One of the most infamous online-activity being experienced at the moment is file sharing. Napster was founded in 1999, and it is the original service for music sharing. It revolutionized the industry through the allowance of the free flow of songs that were MP3 format by using its friendly interface. Obtaining other files, including music, became easily convenient, accessible, and most importantly it became free. The following essay explains the main economic and ethical issues that are related to illegal P2P (peer to peer) file-sharing technologies. It also uses the basic demand and supply model to analyze these issues.
Moral Issue
File sharing is increasingly becoming faster and easier, and this benefits the end-users through the accumulation of music downloads that are free. This causes some implications in the music industry. There have been more than 230 million copies of downloaded Kazaa globally. The file sharing has distributed numerous quantities of copyrighted material (Michael 2018, p.35). This openly qualifies as an infringement of a victim's private property. The owners of copyrights have argued that the sharing of files is piracy. The end-users are essentially obtaining and benefitting from files that they had not initially paid for (Knopper 2018, p.46). Many people are ready and willing to violate these copyright laws for their own benefit and convenience. They do not mind that it is illegal and that this kind of behavior is considered immoral by a large section of individuals.
Economic Issue
P2P sharing networks have increased the platform for sharing of files. Free downloaded music is substituted by end users instead of legitimate record purchases subsequently reducing music sales. In the decade since Napster came into being, there has been a significant reduction in the generated revenue of the music industry. Shipment value from the United States, between the years of 1975 and 1999, rose from $5.8 billion to $12.8 billion constantly in 2000 dollars (Statistical Abstract of The United States 2010, p.262). The annual U.S. revenue, between the years of 1999 and 2008, fell from $12.8 billion to a low of $5.5 billion. This was more than a third below the level experienced in 1999. This decline was not only isolated to the United States, but the worldwide revenue reduced in 1999 from $37 billion to almost $25 billion over the whole of 2007 from all the physical music that was recorded. The RIAA (Recording Industry Association of America) has been representing labels, such as Universal Music Group and Warner Music. This has been on behalf of the music industry to eliminate any illegal file-sharing globally (Statistical Abstract of The United States 2010, p.262).
Analysis
The effects of piracy can be analyzed using a demand curve that represents the distribution of the willingness of consumers to pay for any music that is recorded as a CD (compact disc) with 12 songs ("Measuring the Effect of File Sharing on Music Purchases." 2006, p.3). This is depicted by a marginal cost curve that is horizontal illustrating the cost used in obtaining a disc at the shop. In the U.S a CD cost around $15, and consumers bought them from monopolists at a price that is higher than the marginal cost (Waldfogel 2012, p.34). The section that is below the demand curve is segmented into PS (producer surplus), CS (consumer surplus), marginal costs, and DWL (deadweight loss). The internet's introduction reduced the marginal cost to zero assuming that the willingness to pay by consumers is unchanged. The area of the demand curve now becomes the DWL, PS, and CS (Frenz 2010, p.5). Like it is shown in Fig 1., none can be allocated to the marginal costs of production. File sharing has increased the legal demand for music that is recorded.
Fig 1. (Waldfogel, 2012)
There will be a decrease of new products over a period of time in the market if firms are induced to come up with new products (due to the reduction in revenue) (Koleman 2007, p.25). Piracy can bring about different responses (David, n.d.). If piracy is more in a certain music genre, the development of new products will shift away from that genre and move to those that are not affected. If it is harder to sell recorded music then the artists will shift to performing live music. Strumpf and Oberholzer-Gee (2010) and Handke (2010) suggest that the quantity of albums that were released in Germany and the United States has not reduced meaning that the sharing of files has not affected the supply (Handke, 2006). There were 97,751 albums released in 2009, but just 2050 were able to sell more than 5,000 copies (Peoples 2010). Surpluses generated are not equivalent to the number of products that are availed. The quantity of products, therefore, gives an inaccurate measure of the effects pertaining to the supply of welfare.
Discussion
Demand has reduced due to privacy since the advent of Napster. One way of reconciling this is a vertical supply curve meaning creativity is insignificant to the reward. Music can be made without anticipating any rewards. Private firms cover the costs of bringing the product to the market (Krueger 2006, p.28). The components involved are creation, promotion, and distribution. Creation involves the artistic aspect of recording, engineering, and mixing. New technologies have enabled this component to be less expensive (Sorenson 2010, p.30). Record companies usually invest a lot of funds in the promotion of their new music. Consumers are learning about new music from online platforms. The distribution of music has also been changed through the internet. The distribution is done electronically, thus reducing the costs incurred.
Conclusion
The sharing of files has presented a challenge in the music industry. It has undermined copyright protection enjoyed by recorded music. Since Napster, it does not seem that there has been a significant decrease in the supply of recorded music. Music labels are increasing their production of new music. The supply of music is forthcoming when faced with weakened copyright protection. New distribution and recording have enabled the distribution of music to reach more people globally. Creating works such as movies has, however, increased in cost.
References
David, B. (n.d.). Online Piracy and Recorded Music Sales.
Frenz, M. (2010). Don't blame the P2P sharers. Journal of Evolutionary Economics, 5.
Handke, C. (2006). Plain Destruction or Creative Destruction? Copyright Erosion and the Evolution of the Record Industry. Review of Economic Research on Copyright Issues, (3).
Krueger, A. (2006). Rockonomics: The Economics of Popular Music. Handbook of Economics Art and Culture, 1.
Knopper, S. (2018). Appetite for Self-Destruction. The spectacular crash of in the Digital Age. New York Free Press.
Koleman, S. (2007). The Effect of File Sharing on Record Sales: An Empirical Analysis. Journal of Political Economy.
Measuring the Effect of File Sharing on Music Purchases.”. (2006). Journal of Law and Economics.
Michael, N. (2018). The Impact of Digital File Sharing on the Music Industry: An Empirical Analysis. Topics in Economic Analysis and Policy.
Sorenson, A. (2010). Supply Responses to Digital Distribution: Recorded Music and Live Performances.
Statistical Abstract of The United States. (2010). Economic Report of the President, p.262.
Waldfogel, J. (2012). Music Piracy and Its Effects on Demand, Supply, and Welfare*. 12.
