The business of music is in turmoil. Record stores close. Industry executives lose their jobs. Sales of albums drop — and many in the record industry blame the countless people who share music over the Internet. You hear sinister words such as “piracy” thrown around. But is file sharing really responsible for the industry’s woes?

“I’ve never seen anything that even comes close to providing evidence of that,” says Koleman Strumpf, associate professor of economics.

The fall in record sales — a 26 percent reduction in total units from 1999 through 2002, according to figures released by the Recording Industry of America (RIAA) — could be due to many factors, he says, including the state of the economy, competition from video games and cell phones for consumers’ time and money, or changes in consumer demographics. Strumpf, an avid music fan himself, is studying the effects of file sharing — freely sharing digital versions of songs among computer users via the Internet — on record sales.

Strumpf is analyzing log files from a file-sharing service called Open Nap. His data are lists of what people were looking for and what they actually downloaded on Open Nap over a four-month period. “I have over one million transfers,” Strumpf says. “That’s actually a pretty large sample of what’s out there.”

The goal of Strumpf’s research is to link the names of the songs people downloaded to a database of record sales by album from the same period. Two years ago, in the midst of a court case involving Napster, a file-sharing service, he found that no one had done a concrete study of the correlation between the rise in file sharing and the fall in record sales. Was there really a direct connection between the two trends? If so, he also wanted to know if the loss of royalties hurt the people actually making music — the artists.

“The music industry says that it’s being decimated by file sharing and there’s no longer any incentive to become a musician,” Strumpf says. He thinks his research will show that this is not the case. In the United States, there are somewhere around 30,000 bands on the five largest record labels, he says, and probably only five hundred of them make a living from their album royalties anyway. “The economic incentives for being a musician are very, very limited,” Strumpf says. “A lot of it is luck. Regardless of what file sharing’s going to do, I believe it will not have much influence on people’s desire to form bands and create music.”

But whether or not file sharing is hurting musicians or putting record executives in the poorhouse, it is still a problem for the industry, and it is still illegal.

“The law doesn’t deal specifically with file sharing,” says Laura Gasaway, professor of law and director of Carolina’s law library. “But it’s a reproduction of a copyrighted work, which is infringement.” Hence the recent onslaught of lawsuits by the RIAA, a powerful music-industry lobbying group, against individuals they identify as heavy file sharers. These legal efforts hit Carolina in November 2003, when the RIAA subpoenaed for the personal information of a student who had allegedly shared files.

But could the lawsuits really be making things worse? Strumpf thinks so. “This lawsuit approach fuels the people who are the backbones of these file-sharing networks and gets them even more ticked off at the music industry,” Strumpf says. “There are going to be people who are even more committed to helping other people do this.”

What can the music industry do for what ails it without alienating all its customers? This is a question that intrigues Anne York and her students. York, assistant professor of management-strategy in the business school, incorporated in-depth case studies of the music industry into the syllabus for her senior-level strategic management course in both the spring and fall 2003 semesters.

“Basically the recording industry is an oligopoly — just a few big companies that control pricing, distribution, everything about the process,” York says. It has been this way for years. “But of course the little chink in the armor is that now the Internet is here.”

Discussions of the music industry merge technology, market power, legal issues, and ethical issues, York says. “And students are the best ones to see what the opportunities are. They’re the ones going to the concerts, buying the albums, downloading the music.” Students in her classes admitted they downloaded and shared music — and that they considered it stealing. When asked why they did it, though, “Their reasons were pretty valid,” York says. “They haven’t been given what they want — the ability to buy individual songs affordably, to make their own mixes digitally. They also see recording firms as huge companies that rip off customers and the artists, too.”

York’s students researched the history of the industry and its five major companies. A music executive, a legal expert (Gasaway, from Carolina’s law school), and an ethics expert visited the class. Students also investigated the artist’s perspective and developed business strategies for the companies.

To share her students’ research with others, York is compiling an instructional case based on their work for distribution to business schools. Their case will be one of the first to package information about an entire industry’s trends with studies of individual firms, York says — a way to teach students about competition in an industry that’s changing almost daily.

Former music executive Jay Boberg, one of the speakers to York’s class, is convinced that the old recording-industry model may no longer work. “He suggested that firms will have to accept downloading as inevitable and look for ways to increase the value of what they provide to consumers,” York says.

What are some of the strategies the music giants are using besides lawsuits? “Mergers are the biggest thing right now,” says Josh Payne, a senior business major who took York’s class and contributed an independent study to the final teaching case. “There are two theories: Either you get bigger and cut your costs, or you sell off noncore assets such as CD manufacturing or publishing and try to be flexible.” Even though there are many successful independent, or “indie,” music companies and artists, Payne points out, 80 to 90 percent of the music market is controlled by the five major companies.

The companies are also pursuing new marketing tactics. York mentions car ads that promote catchy songs along with shiny new vehicles, as well as an emerging trend to sell live concert videos at venues immediately following performances. Strumpf points to the cross-marketing of like items by retail services such as Amazon.

Most important, perhaps, to the music industry’s economic survival are the resources of the Internet itself. A major advantage of the Internet’s pervasiveness is that it can help indie artists and companies. Musicians not backed by one of the big five companies, or not on a label at all, can get their music directly to listeners via the Web. Often the listener then purchases the music he or she has heard.

Sean McCrossin, the owner of CD Alley, an independent Chapel Hill record store, says the Internet is good for business. “It gives people an opportunity to get turned on to music,” he says. CD Alley, McCrossin says, hasn’t experienced any drop in sales resulting from file sharing, since most of the music they sell is not mainstream. “We’ve never really sold the stuff that’s been affected,” he says, adding that the independent music community is self-supporting.

Several fledgling pay services for downloading music, including iTunes and a new version of Napster, have emerged, and Napster recently announced a preliminary arrangement with Pennsylvania State University to include music-downloading as part of students’ technology services.

“If companies can, to some extent, protect their content from sharing, and offer it over the Internet at a lower cost, they could have a really viable alternative to piracy,” Payne says. Gasaway says, “They’re already saying that file sharing is decreasing, but we don’t know if it has anything to do with the lawsuits. It could be that people understand what infringement is now or that they’re using the new pay services for downloading music.”

Strumpf is a little more skeptical about these services. “Until they get the selection up to snuff, it’s going to be tough,” he says. People are used to freely downloading not only material that can be purchased in stores, but much that cannot, including live and unreleased versions of songs.

“Currently, there are very big gaps. There are a lot of copyright holders to deal with — and they would have to get all the indie labels if they want to have a big selection on board,” Strumpf says.

Will the music industry learn to use the Internet’s complexities to meet consumers’ demands? It seems that it must. File sharing is inevitable, York suggests. And it’s too global, Strumpf says. Two-thirds of the song downloads over the period he’s studying were done outside of the United States. Even if all U.S. file sharing were stopped by the RIAA’s lawsuits, the problem wouldn’t be solved. And file-sharing networks them-selves continue to be centered farther and farther out of U.S. reach.

“The whole thing is reminiscent to me of Prohibition,” Strumpf says. “You shut it down here, it appears somewhere else. Whether you think it’s a good thing or a bad thing, when there’s a tremendous demand for an activity, markets tend to find a way to provide it.”