Update: the title of this post refers to the season (as in “the summer of savings!”). I inexplicably hadn’t thought of the more common meaning of ‘fall’ when I wrote it (d’oh!), and this post is not meant to imply that I think file-sharing is going away anytime soon.


This is the fall of file-sharing. With negotiations on the ACTA wrapping up and legislation like the Combating Online Infringement and Counterfeits Act making their way through Congress, I thought it would be a good time to take stock of “the state of online piracy”, as it were. Call it what you will – file-sharing, digital theft, copyright infringement – the ease and speed that unauthorized reproduction and distribution of creative works over the internet has caused content industries and creators much consternation over the past decade or so.

The recording industry, by way of example, has seen its sales cut in half in ten years:

Nearly every other creative industry has felt the pinch, from book publishers to film studios, television producers, photographers, and newspapers. But music file-sharing is often thought of as the “canary in the coal mine” of online piracy because of small file sizes and the nature of consumption habits. It’s not surprising then that the recording industry has been one of the first to respond to online piracy, and its actions have garnered the bulk of the attention in the copyright debates.

From 2003-2008, record labels engaged in a campaign to sue individuals for downloading and uploading music online. Although they filed around 35,000 lawsuits, only two of those cases went to trial. Those cases are still not completely settled.

Today, I want to take a look at where these cases stand. What do industry groups think about this strategy? Recent interviews shed some light on this question. Finally, what role does online piracy play in the dive in sales illustrated by the graph above? I sum up the research to date.

File-sharing Litigation Developments

Last year, the only two defendants to make it to trial in the record labels campaign against individual file-sharers were found liable for copyright infringement and faced considerable damages. In both cases, the damages were subsequently reduced on different grounds and the outcomes challenged. A separate defendant never made it to trial but is seeking Supreme Court review of her verdict.

The third trial for Jammie Thomas-Rasset is set for November 1. Thomas-Rasset was first sued in 2006 by several record labels for downloading and uploading music using the P2P software KaZaa. A jury found her liable for copyright infringement and awarded damages of $222,000. The judge sua sponte ordered a new trial after he determined there had been an error in the jury instructions. 1Ben Sheffner, The Jammie Thomas Re-trial: Frequently Asked Questions, June 10, 2009. In 2009, Thomas-Rasset was found liable again by the jury, this time awarding damages of $1,920,000. A few months later, the judge reduced the award to $54,000 using the common-law doctrine of remittitur. After Thomas-Rasset rejected a settlement offer of $25,000, the record labels rejected the remittitur and opted for a new trial – one concerning only damages.

Also making its way through the courts is an appeal in the Tenenbaum file-sharing case. Last year a jury found Joel Tenenbaum liable for downloading and uploading music and awarded damages of $675,000. Tenenbaum subsequently moved for a reduction in damages. This past July, the court granted his motion and reduced damages to $67,500 – on constitutional grounds rather than under the doctrine of remittitur as in the Thomas-Rasset case. The record labels appealed the reduction; briefing and oral arguments will likely begin in the next couple months.

There are hints that the Supreme Court may take up an issue raised in a third file-sharing lawsuit, albeit one that did not make it to trial. A district court ruled on cross-motions for summary judgment that Whitney Harper was liable for copyright infringement but, as an “innocent infringer“, qualified for mitigated statutory damages of $200 per infringed work. 2It is a common misconception that “innocent infringement” is a defense to copyright infringement, but that is not the case. A plaintiff in a copyright suit may seek statutory damages in lieu of actual damages. If a defendant is found liable of copyright infringement, a court may award between $750 and $30,000 per infringed work. If statutory damages are sought, a defendant can make a showing that he was as not aware and had no reason to believe that his or her acts constituted an infringement of copyright” – if successful, the court has discretion to reduce the minimum statutory damages to $200 per infringed work. In February, the Fifth Circuit reversed the court’s ruling on innocent infringement. Harper subsequently petitioned for Supreme Court review of the Fifth Circuit’s ruling, a petition the Court is currently considering.

