software piracy 2.0? - CiteSeerX

DIGITAL MUSIC AND ONLINE SHARING:

SOFTWARE PIRACY 2.0? Considering the similarities and unique characteristics of online file sharing and software piracy. Rapid advances in Internet connectivity and digital compression technologies have dramatically increased online sharing of digitized material, raising issues of intellectual property rights and lost sales. For instance, online music sharing has prompted legal challenges and industry alliances, while raising significant concerns regarding the industry’s future. A study in 2000 reported 14% of Internet users had downloaded music for free [11]. This number has grown rapidly, and online music sharing has been estimated to result in annual sales losses of $3.1 billion by 2005 for the music industry [2]. The effect of such sharing—induced by tech- transferable compressed version. Software, hownology—is inconclusive. Proponents—consumers ever, requires a loss-less compression for proper and some artists—argue that many consumers functioning; music files are much smaller than a download music to sample and subsequently pur- typical software application, and take much less chase a CD1 if they like the music, hence it provides an effective advertising channel By Sudip Bhattacharjee, Ram D. Gopal, and G. Lawrence Sanders [1]. It also benefits recording companies by helping new artists to become known at little cost to the com- time to transfer; individual audio files are not panies themselves. Opponents—in particular the perceived to be as expensive as average software recording industry and some other artists—argue packages, and the volume of available audio files that it undermines sales. Their fundamental is significantly larger than the existing volume of concern is that piracy threatens the business of software products. artists, composers, and producers. The phenomenon of sharing music files Despite its scope and publicity, little research online has been accelerated by various software exists on this problem from a consumer’s eco- packages and increasing Internet connection nomic perspective. Substantial research has speeds. With decreasing data storage cost and examined the related problem of software piracy higher bandwidth, users are able to send large [1, 6–8]. While software and music are both collections of music via email [2]. It is imporinformation goods in that the marginal cost of tant to recognize this phenomenon is not limproduction is virtually zero, certain key charac- ited to audio content. Other digitized goods teristics differentiate the two: audio quality of (movies, photographs, published articles, for the original CD is better than its electronically example) are increasingly shared as technology improves. Here, we strive to understand individual 1In subsequent discussions, references to CD do not exclude other highquality recording media. motivations to “freeload” digital music, such COMMUNICATIONS OF THE ACM July 2003/Vol. 46, No. 7

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that affected industries could develop effective measures to combat the problem. Online music sharing is analyzed from economic, technological, and demographic perspectives, and contrasted with software piracy. In particular we study whether: consumers’ music purchasing behavior is affected by free music; the effects of online sharing are consistent across types of music; and how alternative pricing and distribution mechanisms would affect consumer behavior. Our results suggest that, under certain conditions, sharing digitized music can serve a useful marketing function, and that demand for music depends critically on price, distribution mechanisms, technology, and the type of music. While our results suggest a number of similarities with software piracy, some unique characteristics have important implications for the music industry and technology providers in particular, and other digitized products industries in general.

• Value of music to a consumer and quality of online music affect piracy; • Demographic factors influence piracy; • Consumers’ available bandwidth influences their music purchase decision; and • Piracy provides a word-of-mouth advertising, leading to “sampling” that leads to a future purchase [5]. Behavioral models, which are important to initiate educational and legal campaigns to reduce piracy, are investigated in detail in [9].

Online Music Experience Survey Young people form a significant portion of the music fan base, and online music copying and sharing is rampant among students. We surveyed over 200 respondents during 2000–2001 as part of an ongoing study of consumer attitudes toward Digital Music Piracy: online music. ResponDemographics Lessons from dents were primarily • Age Software Piracy enrolled as full-time • Gender Digital goods have high (15%) or part-time Economic Factors Online Behavior initial production costs, (54%) students in col• Price/distribution strategy • Pirate and very low—approachleges; ages ranged from • Value • Sample • Income • Purchase/subscribe ing zero—reproduction 19 to 54 years, with Technology costs. They also have char61% males. A total of • Connection speed acteristics of a public good 52% of the respon• Quality perception in that sharing with others dents reported a very does not reduce a conhigh level of interest in sumer’s utility for the music, while another product. These traits facili- Figure 1. A model of 37% listened to music regularly. The sample group online music piracy. tate their widespread and is sufficiently diverse in demographic, economic, often illegal distribution and social aspects, and represents a significant comworldwide. ponent of the music industry customer segment. Software piracy research suggests that increasing Respondents were asked to reveal their online music software prices increases piracy [3, 6, 8]. Also, con- experiences, provide some demographic informasumers with a high value for a product typically tend tion, and specify preferences for certain online to purchase rather than pirate [3, 4, 7]. Additionally, music activities under different music CD pricing in the face of increasing preventive controls (encryp- schemes (economic) and Internet connection speeds tion and other technologies), individuals who do not (technological). legitimately own the digital good simply do without Online music sharing is conceptualized as a fourit [6]. This represents an opportunity loss on pro- step process, where economic, technological, and ducer profits. Females and older individuals (as demographic factors guide a consumer’s decision at opposed to younger college students) pirate less, each step. Given a music file, and an economic and and individuals with an ethical disposition tend to technological scenario, a consumer is asked to take pirate less [5–7]. one of six actions, as shown in Figure 2. Once a user We focus on the factors and relationships summa- searches and finds a certain file online, the user may rized in Figure 1. Specifically, we study whether: decide to download, listen, and purchase it based on: a “value” the user attaches to it, the user’s connection • CD pricing, consumer income and Internet con- speed, and the price of the related CD. For example, nection speed (bandwidth) affect piracy (bandif a user downloads, listens to, and deletes the music width measures the ease of copying music); file, then buys the CD of the music, the user has per108

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formed Action A shown in Figure 2. Similarly, a user try’s consumer base. Therefore, the demographic performs Action D when finding some music, down- effect is likely to translate to a larger drain on the loading, listening to, and keeping a copy of the music, bottom line for the music industry than for the softbut does not purchase it. Actions A and C are consid- ware industry. ered sampling2, as these lead to purchases. Action B Increasing the price of a music CD has a strong also constitutes sampling and is similar to listening to effect of increasing its related online piracy, pointing a radio broadcast. Action D to a fairly elastic constitutes freeloading3 or demand for music. Search for music piracy, because files are This is similar to downloaded and kept with demand for software Do not Download no subsequent purchase. This products, despite the Download may also lead to subsequent significant price difsharing of the file. Actions E ferential between the Listen and delete Listen and keep from computer in computer and F constitute traditional two. An average music purchasing decisions. CD retails for approxDo not Do not Do not If a consumer has listened imately $10–$15 and Buy Buy Buy buy buy buy to particular music before, its is significantly less A B C D E F value is assumed to be expensive than typical Actions “known” to the consumer; application software. otherwise it is “unknown.” Additionally, as prices Consumers are presented Figure 2. Online music increase, piracy of known songs (categories (i) and (ii)) experience survey: Possible increase almost twice as fast as unknown ones (catewith five music categories: user actions. Two categories of known gories (iii) to (v)). This indicates the need for differmusic: ential pricing for different music categories. Coupling Category (i)—one of their top five songs (to which individual music downloads with emerging micropaythey attach a high value); and ment methods may also yield promising results. Category (ii)—one of their top 50 songs (to which Inclination to pirate music increases dramatically as they attach moderate value). Internet bandwidth improves, with similar trends for Three categories of unknown music: all music categories. This suggests consumers would Category (iii)—unheard music from their favorite pirate more music as the ease of piracy increases. artist; Income has a negative effect—only for unknown Category (iv)—unheard music from the type of songs, suggesting that individuals with lower incomes songs they like; and are likely to pirate rather than purchase and sample Category (v)—unheard music recommended by a new music, based on current prices. Absence of friend or colleague. income effect for known songs suggests the decision to purchase music containing favorite songs is not sigKey Analyses and Implications nificantly influenced by disposable income. Comparison of Music Freeloading and Software Perception and Impact of Online Audio Quality. Piracy. Overall, we find certain key factors that Digital audio from CD loses some of its sound qualinfluence software piracy also extrapolate to music ity in a compressed format such as MP3, which compiracy. Females display a significantly lower ten- presses the original audio source at rates up to 12:1. dency to freeload music than men. Older individu- The online download process itself leads to files als pirate less; however the effect is small. Previous becoming corrupted or to incomplete downloads, furresearch has similarly categorized young males as ther deteriorating audio quality. In fact, 60% of archetypal software pirates. While the demographic respondents reported experiencing corrupted downprofile is similar to that of software pirates, implica- loads frequently or at least occasionally.4 Interestingly, more than 90% of respondents rated tions to the industries are dramatically different. Younger individuals constitute a minor consumer compressed music quality as almost the same or very segment for typical business software, however, they good compared to CD quality, as shown in the bar comprise a significant portion of the music indus- chart in Figure 3a. The quality perception did not vary across demographic and economic factors. This 2Downloading unknown music prior to a purchasing decision is termed sampling. 3Downloading and keeping known music and not owning it in any form is consid-

ered freeloading.

4Experience of corrupt downloads was measured on a five-point scale, from Frequently to Never.

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suggests that with widespread prevalence of com- than an unknown song. In all comparisons between catpressed digital audio, users have become accustomed egories, a user is willing to pay more for a CD with a to and now accept this level of quality. Also, it is prob- known song than for one with an unheard song. This is able that users’ demands for degrees of quality are natural, considering the speculative risk of buying influenced by free availability of digital audio offer- unheard music. The price difference is also affected by ings. Other results also indiusers’ available bandcated the quality of width, and is consis60.00 downloading music alone is tently lower for 48.30 50.00 42.38 not a significant determining consumers with high 40.00 factor leading to a purchase. bandwidth. This This has crucial ramifica- Percentage 30.00 again seems to imply 20.00 tions for the recording industhat consumers expect 8.52 10.00 try. Pricing and other to find and download 0.80 0.00 economic models that rely on music online. Almost the Very good Half as Does not same good compare audio quality are unlikely to The results sugbe successful under the changgest current uniform ing circumstances. Moreover, with improving com- Figure 3a. MP3 vs. CD CD pricing system is suboptipression technology and faster connections, even quality perception. mal under a changing technohigher-quality digital files will become available, logical scenario. The music which would severely undermine marketing efforts industry should introduce newer economic models of that rely heavily on acoustics. pricing that incorporate both the value of music Consumer Willingness to Purchase. A natural to consumers and technological factors that affect corollary of the non-impact of sharing. For instance, quality is that as users’ Internet two complementary 6 connection speeds increase, approaches can be High bandwidth 5 their price sensitivity to puremployed to increase Low bandwidth chasing music increases. On users’ buying proba4 Mean average, for category (i), a conbilities: users should price 3 sumer with a slow connection difference ($) be provided more 2 is willing to pay 8% more (for exposure to new CD) than one with fast conmusic in order to 1 nection. For category (ii), the familiarize them, 0 difference increases slightly to which would potenCat.(i) vs. Cat.(i) vs. Cat.(ii) vs. Cat.(iii) unknown unknown 8.4%, while for unknown tially result in a higher music music songs it is 7.4%. Hence users willingness to purwith high bandwidth are willchase, and the pricing Figure 3b. Consumers’ willingness to ing to pay less than those with slower connections. pay for different types of music. structure should be Importantly, this result holds true across categories more flexible for clearly implying that users expect to find freely shared unknown music. music online. In terms of pricing, as more music Technologically, copy protection mechanisms are becomes available online, users with fast connections evolving to prevent users from copying digital music would rather download and listen than buy. This is files. Similar to the effects of preventive controls in similar to results obtained in software piracy software piracy [6], music listeners may simply do research—as copying software becomes easier (hence without the copy-protected goods. Further study is convenient), the willingness to purchase decreases. warranted to determine consumer acceptance of such Hence as more music becomes available online (net- technologies. work effect), and as more consumers upgrade to highIssues of Piracy vs. Sampling: For categories (i), speed connections (technology effect), the offered (ii) and (iii), downloading clearly leads to piracy. For price should decrease from current levels to positively other categories, neither piracy nor sampling is eviimpact a user’s buying decision. dent in a statistical sense. Hence consumers with high A user’s willingness to pay also depends on per- perceived value for music primarily pirate it, and ceived value of music, as shown in the bar chart might sample if the value is completely unknown. shown in Figure 3b. For example, users are willing to Overall, results point to the existence of piracy across pay over $5 more for a CD with a category (i) song categories, with indirect evidence for sampling for 110

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Recent variations of the subscription-based model are beginning to provide consumers greater flexibility in purchasing and listening to digital music.

