Study Says File Sharing Helps Established Artists Sell More Albums
File sharing albums before their release dates reinforces popularity and helps sales, according to a study of BitTorrent traffic by Robert G. Hammond, an assistant professor at North Carolina State University. It's a conclusion that clashes with the music industry's position on file sharing, but there could be some potential.

The study's main finding is an album made available in file-sharing networks a month earlier would sell an additional 60 units. "This increase is sales is small relative to other factors that have been found to affect album sales," Hammond writes.

Hammond File Sharing Leak

But not all artists get the same benefit. The positive affect on sales impacts only established, popular artists, not new and relatively unpopular artists. The affect is double for artists who have had an album sell at least 100,000 units and double for artists who have released more than three albums than for newer artists. Hammond keeps these small gains in perspective by acknowledging the far larger effects of promotional efforts such as radio and the benefit of a win or appearance on the annual Grammy Awards.

"File-sharing proponents commonly argue that file sharing democratizes music consumption by 'leveling the playing field' for new/small artists relative to established/popular artists, by allowing artists to have their work heard by a wider audience, lessening the advantage held by established/popular artists in terms of promotional and other support," writes Hammond. "My results suggest that the opposite is happening, which is consistent with evidence on file-sharing behavior."

The study looked only at pre-release albums, not albums after their street dates or individual tracks. Hammond's data source was "the largest network within the BitTorrent protocol" and the largest private (invitation-only) tracker specializing in sound recordings (over 565,000 albums from about 441,000 artists). The study followed 1,095 albums by 1,075 artists from May 2010 to January 2011. The four major label groups released about 37% of the albums in the study. Independent albums distributed by the majors accounted for 22.4% of the albums.

One area of concern with the study is the geographic representation of purchases. The study compares Nielsen SoundScan data to the file-sharing activity of 148,465 people from various countries - including about 80,000 Americans and 11,000 Canadians. However, sales data by Nielsen SoundScan cover only purchases made within the United States (and some of its territories) and Canada. In other words, the purchasing activity of tens of thousands of file sharers does not appear to be represented. Hammond's conclusions might not have changed if only U.S.-based file sharing was tracked, but it's surprising the paper does not even mention this obvious data mismatch or explain if and how it was overcome.

The study's findings may make the music industry at large uncomfortable -- the official line is still that file sharing hurts sales -- and is sure to contribute to the ongoing discussion about the music industry's efforts to stamp out illegal sharing. News of the study spurred the blog TorrentFreak to declare "BitTorrent piracy can act as promotion." If only it were that easy.

The problem in believing piracy helps sales is deciding where to draw the line between legal and illegal. Even if a person or label embraced file sharing for the sake of an individual artist, the larger industry couldn't possibly embrace it. A legal marketplace is important. Implicit in the study is the fact that both buyers and sellers are required in order for pre-release file sharing to have a positive impact on album sales. Without iTunes, Amazon and Best Buy, file-sharers would be just file sharers rather than purchasers. If you carry out the "file sharing should be legal" argument to its logical conclusion, today's retailers will be tomorrow's file-sharing services that integrate with their respective cloud storage services. But to maintain a marketplace, copyright law needs to be enforced enough to keep sellers selling and buyers buying.

But labels can use legal options to try to duplicate the positive impact of pre-release file sharing. For example, many artists offer full or partial album streams before street date at their own web sites or through third parties such as NPR. Some bands -- Coldplay is one that comes to mind -- have opted to release songs on YouTube before street date in order to drive pre-order sales. Subscriptions services are sometimes given albums ahead of street date -- this could become far more commonplace if labels see a corresponding improvement in sales. These are fairly recent developments that have not been studied by economists, but they offer promise without putting the music industry in a position of choosing between legal and illegal promotional vehicles.

Some file sharing will exist in spite of the industry's efforts to stop it (which now includes the participation of Internet service providers in the U.S.). Some of that illegal activity may even help sales of individual albums, as this study suggests. If the industry really wanted to fight file sharing, it would look into better ways to get music to fans before albums' release dates.

Facebook Shares Drop Again
Facebook's post-IPO rollercoaster ride is one of the biggest stories of the week. Shares of Facebook dropped 8.7% to $31.09 in late trading Tuesday, its second day of decline in just its third day of trading on the Nasdaq.

A factor behind Facebook's lackluster - in the eyes of many pundits - IPO is now out in the open: A Morgan Stanley analyst reduced his revenue forecasts before the IPO, according to a Reuters report Tuesday. The change came after Facebook amended its S-1 filing to express caution over its revenue growth as it tries to monetize consumers' mobile usage. The amended S-1 came during the company's road show to sell the IPO to institutional investors.

BTIG analyst Richard Greenfield has a neutral rating on the stock and calls its current valuation "unappealing." Greenfield also noted the timing of Facebook's disclosure in its revised S-1 filing, calling it "peculiar at best and more likely concerning." Brian Wieser at Pivotal Research Group initiated coverage of Facebook with a "sell" rating.

Not all analysts are downbeat on Facebook, however. A Susquehanna analyst has put a $48 price target and a positive rating on the stock, according to Dow Jones Newswire.