Research Finds Digital Piracy Can Increase Profits For Companies

A recent study finds digital piracy of media could actually benefit manufacturers and retailers.

HBO’s “Game of Thrones” has been one of the most pirated shows in recent years, causing the network to invest in preventing illegal streaming of the program.

“People have argued for piracy about how piracy can have a positive impact through advertising – people who use pirated content become legal consumers later on,” says Indiana University Kelley School of Business assistant professor Antino Kim. “Or if there is a, what we call, positive network effect meaning let’s say I’m using Microsoft Word. If I’m using it alone the value might not be great, but if you and I are using it together and thereby we can exchange files, the value of it increase. So pirates increase the demand size overall and hence increase the value of the legal product.”

However, Kim says his and his co-authors research looks at digital piracy in a different way.

“We show that what is bad about piracy, which is suppressing the company’s pricing power, can end up being a good thing,” says Kim.

In fact, the research finds media pirates inject what they call “shadow” competition into what would otherwise be a near-monopolistic market.

“So obviously pirates are not direct competitors as we commonly think of competitors in the market, but they do pose threats of competition these monopolistic manufacturers, like HBO, and monopolistic retailer downstream, like Comcast, and thereby reducing their pricing power,” says Kim.

The moderate amount of piracy can actually help keep costs down for consumers and drive sales up.

“What piracy does is intuitively poses a threat – think of it as a competition to this entire supply chain – and thereby reduces their pricing power,” he says.

In other words, the company can’t charge exorbitant prices as easily.

Kim does not condone piracy and warns that there is a threshold where too much piracy can have negative effects. Still, he warns companies and governments can spend too much protecting content.

“From our observation, we’re seeing a lot of overzealous anti-piracy measures even when the return isn’t clear,” says Kim. “A lot of these anti-piracy measures are expensive and without clear output, they get scrapped.”

The research finds that companies like HBO are wise to use some anti-piracy efforts, but should also understand the possible benefits of it being bootlegged.

Kim’s co-authors on the study, published in the latest issue of MIS Quarterly, are University of Texas-Dallas associate professor Atanu Lahiri and University of Washington professor Debabrata Dey.