Impact of MP3 and File sharing Technology

Assignment
MICROECONOMICS

Submitted by-

Date- 23-8-11

Table of Contents
1 INTRODUCTION....................................................................................................3 1.1 Beginning of a Revolution..............................................................................3 1.2 The Early History of File Sharing....................................................................3 1.3 The MP3 File Sharing Controversy.................................................................3 1.4 Decline in sales of music CDs.......................................................................4 1.5 Peer To Peer..................................................................................................4 2 INDIAN MUSIC INDUSTRY.....................................................................................6 2.1 Advancement of Music Recording Technology...............................................6 2.1.1 Early Nineties:.........................................................................................6 2.1.2 The decade of nineteen twenties:............................................................6 2.1.3 Thirties and Forties:.................................................................................6 2.1.4 Fifties and sixties:...................................................................................7 2.2 Copyright Law...............................................................................................8 3 IMPACT OF FILE SHARING AND MP3 TECHNOLOGY.............................................11 3.1 Determinants of file sharing and copying behaviour....................................11 4 ECONOMIC THEORY OF FILE SHARINGs IMPACT................................................12 4.1 SAMPLING or EXPOSURE EFFECT.................................................................14 4.2 NETWORK EFFECT.......................................................................................15 4.3 INDIRECT APPROPRIABILITY.........................................................................16 5 CONCLUSION.....................................................................................................16 5.1 The negative impact ..................................................................................17 5.2 Positive effects ...........................................................................................17 5.3 The Future of File Sharing............................................................................17 5.4 Steps...........................................................................................................18 5.5 What people can do?...................................................................................18 6 REFERENCES..................................................................................................... 19 2

1 INTRODUCTION
1.1 Beginning of a Revolution
File sharing is as much of the modern world as cell phones or cars, and while the term "file sharing" often conjures of images of illegal piracy, the term actually covers a general range of actions that most computers users undertake every day. Today's computers are file-sharing machines capable of sending and receiving files through email, the Internet, thumb drives, home networking and other routes.

1.2 The Early History of File Sharing

The history of file sharing began in 1971, when the first floppy disk drive became commercially available from IBM. At a size of 8 inches, this massive disk has a formatted storage capacity of just less than eighty kilobytes. This was effectively the first time that widespread file sharing could occur because it was the first time a format that allowed for relatively simple file transfer was available. In 1976, a company called Shugart Associates created the first 5 and a quarter inch floppy disk. Other companies adopted this standard and began to build five and a quarter inch drives of their own. Ward Christensen opened up a new gateway for file sharing in 1978 by creating the first online bulletin board system. This allowed users to share files online, although this was not part of the Internet as we know it today until the 1990s.In 1979 yet another method of online file sharing, Usenet, was created. Usenet was not created with file sharing as a goal, but it was a feature that users increasingly took advantage of as modem speeds increased. The next major milestone in file sharing was the creation of FTP in 1985, or File Transfer Protocol. FTP allowed users to exchange files over a standard TCP/IP based network. This was followed in 1988 by another still popular program, IRC. While IRC was created to host chat rooms, it allowed user-to-user file transfers, a feature many embraced. In 1991, the World Wide Web, at that stage a project lead by Tim Berners-Lee and supported by numerous people across the globe, became publicly available. Throughout the early 1990s, the World Wide Web grew to become the foundation of Internet navigation that we are familiar with today. In doing so, it has become the largest file sharing network ever created.

1.3 The MP3 File Sharing Controversy

The MP3 encoding, which was standardized in 1991 and which substantially reduced the size of audio files, grew to widespread use in the late 1990s. While file sharing through floppy disks (and later CDROMs), FTP servers, and Usenet remained popular during the mid to late 1990s, the controversy which defined file sharing for this period surrounded one file format - the mp3. In 1998, MP3.com and Audiogalaxy were established, the Digital Millennium Copyright Act was unanimously passed, and the first mp3 player devices were launched. MP3.com offered music by unsigned artists, and grew to serve 4 million audio downloads daily. Since the launch of Napster, the first widely adopted file sharing service in 1999, the sources of unauthorised music to download for free from the internet has proliferated. The advent of broadband has facilitated music file sharing on a wider scale. It is now easier than ever before to download music without paying for it and burn it to a CD or to transfer it to a portable digital music device. 3

The launch of Napster in June 1999 introduced peer-to-peer (P2P) file-sharing. For information technology specialists, P2P protocols like BitTorrent are simply efficient means for distributing large volumes of data to large numbers of requesters. A wide range of commercial, scientific and free culture projects are utilizing the advantages of this distribution technology. At the same time copyright infringements do occur on P2P, although their percentage versus legitimate uses is unknown. The music industry has targeted P2P as the single most important cause of the decline in recorded music sales. Its response consisted of civil and criminal law suits, first against the providers of P2P file-sharing services and software and then against individual file-sharers, getting payment providers like credit card companies and PayPal to block the accounts of alleged infringing file-sharing services, getting government agencies to seize the domain names of alleged infringing sites.

