Have we been punk’d by the Recording Industry Association of America? You might think so after reading a study released last week from Harvard Business School and the University of North Carolina, which finds no link between increased file sharing of copyrighted music and decreased CD sales. Harvard Prof. Felix Oberholzer-Gee and UNC’s Koleman Strumpf examined data from the second half of 2002 and found that not only was there no direct link between downloading and slumping CD sales, but that sometimes downloads even spark users to buy the album. The pair studied some 1.75 million downloads over a 17-week period and combined that data with Nielsen SoundScan sales figures for 680 albums to reach their results. The findings certainly have people talking – Forrester Research, for one, which released an earlier study finding that downloads cost the recording industry about $700 million annually. The RIAA, which has filed more than 2,000 suits against music uploaders in the past six months, dismissed the study, saying it has seen plenty of other evidence to support its position. Oberholzer-Gee spoke to Media Life about the surprising results, the future of illegal downloads and the real reasons why people don’t buy CDs.

I think the key finding itself, that there’s no relationship between file sharing and sales, that was surprising. Me and my co-author, Koleman Strumpf, went in thinking that we’d find an effect. That was the established wisdom at the time we started. But we ran the first model and we didn’t get an effect, and we thought, ‘We must be doing this wrong.’ 
   We analyzed the data in every conceivable way that we could, and the results were very robust. There is no big impact from file sharing on sales. We even said, ‘What if the worst-case scenario were true?’ We used a statistical model with the most pessimistic forecast, and our finding was at the most, file sharing could account for a decline of 2 million albums sold in 2002. At the same time, between 2000 and 2002, CD sales declined by 135 million. The effect is just tiny.

My phone has been ringing nonstop! There was some surprise in the consumer surveys that we had. Always people had said you can look to use the internet to essentially figure out the quality [of the CD]. You download a few songs from the album, think they’re great, then go to the store and buy it. There’s a Forrester Research study that shows this. But there was no good way to know how big this group is. Is this the typical consumer or is this a fringe group? 
   We see now in our data that this is exactly what happens. Very rarely do people download an entire album, just one or two songs, and in that sense I think it was somewhat of a surprise for me. 
   The internet is more like the radio than we thought. As a music model it’s like radio, you get the songs for free, you get hooked and you have to buy the CD. A similar thing happens here.

We tracked 680 albums in total. When they’re all taken together, there’s no relation between file sharing and songs. But when you look at this, different albums do really well and others don’t do so well. 
   The music industry profit critically hinges on how well the bestsellers do – all the profits come from albums that sell a half-million copies. We found that CDs that don’t do well, sell 36,000 copies or less, we do find a negative impact on sales. Economically speaking, that’s relatively small, but nevertheless it is there. 
   As you move up the distribution list to the ever more successful albums, we find the effect of file sharing is more and more positive. The top of the distribution, the albums selling more than 600,000 copies, we find that 150 additional downloads increases sales by one single copy.

Well, I think sales are falling quite rapidly, it’s more than just a couple percentage points a year, so it’s natural to look at what has changed [in this time] and then try to think or think of something that could have been happening at the same time. 
   The question is, well, if not file sharing, why do sales fall? There’s a couple of possible reasons. 
   One is that we were in a CD replacement boom for a while, where people bought albums they already owned, they bought them again on CD. We might be at the CD replacement boom end. 
   The economy is relatively weak, and the price of CDs has gone up – they’re more expensive. Then some might say we’re in an artistic slump, that there’s not much interesting music out there, but that’s hard to substantiate.

Relative to the column of file sharing we see, service like iTunes are small. We observed millions and millions of transfers. It might be the downloading from iTunes has a major impact in the future, but I think it’s unlikely at this point.

We see in the data that downloading music was not all that easy in 2002. For every three downloads that were started, only one was successful. It has to do with they end up downloading the wrong file, so they look for the same song again; the file is of poor quality or it gets interrupted. 
   So what in the future we will see is people getting better and better broadband connections and downloading becoming easier. I don’t think the legal strategy the RIAA is pursuing will be successful, and the reason is if you look at where files come from, this is almost a worldwide supply. 
   Only 45 percent of files downloaded in the U.S. come from computers in the U.S.; 55 percent are from all over the world. What you need to make it work is an effective legal strategy in 150 countries, and that seems unlikely.