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Saturday, November 26, 2005

P2P File Sharing, Long Tail & New Pricing Models

Chris Anderson points to a well researched paper by David Blackburn on the economics of P2P file-sharing,which amongst other things finds that it does indeed depress music sales overall. But the effect is not felt evenly. The hits at the top of the charts lose sales, but the niche artists further down the popularity curve actually benefit from file-trading. Blackburn finds that it is unrealistic to believe that the effects of file sharing are constant across all artists as the costs and benefits of file sharing differ with the ex ante popularity of the artist. This suggest that ex ante unknown artists are likely to see more positive overall effects of file sharing than ex ante popular artists are. By adopting an estimation procedure which allows for the effect to vary according to measures of artist popularity, file sharing has had strong effects on the sales of music. In particular, new artists and ex ante relatively unknown artists are seen to benefit from the existence of their songs on file sharing networks, while ex ante popular artists suffer for it.And while the average effect across artists is essentially zero, the average effect on sales is not zero, as more popular artists not surprisingly tend to have higher sales. Thus, this paper finds that file sharing has had large, negative impacts on industry sales and that the RIAA’s strategy of suing individual file sharing users has led to reduced file sharing activity and sizeable increases in sales. Furthermore, the differential effect of file sharing on the sales of artists of different levels of ex ante popularity has led to a dramatic shift in the distribution of sales among artists, as new and less popular artists are now selling more records while star artists have seen their sales shrink, compacting the distribution of outcomes). Chris points out that Blackburn does a little mathematical magic to simulate what would happen if file-trading were reduced by 30%. Artists who are unknown, and thus most helped by file sharing, are those artists who sell relatively few albums, whereas artists who are harmed by file sharing and thus gain from its removal, the popular ones, are the artists whose sales are relatively high. The Long Tail implications of this are pretty clear. For the majority of artists further down the tail, free distribution is good marketing, with a net positive effect on sales. Which is yet another reminder that the rules are all too often made to protect the minority of artists at the top of the curve, not most artists overall. To me, it looks like lot more financial sophistication is needed to get better returns on albums – we need to note that P2P file trading is not zero cost & the record companies ought to look for a different pricing model – charge premium for big names and sell at higher prices in the peak season ( Blackburn notes that the sales of recorded music appear to follow decay patterns and seasonality patterns similar to those of motion pictures) – the first few weeks upon launch & as a comment in anderson’s blog noted , there is a greater case for record companies to look into dramatically cutting the prices for tracks in the long tail. Does the same apply to Bollywood films - not directly as Bollywood films have different economic models - but the longtail patterns are distinctly felt. .

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