1.4 Decline in sales of music CDs

The decline in sales of music CDs has been much in the news over the last few years. Since this decline began at the same time that file-sharing became popular, and since file-sharing would be expected to lead to a decline in sales, file-sharing is the leading candidate among possible causes of this decline. The recording industry has tried to stem this decline in the US and several other countries by suing, or threatening to sue, individuals heavily engaged in file sharing. The motion picture industry has expressed concerns that its sales are likely to suffer a similar fate to that of the sound recording industry if nothing is done to stem the unrestricted use of file-sharing software and it too has engaged in lawsuits against file-sharers. These law suits have attracted a good deal of publicity, discussion, and criticism. A rather influential school of thought has formed in opposition to the corporate players in these industries, and these lawsuits have provided fodder for their critiques of traditional copyright. At the centre of the file-sharing debate is the empirical issue of whether or not file-sharing decreases sales. There are several estimates that the number of music files exchanged on file-sharing networks is larger than the number purchased through legitimate channels. If so, file-sharing could cause a major loss of sales even if only a relatively small percentage of unauthorized downloads translated into a lost sale. Nevertheless, estimates of the number of music files downloaded in file-sharing networks vary widely. The products of these entertainment industries have proven amenable to digitization, allowing them to be transferred over peer-to-peer file-sharing networks. Napster was the first well-known peer to-peer file-sharing system, but others have followed in the wake of the preliminary injunction that effectively shut Napster down. Current replacements have surpassed Napster in popularity. It has been claimed that file-sharing represents over one third of all material transferred over the Internet and that music files are downloaded to the tune of billions files per month. In what follows the focus will be on the sound recording industry because that is that market that has attracted the most attention. Since most computer users have enough bandwidth to download MP3 files and also have in place the requisite CD burners with which to allow the listening of this music in locations not tied to a computer, this is the arena where most file sharing is taking place. It is always useful to examine the predictions of economic theory.

1.5 Peer To Peer

Broadly dened, P2P technology is a distributed computing software architecture that enables individual computers to connect to and communicate directly with other computers. Through this connection, computer users (known as peers) can share communications, processing power, and data les. With respect to le sharing specically, P2P technology allows decentralized sharing. 4

That is, rather than storing les in a central location to which individual computers must connect to retrieve the les, P2P technology enables individual computers to share directly among themselves les stored on the individual computers. Peers can share myriad types of les, including audio, video, software, word processing, and photographs By eliminating the need for a central storage point for les, P2P le-sharing technology allows for faster le transfers and conservation of bandwidth, i.e., the capacity to transmit information to and from a computer. In addition, because P2P technology decreases the need for businesses and consumers to store les on their hard drives, it can lower costs by conserving on storage requirements and saving on maintenance and energy costs related to data retrieval, sharing, and processing. Important Types of P2P sharing: Napster FastTrack Protocol BitTorrent Current Uses of P2P Technology: 1) Commercial Use: Current commercial uses of P2P technology include the licensed distribution of games, movies, music, television programs, software, video streaming, video on demand, Instant Messaging (IM), and VOIP, back up storage of documents and other digital content, and for intra-business collaborative project management. 2) Non-commercial Uses: P2P technology also is being used in certain data processing functions in the applied mathematics and medical research contexts. Other uses include the noncommercial distribution of software, writing, art, photography, or other data by publishers who do not wish to charge for content for example, the free distribution of electronic books to enhance literacy, and the dissemination of free academic curricula such as music lessons from a college of music.

