Online Piracy Can Be Good for Business, Researchers Find

Ham-fisted attacks on internet pirates may actually be counterproductive, researchers warn.
Pirate flag
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Piracy isn’t always the vile market bogeyman it’s portrayed to be by the entertainment industry, a new joint study by Indiana University has found.

The entertainment industry has spent decades demonizing piracy, often to the point of near-parody. Industry groups like the Motion Picture Association of America routinely propose increasingly-aggressive and costly “solutions” to the problem (like dubious lawsuits and kicking pirates off the internet), that historically haven’t done much to actually slow copyright infringement.


But in a new study, Indiana University Researchers like Antino Kim say that online piracy can sometimes have a positive impact on markets, and being overly-aggressive in the policing and punishing of pirates may sometimes be counterproductive.

"When information goods are sold to consumers via a retailer, in certain situations, a moderate level of piracy seems to have a surprisingly positive impact on the profits of the manufacturer and the retailer while, at the same time, enhancing consumer welfare," Kim and his fellow researchers state. As an example, Kim’s study (“The "Invisible Hand" of Piracy: An Economic Analysis of the Information-Goods Supply Chain”) points to the hit HBO show Game Of Thrones, which routinely breaks piracy records thanks to heavy file sharing on BitTorrent.

The researchers found that piracy often acts as a form of invisible competition, keeping both the manufacturer (HBO) and the cable operator (say, Comcast) from raising prices quite as high as they might otherwise (aka double marginalization). Raise prices too high, for example, and users will just flee to piracy, creating even higher losses. The idea that piracy acts as a competitive check on markets is certainly not a new argument. Countless companies (like Good Old Games) have found that the best solution to piracy is to offer a cheaper, better, DRM-free product that makes piracy less palatable. This is, however, a lesson many entertainment executives seem unwilling to learn. The researchers are clear to note their findings have their limits, and that they’re not openly advocating for companies to fully embrace piracy. They do, however, argue that if you understand the benefits of piracy as a form of invisible competition, you’ll find that overly-aggressive anti-piracy efforts can actually harm the market.

"Our results do not imply that the legal channel should, all of a sudden, start actively encouraging piracy," researchers said. "The implication is simply that, situated in a real-world context, our manufacturer and retailer should recognize that a certain level of piracy or its threat might actually be beneficial and should, therefore, exercise some moderation in their anti-piracy efforts.”

HBO executives have publicly conceded that piracy can also prove beneficial by generating additional buzz and consumer interest. It’s not entirely unlike the way executives at Netflix and HBO view rampant password sharing as more of a promotional tool than a nefarious behavior that should be hammered into oblivion (often the position of old school cable execs). That’s not to say that HBO hasn’t engaged in some dubious anti-piracy efforts over the years, including the years it spent seeding “poisoned” BitTorrent files to hinder file traders. But the company has, in the years since, generally adopted the belief that copyright infringement is more of a dual-edged sword than an apocalyptic event. That said, Kim told me in an email that HBO may see slightly more incentive to crack down on piracy in the wake of AT&T’s acquisition of the premium channel, since post-merger it’s both the manufacturer and the retailer (via AT&T and AT&T-owned DirecTV), muting some of the paper’s proposed benefits. “However, there are other positive effects of piracy such as positive network effect (i.e., the more people use the product, the more valuable it becomes) and learning (i.e., pirate users may learn about the product and buy the legal version later on),” Kim added. “These are older insights from other papers. What we find here is in addition to those.”