The Dual Impact of Movie Piracy on Box-Office Revenue: Cannibalization and Promotion

Abstract

There are two main hypothesized effects from movie piracy: a cannibalization effect which reduces legitimate sales, and a promotional effect which increases word-of-mouth and stimulates sales. While these two effects are commonly discussed, there has been no research to measure their relative impact on motion picture sales. In this paper we use a hidden Markov model adapted from MOVIEMOD to decompose, and separately measure, the cannibalization and promotional impacts of piracy.

Using data from all wide release movies in the US from 2006 to 2008 we show that if piracy could be eliminated from the theatrical window then box-office revenues would increase by 15% or $1.3b per year. An analysis for the time period from 2011 to 2013 shows a similar increase of 14%. Our decomposition of piracy into separate cannibalization and promotional effects shows that the negative effects from piracy due to cannibalization dwarf any positive, promotional benefits: if piracy did not generate promotional effects through word-of-mouth communication then box-office revenues would drop by another 1.5%. We also find that, in rare instances (less than 3% of movies) promotional effects from pre-release piracy could increase revenue compared to piracy that occurs at release. Nonetheless, all of the movies in our counterfactual analysis would experience increased box-office revenue if piracy were eliminated altogether.

Keywords: Motion Pictures, Piracy, Box Office Revenue, Hidden Markov Models, Hierarchical Bayesian Models