2 INDIAN MUSIC INDUSTRY

2.1 Advancement of Music Recording Technology
2.1.1 Early Nineties:

Beginning in the nineteenth century with the era of Tin Pan Alley, sheet music distribution was the source of the music industrys revenue. Little interest in the mechanical reproduction of sound existed until 1877 when Thomas Edison developed a tinfoil-wrapped cylinder rotated with a handle. The limited use and tinny sound of this phonograph were discouraging because the foil could be used only a few times before it deteriorated, thus creating enormous production costs. Other inventors improved the original phonograph by using a wax-coated cardboard tube over the cylinder, creating the prototype for the current-day jukebox. Nickel machines, which allowed for consumers to go to a parlor and pay a nickel to listen to wax cylinders reproduce songs and comic monologues, became the latest fad at the time. During the turn of the nineteenth century, three major firms, namely Victor, Columbia, and Edison, were the producers for most of these playback devices and audio products. From a technical standpoint, the production and reproduction of even the wax cylinder was a barrier to entry for firms who wished to enter the recording industry. Each cylinder was individually produced in a time-consuming and hardly foolproof process, which incurred large initial fixed costs and many resources and connections to hire the appropriate band for recording. The next noteworthy technological advance was the invention of the reverse metal master stamper. Several thousand copies could be created from the original before the stamper was discarded. The cost of manufacturing recorded products was reduced, which in turn reduced the payments received by the performers since they were no longer required to be in a recording studio for such a lengthy time period. Meanwhile, the number of firms producing record players and records was quickly increasing as competition in the industry escalated. As new firms were promoting innovative culture-based music, race records began to appear and black artist recordings gained popularity in the music industry.

2.1.2

The decade of nineteen twenties:

The development of the radio and an electrical recording process in the 1920s led to further sound reproduction improvements. When radio became a mass medium, musicians and songwriters initially objected persistently to anyone playing records on the air. By having their music given away for free, musicians thought that radio stations were harming the musicians ability to make a living. Radio station owners argued that once they bought a particular recording, it was theirs to use without any additional financial obligation to composers. This led to a royalty payment system when the American Society of Composers, Authors and Publishers (ASCAP) took the matter to court . Copyright owners subsequently received royalty payments each time their songs were aired. Although initially artists feared the presence of the radio, they soon realized radio was an excellent advertising mechanism for records and concerts as well.

2.1.3

Thirties and Forties:

From 1930-1945, the music recording industry was idle as the Great Depression and World War II decreased the demand for records and thus reduced record sales. Postwar development of tape recordings and the creation of the 12-inch long-playing (LP) vinyl record initiated a tremendous wave 6

of growth in the music industry. Compared to the old method of recording, for an investment of a few thousand dollars, a first-class tape recorder could be purchased. As a result, between 1949 and 1954, the number of companies in America publishing LP recordings increased from eleven to almost two hundred. The low-cost recording equipment allowed small independent companies to compete with RCA, Columbia, and Decca, the major recording labels of the time. The independent labels are credited with bringing traditional jazz, southern rhythm and blues, gospel-based music styles, and rock and roll music into the American mainstream.

2.1.4

Fifties and sixties:

Business began to soar in the mid- to late-1960s as Universal introduced the truer-to-life hi-fi stereo sound recordings at a time when the postwar baby boomers were attracted to the expanding rock genre. Continuing through the 1970s, the high-growth phase was enhanced with the development of the standardized portable cassette player. The music industry entered the 1980s strong, but soon became stagnant. According to Vogel (2001), this noticeable decline in demand is due to a population with a weakened interest in new recordings and poor sound quality control of vinyl pressings. He claims the decline in demand for recorded music was not reversed until the introduction of the compact disc (CD) in 1983. The development of CDs led to growth in the music industry over the last twenty years, affecting the copyright law and structure of the music industry as a whole.

2.2 Copyright Law

The emergence and success of independent record labels sparked a change in the concept of copyright. Prior to the 1970s, copyright was merely a concept in the music industry, not a strictly enforced law. Up-and-coming artists were constantly remaking songs. Occasionally, it became difficult to determine the original artist of a particular song. The emergence of the Copyright Act in 1976 changed the ambiguity concerning music copyright in the following way. A recording of a single song is generally protected by two copyrights: the copyright of the song itself, known as the musical composition copyright, and the copyright of the actual recording of the song, known as the sound recording copyright. As with other intellectual property, the owner of a copyrighted musical composition has the exclusive right to: Reproduce and distribute the musical composition in sheet music and in phone records defined in the Copyright Act as material objects in which sounds, other than those accompanying a motion picture or other audiovisual work, are fixedand from which the sounds can be perceived, reproduced, or otherwise communicated, either directly or with the use of a machine or device. Modify the composition to create imitative works based on the original composition Publicly display the composition And publicly perform the composition.

