In the first of a series of interviews with economics researchers at the Royal Economic Society Conference 2008, Romesh Vaitilingam talks to Karen Croxson about Promotional Piracy: Why some media and software companies turn a blind eye to illegal downloads.
Some providers of digital products, such as software, music and film, may turn a blind eye to or even encourage piracy of their goods, according to new research by Karen Croxson presented at the Royal Economic Society’s 2008 annual conference. They do this because while piracy may harm sales, it can also serve to provide free marketing, helping to create buzz about a product.
The most high profile example of buzz is the Arctic Monkeys, a British music group, which distributed its initial songs freely online. But firms in other industries may benefit from the same effect. Makers of office software such as Microsoft may enjoy a net benefit from piracy: business users are unlikely to copy the product, and others who copy it would not have bought it anyway. Thus, the main effect of piracy is extra cheap promotion, and this in turn may explain why copy protection applied to office software is relatively weak.
In some other markets, the presence of a free copy may result in many consumers who would have bought finding themselves tempted instead to download the product for free. Piracy will undermine legitimate sales in such cases, without necessarily raising consumption: there may be no free extra buzz. This is the more likely scenario in the market for console games, the study suggests, and this helps to understand why companies such as Sony or Nintendo, which make console games, invest heavily in copy protection.
The rise of digital piracy
Developments in computing and the internet have had many liberating effects. End-users can now acquire near perfect copies of many creative works, and often can do so instantaneously (though not entirely without cost). The unauthorised copying of digital goods such as software, music and films a practice referred to as digital piracy has been claimed to place in peril the viability of whole industries. With perceived losses running so high, one might expect to see all sellers moving mountains to safeguard their intellectual property technologically. In fact there are some puzzling differences in attitudes.
Makers of console games such as Nintendo and Sony invest heavily in draconian anti-piracy measures (their systems are notoriously difficult to crack). But providers of office software such as Microsoft have publicly referred to the casual copying and softlifting of their products, seemingly admitting that these are more easily replicated. There is even evidence that business software manufacturers reduced copy protection following the arrival of personal computers in the 1980s.
The analysis in this research report confirms that piracy can displace sales but highlights the importance of being realistic about this: not every copy implies a lost purchase. In any market there are some who value the product but never would buy (perhaps children with limited pocket money) and their piracy poses no threat to sales.
Given that the cost of piracy is likely to come down to a personal calculation (related to such things as the value of time, fear of penalties and moral costs), there may be variation across markets in the genuine sales threat the temptation to pirate by those who would otherwise buy. This goes some way to explaining protection differences.
In addition pirates may help promote the products they steal and this too may weigh on protection decisions. Both bought and pirated software spreads information about a product in guerrilla fashion. Word-of-mouth communication, what marketers sometimes term ‘buzz’ can drive sales success.
Indeed, the sudden rise from obscurity of the Arctic Monkeys attests to the power of buzz: the instant success of the music group’s first album was due not to traditional marketing muscle but to the energy of early consumers who hyped its songs through social networking site myspace.com.
The study brings together these two effects business stealing and promotion. It shows that in markets where the former is more important, firms are more likely to invest in copy protection measures. But in some other cases promotion could be the dominant consideration, and there firms will be less likely to invest heavily in copy protection.
Consider computer games. Many games are targeted at, and probably most valued by, a youth market. Yet the piracy costs of young people may be small, not least because they have more free time and forgo less income by spending time on piracy. In such a market, copying can undermine sales without generating extra promotional benefits (those who pirate would have bought anyway), and this can help explain the drastic protection measures applied.
Contrast this to the market for business software: professional users attach higher worth to office software than do, say, students. At the same time, they are likely to have higher piracy costs (owing to a higher monetary value of time and conceivably greater concern about legal repercussions). With valuable users shying away from copying, the seller in this market finds itself more naturally insulated against lost sales. Moreover, those who pirate, many of whom probably wouldn’t have purchased, represent (virtually) free promotion. A weak appetite for protection is more intelligible in this light.
Promotional Piracy by Karen Croxson was presented at the Royal Economic Society’s annual conference at the University of Warwick, 17-19 March 2008. Karen Croxson is at Oxford University.
For further information Karen Croxson on 01865 279484 (email: firstname.lastname@example.org); or Romesh Vaitilingam on 07768 661095 (email: email@example.com).