Piracy and the Supply of New Creative Works

Brett Danaher, Michael D. Smith, Rahul Telang

Last week we blogged about the peer-reviewed academic literature studying whether piracy harms sales, showing that articles in peer-reviewed journals overwhelmingly find that piracy causes harm to producers by reducing legal sales and revenues. In today’s blog, we will cover a second important policy question regarding piracy: Does piracy harm consumers?

In contrast to the first question, there is little evidence informing this question within the peer-reviewed literature. The reason it is more difficult to determine the effect of piracy on consumers is because there is a major difference between the short run and long run effects of piracy, and it is more difficult to identify and prove long run effects. In the short run, if we assume that the number and quality of creative works produced is fixed, then piracy benefits consumers in two ways. First, consumers who otherwise would have purchased the product at its normal price can now consume the product for free. Second, consumers who otherwise wouldn’t have purchased the product (because their expected value of the product was less than the price) can now consume products they wouldn’t have otherwise been willing to purchase. (more…)

The Truth About Piracy

By:

Brett Danaher, Michael D. Smith, Rahul Telang

Earlier this week, we gave a keynote talk at the Sundance Film Festival about how piracy impacts independent filmmakers. Our talk was based on a paper we delivered to the World Intellectual Property Organization last month, where we presented the economic evidence about three main questions:

  1. Does piracy harm sales?
  2. Does piracy harm consumers?
  3. Can anything be done about piracy?

As academics, we don’t care what the answers to these questions are: a well-identified result that says piracy doesn’t hurt sales is just as interesting as a well-identified finding that it does. In the long run, no one wins by making decisions based on beliefs that aren’t true. (more…)

The Perfect Storm: Snowstorms and the Impact of Theatrical Attendance on DVD Sales

By Michael Smith, Peter Boatwright and Patrick Choi

Everyone knows that movies that are popular in theaters are also popular at home. But no one knows whether increased theater viewing actually causes increased home viewing. Scientifically speaking, this is the difference between correlation and causation. In this instance, it’s difficult to test causation because a movie’s intrinsic appeal affects both measures. To do so accurately, we need an event that changes the number of people who see the movie in theaters, but does so in a way that is completely unrelated to specific movie characteristics.

In our recent paper, we show how snowstorms can provide just such a “perfect” measurement event. When a snowstorm occurs on a movie’s opening weekend in a particular city, fewer people go to see that movie in that city for reasons completely unrelated to the movie itself. In other words, for the purposes of this experiment, snowstorms are essentially random events: Whether it snows in Buffalo versus Minneapolis on the second weekend of November has nothing to do with the characteristics of the movies opening that weekend. (more…)

The Effectiveness of Site Blocking as an Anti-Piracy Strategy: Evidence from the U.K.

Brett Danaher, Michael D. Smith, Rahul Telang

It is well established in the academic research that piracy harms sales for entertainment goods;[1] and there is emerging evidence that, by reducing the profitability of content creation, piracy may reduce the quality and quantity of the content that is created.[2]

Given these empirical results, as academic researchers, we have spent considerable effort trying to understand the effectiveness of various anti-piracy strategies that attempt to mitigate the impact of piracy on industry revenues by either making legal content more appealing or making illegal content less appealing (see for example here and here). Our latest research examines an anti-piracy strategy known as “site-blocking” adopted in many countries, including the United Kingdom where we conduct our analysis. In the U.K. courts respond to blocking requests, and where they find cause, order Internet Service Providers (ISPs) to block access to specific piracy-enabling sites. (more…)

Google, Search Ranking, and the Fight Against Piracy

By: Michael D. Smith

Last month, Rahul Telang and I blogged about research we conducted with Liron Sivan where we used a field experiment to analyze how the position of pirate links in search results impact consumer behavior. Given this research, we were very interested in Google’s announcement last Friday that they were changing their ranking algorithm to make pirate links harder to find in search results.

