Calculating the costs of movie piracy

Cover image from Braveheart movie, starring Mel Gibson

Movie piracy may be siphoning less money from the box office than some analysts suggest, a paper by a Western PhD student says.

In fact, the word-of-mouth promotion generated by people who view illegal downloads could, in some cases, offset movie-house losses as the buzz prompts some people to buy tickets for a film they otherwise might have ignored.

“Nowadays, there’s a very controversial debate on piracy,” said Zhuang Liu, who is working towards his PhD in Economics and whose new paper examines the cost of illegal downloads to the entertainment industry.

The Motion Picture Association said losses due to piracy and illegal downloads soar into the billions each year.

Zhuang Liu, PhD student in Economics

Paul Mayne // Western NewsZhuang Liu, PhD student in Economics

“They’re committed to very generous, eye-popping dollar figures and committed to strengthening copyright legislation,” said Liu, adding the industry’s numbers assume every downloader and viewer would otherwise have watched the movie in theatres – a presumed one-to-one substitution rate, which he contends is far too high.

Many who make or watch bootleg movies do so because they want to be among the first to talk about it to their peers, not because they place a high value on the movie itself, he continued.

“It might seem counter-intuitive at first glance,” Liu said. “But, while those consumers have very low valuation of the movie, they want to watch the movie fresh. That’s why they choose to watch a low-quality, pirated movie.”

They, in turn, spread word of the film to other consumers, who may be more likely to buy tickets to the theatre or buy the studio version of the movie, he said. The word-of-mouth information may then be of some small benefit to legitimate movie-makers.

Liu is not advocating for piracy, but rather argues for bringing a fresh analytical eye to the issue.

He is a movie buff whose favourite film is Braveheart. “It gave me the motivation to pursue a path and to pursue it bravely. That has had a big influence on me,” he said, which was one reason he chose to examine the thorny issues of intellectual property versus technological capability in the entertainment field.

He analyzed BitTorrent downloads and movie sales (including DVDs and at the box office) for a 40-week period in 2015 and concluded file-sharing piracy cost the U.S. box office $231 million, or about 2.7 per cent of its revenue.

In the home-market for DVDs at the time, however, the impact was much greater, and sales of studio-produced DVDs of movies dropped by 36 per cent because of piracy.

Liu calculated the benefit of word-of-mouth promotion through piracy moderated the overall losses by contributing $68.7 million to box-office and DVD revenue.

Overall, piracy still cost the industry hundreds of millions.

He recognizes pirated movies are illegal but, like any bootleg product, they are also a reality that should be acknowledged and addressed analytically, rather than emotionally.

“As an economist, I tend to think the problem of piracy is not a problem of criminality but a business problem,” said Liu.

Bootlegged movies, for example, address movie-house constraints of being available only on someone else’s schedule and lacking accessibility features such as on-screen subtitles.

Today, services such as Netflix have all but replaced DVDs, and many of the numbers he used would be different now. These paid streaming services also fill some gaps the pirated market has historically met, such as on-demand viewing and captioning.

“The main point I want to say is this is a very complex issue,” Liu said.

And it means policy-makers need to examine carefully the different effects piracy may have on economic and social aspects of the marketplace when they assess what changes they may need to make to copyright legislation, he said.

Liu credits his thesis supervisors, economics professors Salvador Navarro and David Rivers, with their support and having helped shape the methodology as he built the data sets.