Ups and downs. Economic and cultural effects of file sharing on music, film and games

The economic implications of file sharing for the level of welfare in the Netherlands are, on balance, strongly positive in the short and long terms. File sharing provides consumers with access to a broad range of cultural products. Conversely, the practice is believed to result in a decline in sales of CDs, DVDs and games.

This conclusion was drawn on the basis of a study into the economic effects of file sharing on music, films and games carried out by a consortium of SEO Economic Research, the Institute for Information Law (IViR) and TNO Information and Communication Technology and commissioned by the Ministry of Education, Culture and Science, the Ministry of Economic Affairs and the Ministry of Justice of the Netherlands. The analysis drew from statistics and recent scientific literature, interviews with heavy file sharers, a representative survey among the population of the Netherlands and a number of informative workshops with people working in the industry.

Estimates of the volume of global unauthorised download traffic vary strongly, but all signs are that this involves many billions of files per year, constituting a substantial share of international internet traffic. Around 4.7 million Dutch internet users aged over 15 years have, over the past 12 months, engaged in downloading without paying on one or more occasions. People tend to see music, film and game sharing as a generally acceptable phenomenon, yet they are ill-informed about the techniques used and the relevant legislation.

The study found that little is known about what is and what is not permitted when it comes to file sharing. Whereas downloading for one’s own use is permitted by law in the Netherlands in the case of copyrighted music and films, game sharing is unlawful. In the case of peer-to-peer (P2P) networks, content is not only often downloaded by users but also made available again to others, usually automatically. The uploading of files without the prior consent of the right holders is not permitted.

Determining the impact of unlicensed downloading on the purchase of paid content is a tricky exercise. File sharing and buying are not mutually exclusive. On average, file sharers buy just as much music, more DVDs and more games than people who never download. Similarly, file sharers visit concerts more often and buy more merchandise.

In the music industry, one track downloaded does not imply one less track sold. Many music sharers would not buy as many CDs at today’s prices if downloading were no longer possible. At the same time, we see that many people download tracks to get to know new music (sampling) and buy the CD if they like the music.

And so whereas file sharing can also have a positive impact on purchasing behaviour, turnover in the entertainment industries is likely to be negatively affected. This applies in particular to CD sales as music downloading is most common. The impact varies depending on the popularity of the artists, with established artists bearing the brunt and lesser known artists benefiting as file sharing raises their profile. On balance, society as a whole reaps welfare gains as the loss in turnover is made good by revenues generated by a large group of file sharers who would never have bought the product if downloading were not possible.

The music and film industries face the challenge of matching supply to changing consumer demands. New business models are taking the stage. The music industry is making an all-out effort to tap new sources of income (concerts, merchandising and sponsorship) for although there is a place for music recordings, such recordings alone will not be enough to run a profitable business in the future. In the film industry, the markets for cinema visits and DVD sales are still on the rise; DVD rentals have dropped sharply. This could change in the future as faster internet connections become available, and so business models need to be reinvented here too. The games industry is showing exuberant growth, particularly at the console games end and in the related hardware-software-content combination, where the spectre of file sharing looms much less large than in PC games, where turnover is now flat. The specific platform-restricted official game release is so attractive that this industry might well be able to better prevent or sidestep the file sharing that besets the music business.