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How Piracy Websites Could Incentivize Innovation in the Entertainment Industry

By Chenyi Zhang

Where do you watch your favorite television show? The most popular responses one would expect are streaming service giants, including but not limited to Netflix, Amazon Prime Video, and HBO Max. However, if we dig deeper into consumers’ true choices and preferences, we would uncover another answer that, despite being used by billions of people, most would hesitate to admit publicly: piracy websites.

Piracy websites serve as the hosts of digital content piracy, the illegal and unauthorized act of copying and distributing online media. In the first quarter of 2022 alone, there were more than 50 billion visits to piracy websites, accounting for a nearly 30 percent increase from the same period last year. Surprisingly, the United States, which has strict copyright laws, experiences the greatest numbers of online piracy. Economically, one can consider consumers of pirated content to be making a core trade-off: despite understanding that their actions will contaminate their moral conscience to be “righteous citizens,” they have ruled that the resulting benefits are greater than the associated psychological costs. To be fair, in the context of rising inflation and costs of living, the joy of finally being able to access popular entertainment that had been locked behind a thick wall of content exclusivity in the form of subscription services and expensive VIP tiers is difficult to be trumped by much of anything else.

Figure 1: Globally, the amount of revenue in billions of dollars lost to online TV and movie piracy from 2010 to 2022 (Source: Statista/Digital TV Research)

It’s easy to criticize consumers for being selfish, but attention should be primarily focused on comparing the perceived versus true costs of online piracy to correctly ascertain the social damage of their behavior. Supporters of stronger privacy regulations cite revenue loss as their main argument. As exhibited in Figure 1, there has been a notable rise in piracy as the internet rapidly advanced from 2010 to 2016 as evidenced by the growing amount of revenue lost. Since consumers are accessing media from piracy sites, which offer the same content free of cost, companies are losing consumers to these new suppliers entering the market. Motion Picture Association, a representative of Netflix, even posited that piracy has created unemployment, causing a decline of between 230,000 and 560,000 jobs in the entertainment industry.

On the other hand, proponents of relaxed policies present evidence that the economic impacts are exaggerated. By staggering the release of films so premieres in movie theaters occur before their online release, films have been able to fend off piracy with minimal impact on their monetary success. In addition, increased competition is known to encourage innovation. Since pirated versions are essentially equal to their legitimate counterparts except for lower average video resolution, the entertainment industry has been forced to discover ways to differentiate its products. A result of product differentiation would be a plethora of benefits to consumers. The offerings of theaters would expand, as demonstrated by 3D and even 4D versions of films, and film and television show producers would invest more time and allocate a greater part of their budget to elevating the visual effects that make the 720p pirated versions substantially less attractive. I agree with this position since the scarcity effect also supports such a perspective. Scarcity, which is derived from unmet demand due to inadequate supply, often leads to raised prices in order to decrease demand and eliminate a shortage. Increasingly differentiating the true product from their counterfeit counterparts creates a form of scarcity for high-quality goods. Similar to how a Louis Vuitton handbag is sold at an exponentially higher price than its counterfeit, the entertainment industry should consider novel ways to elevate its services to create such a discrepancy with pirated versions.

Ultimately, production companies and online media distribution platforms must recognize that increased revenue can only come from meeting current consumer demand or creating new demand. By diverting resources away from confronting piracy—which is a key avenue by which consumers discover new products—and refocusing them on product development, consumers will flock back to “the real deal” soon enough.



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