The dynamic force of internet piracy

The dynamic force of internet piracy

ESSA Writers
March 29, 2014

Illegal streaming of film and television has become a phenomenon that has transformed the operation of the market. The uncontrolled access to free film and television has the power to destroy economic value, and bestows consumers with a potent amount of consumer sovereignty. Accordingly, these revolutions pose a demanding challenge across numerous domains of the economy.

Due to the virtually borderless nature of internet access, products pertained through internet piracy can be perceived as a public good, both non-rivalrous and non-excludable. This fuels the free-rider problem, where it is impossible to prevent consumers from receiving the benefit of the good. As a result, Internet piracy has become a growing, and seemingly unstoppable source of market failure.

In 2011, AFACT (Australian Federation Against Copyright Theft) uncovered a revenue loss of $240 million within the Australian economy, due to digital piracy. The plummet in producer profits can have an undesirable effect on the expression of arts. The dwindling return on film and television may diminish producer confidence, resulting in decreased investment in innovative new projects, especially ventures entailing high levels of risk-taking. Perhaps, in the worse case scenario, it could generate a bleak future, offering more homogenous entertainment goods.

Alarmingly, the stagnating effects of Internet piracy may not be limited to the industry itself. The dangers within the film and television industry could have a multiplier effect on the Australian economy. The 2011 report by AFACT discovered a loss of 6,100 full time equivalent jobs and subsequently, a loss of $193m in Australian tax money due to the uprising of Internet piracy. The ripple effect of illegal streaming and downloading places a significant burden on the government to alleviate the dent in the national GDP.

Indeed, the most natural defence to Internet piracy is innovation. There is hope for components of creative entertainment industries through product differentiation. A diversification of digital delivery gives retailers the desired competitive edge to upheave the attraction of Internet piracy. Some industries have already started to evolve, such as cinemas offering a 3D film experience that is difficult to replicate at home. In addition, theatres have increased their efforts to create “premium” experiences for audiences through gold class experiences, food and wine packages, sealed with promises of improved sound and picture. Nevertheless, many of these solutions require hefty sunk costs, and correspondingly a boost in producer confidence.

However, the main issue raised is whether internet-based piracy is ultimately to blame for the decline in economic performance in the industry. Despite claims that online piracy is devastating the film industry, a new study by researchers at the London School of Economics suggests that movie industries have been exaggerating the impact Internet piracy has had on creative industries. Although sales and rental of DVDs may have declined from 2001 and 2010, the global revenues have increased by five per cent in the same period. Correspondingly, in 2011 Hollywood achieved record-breaking global box office revenues of $35US billion, a profitable six per cent increase over 2010. In fact, it has been contended that increased access to broadcasts actually stimulates the demand for film and television.

Contrary to the belief that file sharing discourages the production of inventive new works, in reality, it may have the opposite effect. In the entertainment business where recognition of work, your name and your appearance is paramount, free streaming may be considered a platform for enlarging your profile. Additionally, most entertainment industries continue to operate on a “tournament [or] lottery model”, where few sensations generate elevated revenues, sufficient to rectify losses on the majority of new products. The marketing benefits that ensue from digital piracy could offset the losses in revenue from illegal sharing of content, to which the impact on the industry would appear almost negligible.

One view is that, digital piracy acts as a threat to the profits of the creative entertainment industry. Alternatively, it may not be the pressing problem film industries have projected it to be. Perhaps, if companies embrace the free digital environment, it may even serve as a source of growth.