Effect of File Sharing on Record Sales

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Advancement in technology almost always affects the economy. In most cases, a new technology is introduced which causes production to be easier and supply to increase. In the case of the music industry, there is much debate whether or not new technology is the cause behind a decrease in record sales or if it is due to something else such as a change in consumer preferences or a decline in the overall economy of the U.S.

Many believe online file sharing is responsible for a recent decline in record sales because consumers no longer have to purchase music because they are able to download and share music online. A study conducted Harvard business professor, Felix Oberholzer-Gee, found that the opposite might actually be the case. He discovered that people don’t download full CDs, instead they download only the hit songs from an album. The radio industry is a compliment to the record industry. People hear hits on the radio and eventually buy the whole CD. He believes that same is true for online sharing. Online sharing is also much cheaper than the radio which creates a more competitive market because there is a greater competition among sharing services. This causes the cost of promotion for the industry to decrease.

On the other hand, unlike with CD sales, iTunes allows for individual song downloading. The economics of the music production are characterized by significant fixed costs and because the albums are now broken apart, the revenue earned from a new album is much lower. This is why many believe that file sharing has hurt the music industry.

The music industry needs to find the most efficient type of bundling of song sales. For example if consumers buy most hit songs on a CD they could get the rest at a discount whether online or in store. A proposed resolution for the decline in record sales is a strategy of selling compliment to record sales. An example of this strategy is when artist give away new releases to promote concerts. Economists need to find a way to use online music sharing to maximize profits and not affect externalities such as the stores that sell the records. If the music industry can find a way for recent advancements in technology to compliment record sales instead of substitute for them, they may be able to regain some of the recent loses in record sales.