According to the announcement, Google changed their ranking algorithm to more aggressively demote links from sites that receive a large number of valid DMCA notices, and to make legal links more prominent in search results. The hope is that these changes will move links from many “notorious” pirate sites off the first page of Google’s search results and will make legal content easier to find.

One might ask whether these changes — moving pirate results from the first to the second page of search results and promoting legal results — could have any effect on user behavior. According to our experimental results, the answer seems to be “yes, they can.” (more…)

Using Search Results to Fight Piracy

By: Michael D. Smith

With the growing consensus in the empirical literature that piracy harms sales, and emerging evidence that increased piracy can affect both the quantity and quality of content produced (here and here for example), governments and industry partners are exploring a variety of ways to reduce the harm caused by intellectual property theft. In addition to graduated response efforts and site shutdowns, Internet intermediaries such as Internet Service Providers, hosting companies, and web search engines are increasingly being asked play a role in limiting the availability of pirated content to consumers.

However, for this to be a viable strategy, it must first be the case that these sorts of efforts influence consumers’ decisions to consume legally. Surprisingly, there is very little empirical evidence one way or the other on this question.

In a recent paper, my colleagues Liron Sivan, Rahul Telang and I used a field experiment to address one aspect of this question: Does the prominence of pirate and legal sites in search results impact consumers’ choices for infringing versus legal content? Our results suggest that reducing the prominence of pirate links in search results can reduce copyright infringement.

To conduct our study, we first developed a custom search engine that allows us to experimentally manipulate what results are shown in response to user search queries. We then studied how changing what sites are listed in search results impacted the consumption behavior of a panel of users drawn from a general population, and a separate panel of only college aged participants.

In our experiments, we first randomly assigned users to one of three groups: a control group of users who are shown the same search results they would receive from a major search engine, and two treatment groups where pirate sites are artificially promoted and artificially demoted in the displayed search results. We then asked users to obtain a movie they are interested in watching, and to use our search engine instead of the search engine they would normally use. We observe what queries each set of users issued to search for their chosen movie, and surveyed them regarding what site they used to obtain the movie.

Our results suggest that changing the prominence of pirate and legal links has a strong impact on user choices: Relative to the control condition, users are more likely to consume legally (and less likely to infringe copyright) when legal content is more prominent in search results, and user are more likely to consume pirate content when pirate content is more prominent in search results.

By analyzing users’ initial search terms we find that these results hold even among users with an apparent predisposition to pirate: users whose initial search terms indicate an intention to consume pirated content are more likely to use legal channels when pirated content is harder to find in search results.

Our results suggest that reducing the prominence of pirate links in search results can reduce copyright infringement. We also note that there is both precedent and available data for this sort of response. In terms of precedent, search engines are already required to block a variety of information, including content from non-FDA approved pharmacies in the U.S. and content that violates an individual’s “right to be forgotten” in a variety of EU countries. Likewise, the websites listed in DMCA notices give search engines some of the raw data necessary to determine which sites are most likely to host infringing content.

Thus, while more research and analysis is needed to craft effective policy, we believe that our experimental results provide important initial evidence that users’ choices for legal versus infringing content can be influenced by what information they are shown, and thus that search engines can play a role in the ongoing fight against intellectual property theft.

Cross posted to the Technology Policy Institute blog

Does Piracy Undermine Product Creation?

By: Michael D. Smith

(Below is a guest post by my colleague, Rahul Telang from Carnegie Mellon University)

That Piracy undermines demand for products in copyright industries is intuitive and well supported by data. Music, movies, books, software have seen demand degradation due to various forms of piracy. What is not so well supported by data is whether piracy undermines product creation. For example, does piracy reduce the number of movies made, or quality of movies made, or investments in movies? Common sense suggests that this must be true. After all, this is the core principle of copyright. Large scale copyright infringement should affect revenues which in turn should affect producers’ incentives to create.

