Research Models on Prediction of the Indie Music Industry.
Scholars created a regression model of physical music sales from 1998-2002 using a cross-section of the 16 countries with the largest markets for pre-recorded music. They define their independent variables as GDP, Downloads, Broadband, Digital Media Players, DVD Players and CD-R Players. Music scholars find that GDP has a strong positive effect on music purchases, although they admit this may likely capture other factors related to the domestic economic environment. Both the downloads and broadband variables are found to be negative and significant at the ten percent level. The -.2 coefficient on music downloads suggests that between the years of 1998-2002, music downloading could have caused a 20% reduction in music sales worldwide and provides strong evidence of MP3s substitutive value for CDs. As discussed in my blog Scholars’ Prediction of the Indie Music Industry – 1, one important shortcoming in the above mentioned theory is the measurement of downloads, represented as the percentage of adults who have downloaded an MP3 illegally at least once. The lack of data on intensity of downloads and the omitted variables implied by the significance of GDP, though, leave the findings mostly inconclusive. Data until 2002 is also unable to include legal digital sales, now an important part of the industry, as no successful digital distributors had been fully established at the time.
Stevans and Sessions’s time series model uses consumer spending on physical purchases of indie music as the dependent variable and explanatory variables including personal income, price index of physical sales, price index of software, per unit price of DVDs and a time trend dummy variable holding the value of 1 beginning in the first quarter of 2000. Stevans and Sessions find evidence to support their claim of structural change in the demand for recorded indie music. Their time trend shows a notable decrease from 2.25 to 0.77% in the growth rate of consumption of recorded music likely capturing the increase in the prevalence and quality of broadband and other omitted explanatory variables. Interestingly, they find that price and DVD prices are both significant, with coefficients, which are clearly larger after 2000. As a result, they conclude that music downloads, although not the only factor, have altered the slope of demand leading to a disproportionate decline in spending on music after 2000. Despite the lack of data on legal music downloading at the time, Stevans and Sessions finish their analysis with some accurate predictions on their potential effect. They postulate that, even if more aggressive copyright laws reduce the price elasticity of demand, digital distributors’ lower prices would balance out these increases. As a result, they claim that consumers would benefit, since they would not only face price stability, but also an enhanced market for all indie music formats.
Oberholzer-Gee and Strumpf continued the update of the literature with their look at the effect of file sharing on legal sales of indie music. Programmes like Gnutella that were more advanced form of P2P file sharing, directly connecting computers and actually created a dispersed network which consequently removed the need for a centralized directory; unlike Napster that hosted file names on its own server. I have written about this in detail in my blog Effect of Piracy on The Indie Music Industry. However, in 2003, RIAA (again) filed a suit, this time against individuals who had used Kazaa, the P2P program, to share large number of files illegally. While the system was difficult to fully shut down due to its diluted nature, the record companies (again) managed to win large settlements from these cases. However, unlike many previous studies that use proxies, such as broadband or a time trend, to capture the effect of file sharing they employ data on actual downloads to U.S. sales data for a large sample of albums. In their literature review, they note that many previous studies had failed to isolate P2P users pointing out that file sharers are generally “time-rich but cash poor” deeming this segment already less likely to purchase indie music. As a result, their model focuses on micro-data on downloads to compensate for this perceived oversight.
In my next blog I am going to discuss the effect of Apple and iTunes on the indie music industry, record labels and other digital services. Please share your experiences in the comments section and I will add them to my future blogs.
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