Die, Substitution Studies, Die II: Well, OK, Maybe Some Should Live

Let’s return to the arcane but, for IP debates, important subject of substitution studies, which try to clarify the extent to which piracy substitutes for or displaces legal sales.  We’ve argued that the media ecology has become so complicated that nobody has a handle on what substitutes for what.  Does a pirated MP3 file substitute for a $1 purchased file, a $12 CD, some number of listens on YouTube or Spotify or radio? Does Spotify substitute for MP3 purchases?  Or YouTube listens? Should we take stagnant discretionary income into account, and rising costs for other media services, like cable TV, Internet access, and data plans.  Do national differences matter–including major differences in digital markets and services (In Germany, CD sales represent over 80% of the market; in the UK and US, under 50%).  What about differences in law (in much of Europe, private copying is legal)?  Which of these factors get priority?  How do we model their interaction?

Substitution studies isolate piracy by discarding or minimizing the other factors.  This is understandable because good data is scarce and complex modeling is difficult.  But it’s a problem in a complex, fast-changing environment–like the music business, software business or, now, TV and movie business.  The narrower the study, the more likely it is to identify a meaningful correlation between two variables–say NBC pulling its material from iTunes and the short term bump in P2P sharing of NBC shows.  But the less likely it is to tell us whether we–as policy makers or researchers or music or movie fans–should care.

Let’s take an example from Smith and Telang’s chart of changes in a few of these media markets since the 1990s.

A record exec might look at this chart and say, piracy killed half my music sales.  A movie exec might look at it and say, piracy killed a quarter of my DVD sales.  But what if consumer budget constraints affect the purchases of shiny discs in general?  What if CDs and DVDs compete for discretionary income?  And what if both now compete–and lose–to other media-related expenses, like video games, data plans, and iPads?  Those markets have ballooned.

It’s possible for all these things to rise in good times, but also likely that preferences will align to favor some much more than others.  The relative ease of access to pirated material is clearly part of this decision matrix but what part?

I mentioned Will Page’s work at PRS for Music [I’m told he’s now at Spotify.  Good catch, Spotify!] as a example of how to start thinking about higher-level economic trade-offs.  Here’s a chart from one of his Economic Insight pieces from 2011:

The chart shows the decline–and then stabilization–of recorded music sales in the UK, plus the more-than-compensatory growth in the live market, plus the declining share of total consumer expenditures represented by both.  From a record label exec perspective, this is a problem.  A substitution study will probably suggest that piracy represents some portion of that, and industry lobbying will push for Internet enforcement bills like the Digital Economy Act.  But from the perspective of the wider music business, it’s good times!  Especially in a period otherwise notable for bad times!

Let’s ask a related question: what will happen to this market as income growth in the UK goes negative?

Will people cut back MP3 purchases or cable TV or cell phone service?  What does stronger enforcement do to this equilibrium, and at what cost?  Maybe an alternative to enforcement is to work to reduce wireless  or cable TV bills.   But this question is almost never raised because these business are intertwined.   The politics of the IP debate have consistently obscured this competition between rights holder groups.

I’ve spoken mostly about goods and services that seem like relatively close competitors, but the issue is, of course, income and expenses in general.  Here’s Page:

Here’s how we described the substitution problem last year in Media Piracy in Emerging Economies: