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99 Cents per Song: A Fair Price for Digital Music?

The Effects of Music Industry Strategies to Raise the Willingness to Pay by P2P Users
Francesco D. Sandulli Samuel Martn-Barbero

ABSTRACT. One of the main challenges of the music industry is to persuade peer-to-peer (P2P) users to pay for downloading songs from the internet. The music industry has launched some initiatives to reach this goal. This article studies the effect of those initiatives on the willingness to pay of a sample of Spanish P2P users. Results show that value-based strategies are the most effective, while legal campaigns come second. File pollution and educational campaigns did not produce any significant result. Collaterally, the article reveals some initial evidence of the digital music being viewed as an inferior good. doi: 10.1080/
15533610802174888 [Article

copies available for a fee from The Haworth Document Delivery Service: 1-800-HAWORTH. E-mail address: <docdelivery@haworth press.com> Website: <http://www.HaworthPress.com> 2007 by The Haworth Press. All rights reserved.]

Francesco D. Sandulli (PhD in Management, Complutense University of Madrid) is Associate Professor and Head of the UCM-France Tlcom Research Center in Information Society, Departamento de Organizacin de Empresas, Facultad de Ciencias Econmicas y Empresariales, Universidad Complutense de Madrid, Campus de Somosaguas 28223 Madrid, Spain (E-mail: sandulli@ccee.ucm.es). Samuel MartnBarbero (PhD in Communication, Complutense University of Madrid) is Associate Professor and Head of Communication Studies at Instituto de Empresa (IE)-Business School, C/Castelln de la Plana 8, 28006 Madrid, Spain (E-mail: samuel.martin@ ie.edu). Journal of Website Promotion, Vol. 2(3/4) 2007 Available online at http://jwp.haworthpress.com 2007 by The Haworth Press, Inc. All rights reserved. doi: 10.1080/15533610802174888

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KEYWORDS. Consumer perceptions, e-commerce, music, peer-topeer (P2P), piracy

INTRODUCTION According to the International Federation of the Phonographic Industry (IFPI) the internet is the fastest-growing delivery channel for music. Single track downloads in 2005 more than doubled, accounting for approximately 6% of global music sales (IFPI, 2006). However, this 6% only took into account legal download numbers, as many other music fans use peer-to-peer (P2P) networks to obtain the music they consume for free. The IFPI data (IFPI, 2006) show that in the five largest European music markets (United Kingdom, Germany, Spain, Sweden and France), most of the users of legal music download services were newcomers to internet music downloading and not users of peer-to-peer (P2P) networks. The same survey shows that only 15% of file-sharers in those countries have ever paid for music downloads (IFPI, 2006). These data confirm that migrating music consumers from unauthorised to legal services will be one of the main challenges of the music industry in the near future. Some empirical scholarship has been done on the reasons explaining why peer-to-peer users will pay for music. One of the most important results of this research is that the current price for digital music, on average 99 cents whether dollar or euro, is considered too high by P2P users (Walsh et al., 2003; Laycock, 2004; Sandulli, 2007; Sandulli and Martn-Barbero, 2007). Building on this earlier work, the main goal of this study is to (1) explore some mechanisms that can be used by the music industry to turn illegal file swappers into legal online buyers, and then to (2) examine the impact of these mechanisms on the price that P2P users are willing to pay for digital music. First, we will discuss some theoretical issues involved with file-sharing and digital music. Afterwards, we will identify the theoretical factors that we believe could explain the willingness or unwillingness to pay for digital music of P2P users. Finally, we will contrast the relative impact of the mechanisms used by the music industry on the willingness to pay for downloading a single track of P2P users in the Spanish music market. Spain is among the 10 biggest music markets in the world, and the one that has experienced the sharpest decline in music sales during the last five years.

Francesco D. Sandulli and Samuel Martn-Barbero

Mechanisms Influencing the Willingness to Pay for Online Music We observed that the music industry is using three mechanisms to influence the willingness to pay for online music of P2P users. The first one is massive file pollution in P2P networks, the second one is value differentiation, and the third one is behavior correction. Lets start with file pollution. In order to fight P2P piracy, the recording industry decided to deposit into file sharing networks large volumes of polluted music files. Some examples of polluting a music file are replacing part of the content with white noise, cutting the duration, inserting warnings about the illegality of P2P downloading or changing the song title. Nowadays, file pollution involves a large proportion of the songs available at P2P networks. For instance, Liang et al. (2006) found that more than the 70% of the copies of the most popular songs were polluted in the Kazaa P2P network. A large European consumer survey from the Informed Dialogue about Consumer Acceptability of DRM Solutions in Europe (INDICARE) confirmed that file pollution is successful (Dufft et al., 2005). In fact, most of the respondents of the INDICARE survey considered that the main problem within European P2P networks is the quality of tracks as many of them are not full length or have bad sound quality. From a theoretical point of view, pollution reduces significantly the quality of reproduction of the songs, limiting the degree of substitution between the legal song and the illegal one, and increases the transaction costs of the P2P download as P2P users cannot distinguish ex ante between polluted and unpolluted songs. For this reason, we expect that the higher the perceived pollution of P2P networks, the higher the willingness to pay for online music. The second mechanism is value differentiation. Legal online music stores such as iTunes or MSN Music Store are trying to provide more value to the music consumer than P2P networks do. These music stores are trying to provide the music consumer first, with a richer music consumption experience in terms of better file compression formats such as the AAC (Advanced Audio Coding) which result in better reproduction quality and faster download of the music file; second, with a better file search and management tools; and finally, with a more reliable and virus-free download environment. Looking more carefully at the functionalities provided by legal music stores (see Table 1), online music shops offer: prelistenings of the songs; large assortments of songs;

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TABLE 1. Functionalities Provided by the Leading Internet Music Stores (as of October 15, 2006)

some exclusive songs from certain artists, plus; powerful software tools to browse the catalogue, to manage the music files or even to interchange files, opinions and experiences with other customers. Summarizing our arguments above, we expect that when online music stores provide song sampling functionality, large stocks of songs, exclusive songs, track management software tools, reliable downloads, and/or advanced audio compression formats, the consumers will be more willing to pay for online music. Downloading music from P2P networks is considered by the music industry a dishonest behavior. To discourage this behavior, the music industry has followed two approaches. The first approach involves legal prosecution. Under this approach, we will expect that whenever the probability of being caught and the magnitude of punishment are increased, dishonesty will be reduced or eliminated and the willingness to pay for online music will be higher. The second approach targets the ethical values of P2P consumers. Behavioral economics literature has demonstrated that individuals act selfishly in the sense of maximizing their own payoffs, yet are also sensitive to the costs their dishonest behavior imposes on others (Mazar and Ariely, 2006). Some works studied two interesting

Francesco D. Sandulli and Samuel Martn-Barbero

mechanisms related to the individuals inherent motivation for honest behavior. Gneezy (2005) found that when individuals face wealthier counterparts, such as rich pop stars or large music companies, they will be more dishonest. Quervain et al. (2004) found that individuals will be more dishonest when facing counterparts that they consider to be also dishonest. Some research on P2P networks confirmed that these two mechanisms are influencing consumer behavior. For instance, Levin et al. (2004) found that American P2P users believe that artists are greedy or rich and that record companies are ripping off the people. Laycock (2004) observed that British users of file-sharing networks generally see the music industry in a negative light, thinking that the music industry makes too much profit. In Walsh et al. (2003) German P2P users showed that one of the main motives for the lack of willingness to pay for internet music downloads was that it was time to oppose the music industry and its overcharged offers. In order to change this bad reputation, the music industry invested in educational efforts to raise awareness about the damage caused to the artists and to build a social norm where illegally downloading music is considered socially undesirable and is frowned upon. We will expect that these campaigns have positive effects on the willingness to pay for online music. We will study not only the impact of file pollution, value differentiation and behavior correction initiatives, but also the role played by some control variables on the willingness to pay for online music. First, we will analyse the age of the P2P user. With this variable we wanted to reflect the fact that different generations tend to have different experiences, values, and priorities, leading to the assumption that different generational groups may exhibit different behaviors and attitudes towards paying for online music. Previous research (Freestone and Mitchell, 2004; Lee and Low, 2004) has shown that Generation Y consumers (between 8 and 24 years old) believe they are not doing any direct harm to the recording industry, blaming the industry for keeping prices artificially high. Moreover, age and income are highly correlated, so lower incomes should be related with a more constraining budget and therefore with a lower willingness to pay for music. We decided to control also for gender because Bhattacharjee et al. (2003) found different attitudes toward willingness to pay for online music, suggesting a possible gender-based music consumption pattern. Another control variable we considered was broadband connection, as it has been taken into account in the literature when explaining the behavior of P2P users (Peitz and Waelbroeck, 2004). In fact, if it is faster to download music from le-

