ILLEGAL MUSIC DOWNLOADINGAND ITS IMPACT ON LEGITIMATE SALES: AUSTRALIAN EMPIRICAL EVIDENCE JORDI McKENZIE* University of Sydney This paper explores illegal music file-sharing activity and its effect on Australian sales of singles in the physical and digital retail markets. Using fifteen weeks of Australian Recording Industry Association weekly chart rankings of physical and digital sales, combined with a proxy for download activity derived from the popular peer-to-peer (P2P) network Limewire, the evidence suggests no discernible impact of download activity on legitimate sales. Whilst significant negative correlation between chart rank and download activity is observed in the digital market, once download endogeneity is purged from the model and song heterogeneity is controlled for no significant relationship remains. I. I ntroduction The recorded music industry is currently experiencing one of the biggest transitional changes in its history. Never before have consumers had the ability to acquire music from so many sources – both lawfully and unlawfully.The internet file-sharing revolution has brought with it a number of challenges for the record companies seeking to protect their profits and their artists’ profits. It is extremely difficult to put an exact figure on the cost to the industry from illegal downloading but estimates have put the number of illegally downloaded songs in excess of one billion each week (Oberholzer-Gee & Strumpf, 2007; Zentner, 2006). In Australia, Music Industry Piracy Investigation (MIPI) estimates that in excess of one billion songs were traded illegally by Australians in 2007. The music industry is understandably concerned with such activity and has responded in a variety of ways ranging from legal actions, 1 accommodating such behaviour, 2 through to lobbying governments to impose taxes on blank media devices (such as CDRs) and to use this revenue to compensate copyright holders for their lost income. 3 Largely, however, there has been a push to increase the opportunities for music lovers to access music through legal downloading sites that are increasing in number (e.g. Apple iTunes). doi: 10.1111/j.1467-8454.2009.00377.x Correspondence: Discipline of Economics, Faculty of Economics and Business, University of Sydney, NSW 2006. j.mckenzie@econ.usyd.edu.au. * This study was in no way supported by the Australian Recorded Industry Association (ARIA) or any other industry organisation. I am grateful to the research assistance of Kamilla Scott-Mckenzie. I am also grateful to two anonymous referees and the editor for helpful suggestions on the original version. All remaining errors are my own. 1 The most famous class action brought by several record labels was A&M Records Inc vs Napster Inc, which Napster lost in 2000. 2 For example, in 2007 the popular cult band Radiohead released the first of two albums In Rainbows on the internet at a price that was effectively free with a voluntary payment system that allowed the consumer to choose no payment. 3 This tax known as the ‘blank media levy’ prevails in Canada and some European countries (e.g. Finland, Netherlands and Sweden) but has found little support elsewhere including Australia. © 2009 The Author Journal compilation © 2009 Blackwell Publishing Ltd/University of Adelaide and Flinders University