r categories (iv) and (v). Further studies are ongoing to determine the effects of such sampling. Online Subscription. Users with high-bandwidth connections (via cable modem or DSL service) indicated they were willing to pay over $10 per month for an online music service, while those with slower connections (56Kbps modem or less) were willing to pay about $5. This demonstrated a significant positive price sensitivity on subscription rates based on Internet connection speeds. It is interesting to contrast here our earlier result that users with high-speed connections were willing to pay a lower price for a CD than those with slower connections. This strongly suggests users find subscription services more convenient, and hence fee-based subscription would become a better model due to its ease of use and greater customer convenience. However, doubts have been raised about the viability of subscription-based business models in their current form [10]. The results did not vary with the age of consumers. However, with a fast connection, men are willing to pay higher subscription rates than women; with a slower connection, women are willing to pay more. This suggests that gender-based, rather than agebased, marketing strategies are likely to have greater impact for signing up subscription members.

flexibility in purchasing and listening to digital music. Other industries that produce digital goods and face similar problems need to be studied. In particular, the TV and movie industry has already felt the pressure, and it is only a matter of better compression technology and increased bandwidth before fulllength movies are shared the same way as music files [12]. The global scope of the Internet calls for the development of generalized models for information goods that are supranational and that transcend cultural, legal, and economic barriers. c

References 1. Boston, W. Bertelsmann is betting that users, content rule with Napster deal. The Wall Street Journal (Nov. 2, 2000). 2. Clark, D. Steps by music industry to halt Internet piracy may be futile. The Wall Street Journal Interactive Edition (Sept. 19, 2000). 3. Cheng., H.K., Sims, R.R., and Teegen, H. To purchase or to pirate software: An empirical study. Journal of Management Information Systems 13, 44 (1997), 49–60. 4. Conner, K.R., and Rummelt, R.P. Software piracy: An analysis of protection strategies. Management Science 37 (1991), 125–139. 5. Givon, M., Mahajan, V., and Muller, E. Software piracy: Estimation of lost sales and the impact on software diffusion. Journal of Marketing 59 (1995), 29–37. 6. Gopal, R.D., and Sanders, G.L. Preventive and deterrent controls for software piracy. Journal of Management Information Systems 13, 44 (1997), 29–48. 7. Gopal, R.D. and Sanders, G.L. International software piracy: Analysis of key issues and impacts. Information Systems Research 9, 4 (1998), 380–397. 8. Gopal, R.D., and Sanders, G.L. Global software piracy: You can’t get blood out of a turnip. Communications of the ACM 43, 9 (Sept. 2000), 82–89. 9. Gopal, R.D., G.L. Sanders, Bhattacharjee, S., Agrawal M., and Wagner, S. A behavioral model of digital music piracy. Journal of Organizational Computing and Electronic Commerce (2003). 10. Mathews, A.W., Peers, M. and Wingfield, N. Music industry is finally online, but there aren’t many listeners. The Wall Street Journal (May 7, 2002). 11. Pew Internet and American Life Project. 13 million Americans “freeload” music on the Internet; 1 billion free music files now sit on Napster users’ computers. Internet Tracking Report (June 8, 2000). 12. Waters, D. ‘Napster effect’ hits U.S. shows. BBC News Online (May 7, 2003).

Conclusion Our study of online digital music sharing highlights several key influential factors. Sharing audio files shows some similarities as well as uniqueness compared to software piracy. Price of music and available bandwidth are found to have significant effects on piracy. The price impact becomes more pronounced as technology improves. We find existence of piracy across all music categories, and weak evidence of sampling for “unknown” music. Interestingly, the perceived quality of compressed audio did not seem to Sudip Bhattacharjee ([email protected]) is an assistant and CIBER research fellow in the School of Business play any significant role. We also find viability of sub- professor Administration at the University of Connecticut, Storrs. scription-based models, which exhibit sensitivity to Ram D. Gopal ([email protected]) is an associate professor, gender differences and differentiated pricing based GE professor of business, and CIBER research fellow in the School of on bandwidth. These insights could influence Business Administration at the University of Connecticut, Storrs. Lawrence Sanders ([email protected]) is a professor enhanced pricing models in the future. Recent varia- G. and chair of the Department of Management Science and Systems at tions of the subscription-based model, for example, the State University of New York at Buffalo. Apple Computer’s à la carte online music service iTunes, are beginning to provide consumers greater © 2003 ACM 0002-0782/03/0700 $5.00 COMMUNICATIONS OF THE ACM July 2003/Vol. 46, No. 7

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