Securities Price Effects of Napster-Related Events

Abstract

Napster released its controversial peer-to-peer music file sharing software to the public in June 1999, and after approximately two years of intense debates and legal battles it was eventually ordered to shut down in February 2001. The opponents of Napster (e.g., the Recording Industry Association of America, RIAA, and Metallica Lars Ulrich) suggested that Napster had collapsed the business structure of the U.S. multibillion-dollar music industry. Napster, on the other hand, argued that its service had increased the music sales. We use Napster as a proxy for diffuse piracy through the Internet since it was the conduit for individual file sharing on a large scale. We examine the effects of 11 prominent Napster-related events on the equity value of firms in the U.S. music industry. If Napster's service stimulated (harmed) music sales, then events that increased (decreased) the effectiveness of Napster would improve (reduce) the stock prices of the music firms. Our evidence suggests that events that increased the effectiveness of Napster as a distribution mechanism improved the stock prices of the music firms. Additionally, the evidence indicates that events that threatened Napster's survival resulted in decreases in the stock prices of the music firms. Music firms in the sample experienced negative excess returns ranging from minus;1.76 percent to minus;10.69 percent in response to anti-Napster events. On the other hand, retreats from anti-Napster events were accompanied by positive excess returns ranging from +0.56 percent to +5.05 percent. The seven anti-Napster events resulted in a total capital loss in excess of $18 billion and the four pro-Napster events created wealth in excess of $9 billion, compared to the total market capitalization of $101 billion for the sample firms.