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Study: File-Sharing No Threat to Music Sales

Internet music piracy has no negative effect on legitimate music sales, according to a study released today by two university researchers that contradicts the music industry’s assertion that the illegal downloading of music online is taking a big bite out of its bottom line.

Songs that were heavily downloaded showed no measurable drop in sales, the researchers found after tracking sales of 680 albums over the course of 17 weeks in the second half of 2002. Matching that data with activity on the OpenNap file-sharing network, they concluded that file sharing actually increases CD sales for hot albums that sell more than 600,000 copies. For every 150 downloads of a song from those albums, sales increase by a copy, the researchers found.

“Consumption of music increases dramatically with the introduction of file sharing, but not everybody who likes to listen to music was a music customer before, so it’s very important to separate the two,” said Felix Oberholzer-Gee, an associate professor at Harvard Business School and one of the authors of the study.

Oberholzer-Gee and his colleague, University of North Carolina’s Koleman Strumpf, also said that their “most pessimistic” statistical model showed that illegal file sharing would have accounted for only 2 million fewer compact discs sales in 2002, whereas CD sales declined by 139 million units between 2000 and 2002.

“From a statistical point of view, what this means is that there is no effect between downloading and sales,” said Oberholzer-Gee.

For albums that fail to sell well, the Internet may contribute to declining sales. Oberholzer-Gee and Strumpf found that albums that sell to niche audiences suffer a “small negative effect” from Internet piracy.

The study stands in opposition to the recording industry’s long-held assertion that the rise of illegal file sharing is a major cause of declining music sales over the past few years. In making its case, the Recording Industry Association of America (RIAA) points to data showing that CD sales fell from a high of more than $13.2 billion in 2000 to $11.2 billion in 2003 – a period that matches the growth of various online music piracy services.

The RIAA has fought illegal music swapping by filing a raft of lawsuits against hundreds of individuals suspected of engaging in music piracy, as well as suits targeting companies like Kazaa and Grokster that make software or run Internet downloading services.

Wayne Rosso, president of the Madrid-based file-sharing company Optisoft, said he hoped the study would spur the RIAA to abandon litigation and look for ways to commercialize file sharing. “There’s no question that there is a market there that could easily be commercialized and we have been trying for years to talk sense to these people and make them see that,” he said. Rosso formerly ran the Grokster file-sharing service.

Eric Garland, chief executive of Big Champagne, an Atlanta company that tracks file-sharing activity, said the findings match what his company has observed about the effect of file sharing on music sales. Although the practice cannibalizes some sales, it may promote others by serving as a marketing tool, Garland said.

The RIAA questioned the conclusions reached by Oberholzer-Gee and Strumpf.

“Countless well respected groups and analysts, including Edison Research, Forrester, the University of Texas, among others, have all determined that illegal file sharing has adversely impacted the sales of CDs,” RIAA spokeswoman Amy Weiss said.

Weiss cited a survey conducted by Houston-based Voter Consumer Research that found those who illegally download more music from the Internet buy less from legitimate outlets. Of respondents ages 18-24 who download, 33 percent said they bought less music than in the past year while 21 percent bought more. Of those ages 25-34, the survey found 25 percent bought less and 17 percent bought more, Weiss said.

Larry Rosin, the president of Somerville, N.J.-based Edison Media Research, said it was absurd to suggest that the Internet and file sharing have not had a profound effect on the music industry.

“Anybody who says that the Internet has not affected sales is just not paying attention to what is going on out there,” he said. “It’s had an effect on everything else in life, why wouldn’t it have an effect on this?”

Edison Media Research has done a series of surveys for a music industry trade publication to track the effect of online file sharing on music sales. Rosin said while file-sharing networks can generate advertising value for some CDs, the net effect of file sharing on music sales has been negative.

The Harvard-UNC study is not the first to take aim at the assertion that online music piracy is the leading factor hurting music sales. In two studies conducted in 1999 and 2002, Jupiter Research analyst Aram Sinnreich found that persons who downloaded music illegally from the Internet were also active purchasers of music from legitimate sources.

“While some people seemed to buy less after file sharing, more people seemed to buy more,” Sinnreich said. “It was more likely to increase somebody’s purchasing habits.”

The 2002 Jupiter study showed that people who traded files for more than six months were 75 percent more likely than average online music fans to spend more money on music.

Sinnreich, no longer with Jupiter, has appeared in court as an expert witness on behalf of Grokster, a popular music downloading site that was sued by the recording industry for facilitating music piracy. In that case, a judge ruled that Grokster and several other services that distribute peer-to-peer software could not be shut down just because the software was used to violate intellectual property rights.

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