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gal music stores comparing to P2P networks, the willingness to pay for online music of users without broadband should be higher. Finally, we wanted to know if the time using P2P networks can create some change barriers for very experienced users. Empirical Research Before describing our sample we should take a look at the Spanish market (Table 2). The first important issue to remark is that since 2001 music sales in Spain follow a continuing decreasing trend. This trend is especially sharp for the Compact Disk and Music Cassette formats. When this trend first started appearing, the industry argued that physical piracy was the main responsible for this decline (Promusicae, 2005). However, as shown in Table 2, market data contradicts this hypothesis as both the estimated share of physical piracy on the Spanish music market and the sales of blank CDs, highly correlated to music piracy, were declining since 2003. On the other side, the number of P2P files downloaded almost tripled during the 2003-2005 period.

TABLE 2. The Music Market in Spain

Francesco D. Sandulli and Samuel Martn-Barbero

The market concentration is growing continuously. In 2005 the Big Four music companies, Sony Music, Warner, Universal and EMI, held more than the 80% of the Spanish market. Moreover, the increasing average revenue per unit sold is also growing but at the same pace as the average Consumption Price Index for Spain. To finish this market overview we observed that the album fragmentation is growing, as the market share of the Top 20 albums is continuously decreasing since 2003. Perhaps the concurrence of the sharp growth of P2P downloads and the increasing fragmentation of the demand confirms the theory of Volz (2006) who argued that P2P and internet music distribution promotes music diversity and erodes the current stardom system promoted by the industry leaders. A market research firm provided us access to a representative panel of Spanish internet users. From this panel, P2P users that have already downloaded music were identified. We sent an email questionnaire to a random sample of 600 P2P users. The questionnaire of the survey covered a set of demographic questions on age, gender, income and broadband, a set of questions on musical tastes, time using P2P networks, the number of songs downloaded per week, how much money they would pay for online music, and finally included a set of questions on their motivations to pay for online music, measured by a seven-point Likert scale from strongly disagree (1) to strongly agree (7). The motivation items were related with the reproduction quality of the songs, the value provided by music stores, and the results of the ethical and legal anti-piracy campaigns. After filtering for invalid questionnaires and atypical observations, we had a final sample of 549 individuals representative of P2P users from age 16 with respect to age and gender. Among the valid questionnaires, the majority were male (57%), between 22 and 31 years old (46.5%), with broadband access (91%). Only 22% bought music at online music stores; the average respondent bought two songs during the last year. The average P2P user in our sample has less than three years experience with P2P networks and downloads 16 songs per week. Sixty-seven percent of our sample was willing to pay for downloading a song, with the average price they would pay for a song 0.56 , the mode 1, the median 0.5, the minimum 0.01 and the maximum 3 per song. First, an exploratory factor analysis was used to group the items of our survey. We extracted 5 factors as shown in Table 3. Not all the items charged in one factor; in Table 3, we show only those items with factor loadings larger than 0.5. The five final factors are Value-related to larger assortment and to reliable downloads, ethical perceptions-re-

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JOURNAL OF WEBSITE PROMOTION TABLE 3. Results of the Exploratory Factor Analysis

lated to P2P user perceptions on the ethical implications of their behavior, legal perceptions-related to the P2P user perceptions on the legal risks of downloading music from P2P networks, and value-related to experience interchange and community building features provided by online music stores. Loadings of the 5 factors were used together with the control variables to perform a linear regression, the dependent variable with money being P2P users would be willing to pay for legal online music. According to the results of the regression analysis (Table 4) the main driver of the willingness to pay for online music is value. More specifically, P2P users will pay for online music when legal internet music stores provide exclusive content, large catalogues of songs and a reliable download. The second relevant result of this research is that the legal fight against P2P download has positive effects on the willingness to pay for online music of P2P users. Thus, increasing the probability of being caught and the magnitude of punishment will produce more revenues in terms of digital music sales. In contrast, ethical campaigns do seem to be having much success in Spain. P2P users in Spain do not perceive that they are causing serious harm to the artists or the music industry, and our analysis shows that the

