Can You Turn Pirates Into Purchasers?
You’re a manufacturer of high-end racing bicycles.
You make your newest bike models available to specialty retailers several weeks ahead of wider distribution, since they’re your most valuable sales partners.
But a crypto-anarchist cycling gang — with the nom de guerre Bikes Want to Be Free! — hates this policy because it inconveniences them. So, the day the newest products hit the street, they smash the windows of the cycle shops and steal the goods.
What’s the rational response?
Do you (a) work with the bike shops to hire security guards and install steel gates over the windows; or (b) say, You know what? Let’s turn those thieves into honest, paying customers by giving them what they want at a 50% discount, so they’ll stop stealing our stuff.
In the media world, there’s a school of thought that piracy is primarily the result of a “market failure” — that business-model decisions like windowing, pricing and content encryption are driving millions of Internet users to sites like The Pirate Bay or the recently shuttered Megaupload. The entertainment industry, according to this line of thinking, should focus not on policing efforts like SOPA and PIPA but on rethinking their retail strategies for a digital age.
Venture capitalist Fred Wilson, for example, lectures Hollywood that “scarcity is a shitty business model.”
“[D]enying customers the films they want, on the devices they want to watch them, when they want to watch them is not a great business model. It leads to piracy, as we have discussed here many times, but more importantly it also leads to the loss of a transaction to a competing form of entertainment,” he wrote in a blog last week.
BTIG analyst Rich Greenfield is of the same mind, arguing that if movie studios made new releases available on the Internet for a rental fee of $20-$25 the same day they premiere in the theater they’ll come out ahead and inhibit illegal downloads (see Greenfield: Shorter Windows Could Reduce Movie Piracy). Wilson, by the way, suggests a more realistic $5 per view.
The calculus involved in eliminating content windows is one thing. Can Hollywood afford to preemptively destroy or diminish the movie theater industry? (Does it need to?) By the same token, cable networks have shown that they won’t risk their billions in affiliates fees for new online distribution models; e.g., they’re licensing older content to Netflix instead of current-season material… or, like HBO, they don’t do business with Netflix at all.
For movies, the hue and cry from theater owners would be inevitable (look what happened when Universal tried a three-week-after-premiere VOD release at $60 — 60 bucks! — for the buzz-poor comedy Tower Heist). Greenfield is unsentimental about giving them the shaft: “No more tests or trials, studios simply need to shift their model and the exhibitor backlash will evaporate.” Simple? I doubt it.
A separate question is whether going direct-to-Internet will curtail piracy. If you’re a believer in the better angels of our nature, perhaps you think the dude who just stole Mission Impossible: Ghost Protocol via Pirate Bay is going to eagerly shell out $5 or even 25 bucks instead.
I think piracy is motivated primarily not by a “failure” of business practices but by greed: getting something for nothing.
Even with the rise of iTunes and other legitimate sources for digital music, illegal downloading remains rampant. The RIAA says the music business has increased its digital revenues by 1000% from 2004 to 2010 — but that “digital music theft has been a major factor behind the overall global market decline of around 31% in the same period.”
Greenfield tries to buttress his window-smashing argument by claiming that “virtually all of Netflix’s content is catalog movies and television series that are readily available illegally. Despite easy illegal access, 21 million consumers are paying Netflix $7.99/month for its streaming service.”
OK, but that means that a whole lot of people — who have instant access to a cheap, legal alternative — are still stealing movies and TV shows. Reducing the opportunities for people to steal content, as SOPA and PIPA were intended to do, is important to ensure the viability of legitimate services.
There’s no doubt: In the instant-clickable-broadband era, consumer expectations are changing rapidly. People want more content in more places. Some may even be willing to pay for that privilege, and earlier releases might indeed grow the entertainment-spending pie. But it’s terrifically wishful thinking to suggest that a shift in business models would somehow transform digital pirates en masse into paying customers.
