Expendables 3 and the negative effects of piracy

By , July 30, 2014.

This past week, a DVD quality copy of Expendables 3 leaked onto online pirate sites, weeks before its August 15 box office debut. Along with the news came the usual claims that filmmakers shouldn’t worry about pre-release piracy—it’s good promotion, says David Pierce at the Verge, and internet commenters offer scores of other rationalizations.

But over at the Technology Policy Institute Blog, researcher Michael W. Smith says the unauthorized pre-release copy will likely hurt box office revenues for the film. He and his colleagues studied the effect of pre-release movie piracy on box office revenue and found that, on average, it “results in a 19% reduction in box office revenue relative to what would have occurred if piracy were only available after the movie’s release.”

Smith’s study is the first peer-reviewed journal article to look at this particular form of piracy. It was recently accepted for publication in the Information Systems Research journal, but a pre-publication draft is available at SSRN.

The study casts doubts on claims that pre-release piracy has no impact on theatrical revenue or even has a beneficial effect by generating buzz. On the contrary, Smith finds that “pre-release piracy significantly reduces a movie’s expected box office revenue and that this impact is stronger earlier in a movie’s lifecycle than in later periods.”

Smith concludes the report by noting some of its limitations. It doesn’t look at the intensity of pre-release pirating, nor at the quality of the unauthorized copies, data which may provide additional insights. It also does not consider the effect of pre-release piracy on different types of films, nor does it examine the effects on revenue streams besides the box office, such as DVD sales.

These last two limitations are particularly worth further research. Most films—particularly indie and niche films—don’t ever screen in theaters, and even among those films that do, box office revenue is only a part of overall revenues.

While Smith’s study is the first peer-reviewed article to look specifically at pre-release piracy and its effects, it is not the first to look at the effects of other forms of piracy on films. In fact, in his article, Smith notes that eight peer-reviewed studies so far have looked at the effect of piracy on film sales, and, more significantly, seven of the eight studies have found “that piracy results in significant harm to motion picture sales.” A broader literature review—focusing not solely on films but on other types of works such as recorded music—found that “The vast majority of papers which have been published in peer-reviewed academic journals—papers spanning a variety of methods, time periods, and contexts—find that piracy causes a statistically significant decrease in sales.”

And yet some measure of file-sharing denialism persists. It, first, runs counter to common sense—yes, if people can get something for free they’ll buy less, and if people buy less of something, less of it will be produced. But it also, as seen above, is not supported by the overwhelming majority of empirical evidence.

In “The Expendables 3” Torrent and the Techno-Utopian Delusion, Indiewire writer Sam Adams sees through this denialism, or, as he calls it, “sheer self-justifying delusion.” In doing so, he touches on a larger point.

Adams notes that some of the rationalization for downloading The Expendables 3 is based on the idea that it is not a movie but a show, one in which the experience of watching in the theater takes precedence (and thus justifies watching an illegitimate, lower-quality version). Because of this, he cautions:

And when you’re paying for the experience—not out of curiosity or as a way of supporting an ecosystem that allows the creation of new work—it only makes sense to sample the product beforehand. But in so doing, you’re pushing cinema in a direction where every movie has to be a show: Either it’s big and loud enough to make you feel like you’re missing out by watching it (legally or illegally) at home or it might as well not show up to play.

CNET’s Nick Statt raises similar concerns:

We often complain about “sequelitis” and the onslaught of low-quality, brainless action movies and series reboots, yet don’t ever seem to take responsibility for the fact that our collective unwillingness to pay for things that don’t have formulaic payout is what drives creative decision making.

In the current model, everything from “Boyhood” and “12 Years A Slave” to “Zero Dark Thirty” and “Gravity” are more harmed by systemic piracy because it devalues films as an art form. Risks are not rewarded when the only movie with a concrete return on its investment is a $200 million narrative train wreck about robot cars or a tongue-and-cheek ensemble action flick featuring Rocky, the former governor of California, and Han Solo.

I enjoy such films, as do millions of others. But it would be a shame if that was all we got to see. The ultimate point is that piracy has societal effects beyond any given film’s bottom line.

