Exclusive Look At New Liebowitz MP3 Study

Economist Stan Liebowitz has been in the news lately for his study, analysis and interpretation of data regarding whether or not MP3s are harming record sales. See this post for background. Now Liebowitz is making his new study available on a preliminary basis with this introduction:

…I should point out a bit of hypocrisy among some followers of this issue. When I changed my mind, from thinking that the economic logic of MP3 downloading would have to harm the industry to thinking that the data indicated that perhaps it didn’t, many who wanted this result to be true hailed me as someone willing to let the evidence talk.

These same individuals, now that new data indicates, to me at least, that perhaps MP3s are causing harm, want to argue that changing my mind because of the data is a sign of inconsistency. In fact, it is the same action, just with a result that was apparently not so popular.

I also would like to point out that my original article (arguing that harm was likely) was written in the fall of 2001 even if it wasn’t published until May. I had argued there that although harm was likely, we probably hadn’t seen much yet because CD writers were not available to a very large segment of the population. During the late spring and early summer of 2002 I began to change my mind based on the fact that I saw statistics indicating that CD writers were more common than I had thought. That was when the first Salon interview occurred. I also assumed that the current recession had reduced record sales. In the last two months I have put together a data set to try to answer these
questions more formally.

I discovered that there is no important linkage between disposable income and record sales. That made the 2001 decline in sales harder to explain without appealing to MP3 downloads. Then I saw preliminary 2002 mid-year SoundScan figures on total record sales (not the RIAA numbers that just came out). I projected the likely decline in CD sales from the SoundScan figures and the results indicated that the decline in sales was now deeper than any decline in the last 30 years and MP3 downloading became a more compelling hypothesis. I haven’t rewritten the report to take account of the official RIAA numbers, but the CD decline in the RIAA numbers (7.2%) is very similar to the 8.1% CD decline I expected based on the earlier SoundScan numbers, so there will be little change except in a few words.

It is a work in progress and I appreciate any suggestions from those familiar with the industry.

Summary The sales of recorded music have fallen recently. Many articles have been written and statements made about whether this decline is due to the downloading of MP3 files. The claim ahs been made that MP3 downloading, if unchecked, would destroy the recording industry, a claim I term the “annihilation hypothesis”. Unfortunately, much of the analysis appears to be little more than looking at the most rudimentary of numbers and then using one’s favorite hypothesis to explain them. There are partisans on both sides trying to spin the numbers to fit their message. Most of the claims that I have seen are often unsubstantiated and sometimes are based on the use of different definitions.

In the following report I look at 30 years of record sales to try to determine what have been the most important influences on record sales. I then use this information to examine what has happened in the market recently to try to determine whether there is evidence that MP3s have caused harm and how large that harm might be. My conclusions, which tend to change as new data come in, are currently as follows:

1) Record sales have had four prior declines in the last thirty years, and the decline as of 2001 does not appear different in character than the other declines.
2) Preliminary reports on mid-year record sales for 2002 indicate a more pronounced decline in sales that now appears to make the current dip larger than previous dips. This new data adds support to the claim that MP3 downloads are causing harm to the recording industry.
3) Income does not appear to be an important factor in record sales changes during the last 30 years. Therefore the current recession does not appear to be responsible for the current decline, contrary to my previous expectations.
4) Sales of singles have been falling almost continuously for the last thirty years. The continuing impact of their decline, therefore, should probably be removed from overall record sales, which diminishes somewhat the severity of the current downturn.
5) Inflation adjusted list prices fell during the 1970s but have remained almost constant for the last twenty years. Increased sales by discounters has probably slightly lowered the price paid by consumers. Price does not seem to play a role in record sales fluctuations.
6) Unit sales per capita have risen substantially over the last 30 years. The main reason for this appears to be that listening to recorded music can be done in more locations. Additional uses for recorded music became available in the automobile and, particularly in the 1980s, in activities amenable to portable ‘walkman’ type devices.
7) The factors that led to growth in unit sales appear to have ended in the mid 1990s. Cassette sales have been dropping to zero and some of the recent decline in overall sales is due to this decline in cassettes.
8) My current, very rough, estimate is that if MP3 downloads continue unabated, that unit sales will drop somewhat more next year and then begin to level off, with an overall decline of about 20% that would be caused by MP3 downloads.

