Study: Piracy Can Be Beneficial To Markets and Consumers

When viewed as another type of competition, especially in information markets. JL


Karl Bode reports in Tech Dirt:

Piracy can act as a form of invisible competition that prevents both a manufacturer and a retailer from jacking up prices at an unreasonable rate: "When information goods are sold to consumers via a retailer, in certain situations, a moderate level of piracy seems to have a surprisingly positive impact on the profits of the manufacturer and the retailer. There are other positive effects of piracy such as positive network effect (i.e., the more people use the product, the more valuable it becomes) and learning (i.e., pirate users may learn about the product and buy the legal version later on).”
If you've been around Techdirt for more than a few weeks, you probably know that one of our core arguments is that piracy should be seen as a competitor, not as some kind of mad demon whose antics can only be thwarted by equally demonic countermeasures. As such the solution for piracy isn't engaging in idiotic, harmful behavior (like copyright troll lawsuits or kicking people off the internet), it's to compete with piracy by offering better, cheaper products that make piracy less appealing. And no, just because you think "competing with free" isn't fair, doesn't mean this entire paragraph isn't true.
Numerous studies (including our own) have shown that you beat piracy through innovation, not scorched earth tactics. But a new collaborative study out of the University of Indiana highlights how piracy, at least in moderation, can have an actively positive impact on both the health of a market and consumers alike. More specifically, the study highlights how piracy can act as a form of invisible competition that prevents both a manufacturer and a retailer from jacking up prices at an unreasonable rate:

"When information goods are sold to consumers via a retailer, in certain situations, a moderate level of piracy seems to have a surprisingly positive impact on the profits of the manufacturer and the retailer while, at the same time, enhancing consumer welfare," wrote Antino Kim, assistant professor of operations and decision technologies at Kelley, and his co-authors.
"Such a win-win-win situation is not only good for the supply chain but is also beneficial for the overall economy."

The researchers are quick to trot out HBO's hit show Game of Thrones, which has frequently been paraded about as one of the most pirated shows of all time, as a good example. In the researchers' examples, they note that piracy prevents both the manufacturer (HBO) and the retailer (say, Comcast) from engaging in using their positions of power to jack up rates (double marginalization), since being too aggressive on pricing would simply drive users to cut the cord and engage in piracy, reducing overall revenues.
That said, the full paywalled paper makes it clear they're not advocating for these companies to suddenly start embracing piracy, just to acknowledge that the impact of piracy on markets is not wholly negative, and therefore heavy-handed anti-piracy efforts may prove counterproductive:

"Our results do not imply that the legal channel should, all of a sudden, start actively encouraging piracy," researchers said. "The implication is simply that, situated in a real-world context, our manufacturer and retailer should recognize that a certain level of piracy or its threat might actually be beneficial and should, therefore, exercise some moderation in their anti-piracy efforts.”

While HBO has had its missteps on this front (you might recall their efforts to "poison" certain BitTorrent files in a bid to make piracy confusing and untenable), executives have generally understood that piracy isn't exclusively a negative phenomenon. Time Warner execs, for example, have noted how the piracy of Game of Thrones (and the countless articles breathlessly heralding this reality) is almost "better than an Emmy" when it comes to marketing their product. Much in the same way they see password sharing as a new form of marketing, not as some kind of diabolical evil in need of crushing.
That said, the researchers did note that with AT&T now owning HBO in the wake of its $86 billion acquisition of Time Warner, AT&T's effectively now the manufacturer and the retailer in this equation. As such, it may be incentivized to crack down harder on piracy than HBO did previously (in fact it already is). Still, the researchers were quick to point out that there's still other perks to piracy AT&T shouldn't ignore:

“However, there are other positive effects of piracy such as positive network effect (i.e., the more people use the product, the more valuable it becomes) and learning (i.e., pirate users may learn about the product and buy the legal version later on),” Kim added. “These are older insights from other papers. What we find here is in addition to those."

Given this is AT&T we're talking about, whether it gets the message is far from certain.