After Megaupload: what actually happens in the marketplace?

"Gone in 60 Seconds: The Impact of the Megaupload Shutdown on Movie Sales" is a fascinating piece of research by Brett Danaher (Wellesley College, Department of Economics) and Michael D. Smith (Carnegie Mellon University, H. John Heinz III School of Public Policy and Management). It's only 22 pages long, plus bibliography, and doesn't have too much algebra in it, and it takes a real-world look at what happened to the market for the sale of recorded movies in the wake of the taking down of the Megaupload file-sharing site.  According to the abstract of this article, which is available via SSRN,

"The growth of Internet-based piracy has led to a wide-ranging debate over how copyright policy should be enforced in the digital era. While some enforcement approaches involve policies designed to deter consumers from filesharing though incentives or penalties, other approaches target the supply of piracy by shutting down Internet sites that serve as major conduits for pirated content. In this paper we analyze how one such anti-piracy intervention, the shutdown of the popular Megaupload site, affected the digital sales of movies for two major studios.

Simply examining changes in sales after the shutdown would produce an inaccurate measure of its actual effect as sales are changing over time for a variety of reasons. Instead we exploit cross-country variation in pre-shutdown usage of Megaupload as a measure of treatment intensity. Controlling for country-specific trends and the Christmas holiday, we find no statistical relationship between Megaupload penetration and changes in digital sales prior to the shutdown. However, we find a statistically significant positive relationship between a country’s Megaupload penetration and its sales change after the shutdown, such that for each additional 1% pre-shutdown Megaupload penetration, the post-shutdown sales unit change was 2.5% to 3.8% higher, suggesting that these increases are a causal effect of the shutdown.

Aggregating these increases, our analysis across 12 countries suggests that, in the 18 weeks following the shutdown, digital revenues for these two studio’s movies were 6-10% higher than they would have been if not for the shutdown. Thus our findings show that the closing of a major online piracy site can increase digital media sales, and by extension we provide evidence that Internet movie piracy displaces digital film sales".

This blogger was particularly taken by the author's concluding comments, in which, without seeking to diminish the quality of their analysis, they do however qualify it:

"...  Megaupload was a very well-known cyberlocker and its shutdown was highly publicized. As such, the shutdown of Megaupload influenced the policies of several other cyberlockers focused on piracy, and our results necessarily measure the “net impact” of the Megaupload shutdown across the cyberlocker industry, as opposed to just measuring the impact of Megaupload. In addition, our results only analyze the impact of Megaupload on digital motion picture sales. We are not able to measure the effect of this shutdown on other motion picture channels (e.g., DVD sales, theatrical sales) or on other product categories (e.g., music, books). Because we only observe 18 weeks following the shutdown, we also do not know whether the sales increase will persist or if these consumers will eventually find their way back to alternative piracy channels (in spite of the fact that we see no clear indication of such a reversion in the 18 weeks in our data). Finally, we note that our study only measures specific benefits of this regulation - it does not measure either tangible or intangible costs of this sort of intervention, and such costs should be considered carefully as part of any policy decisions.

In spite of these limitations, we believe that our study makes several important contributions to the academic literature. First, our study is one of a small number of papers to use real-world sales data to analyze consumer behavior in online channels. Second, our study is one of the first in the literature to analyze the impact of anti-piracy interventions on sales, and the only one we are aware of to analyze supply-side anti-piracy intervention — an important policy question which thus far has not been informed by academically rigorous analysis. Third, our study contributes to the discussion of whether Internet piracy displaces movie sales and rentals, and is the first we are aware of that focuses on paid digital movie downloads. Finally, our analysis provides a methodology and approach that could be applied to other similar anti-piracy interventions in future research".

This blogger hopes that the work by Danaher and Smith will provide a useful building-block with which to construct an edifice of greater understanding of how consumers respond to events such as file-sharing shutdowns and the loss of cyberlockers.  Business based on the commercial sale of digital movies may be able to learn from consumer response and adapt their pricing and marketing mechanisms accordingly.  It would also be good to see how the adjacent markets for music and books behave: are movies the paradigm for all copyright-protected works or, given the relative speed at which films rise and fall in the market place, are they the exception to a different rule?

Thanks go to Chris Torrero for spotting this item.