Despite this compelling argument the data does not support this claim readily. The reasons are many. For one, while the change in demand due to infringement happens more quickly, the production adjustments take time. So unless the infringement is persistent for a period of time, the contraction in production is not readily visible. The technology that leads to widespread infringement (say P2P networks and broadband infra-structure that facilitates online piracy) might also be accompanied by a period where cost of production and distribution declines or new markets open up. The net effect of these two opposing factors is all we can see in the data. And, the net effect could very well be that the production actually has increased!!!. This is not an evidence that piracy does not matter. Finally, there may be distributional bottlenecks (say number of theatres) that may prevent growth in production but might lead to larger investments in movies or in some cases higher input costs (actors and directors become more expensive).

In short, to see the effects of piracy in data, we need a setting where other factors are largely unchanged. With my co-author Joel Waldfogel, we explore Indian movie industry around the diffusion of Cable television and VCR. This phenomenon took place during 1985-2000. The paper is here. The story of our paper from the abstract is essentially that:

The diffusion of the VCR and cable television in India between 1985 and 2000 created substantial opportunities for unpaid movie consumption. We first document, from narrative sources, conditions conducive to piracy as these technologies diffused. We then provide strong circumstantial evidence of piracy in diminished appropriability: movies’ revenues fell by a third to a half, conditional on their ratings by movie-goers and their ranks in their annual revenue distributions. Weaker effective demand undermined creative incentives. While the number of new movies released had grown steadily from 1960 to 1985, it fell markedly between 1985 and 2000, suggesting a supply elasticity in the range of 0.2-0.7.

Even the quality as measured by IMDb ratings declined substantially. Thus, our study provides affirmative evidence on a central tenet of copyright policy, that stronger effective copyright protection effects more creation. For empirical research, sometimes you have to look at the historical context to see the evidence of the effect of a policy. Doing a similar study in post 2000 era for any other country might be tricky because the other competing factors have altered. There will be a need to be more creative in defining and measuring product creation in this new context. And, I am sure we will see such efforts in near future. Needless to say, a lot more research is needed to settle this issue.  However, our paper does provide an evidence that in an appropriate setting, effects of copyright infringement on product creation can be measured.

Cross posted to the Technology Policy Institute blog

The Expendables 3 Leak and the Financial Impact of Pre-Release Piracy

By: Michael D. Smith

This past week a DVD-quality copy of the movie The Expendables 3 leaked online three weeks before its planned U.S. theatrical release. According to Variety, the film was downloaded 189,000 times within 24 hours. As researchers, an immediate question comes to mind: how much of a financial impact could movie-makers face from such pre-release piracy?

The effect of piracy on the sales of movies and other copyrighted works has long been scrutinized, with the vast majority of peer-reviewed academic papers concluding that piracy negatively impacts sales. Indeed, in a recent National Bureau of Economic Research book chapter, my co-authors and I reviewed the academic literature, and showed that 16 of the 19 papers published in peer-reviewed academic journals find that piracy harms media sales.

But less well understood is the impact of pre-release movie piracy, which could be particularly harmful to box office revenue because it appears at a time when there are no legal channels for anxious fans to consume the movie. Because of this, seeing a movie appear online before it appears in theaters sends chills down the spines of studio executives given the investment in human and financial capital necessary to produce the typical studio film.

To better understand the impact of this particular form of piracy, my colleagues and I conducted a study to measure the impact of pre-release piracy on box office revenue. Our study was accepted for publication last month in the peer-reviewed journal Information Systems Research, making it the first peer-reviewed journal article we are aware of to analyze the impact of pre-release movie piracy.

In our study we applied standard statistical models for predicting box office revenue, but added a variable for whether a movie leaked onto pirated networks prior to its release using data obtained from the site VCDQ.com. Our analysis concluded that, on average, pre-release movie piracy results in a 19% reduction in box office revenue relative to what would have occurred if piracy were only available after the movie’s release. As we discuss in the paper, this result is robust to a variety of different empirical approaches and sensitivity tests.

