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 studios, 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
impact 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 availability
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
percent in the week after over-the-air broadcast. With respect to
the impact of piracy on sales, we use the television 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 segmentation 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 do paid products, the presence of free products need
not harm paid sales.
Keywords:
Information goods, movie broadcasts, movie promotion, DVD sales,
movie piracy, broadcast flag, consumer surplus