Kevin Marks responds:

You do not seem to have analysed DVD sales at all. You say:
if the official numbers are to be believed, listening to recorded music took up approximately 45 minutes of a person’s time per day, whereas going to movies took up 2 minutes, watching prerecorded movies took up 9 minutes, and playing videogames took up 7 minutes. I do not believe it is reasonable to argue, at these low time-levels of usage, that changes in movie attendance, DVD usage, or videogames usage, for the population as a whole, could be responsible for more than a small portion of the changes in album sales discussed below.

Did ‘listening to recorded music’ include radio? Does ‘watching prerecorded movies’ include TV movies? How much time was spent watching TV? Aren’t TV audience trending down? Might some of this be displacement by DVD?

An analysis of revenue and units of DVDs would be very helpful – Figure 6 looks like a classic succession curve, as seen with other technologies such as fuel sources, though with a shorter time span. Adding DVD sales, pre-recorded and blank VHS sales and recordable CD sales to it would be illuminating.

By citing the listening/viewing statistics, you are missing 2 behavioural points. Music is listened to repeatedly; Movies less so. There should be a discount rate applied for this.

Secondly, the library/collector model has shifted too. Watching my friends and colleagues, the same people who used to buy huge home audio systems and collect CDs, are now buying huge home Theater systems and collecting DVDs. The amount of time spent viewing or listening to them may not increase, but what they are collecting has. In addition, collecting classic TV series on DVD is a growing market. An examination of retail space devoted to each makes this fairly obvious to the layman, but studying this empirically would be worth doing to test the hypothesis.

p21:

Of course, copying using cassettes requires having an original handy.
That means either borrowing one or purchasing a legitimate copy. The difficulty of borrowing might have been sufficiently great that most copies would have been made from originals purchased by that individual.

Not necessarily. I remember in my youth carefully recording songs from the radio to cassette by listening to the chart countdown, when the order was approximately known. I’m sure many people were transferring older vinyl to cassette as well for portability and making ‘mix tapes’.

The succession from vinyl to tape was based on flexibility – portability, as you say, but also the ability to make ‘mix tapes’ – music sequenced by the customer, not the label. This could be done with singles, by a jukebox, or stacking changer deck, but cassettes let these juxtapositions be recorded for others, as memorialized in the book (and film) High Fidelity.

The succession from vinyl/tape to CD was based on Quality as well as portability. With recordable CDs we now have both.

With MP3 players such the iPod our existing CDs become far more portable. Being able to carry hundreds of albums in my pocket means I am far more likely to listen to what I already have, as it will do shuffle play across my entire collection, or let me pick out one song from a thousand in short order. I think once you get over the ability to carry it all with you, you do want to buy more, as you are listening to more music, but listening to much less music radio, as I have a bigger playlist than they do, and I like all the songs on it.

Another area for investigation that I would love to see some solid stats on is the distribution of hits. Bentley and Maschner have shown that the Billboard chart exhibits a Zipf distribution and is thus in a state of self-organised criticality, where avalanches (sales collapses) of arbitrary size can occur.

My suspicion is that the distribution of album sales, whether cumulative or over an interval, would also show a Zipf distribution. The ‘hit-chasing’ model of the record industry makes a lot of sense if this is the case, as the records that hit it big will be hugely profitable. The ones that do less well – in the long tail of the
distribution – are the ones that are relatively subsidised. However, the tail is cut off at the point where labels won’t pick up a band.

I suspect that the widespread availability of music from unsigned bands via legitimate digital distribution can affect the overall form of the power law, by extending the tail still further, perhaps changing the power of the distribution slope, and reducing the number ot magnitude of hits that way.