Exploring the Impact of Piracy, Part 2

This is Part 2 of a short paper I wrote. Part 1 is here

History Repeats

Throughout history, various information industries have encountered fluctuations in their sales as new technology changes how consumers access and use their products. The idea of intellectual property and copyright began with the invention of the printing press, and the information industries – print, music, film, etc – have followed a reactionary pattern to new technological “threats” ever since. Player pianos, television and VCRs have all been blamed for the economic downturn of various industries. Each of these technologies gave consumers new ways of interacting with their media. Each of these inventions “…rendered the duplication of [copyright holders’] work easier, less expensive or not previously prohibited by existing statute” [21] and rights holders quickly appealed to current law and pressed legislators to draft new law.

In many of these cases of IP-challenging technology, we became dangerously close to removing the new technology from our society. The availability and legality of such technologies often rested on a single court case, such as Universal City Studios v. Sony Corporation of America in 1981, where Universal sued Sony on the grounds that Betamax was a technology that made infringement easily possible. [21] The United States Supreme Court stated “Betamax is… capable of substantial noninfringing use… Sony’s sale of such equipment to the general public does not constitute contributory infringement.”[21]

Following the usual panic, pioneers find new sources of profit in new technologies and new fields of investment and innovation is discovered. [11, 21] The pattern of technological change followed by industry panic and legislation is an increasingly familiar one.

In addition to the fluctuations caused by evolving technology, evolving economies are suspected to account for some portion of changing sales. [11, 21] One of the sharpest declines in the sales of prerecorded music can be blamed on the Great Depression just as easily as it can be on the advent of radio, [21] which was the scapegoat of choice at the time. Many of the recent figures reported by organizations like the RIAA neglect to account for economic recession and reductions in consumer spending. [11]
As technology and society moves forward, the interests and demands of the consumers also change. New forms of entertainment begin to replace the old [11, 21] and businesses selling the older technology begin to see a natural decline in sales. A rise in DVD sales coincided with a decline in CD sales in 2001. [11] Another study[13] notes that an increase in broadband penetration and a user’s use of the Internet coincides with a decrease in the time spent watching TV and listening to prerecorded music. Nontraditional media, such as playing online games, “undirected browsing” and online shopping are some of the new activities listed as substitutions for traditional entertainment.

The economy must change with the advances of technology and society. The ebb and flow of technological and economic advancement will never cease, if history is any indication. As with every shift in technology that brings about a shift in our interaction with information, industry struggles to maintain its previous models. Industry maintains that every change will lead to economic collapse and ruin, while instead the new advancements open up new channels of revenue. [11, 21] The very networks that allow piracy have provided fantastic tools for new forms commerce, entertainment and economic advancement.

Uncounted Benefits: Shadow Diffusion

Even while various organizations report billions of dollars of losses due to piracy, the illegal movement of software, film and music can actually have a positive effect for rights holders. As sharing networks expand and attract more users, the files being shared have the potential to reach an ever-growing audience.[17] Some reports base future predictions of losses to piracy on increased access to the Internet, assuming that faster Internet access will result in more piracy. [22] Contrary to industry predictions, [14] found that an increase in availability of broadband Internet accounted for 9.3% of the increase in DVD sales over a three year period. The observed increase in DVD sales is one example of the unconsidered effects of the Internet and piracy.

The positive effect of piracy has been well documented in the case of computer software. The so-called “shadow diffusion” of software is the sharing of illegal, free, often hacked versions of software. The free movement of commercial software allows more users to test software before they commit to purchasing it. This has a very significant impact on the software industry. In [15] it is demonstrated that, in the specific case of word processors and spreadsheet programs, 80% of legal sales were influenced by pirates – either by word-of-mouth from pirates or users testing software by piracy. It has also been demonstrated that software developers may tolerate piracy for some time to allow their product value and user base to expand more rapidly. [1, 9] Allowing some piracy to occur can increase the number of initial and early adopters, who have a greater influence on their peers and greatly increase the audience the software can reach. [1] The rate of piracy that a software firm can financially support before losing some profits can be as high as 45%. [1]

Uncounted Benefits: Fair Competition

In the case of music, illegal distribution of works can be quite beneficial. Piracy can smooth the “superstar effect” [18] wherein a small portion of artists gain large amounts of wealth. Because of pirate networks, the playing field is leveled – fame and marketing clout have less impact. When the initial investment in a piece of music is zero dollars, consumers are more likely to sample music from unknown artists. The effect of this is that the music is evaluated at its true value instead of its financial one. [18] Unknown artists with talent see a rise in sales while famous artists with less talent note a decrease.

