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Pulling the Plug on Digital Piracy: Michael Smith Examines the Impact on Sales

November 25, 2013

When business revenue is lost to piracy and theft, many want swift action taken to stop the offenders. Yet, when the U.S. government abruptly pulled the plug on an online video site, some worried about the chilling effect on innovation and customer buying patterns. And new questions were raised about whether thieves are deterred or actually emboldened by harsh anti-piracy law enforcement.

Michael D. Smith, Professor of Information Systems and Marketing at Carnegie Mellon University and co-director of CMU’s Initiative for Digital Entertainment Analytics (IDEA), set out to address these and other concerns in his recent research, “Gone in 60 Seconds: The Impact of the Megaupload Shutdown on Movie Sales.”

At a recent MIT Initiative on the Digital Economy (IDE) lunch seminar, Smith said that there is growing proof in the academic literature that piracy does harm sales, but the more complex issue is what to do about it. Many businesses are resigned to hackers and illegal knockoff products, saying that they “can’t compete with free,” he noted. Nevertheless, the international business community wants to deter and stop the spread of these site and remedies are sparking discussion and debate.

According to Smith:

“The growth of Internet-based piracy has led to a wide-ranging debate over how copyright policy should be enforced in the digital era.” His research analyzed “the impact of the U.S. government’s shutdown of a major piracy site — — on digital sales and rentals of movies.”  

The study concludes that:

“The shutdown of Megaupload and its associated sites caused digital revenue for two major motion picture studios to increase by 6.5%-8.5%. The results suggest that some consumers will turn to legal channels when a major file-sharing site is shut down, and by extension that illegal file-sharing displaces digital movie sales.”

Megaupload was accused of trafficking in pirated copyrighted content, prompting the Department of Justice to shut it down globally in January 2012. By exploiting cross-country variation in Megaupload usage, Smith and his co-author Brett Danaher determined that shutting down Megaupload caused a change in digital movie purchase patterns that resulted in an 8% increase in digital sales and rentals for three major film studios in the 18 weeks following the shutdown.

The impact of similar policy interventions on consumer behavior is an important policy question as numerous other countries, such as the U.K., are adopting policy measures in the hopes of controlling digital piracy.

In his paper, Smith says that enforcement approaches vary widely, with some involving policies designed to deter consumers from filesharing though incentives or penalties, while other approaches target the supply of piracy by shutting down Internet sites that serve as major conduits for pirated content.

Smith said that while the study was narrow in focus, it was one of the first to examine real-world sales data to analyze the impact of anti-piracy interventions on sales. Moreover, it “provides a methodology and approach that could be applied to other similar anti-piracy interventions in future research.”