When talking about file sharing, most record label executives (and their lawyers in particular) argue as though a downloaded file equals a lost sale. This is evident in many places: from calculations of lawsuit damages to woes of the ill-faring in general of the record industry.
Many reports argue one way or the other based on empirical evidence. Does file sharing hurt sales? Boost sales? Not affect sales at all? Correlate to sales? If correlation can be proven, can causality be proven?
All those reports are completely irrelevant. They can all be ignored.
The thing is that these record label executives, and their lawyers, lie. Not just misinterpret the data or read shilled reports: they flat out lie. Unless you claim that executives of billion-dollar industries don’t understand Basic Economics 101, which is not a particularly credible claim.
Here’s the thing: claiming that a gratis download is the same as a lost sale is the same as claiming that there is a fixed transaction count available that both the sales and the gratis downloads must share in rivalry. Get that? If there’s a fixed transaction count (as in purchases), one kind — file-shared downloads — can cannibalize the other — over-the-counter sales.
However, this claim is completely bogus. Here’s what we learn in the very first lesson in basic economics, usually in Junior High: There are two concepts called Supply and Demand. They can both be plotted on a chart with transaction count along the vertical axis and the price along the horizontal; the supply and demand curves on this chart look different for different services and products, but always have a few things in common.
The place where Supply meets Demand is always the place which determines the market price, and more importantly for this exercise, the transaction count at that price (with “transaction count”, we mean how many services or goods change hands at that price). If Supply meets Demand further to the right, the price will be higher. If they meet higher up the chart, more transactions will happen.
However, here’s the thing with The Lie of the Lost Sale. When something is available at the cost of a few clicks and minimal searching, it changes the supply curve drastically compared to what was before. Just to illustrate, it changes to something like this:
See what happens here? As supply increases to reflect a near-zero price on file sharing networks (people pay with a little work doing searching and waiting), the transaction count increases dramatically. The chart above is just for illustration; in reality, the transaction count increases thousandfolds rather than the threefold drawn.
The record label executives are not dumb. They understand basic supply-and-demand theory. This is that basic supply-and-demand theory. Therefore, the conclusion must be that they are lying straight every time The Lie of the Lost Sale is repeated.
The number of transactions paid at full price is completely irrelevant to the number of transactions on file sharing networks, for they do not follow the same supply-and-demand curves. (The legality of these transaction types is irrelevant to the applicability supply-and-demand mechanics; the present illegality of one transaction type modifies those supply/demand curves very slightly, but the same mechanics still apply once the curves are there.)
So here it is, in plain summary: One download does not equal a lost sale. There is no correlation whatsoever as the supply of downloads is immensely higher, and therefore, the supply-meets-demand point moves to create thousands of more downloads than there ever were sales.
This is covered in the very first economics lesson.