The RIAA and MPAA Speak Out

As industry groups that represent the bulk of companies that produce and distribute movies and music, the RIAA and MPAA are on center stage of the copyright debates. Perhaps more than any other event, the RIAA member label’s litigation campaign against individual downloaders has pushed copyright law into the public conscious.

Recently, representatives of both industry groups have talked online about internet piracy, shedding some light on their reactions and approaches. In August, RIAA President Cary Sherman spoke with Vice Magazine. While it’s clear the interviewer doesn’t side with the RIAA, 3The article begins, “Many, many people believe that the Recording Industry Association of America is a giant hairy tumor on the neck of the music business. Many people further feel that this disgusting malignancy has slowly spread its cancerous wrath across the public domain in recent years.” Sherman provides insights into the enormity of the problems online piracy poses to the recording industry and its response to it:

A few years ago the RIAA switched tactics. Instead of high-profile prosecutions of people who pirated music, you decided to put the onus on the ISPs. How successful was that transition?
The time had come to shift over to a strategy that would be more effective. The lawsuits were obviously controversial in the media, but the reality was that most people had no idea that what they were doing was illegal at the time of those lawsuits. We did all sorts of surveys. We tried PR firms. We did everything to look at how to begin to change the culture of using illegal P2P. We realized that 1) none of the messages resonated, and 2) most people had no idea that what they were doing was illegal, let alone thought it was wrong. That completely flipped overnight when we started the lawsuits. It made an enormous impression and we were constantly generating dinner conversations about what you may or may not do with your computer. We think it would be very good if there were more such conversations about all the other things that can be done inappropriately with a computer. So we think it had a tremendous impact by very clearly searing in the minds of the public that maybe getting all of this stuff for free isn’t legal after all.

Just yesterday, Copygrounds posted an interview with MPAA representatives Fritz Attaway and Craig Hoffman. Like the interview with Sherman, the piece covers many topics relating to the state of online piracy today. In particular, Attaway compares the MPAA’s response to online piracy with the RIAA’s:

We have used slightly different tactics than RIAA in part because of the nature of our respective works. There are certainly other reasons as well but MPAA has filed end user lawsuits like RIAA has. However, they are very expensive and we have determined that there are other routes that provide a better return; among them education, working with intermediaries like ISPs to discourage infringing activity, and one, that is probably the most important, is encouraging the development of new business models that provide legitimate alternatives. All of these avenues we are pursuing very aggressively. Because for a number of reasons RIAA has focused on end-user suits and that makes sense for them. It is absolutely necessary we would agree that there be consequences to infringing behavior. If bad behavior does not result in consequences pretty soon no one thinks it’s wrong. And that is not a good thing. So we agree that it is helpful to establish that there are consequences for infringing behavior but there are also a number of other things that can be done to discourage bad behavior and we are pursuing those as well.

Effects of Online Piracy

Surprisingly, there are some who oppose the industry’s response to online piracy, but the idea that online piracy harms sales itself. These beliefs are bolstered by a 2004 paper by researchers Olberholzer-Gee and Strumpf which concluded that the net effect of online piracy on sales is “statistically indistinguishable from zero.” The paper was widely hailed among the file-sharing crowd as conclusive proof that online piracy is justified.

However, this crowd missed the news that this past June, Olberholzer-Gee and Strumpf announced a new paper that found up to 20% of the recording industry’s decrease in sales is attributed to file-sharing. This conclusion is more consistent with industry estimates and other independent research. Other researchers, most notably Stan Liebowitz, had previously noted deficiencies in the original paper.

The reality is that a number of independent scholars have researched the effect of online piracy on recorded music sales. The consensus hovers around a 15% reduction in music sales directly attributable to file-sharing. I’ve included a summary of as many studies as I’ve come across below.

