Sunday, May 11, 2008
An economist says music piracy should be hurting the recording industry, but it isn't -- and he doesn't know why.
Jun 13, 2002 | Stan Liebowitz first began to attract public attention as a debunker of the idea that "network effects" could lock in winners in specific markets. The networks effects theory posits that once a certain product gets critical mass, such as, say, the VHS format or the QWERTY keyboard, it will remain supreme, even if other products might be demonstrably superior (such as, some would argue, the Betamax format or the Dvorak keyboard.) If everybody buys VHS tapes, then the studios will only release VHS tapes, and everybody will have to buy only VHS tapes, and so on.
Liebowitz, a professor of managerial economics at the University of Texas at Dallas, argued, along with his coauthor Stephen Margolis, that neither the examples nor the theory held water. Their critique had significant implications, especially when brought to bear on the Microsoft antitrust trial, since one argument put forth by the Justice Department was that "network effects" ensured Microsoft monopoly power.
Liebowitz has consistently criticized the attempt to punish Microsoft for supposed abuses of monopoly power. Two years ago, for example, he wrote a 36-page analysis concluding that a breakup of the software giant would cost U.S. consumers $50 billion over three years. Higher prices, he argued -- charged by the new companies, and by other competitors -- would be the result of regulatory intervention.
Now Liebowitz has turned his attention to another hot-button issue where law and economics intersect: file sharing. It's a logical step for the professor. He's been following copyright law and its effects since the 1970s, when audiotapes were being denounced by the recording industry as tools for theft. On May 15, the Cato Institute published a new paper by Liebowitz, "Policing Pirates in the Networked Age," that takes a comprehensive look at the history of the recording industry's battle with piracy.
In the paper, Liebowitz argues persuasively that record industry experts failed to prove their assertion that Napster was gutting industry revenues. But he also argues that eventually, digital downloading will be a serious threat to those revenues. Both topics will be part of his upcoming book, "Rethinking the Networked Economy," due to be published in August. But the specifics of those arguments may be somewhat altered from their form in the Cato paper, because when Salon caught up with Liebowitz, he was reexamining his data and wondering, Why isn't the record industry hurting more, already?
You point out in your Cato Institute article that throughout history, new technologies are always seen as a threat to copyright, but that the fears are always unfounded. Copiers actually improved the academic journal business; VCRs increased Hollywood's revenues. Yet, you maintain that peer-to-peer file sharing will severely damage the record industry. Why are you so sure that this will happen?
Actually, I'm not sure. It took six months to get [the Cato piece] out. Now I'm stepping back a bit. In the Cato piece, what I said was that [file sharing] seems like it should be causing a lot of harm. But we're not seeing it. The explanation I gave was that maybe there weren't enough people who owned CD writers during that period. In order for downloading to really have an impact on CD sales, it needs to be a substitute for CDs. If file sharing is not a good substitute, then you can download all you want and it may be a new form of listening but it may not hurt CD sales.
The problem is that the number of downloads appears to be larger than the total number of CDs purchased. Worldwide annual downloads, according to estimates from places like Webnoize, would indicate that the number of downloads -- if you assume there are 10 songs on a CD -- is something like five times the total number of CDs sold in the U.S. in a year, and one-and-a-half times the worldwide sales. That's so large that you have to say: Look, if downloads are substitutes [for CDs] in any significant way, we should see really big declines -- unless there's something else going on.
The reason I gave in the paper is that maybe people aren't shifting their music [from MP3s to CDs]. But I've also seen some recent numbers on households that have CD writers, and it's something approaching 30 percent. We should see an impact. There's a 5 percent decline in CD sales this year, but that's what you might expect in a recession. So we're still not seeing much. And what I'm beginning to suggest now is that perhaps people aren't going to replace the purchase of CDs with these MP3s.
Why not?
There are a bunch of potential reasons. It may wind up that people just like to purchase because it's the honest thing to do. There's another possible explanation though, which is something that I'm trying to get harder data on. If we had a degree of copying [now] not that different from in the past, and it's just switched from audiotapes to downloads, then we may not notice an impact on CD sales.
But then, there should have been a noticeable impact in the 1970s, when audiocassettes came along. And one of the reasons why no one has been able to do a good study on that -- the Office of Technology Assessment tried to do a study on it but they based it on surveys of users, which are not very useful -- is that it's very hard to get hard data on CD and record sales. No one was doing studies like that back then. I've seen some numbers, and I'm going to go back and take a look, but if there wasn't a major impact in the 1970s, it may just be that were not going to see much. It may just be another case of crying wolf.
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