The Copyright Act defines sound recordings as works that result from the fixation of a series of musical, spoken, or other sounds regardless of the nature of the material objects, such as discs, tapes, or other phone records, in which they are embodied. According to United States law, only original sound recordings fixed and published on or after February 15, 1972, are protected by copyright law; sound recordings produced before then are not protected by federal copyright law, but they may be protected under state law . The music industry also uses particular licensing terminology: 1. Mechanical license: This is a license to copy and distribute a song in the form of records, tapes, or compact discs or by digital phone record delivery, that is, download from the Internet. 2. Synchronization license: This is a license to copy and distribute music in synchronization with an audiovisual work; this is also known as a synch license. 3. Performance license: This license allows for the public performance of a song. There are two types of performance licenses: non dramatic and dramatic. 4. Parody authorization: This grants permission to modify the lyrics to a song. The music publishers contract with the songwriter may require the songwriter to give consent for alternations to his/her created musical works. Copyright law for intellectual property exists in order to protect works from inefficient duplication and manipulation and provides creators with economic incentives to produce those works. Most poems, novels, musical compositions, and other creative works build heavily on earlier masterpieces, borrowing plot details, characters, chord progressions, and so forth from earlier works. As noted later on, the notion of fair use is crucial to creative works. For example, the Supreme Court states the fair use doctrine permits the sale of video recorders even though no royalty is paid to the copyright owners of television programs for the privilege of recording those programs. Many people use their video recorders to record programs aired at an inconvenient time or to watch them repeatedly. Such uses benefit the copyright owners even without a royalty payment. Because 8

advertisers pay more depending on the number of viewers they reach, fair use was efficient for the use of video recorders. However we now can use video recorders to edit out commercials and advertisements, which may change the economic validity of the Courts decision. This situation is analogous to the music industry with regards to recording tapes off the radio, burning CDs for future listening, turning CD songs into MP3s on ones computer, etc. Therefore, fair use is an important element of copyright law in the music industry and one that must be addressed when determining royalty payments and illegal distribution. Another important aspect of copyright law is the characteristic of public performance of a work. Although initially it seems obvious the copyright on a recorded song should extend to any performance of the song, this is not always the case. For example, say someone sings a song at a wedding. If the guests of the wedding have never heard the song and are then led to buy the recording of that particular song, then the copyright holder would be better off especially if the host had paid a royalty for its performance. But suppose due to the vast amount of wedding music available in the public domain, the host would not pay for any royalty and would simply be deterred from playing the song for fear of heavy copyright violation penalties. Then the copyright holder would be worse off if copyright protection extended to such performances. Posner (1998) generalizes examples such as this with the economic distinction between complements and substitutes. He says a favorable book review is a complement of the book reviewed while the video recorder and the public performance are both complements and substitutes. Whether copyright holders will gain or lose from the invocation of fair use is determined by which effect is dominant

The Indian music industry is over a century old. However, the past few years have been a dismayed for the industry. It has shrunk to INR 10 billion from INR 13.5 billion in the last four years, as the onslaught of piracy, the high cost of acquisition of film music and the low priority accorded to the sectoral issues by the authorities have somewhat upset its business viability. Though the revenue is increasing but the growth rate is not stable. The situation in India is not unique. Globally the music industry has been in recession for about four years and is now making a slow recovery. A series of revenue enhancing the cost cutting measures have been undertaken by global music majors, which are expected to bring about a turnaround soon. In India, the pattern of music consumption and distribution has shifted radically in recent times. Music buying has reduced and despite the popularity of the new Hindi films, which make up for 40 percent of total music sales, the number of units being sold is falling. On the other hand, piracy has ensured 9

that the average retail price of recorded music remains stagnant over the years.

3.06% 3.04% 3.02% 3.00% 2.98% 2.96% 2.94% 2.92% 2.90% 2005 2006 2007 2008 2009

g rowth rate

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3 IMPACT OF FILE SHARING AND MP3 TECHNOLOGY

3.1 Determinants of file sharing and copying behaviour
According to a study by Rochelandet, survey was conducted to understand the copying behaviour. The econometric results are summarized in their table is reproduced here:

Effects on copying behavior - Social neighboring - Internet skills - Copying of software - Cultural diversity - Being male

Determinants

Favorable

Unfavorable

- Increasing in the Willingness To Pay for originals - Increasing in ethical concerns - Higher education - Increasing in age - Perception of legal and technical risks - Cultural spending - Location Experience in copying - Socio-professional group - Income - Diploma Household size

