File sharing: Innocent until proven guilty
An economist says music piracy should be
hurting the recording industry,
but it isn't -- and he doesn't know why.
by Damien Cave
Stan Liebowitz first began to attract
public attention as a debunker of the idea that "network effects"
could lock in winners in specific markets. The networks effects
theory posits that once a certain product gets critical mass,
such as, say, the VHS format or the QWERTY keyboard, it will
remain supreme, even if other products might be demonstrably
superior (such as, some would argue, the Betamax format or the
Dvorak keyboard.) If everybody buys VHS tapes, then the studios
will only release VHS tapes, and everybody will have to buy only
VHS tapes, and so on.
Liebowitz, a professor of managerial economics at the University
of Texas at Dallas, argued, along with his coauthor Stephen
Margolis, that neither the examples nor the theory held water.
Their critique had significant implications, especially when
brought to bear on the Microsoft antitrust trial, since one
argument put forth by the Justice Department was that "network
effects" ensured Microsoft monopoly power.
Liebowitz has consistently criticized the attempt to punish
Microsoft for supposed abuses of monopoly power. Two years ago,
for example, he wrote a 36-page analysis concluding that a
breakup of the software giant would cost U.S. consumers $50
billion over three years. Higher prices, he argued -- charged by
the new companies, and by other competitors -- would be the
result of regulatory intervention.
Now Liebowitz has turned his attention to another hot-button
issue where law and economics intersect: file sharing. It's a
logical step for the professor. He's been following copyright law
and its effects since the 1970s, when audiotapes were being
denounced by the recording industry as tools for theft. On May
15, the Cato Institute published a new paper by Liebowitz,
"Policing Pirates in the Networked Age," that takes a
comprehensive look at the history of the recording industry's
battle with piracy.
In the paper, Liebowitz argues persuasively that record industry
experts failed to prove their assertion that Napster was gutting
industry revenues. But he also argues that eventually, digital
downloading will be a serious threat to those revenues. Both
topics will be part of his upcoming book, "Rethinking the
Networked Economy," due to be published in August. But the
specifics of those arguments may be somewhat altered from their
form in the Cato paper, because when Salon caught up with
Liebowitz, he was reexamining his data and wondering, Why isn't
the record industry hurting more, already?
You point out in your Cato Institute article that throughout
history, new technologies are always seen as a threat to
copyright, but that the fears are always unfounded. Copiers
actually improved the academic journal business; VCRs increased
Hollywood's revenues. Yet, you maintain that peer-to-peer file
sharing will severely damage the record industry. Why are you so
sure that this will happen?
Actually, I'm not sure. It took six months to get [the Cato
piece] out. Now I'm stepping back a bit. In the Cato piece, what
I said was that [file sharing] seems like it should be causing a
lot of harm. But we're not seeing it. The explanation I gave was
that maybe there weren't enough people who owned CD writers
during that period. In order for downloading to really have an
impact on CD sales, it needs to be a substitute for CDs. If file
sharing is not a good substitute, then you can download all you
want and it may be a new form of listening but it may not hurt CD
sales.
The problem is that the number of downloads appears to be larger
than the total number of CDs purchased. Worldwide annual
downloads, according to estimates from places like Webnoize,
would indicate that the number of downloads -- if you assume
there are 10 songs on a CD -- is something like five times the
total number of CDs sold in the U.S. in a year, and
one-and-a-half times the worldwide sales. That's so large that
you have to say: Look, if downloads are substitutes [for CDs] in
any significant way, we should see really big declines -- unless
there's something else going on.
The reason I gave in the paper is that maybe people aren't
shifting their music [from MP3s to CDs]. But I've also seen some
recent numbers on households that have CD writers, and it's
something approaching 30 percent. We should see an impact.
There's a 5 percent decline in CD sales this year, but that's
what you might expect in a recession. So we're still not seeing
much. And what I'm beginning to suggest now is that perhaps
people aren't going to replace the purchase of CDs with these
MP3s.
Why not?
There are a bunch of potential reasons. It may wind up that
people just like to purchase because it's the honest thing to do.
There's another possible explanation though, which is something
that I'm trying to get harder data on. If we had a degree of
copying [now] not that different from in the past, and it's just
switched from audiotapes to downloads, then we may not notice an
impact on CD sales.
But then, there should have been a noticeable impact in the
1970s, when audiocassettes came along. And one of the reasons why
no one has been able to do a good study on that -- the Office of
Technology Assessment tried to do a study on it but they based it
on surveys of users, which are not very useful -- is that it's
very hard to get hard data on CD and record sales. No one was
doing studies like that back then. I've seen some numbers, and
I'm going to go back and take a look, but if there wasn't a major
impact in the 1970s, it may just be that were not going to see
much. It may just be another case of crying wolf.
It sounds like you've changed your mind ...
I try to let data tell me what's actually happening in the
world. And when the theory says one thing and things don't work
that way, then I say something's missing in the theory. A priori,
I had a belief that [file sharing] was different and it was
likely to cause real harm. That's what the Cato piece was
about.
