The True Damages of Online Piracy? It’s Hard to Measure

It doesn’t take a rocket scientist to realize that online piracy is detrimental to content creators, including in the film and music industries. However, academics studying the effects appear to be behind the curve. A few studies, brandished by illegal content providers to perpetuate the myth that content theft is a ‘victimless crime,’ claim to show that illegal downloads actually contribute to industry profits.

In theory, pirates are additional viewers who could purchase merchandise or generate word-of-mouth advertising that could get others to legally view the content. If the good outweighs the bad, then piracy might actually be helping the content industry. Leaving aside the issue of morality of theft, given the scale of online piracy, it’s hard to imagine the good truly outweighing the bad. Yet there are data-driven studies by real academics insisting that digital piracy is a boon for content creators.

However, a new meta-analysis of literature examining the effects of online-piracy, Friends or Foe? A Meta-Analysis of the Link Between “Online Piracy” and Sales of Cultural Goods by Wojciech Hardy, Michal Krawczyk, and Joanna Tyrowicz, shows that these papers finding that digital piracy does not have a significant negative effect on content creators in the music and film industry are outnumbered by those that do find a negative effect. The paper also details the methodological difficulties of calculating just how much damage piracy does, demonstrating why academic research has found such a wide array of empirical results.

Hardy et al. finds that over half of rigorous academic papers (54 percent of papers examining the film industry and 60 percent of papers examining the music industry) on the subject demonstrate that piracy has a clear, statistically significant negative impact on profits for content creators.

Additionally, many papers (36 percent for the film industry and 16 percent for the music industry) were inconclusive. Considering the methodologies being employed—many of which lack the strength to successfully attribute causality—this is not a surprise. This does not necessarily mean that a large number of studies showed no relationship, but instead points to the difficulties incumbent with reaching any significant result. Meanwhile, only 11 percent of film and 23 percent of music industry studies identified a positive relationship between piracy and sales. Yet, these are the ones that are brandished by the defenders of piracy as support for their assertions that no policy actions are needed.

The breadth of these findings is curious. Why are the results so widespread and inconclusive?

Estimating an unobservable counterfactual of an illegal (and thus hard to measure) activity while simultaneously designing a way to avoid causal confusion is hard. Consequentially, empiric results run the gamut—and this is after papers with suspect methodology or lacking regression analysis were excluded from the meta-analysis.

Even defining ”online piracy” varies wildly from one study to the next, as authors try to identify an accurate and endogenous measure for piracy. Obviously, while content piracy rates and overall sales are correlated, there is no causal link between the two as these are both driven by popularity. James Cameron’s Avatar, the most pirated movie of all time at 21 million downloads, also grossed a whopping $2.8 billion in theaters. People pirate bad content much less than they pirate good content. Academics studying digital piracy are forced to find a way around this problem in order to be able to attribute causality, and as such have found creative ways to estimate piracy rates. Examples range from changing local laws to Internet connection speeds and technological proficiency to the number of clicks on unauthorized websites. As the paper notes, these “quasi-natural experiments usually suffer from the insufficient data breadth and quality.”

Even when these strategies succeed, they measure narrow effects and don’t have the power to model the far-reaching impacts of digital piracy. How can they really tell what the movie-going behavior would be like if online piracy was not rampant? Or even what platforms we would consume music through if artists did not have to deal with piracy? As one industry insider—Radiohead producer Nigel Godrich—stated: “The recorded music industry has been so decimated by piracy that the only way for artists to survive is by gaining visibility at any cost, which includes allowing piracy itself.”

Digital theft may even influence what content is produced in the first place. Film executive increasingly green light movies with over-the-top special effects that viewers desire to experience in a theater rather than watching on a laptop. And, as piracy decreases ticket sales but increases merchandising potential, piracy could contribute to the increase in sequels coming out of Hollywood.

Hardy et al. conclude that while the literature clearly skews toward a conclusion that digital piracy has a negative impact, especially when examining more recent studies or studies with cross-national analysis, the existing literature is still inconclusive. Economists simply don’t have a data source, instrument, or quasi-experiment structure that can accurately measure exactly how much damage online piracy does. Moreover, replacing ticket sales is just one impact digital piracy has on industries which have had to reinvent themselves to survive amid high rates of illegal downloads. In the absence of a conclusive academic proof, we should revert to common sense. For many people, when they can easily get something for free with little risk of a downside, they are likely to do just that. All too often they think—to quote Dustin Hoffman in Midnight Cowboy—“Well, if it’s free, then I ain’t stealin’.”

, Flickr