Digitization Tutorial: Piracy, New Products, and More
Joel Waldfogel from University of Minnesota discusses the impact of digitization on piracy, revenue, and welfare in the context of music industry. The presentation covers literature on file sharing, anti-piracy strategies, and the challenging question of sales displacement. Insights are shared on the complex relationship between piracy, revenue, and welfare benefits of digital products.
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Digitization Tutorial: Piracy, New Products, and more Joel Waldfogel University of Minnesota and NBER
A little about me Started life in economics departments Stanford PhD Yale Econ, 1990-1997 Moved to business schools Wharton 1997-2010 Minnesota since 2010 (also affiliated with econ & law) Where you sit has some effect on what you can and want to do Media guy before digitization/Internet Differentiated products IO in radio, newspapers, television, role of FC
Todays agenda Expose you to some literatures/questions Explain my choices, gently steer yours? Piracy and revenue Digitization and the supply of new products The welfare benefit of digitization-enabled new products Digitization and trade (time permitting) Let s keep it loose and informal
Digitization in music, round 1: Piracy The standard music paper motivation since 99: the sky is falling! RIAA Total Value of US Shipments, 1994-2009 16000 14000 total 12000 $ millions 10000 8000 digital 6000 4000 2000 0 physical 19941996199820002002200420062008
Research Response Mostly a kerfuffle about whether file sharing cannibalizes sales Does the newfound ability to consume without payment decrease revenue? Surprisingly hard question to answer Oberholzer-Gee and Strumpf (2006),Rob and Waldfogel (2006), Blackburn (2004), Zentner (2006), and more but most believe that file sharing reduces sales
My assessment of the piracy literature A lot of moderately OK papers It s inherently difficult to get a convincing answer Don t write yet another one of these unless you have a very compelling empirical strategy A related literature: impact of anti-piracy strategies on revenues See various papers by Mike Smith and Rahul Telang Revenue vs welfare Information systems vs economics Is the sales displacement question interesting?
Piracy and welfare I m not saying theft is good. But it does raise surplus in the SR
My 2011 Epiphany Revenue reduction, interesting for producers, is not the most important question Instead: will flow of new products continue? (We should worry about both consumers and producers) RIAA, IFPI: reduced investment will lead to an audio stone age
File sharing is not the only innovation Compound experiment Costs of production, promotion, and distribution have also fallen Maybe weaker IP protection is enough What has happened to the quality of new products since Napster? Contribute to an evidence-based discussion on adequacy of IP protection in new economy This has led me to focus on the supply of new products Beginning with music
Assessing quality/service flow of work over time Hard problem! 2 approaches: Critics best of lists E.g. Number of albums on a best-of-the-decade list from each year Retrospective: to be on list, album s quality must exceed a constant threshold Usage information by time and vintage
Rolling Stones 500 Best Albums (2004) Rolling Stone Index Index Availability from 2004 album list Word, The Virgin Media Under the Radar Uncut .06 Treble Treble Tiny Mix Tapes 80 Times, The The Word The Times The Sunday Times The Sun The Guardian The Boombox Stylus Decade Stylus State Spinner Spinner Slant Slant Rolling Stone Rolling Stone Rock's Back Pages Rhapsody Rhapsody Resident Advisor 60 Resident Advisor Popdose Popdose Pitchfork .04 Pitchfork Pitchfork 1990s (99) Paste The Onion A.V. Club Rolling Stone onethirtybpm OneThirtyBPM NPR National Public Radio Noise Creep Index NME NME musicOMH Mixmag Metromix Denver Metacritic Lost At Sea 40 LostAtSea The Line of Best Fit Kitsap Sun Irish Times HipHopDX Guardian, The Glide Gigwise Gigwise Ghostly FACT .02 Entertainment Weekly eMusic Delusions of Adequacy Decibel Daily Californian Creative Loafing Consequence of Sound Consequence of Sound Complex 20 Complex CokeMachineGlow Boot, The Boom Box, The Billboard BetterPropaganda Austin Town Hall American Songwriter Q NOW MSN.com BET Pitchfork 1990s (03) Blender songs Rate Your Music Zagat Rolling Stone Best Ever 0 Acclaimed Songs Acclaimed Albums 0 1960 1970 1980 1990 2000 2010 1960 1970 1980 1990 Year 2000 2010 Year Regression: Splice together to create overall index, covering pre- and post- Napster era. Plot s
And voila: Index of vintage quality Album Year Dummies and Napster weighted 3 Index is falling prior to Napster 2.5 2 1.5 Post-Napster constancy is, if anything, a relative increase 1 .5 1960 1970 1980 1990 2000 2010 year coef bottom of 95% interval top of 95% interval
Approach #2 Measure of vintage quality based on service flow/consumer decision Sales and airplay Idea: if one vintage s music is better than another s, its greater appeal should generate higher sales or greater airplay through time, after accounting for depreciation
Data Airplay 2004-2008 by vintage Sales 1970-2010, by vintage From RIAA certifications After accounting for age/depreciation, are some vintages used more than others?