In Copyright Extremophiles: Do Creative Industries Thrive or Just Survive in China’s High-Piracy Environment?127 Harvard Journal of Law & Technology 469 (2014). published earlier this year, Eric Priest digs into some of these less obvious effects of piracy in more detail. The claim is sometimes made that maybe copyright—the legal foundation that provides exchange value for creative works—is irrelevant since creativity still exists in areas, such as China, where piracy runs rampant. Priest refutes this by comparing creators in high-piracy areas to biological organisms known as extremophiles.

Just as microorganisms have evolved to thrive in superheated deep-sea vents or highly acidic environments, so too can a subset of creative professionals find ways to monetize their works even in a high-piracy environment. The fact that some monetization models can work for some types of producers or artists in China does not mean that optimal or even near-optimal conditions exist for the development of flourishing, healthy, and stable creative industries. In short, poor copyright enforcement inflicts significant and persistent harms on China’s music and film industries. To invoke the extremophiles analogy, China’s inhospitable creative industry environment may support narrow strains of creative “life,” but with an effective regime of copyright norms and enforcement, China’s creative ecosystem could more closely resemble a lush, diverse rain-forest.

Priest’s research unpacks some of the more pernicious results that piracy has on China’s film and music industries. Along with undermining the ability of a professional class of creators to sustain their livelihoods, high piracy has made these industries “neither robust nor stable” and lead them to become “hyper-dependent on a single revenue stream” (box office for films and ringback tones for music). Priest concludes:

This lack of revenue stream diversity distorts and undermines the creative ecosystem in at least three ways. First, the scarcity of monetization options creates a winner-take-all market dominated by big producers. The paucity of other revenue sources seriously undermines financial support for smaller, independent producers.

Second, rampant piracy and concentration of revenue streams distorts market signals to producers. For example, film producers are incentivized to invest in a relatively narrow range of works that attract the audience whose tastes are most easily monetized—young, urban cinemagoers. Music producers likely are incentivized to produce music that will make the most marketable ringtones.

Third, and perhaps most importantly, reduced revenue stream diversity disproportionately exposes producers to the whims of peculiar markets and exploitation by gatekeeper or monopsonist intermediaries. China’s music industry proves an especially vivid example, as ringback tones gross more than $4 billion annually, but the mobile operators who control ringback tone distribution keep more than ninety-eight percent of that revenue for themselves. The meager two percent that goes to copyright owners amounts to ninety percent of those copyright owners’ total income from recorded music. So if ringtones lose their appeal with consumers, the recording industry will collapse. Without other viable revenue streams to leverage, musicians, producers, and record labels have little choice but to grin and bear it while a state telecommunications monopoly enjoys the great bulk of the rewards of their artistic efforts.

It seems difficult to make a more compelling case for copyright. How creators and the film industry responds to pre-release and other forms of piracy is a wholly separate topic, but the fact remains that any type of piracy has a significant negative effect on revenues as well as the stability and vitality of creative and cultural industries. If we want to maintain robust and independent creativity, we should not be so quick to treat copyright as expendable.

References

References
↑1 27 Harvard Journal of Law & Technology 469 (2014).

How Much More Evidence

By , March 03, 2011.

How much evidence about the negative effects of online piracy can be ignored?

This week, the Canadian Intellectual Property Council released a report on The True Price of Peer to Peer File-Sharing. The report re-examined Don’t blame the P2P file-sharers: the impact of free music downloads on the purchase of music CDs in Canada, a 2007 report that cast doubts on the link between online piracy and music sales.

Using the same data from the 2007 report, analyst Dr. George Barker found the original conclusions to be incorrect.  Dr. Barker instead discovered:

1. three out of every four respondents said that if P2P were not available they would have purchased some or all of the music; and

2. almost two-thirds of the “hardcore” P2P downloaders (those who indicated in the survey that they acquired music by P2P only) said they would have purchased one-third of the tracks they downloaded if the songs were not available on P2P networks — this amounts to an average expense of $168 per person, adding up to hundreds of millions of dollars in extra revenue for the music industry per year from this group alone.

