Does Piracy Create Online Word-of-Mouth? An Empirical Analysis in Movie Industry

Abstract

Anecdotal evidence suggests that counterfeiting/piracy can help create online word-of-mouth (WOM) and through this boost demand but how powerful is such WOM? To answer this question, we conduct a descriptive study with some attempts to establish near causality. We estimate the impact of piracy on WOM and ultimately revenue by applying a panel data method to all movies widely released in the U.S. from 2015 to 2017. In identifying the effects of piracy we make inventive use of Russian piracy data to construct instrument variables for piracy in the U.S. This is possible as the key piracy site, the Pirate Bay, has been blocked in Russia since 2015. We find movies with pre-release piracy are associated with lower revenues despite the WOM effect. Critically, however, we show a positive correlation between post-release piracy and WOM volume and, extend the field, by finding that the presence of post-release piracy is associated with about 3.0% increase in box office revenue. We also note the impact of a raid by the Swedish Police that temporarily took down the Pirate Bay website in December 2014. The period when the site was down experienced a decline in WOM volume and revenues, consistent with the effect of lower post-release piracy predicted by our models. Our findings suggest approaches to target scarce anti-piracy resources, such as focusing on tackling damaging pre-release piracy.

Keywords: Piracy, Online Word-of-Mouth, Motion Pictures, Movies