Copyright and Sales Distribution in the Era of Digitization: Evidence from the Music Industry

Abstract

Digitization has been associated with ushering in Schumpeterian creative destruction in many media industries, such as music, books, movies, and newspapers, while also increasing the variety of products available for consumption. It has also increased the cost of copyright protection by significantly lowering the cost of distributing and storing information. One strategy used to address piracy concerns is the implementation of digital rights management (DRM) technology which allows digital publishers and copyright holders to exert control over how consumers use digital works, by making it difficult to reproduce and distribute copies of legally purchased digital products. However, the effect of DRM on sales is ambiguous because while its implementation has the potential to curtail piracy, it may also have impeded sales by imposing restrictions on how legitimate consumers use legally purchased products. I exploit a natural experiment where the recorded music industry removes digital rights management (DRM) on their entire catalogues of music at different times to examine whether “opening up” the industry’s copyright strategy increases music sales. Using a large sample of albums from all four major record labels that covers multiple genres and both tails of the sales distribution, I find that removing DRM increases digital music sales by 15%. Interestingly, the effect is more pronounced for albums at the left-tail of the music sales distribution, providing evidence that lowering copyright protection disproportionately impacts consumption in the Long- Tail.