Based on this data, Dr. Barker concluded “that P2P downloads have strong negative effects on legitimate music purchases” and, contrary to the original analysis of the data, P2P downloading acts as a substitute for legitimate music purchases. Dr. Barker’s analysis infers that stronger copyright laws “would substantially increase music purchases and music industry sales revenues and, by implication, increase artist income and industry employment and contribute to both economic growth and higher government tax revenues in Canada.”

While it’s significant that a closer analysis of the original data reveals entirely different conclusions, this isn’t the first time the conclusions of the original report have been challenged. Noted economist Stan Liebowitz examined the original report’s conclusions when it first came out and found them “not only implausible” but actually “impossible to be true.”

Other studies independently confirm that reducing online piracy leads to increased sales. 1David Blackburn, On-line Piracy and Recorded Music Sales, Working Paper, Harvard University (2004), finding 30% reduction in files available online leads to 10% increase of industry sales in 2003; Kristina Groennings, An Analysis of the Recording Industry’s Litigation Strategy Against Direct Infringers, 7 Vanderbilt Journal of Entertainment & Technology Law 389 (2005), finding RIAA’s litigation strategy led to initial decrease in P2P filesharing and increase in album sales in 2003 and 2004 after several years of decline. Taking a broader perspective, one economic study of stock prices found that “current and past efforts by the media industry to check illegal file-sharing over P2P networks through stricter copyright laws and lawsuits against violators have a significant positive impact on expected long-term profitability and economic viability of major media firms. 2Sanjay Goel, Paul Miesing, Uday Chandra, The Impact of Illegal Peer-to-Peer File Sharing on the Media Industry, 52 California Management Review 6 (2010).

The conclusions of the CIPC report — “people buy things they like unless they can get them for free — seem obvious enough not to need studying in the first place. But despite study after study and piles of evidence that show the harmful effects of online piracy, there are those who continue to insist that piracy is not a problem. The arguments are not that this approach or that approach to diminishing piracy is unwise for whatever reason, but that the harm doesn’t even exist in the first place.

Prove It

The academic consensus is that online piracy has had a significant negative effect on music sales. I listed a number of major studies on the issue in a previous post here. Olberholzer-Gee and Strumpf provide a similar table of major academic studies on the effect of online piracy in their paper File-sharing and Copyright (Table 5). Studies since then reveal similar findings; for example, Choi and Kim found that piracy has a negative effect on online music sales in Korea in a 2010 study. 3Dongook Choi & Yeonbae Kim, Effects of Piracy and Digital Rights Management on the Online Music Market in Korea, TEMEP Discussion Paper No. 2010:72 (December 2010). While a handful of studies have argued that online piracy has no effect, or even a positive effect, on music sales — most notably an earlier study by Olberholzer-Gee and Strumpf — these studies are in the minority.

The effect of online piracy on music sales around the world is easy to see. Countries which have improved legal responses to online piracy in the past few years, like South Korea and Sweden, have seen music sales rise. In contrast, countries like Spain and Brazil, where copyright laws are lax or ineffective against digital infringement, have seen music sales fall at a rate above the global average. 4See IFPI Digital Music Report 2011 and IFPI Recording Industry in Numbers 2010.

And ineffective copyright enforcement around the world is not just a concern of major media industries. Jiarui Liu looks at the problem of piracy in emerging markets by examining the music industry in China. While it may seem that copyright enforcement in such countries is only a foreign problem, it turns out that rampant infringement has a profound effect on local artists:

In many cases, piracy of foreign works could be more devastating to domestic companies than to foreign companies. Because the competition from low-priced pirated works both online and offline undercuts stable income from royalties, Chinese musicians have witnessed the entire music industry becoming increasingly dependent on alternative revenue streams such as advertising, merchandizing, and live performance. The pressures of paid appearances and extended tours have started to squeeze the time that artists need to spend on music production. The alternative revenue streams also force many music companies to abandon traditional album contracts and operate in a way more like talent agencies that control all aspects of an artist’s career. Music companies are inclined to sign talents at a very young age with a long-term agency deal in order to exploit the full value of artists in the advertising market. In addition, the need to attract sponsorship opportunities puts more emphasis on non-musical qualities, such as a fresh appearance and healthy public image, which to some extent marginalizes “pure” musicians who have less value in those alternative markets.

