Article

The Impact of Illegal
Peer-to-Peer File Sharing
on the Media Industry

Sanjay Goel
Paul Miesing
Uday Chandra



The Internet has become a major source of music and video content
over the past decade. This has been facilitated by the creation of
digital formats for inexpensive media storage and distribution, wide
availability of computers and high-speed Internet connections, and
the evolution of peer-to-peer (P2P) file-sharing networks. P2P networks enable
computers to connect directly to each other and utilize specialized software
(such as eDonkey and Kazaa) to locate and trade a variety of digital files, including
music, movies, video games, and computer programs.
The U.S. music industry enjoyed healthy growth during the 1990s. Shipments
increased from $7.5 billion in 1990 to a high of $14.6 billion in 1999,
dropping thereafter to $8.5 billion in 2008.1 The decline in overall music sales
coincided with a large increase in swapping of digital music files over the Internet,
beginning with the introduction of Napster in 1999. A large majority of
these exchanges occurred over P2P file-sharing networks and were illegal, i.e.,
copyright-protected material was reproduced and transmitted without payment
to artists and music labels.2 The music industry holds P2P file-sharing systems
responsible for a 25% decline in music sales after 1999, and it has identified
unauthorized file sharing over the Internet as a major threat to its long-term
survival with large negative effects on the broader economy as well. While revenues
for the motion picture industry have not experienced similar declines and
incidence of downloading of movies over P2P networks has been much lower,
video piracy is increasing with greater availability of high-speed Internet connections
and more efficient software for sharing larger files. This activity directly
affects the market for home videos, now the largest source of revenues for the
motion picture industry.3
While the media industry blames Internet file sharing for large economic
losses, there is little consensus in prior research on its impact on industry
The Impact of Illegal Peer-to-Peer File Sharing on the Media Industry
CALIFORNIA MANAGEMENT REVIEW VOL. 52, NO. 3 SPRING 2010 CMR.BERKELEY.EDU 7
revenues.4 Some studies attribute the downturn in music sales almost entirely
to piracy,5 while others find that the economic impact of illegal file downloads
on media sales is negligible.6 In the latter case, the drop in sales may be triggered
by a decline in quality of new music or change in the way people listen to music
(e.g., more streaming and fewer CD purchases).7 Another stream of research
indicates that listeners’ ability to sample files for free on P2P networks may
increase music sales.8
The media industry has responded to unauthorized file sharing by lobbying
(through its trade associations, RIAA and MPAA)9 for stricter laws and
by prosecuting Internet providers as well as the most active file-sharers, while
maintaining high product margins and adding encryption software that restricts
duplication and playback (Digital Rights Management). These measures have
failed to check widespread file sharing over P2P networks and have antagonized
many influential industry constituents (e.g., students, college faculty, technology
developers, legal scholars, and present and potential customers), who view this
as a futile effort by the industry to resist change, stifle creativity, and prolong the
use of an unsustainable business model.10
In view of this controversy, we conducted empirical tests to ascertain
whether the financial market perceives the industry’s efforts to tighten and
enforce copyright legislation as having positive consequences for the long-term
profitability and survival of member firms. Our tests used stock price as a measure
of the aggregate views of sophisticated investors on the media industry’s
expected future cash flows. We documented positive stock price reactions for a
broad sample of media stocks to the passage of copyright legislation and news of
enforcement action against copyright violators, which suggests that the market
believes that legal measures taken by the industry to safeguard its intellectual
capital will enhance its future cash flows.
Hence, we regard future business strategies
based on charging for artistic works as viable,
even in the face of current availability
of free substitutes over P2P networks.
There are several business strategies
to check Internet piracy and utilize
new technology to cater to evolving customer
tastes. These include educating the
public about the need to pay for copyright-
protected works in addition to tighter
copyright laws and stricter enforcement,
simplifying the process of obtaining copyright
permissions to encourage legal use of artistic works, and adoption of new
business models that move the industry away from sale of CDs and DVDs and
towards monetizing access to music and movies that may be experienced at any
time. This can be done through a variety of devices and as part of a larger experience,
which includes social networking, playing music in games such as Guitar
Hero and Rock Band, and creative generation of new content through remixes.




SOURCE
Goel, S., Miesing, P., & Chandra, U. (2010). The impact of illegal peer-to-peer file sharing on the media industry. California Management Review, 52(3), 6-33.

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