Wednesday, May 20, 2015

Two Charts on Film Piracy


What follows is an excerpt of the results of a longer paper on The Effect of Increased Availability of Online Piratable Copies of Films on Box Office Revenue. The availability of screener copies online almost immediately for films released late in the year provides an exception to the rule of normal windowing, and the paper attempts to exploit this anomaly to discover whether the immediate availability of high quality piratable copies of films still in theaters affects box office revenue.


The films were first broken into two groups by year of release: Group 1 (1990-2002) and Group 2 (2003-2015. The groups were chosen to delineate between periods of growth in Internet film piracy, specifically the development of the protocol BitTorrent in 2003 (Dahaner and Waldfogel 2012). Before BitTorrent, film piracy via the Internet was more difficult because the large file sizes made it inconveniently slow. The new protocol, however, allows for much faster transfer of large files making downloading movies more feasible. These groups were then subdivided by month and the mean worldwide box office revenue number for each month was calculated. The result of these calculations is seen in Chart 1.



 
Recall that the relationship sought is the difference in revenue for end of year movies as piracy became more prevalent. The data do indeed show a decrease in revenue from November to December, but a drop occurred during between those months in both time periods. The magnitude of the change is especially relevant to this analysis; the change for each time period is shown in the table below.

Time Period
Nov.-Dec. Change in Mean Box Office Revenue ($Millions)
1990-2002
-$166.16
2003-2015
-$85.31


So November films have always averaged more than December films, but the degree in the drop between the two months has decreased as online piracy has proliferated. If film piracy was causing a decrease in revenue, then there should have been a steep drop in revenue from late year releases correlated with the proliferation of Internet film piracy. The lack of such a correlation casts doubt on the claim that piracy is actually decreasing revenue.

Another way of looking at these data is to isolate the month of December and observe the trend within that month. The result of pulling out only December releases is seen in Chart 2. This chart also takes the additional step of separating out U.S. box office gross as an additional category.




 


There is not an easily discernable trend in either set of points. The linear trendline for the worldwide gross has a slope of 2.427 while the trendline for domestic gross has a slope of -1.642. In general, this chart seems to show no strong correlation between what year a December film was released and the revenue it generated. It is interesting to note that slight positive trend exists in the worldwide gross when Internet film piracy is more common in countries other than the United States.[1] This would seem to indicate that even the slight negative trend in U.S. revenue is not caused by piracy.

Conclusions

These data could being showing that there really is not much overlap between people who pirate and people who value consumption of the film more than the price of a ticket. If that is the case, then film producers are not losing much revenue do to online piracy, and they would be able to generate additional revenue by getting current pirates into the theater even if it is for a very low price. Whether a business model and price discrimination scheme could actually be devised to accomplish this goal is not obvious but is worthy of consideration.

If the trends in this study hold true, then it is curious why people do not pirate more when piratable copies are more available. One reason may be individuals’ moral sensibilities. It is not the case, as some economic analyses assume, that everyone who could pirate does even if they view the pirated copy as a substitute. Some have ethical scruples about it. Moral values are not a restriction on maximizing value (as in, I would like to steal a car, but, unfortunately, my morals won’t let me.) Morality is one of the valued ends to be attained; people want to be moral in the same way that they want to watch the movie. The balance between the two is affected by things like the costs (ticket price, gas money, time, and other opportunity costs) of going to the theater and the benefits of pirating a film. Also at play are the somewhat more nebulous considerations of whether actions like piracy are actually immoral. All these go together to produce the decision to pirate or not. This moral sense is often appealed to in campaigns encouraging consumer not to pirate. The famous “you wouldn’t steal a car” ad[2] depends on viewers not wanting to steal and believes that they would not pirate films if they thought of the act as stealing.

Another possible explanation of the data is that people do pirate more when online copies are more available, but something about piracy causes an increase in paid along with unpaid consumption. One possibility, touched on by Shapiro and Varian (1999) in their discussion of free samples, is that unpaid consumption can create “buzz” which leads to paid consumption by other consumers. This point goes back to an earlier example: if one person pirates the latest film and then tells all his friends how great it is, they will probably be more likely to engage in paid consumption than if the pirate had not told them about it. But the pirate’s actions are only possible because he engaged in illegal unpaid consumption. The Internet may even make this kind of scenario more prevalent as social media allow for word of mouth from personally known sources to spread much farther and more quickly. 

The film piracy debate may inevitably boil down to whether or not copyright is something that should be protected. Film studios would like to and absolutely should have their property protected. But there are serious questions to be raise about whether intellectual “property” should be treated as some Lockean right which must be protected even if creative activity would still take place without it. It is certainly important to remember film producers are self-interested actors, just like everyone else in the discussion. 

In the United States, the government has a Constitutional mandate to use intellectual property protections to “promote…the useful arts,” but the government should not be in the businesses of indulging the rent seeking of firms which would like monopoly power. If the findings of this paper are correct, then the effect of an increased availability of piratable copies on the revenues of film producers is much smaller than often asserted if it exists at all. This finding would lead to the conclusion that additional regulation and enforcement aimed at curbing the availability of piratable copies of films on the Internet would be outside the bounds of the Constitutional provision.




[1] Indeed, the MPAA itself, asserts that 80% of piracy happens overseas. Countries that top the piracy rate list are China, Russia, and Hungary. The U.S. does not even make the top ten in most estimates. (MPAA Piracy Report 2005).
[2] The soundtrack to which was, ironically, pirated (Kruszelnicki 2013).

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