Ten Miles Square


August 04, 2012 1:00 PM Online Piracy Isn’t a Problem

By Danny Vinik

Every day, people download millions of songs without paying for them. It’s a practice known as online piracy and the music industry has been demanding tougher laws to combat it since the rise of Napster in 1999. On the surface, the industry’s claims make sense. Copyright law stipulates that it is illegal to download music without the permission of the author, but the record industry has no way to enforce this. Millions of people download content online each year from overseas websites and while the music industry can sue each downloader individually, it has no ability to sue the overseas sites.

The Recording Industry Association of America (RIAA) believes it deserves “selective legal efforts when rogue businesses ignore the law and attempt to profit on the backs of music creators.” However, copyright law is not supposed to protect the recording industry’s profits, but ensure that artists are incentivized to create quality works. The quality and quantity of music released each year has not decreased since the rise in online piracy, demonstrating that artists still have incentives to create music. In fact, online piracy has lead to greater opportunity for smaller artists and labels throughout the industry. The RIAA will certainly continue to lobby Congress for stricter laws, but online piracy of music is simply not a problem.

Copyright law is meant to create an economic bargain between artists and the public. Article I, Section 8, Clause 8 of the Constitution (the Copyright Clause) says,

Congress shall have Power … To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.

The Constitution gives artists a limited monopoly over their work in return for the eventual dedication of it to the public domain. The law is not meant to protect artists’ profits or revenue. As long as the quality and quantity of music is not dropping, Congress has no reason to further incentivize artists. By definition, the incentives are already there. Harvard economist Felix Oberholz-Gee and Kansas business professor Koleman Strumpf summed it up best in their 2010 paper on file sharing and copyright law published in the National Bureau of Economic Research:

[T]he original intent of copyright protection…was conceived not as a welfare program for authors but to encourage the creation of new works. We know that stronger copyright protection can increase the market value of companies. But these gains are a mechanism to raise social welfare, not the intended consequence.

Copyright law may increase profits for artists, but that is so that artists are incentivized to continue creating new works. Profit is not the ultimate goal.

The RIAA would like Congress to treat intellectual property the same as physical property. Under such a scenario, Congress would pass laws that prevent all illegal downloading. The main goal of such laws would be to prevent theft and to protect the music industry’s profits. But digital music is different than physical property; it’s intellectual property and thus governed by the Copyright Clause. If the rise of online downloading had caused a drop in the quantity of music and artists were no longer entering the industry, then Congress would have a reason to crack down on online piracy. The evidence points in the opposite direction.

The quantity of music, including both new albums and new artists, has not decreased with the advent of digital music and the rise of online piracy. According to Nielsen SoundScan, the authority on music industry statistics, artists released 38,857 new in 1999 when Napster debuted and not once from 1992-2002 were there more than 40,000 albums released in a year. In 2008, the number of albums released reached an all-time high at 106,000. As the recession hit the following year, the number dropped to 96,000 and then dropped again, in 2010 to 75,000. But in 2011, it rebounded to 77,000 new releases, nearly double the number released in 1999.

However, examining new album releases is not necessarily a good way to judge the supply side of the industry. It’s never been easier to release an album. Before high-powered computers and widely available recording software, artists faced large costs to produce a CD, but computers have changed this process entirely. A musician can create an album quickly and cheaply. As soon as he or she sells a single album, Nielsen counts that album as a new release. In his 2011 paper in the National Bureau of Economic Research, economics professor Joel Waldfogel found “no evidence that recent changes in appropriability have affected the quantity of new, acclaimed recorded music or new artists coming to market.” Waldfogel examined more than just album release numbers. He established thresholds for the quality of music released to discover if the surge in new albums is a result of a rise in poor-quality albums. He found no evidence of a drop off in quality:

Using indices collectively covering the period since 1960, we document that the annual number of new albums passing various quality thresholds has remained roughly constant since Napster, is statistically indistinguishable from pre-Napster trends, and that album supply has not diverged from song supply since iTunes’ revival of the single format in 2003.

There are no incentive problems.

In fact, there are probably more incentives for individuals to produce an album now than ever before. Smaller labels and smaller artists have seen significant benefits from online piracy. Waldfogel’s study also found that the percentage of independent labels in the Pitchfork Top 100, a measure of the Top 100 tracks each year, rose from 50 percent in the 1980s and 1990s to 60 percent in the 2000s. A 2007 study in Management Science found that albums by artists with smaller labels last longer on the Billboard Top 100 in the era of digital than before it and another study (pdf) in 2004 found that file sharing provides increased exposure for new artists and leads to income redistribution throughout the music industry. In addition, a just-released study found that online file sharing has led to increased concert revenue for artists as online piracy has dispersed artists’ music more widely and given them a greater following.

All of this leads to the conclusion that copyright law is too tough right now and should be laxer. File sharing on its own is relaxing the law by illegal means, but is nevertheless doing so. The RIAA claims that this “is a real, ongoing and evolving challenge.” That may be true for the music industry’s profits. As for the fundamental goals of copyright law, it’s working exactly as planned.

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Danny Vinik is an intern at the Washington Monthly.
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  • Not BennyM on August 06, 2012 9:45 AM:

    "Smaller labels and smaller artists have seen significant benefits from online piracy."

    This is just not true. Smaller labels and artists still have to spend their hard earned money on producing and creating music that people aren't paying for. Just seeing more widespread and diverse listenership doesn't make up for the fact that they are pumping their own money into a system that doesn't reward them accordingly.

    The argument that artists are supporting themselves through playing shows and touring is ignorant. When a small label band puts their money into making music people aren't paying for, how are they supposed to afford playing shows? An up and coming band gets paid jack for putting on a show, certainly not enough to cover the cost of the equipment they need in order to play.

    The result of this is that major labels pick exactly what artists get to make money and get big and which don't by choosing who to take on their tours. This leads to a total lull in creativity and originality as artists try to fit this mold that they think will get them noticed by a label. It could be argued that this has always been the way to "make it" in the business, but when artists lose ownership of their music, and the ability to profit from their own creativity, there is almost no incentive to push the envelope and try new things.

    There's a reason most artists that make it in today's environment grew up wealthy... and who wants to hear a bunch of rich kids making music? Not me.

  • Danny Vinik on August 09, 2012 12:19 PM:

    I agree with parts of your argument, but they are irrelevant to my overall point that the incentives for creating music have not decreased and under the fundamentals of copyright law, online piracy is not an issue. You may have an issue with copyright law, but that is an entirely different argument.

    As for smaller artists, they don't necessarily lose sales from file sharing. The study I cited says, "file sharing essentially shifts sales away from established acts toward unknown acts." You say "people aren't pay for" music of smaller artist's sales but where's your evidence? There may be anecdotal evidence of bands who lose money but the research does not back up this assertion as a whole.

    In addition, smaller labels have more power in the industry now than ever before and those smaller labels have a stronger likelihood of taking a chance on a less generic band (since major labels will never do so). That means that these new, creative bands actually have a greater likelihood of succeeding and thus have more incentives to create their music. It's easy to conclude that online piracy has hurt smaller artists but the evidence just isn't there. Major labels may be choosing more and more generic artists to fund but that has nothing to do with piracy and everything to do with profits.