Market failures

Over the holidays, Facebook founder Mark Zuckerberg’s sister, Randi, was surprised when a picture she posted on her brother’s fairly well-known web site later appeared on Twitter. The problem was rooted in privacy settings and how Facebook treats comments on items posted on the site.

After the story became public, several of the co-hosts of NBC’s Today show discussed the report. Their “technological ignorance” banter drew the ire of Mashable’s Andrea Smith, who rightly pointed out that “[r]eading the news and then proclaiming you don’t understand any part of it is the epitome of failure”.

Unfortunately, the practice of reducing reasonably complex stories to less than their essence is not limited to television. A topic I care about a lot, piracy, was recently on the agenda at the Digital Book World conference.

Michael D. Smith, a Carnegie Mellon professor of information technology and marketing, was asked to present his findings, described in the session overview as "piracy clearly hurts media sales". The talk was covered by Jeremy Greenfield in a post titled, “Does piracy hurt digital content sales? Yes”.

No doubt the headline generated some traffic. While Smith may have said it, the claim is neither accurate nor complete.

Greenfield’s coverage leads with a set of “myths” that Smith sets up as straw men to knock down with his research:

“People who pirate digital content wouldn’t have bought it if it wasn’t available for free. Publishers can’t do anything about pirates anyway. And, besides, piracy doesn’t hurt ebook and other digital content sales.”

No one who studies this topic actually says any of these things. We try to structure studies whose methodologies are public and whose data can be examined. We look at the impact of piracy in multiple ways: Is the author known? Is the book a best seller? Was the title otherwise available digitally?

When I was actively trying to recruit publishers to share sales data so that we could measure the impact of piracy, my pitch was simple: Piracy does have an impact, but:

O’Reilly was the only publisher to join that study. Five years later, we’re continuing to debate whether piracy is a problem without any basis for understanding what we even mean by “problem”. Consider one of the comments on Greenfield’s post:

“And the discussion about whether or not it hurts sales is utterly not the point. You can’t take anything else I own even if you think it would be in my best interest. The issue is control, not results.”

I dare not tell the commenter what happens with ARCs in New York City subways.

Piracy is not monolithic. A download in Romania for a book available only in the United States is a signal, not necessarily a lost sale. Many studies miss this, looking instead at aggregated downloading and equating it with lost income.

To be fair, Smith’s work may recognize all of this and more, but from a distance there’s no way to know it. In his post, Greenfield includes one of Smith’s slides that claims there are just four studies that found piracy does not harm sales and 25 reports that say it does.

Q.E.D., right?

If the studies were all consistent in both sample set and methodology, maybe. But they aren’t even studying the same things. Some focus on music, others movies, others television shows, a few on a mixture of media. Some date back to 2004 through 2007, have not been repeated and can’t be used to establish any longitudinal changes.

Studies aside, the most frustrating part of Smith’s talk involved anecdotal evidence of the impact of piracy. Greenfield writes:

“Smith cited an anonymous publisher that selectively windowed its ebook and print book titles to see if releasing the digital version after the print version would result in increased sales for the print version. Sales of print copies increased by 0.4% — but ebook sales decreased by 52% and overall sales dropped by 22%, presumably because of piracy.”

The emphasis in the last phrase is mine. Presumably? This is why we do research. I could argue that overall sales decreased because people could not get the book in the format that they wanted when they wanted to read it. If so, that’s not piracy; that’s a market failure. But without data, either perspective is just speculation.

Smith also claims that “the shutdown of Megaupload coincided with reduced instances of piracy across multiple countries.” Comforting, except that (in a paper that Smith does not cite) Christian Peukert and Jörg Claussen recently found:

“…that shutting down Megaupload actually had a negative to insignificant impact on box-office revenues for most films. The exception was found to be blockbusters, which they defined as movies shown on more than 500 screens. For these releases, total revenue improved after the site was shut down.”

Smith’s ideas aren’t new. In fact, three years ago, when Digital Book World debuted, Brian Napack, then the COO of Macmillan, presented a seven-point plan to “stop piracy”. In his presentation, Napack described a fourth action item, “Build a viable consumer marketplace”, as (in his words) the most important initiative.

In response I agreed, suggesting that he try starting with the big idea: “Building a viable digital marketplace, one that takes into account buyer behavior around price, format and the use of DRM, among other concerns.”

Data is data; it deserves an assessment and discussion. I'm sure I'd learn something by talking with the folks from Carnegie Mellon. Hopefully they would learn something from me, as well.

We might never see eye to eye. But I do think I could convince them to stop talking about piracy as if these sessions were some kind of door prize for the uninitiated.

Edited on January 24 to add a link to a Mediabistro report by Dianna Dilworth on the same presentation by Michael D. Smith. The Mediabistro report for the most part parallels the DBW report, with small differences in coverage of the eBook windowing experiment and what Smith said about content sales after Megaupload was shut down.

Brian O'Leary

About Brian O'Leary

Founder and principal of Magellan Media Consulting, Brian O’Leary helps enterprises with media and publishing components capitalize on the power of content. A veteran of more than 30 years in the publishing industry and a prolific content producer himself, Brian leverages the breadth and depth of his experience to deliver innovative content solutions.

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