The Impact of Free Music Downloads on the Purchase of Music CDs in Canada

This report examines data on the effects of Internet peer-to-peer (P2P) file sharing activities on music purchasing which were obtained from a survey commissioned by Industry Canada. The survey was designed to “inform Industry Canada's policy development work” and ultimately therefore support better policy decisions regarding the copyright law in Canada. In order to support its policy decisions regarding the copyright regime in Canada, Industry Canada commissioned a survey by Decima Research in 2006 which was designed to measure the extent to which peer to peer (P2P) file-sharing activities act as substitutes or complements to music purchases. We focus our analysis on how reported changes in P2P downloading by individuals related to their reported changes in CD demand between 2004 and 2005 to test the hypothesis whether P2P downloading may be reducing CD demand. All of our regression results (reported in Tables 2 and 3 below) show a negative association between P2P downloading and CD demand as might be expected. We consistently find a negative and statistically significant partial correlation between CD purchases and P2P downloads. The range of these estimated correlations is between -0.039 and -0.050, with more consistent, mid-range values coming from the difference on difference regressions (-0.041 and -0.043). This implies a 10% increase in P2P downloads reduces CD demand by around 0.4%. This paper we believe corrects for two fundamental errors in previous analysis by Anderson and Frenz (AF) which led them to their erroneous conclusions that the Industry Canada data showed “… no association between the number of P2P files downloaded and CD album sales,” and “… that P2P file-sharing is not to blame for the decline in CD markets. Music markets are not simply undermined by free music downloading and P2P file-sharing.” In particular, we first correct for the fact AF biased their results by excluding from their analysis the group of consumers who had completely stopped purchasing CD’s (potentially because of P2P activity) prior to 2005. This is the very group who were most responsive, or likely to have substituted P2P downloading for CD purchases. Second, we control for the fact that the level of an individual’s demand for CD’s, and the level of an individual’s P2P downloading may be correlated simply because they are both affected by the same third factor, such as love of music, so that high (or low) levels of CD demand is likely to be associated with high (low) levels of P2P demand. Such a positive association between the level of demand and level of P2P downloading may have led AF to mistakenly conclude they had found evidence of a positive market creation effect, as AF regressed the level of individuals CD demand against the level of individuals P2P downloading. Instead we focused on the changes in CD demand and changes in P2P downloading, using data in the survey that AF ignored on 2004 and 2005 behaviours of participants. By focusing on a longitudinal analysis of how the change in individual P2P downloading behaviour affected the change in CD demand we were better able to isolate the true relationship between increases or changes in P2P downloading and CD demand