But if a year from now, when the economy picks up, we still
don't see a decline of 15 to 20 percent at least, then file
sharing is having a very small impact, considering how massive
the downloading is. It's not that say, 10 percent of record sales
is a trivial amount of money, but it's not going to be the death
of the record industry.
Are you basing your shift in opinion solely on the lack of
evidence showing damage to sales or is there other empirical
evidence that supports the claim that downloading won't destroy
the industry?
It's mainly the sales. That's where you would look, that's where
there should be clear evidence. If downloading was 10 percent of
CD sales, you can imagine it would be hard to notice because lots
of things buffet the CD market. Is there someone who has a really
hot CD this year? Have tastes changed? Things come and go and
take up people's attention.
But with the amount of downloading as large as it is, if it's
really going to have an impact, it should be pretty obvious. We
have more downloads than legitimate sales; that's a very big
market. You don't need sophisticated analysis to see a 30 percent
drop in CD sales and to say that it wouldn't be due to a minor
recession. And that's the kind of thing you should see if there's
a massive amount of pirating that's much greater than what
existed before.
So far, why do you think people are both purchasing music and
downloading it?
It may be the cost of putting these collections of songs
together. Even though it seems low, it's more effort than the
typical person is willing to go through. That may be what the
salvation of the record industry is -- that it's simply too hard
to do on your own what they do for you.
Do you think that this new download use is likely to become a
new revenue stream, just as videotapes were for Hollywood?
I believe it's more efficient to download music than to go to a
record store. I think that digital products should be sold over
the Net and they're likely to be successful. So I expect that the
buying of records will eventually cease. But the tastes of
consumers are a hard thing to know for sure. They like holding
these things.
What do you make of the subscription services that have been
popping up -- the vast majority of which don't allow for much
flexibility? Are these viable alternatives to the unofficial
file-sharing networks?
Certainly, if they're going to sell music that you can't make
copies of, people aren't likely to pay as much for it. I don't
know that the record companies really understand that. I think
the pricing that they have for these services doesn't make any
sense.
But again, you have to remember that what seems to take a long
time while it's happening, in a historical context can occur very
quickly. Videotapes when they first came out were totally
mispriced. They used to sell them for about $100 because the idea
was, no one really wants to have a library of videotapes. Why
would you watch a movie more than once? The video rental places
were going to be the ones to buy the videotapes, and since they
were going to rent it over and over again, a very high price
should be charged. It was only by accident that the movie
industry discovered that gee, it's a much more elastic demand
than we had thought.
They had a special on one of the big holidays where I think
"E.T." was dropped down to $25 -- no one had ever done anything
like that -- and the sales were just enormous, way beyond
expectations. That's where they learned that if you lower the
price, you can sell a ton of these. And now the revenues from
videotape sales -- not rentals -- are larger than the revenues
from theatrical releases.
Looking back, it appears that it happened quite quickly. But at
the time, there were a couple years where videotape people were
mispricing videotapes. So it wouldn't be surprising if we had
mispricing here as well. They're learning what to do.
There's one other thing that makes it difficult for these
services -- the big retailers. Stores like Best Buy should be
dead set against the major record companies allowing inexpensive
downloads. And it's still the case that almost all the business
that the labels have will be through retailers. So they have the
retailers pushing really hard -- they don't want the major
companies to have affordable downloads and the labels don't want
to alienate the retailers.
So if one of these companies, say PressPlay, really lowered its
price, I presume that some of the major retailers would say,
look, if you're going to charge such low prices, then we're going
to push the other labels who aren't charging such low prices.
We're going to put their CDs in more prominent locations. It will
take a while for retailers to lose their power, and for
legitimate downloading to get big enough. So there are some
things going on that make me think it's going to be while --
maybe a decade -- before we get to reasonable pricing on
downloaded music. But it should clearly be the way to do
it.
At what point does the industry accept the facts that you're
pointing out, and move on?
My experience with the industry is that they'll never accept it
because they never accepted it with any of the other copying
technologies ... I don't think they're going to back off. I'm not
sure they'd believe it if you told them there wasn't any damage,
even if you told them there was a statistical study that
indicates no decrease in sales. What they'd say is, even if there
isn't, let's just be safe.
What would it take for change to occur? Could the artists be a
force for change?
If a couple years go by and the massive copying still continues
while the artists see that it doesn't have a negative impact on
sales -- if that turns out to be the case -- then I suspect that
the level of concern will go down. They'll still talk, the record
industry, but they won't be manic about it. They were concerned
about audiotaping but after a while, they seemed to realize that
it wasn't that bad. But it took them a long time.
Is their energy in fighting file sharing far more intense than
what was expended to fight previous copying technology?
Yes, and you have to remember it's coming from multiple sources
now. In the past, it was really just music. There wasn't a major
concern about videotapes being copied. Now there's a concern even
though it takes forever to download, that you're going to have
movie file sharing. So you have the studios falling in line. And
a lot of artists, in film and music, are more concerned than they
used to be.