Regression approach Define st,v= share of vintage v music in the sales or airplay of music in period t. For a given year t, s varies across vintages because of depreciation and variation in vintage quality Regress ln(st,v) on age dummies, vintage dummies. Allow flexible depreciation pattern Then: vintage dummies are index of vintage quality
Resulting Airplay Index Airplay-Based Index Flexible Nonparametric 2.5 2 1.5 1 .5 0 1960 1970 1980 1990 2000 2010 Vintage Index bottom of 95% interval top of 95% interval
Sales-Based Index Sales-Based Index Flexible Nonparameric 1 0 Index -1 -2 1960 1970 1980 1990 2000 2010 Vintage
Bottom line No evidence that vintage quality has declined More compelling evidence that it has increased Hard to know what it might otherwise have been Big contrast to IFPI/RIAA view Puzzle: why continued quality despite revenue collapse?
Welfare benefit of new products Fundamental feature of creative products: nobody knows anything Hard to predict success at time of investment Perhaps 10 percent succeed Traditionally, it has been expensive to experiment Must bring a product to market to learn whether it will succeed Music: $1 million using traditional means So bet on a few artists with ex ante promise
Along comes digitization Negative shock to demand and supply Obvious effects on production and distribution Recording, distribution are now inexpensive Promotion too? Traditionally, radio is a bottleneck Now Internet radio and online criticism It has become cheaper to experiment Do we end up discovering more artists with ex post value?
How could quality improve? Label forms estimate of album marketability q as truth + error: q =q + Bring a product to market if q > T. Cost reduction trumps piracy, so that on balance, digitization reduces T, raising the number of projects that can be brought to market. Big question: what happens to the volume of good work available to consumers?
Suppose marketability were predictable Then reduction in T brings more products But they are of modest quality: T < q < T
With unpredictability Release all products with expected quality above T Result: more products with quality > T Release of products with less ex ante promise leads to a greater number of products with ex post success/value
Is this explanation right? More new products? including indies with less ex ante promise? Do consumers have ways to learn about a proliferation of new products? Changing roles of traditional radio, Internet, and critics Are the new products good ? Do the products with less ex ante promise e.g. indie artists who would not have been released before digitization account for a rising share of ex post success?
