New Study Finds Megaupload Shutdown Caused Rise in Film Sales

Researchers at Carnegie Mellon University released a study today concluding that the shutdown of MegaUpload last year caused digital movie revenues to increase.

The academic study, Gone in 60 Seconds: The Impact of the Megaupload Shutdown on Movie Sales, was authored by Brett Danaher and Michael D. Smith, working at the University's Initiative for Digital Entertainment Analytics. The abstract states:

The growth of Internet-based piracy has led to a wide-ranging debate over how copyright policy should be enforced in the digital era. While some enforcement approaches involve policies designed to deter consumers from filesharing though incentives or penalties, other approaches target the supply of piracy by shutting down Internet sites that serve as major conduits for pirated content. In this paper we analyze how one such anti-piracy intervention, the shutdown of the popular Megaupload site, affected the digital sales of movies for two major studios.

Simply examining changes in sales after the shutdown would produce an inaccurate measure of its actual effect as sales are changing over time for a variety of reasons. Instead we exploit cross-country variation in pre-shutdown usage of Megaupload as a measure of treatment intensity. Controlling for country-specific trends and the Christmas holiday, we find no statistical relationship between Megaupload penetration and changes in digital sales prior to the shutdown. However, we find a statistically significant positive relationship between a country’s Megaupload penetration and its sales change after the shutdown, such that for each additional 1% pre-shutdown Megaupload penetration, the post-shutdown sales unit change was 2.5% to 3.8% higher, suggesting that these increases are a causal effect of the shutdown.

Aggregating these increases, our analysis across 12 countries suggests that, in the 18 weeks following the shutdown, digital revenues for these two studio’s movies were 6-10% higher than they would have been if not for the shutdown. Thus our findings show that the closing of a major online piracy site can increase digital media sales, and by extension we provide evidence that Internet movie piracy displaces digital film sales.

As the study notes, the majority of academic literature has established that piracy has a negative impact on music and movie sales, but only recently have researchers begun to look at whether efforts to reduce piracy result in an increase in sales. A peer-reviewed study soon to be published in the Journal of Industrial Economics (a pre-press version is available online) found that France's graduated response law (HADOPI) caused a 20-25% increase in music sales in France. An earlier paper, Piracy, Music, and Movies: A Natural Experiment, found that the enactment of stricter anti-piracy measures in Sweden resulted in a 48% increase in digital music sales and a 27% increase in CD sales.

Besides contributing additional empirical data to this growing body of academic literature, Danaher and Smith's study makes several new contributions. First, the study is perhaps the first to look at "supply-side" enforcement of piracy — the two studies mentioned above examined "demand-side" enforcement that focused on individual infringers. Second, the study appears to be the first to look at digital movie sales (and rentals). Previous studies have either measured music sales, both physical and digital, or physical movie sales and box office receipts.

In a blog post announcing the study, Danaher and Smith conclude by reframing the idea that the solution to piracy involves learning how to "compete with free." The researchers state, "we believe that another key part of competing with free piracy can be making content on illegal channels less valuable to consumers. In this regard, our finding of a 6-10% increase in digital movie revenue suggests that even though shutting down Megaupload didn’t stop all piracy, it was successful in making piracy sufficiently less reliable, less easy-to-use, and less convenient than it was before, and some consumers were willing to switch from piracy to legal channels as a result."