Economic effect of downloading a net win
January 23, 2009
A new report, commissioned by the Ministry of Economic Affairs of the Netherlands, to look at the effects of downloading was just released (here; it’s in Dutch, of course). Some of the findings were not entirely unexpected – for example, 35% of the Dutch population has downloaded content (music, movies, games) without paying for it, but they pay for content as much as those that haven’t ‘freeloaded.’
But the most interesting point was the following (it’s quoted from Ars Technica, who posted about the report):
The study concludes that the effects are strongly positive because consumers get to enjoy desirable content and also get to keep their cash to buy other things. Because the consumers save much more money than the producers lose, the net economic effects are positive. The report also reinforces the truth that unpaid downloads do not translate into lost sales in anything close to a one-to-one ratio.
It’s refreshing to see downloading considered in the context of society as a whole, rather than just in terms of money lost by corporations.
If anyone reads Dutch, I’d be interested in the rest of the report. Feel free to e-mail me or to share in the comments.
[via Ars Technica]
zed equals zee 
I don’t speak Dutch, but based on how Ars Technica presents it, the societal impact portion doesn’t look to me like great economics. In particular, it only appears to look at the demand impacts on the music industry. In demand terms, you’d expect people getting something for free to always result in a net societal gain. Downloaders get some of product X for free, meaning they now have more money to spend on everything else than they otherwise would have. And since they’re consumers of X, it’s very likely that some of that money will go to the purchase of additional X that they can’t (or won’t) download for free. So on the demand side, free stuff is pretty nearly never going to be a one-to-one sales loss.
But that ignores the supply consequences of free stuff (the incentive to create or produce X, essentially). And that’s a much harder thing to quantify, especially in the music industry, which is why some artists claim downloading is a huge problem and others tolerate, support, or even promote downloading of their works. Personally, I think it’s unlikely in this particular case that societal costs on the supply side outweigh societal benefits on the demand side, but I don’t have any hard data to support that, and this study doesn’t seem to have provided any.
As you point out, that is the open question about filesharing and downloading – does it reduce the supply of music? One point that you didn’t raise is that the incremental cost of additional copies of music is zero, which is makes the economics fundamentally weird. If you can sell, say, 100 copies to cover your costs, you can ‘afford’ to give away 1000 – hence the rise of the MP3 single (you might resent not getting paid, of course, and some people do).
The second issue is that the same technologies that make it easy to download music make it easy to create and distribute music, so it’s pretty difficult to disentangle these two effects when trying to figure out the effect of unpaid downloads on supply.
But I did think the Dutch report was striking (compared to all the other studies of downloading I’ve seen) in that it explicitly made the point that free downloads are a net social and economic benefit, rather than taking the corporatist view and considering them a loss.
I think it should be no surprise that there is not a 1:1 ratio for lost sales against downloads. All consumers value products differently and if someone doesn’t view a product (in this case, an album) as $12-$18 then they would’ve never paid for it in the first place. A lot of illegal downloads are people who want to give the music a try and will take care of the low opportunity cost that illegal downloads offer to music listeners.
The real value that most in the industry do not realize is that they are extending the reach of their product to consumers that would otherwise never spend a dime on the artist. If this tier of consumers/fans were never going to pay for it in the first place, it doesn’t hurt to give it to them for free in hopes that maybe in the future they will “love” the artist and care enough to pay for a concert ticket or a limited edition vinyl (Like I did for the latest Mountain Goats EP – I don’t even have a record player.)
I made this argument for a series of posts I did about Radiohead and their pay-what-you-want model. See below:
“Solving the Mystery of In Rainbows‘ Average Download Price”: Part 1, Part 2
I think you’re absolutely correct, James. Incidentally, the Dutch report (as reported in Ars Technica) distinguished between downloading music and movies. While movies are usually just watched once, and a free download typically supplants a legal download or hardcopy purchase, music is more often ‘sampled.’ People download music for free in order to try it out and, as you said, if they enjoy it, they often move towards purchases. In this model, free downloading is directly analogous to radio play.
Also, those posts were interesting and insightful – thanks for the links! In case you missed it, In Rainbows, an album that was available digitally, legally and PWYC, was the biggest vinyl seller of 2008 (link).
Unfortunately, vinyl is just a novelty item…or so says the Newbury Comic’s CEO. Bob Lefsetz agrees saying something to the effect of, it’s nothing more than a pimple on the ass of other music media.
Of course, this coming from a man who’s company is in the business of selling novelty items these days and Lefsetz, who’s just a curmudgeon at this point.
I’m a bit more hopeful regarding vinyl.
Cheers,
Aaron
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