What Is P2P File Sharing?
Peer-to-peer is now the common term used to describe Internet file-sharing services. The name derives from the underlying structure of the Internet, in which various computers store information and other computers retrieve it through interconnected networks. With P2P, all computers sharing information over the Internet are "peers" because they both store and retrieve information.
To use a P2P service, such as KaZaA, users download software that enables them to "join" a particular "club." Joining allows each individual to search other members' computers for specific files, such as a digital copy of the newest song by Galactic. Once the file is found, the member who initiated the search can download his or her own copy of the file directly from another member's computer--at no cost. Typically, members of the group make their own digital files available for others to share, thus increasing the number of files that are available for everyone in the group. The overall size of the group, of course, is bounded only by the number of people connected to the Internet.
The majority of P2P services' users trade digital copies of songs and, to a lesser extent, movies. Though there is nothing inherently illegal about the technology itself (it can be used to share any type of digital file, such as personal photos or text files), many of the files traded through P2P networks are copyrighted. It is the unauthorized "sharing" of these copyrighted materials that has stirred the P2P controversy.
Economic Theory on File Sharing
Most of the theoretical literature about copying intellectual property materials (such as music, books, and movies) was developed before the introduction of the Internet. Consequently, this area of economic theory cannot be used to defend P2P. For example, much of the existing literature bolsters the idea that small-scale sharing can make both consumers and producers better off.1 Because producers know certain groups of consumers will buy rather than copy, those who will buy can be charged a higher price. In contrast, the large-scale nature of P2P copying and the downward pressure that P2P copying exerts on music prices invalidate this "beneficial for everyone" prediction.
The Evidence on File Sharing
Because of econometric and data issues, studies thus far have produced disparate estimates of file sharing's impact on album sales. For example, it was widely reported that a Harvard professor's research found that file sharing had virtually no impact on overall album sales and seemed to increase sales of some albums.4 However, Liebowitz both details several econometric problems with that paper and estimates that file sharing reduced album sales between 2000 and 2003 by as much as 30 percent.5
Why the Evidence May Not Matter
Each of the above-mentioned studies has its own strengths and weaknesses. None of the results, however, supports the contention that P2P does not threaten the long-term viability of the music industry. The reasons that the current evidence is only a small piece of the puzzle can be summarized as follows:
- Relatively Few Studies.
- Shortcomings of Aggregate Data.
- Shortcomings of Micro Data.
- Technical Problem for Regressions.
- Prior-Year Sales vs. Future Sales.
The Future Market for Music
The last bullet point--that the future market for music is likely to be quite different from today's market--is vital to understanding the P2P debate. In 2003, the U.S. music industry reported annual sales of almost $12 billion. Nearly all of those sales (about 90 percent) occurred in stores. Sales through mail order record clubs currently represent only about 4 percent of annual sales. Internet sales, though growing, still account for only 5 percent of the total. Music sales over the Internet are likely to be more plentiful in the coming years, but Internet commerce for all types of goods is still in its early stages.
P2P threatens artists' ability to sell their music through digital downloading because the digital files available from sellers are virtually indistinguishable from those available on the file-sharing services. Economists refer to these types of goods as perfect substitutes, reflecting the fact that one digital file (the copy made available by the seller on the Internet) is a nearly perfect replacement for the other (the copy made available by the file sharer). It is a basic tenet of economic theory that, when choosing between two such goods, consumers will choose the one that costs less.
Copyright owners should be able to protect their intellectual property against digital theft. There have already been a number of lawsuits against heavy users of P2P systems. These lawsuits can and should be pursued vigorously. Existing laws also provide remedies for those who contribute to infringement, such as P2P operators--although there is considerable litigation about how and when such contributory liability can be triggered.10
Economic theory suggests that P2P file sharing will decrease album sales, and several new studies show various levels of support for this prediction. Isolating the impact of P2P on previous album sales, however, says very little about the music industry's long-term viability if Internet file sharing continues unabated. Internet file sharing threatens artists' ability to sell their music through digital downloading because the digital files available from artists are virtually indistinguishable from those available on P2P services.
Making copyrighted material instantly available to the world without the owner's permission is stealing. The challenge for policymakers is to curtail this theft of intellectual property without limiting legitimate activity or chilling technological innovation through regulation.