And to be honest, it looks like [file sharing] should really
cause problems. I honestly believed it too. If you look at the
logic of it, then you say this one is real, this one should
really do damage. And I'm not willing to say that it's not going
to. But I'm just saying it's beginning to look like a lie.
You also argue that the industry shouldn't have sued Napster.
What should they have done?
They should have tried to negotiate with Napster to try to
change the rules a bit. Number 1, they could have kept a bit of
control over what was happening. They could have done a few
things, like saying in order to download something you have to
upload something. That would more likely make people want to buy
originals. It's a more controllable form than the pure
peer-to-peer without the central server.
Let's talk about digital rights management [DRM]. The idea
behind DRM is that entertainment content will be delivered in a
form that includes copy protection and a payment mechanism. In
your paper, you identify DRM as a possible solution to the online
copyright battle. Do you still stand by that?
Yes, it should still work. I got a lot of hostility to that idea
from people who would normally agree with me. I got a nasty
letter from someone, who said he took a videotape of his
brother's wedding, and then he tried to transfer the sound to the
digital audiotape that he had, and it wouldn't do it. He blamed
DRM for that.
I wrote him back and said, look, be mad at the Digital Home
Recording Act. That's what said you can't record from a digital
source onto a digital audiotape. It has nothing to do with
DRM.
DRM, as I see it, is merely the protection in the software, on a
CD or whatever, that would allow micro-payments. It doesn't do
this yet, but in principle it could. That's what I view as closer
to ideal. They can let you do a lot and you pay a higher price,
or let you do only a little in which case you'd be paying a lower
price. It solves a lot of peculiar economic problems that arise
when you're dealing with intellectual property. If it stopped
copying, if it was fairly effective -- it will never stop all the
hardcore crackers -- then the copyright owners will get a
reasonably good deal and users will get a reasonably good
deal.
The micro-payments idea has been floating around for years and
it's never happened. Why do you think it would work and why
hasn't it worked so far?
I have to believe the computer people who think that DRM is
viable. The micro-payment part is the harder part because the
credit card companies won't accept payments as small as
micro-payments would need to be. If someone can come along who is
able to accept small micro-payments -- one of the credit-card
type companies -- then it could be viable. Right now, that's
probably the biggest impediment: There's a fixed cost for using a
credit card that's bigger than what a lot of these payments would
be.
The idea has caused a fair amount of hysteria in the academic
community, because they think fair use is going to disappear. I
think that's totally not true. Fair use is still there. DRM can't
keep you from reading the material, as long as you pay the price.
Some say, Well, how can you take a paragraph and copy it anymore?
That's what we normally consider to be fair use. But the fact is,
you can still do that. You might not be able to cut and paste but
as long as you can read it, you can type it.
But essentially, you're being forced to pay a company for a
right that's protected in the Constitution ...
That's right. You might have to pay something. But you can
always go to someone that has a legitimate version, or to a
library or something like that. So I don't think it's really
changing fair use. It's what fair use was before the copier. We
certainly had fair use then, so this doesn't kill fair use. It's
just not as easy as it could be but it's not any harder than it
was 30 years ago.
But doesn't DRM limit the incentive to create, by making it
harder for people to create works that derive from copyrighted
creations?
I don't think that all that many people are going to use very
much less. So you pay a little bit of money, which is all it
should cost to get a copy. Academics mainly cite academic stuff
and this usually goes at low prices. Everyone's putting up copies
of their paper before publication for free downloads anyway. When
you talk about quoting people's work, you see a lot more of that
on the academic side. And they're the ones who are upset about
it. There aren't that many novelists who are quoting other
people.
Larry Lessig, Pam Samuelson and other legal scholars argue that
the copyright balance has been shifting in favor of corporations
for decades, with the extension of copyright law's term, the DMCA
and other legislation. They think the balance has been upset so
every issue becomes a vital opportunity to tip the scales back in
the public's favor. Do you think these scholars are misreading
recent copyright history?
While it's true that there's always been a balance, we don't
know if it's been a particularly good or even balance. We really
don't know. There's no empirical work that can tell you whether
copyright is good or bad. It's one of the great problems with
this area of law. And yes, copyright law has changed
tremendously.
But I think there's a bit of hysteria there and part of it is
self-serving. Academics have gotten a bit spoiled. These days
they can copy things easily for free. If they had to pay some
small amount, which is really all we're talking about, they get
upset. I don't see the costs as a major problem.
I view the DMCA as draconian. I'm really quite unhappy about it.
But I'm not unhappy with digital rights management, narrowly
defined to software that keeps you from making copies; that
doesn't extend the length of copyright; and certainly doesn't get
rid of fair use.
What makes you so sure that DRM won't turn off consumers and
make them focus on the rogue file-sharing services?
If it turns off consumers, they'll have to remove it or lower
the price. The people selling these things want to make money,
which means they want to give people whatever it is that they
want to pay the most for. They want to maximize profits and if
they change their product and no one wants to buy it, they'll
change it back in a heartbeat. That's the beauty of the market.
That's why it can't get too far afield. If they get every
consumer mad at them, they'll be in big trouble.
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