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The Truth About Piracy

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.

But when it comes to piracy, that’s what a lot of people do. In presenting these results to various audiences, we have been surprised by the number of people who revealed misperceptions to us about the actual impact of piracy on sales and on society. Given the importance of these issues, and given the dangers of putting ideology before evidence, we’ve decided to blog about the academic evidence on the effects of piracy.

We’ll devote this post to the first question listed above: Does piracy harm sales?

How can you determine the truth about the impact of piracy on sales? Economic theory is inconclusive on this question. You can make a perfectly valid theoretical argument that in most cases piracy will hurt legal sales (after all, when something is available for free it is generally harder to convince people to pay for it). But you can also make a perfectly valid theoretical argument that piracy will have no effect on legal sales, or could even cause legal sales to increase (because of increased awareness for the content or artist).

So what should you do when the theory is inconclusive? Study the data, of course. And fortunately, economists and other academics have been gathering data and using it to study these questions since the early days of Napster, in 2000—which means we have plenty to work with. When  we recently surveyed the peer-reviewed academic literature, we found 25 journal articles that analyze the impact of piracy on sales, which we’ve summarized in tables 1 and 2 below. [1] What we discovered in reviewing these papers was a broad consensus: 22 of the 25 papers found that piracy reduces the revenue producers make from legal sales.

Peer-Reviewed Journal Articles Finding No Statistical Impact of Piracy

Citation Primary Data Result
Oberholzer and Strumpf (2007, Journal of Political Economy) 2002 OpenNap music downloads, 2002
U.S. sales of popular albums
“[F]ile sharing has had no statistically significant
effect on purchases of the average album in our sample.”
Smith and Telang (2009,
MIS Quarterly)
2005-2006 Amazon DVD sales ranks and
BitTorrent movie file
downloads
“[T]he availability of pirated content at [television broadcast] has no effect on post-broadcast
DVD sales gains.
Andersen and Frenz (2010,
J. of Evolutionary Economics)
2006 survey of Canadian customers’ file
sharing and CD purchasing behavior
There is “no (statistical) association between the number of P2P files downloaded and CD
album sales.”

