Researchers: movie studios sold more after Megaupload was shut down

While Kim Dotcom continues to fight his Megaupload copyright case in New Zealand and the United States, a new academic study concludes that “the closing of a major online piracy site can increase digital media sales, and by extension we provide evidence that Internet movie piracy displaces digital film sales.”

On Wednesday, Brett Danaher and Michael D. Smith, professors at Wellesley College and Carnegie Mellon University (CMU) respectively, published a paper on the well-known Social Science Research Network. (The paper has not yet been peer-reviewed, nor published in an academic journal.)

Smith is also the co-director of the Initiative for Digital Entertainment Analytics at CMU, which is funded by the Motion Picture Association of America (MPAA).

The pair write:

Controlling for country-specific trends and the Christmas holiday, we find no statistical relationship between Megaupload penetration and changes in digital sales prior to the shutdown. However, we find a statistically significant positive relationship between a country’s Megaupload penetration and its sales change after the shutdown, such that for each additional one percent pre-shutdown Megaupload penetration, the post-shutdown sales unit change was 2.5 percent to 3.8 percent higher, suggesting that these increases are a causal effect of the shutdown.

Aggregating these increases, our analysis across 12 countries suggests that, in the 18 weeks following the shutdown, digital revenues for these two studio’s movies were six to 10 percent higher than they would have been if not for the shutdown.”

Surprise: content industry loves the study

The MPAAs spokesperson, Howard Gantman, told Ars that shutting down a site like Megaupload “won’t solve the piracy problem on its own.” He did call such tactics “necessary and vital,” adding that they help “foster a playing field where legal services can thrive, enabling the movie makers to distribute their creative product in more new and innovative ways every day.”

Cara Duckworth, a spokesperson for the Recording Industry Association of America (RIAA), told Ars that the organization also applauded these findings.

“It’s another sign that protecting rights moves the needle. We’ve seen indication of this time and time again, more recently from the LimeWire shutdown that resulted in a decrease in peer-to-peer piracy and a simultaneous increase in digital sales,” she wrote in an e-mail. “That’s real money in the pockets of artists and creators.”

Danaher, Smith, and two other co-authors had previously authored a related paper on the French anti-piracy regime, Hadopi back in 2012. This research concluded that “HADOPI caused iTunes song and album sales to increase by 22.5 percent and 25 percent respectively relative to changes in the control group.”

Today, Danaher told Ars that there’s been surprisingly little evidence illustrating the before and after effects of shock events, such as the introduction of Hadopi, the shutdown of Megaupload, and the recent introduction of the Copyright Alert System (also known as “six strikes”). Danaher acknowledged that piracy will likely never be completely eliminated (nor is it desirable to, from a public policy perspective, due to prohibitive costs). However, he said that paid content is not only competing with free pirated content (on BitTorrent) but also with free but legal content (think Hulu, for example), saying that this was only “half the story.”

“The other way of attacking the issue is this: you can consider making sure the free illegal good [is mitigated],” he said.

“We think that what we’re showing, which is some sort of policy, showing that making piracy more inconvenient, [is] effective. But, an Ars Technica reader, much like a commenter on a TorrentFreak blog post, could say that ‘If you shut down Megaupload, I know how to get it elsewhere.’ You have to remember you’re reading a very specific tech blog. If you tell me that piracy of a bunch of other cyberlockers went up, I believe that. If you tell me that VPN use is going up, I would buy that. But there are people who aren’t TorrentFreak readers or Ars readers but are pirating in some way, and when you make content harder to get, [they turn away]. Are there some people that are now thinking, ‘Where do I get that in a reliable, malware-free way, and turn to legal channels?’ Yes. Our study says that there are enough to increase revenues by the amount that were estimated.”

Could lack of legal content explain high piracy rates?

The study specifically looks at the Megaupload penetration rate (Megaupload users divided by all Internet users in a given country) across 12 countries around the world in December 2011, one month before the notorious site was shut down. It also looks at sales data “provided by two major US movie studios” for “all digital purchases and rentals through their major digital channels aggregated at a weekly level from September 2, 2011 until May 31, 2012.”

The authors did not disclose the names of these studios, nor did they explain why this info needed to be kept confidential. In the study, the social scientists also normalized digital sales rates (taking into account spikes from release of blockbusters and the end-of-year surge).

While the United States represented by far the greatest single market of Megaupload users in the study, it was relatively low by percentage—just two percent. Meanwhile, nearly 17 percent of Spanish Internet users visited Megaupload or Megavideo.

“This is consistent with what was suggested by the scatterplots: post-shutdown sales increased more in countries with higher [Megaupload penetration rates] than in countries with lower MPR’s,” the authors write.

Given the fragmented nature of the European Union content market—despite efforts to create a truly singular “digital single market”—it’s still true that content availability varies significantly across the soon-to-be 28-member block. For example, the iTunes Stores in Austria, Spain, and Denmark still do not have TV show availability, while Latvia, Belgium, and Germany do.

Danaher conceded that part of why Megaupload usage may have been noticeably higher in Spain (when compared by percentage to the United States) was the relative lack of legal alternatives for Spanish-language and English-language content in a timely and easy-to-access fashion.

Last year, a related paper published by two European researchers concluded in its abstract: “[the Megaupload shutdown] had a negative, yet insignificant effect on box office revenues.” However, that paper provides scant evidence as to its methodology.