Neutral

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4 ECONOMIC THEORY OF FILE SHARINGs IMPACT

While many people may think sharing and downloading files is harmless, it actually affects a wide range of people and has a large impact on the economy Record sales: One way P2P file sharing has affected the economy is through record sales. Fewer people are buying whole CDs now because they can download them in their entirety, or pick the songs from the album that they like, for free from P2P networks. Economic studies have traced this drop in sales to the arrival of Napster, one of the original P2P sharing programs almost $6 billion in just a few years. Entertainers and producers: Most music performers make substantial amounts from royalties from music. Downloading music from the Internet or P2P networks does not pay royalties to the performers, record companies, or producers of this media. As a result, they are losing money as well. Record stores: There are many small, independently run record stores that have gone out of business in recent years, and many economists and industry experts have attributed this to the surge in P2P file sharing. Because people can download music off the Internet for free, then burn it onto their own MP3 players or even CDs, many record stores are experiencing problems or going out of business. Since 2003, over 1,000 small, independent record stores have closed nationwide. Employees/owners: While many people think that the only ones who really lose money from P2P file sharing are the already-wealthy performers and record executives. However, everyone involved in the music industry, all the way down to the clerks in the record stores, are affected by illegal file sharing, and some of them lose their jobs over it. On the one hand, a downloaded file can substitute for the purchase of an original CD or single song. Substitution of a free alternative is easily understood to have a negative impact on sales.

Based on various studies by researchers at Harvard, MIT and Stanford, factors contributing to the sales of music include the following PRICE OF THE MUSIC-With the rise of MP3 and file sharing technology, people who could not otherwise afford to buy complete CDs received access to free music. Also the people who had free access to MP3 music through file sharing decreased their demand for CDs. Due to this reason there was a decrease in sales of CD as many researchers believe. However some researchers have a different opinion. According to Felix Oberholzer-Gee at Harvard Business School in Massachusetts and Koleman Strumpf at the University of North Carolina, data based on the most actively downloaded songs show there is no correlation between sales of those CD and number of downloaded songs. Surprisingly, albums that sold more than 600,000 copies during this period appeared to sell better when downloaded more heavily. In addition, people who conduct illegal music file sharing tend to spend more money on purchasing music because they are interested in music. MACRO-ECONOMIC FACTORS- These factors include the GDP (income), recession and its impact, copy-protection mechanisms, Digital Rights Management in the country etc. Increase in GDP has a positive impact on music industry however recession caused the sales to decrease as was evident from the Indian music industry data available. Laws related to copyright and digital rights tend to increase the sales of CDs as it discourages illegal file sharing prevalent in the country. DEMOGRAPHICS- These include factors age, gender, family income etc. It was observed in various studies that file sharing was most common in young people as compared to older people. Behaviour of copying was also more common in males as compared to females. Also the higher income groups had a higher tendency to purchase music than to copy. 12

A change in media portability can change the nature of the demand, opening up or closing markets. Changes in the price of complements/substitutes, such as television, movies, radio, videogames and so forth. Sales might be influenced by the nature of the distribution channels. As authorized digital downloads play an increasing share of this market, the sales of albums would be likely to change, particularly if pricing is no longer per unit but instead more of the per month variety. On a more prosaic level, if distribution shifts from record stores to major discount chains, such as Wal-Mart and Best Buy, as seems to have been the case in the last decade, unit sales might increase because retail margins lower the effective price to consumers. On the other hand, the users might merely use downloaded songs to become more familiar with potential music. Although this was originally referred to as the exposure effect, it is currently called the sampling effect. Under this scenario users sample from available music and then purchase those songs and albums that are found to be most suitable to matching the tastes of the users. This sampling hypothesis is usually associated with a claim that sales will increase if consumers are allowed to become more familiar with the product before they purchase it, although, there has not been much analysis of this claim. There is also a claim of potential network effects. As more downloader listen to music, this theory goes, other consumers derive greater value from their legitimate purchases. It is suggested that is might lead to an increase in the sales of CDs. Gayer and Shy present such a model in their paper in this volume. Finally, there is a possibility that sellers of original files can capture the value from later copiers indirectly in the price of originals, a concept known as indirect appropriability.