—————————
Follow me on Twitter: @xpangler
Todd Spangler commented:
Interesting item, which goes to this very discussion: Is It OK to Steal ‘Downton Abbey’? www.salon.com/2012/01/27/is_it_ok_to_steal_downton_abbey/
Todd Spangler commented:
Peter - But they're explicitly arguing that the availability of legal alternatives will *reduce* piracy (i.e. that people help themselves to illicit content because they have "no other choice"), suggesting that these folks would be honest customers if given the choice. Greenfield says "the best way to attack piracy is to make content easily available at a reasonable price to consumers." What I'm saying is that even with legal options available, piracy continues to flourish (as you pointed out)
Peter Litman commented:
Todd: The issue of piracy for content providers is not entirely, or even mostly, about turning pirates into purchasers. The issue is maintaining or building legitimate revenue streams in the face of piracy that is not simply going to go away, irrespective of the enforcement or security efforts that are directed toward it. The issue is not whether availability on iTunes cut music piracy, but whether the music industry would have been better off to stick to its prior strategies (selling CDs, selling only whole albums, selling copy-protected digital files, suing individuals). iTunes created a legal revenue stream. The point that Wilson and Greenfield are making is that scarcity creates more opportunities for pirates and that will work to the detriment of growing or maintaining legal revenues.
Nick commented:
I am always deeply amused by the gulf between Silicon Valley and Hollywood.
Look, this is really simple: the digital economy has no inherent tolerance for making information scarce. A number of entertainment industry mechanisms--like windowing--don't create value in the product, but extract more consumer surplus by reducing supply. The Internet fixes this economic inefficiency. This is great for customers (or pirates, as we call the people who use illegal means to capture this increased consumer surplus). This is harmful to content creators.
People I know pirate without reservation when there is no paid alternative that satisfies what they want to do (for instance, watching a first-run movie in their homes). They have time, bandwidth, and have invested in skills necessary to pirate movies. So they're paying for it in inconvenience. You can pass laws like SOPA and PIPA to try to raise this inconvenience cost, but it doesn't follow logically that this will drive demand for windowed content, it will just (temporarily) diminish piracy.
There is a fair price and bundle at every window, as long as you give people the opportunity to watch it how and when they want to. Some people will buy at a high price, some will fall off because it's not worth the price, and some people will pirate no matter what. But piracy would be a second-order effect if this more closely resembled an efficient market, and it doesn't.
Old Newspaper Man commented:
Todd, there you go again. Here's a simple example: Reckless driving is not drunk driving. They're both wrong, they're both crimes, they have some things in common, but they're not the same, and they shouldn't be treated the same.
Piracy is not the same as theft. Both are wrong. Both are crimes. Yet they are not the same and shouldn't be treated the same. Eliminating the hyperbole is the first step toward a rational solution to a real problem.
About the annoyance thing, I was making the point that economically, the marginal cost to the original producer of a pirated item is small, given your argument that most pirates won't ever pay for that item. (This was more obvious when my paragraph breaks were intact.) However, piracy is darned annoying to a lot of creators, so that explains why they might react disproportionately compared to the economic benefit of their actions.
Todd Spangler commented:
Piracy is “not stealing” and just an “annoyance”? I disagree. Taking something without paying for it is theft. The fact that you (and many others) don’t believe illegal downloading/streaming is a crime is precisely why content owners need sticks (enforcement) along with carrots. If a crime is the result of means, motive and opportunity, you want to reduce the means and opportunity for people to steal digital goods. And hope that “education” and legit services cut down motive.
Old Newspaper Man commented:
Todd, your opening analogy stinks. If someone steals my bike, I don't have it any more. If someone makes a copy of my bike, it's still there. Piracy is bad, but it's not stealing.
But I agree with you that most pirates won't be converted into paying customers. You could also explore the flip side of that argument: Preventing piracy won't translate into profit. Sure, when you've worked hard to create something great, it's really annoying to see someone make copies of it without paying for it. But that's all it is - an annoyance. Extraordinary efforts at fighting piracy won't help the bottom line. Taken to extreme, they poison the producers' image by making them look like vindictive jerks instead of rational defenders of their work.
Slapping pirates might feel good, but it won't make much difference financially. The way to keep customers on the straight and narrow is to educate them and provide them with convenient, legal ways to get what they want. That's working great for Apple.