Journal of Social Sciences 6 (3): 303-309, 2010 ISSN 1549-3652 © 2010 Science Publications Napster and its Effects on the Music Industry: An Empirical Analysis 1Patrick Mooney, 1Subarna Samanta and 2Ali H.M. Zadeh 1Department of Economics, College of New Jersey, Ewing, NJ 08628, USA 2Department of Management, Susquehanna University, Selinsgrove, PA, 17870, USA Abstract: Problem statement: In the mid to late 1990s the rise of the internet has led to the development of Peer-to-Peer networks (P2P), which allows for increased and rapid connectivity between individuals and has made the transfer of information and files as simple as clicking a button. Approach: The ability to connect so easily has had its share of positive and negative effects on the music industry. Results: One potentially negative effect in particular has been the charge made by the Recording Industry Association of America (RIAA), a trade group representing the music industry, that P2P networks have enabled individuals to effectively steal and share music, which is concomitant with decreasing CD sales. Still others claim that the availability of free music on applications such as Napster and Kazaa, among others, has actually helped the music industry by exposing individuals to artists they might not have otherwise become aware of. This study attempts to empirically identify and measure the effects of illegal downloading on CD sales and the music industry as a whole, using semi- annual time series data for the years 1990 through 2007. Conclusion/Recommendations: Our regression results showed that we cannot establish illegal downloading as the main culprit for decline in CD sales. There appears to be a number of factors driving down the sale of CDs, the largest of which is the sale of vinyl singles. The rise of legal online downloading since 2002 will also be accounted for the online electronic transfer and its effect on CD sales. Key words: Peer-to-Peer (P2P) networks, illegal downloading, Napster, vinyl, regression INTRODUCTION recording artists individually and the music industry as a whole. It has also led to disputes over copyright The global economic climate has experienced infringement upon the rights of music artists. dramatic changes over the last two decades as a result Proponents of these types P2P networks (that facilitate of the personal computer and increased Internet music file sharing) claim that the ability to download connectivity. This rapid advancement of technology has music for free has had an innocuous effect on CD and created new business opportunities and allowed for vast paid electronic sales. Still others claim that the improvements in communication. Despite the multitude availability of free music on applications such as of positive effects being reaped from the internet, there Napster and Kazaa, among others, has actually helped also exist issues that have upset many people. In the the music industry by exposing individuals to artists mid to late 1990s the rise of the internet has led to the they might not have otherwise become aware of, or has development of Peer-to-Peer networks (P2P), which allowed sampling of music prior to purchase. The allows for increased and rapid connectivity between purpose of our research project is to identify the extent individuals and has made the transfer of information to which these P2P networks have contributed to the and files as simple as clicking a button. The ability to overall decline in CD sales and, also, to identify the connect so easily with masses of individuals has had its effects of enacted legislature against illegal file sharing share of positive and negative effects. One potentially and the increase in access to legal digital downloads negative effect, in particular, has led to much have helped curb this issue. The study is organized as controversies in our society: the Recording Industry follows: firstly this study briefly explains the nature of Association of America (RIAA, 2009), a trade group the recorded music industry and its history, the nature representing the music industry, has charged that P2P and function of P2P networks and legislation imposed networks have enabled individuals to effectively steal to protect intellectual property. Secondly this study and share music, leading to a significant reduction of briefly reviews the literature. In fourth part, this study CD sales and illegally appropriate the profits of details the hypotheses to be tested and discusses the Corresponding Author: Ali H.M. Zadeh, Department of Management, Susquehanna University, Selinsgrove, PA 17870, USA 303 J. Social Sci., 6 (3): 303-309, 2010 data and econometric methodology. In fifth part, this The digital revolution of the musical world study discusses empirical results and implications. appeared to happen very quickly. However, the music Finally conclusion is given. industry’s infrastructure and institutional legislation protecting the rights of the artists lagged far behind the A brief history of the recorded music industry: The innovative changes taking place. Before the record recorded music industry consists of several groups who companies could begin putting into place online are involved in the creation, recording and distribution marketplaces, others were already creating their own of music. In the nineteenth century, the music industry P2P software to share music free of charge. This was dominated by live music or the sale of sheet music. created the problematic issue of the P2P networks. The creation of the phonograph marked the Although the development of P2P networks has establishment of a new market: recorded music, which changed the climate of the internet and has led to some currently dominates the industry in this day and age. excellent innovations, however, these P2P networks The industry saw many changes over time, generally, as have also enabled online communities to connect and a result of technological innovation. Some of the groups illegally share copyrighted music without any payment involved in this industry include musicians, producers, to the artists. In order to understand the effects these A & R agents, publishers, labels and retail music stores. P2P networks can potentially have on the music However, for most of the later part of the 20th and into industry, it is important to first develop an the 21st century, the music industry consisted primarily understanding of how they function. (on the supply side) of two major groups. These groups P2P networks are online communities that are able are major record labels which are dominated by the to connect to one another’s computers to search, share “big four” record groups (Sony, BMG, EMI, Universal and download files. These P2P networks capabilities and Warner). The other group is comprised of smaller can easily be extended to movies, pictures and independent labels producing and distributing music on computer programs. A distinct characteristic separating a much smaller scale. These two groups spent a long P2P networks from other more traditional networks is period of time at odds with one another, but each the lack of a central server or client severs, but rather played an integral role in the industry’s development shared peer nodes which provide the bandwidth. Most and expansion. Independent labels boasted the ability to online business networks derive from a central server serve artists’ interests and not be part of the corporate where a client would initiate a download and the server “sell out” of major labels. They were able to spend time would react to satisfy the request. In most P2P networks break in new artists and genres creating and feeding the individual computers initiate downloads directly expanding demand for music. Major labels were able to from one another usually through host software. Thus, amass large quantities of capital that allowed them to as more users begin to use these P2P networks, their finance the recording process and expand to have global system capacity increases along with the number of distribution chains that served to feed global demand files available for sharing. for recorded music. Furthermore, labels are supposed to P2P networks, despite the fact that they pose a protect the intellectual property of their clients, threat to some industries, have been used to break new preventing piracy and unlicensed distribution. The ground in innovation and assisted in the distribution of 1980s led to most independent labels using major labels information. For example, many computer for their distribution and, therefore, independent labels programmers will make their programs and program came to serve the interests of major labels (Throsby, codes available on P2P networks for other individuals 2002). to test, adjust and improve the programs. Furthermore, P2P file sharing did not mark the first threat to the many colleges have become a part of online academic rights and profits of the music industry and the artists P2P networks that allow colleges and higher education they represent. The ability to copy tapes, burn CDs, or institutions to legally share files. The largest of these purchase pirated music from street vendors has long academic P2P networks is the Penn State’s LionShare. plagued the music industry. However, the burning of LionShare allows secure and legal file sharing of CDs and copying of tapes took place on a relatively academic content. Another attractive feature of small scale in comparison to the online sharing. The LionShare is its commitment to disclosure of the online climate of sharing allowed people all over the identity of sharing peers and movement away from world to access a person’s music library, where burning anonymous sharing. It is clear therefore why it is a CD would require one to know an individual who has important to understand how P2P networks function the music they want and who is generally in a very and facilitate illegal file sharing (Felix and Strumpf, close geographical proximity (Harrower, 2005). 2004).