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Piracy Or Free Promotion

The list of industries affected by piracy range from pharmaceuticals, cosmetics, apparels, fashion accessories to digitally distributed products. Software, Music CDs and DVDs, Movie DVDs and Games – all have their pirated versions freely available for those who know where to look for. For many years, companies that make these products have vociferously fought against piracy, insisting that it erodes their profit margins. In recent times, however, studies have shown that one pirated copy does not necessarily mean loss of revenue. And in some cases, piracy might even help the product.

Let's take a look at some data for these various products:

Software: According to the Business Software Alliance (BSA), “The retail value of unlicensed software — representing revenue losses to software companies — broke the $50 billion level for the first time in 2008. Worldwide losses grew by 11 percent to $53 billion.” Studies show that a third of all products installed on personal computers are pirated. Rather than having 2 choices: Buy or Not Adopt, there’s a third one: Use a Pirated Copy.

Music and Movie Discs: Sales of Music CDs fell by about 16% worldwide, causing overall industry revenue to decline to about $15.8 billion in 2009 from about $17.5 billion a year earlier. Movie DVD sales represent more than half of the revenue studios generate from most of their movies. But growth in this area has almost stagnated with a growth of 2% in 2009. Sales of movie discs are expected to fall by about 20% by 2010, according to Adams Media Research. A big portion of this loss is seen as coming from piracy of DVDs and peer to peer (P2P) sharing sites. While penetration of broadband is a good way to serve up these movies into people's homes, piracy and illegal copies keep the profits from it rather low.

Computer Games: Computer games are protected heavily because these products are aimed at the youth market. Younger people tend to value games more, and worry less about copying illegally. They also have more time on their hands. Many games manufacturers are seen as having draconian anti-piracy measures in place. Entertainment Software Association (ESA) estimates that around 10 MM games were downloaded illegally during Dec’10.
Free Promotion through Piracy

Sony and Nintendo have some very strict anti-piracy measures in place for their games. In contrast, some software producers don't appear to put too much effort into protecting their products from piracy. Piracy is undesirable only if those who would otherwise buy a legitimate copy might become tempted to download illegal copy. In all the markets, there are users who will not buy the product even if they value it. Their piracy cannot harm the seller. These pirates will, in fact, benefit the industry: they will talk to others about product experiences and create buzz around the product free of cost to the companies.

Software Industry

There are some conditions where piracy is definitely not desirable. Piracy is not useful when: piracy control is costly, penetration is quick, future profits are greatly discounted, customer inertia is low, or product life is short. A moderate tolerance for piracy is useful in facilitating faster adoption of products. Piracy facilitates penetration in the market and prevents users from discovering Open Source alternatives. Microsoft admits that piracy of its Windows operating system has helped garner huge market share in China. Senior Officials of Microsoft have been admitting that piracy of their products have helped Windows to compete with Linux.

Piracy can also be helpful as a promotional tool. In most markets, consumers are not aware of all products that exist and are available. The traditional ways of informing people involves costly advertising, PR and marketing initiatives. Thanks to piracy, there is already a pool of current customers who do this for free.

Any software maker wants to see more people use and adopt its products. However, due to network incompatibilities, customers will not buy new software unless a large number of people are already using it. A software company could run into this problem and find it hard to nudge people out of the initial inertia. This is where piracy helps – increasing user base size and creating an existing network. For instance, the proliferation of pirated copies of Windows OS and Office has established Microsoft as the software standard. As more people and organizations start to buy legitimate copies of the software, they are more likely to buy Microsoft products because there are already a lot of people using them. This is called the network effect.

In their paper on the ‘Effect of Piracy on the Market Penetration of Subscription Software’, Vijay Mahajan and Ashutosh Prasad put forth the argument that piracy may be good for a new product if the firm needs to 'establish an initial user base and speed up diffusion'.

Entertainment Industry

With the music industry, piracy works in a slightly different way. In recent years, though fewer records have been sold because of online radio and free file-sharing, less known artists find it easier to reach their audience.

So while artists are seeing a rise in income from live performances, labels are struggling, due to decreased revenue from recorded music. More artists have made money via live performances in the past few years. The artists that suffer from piracy are the ones whose tracks and albums were overly promoted by the record labels. Here also, piracy is the tool with which a fan base is being built.

So while record companies do sustain a loss in sales, music itself proliferates – with more artists being able to reach their fans and create new fans. Artists themselves don't see any negative impact from piracy of their songs and albums. In fact with better reach, they are in a better position to book live gigs.

For the movie industry, the production houses may loose money on ticket or DVD sales due to piracy but they earn from accessories sold due to hype created around the movie. Piracy aided by broadband revolution has also helped obscure and less publicized movies getting attention from the viewers.
The Future of Piracy

The lowest-piracy countries are the United States, Japan, New Zealand, and Luxembourg, with about 20% piracy. The highest-piracy countries are Armenia, Bangladesh, Georgia, and Zimbabwe, all over 90 %. Cost of the software is not the only factor that affects extent of piracy. Other factors like cultural norms, strength of local intellectual property laws and the enforcing authorities' effectiveness are all equally important factors. 

So while piracy rates in developing countries are high, they also represent a big market potential. According to IDC, over the next four years nearly $450 billion will be spent on buying legit copies of PC software. If piracy rates stay as they are, about $300 billion will be pirated. Based on the IDC forecast, over the next four years, lowering global piracy by one point a year would mean $20 billion in industry revenues.

Over a period of last few years, open source programs have provided a major threat to paid softwares and P2P platforms have taken sheen away from disc sales. Though the enforcement against copying will become stricter, the world will move more towards free society.

Disclaimer: This article is in no way meant to promote piracy. It just highlights certain industries or companies who have taken advantage of free promotion they have got from their pirated products.


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