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Closing Piracy Powerhouse Actually Hurt Movie Revenues

Only blockbusters benefitted from shutdown of Megaupload; grosses of mid-range pics declined

Closing the notorious piracy site Megaupload didn’t help theatrical film grosses , according to a new study.

Megaupload, which claimed at one time to account for as much as 4% of all Internet traffic, was shut down suddenly by the FBI on Jan. 19, 2012, its domains seized and its management team arrested. That amounted to what the researchers call a “quasi-experiment” in anti-piracy policy.

“We find that box office revenues of a majority of movies did not increase,” said the paper. “While for a mid-range of movies the effect of the shutdown is even negative, only large blockbusters could benefit from the absence of Megaupload.”

They add that their findings suggest “that there were less average performing movies after the shutdown, while at the same time there were more poorly performing movies.”

The study, from researchers at Ludwig Maximilians University Munich and Copenhagen Business School, looked at weekly data from 10,272 movies in 50 countries, as reported on boxofficemojo.com. Its results contrast with findings of researchers at Carnegie Mellon, who found that the shutdown of Megaupload boosted legal digital sales of movies.

The European researchers attributed the “counterintuitive” drop in theatrical grosses following the shutdown of the site to “social network effects, where online piracy acts as a mechanism to spread information about a good from consumers with low willingness to pay to consumers with high willingness to pay.” This network information-spreading effect of illegal downloads, they argue, “seems to be especially important for movies with smaller audiences.”

“Piracy has positive externalities,” they wrote, “where information about the quality of an experience good spills over from pirates to purchasers. Once it becomes significantly less easy to consume pirated content online, we would expect that at least some consumers convert to legal digital purchases or start going to the movies.” But when that happens, they argue, the positive effects of piracy vanish, and some consumers end up less informed about specific titles.

Blockbusters’ huge advertising campaigns make that unimportant, but pictures without that advantage were hurt on average after Megaupload shut down.

The authors argue that these findings imply that anti-piracy policy may have unintended consequences because different kinds of movies are affected differently as piracy declines.

Some entertainment pros and technologists have predicted this might be the case, as anecdotes have long circulated that young viewers, especially young men, like to check out a picture via the Web before deciding if they like it enough to buy a ticket. That has been one argument for ending theatrical windows on some pictures and moving to day-and-date release on streaming VOD.

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