CD Sales In Canada As Revealed By Birgitte Andersen

August 27, 2012 by
Filed under: Announcements & Events, Downloads, Entertainment Industry, Legal P2P News & Issues 

There’s been much controversy on the issue of file-sharing and how it affected the entertainment industry. Studies piled up quickly, some claiming the file-sharing is helping with sales, others the exact opposite. This article is going to cover a study on how file-sharing affected CD sales in Canada. It was written by Birgitte Andersen – a Danish academic working in London at Birkbeck College.

Before discussing about the study, we must first mention the 2006 survey taken by an economics professor – Prof. Liebowitz. Also Director of the Center for Economic Analysis of Property Rights and Innovation at the University of Texas, his review was highly regarded; after a thorough look into file-sharing, the professor concluded that “file-sharing has brought significant harm to the recording industry”. A year before, he also criticized the idea that illegal file-sharing helps rights owners.

However, not everyone agreed with the professor’s conclusion. One person is Birgitte Andersen. Her report was first published by Industry Canada’s website in 2007 and was titled “The Impact of Music Downloads and P2P File-Sharing on the Purchase of Music: A Study for Industry Canada.” The study confirmed that a “review of existing econometric studies suggests that P2P file-sharing tends to decrease music purchasing,” but concluded that “P2P file sharing tends to increase rather than decrease music purchasing.”

As soon as Andersen’s study saw the light of the day, it was labeled as a “must read” by Michael Geist. As such, he concluded that the music industry “has benefited from P2P” and “that there is no emergency that necessitates legislative intervention to reform the Copyright Act.”

He continued to defend and praise Ms. Andersen, especially after her paper was scrutinized by professor Liebowitz who said that her report is “a result that is not only implausible but is actually impossible to be true”. Michael Geist certified the study, claiming it was “not a study with a particular desired outcome.”

In March 2010, the Danish academic withdrew her initial claim by publishing a revised paper, with help from co-author Marion Frenz. Both came to the conclusion that “the Industry Canada data showed no association between the number of P2P files downloaded and CD album sales”. She concluded that “P2P file-sharing is not to blame for the decline in CD markets”.

Last week, professor George Barker – Director of the Center of Law and Economics at the College of Law (Australia’s National University), published a study based on Ms. Andersen’s two papers. After thoroughly analysing her findings, he claims that both her studies were “fundamentally flawed.”

All of our regression results (reported in Tables 2 and 3 above) show a negative association between P2P downloading and CD demand. We consistently find a negative and statistically significant partial correlation between CD purchases and P2P downloads. The range of these estimated correlations is between -0.039 and -0.050, with more consistent, mid-range values coming from the difference on difference regressions (-0.041 and -0.043). This implies a 10% increase in P2P downloads reduces CD demand by around 0.4%.

This directly contradicts the much cited and controversial conclusion of Andersen and Frenz… AF claimed that the data showed “… no association between the number of P2P files downloaded and CD album sales,” claiming therefore that “… this paper show (sic) that P2P file-sharing is not to blame for the decline in CD markets. Music markets are not simply undermined by free music downloading and P2P file-sharing.”

In this paper we have corrected for two fundamental errors in the previous analysis by AF leading to their erroneous conclusion. First we corrected for the fact AF biased their results by excluding from their analysis the group of consumers who had completely stopped purchasing CD’s (potentially because of P2P activity) prior to 2005. This is the very group who were most responsive, or likely to have substituted P2P downloading for CD purchases. Second we controlled for the fact that the level of an individual’s demand for CD’s, and the level of an individual’s P2P downloading may be correlated simply because they are both affected by the same third factor, such as love of music, so that high (or low) levels of CD demand is likely to be associated with high (low) levels of P2P demand. Such a positive association between the level of demand and level of P2P downloading may have led AF to mistakenly conclude they had found evidence of a positive market creation effect, as AF regressed the level of individuals CD demand against the level of individuals P2P downloading. Instead we focused on the changes in CD demand and changes in P2P downloading, using data in the survey that AF ignored on 2004 and 2005 behaviours of participants. By focusing on a longitudinal analysis of how the change in individual P2P downloading behaviour affected the change in CD demand we were better able to isolate the true relationship between increases or changes in P2P downloading and changes in CD demand.

……

All the same, the evidence here supports the current findings from almost all econometric studies that have been undertaken to date, including those in this issue—file sharing has brought significant harm to the recording industry. The birth of file sharing and the very large decline in CD sales that immediately followed is a powerful piece of evidence on its own. The 2004 increase in CD sales, temporarily reversing the decline, largely matches a reversal in the amount of file-sharing activity. Furthermore, analysis of the various possible alternative explanations for the decline in CD sales fails to find any viable candidates.
This conclusion, preliminary though it might be, should not be much of a surprise. Common sense is, or should be, the handmaiden of economic analysis. When given the choice of free and convenient high-quality copies versus purchased originals, is it really a surprise that a significant number of individuals will choose to substitute the free copy for the purchase? The conditions needed to override this basic intuition are demanding and seemingly not met in the case of file sharing.

What really seems out of the ordinary is that Industry Canada is still continuing to keep Andersen’s original study on their website, even though it was abandoned by the author and proved to be wrong by both Liebowitz and Barker. The document can be found on both the Industry Canada’s website and the Industry Canada Intellectual Property Directorate’s website, but each of them have different disclaimers:

“These studies were funded by the Intellectual Property Policy Directorate, Industry Canada. The opinions expressed in these studies are those of the respective authors and do not necessarily reflect the policies or opinions of Industry Canada or the Government of Canada,” reads the first.

“THE VIEWS EXPRESSED ARE THOSE OF THE AUTHORS. NO RESPONSIBILITY FOR THEM SHOULD BE ATTRIBUTED TO INDUSTRY CANADA,” says the second.

The real issue is that Industry Canada apparently seems to support Ms. Andersen’s 2007 study since its disclaimer is found at the bottom of the page. One institution who felt for this is the Library of Parliament – in its Legislative Summary of Bill C-11 they referred to her study as an “Industry Canada released study investigating the effects on music sales of music downloading”.

With that in mind, it’s only natural to strongly suggest that the text should be removed or at least “labeled” with a notice of some sort to avoid further confusion.

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