File-sharers are content industry’s “largest customers”

Drawing on a major study of Dutch file-sharers, Prof. Nico van Eijk of the University of Amsterdam concludes, "These figures show that there is no sharp divide between file sharers and others in their buying behaviour. On the contrary, when it comes to attending concerts, and expenses on DVDs and games, file sharers are the industry's largest customers... There does not appear to be a clear relationship between the decline in sales and file sharing."

In fact, the study found that file-sharers often buy more content, especially when it comes to films and games.

Van Eijk's conclusions appear in a recent paper for the journal Communications & Strategies (PDF), one coauthored with Joost Poort and Paul Rutten. While van Eijk doesn't deny that specific industries (like recorded music) have been in decline, he paints a more complicated picture of the content industries as a whole.

For instance, Sweden has long been regarded as a worldwide piracy hub—it's home to The Pirate Bay, the VPN IPRedator, and it sent a member of the Pirate Party to the European Parliament. But van Eijk draws on 2009 research showing that "total revenues [in Sweden] from recorded music, live concerts and collecting societies remained roughly stable between 2000 and 2008."

That doesn't help the recording industry, however, unless music labels get a cut of revenues from live music and merchandise. That's exactly what has started to happen via so-called "360 deals" over the last few years, where labels will invest in recording and promotion budgets for bands, but only when they benefit from all parts of the band's revenue stream.

Van Eijk sees this as a necessary business model change in response to file-sharing, but he argues that far more innovation is needed. And he blasts the music industry in particular for acting out of fear. Labels tried to "stem the tide of unlicensed music file sharing with their conservative strategy of abstaining from innovation, promoting legal measures against supposed offences, and digital rights management," he wrote. 

"This strategy resulted in the current backlash, providing space for a new entrant establishing a major brand in the online music business: Apple's iTunes. Reinvention of the business model looks like the only way out for the traditional players in the music industry."

If you attend music industry conferences, you never have wait long for someone to say that we have entered an age in which people are unwilling to pay for content; that is, traditional business models are dead.

Van Eijk still sees life left in direct content sales, but he notes that current prices are far out of line with consumer expectations. When file-sharers were surveyed about what a "reasonable" price would be for an album, a movie, and a video game, the answers were surprising. A full 75 percent of file-sharers thought €8 was appropriate for an album—not too far off from current pricing.

But video games are another story. If the gaming industry wants to offer a "reasonable" price to three-quarters of file-swappers, it needs to sell games for €7, a far cry from the €50 or so currently charged for a new video game.

If we look at the median and the top quartile, the same trend holds. Music and film prices are already close to the "reasonable" zone, but video games are not; even the most spendthrift file-sharers believed that only €24 was reasonable for a new game. The upside for the gaming industry is that most people see games as more valuable per unit than music and movies.

In the end, says van Eijk, "File sharing is here to stay and... people who download are at the same time important customers of the entertainment industry... And so the entertainment industry will have to work actively towards innovation on all fronts. New models worth developing, for example, are those that seek to achieve commercial diversification or that match supply and end-user needs more closely. In such a context, criminalizing large parts of the population makes no sense. Enforcement should focus on large scale and/or commercial upload activities."