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 <a href="http://www.hbs acheter 4 gratuit”>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 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