Study says ". a certain level of piracy or its threat might actually be beneficial ."

[darryl]

Torrentfread reports on a study by "Indiana University researcher Antino Kim conducted together with colleagues from the University of Texas-Dallas and the University of Washington",

Torrentfreak Article

The study suggests that in some circumstances tolerating a certain level of piracy can benefit Consumers, Creators and Retailers. The particular circumstances where this may be the case involve essentially Creators and/or Retailers with monopoly control of prices of "Information Goods". To partially quote:

.... piracy limits the pricing power of both the creator and the retailer. This reduces the impact of double marginalization, which occurs when creators and retailers both add significantly to the price of a product.

In some situations this so-called "shadow competition" from piracy pushes the price closer to the economic optimum, a price point at which everyone benefits. One example used is the price of an HBO subscription, including of course access to Game of Thrones. It is said that HBO is not going to extremes to prevent piracy of what is probably the most pirated show in history, implying of course that HBO recognises, at least by its actions or lack thereof, that such piracy may in fact not be doing them harm. To quote again from Torrentfreak:

Following the logic of the paper, the threat of piracy keeps the price of HBO cable subscriptions down. Neither HBO (creator) nor the cable and satellite TV operators (retailer) are overcharging, despite their relative monopolies. This means a better price point and more legitimate consumers.

This is an interesting argument. It does not claim that this principle is universally applicable, even in cases where monopoly power is enjoyed by creators and retailers. In theory it is at least potentially applicable where monopoly power is used to artificially inflate prices of "Information Goods" It has an interesting operation in regard to Copyright, since copyright grants the monopoly control of pricing and envisages a higher price to both the retailer and the consumer. Nevertheless the prices set remain subject to the market. There is still an optimum price at which net revenue is maximised, though many Industries with limited or no competition fail to come to this price.

Traditional book publishing is a good example, where pricing policy set by an oligopoly in the absence of competition in the past are now under pressure. The defence of the higher prices essentially come down to the fear that lower prices would devalue the product in the eyes of the consumer. Some traditional publishers have responded to the challenge with lower prices and better deals for authors. The Big 5 so far have not, despite both legitimate and "shadow" competition, and seem to be slowly losing market share as a result. Arguably this is a case where the argument set out in the paper would apply, except that the Big 5 are clinging to high prices for other reasons. This means they lose potential legitimate customers, not only to Piracy but to Indies, Libraries and of course people who simply won't pay the higher price and simply don't buy the book or a replacement.

Having given a little thought to the article I think the principle is almost intuitively correct. This does not mean that piracy is generically a good thing. Just that it can be in some cases. Am interested in others thoughts on the issue.

[DNSB]

Originally Posted by darryl

In some situations this so-called "shadow competition" from piracy pushes the price closer to the economic optimum, a price point at which everyone benefits. One example used is the price of an HBO subscription, including of course access to Game of Thrones. It is said that HBO is not going to extremes to prevent piracy of what is probably the most pirated show in history, implying of course that HBO recognises, at least by its actions or lack thereof, that such piracy may in fact not be doing them harm.

Why do I keep getting cease and desist orders forwarded from several customers? While BitTorrent does not work from their sites, the connection to the servers is made and that appears to be enough to get the lawyers into the act -- you gotta look like you are doing something to get those retainers.

Students--you can't live with them and you're not allowed to put them to bed with a shovel.

[pwalker8]

The basic flaw is the idea that somehow the evil content creators/Realtors can somehow artificially pump the price of a property over any give time period. Basic Economic theory says that if you price a property outside what consumers will pay for it, then no one will buy it unless it's necessary for life. Yet, millions are willing to pay what you consider an artificially inflated price. That tends to argue that the flaw is your price assumption rather than that of the creator/retailer.

I think that it's true that for certain segments of the population, the preferred price point is zero. That's why students tend to be the most aggressive pirate population, they aren't going to pay for content no matter what. They are too use to someone else paying for it and don't recognize the risks involved in pirating.

GOT is an interesting example, because you can get it so many different ways at so many different price points. You can get it by subscribing to HBO or watching on any number of different platforms at different price points after the episode has appeared on HBO. You can buy it, rent it or watch it as part of a streaming service or buy the DVD. As part of the HBO package of content, the point of GOT was never the actual price of GOT, but how much people would be willing to pay for a HBO subscription, followed by various other ways to monetize the offering. One could very well argue that GOT shows the validity of the multiple price points based on time that is the basic business model of book publishing and has been for several decades.

