Sunday, November 1, 2009

Professor Roberts' Bizarro World

Bizarro World – With Professor Russell Roberts.

The article for this week’s reading is entitled “Napsternomics: What’s the Most Effective Way to Protect Intellectual Property Rights?” I found the article to be another crazy road trip through Bizarro World with my least favorite economist, Russell Roberts, behind the wheel.

Roberts fired up the engine on his 1972 VW Microbus by giving us a definition of Napster, the software program where without much effort one would download virtually any song onto their computer and move it to an MP3 player or burn it to a CD. He tells us that the critics of Napster argue that this method of obtaining music was essentially theft. Roberts points out that if Napster was legal and widespread, sales of recorded music would essentially go to zero, destroying the incentive to be a musician. The critics thought that Napster would mean the end of the professional music community.

In his article, Roberts disagrees with the critics of Napster. He does accept the view that Napster was a form of theft, and theft would have been good for the music industry in the long run. To quote Roberts,

“…the decision to shut down Napster via the courts may ultimately harm music lovers, even those like myself who never used Napster. In other words, I will argue that allowing the theft of music via Napster could have actually increased revenue for the music industry benefiting music lovers and the creators of music.”

Roberts’ article was written in June of 2002, so it’s possible to see if Robert’s prediction came true. Roberts states:

” If Napster had been allowed to flourish, it's possible that new technologies would have been created to allow music producers to charge for their work at the same time that listeners would have benefited from the access opportunities provided by Napster.”

I’m going to argue that the file sharing technology that Napster popularized never actually went away. While Napster itself lasted only from June 1999 to July 2001 as a free file sharing service, other peer to peer file sharing software programs such as Kazaa, and bittorrent, stepped in to fill the ‘Napster niche”. Kazaa and FastTrack, (another file sharing software program) were created by Niklas Zennström, Janus Friis, and Priit Kasesalu. It was introduced by their Dutch company Consumer Empowerment in March 2001. The shutdown of Napster allowed Kazaa to rapidly facilitate the free sharing and copying of music in a peer to peer environment. In my opinion Kazaa was just Napster by another name that actually allowed you to download more music faster. (I’m leaving aside the costs of Kazaa, such as increased introduction of malware, viruses and other malicious code. If you want to research that tradeoff, jump on wikipedia and bring some caffeine and Kleenex.

BitTorrent is another of a long line of file sharing software programs that were able to quickly and easily take Napster’s place. According to Wikipedia: (I know not the most reliable source…) “The first client, known as BitTorrent, was created by Bram Cohen, in October 2002. A BitTorrent client is a computer program that manages downloads and uploads using the BitTorrent protocol.”

Ok, let’s go back to Roberts’ contention that, “If Napster had been allowed to flourish, it's possible that new technologies would have been created to allow music producers to charge for their work at the same time that listeners would have benefited from the access opportunities provided by Napster” Napster was allowed to flourish! Just not under the name Napster. In Roberts’ article he likens Napster style peer to peer file sharing to people in Boston and New York City stealing car stereos. In his analogy, those cities eventually just stop trying to catch the criminals who break into cars to steal car stereos. This allows the market to invent ways to disincentivize this theft, and at the same time better satisfy the wants and needs of consumers. (I think this analogy is complete and utter bullshit, and I’m willing to defend my opinion at our next meeting Thursday and also in person to Professor Roberts. I digress.)

Roberts feels that shutting down Napster would have been the equivalent of Boston and The Big Apple cracking down on car stereo theft. THAT IS FALSE. Shutting down Napster was like cracking down on car stereo theft using a crowbar to smash the window. Since the other file sharing options were still available, “Napster” was actually still around. You can’t steal a car stereo if you use a crowbar to smash the window, but you can if you use a brick, or your fist. That analogy more closely resembles what actually happened in real life.

Arrrgh… this post is too long.

Two more points, the music industry was already licensing music for downloads before Napster was shut down, its market was already responding to the theft! It was already providing consumers with what they wanted! Enter iTunes: iTunes is a proprietary digital media player application, used for playing and organizing digital music and video files. The program is also an interface to manage the contents on Apple's popular iPod digital media players as well as the iPhone. Additionally, iTunes can connect to the iTunes Store via the Internet to purchase and download music, music videos, television shows, applications, iPod games, audiobooks, podcasts, feature length films and movie rentals (not available in all countries), and ringtones (available only in the USA). It is also used to download applications for the iPhone and iPod touch running iPhone OS 2.0 or later.[1]

iTunes was introduced by Apple Inc. on January 9, 2001,[2] at the Macworld Expo in San Francisco. (Before Napster was shut down!)

