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«Contact information Address: Edificio Expo. c/ Inca Garcilaso, 3. E-41092 Seville (Spain) E-mail: jrc-ipts-secretariat Tel.: +34 ...»

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Institute for Prospective Technological Studies

Digital Economy Working Paper 2015/01

Online Copyright Enforcement,

Consumer Behavior, and Market

Structure

Luis Aguiar (IPTS)

Jörg Claussen (Copenhagen Business School)

Christian Peukert (University of Zürich)

European Commission

Joint Research Centre

Institute for Prospective Technological Studies

Contact information

Address: Edificio Expo. c/ Inca Garcilaso, 3. E-41092 Seville (Spain)

E-mail: jrc-ipts-secretariat@ec.europa.eu

Tel.: +34 954488318 Fax: +34 954488300 JRC Science Hub https://ec.europa.eu/jrc This publication is a Working Paper by the Joint Research Centre of the European Commission. It results from the Digital Economy Research Programme at the JRC Institute for Prospective Technological Studies, which carries out economic research on information society and EU Digital Agenda policy issues, with a focus on growth, jobs and innovation in the Single Market. The Digital Economy Research Programme is co-financed by the Directorate General Communications Networks, Content and Technology.

Legal Notice This publication is a Technical Report by the Joint Research Centre, the European Commission’s in-house science service.

It aims to provide evidence-based scientific support to the European policy-making process. The scientific output expressed does not imply a policy position of the European Commission. Neither the European Commission nor any person acting on behalf of the Commission is responsible for the use which might be made of this publication.

All images © European Union 2015 JRC93492 ISSN 1831-9408 (online) Spain: European Commission, Joint Research Centre, 2015 © European Union, 2015 Reproduction is authorised provided the source is acknowledged.

Abstract Taking down copyright-infringing websites is a way to reduce consumption of pirated media content and increase licensed consumption. We analyze the consequences of the shutdown of the most popular German video streaming website kino.to - in June 2011. Using individual-level clickstream data, we find that the shutdown led to significant but short-lived declines in piracy levels. The existence of alternative sources of unlicensed consumption, coupled with the rapid emergence of new platforms, led the streaming piracy market to quickly recover from the intervention and to limited substitution into licensed consumption. Our results therefore present evidence of a high elasticity of supply in the online movie piracy market, together with relatively low switching costs for users of copyright infringing platforms. The postshutdown market structure was much more fragmented, thus making it potentially more resistant to any future interventions.

Abstract Taking down copyright-infringing websites is a way to reduce consumption of pirated media content and increase licensed consumption. We analyze the consequences of the shutdown of the most popular German video streaming website - kino.to in June 2011. Using individual-level clickstream data, we find that the shutdown led to significant but short-lived declines in piracy levels. The existence of alternative sources of unlicensed consumption, coupled with the rapid emergence of new platforms, led the streaming piracy market to quickly recover from the intervention and to limited substitution into licensed consumption. Our results therefore present evidence of a high elasticity of supply in the online movie piracy market, together with relatively low switching costs for users of copyright infringing platforms. The post-shutdown market structure was much more fragmented, thus making it potentially more resistant to any future interventions.

Keywords: Anti-Piracy Intervention, Copyright, Movie Industry, Natural Experiment JEL classification: K42, L82, O34, O38 1 Introduction The media industry has been drastically affected by digitization, with information and communication technologies changing the way music, movies, and books are consumed and produced. On the one hand, consumers have seen a radical increase in their ability to consume cultural products following digital formatting. On the other hand, digitization has also facilitated access to copyright infringing content thanks to the advent of file-sharing networks and, more recently, unlicensed online streaming. Because of the important investments needed to bring creative products to market, this expansion in unpaid consumption has led to serious concerns about its negative effects on producers’ revenue and ultimately on the supply of such products. For this reason, both industry representatives and academics have for many years sought to identify the effects of illegal file-sharing on sales. In the case of the movie industry, most empirical studies find that illegal consumption does indeed displace sales.1 Given the drastic improvements in both unlicensed video consumption platforms and Internet connection speeds, these findings have understandably raised concerns about continued investment in movie production and overall welfare.

Governments and industry representatives have contemplated different sets of actions to increase copyright enforcement on the Internet. In recent years, one of the most prominent type of intervention involves governments’ seizures of specific platforms hosting or providing access to pirated content.2 These interventions usually involve large amounts of public resources - both in direct intervention costs (e.g. police force) and in court cases3





- and governments and public entities have realized the importance of taking into account See, for instance, Bai and Waldfogel (2012); Bounie et al. (2006); Danaher and Waldfogel (2012);

Rob and Waldfogel (2007); Zentner (2010).

Because they aim at reducing the consumption of copyright infringing content by limiting the supply of such products, these interventions are typically referred to as “supply-side” anti-piracy interventions.

They can also be implemented through private rather than public effort. For instance, firms can attempt to limit the amount of piracy for their own products, or they may implement technical solutions such as Digital Rights Management. Another type of intervention - referred to as “demand-side” intervention concentrates its effort on the end consumers of copyright infringing content in order to discourage consumption of such products. These typically include lawsuits against individual users or the introduction of graduated response laws such as the HADOPI law in France, where consumers found guilty of copyright infringement would potentially face loss of Internet access after two warnings and repeated infringement.