Conclusion Author Date Report
2.1% reduction of music sales Wu & Sukoco 2007 The Influence of Internet on Music Market – Revisited
13% reduction in CD purchases Michel, Norbert 2006 The Impact of Digital File Sharing on the Music Industry: An Empirical Analysis
“Lost sales amount to a 131% of the legal market” Montoro-Pons & Cuadrado-Garcia 2006 Digital Goods and the Effects of Copying: An Empirical Study of the Music Market
9-10% reduction in reduction in album sales Rob & Waldfogel 2006 Piracy on the High C’s: Music Downloading, Sales Displacement, and Social Welfare in a Sample of College Students, Journal of Law and Economics
14-23% reduction in CD sales Zentner, Alejandro 2005 File Sharing and International Sales of Copyrighted Music: An Empirical Analysis with a Panel of Countries
33% of the total reduction in recorded music sales Hong, Seung-Hyun 2004 The Effect of Internet Piracy on CD Sales: Cross-section EvidenceThe Effect of Napster on Recorded Music Sales: Evidence from the Consumer Expenditure Survey
10% reduction in CD sales Paetz & Waelbroeck 2004 The Effect of Internet Piracy on CD Sales: Cross-section Evidence
20-25% reduction in music revenues Liebowitz, Stan 2003 Will MP3 Downloads Annihilate the Record Industry? The Evidence so Far
7.8-14.5% reduction in music sales Zentner, Alejandro 2003 Measuring the Effect of Online Music Piracy on Music Sales

Along the same lines as the question “does online piracy hurt sales” is the question “does managing piracy help sales.” Research suggests that it does. A study by David Blackburn concluded that a 30% reduction in file-sharing across the board would increase music sales by 10%. Analysis of the litigation campaign by RIAA record labels also show a positive benefit:

The RIAA’s litigation efforts against direct infringers have led to an initial decrease infile-sharing on P2P networks, have prompted universities to adopt copyright policies and initiate negotiations with legitimate sites, and have increased the appeal of legitimate sites. In addition,album sales increased for the first time in several years by 4.7 percent in the last quarter of 2003. In January 2004, sales showed a 10.4 percent increase since January of the previous year. Total sales in 2004 are predicted to exceed those in the last two years, although the rate of increase has slowed.

The Fall of File-sharing

The upcoming weeks and month will no doubt show a lot of movement within the law on issues relating to online piracy. Expect the copyright debates to continue at a fevered pitch. In the meantime, if you have any stories or topics you’d like to see covered here, drop a message or comment.

References   [ + ]

1. Ben Sheffner, The Jammie Thomas Re-trial: Frequently Asked Questions, June 10, 2009.
2. It is a common misconception that “innocent infringement” is a defense to copyright infringement, but that is not the case. A plaintiff in a copyright suit may seek statutory damages in lieu of actual damages. If a defendant is found liable of copyright infringement, a court may award between $750 and $30,000 per infringed work. If statutory damages are sought, a defendant can make a showing that he was as not aware and had no reason to believe that his or her acts constituted an infringement of copyright” – if successful, the court has discretion to reduce the minimum statutory damages to $200 per infringed work.
3. The article begins, “Many, many people believe that the Recording Industry Association of America is a giant hairy tumor on the neck of the music business. Many people further feel that this disgusting malignancy has slowly spread its cancerous wrath across the public domain in recent years.”

7 Comments

  1. Thanks for the summary of the various studies. I don’t get into these debates because I’d rather focus on other issues than the rightness or wrongness of file-sharing and copyright. However, having the information pulled together in one spot is useful for anyone wanting to do research in this

  2. I’m at odds with some of the data.

    First, the recording industry’s litigation is a well known disaster. Did filesharing go away? It’s actually increased while the RIAA is vilified for its over aggressive actions 2 years ago. It didn’t help that they had to pay quite a bit for bad lawsuits.

    Then, when you look at the fees that went with all of the litigation, it says that this was a failure.
    Something else I’m looking at is the fact that you have a lot of data regarding CD sales as well as downloads. Where is the information regarding a resurgence in vinyl sales? Where is the overview of the entire industry? Also, just because CD sales are down, that doesn’t necessarily mean that the music industry is failing. It’s just like saying the loss of the mixtape is killing the industry. No, people are going to other media. The fact that there is a levy on CDs doesn’t help. Where are the lists describing revenue from Apple iTunes? Ringtones? Video games? I’m pretty sure that those revenue sources, no matter how small, will show that the music industry is doing far better than the bleak picture they want to put out.

