correlate it with the demand model drawn from SoundScan data. The tested hypothesis, that P2P file sharing is responsible for a drop in album sales had to be rejected. In the words of the authors: “[W]e can reject a null that P2P caused a sales decline greater than 24.1 million. (…) [W]e conclude that the impact could not have been larger than 6.0 million albums. While file sharers downloaded billions of files in 2002, the consequences for the industry amounted to no more than 0.7% of sales.” And to sum up: “(…) there is no statistically significant effect of file sharing on sales” (Oberholzer-Gee and Strumpf 2007: 39). These results hold true even after a series of robustness tests.
The Oberholzer-Gee/Strumpf study is based on a high-quality data-set. The results are representative for the U.S. However, the results are not valid forever, but only for the study period. Beyond that, one has to rely on plausible assumptions, which in turn are easily challenged. Therefore, the study should be regularily repeated not only for the U.S. but also for other countries in order to achieve valid long-term results.
Oberholzer-Gee, Felix and Koleman Strumpf, 2004, The Effect of File Sharing on Record Sales. An Empirical Analysis. Working Paper, Harvard Business School.
Oberholzer-Gee, Felix and Strumpf, Koleman, 2007, “The Effect of File Sharing on Record Sales: An Empirical Analysis”. Journal of Political Economy, Vol 115, No. 1 (2007).
In the next part of the serie I will discuss the music file sahring study of Brigitte Andersen and Marion Frenz on the Canadian music market, in which they concluded, that the negative substitution effect and the positive sampling effect cancel one another out “(…) leading to no association between the number of P2P files downloaded and CD album sales.”