As content owners lobby for anti-piracy legislation, the impact of file sharing on music purchases is more important than ever. A recent study on British file sharing by the think-tank Demos (and funded by Virgin Media, who will soon launch its own music service) looked at the spending of file sharers and music buyers. The study found that one-third of British adults said they use free download sites like Rapidshare and BitTorrent, and 26% of that group said they spend a little or lot more on music as a result. So about 9% (or 26% of 33%) of file sharers said they spend more on music while 47% said they spend the same and 19% said they spend a little or a lot less. (Note that these are self-reported numbers.)

Because a portion of file sharers reported spending more on music, some in the media interpreted the study to mean file sharing helps music sales. Since file sharers buy a lot of music, goes the line of thinking, it must be good for record labels. And because 42% of respondents in the study said they use file sharing to “try before they buy,” some people thought file sharing encouraged purchases. These are wrong interpretations of the data. No information was given on the number of “samples” that did and did not result in a purchase. And while some file sharers say they spend more money as a result of their illegal downloads, even more said they spend less money. These are examples the kind of logic that prompts comments from trade groups.

The IFPI shared with Billboard results of a Jupiter-conducted P2P study done earlier this year. In its report, Jupiter broke out different groups according to their per capita average revenue. Music sharers were worth only €65.64 each, according to Jupiter. Music buyers in general were worth €88.08. Digital music buyers (who may or may not buy CDs and use P2P applications) were worth €98.24.

Some music sharers buy music, some do not. Going by the numbers found in various articles on the Demos study, a whopping 25% of file sharers in the study do not buy music at all. That means a substantial number of non-buyers pull down the average revenue of file sharers to €65.64 each. The freeloaders, those who share files but do not purchase, are the most troubling group of consumers for the industry.

Jupiter’s data portrays file sharers as digital-savvy music fans who have greatly given up buying CDs yet are ahead of the curve when it comes to buying music online and through mobile phones. This group is likely comprised of younger consumers, who are less likely to buy physical product and more comfortable with digital technologies. Data from Nielsen’s @Plan (Fall 2009) show this portrait is pretty accurate. By using LimeWire is a proxy for file sharing in general, insight can be gained into how different age groups participate in file sharing and music purchasing. (LimeWire is used far more often the other P2P applications tracked by Nielsen @Plan.)

-- 8% of online adults have used LimeWire in the last 30 days.
-- By a margin of 9.6% to 7.2%, music-buying adults are more likely to have used LimeWire than those who have not bought music.
-- At 26.3%, the 18-24 group is more than twice as likely to have used LimeWire in the last 30 days as the 25-34 (12.8%) and 35-44 (10.1%) age groups.
-- Consumers 18-24 are less likely than older consumers to have purchased music -- either CDs or digital – in the last six months. The 35-44 age group is 66% more likely to have purchased music in the last six months than the 18-24 age group.
-- Music buyers – some of whom are file sharers – are almost universally more engaged with all forms of music consumption than non buyers: radio listening, satellite radio listening, audio-related hardware purchasing and recent use of iTunes, Zune, RealPlayer, Rhapsody and Windows Media Player.
-- Nearly ten times as many music buyers have not used LimeWire as have used LimeWire, meaning the vast majority of music buyers have not used the popular P2P app.

Combine the 18-24 group’s tendency to use P2P, their lower tendency to purchase music – especially CDs – and the lower sale prices of digital formats, and you have a group of consumers with a relatively low per-capita spend and a higher tendency to be file-sharing freeloaders.

The Fundamental Question

While a large portion of the Demos study respondents are freeloaders, it’s entirely possible active buyers would be even more active in the absence of file sharing. Neither the Jupiter data released by the IFPI nor the Nielsen data seen here answer the question most fundamental to a discussion of P2P’s impact on music purchases: How have these consumers’ purchases changed over time? We need to know if the act of file sharing reduces legitimate purchases and, if so, by how much? Knowing those two things will allow us to better estimate the impact of file sharing and distinguish it from other factors – lack of credit cards, absence of disposable income, unavailability of a certain title, and the effect of a la carte downloading – that may also come into play in lower recorded music revenues.

A key takeaway of the Demos study is that punishing file sharers – by a three-strikes law that would suspend Internet access for repeat offenders – can mean punishing some of the best customers, the very ones who are most likely to pay to consume entertainment of all sorts. “Politicians and music companies need to recognize that the nature of music consumption has changed, and consumers are demanding lower prices and easier access,” Peter Brandwell of Demos told the Independent.

At the end of the day, there’s a lot of guesswork involved in estimating both file sharing’s impact on music purchases and anti-piracy laws’ effectiveness. For example, Demos’ Brandwell says consumers want lower prices, yet they have hardly minded a 30% price hike for the most popular tracks at iTunes. Academic studies have enough conclusions to satisfy any point on the debate’s spectrum of opinions. And it’s too early to say how a coordinated, ISP-based anti-piracy campaign will impact piracy levels. All we know for sure right now is music buyers are also file sharers and many file sharers are not music buyers.