Piracy is also credited with growing interest in niche markets, especially movies. Internet users have more access to nonmainstream entertainment than what they previously had exposure to through brick-and-mortar stores and local markets. [14] Following trends discussed above, pirates can sample it for free and increase the exposure of otherwise ignored producers and writers.

These specific cases can be extrapolated to software. Piracy creates a competitive market where products compete on a more even ground. The “superstar” effect in the software market can be reduced and users are free to sample and test products they would have had to invest in previously.[7] Newer, upstart firms have greater exposure allowing for a more competitive overall market and increased inflow of new firms.

What of the Future?

Piracy is widespread and attempts to stamp it out completely have been met with failure. [3, 16] It is a side effect of fast, interconnected networks. Accommodating piracy into future business models and using nonconventional methods to combat it is the only way for businesses to adjust. Using the counterintuitive approach of lowering prices of digital products and avoiding the use of DRM is shown to make users more likely to pay for their products.[16] Lower prices are beneficial to consumers, and create healthy competition. Reduction of use of DRM is beneficial to both the consumer and the producer. A software developer with relaxed restrictions on their software does not have to invest in extensive (and ineffective) IP protection schemes.
The cry of financial ruin is a shrill but familiar one. This time, however, those who feel threatened have much more power and are using it in courts and government. Copyright legislation and litigation has created a tense interaction between consumer and producer of electronic products. As attitudes to information goods changes, law and business is slow to keep up. [8] There is evidence to suggest that consumers are becoming disenchanted with the legalistic way certain industries operate, [12] and this could be indicative of a cultural shift of values that businesses need to be aware of.

The familiar pattern of technology resistance and adoption is beginning to play out again in the form of digital networks and accompanying piracy. This resistance to new technology is expected, but wearisome. History shows that the technology doesn’t retreat, [21] and all current attempts to forcefully neuter it have been failures. There is little hope that industry will be able to protect its intellectual property in the same way that were possible in the “analog age” [8, 16] and the only approach remaining is to adjust.

Conclusion

The economic impact of software piracy – indeed, any piracy – is difficult to measure because it has both negative effects and positive ones, and many estimations are overly simplistic in their approach, such as failure to account for a proper substitution rate, cultural values, general economic downturn and consumer disinterest. Shadow diffusion and a redistribution of wealth among the economic players are clear benefits of online piracy.


References

References
[1] Ashutosh Prasad and Vijay Mahajan, "How many pirates should a software firm tolerate?: An analysis of piracy protection on the diffusion of software," International Journal of Research in Marketing, vol. 20, (4), pp. 337-353, Dec. 2003. [Online]. Available: http://www.sciencedirect.com. Accessed: Feb. 17, 2010

[2] BSA/IDC. Sixth annual global software piracy study. Business Software Alliance/International Data Corporation, 2009. [Online]. Available: http://global.bsa.org/globalpiracy2008/index.html. Accessed: March 31, 2010

[3] Cory Doctorow. "Microsoft research DRM talk," in Selected Essays on Technology, Creativity, Copyright and the Future of the Future Anonymous 2008, [eBook]. Available: http://craphound.com/content/download

[4] Deli Yang, Mahmut Sonmez, Derek Bosworth and Gerald Fryxell, "Global Software Piracy: Searching for Further Explanations," Journal of Business Ethics, vol. 87, (2), pp. 269-283, June. 2009. [Online]. Available: http://www.springerlink.com. Accessed: March 11, 2010

[5] Ilkka A. Ronkainen and Jose-Luis Guerrero-Cusumano, "CORRELATES OF INTELLECTUAL PROPERTY VIOLATION," Multinational Business Review, vol. 9, (1), pp. 59-65, 2001. [Online]. Available: http://search.ebscohost.com.proxy.hil.unb.ca/login.aspx?direct=true&db=buh&AN=4128103&site=ehost-live. Accessed: March 11, 2010

[6] Itim International. Geert hofstede cultural dimensions. [Online]. 2010(April 11), pp. 1. Available: http://www.geert-hofstede.com/

[7] J. Hong and J. Kim, "Competition with clone: an analysis of the role of illegal copy," NETNOMICS, vol. 9, (2), pp. 87-84, Oct. 2008. [Online]. Available: http://www.springerlink.com. Accessed: March 10, 2010

[8] J. Patrick McGrail and Ewa McGrail, "Overwrought copyright: Why copyright law from the Analog Age does not work in the Digital Age’s society and classroom," Education and Information Technologies, pp. April 11, 2010, Jun. 2009. [Online]. Available: http://www.springerlink.com/. Accessed: March 10, 2010