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4.1 SAMPLING or EXPOSURE EFFECT

The sampling story basically argues that file sharing allows consumers to experience music in a more complete manner prior to purchase than they would have been able to do were they to use the more traditional methods of learning about music: hearing it on the radio or at a friends house. With filesharing, listeners can become as familiar with a song as they wish, listening to it over and over again until they are certain they like it. At that point, according to the sampling theory, the listeners go out and purchase the music. A natural question is to ask why they would make a purchase when they already have the item for free. There are several possible answers. First, they might be uncomfortable listening to music which they have not purchased. This discomfort might arise from a sense of honesty or a sense of wishing to support their favourite musicians. Alternatively, listeners might get to know three or four songs on an album which then allows them to feel comfortable buying the entire album and avoid the efforts involved with downloading the rest of the album. Assuming that sampling occurs in the manner described above, what would be the likely economic impacts of sampling? Assume that those engaged in sampling have no intention of listening to MP3 files after the sample period. Instead, they either purchase the music or throw it away. This is a pure analysis of sampling independent of any pirating motive. There are few explications of the impacts of sampling. Presumably, after sampling, consumers have more information about which CDs to purchase, allowing them to purchase CDs that provide greater utility than they would have purchased without sampling. Although it is natural to think that consumers would be led to purchase more CDs if CDs can provide greater utility than they did without sampling, this is not necessarily the case. To see this it helps to analogize the CD to a candy bar, following a line of reasoning developed Each individual consumer has particular tastes in music and some CDs are better than others as far as satisfying these tastes. Consumers, after all, do not derive utility from the CDs per se but derive enjoyment from listening to the music contained within the CD. The underlying demand can be thought of as the demand for music- listening services, which is met to differing degrees of success by various CDs. Those CDs that better satisfy the consumer can be thought of as providing more musiclistening services within the fifty or so minutes of music contained within the CD. Since those CDs contain more of what the consumer wants, they can be analogized to providing consumers larger candy bars containing more of the candy which the consumer ultimately desires. Sampling has the impact of increasing the amount of music listening services on the CDs purchased. In the candy bar case, it is natural but wrong to think that if candy bars remain constant in price while increasing in size, that the quantity of candy bars sold will increase. After all, each large candy bar provides more utility than a small candy bar. This is apparently the thinking of those claiming that sampling MP3s increases the sales of CDs. First note that the price of candy (music services) is effectively lowered when the bar (CD) becomes bigger, holding the price of the candy bar (CD) constant. If the demand for candy (music services) is elastic, then revenue in the market will increase when candy (music services) goes down in price, as it does when constant-price bars (CDs) become larger. If revenues increase in this way, and the price of bar is unchanged, then more candy-bars are purchased. The inverse of this story will hold when the demand for candy is inelastic. Making candy bars larger rotates the demand curve so that the price is higher at small quantities but lower at large quantitiesin other words, the demand curve rotates and becomes steeper. Satiation occurs at a smaller number of bars since each bar is bigger The elasticity of demand for CDs maps directly into the elasticity of demand for music- listening services. If the price elasticity of demand for CDs equals one, so too must the price elasticity of 14

demand for music- listening services. After all, if the marginal revenue of another unit of music service is negative, so too must be the marginal revenue of the CD containing that unit.

4.2 NETWORK EFFECT

Some products have network effects. These occur for when consumers values of a product change depending on the number of other users there are of the product. The network effects story applied to file-sharing goes like this: File-sharing is likely to increase the number of individuals who listen to pre recorded music. If there is more consumption of music on the part of file-sharers, the value of music for non file-sharing individuals might increase and the nonfile-sharers would then be expected to purchase more music. What might be the nature of network effects in music? Although it is almost certainly a common event that one person hears music at a friends house and decides to buy it that is not sufficient for a network effect to exist. Just hearing new music is merely a form of sampling. For it to be a network effect, the value of the music once it has been heard must be higher because others also like to listen to this music. Alternatively, consumers may enjoy being part of a crowd and value particular songs more highly when they understand that others also listen to those song. Let us assume that there are such general network effects so that the utility of purchasing any particular CD increases as other individuals listen to more music. Nevertheless, those models demonstrate, at most, that there are certain theoretical conditions under which general network effects might benefit the sellers of music. A precondition for such a result is that file-sharing actually increases the man-hours spent listening to music since that is the mechanism that would lead to increased value for CDs. It seems unlikely that file-sharing will actually increase the total time spent listening to music. However, it is usually assumed that file-sharing must increase music listening since songs are made available for free that otherwise would require payment. It is a truism to economists that if the price is lowered the quantity consumed must increase. But in fact the alternative to file-sharing might not be the purchase of CDs, but instead might be the activity of listening to radio. Radio is another free method for music listening. Although file-sharing is likely to increase the time spent listening to non broadcast music, it will not necessarily increase the time spent overall listening to music. It is true that file-sharing is likely to give consumers a better choice of music to listen to since consumers cannot control what is on the radio but can control the choice of downloaded music. But just because an hour of listening to downloaded files might provide greater utility to listeners than an hour listening to radio doesnt mean that file-sharing will increase the time spent listening to music. Thus, in order for file-sharing to increase record sales due to network effects several rather long chains of possibilities all need to go the right way. First, network effects need to be general and not specific. Second, file-sharing needs to increase the general consumption of music, which is questionable. And finally, the network effects need to increase the demand by those who purchased CDs prior to file-sharing by more than the effect of a free substitute diminishes that demand. These are a set of conditions that seem highly unlikely to occur. That is why network effects seem an unlikely factor to eliminate the negative impact of file sharing of the sales of legitimate purchases.