Most importantly, as copyright piracy obstructs the communication of consumer preferences to musicians, an increasing number of musical works are created to accommodate the tastes of entrepreneurs (e.g., sponsors and advertisers) rather than those of average consumers, and this has caused a fundamental shift in the creative process of the Chinese music industry. Although entrepreneurs should arguably be willing to take whatever is popular among music fans as a draw to their own products, the expectations of entrepreneurs and consumers do not always meet in a dynamic market setting. For this reason, the interests of less commercial artists and new artists are more likely to be compromised. 5The Tough Reality of Copyright Piracy: A Case Study of the Music Industry in China, 27 Cardozo Arts & Entertainment Law Journal 621 (2010).

Commitment to effective intellectual property laws has ripple effects in a nation’s economy beyond the media industries. On Tuesday, attorney Lawrence J. Siskind, writing in The Recorder, asked Has Israel’s Approach to IP Law It Strong? In the article, he attributes some of Israel’s national growth over the past several decades to strengthening its approach to intellectual property. He quotes one report that says, “Israel, by 1990 was still mostly barren of technology and finance. … Israel generated few significant companies or technologies, no significant financial institutions, and little important science.” The country was known for wide-scale piracy at the time. But this changed by the turn of the new century (in part due to trade pressures from the US). “As Israel’s image morphed from IP pirate to IP protector, the country became a magnet for global investment.”

Courts, which are in the business of judging evidentiary claims, recognize the harms of online piracy. For example, the court in A&M Records v. Napster was convinced that “Napster use is likely to reduce CD purchases by college students.” Napster’s expert did not “provide credible evidence that music file-sharing on Napster stimulates more CD sales than it displaces.” Napster also tried to argue that the “sampling” of music its service provided (try-before-you-buy) stimulates retail music sales. The court was still not persuaded, calling the evidence used to support this argument “unreliable” and accepting “that the activity defendant calls sampling actually decreases retail sales of their music.” 6114 F.Supp.2d 896, 910-914 (ND Cali 2000).

Yet, some still find ways to rationalize away the conclusions revealed above.

Yes, But…

These ways include focusing a lot of attention on less-than reliable studies or distorting the literature that is out there.

As mentioned above, one of the favorite studies of the piracy-is-not-a-problem contingent is Olberholzer-Gee & Strumpf’s 2007 paper, The Effect of File Sharing on Record Sales: An Empirical Analysis. But the study looked only at a small period of time (17 weeks at the end of 2002) and uses some curious methodologies (“Our most important instrument  is the number of German secondary school kids who are on vacation in a given week”). Stan Liebowitz has been especially critical of the study, and has published several responses worth a read here, here, here, and here. But the biggest surprise comes from Olberholzer-Gee and Strumpf themselves, who backed off from their earlier claims in a 2010 paper.

Another report widely cited as evidence against the harm of piracy is the US Government Accountability Office’s April 2010 Observations on Efforts to Quantify the Economic Effects of Counterfeit and Pirated Goods. After the release of this report, many declared the debate over the effects of piracy over — most notably a number of interest groups in a full page ad that said “Content Industry Piracy Claims are Bogus.” 7Other examples include an article in Ars Technica titled “US government finally admits most piracy estimates are bogus.” But is that really what the report said?

No. Far from looking at all or even most piracy claims, the report only examined a small percentage of independent reports — and even then, it merely highlighted some of the limitations inherent in those reports. It’s most damning conclusions were aimed at only three government agency figures that have been used — an FBI estimate used in 2002, a CBP estimate also used in a 2002 memo, and an estimate used by the Motor and Equipment Manufacturers Association in 2005 attributed to the FTC. The GAO’s conclusion? It couldn’t substantiate these estimates. The broader takeaway of the GAO report reflects the consensus: piracy has significant negative effects, but it’s difficult to nail down a specific number or dollar figure on the harm caused.