[9] Joshua Slive and Dan Bernhardt, "Pirated for profit," Canadian Journal of Economics, vol. 31, (4), pp. 886-900, Oct. 1998. [Online]. Available: http://search.ebscohost.com.proxy.hil.unb.ca/login.aspx?direct=true&db=buh&AN=1461743&site=ehost-live. Accessed: Feb 17, 2010

[10] LEK Consulting. The cost of movie piracy. MPAA, 2006. [Online]. Available: http://mpaa.org/press_releases/leksummarympa.pdf. Accessed: March 31, 2010

[11] M. Lesk, "Chicken Little and the recorded music crisis," Security & Privacy, IEEE, vol. 1, (5), pp. 73-75, Sept. 2003. [Online]. Available: http://ieeexplore.ieee.org. Accessed: Feb 17, 2010

[12] Mark Blythe and Peter Wright, "Technology scruples: why intimidation will not save the recording industry and how enchantment might," Personal and Ubiquitous Computing, vol. 12, (5), pp. 411-420, Mar. 2007. [Online]. Available: http://www.springerlink.com. Accessed: March 10, 2010

[13] Martin Peitz and Patrick Waelbroeck, "THE EFFECT OF INTERNET PIRACY ON MUSIC SALES: CROSS-SECTION EVIDENCE," Review of Economic Research on Copyright Issues, vol. 1, (2), pp. 71-79, Dec. 2004. [Online]. Available: http://www.serci.org/default.asp. Accessed: March 31, 2010

[14] Michael D. Smith and Rahul Telang, "Piracy or Promotion," April. 2009. [Online]. Available: http://ssrn.com/abstract=918240. Accessed: March 31, 2010

[15] Moshe Givon, Vijay Mahajan and Eitan Muller, "Software Piracy: Estimation of Lost Sales and the Impact on Software Diffusion," Journal of Marketing, vol. 59, (1), pp. 29-37, Jan. 1995. [Online]. Available: http://search.ebscohost.com.proxy.hil.unb.ca/login.aspx?direct=true&db=ufh&AN=9501310003&site=ehost-live. Accessed: Feb. 17, 2010

[16] Peter Biddle, Paul England, Marcus Peinado and and Bryan Willman. The darknet and the future of content distribution. Microsoft Corporation, 2002. [online]. Available: crypto.stanford.edu/DRM2002/darknet5.doc.

[17] R. Prasad, "Pros and cons of piracy based on Personal Network in a socio economic context," Wireless Communication, Vehicular Technology, Information Theory and Aerospace & Electronic Systems Technology, 2009. Wireless VITAE 2009. 1st International Conference on, pp. 471-475, 2009. [Online]. Available: http://ieeexplore.ieee.org. Accessed: Feb 17, 2010

[18] Ram D Gopal, Sudip Bhattacharjee and G. Lawrence Sanders, "Do Artists Benefit from Online Music Sharing?" Journal of Business, vol. 79, (3), pp. 1503-1533, May. 2006. [Online]. Available: http://search.ebscohost.com.proxy.hil.unb.ca/login.aspx?direct=true&db=buh&AN=21080254&site=ehost-live. Accessed: Feb 17, 2010

[19] Recording Industry Association of America. (2009) Music rules - teacher's guide. [Online]. 2010(April 11), Available: http://www.music-rules.com/teachers.html

[20] Stephen E. Siwek. The true cost of sound recording piracy to the U.S. economy. Institute for Policy Innovation, 2007. [Online]. Available: http://ipi.org. Accessed: March 31, 2010

[21] Steven W. Kopp, "The Digital Technology Revolution and Its Effect on the Market for Copyrighted Works: Is History Repeating Itself?" Journal of Macromarketing, vol. 24, (1), pp. 17-30, June. 2004. [Online]. Available: http://jmk.sagepub.com. Accessed: March 8, 2010

[22] TERA Consultants/ICC. Building a digital economy: The importance of saving jobs in the EU’s creative industries. International Chamber of Commerce/BASCAP, March, 2010. [Online]. Available: http://www.iccwbo.org/bascap/id35360/index.html. Accessed: April 11, 2010

[23] Trevor T. Moores, "An Analysis of the Impact of Economic Wealth and National Culture on the Rise and Fall of Software Piracy Rates," Journal of Business Ethics, vol. 81, (1), pp. 39-51, Aug. 2008. [Online]. Available: http://www.springerlink.com. Accessed: March 8, 2010

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