P2P Foundation

This is an interesting bit of research, adding to the growing body of data trying to understand the positive or negative impacts of P2P downloading of films and the like. (The US General Accounting Office did a huge survey of the reseach in 2009 and were unable to conclude a positive nor negative effect either way.) This is from the abstract of the paper in question:

In this paper, I estimate the overall effect of piracy on movie industry revenues using a fixed-effects, two-stage least squares analysis of data on movie sales, admission prices, cable penetrations, and piracy rates of motion pictures, music, and business software in 20 countries over a 6 year period from 1999 to 2004. The results show that movie piracy has a positive effect on the increase of theater admissions.

This is a pretty amazing result – and goes counter to the pervialing wisdom in Hollywood who have been trying to close down P2P sites such as The Pirate Bay. What also struck me about this is that the method used to do this is via mathematical modeling;

In order to do this, we first developed a mathematical model by modifying Hui and Png’s model for music piracy. The mathematical model shows the relationship between the amount of piracy, the movie admission price, the quality differential between a theatrical movie and a pirated movie, and the copy cost of piracy … The data was regressed using ordinary least square, fixed-effects, and fixed-effects two-stage least square model analysis. Although each positive and negative impact of movie piracy on the theatrical movie industry was not estimated, the overall piracy effect resulting from the substitution between the negative and the positive impact of piracy was estimated. The results show that the overall impact of piracy is slightly positive. This implies the counterintuitive conclusion that theatrical movie sales have reaped at least slight benefits from movie piracy.

So why does this counterintuitive relationship exist?  The authors suggest that it is because;

The positive impact of piracy on a theatrical movie can be intuitively understood by looking at the effect of what is called “word-of-mouth” communication. Because time is limited, people must make decisions about what movies they will spend time watching. In order to pick the movies that they will enjoy the most, people must use information gleaned from those who have already seen the movie they are considering watching. The people who have already seen the movie may have done so either legally or illegally. Either way, the information they pass on affects the decision of those who have not yet seen the movie. If the information obtained through word-of-mouth communication is positive, the piracy of movies can actually work to increase the sales of legitimate movies.

However the paper does have a few limitations, as freely noted by the authors. One important one is that the modeling is based on piracy estimates, and this type of data is notoriously unreliable. In addition the right data-set to feed into the modeling did not exist for several major movie consumor counties; notably the US, England and Japan. Without these, it’s hard to be able to draw conclusive definitions, however the data-set does model 20 countries, so neither can the finding be ignored.
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Sung Wook Ji (2007). Piracy Impact on the Theatrical Movie Industry Paper presented at the annual meeting of the International Communication Association, TBA, San Francisco, CA Online
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Hat-tip to Michel for the link. Also posted on my blog.