Ok my final two points:

  • In Professor Roberts’ Bizarro World, Napster was shut down, effectively barring the theft of music. In his ideal world, if Napster had been allowed to stick around the “theft of music via Napster could have actually increased revenue for the music industry benefiting music lovers and the creators of music.”
  • In the real world, while Napster was shut down, “Napster” wasn’t. There never was a real concerted effort to end file sharing, Napster replacements were active before the actual Napster was shut down, and the amount of freely downloaded music has actually risen from year to year. In this real world, the theft of music hasn’t increased revenue for the music industry. (In 1999 the major labels sold about 13 billion dollars worth of music, in 1998 only 9 billion.) Whether music lovers and the creators of music have benefited is an open question.

Please listen to a recent On the Media with Brooke Gladstone, from Oct 23, for a bird’s eye view of the Napster vs. Record Label incident.


  1. Just want to point out that at the time Russel wrote this article itunes was in fact readily available. However the introduction of Apple's itune's store, the actual client through which people could download music legally, wasn't introduced until April 2003 - long after Napster shut down and Russel published the article you criticize. Also early in the itunes store's history Apple experimented with several digital rights management (DMR) schemes which in effect meant those who decided to get their music through legal channels didn't technically "own" their music. They were merely "borrowing" it temporarily from Apple and their RIAA backed record labels, who could at any time revoke their permissions to listen to the music they purchased.

  2. Thank you for the correction! I was under the impression legal downloads started before napster got deep sixes. Check out that on the media link. I found the riaa insider interview to be eye opening.

  3. Oops. I made a huge mistake.

    Should read 1999 - 13billion
    2008 - 9billion

    Yikes I need to hire an editor.

  4. I fail to see how Roberts' central thesis is false. Granted he failed to anticipate the explosion of alternative P2P file-sharing options after Napster's demise but his prediction that the existence of illegal downloads on the web would provide copyright holders with an incentive to look for ways to protect their intellectual property from unlicensed distribution was spot on. What Roberts didn't realize was the futility of the copyright holders' experiments with methods of discouraging copyright infringement. He assumed that some sort of innovative new technology would be invented that would allow copyright holders to discourage illegal downloading in the same way that the invention of removable radios discouraged stereo theft. DRM is just that sort of innovation. In that sense his NYC analogy was accurate. The only difference is that the market in NYC was self correcting whereas in the digital music market the pirates have consistently outsmarted the copyright owners. That's because Roberts, and essentially everyone else at the time, underestimated was the ingenuity of digital pirates and their skills at subverting any DRM technology copyright holders could come up with. As a result P2P sharing is at an all time high while record profits drop to an all time low.

    Now that they've failed to discourage P2P transfers on their own via DRM they've resorted to seeking legal intervention and government protection. You say that "there never was a real concerted effort to end file sharing", but I'd point you towards the scores of lawsuits the RIAA has filed since MP3 and P2P technology came into the mainstream. It's been indiscriminately suing individual file-sharers, torrent trackers, website owners, software engineers et al. for at least the past decade in an unsuccessful effort to deter piracy.

  5. Roberts said "I will argue that allowing the theft of music via Napster could have actually increased revenue for the music industry benefiting music lovers and the creators of music.”

    In my experience, that's about as close to a testable prediction as economists ever get. He gives him self some wiggle room by saying "could have". Fine, I won't hold him to a high standard. Even if they only increased revenue by a single penny, I'll concede the victory to Roberts.

    Music industry revenue is down 4 BILLION as of 2008.

    I argue that while the "capital N Napster" was shut down, the technology it represented was not.

    I say that the industry did allow theft of music via Napster (actually Napster substitutes.) If you want to use his "NYC Stolen Stereo analogy", what happened is that the recording industry never came out with a product that stopped functioning when it was stolen. The car stereo industry did.

    If you want to argue that the music industry 'could have, but didn't' then you will be pulling me into a hypothetical world that doesn't exist in reality.

    Professor Roberts argued in his piece that when you give the actual property rights for your stuff to thieves, the market will respond in a way that benefits both the Producers and the Consumers.

    Through technological innovation and ineffective law enforcement, the actual property rights for music was given to thieves. The market did respond, consider what happened to Napster after it was shut down as a p2p file sharing system, or consider iTunes. ITunes just sold its six billionth song in January of 2009. I don't know what it's up to 11 months later...