For instance, the UK Intellectual Property Office created an Intellectual Property Crime Unit as part of the City of London Police in September 2013, which is “dedicated to tackling online piracy and other forms of intellectual property crime.” See http://tinyurl.com/govuk-piracyunit. It initially provided £2.5 million in funding over two years to the City of London Police, and has now expanded its budget by £3 million until 2017. See http://tinyurl.com/govuk-piracyunit2.

empirical evidence when considering their implementation (Hargreaves, 2011; Intellectual Property Office, 2014). Yet, this evidence is still scarce and instigators of anti-piracy interventions often lack knowledge on their effectiveness and potential pitfalls. As Tony Clayton, chief economist at the UK Intellectual Property Office, argued, “At the moment, the government and industry do not have an evidence-based approach to what works in this area. The trade-off between costs of infringement and gains from enforcement isn’t supported by evidence to give us understanding of policy outcomes. That means policy is often set by people who shout loudest.”4 And indeed, these anti-piracy interventions are not guaranteed to be effective. First, given the existence of numerous alternative platforms offering copyright infringing content, it is not obvious that the take-down of a specific unlicensed website would lead to a reduction in overall piracy. If users are able to easily switch across platforms, the intervention may result in a simple transfer of consumption from one unlicensed website to another (Bilton, 2012). Second, even if the intervention is successful in reducing overall consumption of pirated content, it will destroy surplus for individuals who consume copyright infringing products. If these consumers are not willing to pay for the licensed version of these products, their surplus will not translate into surplus to producers. Removing access to pirated content will therefore simply convert consumer surplus into deadweight loss, reducing overall welfare. Removal of pirated content can be beneficial to producers, however, if some of the consumers of copyright infringing content are willing to migrate to licensed versions of the product.

Any anti-piracy intervention should therefore, as a minimum requirement, manage to convert unlicensed consumers into licensed ones for it to be justified.5 Finally, seizing the dominant unlicensed website may have important consequences on the structure of the piracy market, as it could both incentivize entry of new platforms and generate more competition among existing websites to get a piece of the unserved market.

Given the inherent difficulty in measuring online piracy, obtaining detailed evidence on consumers’ behavior following anti-piracy interventions is a challenging task and one of the main reasons for the lack of evidence on this issue. Previous literature has predominantly Statement of Tony Clayton, chief economist of the UK IPO, at the conference launching the CREATe Research Programme, RCUK Centre for Copyright and New Business Models in the Creative Economy, February 1, 2013. See http://www.create.ac.uk/context/expert-views/panel-ukipo/.

Note that this is only a necessary condition. In particular, any anti-piracy intervention will not be worthwhile if the share of converted pirates results in revenue gains that fall short of the intervention’s implementation costs.

relied on product-level data such as digital movie sales or box-office revenues to identify the effects of anti-piracy interventions in the movie industry (Peukert et al., 2013; Danaher and Smith, 2014).6 While existing studies relying on product sales data are informative and allow the identification of the effect of the intervention on sales, they are constrained to treat consumer behavior as a “black box.” These limitations result in an incomplete picture of the effectiveness and the consequences of these interventions.

The objective of this paper is to evaluate the impact of a specific supply-side anti-piracy intervention in the movie industry by analyzing the unexpected shutdown of the major unlicensed streaming website kino.to in Germany. Our analysis relies on clickstream data, which allows us to follow individuals’ behavior on a very large set of websites, including licensed and unlicensed video consumption websites, throughout 2011. Our paper is the first to provide detailed evidence on the effects of a copyright enforcement intervention on consumer behavior and on the structure of the piracy market. In particular, we shed light on the potential pitfalls of anti-piracy interventions in online markets where the elasticity of supply is high and consumers’ switching costs are low.

The results from our empirical analysis show that the shutdown of kino.to led to a significant but short-lived decrease in the usage of unlicensed video streaming websites.

Unsurprisingly, this effect is particularly large for individuals who were using kino.to previous to its shutdown, with decreases of more than 30% in overall piracy consumption during the four weeks directly following the intervention. We nevertheless observe that consumption of pirated content increases again following the fourth week after the shutdown. This increase is driven both by substitution towards existing alternative unlicensed platforms and by the entry of new platforms following the shutdown.

Second, we find limited substitution into consumption of licensed offline video content, proxied by visits to specific types of websites. Our results show that consumers do not increase their visits to websites of movie theaters or to DVD-related Amazon webpages.

However, we find a small increase in clicks to licensed online video services (such as Maxdome, Lovefilm, and iTunes) after the shutdown, providing evidence that the intervention Other studies have made use of product level data to evaluate the effects of copyright enforcement in other industries. See, for instance, Danaher et al. (2014) for an evaluation of the effects of the HADOPI law on digital music sales, Zhang (2013) for the effect of DRM removal on digital music sales, or Reimers (2014) for an analysis of the effectiveness of private copyright protection in the book industry.

was successful in converting part of kino.to’s users toward legitimate video consumption. Perhaps more importantly, we also find that heavy kino.to users disproportionately increase their visits to websites of licensed video services. This substitution was nevertheless undermined by the existence of alternative unlicensed streaming websites, which allowed consumers to rapidly transfer their consumption of copyright infringing videos from kino.to to other platforms. In particular, we document a large increase in clicks to the second-most popular platform - movie2k.to - directly after kino.to disappears.

Only five weeks after the intervention, we also observe the entry of a new platform kinoX.to - which manages to quickly appropriate a significant share of the unlicensed video streaming market at the expense of movie2k.to and the other smaller platforms.

These results reflect both the high elasticity of supply to the shutdown, and the fact that consumers face little difficulty in switching from one platform to another.



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