A particularly telling example of distortion can be seen in an article on Torrentfreak, Pirates are the Music Industry’s Most Valuable Customers. The site draws that conclusion from an IFPI commissioned survey carried out by Jupiter Research. Torrentfreak highlights the survey’s results that, compared to music buyers, music pirates are “31% more likely to buy single tracks online, 33% more likely to buy music albums online, 100% more likely to pay for music subscription services, and 60% more likely to pay for music on mobile phone.” That sounds like a big deal until you look at the actual report. There, you’ll see that Torrentfreak played a little numbers game — the percentage of either group of participants to engage in any of these activities is small, so that even a few percentage points difference results in an impressive-sounding “more likely” figure. For example, only 2% of “music buyers” paid for a music subscription service compare to 4% of “music pirates.” Not as impressive when you put it that way.

While that kind of statistical shenanigary might be overlooked, what’s truly misleading is that if you look at the total figures provided by the report, the total music spending by “music pirates” is less than the total of “music buyers” (and every other segment surveyed).

Well What About…

Maybe there are causes besides piracy of decreasing music sales, the final argument goes.

Not so, according to Stan Liebowitz, who has examined data over the past 30 years to arrive at his conclusion. While some factors may have played some role, that role is at best secondary and at the very least only negligible. Nothing else — the general economy, shifts in consumer spending to other forms of entertainment, etc. — has caused as big an impact as the advent of online piracy. The data doesn’t support the idea, and neither do economic theories. 8Liebowitz’s own site summarizes his research in file-sharing and links to his papers on the subject.

Is it possible that piracy has positive benefits? The GAO report considered this question, as have several other studies. Maybe network effects increase the value of copyrighted works. Maybe the “sampling” of digital files that file-sharing allows lead to more purchases.

Again, the consensus among researchers is that any possible positive benefits of piracy are far outweighed by the negative effects. 9Note that these questions of “benefits” are mostly limited to economic benefits. Not addressed in this discussion are the equally, if not more, important personal considerations of creators: their free speech interests and the chilling effect of piracy, to name just two. Going back to Liebowitz, “sampling” is more likely to decrease sales rather than increase them. This seems like common sense if you think about it: if you can “sample” an entire work, over and over again, whenever and wherever you want, why would you ever buy it? Never mind that if piracy’s positive benefits were greater than the negative effects, we wouldn’t be having this debate, since creators and media industries would be doing better rather than worse after a decade of file-sharing.

Most creators don’t need to be convinced that piracy is a problem — the real question is how best to deal with it, whether that involves legal, technological, or business model solutions (or, most likely, some combination of the three). But despite all the evidence about the harms of online piracy, there will still be those who keep believing it is not harming creators and the media industries that invest in them. New research and studies will continue to be ignored or distorted. Alternative theories about piracy will be made that may sound nice, but without evidence to substantiate them, they are mere speculation.

References

References
↑1 David Blackburn, On-line Piracy and Recorded Music Sales, Working Paper, Harvard University (2004), finding 30% reduction in files available online leads to 10% increase of industry sales in 2003; Kristina Groennings, An Analysis of the Recording Industry’s Litigation Strategy Against Direct Infringers, 7 Vanderbilt Journal of Entertainment & Technology Law 389 (2005), finding RIAA’s litigation strategy led to initial decrease in P2P filesharing and increase in album sales in 2003 and 2004 after several years of decline.
↑2 Sanjay Goel, Paul Miesing, Uday Chandra, The Impact of Illegal Peer-to-Peer File Sharing on the Media Industry, 52 California Management Review 6 (2010).
↑3 Dongook Choi & Yeonbae Kim, Effects of Piracy and Digital Rights Management on the Online Music Market in Korea, TEMEP Discussion Paper No. 2010:72 (December 2010).
↑4 See IFPI Digital Music Report 2011 and IFPI Recording Industry in Numbers 2010.
↑5 The Tough Reality of Copyright Piracy: A Case Study of the Music Industry in China, 27 Cardozo Arts & Entertainment Law Journal 621 (2010).
↑6 114 F.Supp.2d 896, 910-914 (ND Cali 2000).
↑7 Other examples include an article in Ars Technica titled “US government finally admits most piracy estimates are bogus.”
↑8 Liebowitz’s own site summarizes his research in file-sharing and links to his papers on the subject.
↑9 Note that these questions of “benefits” are mostly limited to economic benefits. Not addressed in this discussion are the equally, if not more, important personal considerations of creators: their free speech interests and the chilling effect of piracy, to name just two.