    Professor told us that in this specific instance, if you let the thieves have your junk, the market will respond, and we will all be better off.

    The market responded: we aren't better off.

  6. I like Josh disagree with Robert’s main point. I think that in the case of Napster that systems for protecting music from theft actually increased because Napster was shut down by the legal system. This is because of the publicity that was created by the ordeal. Music recording companies saw how their profits would dissipate and many never would be music pirates became so because they learned of such sites through the shut down of Napster . Other file sharing sites took Napsters place. Most people that I’ve talked to about stealing music have done so through other sites, infact I don’t think that I know anyone who originally used Napster during it’s hay day.

  7. You're right that the music industry failed to devise a means to successfully restrict access to copyrighted music over the internet and they are worse of because of it. However I would argue that net social welfare may actually have increased as a result of piracy despite the losses of music labels, musicians, and traditional record stores.

  8. LOL, If only that what Professor had predicted! I might be agreeing with him. I owned a record store for around three years in the early 2000's, And I actually think that music piracy probably helped me out. (Hard to tell for sure though.)

  9. If you bought and sold used albums at your shop and didn't give the RIAA a slice of your earnings in their eyes you're no better than a pirate, car thief, commie, terrorist etc.

  10. First off, Josh:

    "If you want to argue that the music industry 'could have, but didn't' then you will be pulling me into a hypothetical world that doesn't exist in reality."

    Like "imaginary wealth" and the world as a "single self-contained trading system" because of the lack of interplanetary commerce? Ha ha. We've already delved deep into the realm of hypotheses my friend.

    But I take your point that we have to deal with what actually happened, not what might have happened. And I agree with you that the market hasn't responded quite the way Professor Roberts predicted. The courts tried to shut online music piracy down but failed, because as Richard pointed out the pirates have stayed ahead of the system.

    The markets definitely tried to respond (iTunes) with some measure of success. You mentioned that iTunes has sold over 6 billion songs. Was this profit included in the $9 Billion profits of the Record Industries in 2008? Curious how that pans into it.

    Perhaps the reason the music industry is losing money is that it is not correctly responding to supply and demand. Albums are getting more and more expensive while free music is getting easier and easier, whether you download it online or you just copy the contents of someone's iPod onto your computer.

    Perhaps the music industry needs to lower the costs of cds. And I know that theoretically the only way to counter the cost of free music (nothing) is to produce music for free (impossible), but I think the music industry would sell more albums and actually make more money if they lowered the costs of cds down.

    The problem with this is that because the profit margin will be narrower and so Record companies are less likely to take risks on new artists and so the variety might decrease. But I think technology counters this by allowing people the ability to market themselves easily online by cheaply recording demos and posting them to community review sites.

    It's hard to predict the future of the music industry, after all, the industry might take a surprise corner and go in a direction completely unexpected. It doesn't seem likely that the music industry can exist as it has been in the past, though. Something's going to have to change or it will keep losing income year by year.

  11. "The markets definitely tried to respond (iTunes) with some measure of success. You mentioned that iTunes has sold over 6 billion songs. Was this profit included in the $9 Billion profits of the Record Industries in 2008? Curious how that pans into it."

    I tried to find out, but if the detailed numbers are out there I'm having trouble finding them.

  12. UDO,
    I like where you were headed with this post. Mr. Roberts seems to be making a lot of leaps in his article, most of which don't really make sense. It is difficult to see how car owners (as opposed to stereo manufactures) were benefited by thieves freely stealing stereos. Sure car stereos were redesigned to be harder to steal, or useless once stolen, but where is the benefit for the car owner in that situation? While he could have a point, claiming that the cost of the law enforcement necessary to prevent stereo theft would have exceed the cost of redesigned stereos, he fails to provide any evidence that was actually the case. I tend to find evidence more convincing than unsubstantiated claims.
    To back up Mr. Roberts for a minute. On the idea that music piracy sites could actually help record sales, the BBC posted an article on the second of this month ( ) that claims that those individuals--in the UK at least--who steal music also purchase around twice as much music as those who don't. That fact actually has less to do with the innovation Mr. Roberts believed would have come from unhampered file sharing than it does with the fact that people who love music will purchase it as well as steal it--because they love music. We cannot draw the conclusion that music piracy actually promoted record sales from the BBC article. In fact it could very well be that the pirates would have purchased more music had they been unable to steal the music that they had. Instead, we can only draw the conclusion that people who love music will obtain more music than those who don’t—not exactly a revelation I know. We should be careful about committing post hoc proctor hoc fallacies, even when they may support an idea we like.