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The Simple Economics of Piracy (Or, Would You Pay $136 for Tron Legacy?)

Digital media technologies have become much much cheaper without any corresponding increase in access to affordable media goods. So why doesn't Sony or Disney lower prices in the developing world and expand its markets?
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With bipartisanship in the US all but broken, intellectual property policy is one of the last bastions of strong consensus. With remarkable consistency, Democrats and Republicans have backed industry-led efforts to expand intellectual property rights and ramp up the enforcement of them. Support comes from across the political spectrum, from the US Chamber of Commerce to the current vice president's office, where Joe Biden has led the charge against what he calls "people blatantly stealing from Americans -- stealing their ideas and robbing us of America's creative energies." The latest fruit of this effort is the PROTECT IP bill currently before Congress. If passed, PROTECT IP will empower private parties and the Justice Department to block access to websites deemed to be "dedicated to copyright infringement." What critics fear it will do, instead, is open the door to government censorship of the Internet, stifle innovation in the web services sector, and break the unified naming conventions that make the Internet a truly global network. The act is unlikely, in any event, to seriously inconvenience piracy. The means for circumventing these blocks are trivial and in fact already available.

The image of foreigners stealing American creative products is, of course, political catnip. What US politician wouldn't get behind measures to stop such behavior? Unfortunately, it is also an unproductive way of understanding, much less addressing, the problem of global media piracy. In the SSRC's three-year, comparative study of piracy in the developing world, our teams came to some different conclusions about piracy's causes and potential solutions. Our explanation, at its core, is very simple: high prices for media goods, low incomes, and cheap digital technologies are the main ingredients of global media piracy. If piracy is ubiquitous in most parts of the world, it is because these conditions are ubiquitous.

This may seem like an obvious conclusion but it is strikingly absent from policy conversations about intellectual property, which focus almost exclusively on strengthening enforcement. Nowhere in the industry literature or in major policy statements like the US Trade Representative's annual Special 301 reports will you find an acknowledgement of piracy's underlying causes: the fact that, in most parts of the world, digital media technologies have become much much cheaper without any corresponding increase in access to legal, affordable media goods. DVDs, CDs, and software in Brazil, Russia, Mexico, or South Africa, for example, are still priced at US and European levels, resulting in tiny legal markets accessible to only fractions of the population. Would you pay $136 for a Tron Legacy DVD (the relative price in Mexico, adjusted for local incomes)? How about a $7300 copy of Adobe's Creative Suite? I didn't think so.

So why doesn't Sony or Disney or Warner Music Group lower prices in the developing world and expand its markets? Say, to something comparable to the $1.60 per album level recently advocated by Warner Music UK's former CEO Rob Dickens? Isn't there a win-win scenario in which prices fall, markets grow, and profits increase? To judge solely by the behavior of the big multinational companies in this sector, the answer is no. They're fine with high prices and the resulting tiny markets. Why is this so? We drew two conclusions in our study: (1) they want to protect the pricing structure in the high-income countries that generate most of their profits; and (2) they want to maintain dominant positions in developing markets as local incomes slowly rise. In most countries, there is no serious domestic competition to provide an alternative. And that, too, is a problem.

The big industry players in the enforcement fight see no issue here. As Greg Frazer, vice president of the MPAA put it recently in an interview in Brazil, "Democratizing culture is not in our interests. It really isn't my interest."

Fair enough. But democratizing culture is in the interests of developing-country governments. And legal forms of democratization of access would be much better than the illegal ones we'll get anyway. Would lower prices eliminate piracy? No. That goal is unrealistic. But as the US context shows (and as we show elsewhere in our report), in competitive markets, companies will leverage digital technologies to produce lower-price, lower-piracy outcomes. There's little reason, in contrast, for poor countries to spend scarce public resources on enforcement initiatives designed to prop up the market for high priced DVDs and $300 copies of Microsoft Office. Put differently, there is no viable enforcement strategy without an affordable access strategy. And the US -- the main protagonist of this story -- doesn't have one.

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