So I wrote 3 4 6 descriptive papers documenting Growth in the number of new products Growth in experienced quality That new product account for a growing share of the winners Music 2012 paper in Journal of Law and Economics 2014 chapter in NBER volume Economic Analysis of the Digital Economy 2016 paper with Aguiar in Information Economics and Policy Books 2015 paper with Reimers in Information Economics and Policy Movies Forthcoming paper in Journal of Industrial Economics Television Forthcoming paper in Innovation Policy and the Economy Tradeoffs of phenomenon vs technique-driven research
Illustrative Anecdote: Arcade Fire s The Suburbs Released by indie Merge Records August, 3, 2011 Critical acclaim Metascore=87 (top 5%) Little conventional airplay Not on BB Airplay Chart But big on Internet radio Success Sold >0.5 million copies Best Album Grammy for 2011 Arcade Fire Ready to Start on Last.fm 40000 30000 listeners 20000 10000 01jul2010 01oct2010 01jan2011 ddate 01apr2011 01jul2011
Answers Growth in releases? Yes. Nielsen: 35k in 2000, 100k in 2010 Changing information environment Ex ante promise and ex post success
Answers Growth in releases? Changing information environment Ex ante promise and ex post success
Changing Information Environment Traditional radio BB airplay top 75 songs by week 3,900 listings per year But only about 300 distinct artists Traditional vs Internet radio Compare BB list with last.fm top 420 songs of the week in 2006 Little overlap 10 percent
Top 2006 BB Airplay Artists not on Last.fm Weekly Top 420 Top Artists on Last.fm in 2006 without BB Airplay ARTIST BB airplay index ARTIST DEATH CAB FOR CUTIE COLDPLAY RADIOHEAD MUSE ARCTIC MONKEYS THE POSTAL SERVICE THE BEATLES SYSTEM OF A DOWN BLOC PARTY NIRVANA THE ARCADE FIRE listeners 5,200,000 5,200,000 4,700,000 3,900,000 3,000,000 2,800,000 2,400,000 2,300,000 2,100,000 1,900,000 1,900,000 MARY J. BLIGE BEYONCE NE-YO CASSIE CHRIS BROWN YUNG JOC SHAKIRA LUDACRIS CHAMILLIONAIRE AKON 14.3 12.0 10.3 9.8 9.8 8.2 6.9 6.0 5.7 5.2 Takeaway: Internet radio allows promotion for artists with less promotion on traditional radio
Second, growth in criticism Much of it online Growth in Reviews sources founded since 1980 with over 2000 reviews in Metacritic 100000 Cumulative Metacritic Reviews 2000-2011 80000 Under The Radar Drowned In Sound PopMatters 60000 Uncut Pitchfork The A.V. Club 40000 Mojo All Music Guide Entertainment Weekly Q Magazine 20000 Spin Alternative Press Rolling Stone 0 1970 1980 1990 2000 2010 Founding Year
Success and promotional channels What s happening to the role of traditional airplay among successful artists? What s happening to the role of critics?
Learning from critics vs radio Of commercial successes: Share of BB200 with Metacritic Reviews Share of BB200 with Billboard Airplay .4 .3 .3 m ea n o f d m e ta m ea n o f d air .2 .2 .1 .1 0 0 1993 1996 1997 1998 2005 2008 2009 1991 1992 1994 1995 1999 2000 2001 2002 2003 2004 2006 2007 2010 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Declining share with airplay, especially since 2000 By contrast: increasing share with critical attention
Answers Growth in releases? Changing information environment Ex ante promise and ex post success
Ex ante promise and ex post success Do artist with less ex ante promise who would not have made it to market prior to digitization now achieve sales success? Specifically, do indies account for a growing share of sales? Indie Share among Billboard 200 Indie Share among Billboard 25 .4 .2 .15 .3 mean of dindie mean of dindie .2 .1 .05 .1 0 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Even the losers get lucky sometimes
Summing up music Digital disintermediation provides possible explanation for increased quality Given unpredictability, more experimentation leads to discovery of additional good music Ex ante loser become ex post winners Much of which would not have come to market before digitization
What about other cultural products? Books, motion pictures, television, Of each, ask the questions (when possible): More products? Ways to learn about new products? Growing success of ex ante losers ? Are the new vintages good ?