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  4. You give a rather sweeping statement; the “fall of file-sharing”. Is there a reason it is “falling”? – I’m not sure I really see what these articles are leading up to. Thanks!

    • Haha, I meant ‘fall’ as in ‘autumn’ … the other meaning inexplicably didn’t occur to me. :/

  5. While I may not concur with the certitude expressed in the title, I will say you have put together an excellent snapshot of recent developments in peer-to-peer litigation and research. I hadn’t seen the updated work by Olberholzer-Gee and Strumpf. Thanks for bringing this all together in one post,

  6. Without wishing to detract too much from an interesting (if slightly US-centric; UK recorded music sales actually increased this year – the chart only covers US figures) article, there seem to be a few issues with the section on effects.

    In particular, there doesn’t seem to be anything in Oberholzer-Gee and Strumpf (2010) (also note the spelling of the first name) that contradicts their earlier paper. In fact, the paper concludes that “the empirical evidence on sales displacement is mixed” and that some “findings, in particular the papers using actual file-sharing data, suggest that piracy and music sales are largely unrelated”. The 20% figure mentioned in the introduction would seem to be an upper bound to the estimate, rather than an estimate itself.

    As for the other studies, Wu & Sukoco (2007) noted that “only 2.1 percent of the decrease of music sales can be addressed to the Internet” (emphasis mine), not file-sharing, and that the “internet contributes positively to the sales of
    music”.

    Michel, Norbert (2006) – using data from up to 2003, found that “file sharing may have reduced album sales … by as much as 13 percent for some music consumers” (emphasis mine), so your stated conclusion would seem to be an exaggeration (as not all CD sales are albums, 13% was the maximum reduction and it did not apply to all music consumers and thus all sales).

    Montoro-Pons & Cuadrado-Garcia (2006) did find that “lost sales due to piracy [were] worth a 131% of the legal market” however immediately noted that this was not weighted by market share, which “reduces the above outcome to around a 30% of the legal global market” – so while your quote was accurate, it was somewhat misleading.

    Rob & Waldfoge (2006) (again using data from 2003) specifically noted that their “results should not be generalized” (due to being based on a non-representative sample of university students), however the 10% figure would seem to be an accurate reflection of their findings (among the very limited sample).

    Regrettably I can’t seem to get hold of a copy of Zentner, Alejandro (2005), but from the information available it would seem he concluded (based on data collected in 2001) that “sales in 2002 would have been around 7.8 percent higher” (not 14-23%)- however he also found that “people who regularly download music online are more likely to buy music”. Obviously I cannot comment fully due to not having the full text.

    Hong, Seung-Hyun (2004) appears to only be examining the effect of Napster in 2000, and while it does blame the Internet (not specifically file-sharing) for 33% of the decrease, it also notes “that more than 80% of music sales decrease in 2000 might have resulted from factors aside from Napster”, suggesting that this may be a particularly high estimate.

    Paetz & Waelbroeck (2004) – focussing on 2001-02 – did find that downloading “could have caused a 10% reduction in CD sales … in 2001″. However, their results showed only “a 2% loss in CD sales due to music downloads” in the US in 2002. In fact they go on to note “the recent legal actions and the development of technical measures of protection of musical CDs carried by copyright owners may be badly motivated” and “labels may benefit from file-sharing”.

    So, it would seem that in 8 of the 10 papers you cited, the conclusions you drew from them were questionable (incidentally, the final figure given would seem to be based on IFPI estimates), and in some cases, misleading or potentially inaccurate. Furthermore, there is very little data gathered from after 2003, i.e. after the launch of the iTunes Store and the rise in lawful online music distribution. If anything, this shows that there is very little consistency in estimates for the “damages” of file-sharing (with figures varying from losses of hundreds of billions of $s, to millions) and a significant lack of evidence (something which both the EU’s Counter Project and the UK’s communication’s regulator Ofcom are attempting to fix at the moment).

    Anyway, the rest of the article was certainly informative – with an interesting summary of the main cases in the US, along with a useful list of papers.

  7. Finally found the channels of distribution and piracy video:

    Link Very good economic look. I believe it will change quite a few perspectives if watched from beginning to end.