What Filesharing Studies Really Say – Part 7 – Piracy Increases Producers Profits

What Filesharing Studies Really Say – Part 7 – Piracy Increases Producers Profits

We’ve already seen over a half a dozen studies of varying viewpoints that seem to confirm what a lot of observers have thought all along about file-sharing. In the study for today, there is an interesting perspective on how small entertainment firms actually benefit from piracy.

We’ve seen this argument before by the major corporations. The dire warnings of piracy negatively affects everyone both big and small. This study appears to blow a huge hole in that theory and proposes that while major corporations are more motivated to right piracy, there is an economic incentive for smaller firms to enjoy piracy.

This particular study is entitled “Turning Piracy into Profits: a Theoretical Investigation”. this study was published in 2010 by the Department of Economics of the University of Bologna (before you comment on it, Bologna is also a city in Italy).

The study, unfortunately, stumbles a little out of the gate. It describes file-sharing as follows:

Despite many efforts by governments and media industries to stop piracy, the popularity of Internet file-sharing has increased significantly over the last decade. The diffusion of digital goods over the net has been facilitated by the emergence of more efficient storage and distribution models. Aside from the centralised, server-based approach
(Napster, Emule), new organisational models based on peer-to-peer (P2P) networks (Direct Connect, Morpheus) have recently been developed. While in the former model communication is usually to and from a central server where files are stored, P2P system peer nodes simultaneously work as both clients and servers to the other nodes of the network. The resources shared within these communities are similar to club goods (Buchanan, 1965; Samuelson, 1954); they exhibit characteristics of excludability and non-rivalry, at least to some extent, due to possible congestion effects (Krishnan et al., 2007). To avoid problems of free riding, access to these communities is generally restricted through membership rules (such as the requirement of providing some minimal quality good to the community). For instance, most P2P networks either provide incentives for uploading files or force the sharing of files that are currently downloaded.

Since this paper was published in 2010, we know that the eMule client had long since implemented Kad which is completely decentralized. What is probably being referenced here is the ED2K (eDonkey2000) network where servers are used. Even though servers are used in this network (which, if I may point out, is still functioning on a more limited capacity these days), the server system is very much decentralized. The theory is, if one server goes down, the others can simply take their place. Given the Kademlia system eMule uses, I’d say that eMule users tend to operate on a more decentralized basis than the study would imply. Also, if we’re talking about restricted membership and what is most heavily used, I would say that this is much more likely to be referring to private BitTorrent websites. These sites not only operate to avoid hit and run download, but also operate under the assumption (albeit, flawed) that private BitTorrent websites are secure. Since we’ve seen private BitTorrent websites get taken down by authorities in the past already, we know based on experience that private BitTorrent websites aren’t invulnerable. Providing incentives to upload isn’t exclusive to BitTorrent, but we should point out what is known to be a popular method when talking about gated communities in the file-sharing scene. Fortunately, this study isn’t dependent on knowledge of how file-sharing works, but rather, how it affects business.

The study explains their intentions further down:

A distinguishing feature of the present paper is that we focus on small-scale piracy by assuming that content uploading (sharing) is contingent on access to the private file-sharing community. Our results predict that the extent of market coverage is relevant to determining firms’ attitudes towards piracy, because in partially served markets the presence of these communities has a sales-enhancing effect. Thus, we provide another rationale for piracy to be advantageous for firms without relying on network externalities.

So, rather than taking the approach of trying to figure out losses and end up finding that losses are either minimal to non-existent, this paper is suppose to show that file-sharing is a beneficial asset to companies, increasing profits as a result. On the basis of having read the previous studies in this series (not to mention, other studies covered here on ZeroPaid in years past), this actually makes sense given the sampling activities of file-sharers as well as file-sharers discovering new music. When thinking about what it’s like in a private BitTorrent website, the idea of people finding new music makes a lot of sense give various features like which BitTorrent swarm is popular and even discussion forums built in to many of these sites. I’m willing to bet the experience of finding, say, music the user has never even heard of on a specialized music site is not that uncommon. It’s not that hard to make a connection between that and the generation of new revenue.

The paper goes on to set up a model for a duolopoy and then calculates what the market would look like from an economic standpoint for several pages. The study then goes on to calculate the various entertainment firms profitability in the presence of piracy, comparing it to the same firms trying to sell music in the absence of piracy (which, again, is loaded with mathematical calculations and mathematical proofs which even I can’t even hope to fully decipher, let alone explain in simple terms in this article) What the paper ultimately found was as follows:

As companies do not interact both when the market is partially served and when it is covered at the limit, in the parameter space [math], the introduction of the downloading option does not strengthen the competition in the market; however, it increases the value that consumers place on goods and, in turn, their willingness to pay. Firms always benefit from piracy because they succeed in extracting this extra surplus. In particular, for [math that can’t even be copied over] we look at the two market configurations III and VI and find that [math that can’t be copied]. Although the monopoly price of the configuration VI may be higher than the corresponding price of the configuration III, the possibility to download allows firms to serve a larger number of customers without affecting the degree of competition in the market. For [more math that can’t be copied over], we look at the market configurations III and IV, where companies split the market equally and quote a price that is just sufficient to cover the market. We find that [even more math that can’t be copied over]. In this case, even though the demand effect is nil, companies may set a higher price to cover the market; this gives firms the possibility to indirectly appropriate some revenue from piracy.

So, what this study found (besides being able to use lots of really complex math) was that entertainment firms actually benefit from piracy due to an increase in number of consumers. Even though there’s lots of references to complex math and other sources, it’s possible to get this interpretation from the above comments. The study goes on to conclude with the following:

In this paper, we have shown that firms’ attitudes towards piracy depend on the extent of market coverage. In markets that are not fully covered, firms can benefit from piracy, because it allows them to reach a larger share of customers that otherwise would not buy at all. The opposite incentives arise in covered markets where firms prefer full protection from piracy. Our results are thus in line with the observation that companies operating in emerging markets are unlikely to take a firm stance against piracy. By adopting a dynamic perspective, our analysis also suggests that a company becomes more willing to fight piracy at later stages of industry development.

This makes sense. In fact, it’s almost stating the obvious that the largest entertainment firms have a tendency to be anti-piracy (Sony anyone?) even though piracy tends, as this study suggests, to increase revenues for entertainment firms – especially smaller firms with limited access to the customer base. So much for the theory that piracy will be the death of the entertainment industry.

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More piracy = more publicity.

More publicity = bigger audience, more profits.

Those who have to pirate, will.  Those who have the money to blow, won't.