Essays on Digitization and the Market for Intangibles

111 Pages·2014·0.65 MB·English

Essays on Digitization and the Market for Intangibles:
Evidence from Creative and Technology Settings
by
Laurina Zhang
A thesis submitted in conformity with the requirements
for the degree of Doctor of Philosophy
Graduate Department of Rotman School of Management
University of Toronto
(cid:13)c Copyright 2014 by Laurina Zhang
Abstract
Essays on Digitization and the Market for Intangibles: Evidence from Creative and
Technology Settings
Laurina Zhang
Doctor of Philosophy
Graduate Department of Rotman School of Management
University of Toronto
2014
This thesis examines the impact of intellectual property (IP) on firm-level performance
outcomes in the market for intangibles. While the market for intangibles plays an expanding
role in economic growth, it is often susceptible to market failure. In particular, digitization
adds additional challenges to how firms shape their IP strategies by significantly lowering
the cost of copying and sharing digital content, and thereby impacting firm appropriability
in many settings. The first chapter analyzes the impact of a firm-level IP strategy commonly
used by media industries to combat piracy - digital rights management (DRM) on music
sales. To do this, I exploit a natural experiment, where different record labels remove DRM
from their entire catalogue of music at different times, to examine whether relaxing an
album’s sharing restrictions increases sales. Specifically, I compare sales of similar albums
with and without DRM before and after DRM removal, and I find that removing DRM
increases digital music sales. However, relaxing sharing restrictions does not impact all
albumsequally; itincreasesthesalesoflower-sellingalbums(i.e.,the“longtail”)significantly
but does not benefit top-selling albums. My results are consistent with theory that shows
lowering search costs can facilitate the discovery of niche products, and suggest that the
optimal strength of IP in creative industries depend on the distribution of products (e.g.,
mainstream vs. niche) within the firms’ portfolio. My second and third chapters examine
whether structural features of the market for intangibles, impact firm-level outcomes in
technology-orientedindustries. Mysecondchapterreportsthefirstempiricalevidencelinking
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the three main sources of failure emphasized in the market design literature (lack of market
thickness, congestion, lack of market safety) to deal outcomes using novel survey data on
technology licensing. This chapter disaggregates the licensing process into three stages and
finds variation in the salience of market features. In the final chapter, I document the rated
importance of different forms of IP and explore the extent to which firm and industry factors
influence organizations’ motivations for developing IP assets.
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Acknowledgements
My doctoral committee chair, Ajay Agrawal, has been an incredible advisor to me over
the years. I am truly grateful for all of the guidance, time, opportunities, and resources that
he has provided me throughout my studies. I would not be the researcher and person that
I am today without his mentorship.
I am very fortunate to have an amazing doctoral committee. Joshua Gans, Avi Gold-
farb, and Joanne Oxley have all been incredibly generous with their time and ideas. Joshua
consistently pushed me to sharpen my theoretical reasoning and understanding of the un-
derlying phenomenon. Avi is an inspiring researcher and a wonderful teacher, who taught
me everything I know about advancing an empirical project. Joanne’s thoughtfulness and
guidance in framing my thesis has helped my research become more compelling to different
audiences.
I am also grateful for the support I received from the faculty at Rotman. In particular, I
am thankful for the numerous conversations I have had with April Franco, Alberto Galasso,
Nico Lacetera, and Matt Mitchell, throughout my studies.
I have been very fortunate to have wonderful colleagues in the PhD program who pro-
vided some of the most defining memories over these past few years. In particular, I am
thankful to Kwangjune Ahn, Sandra Barbosu, Jessica Burshell, Christian Catalini, Jill
Chown, Octavio Martinez, and Keyvan Vakili, for their advice and support. I am espe-
cially grateful to have Liz Lyons and Florenta Teodoridis as my companions for the journey
- they are great colleagues and friends.
I am also thankful to Gina Buonaguro for providing feedback on my text and Dawn
Bloomfield for coordinating my references during the job market season.
Lastly, I am thankful to my parents, who always provided love and encouragement
throughout the years. I am grateful to Chris, who undertook this journey with me and
whose unfailing support helped carry me through the highs and lows.
I gratefully acknowledge financial support from the NBER Digitization and Copyright
Initiative, the Centre for Innovation and Entrepreneurship at the Rotman School of Man-
agement, the Martin Prosperity Institute, and the Rotman School of Management doctoral
program.