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4.3 INDIRECT APPROPRIABILITY

The basic idea is that originals from which copies are made might undergo an increase in demand as those making copies of originals incorporate the extra value derived by the users of unauthorized copies. In order for indirect appropriability to work, however, one of two conditions must hold. First, the variability in the number of copies made from each original must be small, as in the example above. Or else the seller needs to be able to charge higher prices for those originals from which the most copies are made as in the real world example of photocopies. Indirect appropriability will not work in the case of file-sharing. Because there is great variability in the copies made from each original, and sellers of originals cannot identify which originals are going to be used on file-sharing systems, the mechanisms that allow indirect appropriability to function will not work.

5 CONCLUSION
The music business has faced a number of challenges in recent years. The effect the internet would have on the music business was completely underestimated by record companies and music 16

publishers. They were taken unaware by the impact of file sharing websites such as Napster. In the past few years CD sales have declined sharply. People regard them as being expensive and out of date. Many bands now make more money from touring then they do from CD sales. The internet has had a huge effect on the music business in recent years both positive and negative.

5.1 The negative impact

With piracy and file-sharing websites within hours of a new CD being released it has been copied and is available for illegal download on the internet. This obviously costs record companies a huge amount of money in lost sales. The music industry needs to adapt to changing circumstances. If it can change its business model to take advantage of new technology and deal with the problems of piracy then it will remain profitable. The analysis of file-sharing is a relatively new phenomenon. Economists are just getting started. Nevertheless, progress is being made. The theory underlying the analysis of filesharing has not received the attention that it deserves. It has always been clear that some possible aspects of file-sharing would harm copyright owners, such as the substitution of copies for the purchase of originals. What has not been understood is that the use of file-sharing to sample products is also likely to lead to harm to copyright owners.

Although one can still construct theoretical conditions under which file-sharing might benefit copyright holders, these conditions seem quite farfetched. A broad analysis of the various theoretical factors at work supports a view that file-sharing is likely to cause serious damage to the owners of copyright materials that are so shared.

5.2 Positive effects

It has created a cheap and efficient way of selling music-downloading MP3 files straight from the internet e.g. I Tunes. The internet has also reduced advertising costs and created closer relationships between bands and their fans. Although MP3 file sharing may decrease sales of CD, there are many benefits for music industry. For instance, although music file sharing is harmful to big music company like Sony Music, we cant ignore increasing number sales of audio devises. Customers tend to buy more audio device such as mp3 players when it is easy and cheap to download music. In contrast, if the cost of music is expensive, sales of music devices will decline. Therefore, there is tradeoff between sales of CD and sales of music devices.

5.3 The Future of File Sharing

Peer-to-peer networks remain strong and are likely to remain strong for some time. Barring packet sniffing to search for peer-to-peer file transfers, a practice which remains legally problematic for Internet service providers, there is no way to crack down on these networks. There are also a fair number of users who legitimately transfer files through these networks, making it difficult for any broad action to be taken against them. It is hard to say what the next revolution in file sharing will be, but whatever it is, it will probably create just as much controversy as file sharing has in the past. The last few years have provided economists a laboratory of sorts to analyze the impacts of file sharing. The basic evidence in the United States over the last few yearsthe birth of file-sharing and the subsequent decline in CD salesmakes for an extremely compelling and simple explanation in 17