The growing consensus in the academic literature regarding financial harm from digital piracy provides an important backdrop to active policy debates about the best options for addressing this threat. We have seen governments and industry adopt various anti-piracy measures in recent years, from government sponsored graduated response laws, site blocking and site shutdowns; to market-based responses by rights holders and industry-level partnerships such as the Copyright Alert System in the United States.

At next month’s TPI Aspen Forum I am pleased to be chairing a panel of industry, legal, and policy experts to discuss the effectiveness and appropriateness of these initiatives to better serve the interests of the creative sector, the technology industries, and society as a whole. However, what seems to require no discussion is that digital piracy of this type can dramatically reduce sales.

Cross posted to the Technology Policy Institute blog

Does Piracy Harm Sales?

By: Michael D. Smith

My last post challenged a New York Times op-ed’s view that the media industries should give up fighting piracy. Implicit in the Times editorial’s argument is the idea that piracy has little or no impact on media sales — a view shared by many in the tech community and seeming by some journalists as well.

My colleague, Rahul Telang, and I recently finished a paper reviewing the academic research on the impact of piracy on sales. Our review finds that, when viewed as a whole, the academic literature strongly suggests that piracy harms media sales: the vast majority of academic papers — particularly those published in peer-reviewed academic journals — find evidence of harm from piracy. This conclusion is consistent with reviews of the academic literature by Stan Liebowitz in 2006 and by Felix Oberholzer-Gee and Koleman Strumpf in 2009, but includes more recent studies — and we believe these recent papers make the case of harm from piracy even stronger than what the literature suggested just a few years ago.

One recent paper in particular caught our eye. As we were finalizing our review, George Barker and Tim Maloney of the Australian National University posted a paper to SSRN contradicting the results of a prior paper by Birgitte Andersen and Marion Frenz. Andersen and Frenz used data from a 2005 Decima Research survey on piracy and purchasing habits of more than 2,000 Canadian citizens. Their original report to Industry Canada used this data to conclude that increased piracy actually helps music sales: “for every 12 downloaded songs, music purchases increase by 0.44 CDs.” While this finding was softened to a finding of “no association between” piracy and CD sales by the time the paper was published in the Journal of Evolutionary Economics, Andersen and Frenz’s work was widely touted in some circles as conclusive evidence that piracy doesn’t harm, and can in fact can help, media sales.

The Barker and Maloney paper, however, used the same data as Andersen and Frenz did, but came to the opposite conclusion: “a 10% increase in P2P downloads reduces CD demand by around 0.4%” (emphasis mine). The change in results was driven by several changes in Barker and Maloney’s empirical analysis, the most interesting of which was their decision to include a large number of respondents excluded in Andersen and Frenz’s study. Specifically, the Andersen and Frenz paper excluded all respondents who did not purchase CDs in 2005 (about 20% of the total sample) under the rationale that “these consumers may never have been active in CD purchasing” and therefore were irrelevant to an analysis of the impact of piracy on CD sales.

Barker and Maloney noted that the original survey data included questions on the number of CD sales in both 2005 and 2004, allowing the authors to partially test whether consumers who had no CD purchases in 2005 were “never active in CD purchasing.” Interestingly this test showed that about one-third of consumers who did not purchase CDs in 2005 had purchased CDs in 2004. This one small fact radically changes the likely importance of these consumers to the analysis. While consumers with no interest in CD purchases might be irrelevant to the analysis, consumers who stopped purchasing CDs between 2004 and 2005 might be exactly the sort of consumers whose purchases were most influenced by piracy.

I believe there are two important lessons here. First, that small changes in the understanding of the data can make a large change in a paper’s conclusions, a lesson that Joshua blogged about previously. Second, that in the context of social science research we should be careful not to take any one paper as conclusive evidence of an effect. Rather, because of the limitations inherent in any social science research, when trying to understand what the academic literature “says” about a topic, we should look at the literature as a whole. Applying this standard to the academic literature on piracy one finds paper after paper examining different datasets from different industries in different timeframes all reaching the same conclusion: piracy harms sales.

