The Economics behind Pirating

With massive technological advances, it is safe to say that through growing ease of access we have all pirated copyright material such as music, TV shows, software or movies in one way or another.  Whether we have downloaded it ourselves through direct download sites and peer to peer networks, or perhaps received a copy from a friend or even used some other elaborate method to avoid paying for it, the logic of pirating is simple: why pay so much more for something that is readily accessible at near free of charge price.

Firstly the cost advantages of pirating are staggering in comparison to legitimate purchase of copyrighted material. Cheaper internet deals with large data allowances which are the household norm nowadays provide a huge incentive for us to not pay $18 to watch a movie in the cinema or buy it on DVD. Also consider $300 for a copy of Windows Operating Software or Anti Virus Software or $12 for a music album. As the internet is becoming more and more of a necessity within our daily lives, most of us would already paying for internet services, making it a sunk cost in analysing the economic cost of pirating.

So let’s suppose we have a hypothetical situation where we are already paying $40 a month for 40 Gigabytes (GB) of data allowance and assume we are using half our data usage for pirating movies leaving us with 20GB. Also assume that these movies are 1.2GB (a conservative approximation) files each thus we can download 16 movies per month and the cost of excess data usage is 1cent per megabyte (Telstra). Here are some graphs that illustrate the comparison between going to the cinemas and pirating:

graph 1

graph 2

As we can see from the graphs in a realistic situation where internet services are already sunk costs, pirating has an absolute advantage in all situations due to having to pay the cinema price on top of internet costs. Also consider other factors which can give pirating an even greater advantage such as: reduced internet speed instead of excess usage surcharges, using all 40 GB of data for pirating which yields 33 movies a month and better internet deals. When it is a side by side comparison with no internet sunk cost assumption, then you would need to pirate three or more movies a month in order to be better off pirating, which most people would just do that since paying $40 will yield 16 pirated movies + 20GB web browsing data worth’s of utility vs. watching two movies in the cinema worth’s of utility.

The economic principle of sunk cost is particularly important in this analysis, as when people pay for something, it is likely they want to maximise their utility they get from it. So if we pay for 40GB of data allowance, we want to maximise our utility by consuming the 40GB worth of data. Other examples of this are when food is about to expire, we force ourselves to finish it to not waste any obtainable utility. The truth is it is virtually impossible for a typical household to use anywhere near 40GB worth of data a month through legitimate activities such as web browsing, YouTube and emails etc. Hence if we had the ‘opportunity to substitute’ paying for a movie, with downloading it and using up our data that we already paid for, we’d certainly download it (assume same utility between the two in this case for simplicity) to use up some of the utility we can attain from the sunk costs of the internet services.

With the work of illegal upload originators being able to crack copyright protected material people now have readily access to the copyrighted material making an even stronger incentive to download illegally. The big legal debate about piracy also affects this ‘opportunity to substitute’ because we are less likely to pirate if there was a higher chance of getting charged with piracy or that content was not readily available due to uploaders getting prosecuted. However due to the widespread nature of piracy it would be too difficult to prosecute all of the downloaders or even prosecute all the uploaders. There are just too many people involved to justify the resources necessary to stop it all, but also the borderline legality of the methods they are using, or even proposing to catch people with, is also questionable.

The question of accessing older or copyrighted material from different countries, which is not readily accessible legally, is also a strong complication to the legal debate. Internet service providers are also powerless due to the nature of their business model, which relies on such activity to generate much of its service revenue otherwise most people would switch to low data allowance packages or change companies that don’t crack down on piracy.  These factors if changed could in fact drive the ‘real cost’ of pirating higher, creating less ‘opportunity to substitute’ and thus less incentive to pirate, however in their current states they are largely irrelevant.

Despite piracy being rampant we do still occasionally go to the cinemas, perhaps to enjoy a night out or to watch the latest blockbuster movie and some people still pay for music on ITunes to support the artist. An area we can learn from is the gaming industry, which has been able to prevent piracy to some extent, with payment required to access the online gaming community, obvious examples include World of Warcraft, Steam network and the Playstation Network. Most people are willing to pay due to the extra utility of the game changing experience online gaming communities can bring and the absence of methods to bypass the system. However for other industries such as software, music, TV shows and movies this, in most cases, is not directly applicable. These industries are now frantically trying to develop new revenue streams, trying to improve product and delivery mechanisms to get consumers to buy ‘legit’, and lobbying governments to crack down on piracy and resolve this economic dilemma.