Posted by: alansylvestre | October 22, 2014

The Economics of Piracy

game of thrones

According to an article in TIME Magazine, HBO’s Game of Thrones is the most pirated TV show of all-time.

Since the advent of the Internet, companies in the entertainment industry have argued that piracy has hurt the entertainment industry because users are not paying for the content they watch.

In Spreadable Media: Creating Value and Meaning in a Networked Culture, Shoemaker writes how Jason Mittel wrote that his using file sharing to watch the first season of Veronica Mars, “actually offered more value to the industry.” (Shoemaker, 115). His claim was that because he was watching it outside the Nielsen system, he wasn’t watching commercials and “his viewing factors didn’t fall into the elaborate exchange of audiences between networks and advertisers via the currency of ratings.”

In 2013, Yahoo News reported that piracy is not hurting the profits of the entertainment industry, based off a study put out by the London School of Economics and Political Science (LSE). In their story, they quote Bart Cammaerts, one of the authors of the story, who says, “Contrary to the industry claims, the music industry is not in terminal decline, but still holding ground and showing healthy profits. Revenues from digital sales, subscription services, streaming and live performances compensate for the decline in revenues from the sale of CDs or records.”

Is pirating having a negative effect on the entertainment industry, or is it creating more profit for the industry because more viewers are watching the content, ultimately leading to a higher demand for advertisements?

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Responses

  1. You raise a good question, Alan. Game of Thrones took the world by a storm, and word-of-mouth has made it the go-to show for a lot of people. Due the fact that it is produced and distributed by HBO, its consumption is limited to those with a subscription in their cable package. That is narrowing the audience to a small percentage of affluent viewers, yet their success transcended that.

    Piracy is what drives this show’s international success. Illegal streaming and torrents have made episodes available at increasingly fast speeds, and millions of viewers worldwide have enjoyed episodes only hours after they made their premiere. This has expanded their fan base, which allows their popularity and respectability among other shows to grow as well.

    But one important aspect to analyze is the existence of HBOGO. This online portion of the network has an impressive library, giving viewers the chance to watch on-demand rather than limiting themselves to the established programming. The only downside, is that an HBO cable subscription is needed. This has taken viewers to watch the show with a “borrowed” user, which is often shared several dozen times. How is that affecting their revenue? Their CEO, Richard Plepler, shares their perspective:

    Nine months later, HBO announced they will offer subscriptions starting next year. What changed? Has the password spreadability gone beyond their expectations? Have they decided to cater the viewers demands even though they are aware of the impact this will have in cable companies?

    • Lucila, you bring up an interesting point. Given the advent of HBOGO,users have more access to content in HBO’s library than they would have if they were to simply pay for a paid subscription.

      In my opinion, when Richard Plepler released that statement, he finally recognized the growing interest of internet users. True, by offering online subscriptions, he might be decreasing the amount of cable subscribers, but he would be increasing the demand for Internet subscribers because they could watch the same content on their own time. PricewaterhouseCoopers (PWC), a company that monitors and reports on online advertising revenue, said in their 2014 quarterly report that online revenue from advertising had increased 15.1% since the beginning of 2014.

      I don’t think they expected to have such a spreadable effect in terms of their Internet presence, but
      I think HBO, and other companies alike, are recognizing just how much money online advertising agencies are willing to spend.

      What does this mean for cable companies? I think the answer is unclear as of right now because there are still some who prefer a cable subscription over an Internet subscription. But, if I speculate into the future, I foresee cable companies depreciating as the demand for online content increases.

  2. I believe this is a matter of differences in the foreseeable future. Time is blurring the lines between the internet and telephones, television and film. Soon our media experiences will be centralized and there won’t be the same distinctions between channels. Cable companies need to make the transition and offer online subscriptions as well. Comcast has an Xfinity app, where people with their paid cable subscription can access a variety of shows and upgrades. For example, to upgrade my mom’s to HBO, she is paying ten extra dollars a month. I will dare to say the upcoming GO subscription will be more than that, which won’t make the Xfinity people cancel their subscription (unless they only had it to watch HBO, then, they should not have been paying for those extra channels all along).

    The cable business was, for a long time, limited to geographical reach. Even today, with all the competition, there is a limited amount of providers for certain areas. The market is rapidly expanding, and so should they. Having online subscriptions will only increase their growth, since there will still be a large audience with the more traditional cable boxes. I can only see a couple of problems with the online cable modem. The first one is password-sharing, although that can be monitored or limited to amount of devices. The second one is that I do not believe people would pay as much for an online subscription, which might bring their numbers down.

  3. Lucila,I think you raise a very interesting question in your above comment. Would someone pay as much for an online subscription as they would for a cable subscription? And would offering a cheaper Internet subscription, combined with advertising revenue, provide cable companies with enough money to offset their costs? I think those are two key questions cable companies are going to have to ask themselves as they decide whether or not to embrace the growth in demand for online content.

    You also bring up a very good point when you talk about password sharing. Other companies, such as Adobe, have a limited-license agreement when you buy one of their products where the user can only install the program on two or three devices, depending on which license you buy. I wonder if cable companies are going to attempt a model like this, where they only allow passwords to work on a few devices.

    These are very good points to bring up as the discussion ensues around piracy and cable subscription models.

    • I think it’s a little late for HBO Go to start offering online subscriptions, honestly. I see that the demand for content is there, but if people are already accessing it for free via shared subscriptions and piracy, what will make them start paying for it now? One thing the authors of “Spreadable Media” have failed to address for me is what motivates people to seek content outside the original source. I personally have never thought to myself, “Wow, this free content is awesome. If only it were more expensive…” Unless HBO releases the online subscriptions alongside new restrictions on the number of devices allowed per account, thereby forcing “piggyback” users to start paying, the revenues from an online subscription service will be minimal. And even if they added restrictions on devices, they’re only cutting down on shared log-ins. They’re not even touching the 1.5 million people downloading the episodes from other sources.
      Going back to your original post, I think GoT is the exception to the rule when it comes to piracy. Unlike most other shows, there are no ads running alongside the content on HBO or on HBO Go. In this sense, advertisers have a better shot at aligning themselves with the show via piracy sites. I’m not saying it’s morally right, but it’s economically true. Basic cable shows only exist as a function of advertising. The concern over how many people watch a basic cable show is really how many people watched the ads. More eyeballs, more money. For them, piracy could lead to a decline in Nielsen viewers, which could in turn lead to a decrease in ad revenue.
      HBO relies on subscription revenues and positive press. According to June Thomas, “Since the premium cable networks produce just three or four episodes of original television each week, they need to attract positive attention– the more a show like Game of Thrones dominates the cultural conversation, the more people will sign up for HBO to watch it.” They certainly have good press, it just doesn’t seem to be driving membership. It is, however, driving demand for more and more content, including merchandise, a roving museum exhibit, and even a new line of wine and beer. Perhaps HBO is using the popularity of the show, perpetuated to a great degree through piracy, to drive revenues in new and innovative ways, which is why the CEO is not worried.

  4. June Thompson’s article: http://www.slate.com/articles/arts/culturebox/2012/03/game_of_thrones_how_hbo_and_showtime_make_money_despite_low_ratings_.html

    I can’t get it to link.

  5. June Thomas’s article. Jeez. I can has blog.


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