spite of the protestations to the contrary from a large and vocal group of individuals supportive of file sharing. Empirical examinations by economists must be undertaken against the backdrop of this simple explanation. That these basic facts fit nicely with the economic theory only adds support to this explanation. With such a strong prior, empirical studies need to meet a higher hurdle than normal before they might be considered to overturn this expectation. All of the empirical works to date suffer from various imperfections. Nevertheless, all the studies except one find results supportive of the thesis that file-sharing is causing harm. As more evidence accumulates, both in the world at large and in the pages of academic publications we can expect to learn more about the impacts of file-sharing. The political arena is calling for an answer now, however, and is impatient to wait for academics to reach unanimity, which academics almost never do anyway. If an answer is needed, the answer that would appear to have the greatest likelihood of being correct given our current state of knowledge is that file-sharing hurts copyright owners and that it is responsible for most, if not all, of the recent decline in sales.

5.4 Steps
Three types of business models: Traditional business models based on mass production and distribution of physical formats. Revolutionary models based on unauthorised P2P file sharing, enabled by software-providing companies and allowing millions of consumers to share music without any payment to their right holders. New business models under which consumers pay to download music from authorised providers. With the increasing threat, following steps can be taken: Digital download ( la carte): music is sold directly per download (iTunes), is stored on the users own devices and becomes their property. Streaming subscriptions: instead of paying per download, users pay a fixed monthly fee to stream an unlimited number of music files, but will not get to own them. Portable subscriptions: users can download large collections of music for a fixed monthly fee, with ownership cancelled if they stop paying their subscriptions. Streaming radio: listeners pay a monthly subscription fee for access to online radio.

5.5 What people can do?

There are a number of things you can do to help the music economy from illegal P2P file sharing. First of all, dont download music illegally. There are a number of sites you can use that allow you to download music legally for a very small fee, or sometimes free. You can also check your computer to make sure you arent unknowingly sharing music or other media files. Uninstall all of your P2P programs, which may have enabled your computer to share music, and then run an anti-virus to get rid of spy and malware.

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6 REFERENCES
1. [hong_2004] The Effect of Napster on Recorded Music Sales: Evidence from the Consumer Expenditure Survey , Hong, Seung-Hyun; 2004-01 http://www.stanford.edu/group/siepr/cgi-bin/siepr/? q=system/files/shared/pubs/papers/pdf/03-18.pdf 2. [leguel_ea_2005] P2P Music-Sharing Networks: Why Legal Fight Against Copiers May be Inefficient? , Fabrice Le Guel; Fabrice Rochelandet; 2005-10-01 http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=476297 3. [oberholzer_ea_2004] The Effect of File Sharing on Record Sales: An Empirical Analysis , Oberholzer, Felix; Strumpf, Koleman; 2004-03 http://www.unc.edu/~cigar/papers/FileSharing_March2004.pdf 4. [oberholzer_ea_2005] The Effect of File Sharing on Record Sales: An Empirical Analysis , Oberholzer, Felix; Strumpf, Koleman; 2005-06 http://www.unc.edu/~cigar/papers/FileSharing_June2005_final.pdf 5. [peitz_ea_2004] The Effect of Internet Piracy on Music Sales: Cross-Section Evidence , Peitz, M.; Waelbroeck, P.; Review of Economic Research on Copyright Issues pp. 71-79 2004 http://www.serci.org/docs_1_2/waelbroeck.pdf 6. [rob_ea_2004] Piracy on the High C's: Music Downloading, Sales Displacement, and Social Welfare in a Sample of College Students , Rob, Rafael; Waldfogel, Joel; 200409-30 Preliminary Draft 2004-09-30 NBER working paper (have to pay!) 7. http://musicbusinessresearch.wordpress.com/2010/03/29/the-recession-inthe-music-industry-a-cause-analysis/ 8. http://www.utdallas.edu/~liebowit/intprop/MIT.pdf 9. http://www.longtail.com/the_long_tail/2005/11/the_effect_of_p.html 10. http://www.heritage.org/research/reports/2004/08/internet-file-sharing-the-evidence-so-far-andwhat-it-means-for-the-future

11. http://www.ftc.gov/reports/p2p05/050623p2prpt.pdf 12. http://www.heritage.org/research/reports/2004/08/internet-file-sharing-the-evidence-so-far-andwhat-it-means-for-the-future

13. http://www.brighthub.com/computing/smbsecurity/articles/67395.aspx#ixzz1VdqJDWrI

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