Napster and its Effects on the Music Industry: An Empirical Analysis

Problem statement: In the mid to late 1990s the rise of the internet has led to the development of Peer-to-Peer networks (P2P), which allows for increased and rapid connectivity between individuals and has made the transfer of information and files as simple as clicking a button. Approach: The ability to connect so easily has had its share of positive and negative effects on the music industry. Results: One potentially negative effect in particular has been the charge made by the Recording Industry Association of America (RIAA), a trade group representing the music industry, that P2P networks have enabled individuals to effectively steal and share music, which is concomitant with decreasing CD sales. Still others claim that the availability of free music on applications such as Napster and Kazaa, among others, has actually helped the music industry by exposing individuals to artists they might not have otherwise become aware of. This study attempts to empirically identify and measure the effects of illegal downloading on CD sales and the music industry as a whole, using semiannual time series data for the years 1990 through 2007. Conclusion/Recommendations: Our regression results showed that we cannot establish illegal downloading as the main culprit for decline in CD sales. There appears to be a number of factors driving down the sale of CDs, the largest of which is the sale of vinyl singles. The rise of legal online downloading since 2002 will also be accounted for the online electronic transfer and its effect on CD sales.