[darryl]

@pwalker8. If your argument is in fact correct, we wouldn't need anti-trust legislation since the market price can never be artificially inflated even in a monopoly or oligopoly situation. Different numbers of people are prepared to buy at different price points. Competition, even shadow competition, has the potential to drive prices down. In an already efficient market this shadow competition will damage legitimate players and may even tend to drive legitimate players out of the business and jeopardise the viability of the industry itself. However, the paper suggests that in an industry where competition is not working and pricing is well about the optimal price point, piracy may in fact be beneficial by forcing the price down towards the optimum price point where net revenue will be maximised.

[pwalker8]

Originally Posted by darryl

@pwalker8. If your argument is in fact correct, we wouldn't need anti-trust legislation since the market price can never be artificially inflated even in a monopoly or oligopoly situation. Different numbers of people are prepared to buy at different price points. Competition, even shadow competition, has the potential to drive prices down. In an already efficient market this shadow competition will damage legitimate players and may even tend to drive legitimate players out of the business and jeopardise the viability of the industry itself. However, the paper suggests that in an industry where competition is not working and pricing is well about the optimal price point, piracy may in fact be beneficial by forcing the price down towards the optimum price point where net revenue will be maximised.

There is indeed an argument that anti-trust legislation is normally unnecessary. Most of the time, I tend to agree with that argument. With a few exceptions, most monopoly positions require support by the government. The original US anti-trust legislation, the Sherman anti-trust, was written by the Senator from Ohio in response to how the railroads were treating Ohio. The railroads at the time were a government supported monopoly.

There is an editorial in today's Wall Street Journal by Ted Olson about the current anti-trust case in court with Qualcomm. Of course, Qualcomm co-op the standards process to get the process that it held the patent on declared a communication standard, then reneged on it's promise to license that patent to all comers at a reasonable fee, so one could say that it is using both a government granted monopoly as well as a pseudo government agency granted standard. Perhaps a better solution would have been to require any patent that is incorporated in a standard to be renounced.

The optimum price point is a matter of opinion and exists at different price points for different markets. Copyright, is of course, a government granted monopoly, and as such meets some of the criteria for successful price fixing. Of course, if someone doesn't want to pay for Game of Thrones, then one can watch any number of other programs, which the vast majority of the potential audience seems to have done.

I seriously doubt that piracy kept the cost of GOT down. First, GOT was part of the HBO package, so for people who already subscribe get it without paying extra. The analysis is how much do they charge for GOT via the normal streaming, renting and purchase venues. GOT seems to be competitively priced in those venues, i.e. priced at price point fairly similar to what other such shows are priced at. Season 3 of GOT on iTunes is approximately $40 or $4 per episode. Big Bang Theory, a show that one can watch for free on TV, is $30 per season or $3 per episode. Star Trek Discovery is $35 per season. Does the threat of piracy also keep those shows priced fairly comparably? It seems that the assumption is that if not for the threat of piracy, they would price GOT at some price point far above what the market has settled on what TV shows should cost. I question that assumption.

[GeoffR]

I haven't read the full paper, and I am not an economist, but I think the idea of shadow competition from pirates benefiting both producer and retailer would only apply to a wholesale type situation, where the producer benefits if the retailer lowers their (inefficiently high) price because it means the price to the consumer is lower but the producer still gets their wholesale price, i.e. the retailer is taking a smaller share of the revenue. (Edit: and vice versa where the retailer benefits if a producer reduces their inefficiently high wholesale price to compete with pirates.)

However that wouldn't apply to the ebook market which is all based on commission sales, the producer generally sets the retail price, and if the retailer does discount their price to compete with pirates then the commission arrangement means that the producer loses out too.

[darryl]

I would have thought it potentially applied very much to the market for Big 5 ebooks for the reasons set out in my original post. The publisher sets a very high price in the absence of competition. If Indie Competition and/or shadow competition force that price down towards the optimum, then everyone makes more. The retailer receives less agency commission on each sale at the lower price, but more than makes up for this with increased sales. Likewise the Publisher makes less money per sale but more than makes up for this by more sales. The marginal cost of each ebook is negligible. Even the author will be better off depending of course on the terms of their contract with the publisher.

Meanwhile, in the real world, neither Indie competition nor piracy is reducing Big 5 agency prices. I suspect this is at least partly because the Big 5 have print book sales to consider and seem to take the view that pricing ebooks so as to effectively compete with Indies will cannibalise print sales. As I mentioned in another thread, I doubt sales of paper books play any role whatsoever in the Indie market, where paper sales are very much ancillary to ebooks and sales of print books a bonus.

