This paper discusses whether a compensation system (CS) for recorded music – endowing private Internet subscribers with the right to download and use works in return for a fee – would be welfare increasing under current market conditions. It reports the results of a discrete choice experiment conducted with a representative sample of the Dutch population consisting of 4,986 participants. The Internet penetration rate in the Netherlands is 95%, one of the highest worldwide (Eurostat 2014). The Netherlands also entertain a system of levies on copying technology, so that basic elements of a CS should be familiar to many residence.
We find that applied only to recorded music, a mandatory CS could increase the welfare of rights holders and users in the Netherlands by over €600 million per year (over €35 per capita). This far exceeds the current sales value of recorded music of ca. €144 million. Even if a CS were to substitute all of the current sales of recorded music and provided no cost savings, it could simultaneously increase user welfare and rights holder revenues at a price that constitutes a reasonable surplus split. According to our results, this is achieved over a broad range of CS user fees, for example between ca. €1.74 and €9.25 for a CS that is mandatory for all households with Internet subscription.
Some market conditions in the Netherlands make this result particularly noteworthy. On the one hand, during data collection unauthorized private copying from unlawful sources was not outlawed in contrast to some other European countries. On the other hand, the digital market for recorded music in the Netherlands is relatively advanced. In 2012, the year preceding data collection, the digital market in the Netherlands already accounted for 31% of all revenues in the primary market for recorded music, in which authorized services make copies of recordings available to end-users (IFPI 2013). Given lower average retail prices for digital copies, the share of ‘digital’ in unit sales would be higher. Music subscription services and ad-supported online music services accounted for 54% of digital revenues. Residents of the Netherlands thus report substantial willingness to pay (WTP) for participation in a compensation system covering recorded music, in spite of (1) virtually no legal risk associated with private copying from unlawful sources at the time of data collection, and (2) availability and widespread use of authorized digital music services and in particular music subscriptions.
The paper is structured as follows: section 2 briefly discusses digitization in the copyright industries and the literature on CS. Section 3 describes the application and limitation of contingent valuation methods to value untraded goods and discrete choice experiments in particular, and provides information on the method and data used in this paper. Section 4 describes basic results and section 5 presents estimates the effect of several CS options on user welfare and rights holder revenues. Section 6 discusses a number of limitations and extensions to our assessment. Section 7 presents main conclusions.
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