The Digital-Piracy Dilemma

[Eren]

In the world of film, one of the most important things copyright owners can do is market their content online to increase awareness and revenue. At the same time, they have to protect their content from internet piracy, which chips away at sales. This is an often-discussed dilemma — but two recent peer-reviewed papers suggest that these two goals may not always be in tension. Piracy, the papers suggest, can actually boost sales of some digital products by increasing word-of-mouth and overall market awareness. This has led some industry observers to argue that efforts by firms and governments to combat digital piracy may be wasted.

We disagree with that assessment. We’ve been at the forefront of research on this topic for years, and we worry that this line of thought oversimplifies matters in ways that may mislead managers and policymakers.

We’ve come to this conclusion on the basis of four simple facts.

First, for the vast majority of products, piracy does exactly what you’d expect it to do: It reduces legal sales. That’s the conclusion of our recent review of the academic literature, which found that 29 of the 33 peer-reviewed papers studying this question found that digital piracy causes statistically and economically significant harm to creators by cannibalizing sales in legal channels, and other papers found that piracy can harm consumers by reducing the economic incentives creators have to invest in high-quality entertainment projects.

Second, there is an emerging consensus in the peer-reviewed academic literature that anti-piracy regulations can reduce piracy consumption and increase legal sales. They make pirated content riskier to consume, harder to discover, or more difficult to supply.

Third, situations where the benefits of piracy outweigh the harms of piracy only apply at specific times, in a limited number of channels, and to a small fraction of products. With regard to times: The first study cited above finds that piracy that appears before a movie’s theatrical premiere decreases box office revenue by 11%, even though piracy that appears after a movie’s premiere can generate word-of-mouth gains that increase a movie’s box office revenues by 3%. With regard to channels: Neither finding accounts for the fact that piracy in the theatrical window can hurt sales in later home-video release channels, a result we have seen in some of our own work. And with regard to products: Although the second study cited above found that piracy may have increased sales of the least popular decile of movies, it also found that piracy hurts sales of the most popular decile of movies. In interpreting this result, it is important to recognize that although the number of movies in the top and bottom decile of popularity is the same, their economic impact is radically different. According to data provided by the trade publication The Numbers, in 2019 the 56 movies in top decile of sales (those hurt by piracy) grossed over $9.2 billion while the 56 movies in the bottom decile of sales (those helped by piracy) grossed only $310,000. It makes perfect economic sense for rights holders and policymakers to try to protect sales of movies that gross on average $165 million each, even if this protection might have the unintended consequence of hurting sales of movies that gross on average $5,500 each.

Fourth, piracy isn’t the only way to increase word-of-mouth online. Although free availability may increase awareness and sales of some less well-known products, piracy isn’t the only way to give products away for free. For example, rights holders can use platforms like IMDB, YouTube, or TubiTV to make their content available for free — and unlike piracy, legal platforms allow rights holders to retain their legal rights to decide whether to make their content available for free, and when to remove it from free availability (for example, once awareness reaches the point where free availability is no longer beneficial).

In light of these four facts, it would be a mistake for managers or policymakers to interpret the recent findings about how piracy can provide word-of-mouth benefits in some circumstances as a general argument against anti-piracy enforcement. Instead, these findings should provide a roadmap for rights holders to identify circumstances where their products may benefit from free distribution. The bottom line: policymakers should continue to protect creators and consumers by enforcing copyrights online, leaving rights holders with the sole discretion over whether, when, how long to make their content freely available.

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