Estimating the Effect of Movie Piracy on Box-Office Revenue

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Rev Ind Organ (2007) 30:291–301 DOI 10.1007/s11151-007-9141-0

Estimating the Effects of Movie Piracy on Box-office Revenue Arthur S. De Vany · W. David Walls

Published online: 24 August 2007 © Springer Science+Business Media, LLC 2007

Abstract Piracy is one of the most challenging problems faced by the motion picture industry. The Motion Picture Association of America estimates that US studios lose more than $3 billion annually in box office revenue from piracy. They have launched a major effort to prevent these losses. Yet their efforts are hampered by the ex post, counterfactual, and indirect methods by which losses are usually estimated. This paper addresses these issues directly. We develop and estimate a statistical model of the effects of piracy on the box-office performance of a widely-released movie. The model discredits the argument that piracy increases sales, showing unambiguously that Internet piracy diminished the box-office revenues of a widely released motion picture. The model overcomes a major weakness of counterfactual or “but for piracy” methods widely used to estimate damages. These counterfactual methods violate the “nobody knows” principle because they forecast what the movie would have earned in the absence piracy. The model we present does not violate this basic principle of motion picture uncertainty. We estimate that pre-release and contemporaneous Internet downloads of a major studio movie accelerated its box-office revenue decline and caused the picture to lose about $40 million in revenue. Keywords estimation Movie piracy · Nobody knows principle · Forensic revenue loss

A. S. De Vany Department of Economics, University of California Irvine, Irvine, CA 92717, USA e-mail: W. D. Walls (B ) Department of Economics, University of Calgary, Calgary, AB, Canada T2N-1N4 e-mail: W. D. Walls School of Business and Management, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong


A. S. De Vany, W. D. Walls

JEL Codes

L820 · Z110 · C800

I Introduction Copyright infringement and other forms of theft of intellectual property have become a large and growing problem around the world. Even a small amount of infringement can generate enormous absolute losses to property rights holders if one recognizes that the intellectual capital of the S&P 500 companies is worth an estimated US$3.4 trillion (Bowers 2001). The problem is acute for the motion picture industry. It relies on foreign markets for the bulk of its sales; these are the markets where piracy is most common (Walls in press a). The Motion Picture Association of America estimates that motion-picture industry losses due to piracy exceed $3 billion annually in potential worldwide revenue (MPAA 2005).1 A $3 billion revenue loss to an industry that takes in less than $10 billion annually is a serious loss. Revenues lost to piracy are difficult for the motion picture industry to absorb because most movie projects are not profitable and a handful of extraordinary successes drive total profit (De Vany and Walls 2004b; Vogel 1998). Since these hits are the movies most likely to be pirated, the impact on profit is greater than the impact on revenues would suggest. In 2000, the average major studio film cost $55 million to produce and $27 million to advertise and market (MPAA 2005). A small revenue leakage from piracy can be magnified when the movie is released sequentially, first to cinemas and then to other windows of distribution. If piracy reduces revenues early in the theatrical run of a motion picture, these early losses are magnified later in the run and in subsequent venues because there are increasing returns to information in motion pictures (De Vany and Walls 1996; Walls 1997; Hand 2001; Maddison 2004). Studios have begun to release their major movies in international markets simultaneously with the domestic release in order to limit the damage of piracy. This form of...
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