Piracy as a Signal of Value?

23 August 2009, 1247 EDT

[Cross posted at bill | petti)

Christopher Penn crafts an interesting piece arguing that piracy (i.e. copyright infringement) is, among other things, a market signal:

Piracy indicates that something is sufficiently valuable enough that it’s worth stealing. It’s worth making an illegal copy and spreading without compensating the creator.

Do you want the most accurate, unbiased, unmanipulated measure of how popular and valuable something is? Go hit up a site like The Pirate Bay or Demonoid or any of the other file sharing services and see if someone is stealing it.

Now, I think this is an interesting observation, as well as a logical one. It seems intuitive that someone must value a product in order to go to the trouble of illegally copying and distributing it. This act takes time as well as incurs particular risks if one is caught. Similarly, for someone to illegally download a product they too incur some level of risk and therefore must believe the product to be worth the risk they are taking on. However, I would have to disagree with Christopher that using file sharing services as an index for how valuable something is constitutes the optimal way to measure value.

In most cases (and I stress most, leaving room for a few exceptions), the market price of a product can indicate three things: level of demand, level of supply, and/or price of inputs for that product. When price rises either demand has increased, supply has decreased, or the cost of inputs has increased. If consumers keep consuming the product at the higher price it indicates that they place a higher marginal utility on that product (fancy way of saying they value or like it more). If consumers are not willing to pay the higher cost the market will correct itself–as demand drops, supply increases, etc.–leading to a lower price for the product.

With piracy, we lose the power of the price signal. ‘Producers’ in this scenario essentially have no production costs, as it is incredibly easy to produce and distribute pirated products electronically. They also have no concerns for inventory, since ‘digital shelf space’ is infinite. Additionally, consumers bear no immediate costs for consuming the product. That is the whole point of illegal file sharing–one does not have to pay for what one consumes. Without any kind of feedback besides pure demand, it is hard to gauge how valuable something is since consumers are not being asked to sacrifice anything of value for the product.

However, there is one possible bit of cost that we could incorporate–risk. Copyright infringement is illegal (well, most places) and, if caught, one could face stiff fines and penalties for either ‘producing’ or ‘consuming’ illegal content. We woul need to incorporate a measure of risk that takes into account the severity of the possible penalties and multiply that times the likelihood that one would be caught and that the harshest penalty would be applied. Say, for example, R=P x L where R equals the total risk assumed, P equals penalties, and L equals the likelihood of being penalized. This measure could denote the actual ‘price’ that people are willing to pay to either distribute and consume specific illegal products.

I think if we look at it this way we would find that the value of these goods (in most cases) is far less than Christopher thinks they are, as the probability of being caught is quite low for most participants in this type of economy. If that is the case, the rate of piracy would not necessarily indicate that consumers value the product more, but actually that they value it less since R would likely be less than the market price ($). I think there is a philosophical dimension to piracy that Christopher does not incorporate into his theory (more on this below).

Christopher makes another point with regards to marketing:

Unlike commercial markets where marketers spend time, energy, and money to get you to buy things, no commercial marketer actively goes out and tells people to steal their products and not pay them. That’s completely irrational.

Give away for non-monetary currency, sure, through inbound links or reputation, through legitimate venues like your web site or iTunes, but no one wants to confer any level of legitimacy on pirate markets. Thus, when you see something in a pirate market that is actively being traded (meaning someone right now is seeding or leeching, uploading or downloading), it’s a good indicator to me that there’s value being exchanged, even if the creator isn’t getting compensated.

This is true in most cases, except that whether you pay for a product or not you have still been exposed to the barrage of marketing activities that promote the product.

Finally, piracy as a signal runs into problems due to the philosophical/psychological dimensions to the practice. Peter emailed me to discuss the post and lays out some of the basic logic that I was alluding to above regarding philosophical/psychological factors to piracy:

On piracy–there is also a social/normative component, in that people want to identify as Pirates because Pirates are cool.

Sometimes you’ll have folks who want something but don’t want to pay, and there’s an economic signal there. But, you will also have an identification element at work–I’m a Pirate, i don’t pay for anything (even if the cost is negligible), mainly for the self image of romantic hero bucking the system, rebeling against the Man. Pirates are, after all, cool. They even have a major political party in Europe that won seats in the EU parliament.

I agree with Peter, and this fact further complicates using piracy as a signal of value. Furthermore, we know from experimental work that simply making something free can alter how the item is perceived and, consequently, consumed.

[BTW, Peter and Patrick are supervising some really sharp undergrads who are doing some independent Piracy research this summer, and this identification element becomes a strong running theme for them, as the modern notion of piracy contains a romantic and heroic element to it. They have a great blog on the project: https://roguishcommonwealth.blogspot.com]

Overall I think the idea is very interesting and we likely can extract some additional measure of value from file sharing sites. But piracy is just one input among many that we could use to devise a more complete index for value.

(via chrisbrogan)