Will file-sharing be the savior or the slayer of the music industry? The industry is quite sure that it knows the answer, and it has been attempting to sue the file-sharing genie back into its bottle, with limited success. Defenders of sharing argue that it actually benefits the music industry by exposing people to more artists. But for a topic this controversial, file-sharing has received limited academic scrutiny. The entire debate is in need of some good empirical evidence, which is why Norbert Michel's recent paper in Topics in Economic Analysis & Policy is so intriguing.

Though the methodology is complex, the results are straightforward: some US music consumers "could have decreased their CD purchases (prior to 2004) by about 13 percent due to Internet file sharing."

The paper, titled "The Impact of Digital File Sharing on the Music Industry: An Empirical Analysis," is the first to use the fine-grained data gathered by the Consumer Expenditure Survey (CEX). The Survey is run by the Bureau of Labor Statistics, which tracks nearly all household expenses for selected families in order to calculate numbers like the Consumer Price Index. Michel points out that such a survey has the advantage of eliminating self-serving responses, since participants have no reason to believe the data will be used to measure the effects of file-sharing.

The data used was from 1995 through 2003. Michel wanted to see if there's a link between owning a computer and decreased CD buying during those years. It turns out that there is. During 2002 computer owners' CD sales decreased by $4.79 a year, and by $5.55 in 2003. Those without computers only decreased by $0.80 and $0.22, respectively. On the other hand, in 2001, the year that Napster closed, people with computers increased their CD buying by 19 percent while non-computer owners held steady. Could the decrease in CD buying the following two years be chalked up to increased sales of digital downloads, which started to become popular just at that time? The paper does not address the question.

According to Michel's methodology, those who owned a computer bought almost 13 percent fewer CDs from 1999 to 2003, with those who bought the most music showing the largest decrease. His conclusion is that file-sharing does have an effect on music sales, a conclusion shared by Zentner (2005), Hong (2004), Liebowitz (2004), and Rob and Waldfogel (2004).

A consensus?

The scholarly consensus is not unanimous, however. Michel notes that Oberholzer and Strumpf (2004) found no correlation between file-sharing and P2P use in 2002, and a more recent paper by a Harvard student found that file-sharing benefited more obscure artists.

The dominant impression gained from reading these studies is that finding accurate correlations between file-sharing and loss of revenue for the music industry is tremendously difficult. Michel points out, for instance, that his data would be better if it focused only on broadband users—but such data was not available for the time period he wanted. And then, of course, having a broadband connection is not the same as using it extensively, or even for using it at all for P2P. And of course it would be nice to know exactly how many copyrighted songs each particular household downloaded using such software, but this number too is almost impossible to get.

Despite the sophisticated regression analyses and economic modeling done by these authors, the initial data points are not ideal starting places for this sort of analysis. And academic papers are unlikely to sway those who have either made up their minds on the issue or simply want to justify behavior they think think should be legal.