Cross posted to the Digitopoly blog

Anti-piracy regulation and competing with free

By: Michael D. Smith

In a New York Times op-ed earlier this month, Nick Bilton used the metaphor of “Whac-A-Mole” to suggest that the creative industries are hopelessly naïve in their efforts to regulate online piracy. The editorial, “Internet Pirates Will Always Win”, argues that anti-piracy regulation is a lot like Whac-A-Mole: hitting one target only causes two or three new targets to emerge — content identification systems can be fooled, shutting down some sites only causes new sites to open, and new filesharing protocols make it harder and harder to monitor pirate activity. In a way, the argument parallels the “you can never compete with free” arguments that have been advanced by those in favor of anti-piracy regulations, but this time with a very different conclusion: Because you will never stop piracy, the creative industries should stop trying.

“Those who don’t know history are destined to repeat it.” Edmund Burke (1729-1797)

The problem with this formulation of the “competing with free” argument is that it doesn’t learn from the history of online price competition. Harken all the way back to 1998 where conventional wisdom said that the Internet would allow consumers to easily find the lowest price and therefore would inevitably lead to “fierce price competition, dwindling product differentiation, and vanishing brand loyalty.”

This argument seemed plausible enough: Why would you pay more for something that you could get for less? Unfortunately, the argument ignored the power of product differentiation. Differentiate your product offering on things like reliability, convenience, service, quality, and timeliness and consumers will cheerfully pay more for a product they know they could get elsewhere for less. In joint research with Erik Brynjolfsson, we found that while Amazon’s prices were well above the lowest price online, they still retained a dominant share of the market in head-to-head competition with much lower priced alternatives from online retailers like altbookstore, booksnow, and musicboulevard. We also found that shopbot consumers, arguably among the most price sensitive consumers online, were willing to pay several dollars more to buy from Amazon.com even when lower priced alternatives were displayed on the same search page just one click away.

What does this have to do with anti-piracy regulation? Possibly quite a lot if one views “competing with free” as simply a special case of price competition. Imagine competition in the digital media space where the media companies and their online distribution partners play the role of Amazon, and where pirate sites play the role of lower priced alternatives from the likes of altbookstore. The twist on this example is that while Amazon could only control the differentiation of their own offerings, media companies can use anti-piracy regulation to impact the differentiation of their pirate competitors’ offerings as well. Thus, media companies can use iTunes and Hulu to improve the convenience, quality, and reliability of their paid products, while also using anti-piracy regulation to reduce the convenience, quality, and reliability of the free pirate competition.

Which brings us back to Mr. Bolton’s argument about the (supposed) ineffectiveness of anti-piracy regulation and raises the question: Can anti-piracy interventions cause people to switch from piracy to legitimate purchases? This is an empirical question, and our early empirical evidence suggests that both a French “3 strikes” anti-piracy law and the recent shutdown of the Megaupload site have been effective in increasing digital sales.

In the case of the French “HADOPI” law, in a co-authored paper with Rahul Telang, Brett Danaher and Siwen Chen we examine the impact of the law on consumer behavior by comparing digital sales patterns in France to a control group of statistically similar countries, and we find that the French anti-piracy law caused a 20-25% increase in music sales in France relative to the control group. We also find that the increase is larger for heavily pirated genres (Rap and Hip Hop, Rock) than it is for less heavily pirated genres (Classical, Jazz, Folk, and Christian). Finally, we show that these results are robust to a variety of counter-explanations including accounting for sales of Apple iOS devices which changed at about the same levels as they did in the control group countries. Likewise, in a recent working paper we analyze the impact of the January 2012 shutdown of Megaupload’s piracy-enabling cyberlocker service,  and find that this shutdown led to an increase in digital sales relative to historical norms and that the increase was larger in countries that were heavier users of Megaupload prior to its shutdown.

Together these results suggest that anti-piracy regulations don’t have to be perfectly effective to get the job done. In that way, anti-piracy interventions may be less like “Whac-A-Mole,” and more like horseshoes where you can score points just by getting sufficiently close to the target.

Cross posted to the Digitopoly blog