[pwalker8]

And yet, if you believe one of the few authors who is willing to talk about his sales figures(John Scalzi), he sold more ebooks than hardback books and almost twice as many audiobooks which cost even more. The only real sales figures we have to go by are very much counter to your base assumption.

I think part of what you are missing is that ebooks are actually multiple markets, rather than one large market. Indie books tend to appeal to a specific sub-group of ebook buyers, while name publishers appeals to a different sub-group with a certain amount of cross over. In practical terms you are looking at the price of a 20 inch TV and concluding that the price of a 50 inch TV must be artificially inflated. It isn't, it's just a different market.

The indie market seems to be a lot more price focused than the name author market. Frankly, this isn't anything new. We saw the same dynamics 40 years ago when the reader markets were divided into hardbacks, trade, paperbacks, used, swap and library with a certain amount of cross over. I can remember those who wouldn't buy hardback books railing about inflated prices on hardback books.

[DiapDealer]

Originally Posted by darryl

The publisher sets a very high price in the absence of competition.

"Very High Price" is quite a loaded statement--regardless of the presence (or lack) of competition. It's a statement that's typically only uttered by the "Ebooks should be much, much cheaper than they are" camp. A camp that no one has sufficiently proven to me represents a) a very significant portion of the reading public; and b) a very realistic portion of same.

The publisher sets a price. Most of the reading public seem willing to pay it (for one format or the other). If they weren't, those prices would change.

[pwalker8]

Originally Posted by DiapDealer

"Very High Price" is quite a loaded statement--regardless of the presence (or lack) of competition. It's a statement that's typically only uttered by the "Ebooks should be much, much cheaper than they are" camp. A camp that no one has sufficiently proven to me represents a) a very significant portion of the reading public; and b) a very realistic portion of same.

The publisher sets a price. Most of the reading public seem willing to pay it (for one format or the other). If they weren't, those prices would change.

I would phrase it as represents a very significant portion of the buying public. In general, publishers and authors don't particularly care about those who read but don't buy (ranging from pirates to PD only to library only and no I not trying to equate those three groups, just pointing out that there are significant groups of people who aren't going to buy regardless of the price).

[gbm]

These essays by Eric Flint are from 2002 but still have bearing.

Prime Palaver # 6 Eric Flint April 15, 2002

Jim Baen and I set up the Free Library about a year and half ago. Leaving aside the various political and philosophical issues, which I've addressed elsewhere, the premise behind the Library had a practical component as well. In brief, that in relative terms an author will gain, not lose, by having titles in the Library.

What I mean by "relative" is simply this: overall, an author is far more likely to increase sales than to lose them. Or, to put it more accurately, exposure in the Library will generate more sales than it will lose.

As a practical proposition, the theory behind the Free Library is that, certainly in the long run, it benefits an author to have a certain number of free or cheap titles of theirs readily available to the public. By far the main enemy any author faces, except a handful of ones who are famous to the public at large, is simply obscurity. Even well-known SF authors are only read by a small percentage of the potential SF audience. Most readers, even ones who have heard of the author, simply pass them up.

Why? In most cases, simply because they don't really know anything about the writer and aren't willing to spend $7 to $28 just to experiment. So, they keep buying those authors they are familiar with.

Prime Palaver # 7 Eric Flint April 26, 2002

Every professional in the industry knows perfectly well that, with a small number of exceptions, 80% of the sales of a book are going to happen in the first three months after the book appears on the shelves. And once a book is more than two or three years old, as a rule, it will sell very few copies. By "very few," I'm talking about a few hundred copies a year. That's true even for paper editions today, much less electronic editions -- which today sell maybe 5 or 10 copies a year of that same book.

Granted, some books do better than that. On the other hand, lots of books do worse than that. In fact, it is not at all uncommon to see books going out of print within a year or two after they come out.

This one from Janis Ian well just read it.

Prime Palaver # 11 Janis Ian September 16, 2002

When I research an article, I normally send 30 or so emails to friends and acquaintances asking for opinions and anecdotes. I usually receive 10-20 in reply. But not so on this subject!

I sent 36 emails requesting opinions and facts on free music downloading from the Net. I stated that I planned to adopt the viewpoint of devil's advocate: free Internet downloads are good for the music industry and its artists.

I've received, to date, over 300 replies, every single one from someone legitimately "in the music business."

