Intellectual Property Strategy and the Long Tail: Evidence from the Recorded Music Industry

Digitization has impacted firm profitability in many media industries by lowering the cost of copying and sharing creative works. I examine the impact of digital rights management (DRM) a prevalent strategy used by firms in media industries to address piracy concerns on music sales. I exploit a natural experiment, where different labels remove DRM from their entire catalogue of music at different times, to examine whether relaxing an album’s sharing restrictions increases sales. Using a large sample of albums from all four major record labels, I find that removing DRM increases digital music sales by 10% but relaxing sharing restrictions does not impact all albums equally. It increases the sales of lower-selling albums (i.e., the “long tail”) significantly (30%) but does not benefit top-selling albums. These results suggest that the optimal strength of copyright depends on the distribution of products in firms’ portfolio. ∗Ivey Business School, Western University, 1255 Western Road, London ON, N6G 0N1, Canada, lzhang@ivey.uwo.ca Acknowledgments: I am grateful to my PhD advisors for their insights and guidance over the years: Ajay Agrawal (chair), Joshua Gans, Avi Goldfarb, and Joanne Oxley. I also thank Brett Danaher, April Franco, Alberto Galasso, Shane Greenstein, Doug Hyatt, Ariel Katz, Nicola Lacetera, Matt Mitchell, Carl Shapiro, and participants of NBER Summer Institute’s Digitization meeting and Searle Roundtable on the Law & Economics of Digital Markets for helpful suggestions. I gratefully acknowledge funding support from the NBER Economics of Digitization and Copyright Initiative, the Martin Prosperity Institute, and the Centre for Innovation and Entrepreneurship.