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Streaming content on Hulu significantly reduces piracy

January 6, 2014

In an article published a while ago in Marketing Science, my colleagues and I showed that removing video content from the iTunes video store caused a significant increase in piracy of that content without stimulating DVD sales.  Further, adding the same content back to iTunes caused a decrease in piracy, but at a smaller level than the increase that corresponded to removal.

Recently we chose to revisit this topic but in a different context – we noted that about a year after Hulu.com came into existence (streaming NBC and Fox content), ABC chose to start streaming the last four episodes of a number of its hit television shows on Hulu.  In an NBER chapter on the Economics of Digitization, we asked whether piracy of ABC content changed after its addition to Hulu in a different fashion than any natural, seasonal changes in content of CBS, Fox, NBC, or CW content.  What we found was not surprising – piracy of ABC content dropped 20% more than other networks immediately following the addition of this content to Hulu.  See the graph attached to this blog post which shows the trend in ABC piracy vs. the “control” networks, surrounding the date of ABC’s addition to Hulu.

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It is not surprising that making content freely available (with short advertisements) online at any time of day can migrate consumers from illegal channels to this legal one.  Of course, streaming on Hulu has lower profit margin than over-the-air broadcasts (advertisers pay less for Hulu ad time than over-the-air ad time).  So to put this finding into context, one would want to ask if Hulu broadcasts have any impact on viewership in other channels like over-the-air broadcast, digital downloads, or DVD box set sales.  Our finding was put forth as an example of using good methodology to tease out the causal effect of Hulu on piracy.

Surprising Finding

However, in the midst of this seemingly innocuous exercise, we noticed something else that was less expected.  In the graph above, notice that piracy of Fox, CBS, CW, and NBC content also seems to drop some immediately following the addition of ABC content to Hulu.  Perhaps this is due to chance, but we notice that the drop in the control group (after the experiment) is an immediate break from its former trend.  In other words, it almost looks as if maybe the control group experienced a smaller dropper in piracy that might be attributed to ABC’s addition to Hulu…

Why might this be?  Well, imagine a viewer is pirating her favorite two shows on ABC as well as a show she likes on CBS (which does not stream on Hulu).  Now imagine that those two favorite ABC shows become available on Hulu and she switches over to Hulu for its convenience and relative safety (I find Hulu much easier than piracy).  But something else happens… she discovers an NBC show that she really likes on Hulu and starts watching it while she’s there… this replaces the time she used to spend watching the CBS show she pirated.  As a result, piracy of CBS content drops even though they didn’t add their content to Hulu.

As researchers, can we be certain of this narrative?  Absolutely not – there is not enough in our data to validate this story.  However, it’s an interesting and not ridiculous explanation for the apparent drop in control group content after the ABC experiment on Hulu.  If it’s true, that means that when a network adds its content to a major digital distribution site, it has positive spillovers for other networks on that site due to consumer discovery.  Certainly this possibility is worth some additional research to see if it can be supported.

I wouldn’t make such a big deal of this story right now since our data do not really provide enough proof, but we observed the same sort of thing back in our iTunes paper.  When NBC removed their content from iTunes, NBC piracy spiked very high but piracy of the control group content experience a smaller spike as well.  We also could not prove this at the time, but it almost suggested that when NBC viewers turned to piracy as a result of lack of iTunes availability, they started pirating content of other networks more as well (consistent with the idea that there is a “fixed cost” to piracy).

I think the idea of spillovers across networks in the “channel distribution game” is a very interesting idea that deserves further exploration.

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