Converting Pirates Without Cannibalizing Purchasers: The Impact of Digital Distribution on Physical Sales and Internet Piracy

Abstract:     
The availability of digital distribution channels for media has raised several important questions for marketers. Notable among these are whether digital distribution channels will cannibalize physical sales and whether legitimate digital distribution will dissuade consumers from using digital piracy channels. We address these questions using the removal of NBC television content from Apple’s iTunes store in December 2007, and its restoration in September 2008, as natural shocks to the supply of legitimate digital content and analyzing its impact on DVD and piracy channels.

We find that NBC’s decision to remove its content from iTunes in December 2007 is causally associated with an 11.5% increase in the demand for pirated content. This is roughly equivalent to an increase of 53,000 downloads a day for NBC’s content which is approximately twice as large as NBC’s total legal purchases on iTunes for the same content prior to the removal. We also see no change in demand for NBC’s DVD content associated with the removal of the iTunes channel. Finally, we find evidence of a smaller, and statistically insignificant, decrease in piracy for the same content when it was restored to the iTunes store in September 2008.

Keywords: digital distribution, channel conflict, cannibalization, iTunes, DVD

JEL Classifications: L1, M2, M3

Working Paper Series