Francesco D. Sandulli and Samuel Martn-Barbero TABLE 4. Results of the Regression Analysis

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stronger this perception, the lower the willingness to pay for online music. We believe that the problem here is that P2P users do not understand what the music industry is. P2P users see the trees, mainly the Big Four companies and a selected number of superstars protected by them, but not the forest. And if a P2P user goes back to Table 2, he will notice that despite the increasing number of P2P downloads, during the last five years the market share of the Big Four has been steadily growing. We did not find statistically significant results for the other two factors, value related to community experience and pollution. Regarding the control variables, we found only two control variables to have some significant effect on the willingness to pay for online music. First, we observed that the number of songs purchased online the year before has positive effect on the willingness to pay for online music. The main conclusion arising from this result is that those P2P users who had already used online music stores are quite satisfied with the value they receive for their money. The second significant control variable is income, and this surprisingly, has a negative coefficient. This result is very interesting as it implies that richer P2P users are less willing to pay for online music. Even if more specific research would be needed

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on this point, we suspect that digital music plays the role of an inferior good within the leisure basket of individuals. In economic terms an inferior good is one that decreases in demand when the consumers income rises, because more costly substitutes that offer more pleasure are preferred by the consumer. Therefore, what we suspect is that there are more costly substitutes that produce more pleasure than digital music. In fact Sosnick (2004) already demonstrated that music was an inferior good in rich countries. Now the challenge for future research will be to understand which these substitutes are: Perhaps compact discs has better reproduction quality than a digital music file? Perhaps travel, golf or concerts? CONCLUSIONS One of the main challenges of the music industry is to persuade P2P users to pay for downloading songs from the internet. The music industry has launched some initiatives to reach this goal. Some of them were unfriendly, such as polluting P2P networks with corrupted music files or bringing P2P users to court. Some others were friendlier, such as trying to convince P2P users to purchase songs legally by providing them with more value for each digital music purchase, or to raise awareness about the damage P2P activity can cause the music industry. Our research analysed the impact of these initiatives on the P2P users perceptions and their willingness to pay for online music in the most declining music market in the world: Spain. Results of our study show that coercive actions and more specifically legal actions against P2P behavior have some positive effect on the willingness to pay of P2P users. However, the coercive measures have serious collateral effects in terms of unpopularity of the music industry. Both our research and previous research (Walsh et al., 2003; Laycock, 2004; Levin et al., 2004) revealed that P2P users have a feeling of aversion and antipathy for the four largest companies leading the music industry. Our research demonstrated that these feelings have a negative influence on the willingness to pay of P2P users. The music industry in some countries (such as Spain or the United States) launched educational campaigns aimed to change the negative perception of the music industry. Our results show that these campaigns in Spain, for the moment, at least, have not been successful in influencing the willingness to pay for music of P2P users. Moreover, our research revealed an important result: initiatives related to the value

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proposition of online music stores are more effective than coercive measures. More specifically, P2P users are being attracted to legal download services by catalogues of millions of songs, exclusive content such as exclusive songs or artists merchandising, and safe download environments. What is more, our study showed that P2P users who had already used the services of legal internet music stores were quite satisfied with the experience, as their willingness to pay is higher than for those P2P users who have never purchased music on the internet. Thus, more effort and development should be put into value differentiation between legal download services and P2P networks. One point that remains is how one internet music store can differentiate from the others, if all of them offer large catalogues, secure downloads, and exclusive contents. Further research would be needed to solve this question. Finally, our investigation discovered some initial evidence that digital music could be considered in economic terms an inferior good. If deeper research confirms this supposition, this discovery will have interesting implications to the industry, especially useful when defining product, price, and market strategies on internet distribution of music. The results of this research can be applied to those music markets such as Italy, Sweden, the Netherlands, or France, which, along with Spain have declining sales, intensive downloading (but with very few legal downloads), and failing enforcement (with little impact of legal actions against the P2P community). In some other countries such as the UK, U.S. or Germany, even if there is not empirical scholar evidence yet, market figures suggest that legal actions against P2P users could have some impact on the current music sales revival. Thus, we encourage future researchers to try to understand why P2P user perceptions are different in these two groups of countries. REFERENCES
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Received: March 10, 2006 Revised: May 12, 2006 Accepted: June 14, 2006