What's more interesting than the emails are the phone calls. I don't know anyone at NARAS (home of the Grammy Awards), and I know Hilary Rosen (head of the Recording Industry Association of America, or RIAA) only vaguely. Yet within 24 hours of sending my original email, I'd received two messages from Rosen and four from NARAS requesting that I call to "discuss the article."

Huh. Didn't know I was that widely read.

Ms. Rosen, to be fair, stressed that she was only interested in presenting RIAA's side of the issue, and was kind enough to send me a fair amount of statistics and documentation, including a number of focus group studies RIAA had run on the matter.

However, the problem with focus groups is the same problem anthropologists have when studying peoples in the field – the moment the anthropologist's presence is known, everything changes. Hundreds of scientific studies have shown that any experimental group wants to please the examiner. For focus groups, this is particularly true. Coffee and donuts are the least of the pay-offs.

The NARAS people were a bit more pushy. They told me downloads were "destroying sales", "ruining the music industry", and "costing you money".

bernie

[pwalker8]

Originally Posted by gbm

These essays by Eric Flint are from 2002 but still have bearing.

Prime Palaver # 6 Eric Flint April 15, 2002



Prime Palaver # 7 Eric Flint April 26, 2002



This one from Janis Ian well just read it.

Prime Palaver # 11 Janis Ian September 16, 2002



bernie

I don't think that there is a lot of disagreement that having freebies out there can get new readers to try an author. But that's a somewhat different argument than the idea that piracy can keep prices down, or that prices are artificially high for certain books or shows.

I will certainly say that I am a lot more willing to try a new author if the book is free or cheap (which is why Tor currently has their ebook give away), but I'm quite willing to pay the full price for a book that someone I trust says is a good book.

[SteveEisenberg]

The TorrentFreak article summarizing the research is free, which is fair enough given that it provides no real evidence for the thesis.

The research itself is US$10.00 for 25 pages.

Decades ago, I recall reading that micropayment systems would reduce individual article cost to maybe 10 cents. I would pay that, even though something tells me this isn't a great achievement of economic science.

So why is it $10 to download one article? And why is a subscription $210 a year for four paper issues ($425 for libraries). Not enough people pirating the MIS Quarterly?

[darryl]

Originally Posted by DiapDealer

"Very High Price" is quite a loaded statement--regardless of the presence (or lack) of competition. It's a statement that's typically only uttered by the "Ebooks should be much, much cheaper than they are" camp. A camp that no one has sufficiently proven to me represents a) a very significant portion of the reading public; and b) a very realistic portion of same.

The publisher sets a price. Most of the reading public seem willing to pay it (for one format or the other). If they weren't, those prices would change.

I plead guilty to the loaded language. And to believing that Big 5 ebooks are overpriced as a general rule. This is not to say that keeping Big 5 ebook pricing high is an irrational decision, though I suspect that it is doomed to fail in the longer term. It is hardly irrational for publishers whose main focus is on print books to take account of the likely effect of cheaper ebooks on sales of their print books. In fact, it would be irrational for them not to.

I see no justification for the statement that "most of the reading public seem willing to pay it" in reference to Big 5 agency prices. That the Big 5 have not lowered prices yet says nothing more than that there are sufficient purchasers at their present price points (combined ebooks and print books) for them to remain viable. However, it seems that the Big 5 are losing market share so far as ebook sales are concerned, and have effectively ceded entire genres to Indies. The large and growing ebook Indie market are also part of the reading public. I don't know about "most", but certainly a very significant part.

[DiapDealer]

Originally Posted by darryl

That the Big 5 have not lowered prices yet says nothing more than that there are sufficient purchasers at their present price points (combined ebooks and print books) for them to remain viable.

Yes. Which is my point, basically. And that fact is not likely to change in our lifetimes. There are clearly enough people "in" at $12-$16 (myself included) to sustain their model. Dollars to hours of enjoyment, books (e or p) are still--hands-down--the cheapest consumer experience going, in my opinion. Much cheaper (per hour of enjoyment provided) than movies, dining out, sporting events, craft beer, bacon, etc...

I don't believe the market correction you seem to be predicting (or hoping for) is ever going to happen. We shall see, though. Keep in mind that the Big 5 have been in competition with freely available reading material--multiple lifetimes per person's worth--for a long, long time now, in the form of public libraries. Ebooks have only increased the amount of free reading available. And still they're (the Big 5) "winning" at their current pricing. So how, exactly, is it that cheaper indie e-only titles are going to bring them to their knees where a forever's-worth-of-free has failed to do so ... forever?