Piracy Undermining Content Creation: Loch Ness Monster or Black Swan?

Theory and common sense dictate that piracy should threaten new product creation. If it costs money to bring new works to market, then a reduction in revenue – all else constant – should render some projects uneconomic. So compelling is this theory that the content industries share it with lawmakers at every opportunity. Robert Solow once quipped, “You see the computer age everywhere but in the productivity statistics.”   So it has been with piracy and content creation: one can see a negative impact of piracy everywhere except in the evidence about content creation.

Maybe until now.

Rahul Telang and I have been wrangling the data we can find on movie production in India around the diffusion of cable television and the VCR. Interested folks should take a look here. But basically the story goes like this, from the paper’s abstract:

“The diffusion of the VCR and cable television in India between 1985 and 2000 created substantial opportunities for unpaid movie consumption. We use this episode to study possible impacts of piracy on supply. We first document, from narrative sources, conditions conducive to piracy as these technologies diffused. We then provide strong circumstantial evidence of piracy in diminished appropriability: movies’ revenues fell by a third to a half, conditional on their ratings by movie-goers and their ranks in their annual revenue distributions. Weaker effective demand undermined creative incentives. While the number of new movies released had grown steadily from 1960 to 1985, it fell markedly between 1985 and 2000, suggesting a supply elasticity in the range of 0.2-0.7.”

The contrast between the experience of the Indian movie industry in the 1980s and the US music industry following Napster is stark.   In my previous work on recorded music since Napster, I found that the quantity and appeal of new music had both increased. While this is very surprising at first blush – how can musicians create more and better products when revenue has collapsed? – it’s less puzzling after a moment’s reflection. While digitization facilitated unpaid consumption, which was bad news for content creators, it also reduced the cost of bringing new work to market, which was good news. The good news outweighed the bad news. These disparate findings on piracy’s impact – devastating in the India of the 1980s but muted by other technological changes for music after 1999 – show that the impact of piracy is not some universal constant but is instead context specific.

Still, for those who base their beliefs on evidence, the negative impact of piracy on production has moved from the realm of the Loch Ness Monster (zealous fans, not much evidence) to the realm of the black swan (documented but rare). As usual, more research is needed.