Books Growth in new products, ecosystem ? Share of Adults with Tablets and eReaders new self-published books .4 450,000 .3 400,000 350,000 .2 300,000 250,000 .1 200,000 150,000 0 100,000 01jul2010 01jul2011 01jul2012 01jul2013 ddate 50,000 ebook reader either tablet 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 Yes, especially self-published e-books, supported by diffusion of tablets & e-readers
Commercial success of ex ante losers Share of Bestseller Listings Originally Self-Published Share of Bestseller Listings Originally Self-Published romance .2 .6 .15 .4 share share .1 .2 .05 0 0 01jan2009 01jan2010 01jan2011 01jan2012 date 01jan2013 01jan2014 01jan2009 01jan2010 01jan2011 01jan2012 date 01jan2013 01jan2014 From Storming the Gatekeepers, Waldfogel and Reimers (2013)
Movies: digitization and cost reduction Camera Types for Theatrical Releases 1 Production Digital cameras that are cheap and good Distribution Digital sales (iTunes, Netflix, Amazon, ) Promotion Lots of movies reviewed online + user-generated reviews .8 .6 .4 .2 0 20002001200220032004200520062007200820092010201120122013 mean of arri mean of moviecam mean of alexa mean of canon mean of pana mean of aaton mean of red mean of other
Major titles are steady, even declining Major MPAA Releases 250 200 mpaareleases 150 100 50 0 1980 1990 2000 2010 year Source: MPAA
but huge growth in overall production Movies with IMDb pages as of August 2013
Growth in small-scale theatrical release Theatrical Release 800 600 400 200 0 1990 1995 2000 year/vintage 2005 2010 MPAA movies theatrical releases 500+ screens reviewed at Metacritic Sources: MPAA, Box Office Mojo, Metacritic
More movies released to digital streaming services Online vs Theatrical 1500 In 2013, over 1000 vintage-2010 movies available on streaming Netflix, over 1,200 at Amazon Instant 1000 500 0 1990 1995 2000 year/vintage 2005 2010 Theatrical releases Streaming at Amazon Streaming Netflix avail in '13 Sources: IMDb, Instatwatcher.com, Box Office Mojo
Product discovery Significant growth in review provision and availability A range of professionals plus amateurs Growth in Critic Coverage by Group User-rated Movies at IMDb by Vintage 2600 1=top 250, 2=250-500, 3=500-750,4=750-100 1 2 2400 1 Movies with IMDb User Ratings .2 .4 .6 .8 2200 mean of dcritic 0 2000 1990 1995 2000 2005 2010 1990 1995 2000 2005 2010 3 4 1 1800 .2 .4 .6 .8 1600 0 1990 1995 2000 2005 2010 1990 1995 2000 2005 2010 2000 2005 2010 2015 year Graphs by group Reviews of selected movies at IMDb Source: IMDb, movies with 5+ user ratings
Argo example: wide range of pros Alexa Traffic Ranks of IMDb Argo Reviewers vertical lines at Rolling Stone, indiewire 588 reviews and the Alexa ranks of their sources. Median rank: 1.6 million .2 .15 Density .1 .05 0 0 5 10 15 20 Log Alexa Traffic Rank
Do independent movies succeed? What is independent ? I know it when I see it Independent Spirit Limited appeal Indiewire Not produced by major studio
Indies are growing share of box office,DVD revenue, and what s available Independent Share of Theatrical and DVD Revenue Independent Share of Available Movies by Vintage as of August 2013 .5 1 .8 .4 .6 .3 .4 .2 .2 0 .1 1980 1990 2000 2010 year 1990 1995 2000 2005 2010 2015 year Netflix streaming on television Amazon Instant Top 50 Vudu by Vintage Box Office DVD listings
Are the new movies good Rotten Tomatoes Best Share of RT Top Movies from Independent Studios 87-90, 90-95, 95 1 100 80 .8 60 Not Major .6 40 20 .4 0 1993 1994 1995 1996 1997 1998 1999 2000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 .2 mean of low mean of high mean of medium 1980 1990 2000 2010 year Absolute number of movies with high grades has risen a lot and independent movies account for growing share of RT-top movies
