|Title:||Digitization and Competition in Copyright Industries: One Step Forward and Two Steps Back?|
|Citation:||Handke, C. (2015). Digitization and Competition in Copyright Industries: One Step Forward and Two Steps Back?. Homo Oeconomicus, 32.|
|Link(s):||Definitive , Open Access|
|Key Related Studies:|
|About the Data|
|Data Description:||The author carries out a study on the digital retailing by analysing the growth of iTunes between 2004 and 2013.|
|Data Type:||Secondary data|
|Secondary Data Sources:|
|Data Collection Methods:|
|Data Analysis Methods:|
|Cross Country Study?:||No|
|Government or policy study?:||No|
|Time Period(s) of Collection:|
How can copyright promote innovation in digital markets? Based on economic reasoning and empirical evidence, this paper provides an original perspective on this question. It focuses on two aspects of digitization – unauthorized copying and digital retailing – and how they affect two determinants of innovation – competition and appropriability in copyright industries. Unauthorized copying has ambiguous consequences: on the one hand, it affects the extent to which suppliers of reproducible creative works can appropriate the value of these intangible goods; on the other hand, unauthorized copying has increased competition between suppliers of creative works, and is associated with substantial productivity increases. Contrary to common expectations, our empirical evidence suggests that digital retailing is not associated with disintermediation and has not made the market for recorded music more contestable. Furthermore, the market power of Internet-based intermediaries can undermine the appropriability of creators, which has not yet been acknowledged in debates on copyright reforms. In this context, copyright policy that focuses on controlling unauthorized use can be ineffective. It needs to be complemented by regulation that limits the market power of digital retailers.
Main Results of the Study
- In Germany, digital retailing has expanded rapidly since the formation of the iTunes store in 2004 – see table 1. Digital unit sales were negligible before and increased from up 7.9 million in 2004 to 61.6 million in 2009, when they made up more than a third of the market for authorized copies of sound recordings. By 2012, the majority of unit sales were ‘digital’. Furthermore, income from subscription services and advertising-financed music streaming services online have been growing rapidly (not covered in Table 1). To be sure, in terms of retail value, the share of the digital market is lower, since average retail prices per unit in the digital market are lower. Nevertheless, it is clear that large parts of the legitimate market for recorded music has become ‘digital’ since 2004.
- The most relevant observation for this paper is that growth in the number of record companies was relatively high before the popularization of digital retailing. The number of record companies expanded less rapidly in the period in which digital sales started to pick up. In the five years from 1999 to 2003, when authorized digital retailing had been negligible, the number of firms had expanded by an average of 68 firms per year. After the iTunes store had 18 started operating in 2004, digital retailing proliferated. From 2005 to 2009, the number of record companies increased on average by less than 12 firms per year, and by less than 21 firms per year for the entire period from 2005 to 2013. This is a striking difference from the years preceding digital retailing, especially because accumulated revenues from sales of sound recordings in Germany fell much more rapidly from 1999 to 2003 (physical and digital). Nominal revenues fell by over 34% in the five years before substantial digital retailing from 1999 and 2003 (BV Phono 2008). It fell by 12.5% in the five years after 2004, from 2005 to 2009, and by 16.9% in the nine years from 2005 to 2013 (BV Phono 2014). Of course, in a context of broader and disruptive technological change, other factors may be driving these developments. Nevertheless, the number of record companies increased more rapidly before digital retailing started taking up. It is thus improbable that digital retailing would have promoted market entry by record companies.
Policy Implications as Stated By Author
- Unauthorized digital copying does not only affect the appropriability for creators and rights holders. The empirical literature also indicates that digital copying has increased competition between suppliers of content, and the record industry has become more productive over recent years: while revenues have fallen considerably, the empirical literature to date suggests that the supply of new creative works has continued to increase rapidly (Waldfogel 2011, 2012; Handke 2012a). Digital retailing may co-determine this development, as it makes trading of copyright works more efficient. However, according to the evidence presented in this paper, digital retailing does not promote the position of newcomers and fringe suppliers, and is thus unlikely to promote competition between firms supplying copyright works.
- The appropriability of copyright works does not only depend on end-user behaviour. It also depends on the bargaining position of rights holders with (other) intermediaries. The current understanding of markets for information services suggests that digital retailers are likely to acquire a dominant position in markets for copyright works. This paper presents preliminary empirical evidence of such a development. Market power of digital retailers is bound to undermine the prospects of creators and rights holders to appropriate much of the value of the works they supply.
- In a context of digitization, it is not adequate for copyright policy to concentrate on control over the use of copyright works. In the economic perspective, copyright is a costly means to promote pecuniary incentives for content creation. There is little point in establishing exclusive rights over the use information goods if the rights holders are in no position to benefit from it because they face quasi-monopolistic intermediaries.
Coverage of Study
|Level of aggregation:||Years of iTunes selling digital songs and videos|
|Period of material under study:||Not-stated|