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Continued from previous page
In Praise of File Sharing
Since his first meeting five years ago, Fader has continued to challenge
the strongly held beliefs of dozens of music industry leaders.
In the process, Fader has morphed from a little-known marketing
research specialist, content in his "narrow packaged-goods world,"
to a leading critic of the music industry, going so far, in July 2000,
to serve as a key expert witness on behalf of Napster, the peer-to-peer
filesharing service. During and since the Napster trial, Fader
has argued that trading music files over the Internet, a practice the
industry believes it loses $3.5 billion a year to, can actually boost
sales in the long run. Some of his recent research (such as a study
he co-authored, called "Using
Advance Purchase Orders to Forecast
New Product Sales") uses complex
statistical methods to understand how
factors such as radio airplay and other
forms of early publicity, including filesharing,
can drive album sales.
"Generating buzz is a good thing,
and filesharing is like a preview for a
movie. It's a tease without giving the
whole movie away," Fader says.
"There's a big difference between an
MP3 music file and a complete CD,
and most music fans realize this.
Even if that means losing some sales
to filesharing, it's so important to
spread the word that the net effect is
generally positive for the industry."
Rap artist 50 Cent, for example,
was a relative unknown prior to the
release of his debut CD in early 2003.
"But a few of his songs leaked out
over the Internet a few months prior
to the album's release, and his popularity
exploded," Fader says. "The
record label got worried, saying that
people were stealing the songs, and
moved up the album launch by a few
weeks to try to stem the flow." In its
first week in distribution, the album
broke the record for retail sales by a
new artist. "The obvious conclusion is
that the files floating around were generating buzz and generating
the sales," Fader says. "But what did the industry say? 'This filesharing
is a terrible thing. We can't imagine how many additional
sales we would have had if the filesharing hadn't been going on.'"
Other recent research supports Fader's view. A 2002 report
from Forrester Research saw "no evidence of decreased CD
buying among frequent digital music consumers." The study's
author cited the economy and surging DVD and video game sales
as more likely causes, saying, "There's no denying that times are
tough for the music industry, but not because of downloading."
But the music industry has rejected this study and others that have
drawn similar conclusions, responding to the filesharing issue by
creating technological barriers to downloading and filing lawsuits
against downloaders.
Fader, who has spent most of his 17 years on the Wharton
faculty using behavioral data to understand and forecast customer
behavior for grocery products, never imagined becoming a music
industry gadfly. "I had always been happy to sit in my ivory tower
office, messing with numbers for soap and toothpaste," he says.
But when a couple of his MBA
students brought Fader some data
on album sales, he saw sales patterns
that mirrored those for new
consumer packaged goods launches.
"What I saw was a very sexy
industry that needed some fresh
insights," Fader says. "I felt I had
some interesting frameworks for
them to consider. And unlike
packaged goods, where most of
the action is in repeat purchasing,
in music, you never buy the same
album twice. The numbers are
much cleaner and easier to work
with than other industries, where
it's a mish-mash of old and new
customers. The models work
extraordinarily well in an industry
like this."
And while the music industry is
perhaps the most vivid example of
an industry loathe to change its
business practices, Fader says it's
simply a one of many "creative"
businesses, from baseball to book
publishing, that have typically
relied on instinct over quantitative
analysis when making strategic
decisions. "These are very
general issues," he says. "The
music industry just happens to be
an extreme example. Too many
industries really think their patterns
are different and that they
can't learn from other businesses.
They need to swallow their pride, drop traditional ways of evaluating
success, and embrace the right kids of quantitative metrics
with no hesitation. It's important to realize just how astonishingly
consistent the buying patterns are across industries. People are people.
When you focus on the behavioral data as opposed to the surface-level details of a product, it doesn't really matter what product
it is."
Crunch, Crunch
Collecting dollar bills with interesting serial numbers was Pete
Fader's favorite thing to do as a young boy. Groups of numbers
were beautiful and mysterious to Fader, and his parents, both
"world-class bridge players," saw no harm in their son's unusual
preoccupation. "Every day when my mother would come home
from shopping she would show me all of the interesting bills that
she'd gotten that day. She actively encouraged that kind of thing
not so much as an academic exercise but because I was into it,"
says Fader, 42, a New York native. (Today he proudly owns the
domain name www.coolnumbers.com, where he set up algorithms
to help people check out the "interestingness"
of their own dollar bills.)
Later, his passion for numbers
turned into an obsession for baseball,
with Fader compulsively gathering
and analyzing tiny numeric
details, from batting averages to box
scores, throughout his teen years and
into college. He was forced to pause
during the 1981 players' strike and
realized that he had free time to seek
other kinds of numbers to play with.
Fader's fixation for baseball waned,
but his love of number crunching
remained, straying to data sources
such as the Billboard music charts.
"It was a very nerdy life, and still
is," he says. "But now it's directed
at issues that people care about."
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