Economics of Digital Media and Piracy

The rise of Internet media piracy is often cited as the primary source of falling profits in the media industries, as markets for music, movies, and television have diminished since the turn of the millennium. This had led to niche of studies in economics and business-related fields aimed at quantifying losses to the industries and providing potential solutions. 

The transition from traditional media markets to digital markets was one of the dominant threads of discussion. Traditional markets, channels might be print, or radio and television, either broadcasting or cable.  Firms earn revenue from advertising, subscriptions, or a combination of the two. Firms face a downward sloping demand curve because an increase in price reduces the amount of advertising or subscriptions they sell, and vice versa. 

Digital market where the channel might be a website on the Internet. The firm faces a downward sloping demand curve, but prevailing prices are much lower. The firm is forced to charge a fraction of its price in the traditional market. Prices are lower in the digital market because of the volume of identical or close to identical media content – audiences easily can switch to a substitute if the firm raises prices.  In addition, most online advertising revenue is generated on about 50 websites, according to the Interactive Advertising Bureau.Everyone else competes for small shares of the remaining revenue.

Intense competition in the digital market might create a price ceiling, illustrated by the kinked demand curve.  When prices reach the flat portion of the demand curve, additional increases mean the firm will lose all of its customers. The risk of this happening drives the debate about charging for access to websites. Classic differentiation strategy - provides content tailored to the interests of different market segments – or niche audiences. a cost-reduction strategy.  Reduce costs by creating economies of scale, republish the same or similar content in different channels.  This is often referred to as convergence. Another strategy is based on moving away from intensely competitive digital channels. Firms are trying to find less competitive channels where audiences and advertisers are more likely to pay for differentiated content.

Piracy is the illegal reproduction (copy or counterfeiting) of work such as software, recordings or motion pictures. With the advanced evolution of technology, piracy has become easier and, at the same time, more prevalent. Protected music can be downloaded from the Internet without paying for it. Computer software can be programmed by cheap workers offshore copying the design behind the original software. Although most know about software piracy, many people don’t fully comprehend its impact.

Pirated material is distributed in two ways. Unknowing consumers buy pirated items. Others buy pirated items knowing they are pirated. According to the Business Software Alliance, software theft costs Industry $51 billion in 2009. Piracy diverts money away from producers and distributors of items such as audio recordings, making those companies who make an investment in production and distribution less profitable. Except in the case where pirated items are sold through retail channels and taxed, tax revenue is not generated from pirated items. For example, when music is downloaded with no tax charged when it is supposed to be, as dictated by tax laws, that revenue is lost as well. Lost tax revenue reduces funds available by the taxing government to spend. To lessen the effect of piracy on a business, businesses can implement methods to discourage software piracy, such as changes to how software is distributed to make it harder to download. Another way to lessen piracy is to educate the public about the impact of piracy on their lives. For example, piracy causes items to be more expensive because a company does not realize the income it is entitled to and has to charge higher prices for its products to make up for lost revenue.

The explosive growth of piracy as digital technologies became cheap and ubiquitous around the world, and another following the growth of industry lobbies that have reshaped laws and law enforcement around copyright protection. The report argues that these efforts have largely failed, and that the problem of piracy is better conceived as a failure of affordable access to media in legal markets.

The growth of digital piracy since the mid-1990s has undermined a wide range of media business models, but it has also disrupted this bad market equilibrium and created opportunities in emerging economies for price and service innovations that leverage the new technologies. In our view, the most important question is not whether stronger enforcement can reduce piracy and preserve the existing market structure—our research offers no reassurance on this front—but whether stable cultural and business models can emerge at the low end of these media markets that are capable of addressing the next several billion media consumers. Our country studies provide glimpses of this reinvention as costs of production and distribution decline and as producers and distributors compete and innovate.