Peer-Reviewed Journal Articles Finding That Piracy Harms Sales

Citation Primary Data Result
Hui and Png (2003, Contrib. to Economic Analysis &
Policy
)
1994-98 IFPI worldwide
CD sales data and
physical piracy rates
“[D]emand for music CDs decreased with piracy,
suggesting that ‘theft’ outweighed the ‘positive’
effects of piracy.”
Peitz and Waelbroeck
(2004, Rev. of Econ.
Res. on Copyright
)
1998-2002 worldwide
CD sales, IPSOS survey
data for piracy downloads
“The implied loss of CD sales due to MP3 downloads is -20% for the period 1998-2002.”
Zentner (2005, Topics
in Economic Analysis
and Policy
)
1997-2002 country-level
data on music sales
and broadband usage.
“countries with higher internet and broadband penetration have suffered higher drops in music sales”
Stevens and Sessions (2005, Journal of Consumer Policy) 1990-2004 consumer
spending on cassette tapes, LPs, and CDs.
“[T]he proliferation of peer-to-peer file sharing networks since 2000 has led to a significant decline in music format sales.” (emphasis in original)
Bounie et al. (2006,
Rev. of Econ. Res.
on Copyright
)
2005 survey of movie
piracy and purchases
from French universities
“[Piracy] has a strong [negative] impact on video [VHS and DVD] purchases and rentals” but statistically no impact on box office revenue.
Michel (2006, Topics
in Economic Analysis
and Policy
)
1995-2003 U.S. BLS
micro Consumer Expenditure
Survey data
“The relationship between computer ownership and music purchases weakened” due to piracy, potentially reducing CD sales by 13 percent.
Rob and Waldfogel
(2006, Journal of
Law and Economics
)
2003 survey of U.S.
college students
piracy and purchase
behavior
“[E]ach album download reduces purchases by 0.2 in our sample, although possibly by much more.”
Zentner (2006,
Journal of Law
and Economics)
2001 survey of European
music purchase and
piracy behavior
“[Piracy] may explain a 30 percent reduction in the probability of buying music.”
Bhattacharjee et al.
(2007, Management
Science
)
1995-2002 Billboard
100 chart rankings,
WinMX file sharing
post 2000
P2P file sharing technologies have resulted in “significantly reduced chart survival except for those albums that debut high on the charts.”
DeVany and Walls
(2007, Review of
Industrial Organization)
Box office revenue and
the supply of pirated
content for an unnamed
movie
“[Piracy] of a major studio movie accelerated its box-office decline and caused the picture to lose about $40 million in revenue.”
Hennig-Thurau,
Henning, Sattler
(2007, Marketing
Science
)
2006 survey of German movie purchase and
piracy intentions
Piracy causes “substantial cannibalization of theater visits, DVD rentals [and] purchases responsible for annual
revenue losses of $300 million in Germany.”
Rob and Waldfogel
(2007, Journal of
Industrial Economics
)
2005 survey of U.Penn. students’ movie
purchase and piracy
behavior
“[U]npaid first [piracy] consumption reduces paid consumption by about 1 unit.”
Liebowitz (2008,
Management Science)
1998-2003 Census data
on broadband Internet
use and music purchases
“[F]ile sharing appears to have caused the entire decline in record sales [observed from 1998-2003].”
Bender and Wang (2009,
International Social
Science Review
)
1999-2007 Country-level
annual recorded
music sales
“For a one percent increase in piracy rate, music sales declined about 0.6 percent.”
Danaher et al. (2010, Marketing Science) 2007-2008 BitTorrent downloads of television torrents “[T]he removal of NBC content from iTunes resulted in an 11.4% increase in piracy for its content”
Waldfogel (2010,
Information
Economics
and Policy
)
2009-2010 survey of Wharton students’ music piracy and purchases “[A]n additional song stolen reduces paid consumption by between a third and a sixth of a song.”
Bai and Waldfogel
(2012, Information
Economics and Policy
)
2008-2009 survey of Chinese university
students’ movie behavior
“[T]hree quarters of [Chinese students’] movie consumption is unpaid and … each instance of [piracy] displaces 0.14 paid consumption instances.”
Danaher et al. (2013,
J. of Industrial
Economics
)
2008-2011 iTunes music sales in France and other European countries The HADOPI anti-piracy law “caused iTunes music sales to increase by 22-25% [in France] relative to changes in the control group [countries].”
Hong (2013, J. of
Applied Econometrics
)
1996-2002 survey data
from U.S. BLS
Consumer Expenditure
Survey data
“[F]ile sharing is likely to explain about 20% of the total sales decline during the Napster period, mostly driven by downloading activities of households with children aged 6-17.”
Danaher and Smith
(2014, International
Journal of Industrial
Organization)
2011-2013 Sales and
rental data for movies
in 12 European countries from 3 major motion
picture studios
“The shutdown of Megaupload and its associated sites caused digital revenues for three major motion picture studios to increase by 6.5–8.5%.”
Ma et al. (2014, Information
Systems Research
)
Box office revenue for
All movies whose wide
release occurred between February 2006
and December 2008.
“Pre-release [movie] piracy causes a 19.1% decline in
revenue compared to piracy that occurs post release.”
Adermon and Liang (2014,
Journal of Economic
Behavior &
Organization
)
Digital and physical music
sales in Sweden, Norway, and
Finland from 2004 through 2009.
The IPRED copyright reform measure in Sweden “increased music sales by 36% during the first six months [after it was implemented]. Pirated music therefore seems to be a
strong substitute to legal music [purchases].”

 

Obviously, a broad consensus on this question isn’t the same as unanimity. For example, one of our papers (Smith and Telang 2009) found that piracy has statistically no impact on legal sales when movies are broadcast on over-the-air television, approximately 2-3 years after their theatrical release, and another of our papers (Ma et al. 2014) found that when piracy occurs before a movie is released in theaters, it causes an average drop of 19.1 percent in theatrical revenue. Piracy doesn’t alwaysharm sales, in other words, but it usually does.

But what about consumers? Does piracy harm them? We’ll take that question on in our next post.

[1] These 25 studies include 21 studies discussed in the WIPO paper and 4 additional studies that were brought to our attention after the WIPO paper became public.

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