Measuring the Effect of Online Music Piracy on Music Sales

Abstract

Online piracy may substantially undermine intellectual property rights of digital goods. This paper concentrates on the music industry. I estimate the effect of online music piracy on music sales using two databases: a European individual level cross section of more than 15,000 people from October 2001 and a panel of aggregate music sales by country for years 1997-2002. In the micro-data, a simple comparison of means shows that people who regularly download music online are more likely to buy music. The positive relation persists when controlling for many individual level characteristics. However, simultaneity between tastes for music and peer-to peer usage makes it difficult to isolate the causal effect of online piracy on music purchases. To break that simultaneity, this paper uses broadband connection and measures of internet sophistication as instruments for peer-to-peer systems usage. The results suggest that, for the group of users of peer-to- peer systems, piracy reduces the probability of buying music by 35% to 65%. Based on my estimates, back of the envelope calculations indicate that online music piracy may explain a drop in music sales of 7.8% to 14.5%. Using the number of internet users by country as a measure of users of P2P systems, the panel of aggregate data shows a larger impact of piracy on music sales.