Did Shutting Down Megaupload Impact Digital Movie Sales?

Brett Danaher and Michael Smith

(This blog post summarizes our Megaupload paper. You can find the complete paper here: http://ssrn.com/abstract=2229349)

Copyright policy has become an increasingly controversial topic with the rise of Internet-based piracy. While some still debate whether piracy has impacted revenues in the creative industries, the majority of academic studies on this question have concluded that the net effect of piracy is a reduction in sales (see reviews of the academic literature here, here, and here, along with a summary blog post here).

Given these findings, in recent years the debate over copyright has shifted toward asking what actions (if any) should governments take to protect intellectual property and mitigate the impact of piracy. Yesterday we posted a paper to SSRN that empirically analyzes the impact of a major antipiracy event — the January 19, 2012 shutdown of the popular Megaupload.com site — on digital sales and rentals of movies for two major movie studios.

Measuring the effect of the Megaupload shutdown is complicated by its timing and the fact that the shutdown occurred worldwide (leaving us without an obvious counterfactual). Because of this, if we were to simply analyze how digital sales and rentals changed in the few weeks or months after the shutdown, we could not make any causal claims, as sales change over time for a variety of reasons including the general long-term growth of the digital movie market or, in the case of the Megaupload shutdown, short term sales declines that occur after Christmas peaks.

Our paper tries to overcome these challenges by exploiting cross-country variation in the adoption and use of Megaupload. Our logic is that if the shutdown affected sales, then countries that used Megaupload a lot should see a greater increase in sales than other countries do. Moreover, for this change to be causally related to the shutdown, we must also show that the sales trends in high Megaupload usage countries were similar to those in low Megaupload usage countries before the shutdown, and only changed after the shutdown.

This is exactly what we find. After controlling for country-specific trends and the Christmas holiday, a country’s pre-shutdown Megaupload penetration rate (the % of Internet users that accessed Megaupload or Megavideo during December 2011) was statistically independent of its week-to-week changes in sales. However, immediately following the shutdown, there was a positive and statistically significant relationship between a country’s sales growth and it’s pre-shutdown Megaupload penetration, such that for each additional 1% (lost) penetration of Megaupload the post-shutdown sales increase was between 2.5% and 3.8% higher (depending on which of our models you believe to be most accurate).

The fact that these trends didn’t exist before the shutdown but existed after the shutdown suggests a causal effect of the shutdown on digital sales, and we find a similar (but slightly weaker) relationship for digital rentals. In aggregate, our estimates suggest that, across the 12 countries in our study, revenues from digital sales and rentals for the two studios were 6-10% higher than they would have been if Megaupload hadn’t been shutdown.

It’s important to note that our study only covers 18 weeks after the shutdown, and while we see no sign of sales reverting to original levels, the long-term impacts of the shutdown should be studied.  We also do not estimate the impact on other sales channels or other forms of media, nor do we have information on the costs associated with the shutdown of Megaupload.  All of these things should be taken into account when considering the pros and cons of government anti-piracy interventions.

However, we believe that our results can inform the debate about anti-piracy regulations and may help to better understand consumer behavior in the presence of piracy.

With respect to the debate on anti-piracy regulation, our Megaupload results complement results in an earlier paper with Rahul Telang and Siwen Chen where we found the HADOPI law in France resulted in a causal 20-25% increase in music sales in France. (This paper recently made it through the peer-review process and is now forthcoming at the Journal of Industrial Economics, but a pre-press version of the paper is available here.) Together we believe these papers show that both demand-side (i.e., HADOPI) and supply-side (i.e., Megaupload) anti-piracy efforts can be effective in leading some pirates back to legitimate digital channels.

With respect to understanding consumer behavior, one might ask why shutting down Megaupload would be effective at all in causing pirates to switch to legitimate channels? Megaupload was arguably the most popular cyberlocker on the Internet, but it was far from the only site. In fact, Computer Science researchers at Northeastern University recently posted a paper finding that after Megaupload was shut down, the pirated content previously available on Megaupload was still available on a variety of other sites. Why didn’t consumers just switch from Megaupload to some of those sites?

Undoubtedly some did, but our research suggests that many didn’t. Why? This is a topic we have blogged about previously, and our basic thinking is that one way to look at piracy is as a competing good that just happens to be free. While some have argued that you can’t compete with free, we think a more productive view is that competing with free (pirated) content is just a special case of price competition. We know that people are willing to pay a few dollars more to buy books from Amazon, even if the same books could be found for lower prices at other stores (see here or here). This suggests that Amazon’s consumers value things like reliability, ease-of-use, and convenience, and are willing to pay more for products with these attributes.

Applying these results to digital media channels, we would expect that some consumers would be willing to buy through legitimate channels if content in those channels is more valuable than the “free” pirated alternative. In this view a key part of competing with free pirated content is using the same tools that Amazon uses — reliability, ease-of-use, and convenience — to make content on legal distribution channels more valuable than competing content piracy channels.

However, we believe that another key part of competing with free piracy can be making content on illegal channels less valuable to consumers. In this regard, our finding of a 6-10% increase in digital movie revenue suggests that even though shutting down Megaupload didn’t stop all piracy, it was successful in making piracy sufficiently less reliable, less easy-to-use, and less convenient than it was before, and some consumers were willing to switch from piracy to legal channels as a result.