New Study Shows Piracy is Good for Sales

Still buying the moral panic over Internet piracy? Internet file-sharing “piracy” drives sales (i.e. it functions as advertising), according to a new study conducted by two business researchers from the Ludwig-Maximilians-University Munich and the Copenhagen Business School.

This has always been a competing theory to the “substitutes for sales” theory promoted by copyright maximalists, but it’s actually very hard to test either, because it’s difficult to measure the impact and set up controls.

In the past, the copyright industry has made the assumption that every time a person receives a free copy of a media product (“pirated copies”) that a sale has been lost. This is equivalent to assuming that if you will pick up a free flyer off of a conference “freebies” table that you would have paid $5 (or $50 or $500) for the same flyer had you offered it for sale. Of course, this is untrue.  It’s hard to believe that anyone would make real policy based on such an absurd assumption, but in fact that is exactly what has been happening with new “anti-piracy” laws being promoted by corporate publishers.

We have no idea what a free thing is worth to the person picking it up, and we frequently give away free things to create a market for related items. If this effect dominates, then piracy will actually make sales go up instead of down. But it’s just as hard to prove as the idea that piracy harms sales.

The competing “piracy drives sales” theory is based on the simple idea that, because you get a free copy of a musical recording or movie online, you are more likely to consider buying the “official” DVD or CD from the publisher (i.e. a related product). This is because, there are a number of ways in which the official version is more valuable than the free online version, including the desire of fans to give money to the artists they like.

There is of course some evidence that this certainly works if you do it on purpose. Artists who have built business plans based on this assumption have been doing very well lately: Nina Paley used a similar model to sell her “Sita Sings the Blues“, starting in 2009, which has produced profits through her online store and other channels considerably higher than a similar film promoted through the standard proprietary channels. Amanda Palmer financed her latest album, Theatre is Evil, through a Kickstarter campaign, and much of her music can be downloaded for free from her site. And these are just two rather prominent examples.

Of course, I’m also directly involved in such a project with “Lunatics” and to a lesser degree with “Morevna Project“.

The shutdown of Megaupload last year was a massive blow to file-sharing, though, and this provides an adequate signal to test the response. This event provides a way to collect evidence for the impact of “piracy” on entertainment industry sales.

The result reported is that, for the most part it made no difference — but the difference that it did make was a net negative for industry sales. This supports the hypothesis that piracy primarily functions to advertise works and thus drive sales rather than replacing them.

The only exception is for the very high-end blockbusters. That makes sense, because these are so heavily marketed that the piracy could hardly add to the public’s awareness of them. Here we see a tiny drop in sales — but it’s not enough to compensate for the overall loss. In other words, by pressuring the US Department of Justice to strain relations with New Zealand by cracking down on Megaupload, the industry actually did nothing but cause harm, even to itself.

It’s important to remember that the movie industry has insisted on the necessity of massively-oppressive and invasive new laws which, as a side effect, damage online free speech and punish consumers severely. Their justification is that piracy has a massive negative impact on their sales. This study shows that this is not even remotely true.

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About Terry Hancock

Terry Hancock is the producer and director of "Lunatics" ( http://lunatics.tv ). He is also a regular columnist for Free Software Magazine ( http://www.freesoftwaremagazine.com/articles_by/5 ), and a lifelong advocate for space, science, and technology. More at http://terryhancock.narya.net
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