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Megaupload Shutdown Increased Sales of Digital Movies

March 12, 2013

Last week my coauthor and I released our study “Gone in 60 Seconds: The Impact of the Megaupload Shutdown on Digital Movie Sales“.  In the study we attempt to estimate the causal impact that shutting down Megaupload had on digital sales and rentals for 2 major movie studios.  Using a difference in difference methodology, find that digital revenues for the 2 studios were 6-10% higher than they would have been without the shutdown, in the 12 countries we studied for the 18 weeks following the shutdown.  Note the italics.  We don’t simply look at the sales change after the shutdown.  We have an entire model dedicated to trying to tease out the causal effect.  The intuition of the model is based on common sense – if the shutdown had any impact at all, then we would expect sales growth (after the shutdown) to be larger for countries where many consumers used Megaupload and smaller for countries were a lower percent of consumers were using Megaupload.  After all, in a country where no one pirated at all, the shutdown shouldn’t have had much impact at all.  We do a lot more with the model than just this, but that’s the intuition behind our claims of causation.

The finding that revenue was increased 6-10% by the shutdown is important for a few reasons.  First, it establishes that cyberlocker movie piracy really did harm digital movie sales, a point that has been contended.  Second, it has been said that shutting down piracy websites is like playing a game of whack-a-mole – shut one down and another pops up.  We think it’s not so simple.  We think that firms compete with piracy, and the disadvantage to the firms is that piracy is free.  One thing firms can do due compete is to make their products more desirable, more convenient, more available, more reliable, attractively priced, etc..  But free is a tough price to compete with.  So our study says that policies that make illegal filesharing channels less convenient can impact marginal consumers and make it easier for firms to “compete with free.”

The Wall Street Journal covered our study nicely.  I actually was interviewed on Bloomberg TV, although that was more of a fun interview about what Megaupload was all about than about the implications of our study.  The study is currently under peer review at a good econ journal.

What’s interesting has been the reaction to the study.  News sources and even torrentfreak.com covered our study quite objectively.  But commenting on blogs has often been negative.  I think our study is being misinterpreted as “all anti-piracy measures are great” and “all pirates are stealing and should be stopped.”  That is really not the point of our study at all. First, we are only measuring the potential benefits (in one channel for one form of media)… these benefits should be weighed against the costs of anti-piracy interventions. 

More importantly, we think the interpretation of our study is different, as we note in our blog post announcing the study.  Sure, there are probably people who will only ever pirate (but many of them wouldn’t have bought anyway, so they are not a loss to content industries).  But there are many pirates *who will buy if the content on legal channels compares favorably to the content on legal channels* on dimensions like 1) what is available  2) when it’s available  3) how convenient is it  4)  how reliable is it, etc…

So what we’re saying is that part of the story is that making legal content more appealing *can* allow firms to compete with piracy.  But the other side of the story is that piracy is free, and free is a very attractive price.  Policies or interventions that make piracy less convenient can also help to swing marginal consumers from illegal channels into legal ones.  The question is which policies or interventions are worthwhile from a cost-benefit standpoint.

We’ll be doing more research into this.

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