In the aftermath of Grokster I continue to ponder the argument that media companies should have to show market impact to justify imposing secondary liability for P2P downloading. This came up again when I spoke on the subject at TTI/Vanguard's recent conference on evolving systems; the audience was very interested in this question.

The real question should not be impact on CD sales, though I discuss that below...

CD sales are the business model of the eighties. Those who continue to buy CD's in any number are likely a very different crowd from those who get their music online (my friend Jim Delong excepted). The question is what is the impact on ventures like iTunes, or other online ventures that do not yet exist. Apple's March 2005 10-Q filing sums up the situation:

The Company is currently focused on market opportunities related to digital music distribution and related consumer electronic devices, including iPods. The Company faces increasing competition from other companies promoting their own digital music products and distribution services and free peer-to-peer music services. These competitors include both new entrants with different market approaches, such as subscription services models, and also larger companies that may have greater technical, marketing, distribution and other resources than those of the Company, as well as established hardware, software and music content supplier relationships. Failure to effectively compete could negatively affect the Company’s operating results and financial position. There can be no assurance that the Company will be able to continue to provide products and services that effectively compete in these markets or successfully distribute and sell digital music outside the U.S. The Company may also have to respond to price competition by lowering prices and/or increasing features which could adversely affect the Company’s music product gross margins as well as overall Company gross margins.

But let's go back. Suppose one insists that indeed the impact on CD sales is what matters. And furthermore one brings up the Harvard study saying there is no impact on CD sales. Several points now come to mind in response.

-The Harvard study was peculiar, in that for one thing it did not distinguish between the downloading of hits from flops. The economic impact on the industry is quite different, and arguably a better methodology would have weighted these differently (I credit the economist Stan Leibowitz for this point). (Music and movies are also arguably different, in that most people watch most movies once, whereas a song may be listened to many times).

-The Harvard study defies common sense. The simple reality is, that of the people I know that listen to music often, almost none of them are paying for any of it. There is an enormous amount of free-riding going on, and at some point that is going to have consequences, especially as global broadband picks up. Better address this sooner rather than later; once consumers expect to get something for free, it will be even more difficult for pay-based models to get going.

-Spanish IP enforcement authorities I spoke with recently noted that counterfeit CD production is falling off, as P2P picks up. Seems reasonable to suppose that if P2P is displacing pirated CD sales it is displacing ordinary CD sales as well.

-And, as I've noted before, music isn't the only good affected--we also need to think about software, photography, etc.

-DOJ's IP study relates an anecdote about a songwriter--of top ten material, at that, who as more and more unlicensed copies of his song were downloaded, ended up laying off his employees; he wasn't being paid for any of it. Anecdotes are always tricky, but it illustrates well the point that if an impact is felt first, it will often be small players who are hit the hardest.

That's all for now.