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Contents
Abstract ii
Acknowledgements iv
Introduction 1
1 Intellectual Property Strategy and the Long Tail: Evidence from the
Recorded Music Industry 4
1.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.2 Setting & Related Literature . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
1.3 The DRM “Experiment” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
1.4 Empirical Strategy & Identification . . . . . . . . . . . . . . . . . . . . . . . 17
1.5 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
1.5.1 Data Construction and Sources . . . . . . . . . . . . . . . . . . . . . 21
1.5.2 Descriptive Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
1.6 Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
1.6.1 Main Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
1.6.2 Robustness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
1.6.3 The Long Tail Effect and Product Discovery . . . . . . . . . . . . . . 28
1.6.4 The Long-Tail Effect and Increase in Value . . . . . . . . . . . . . . . 31
1.6.5 The Long Tail Effect: Albums of Different Vintages & Genres . . . . 32
1.6.6 Why Does EMI Drop DRM First? . . . . . . . . . . . . . . . . . . . . 36
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1.7 Conclusion and Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
1.8 Tables and Figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
1.9 Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
2 Deals Not Done: Sources of Failure in the Market for Ideas 52
2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
2.2 Empirics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
2.2.1 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
2.2.2 Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
2.2.3 Empirical strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
2.3 Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
2.3.1 Descriptive evidence . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
2.3.2 Main results: Market features and licensing stages . . . . . . . . . . . 61
2.3.3 Market thickness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
2.3.4 Market safety . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
2.3.5 Bargaining frictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
2.3.6 Selection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
2.3.7 Mediating factors: Organization type and industry effects . . . . . . . 64
2.4 Conclusion and Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
2.5 Tables and Figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
2.6 Additional Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
3 Motivations to Develop and License Intellectual Property: Survey Evi-
dence from the US and Canada 78
3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
3.2 Empirics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
3.2.1 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
3.2.2 Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
3.2.3 Empirical Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
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3.3 Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
3.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
3.5 Tables and Figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
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List of Tables
1.1 Summary Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
1.2 The Impact of DRM Removal on Online Sales . . . . . . . . . . . . . . . . . 45
1.3 Treated vs. Control Albums . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
1.4 The Impact of DRM Removal on Online Sales (matched sample) . . . . . . . 46
1.5 The Impact of DRM Removal on Different Parts of the Sales Distribution . . 46
1.6 The Impact of DRM Removal on non-EMI albums Released Before DRM
Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
1.7 The Impact of DRM Removal on Albums Released Before 1992 . . . . . . . 47
1.8 The Impact of DRM Removal on Albums Released After 1992 . . . . . . . . 48
1.9 The Impact of DRM Removal on Albums of Different Genres . . . . . . . . . 48
1.10 Distribution of Total Sales by Major . . . . . . . . . . . . . . . . . . . . . . 49
1.11 The Impact of DRM Removal on Different Parts of the Sales Distribution
(Triple Interactions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
1.12 The Impact of DRM Removal on the Sales Distribution (CEM sample) . . . 51
1.13 The Impact of DRM Removal on the Sales Distribution (based on ranks) . . 51
1.14 Technological Device Ownership Among Young and Old Americans . . . . . 51
2.1 Summary Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
2.2 Market Thickness, Market Safety, and Bargaining Frictions . . . . . . . . . . 69
2.3 Restricted Sample to Examine Selection Bias (Firms that have at least 5-25%
of their negotiations result in an agreement) . . . . . . . . . . . . . . . . . . 70
2.4 University versus Industry Deals . . . . . . . . . . . . . . . . . . . . . . . . . 71
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2.5 The Effect of Market Safety on Healthcare and Software & Electronics . . . 71
2.6 Level of Unlicensed IP that has a Potential Licensor/Licensee (High-deal suc-
cess is defined as a level of unlicensed IP with potential licensor/licensee
greater than or equal to the median percentage of 50-75%) . . . . . . . . . . 72
2.7 LevelofNegotiationsStartedOncePotentialLicensor/LicenseeisFound(High-
deal success is defined as a level of negotiations started greater than or equal
to the median percentage of 25-50%) . . . . . . . . . . . . . . . . . . . . . . 73
2.8 Level of Agreements Reached Once Negotiations are Started (High-deal suc-
cess is defined as a level of agreements reached that is greater than or equal
to the median percentage of 50-75%) . . . . . . . . . . . . . . . . . . . . . . 74
2.9 Comparison of Market Feature Definition . . . . . . . . . . . . . . . . . . . . 75
2.10 2006 LES Survey Questions Corresponding to Market Features . . . . . . . . 76
2.11 Variable Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
3.1 Summary Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
3.2 The Impact of Firm Size on Motivations to Develop IP Assets . . . . . . . . 90
3.3 The Impact of Firm Size on Motivations to Develop IP Assets (Healthcare
and Software & Electronics) . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
3.4 The Impact of Firm Size and Position in Value Chain on Motivations to
Develop IP Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
3.5 The Impact of Firm Size and Basic Research on the Level of Enforcement
Licensing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
3.6 Contractual Uncertainty - Restructuring Licensing Agreements . . . . . . . . 93
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List of Figures
1.1 Pre- and Post DRM Removal Effects on Online Album Sales . . . . . . . . . 41
1.2 Total Online Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
1.3 Above 50,000 copies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
1.4 Below 50,000 copies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
2.1 Deal failure measured by the percentage of unlicensed IP that would like to
be licensed (2006 LES Survey) . . . . . . . . . . . . . . . . . . . . . . . . . . 67
x