How Piracy Can Hurt Consumers

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The public debate about Internet piracy is typically seen as pitting the interests of producers versus the interests of consumers. On one hand, the empirical evidence is clear: piracy hurts producers by reducing the amount of money they can make from their creative efforts. But it is easy to see why consumers might like piracy: those who had been willing to pay the market price can now get it for free, and those who hadn’t been willing to pay the market price can now consume content they wouldn’t have been able to access otherwise.

The problem with this way of looking at piracy is that it focuses solely on demand. But there’s another side to all of this: supply, specifically how piracy can affect both the quantity and quality of movies that are supplied to consumers. People tend to neglect this question, but we believe it’s going to become increasingly important to answer in the years ahead.

Consider the number of movies made. For movies, especially in the digital age, the fixed costs of production are substantial, but the marginal costs of reproduction are not. Think of the budgets associated with blockbuster films, which can run into the hundreds of millions of dollars. If piracy lowers the expected revenues of a film to a point below the fixed cost of its production, then the film will not be made, and if that happens the social-welfare benefit of bringing it to market disappears. In that case producers and consumers lose.

Does piracy actually make producers less willing or able to create some types of new creative works? That, of course, is the big question. To stimulate more discussion of it, we recently published a paper in the George Mason University Law Review that looked into how piracy seems to be affecting movie production. We first determined, pretty easily, that supply has not decreased since the era of meaningful Internet movie piracy began, roughly in 2007. Both Hollywood and independent producers continue to churn out films. This isn’t surprising, given all of the new content-creation and content-distribution technologies that have developed alongside the rise of digital piracy.

But that’s not the end of the story. As we discuss in the paper, it’s very possible that when considered by itself piracy is causing a number of subtle distortions in the production of new films, among them a possible retreat from riskier movies, an increasing need to accept funding with creative conditions attached, and a reduced ability to fund expensive but valuable creative elements—for example, expensive CGI scenes and other special effects. To the extent that these distortions actually exist, how can we start to explore potential effects?

One way, we decided, would be to study the difference in supply of movies in low-piracy and high-piracy settings, before and after the rise of Internet piracy. So we attacked that problem in a simple and limited way: by studying the number of Academy Award–winning films financed by higher-piracy and lower-piracy countries. Winning an Academy Award is just one indicator of a movie’s quality, of course. But to us it seemed like a decent proxy for quality, however imperfect, that we could use in trying to measure the effect of piracy on supply. If piracy affects the supply of movies in a given country, we reasoned, that will mean less money available in those countries to make movies, which will reduce the quality of the movies that are made—and that, in turn, will diminish the odds of movies from that country winning Academy Awards.

We began our study by compiling a list of all movies from 1995 to 2014 that had won at least one Academy Award, noting in each case which country or countries had financed the movie. And when we studied that list, we found data suggesting that piracy does indeed affect film quality. In Italy and Mexico, two countries in which piracy has strongly influenced demand, the number of awards decreased significantly from the pre-piracy to the post-piracy period, whereas in the U.K. and France, two countries in which piracy has had a smaller effect on demand, the number of awards won increased meaningfully.

We don’t pretend that this simple comparison proves that piracy is having a harmful effect on supply in the movie business. In some of the other countries we studied, we observed less of a correlation between piracy and the number of Academy Awards won. Future researchers will obviously need to study this question in broader and more sophisticated ways. That said, the correlations we found are consistent with the hypothesis that piracy adversely affects both demand and supply, and has caused investment in culturally important films to drop, and is also consistent with our prior research analyzing how piracy impacted Bollywood films in the 1980s. If others end up confirming these correlations, then we will have to admit something important: When it comes to copyright protection, producers and consumers are far more aligned in their interests than is commonly recognized: both will benefit in the long run if piracy is converted to legal consumption.