Competing with Free: The Impact of Movie Broadcasts on DVD Sales and Internet Piracy

Abstract:     
The creative industries have frequently expressed concern that they can't compete with freely available copies of their content. Competing with free is particularly concerning for movie stu-dios, whose content may be more prone to single-use consumption than other industries such as music. This issue has gained renewed importance recently with the advent of new digital video recording and distribution technologies, and the widespread availability of Internet piracy.

We examine competition between "free" and paid video content in two important contexts: the impact of legitimate free distribution in one channel on sales through paid channels, and the im-pact of illegitimate "free" distribution in pirated channels on sales through paid channels. We do this by studying the impact of movie broadcasts on DVD demand and the impact of piracy avail-ability at the time of broadcast on DVD demand for movies shown on over-the-air and cable television during an eight-month period in 2005-2006.

With respect to the impact of movie broadcasts on sales, we find that movie broadcasts on over-the-air networks result in an increase in DVD sales at Amazon.com by an average of 118% in the week after over-the-air broadcast. With respect to the impact of piracy on sales, we use the tele-vision broadcast as an exogenous demand shock and find that the availability of pirated content at the time of broadcast has no effect on post-broadcast DVD sales gains.

Together our results suggest that creative artists can use product differentiation and market seg-mentation strategies to compete with freely available copies of their content. Specifically, the post-broadcast increase in DVD sales suggests that giving away content in one channel can stimulate sales in a paid channel if the free content is sufficiently differentiated from its paid counterpart. Likewise, the example of post-broadcast piracy suggests that if free products appeal to a different customer segment than paid products do, the presence of free products need not harm paid sales.

Keywords: Information goods, Movie broadcasts, movie promotion, DVD Sales, Broadcast flag, consumer surplus

JEL Classifications: L8, L86, M3, M31, O30

Working Paper Series