The Relationship Between Movie Piracy and Revenues Is Weirder Than We Imagine

Research published by Zhuang Liu, a Ph.D. candidate in the Economics Department of the University of Western Ontario, challenges the commonly held view that piracy causes copyright holders severe financial losses.

The research, titled “Quantifying the Heterogeneous Effects of Piracy on the Demand for Movies,” looked at download numbers of pirated content from torrents and compared them to box office revenues and DVD sales over a period of 40 weeks.

The study concluded that while piracy does impact sales negatively, the relation between the two is far from being straightforward.

For the 40 weeks in question, Liu noted that illegal file sharing reduced revenues of the motion picture industry from the box office by $231 million, which is equal to 2.71% of the current box office in the US, or half a million dollars per movie.

Instead, the study showed that the real harm is exhibited in DVD aftersales. “(…) in the home-video market, DVD revenue decreases by a surprising 36% due to piracy,” Liu wrote.

This observation could be corroborated by another one: when it comes to low-quality pirated releases, the resulting “word-of-mouth” marketing outweighs the negative effects on sales. “There’s some benefit from piracy, the word-of-mouth from piracy actually contribute to a total of $68.7 million to the industry box office and DVD revenue,” Liu wrote.

It turns out that the harm is done by later, high-quality leaks, which compete directly with DVD and Blu-ray sales.

Piracy for Piracy’s Sake

Liu also notes the following: “Consumers who watch pirated movies simply like ‘pirated stuff’, so if studios try to report and remove torrents of a movie on the file-sharing network, the pirate consumers will just switch to other pirated movies. The improvement in revenue will be very small, around $70,000 on average per movie.”

This means that if a movie is completely protected from piracy, it ‘only’ gains $70,000 in additional revenue on average.

Finally, Lui showed that since pirates save more money than the movie studios lose, consumer welfare would be lost if all piracy were eradicated. “Consumer welfare decreases when we ban piracy, which is much higher than the increase in motion picture industry revenue,” he concluded.