by Mike Masnick

Filed Under:
competing, free, michael d. smith

Evidence Shows You Can, In Fact, 'Compete' With 'Free'

from the but-of-course dept

I've argued in the past that the claim you "can't compete with free," is entirely bogus, not just because people do it all the time, but because the very premise of the argument is wrong. Competition has always been about a lot more than price, and the "free" part is meaningless if a competitor can drive price to a lower cost then your marginal cost -- no matter what that price is. But, now there's actually some growing empirical evidence that the claim "you can't compete with free," is really, really untrue.

Modplan points us to a recent talk given by professor Michael D. Smith at Google. Smith is from Carnegie Mellon and is discussing some of his recent papers, such as one on whether or not "piracy" acts as promotion for movies and another one on how digital sales, when set up right, don't actually cannibalize other sales. That latter one debunks the silly claim from Jeff Zucker and many others that they're "trading analog dollars for digital pennies."
Some of the key points:
  • Contrary to the claim that free viewability of movies decreases demand, research shows that when a movie airs on TV for free, it increases demand for the movie both in DVD sales and via file sharing. And, on top of that, the greater demand for the content in file sharing does not appear to hurt the sales of DVDs.
  • One bit of research involved the natural experiment that happened when NBC Universal, due to a contract dispute with Apple, removed its TV shows from iTunes for almost a year before putting them back. So, what happened when the content got pulled? Well, first, piracy rates increased -- and not just in absolute numbers. The research compared piracy rates against the other major TV networks, and found that the rates tracked almost exactly prior to the content getting pulled from iTunes... but the second it got pulled, NBC piracy rates were noticeably higher than the other networks. In other words, not offering consumers a way to buy your content legitimately increase unauthorized access. No shock there, but nice to see the data to support that. Specifically, the data found that the "demand" for unauthorized versions increased by 11%.
  • Separately, the research showed a smaller, but still significant increase in demand for unauthorized content from those other networks. The theory here is that once NBC pulled its authorized content from iTunes, people who started getting it via BitTorrent suddenly realized they might as well do the same for non-NBC content. So, NBC's decision not to offer authorized content may have actually increased demand for file sharing on other networks as well
  • Here's where it gets interesting: what impact did this have on DVD sales on Amazon? Again comparing NBC data to other networks, there is no noticeable impact after the content is removed from iTunes as compared to other networks. In other words, while the action did increase "piracy," there's no indication that increased piracy decreased DVD demand.
  • Next experiment involved a move in the opposite direction. Looking at the "demand" for unauthorized BitTorrents of shows from ABC right before and after ABC added its shows to Hulu, again, as compared to the other networks. And here, there was a massive decrease in "demand" for the unauthorized works on BitTorrent.
  • Again, however, when the content went "free" on Hulu it did not harm DVD sales. Actually, DVD sales went slightly up (not enough to be statistically significant).
  • The final study looked at what happened to demand for movies that went on HBO, which created an interesting situation, because before HBO will air a movie, it requires the studios to remove that movie from video on demand or other digital distribution channels like iTunes. So, the content disappears from those other channels for a few weeks before it shows up on HBO. The research looked at where former iTunes and video on demand customers went for content in the window between the content being pulled from those channels and when it aired on HBO.
  • What the research showed was actually no statistically significant change in demand when the content got pulled from the digital distribution channels... but a big increase in demand after the movie aired on HBO.
It's an interesting talk with lots of great data. The key conclusions:
  • You absolutely can compete with free.
  • If you offer a convenient and reasonable offering, eve people who were getting content in an unauthorized manner, will often buy (i.e., it's possible to turn "pirates" into buyers). That is, it's not the "free" part that's the driving aspect of much of their behavior, but the convenience factor.
There's obviously a lot more that can be done here, and I do wonder if all of these findings hold up over time, but it's a nice look at some of the current research.

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  1. icon
    Greevar (profile), 10 Sep 2010 @ 7:43pm

    This isn't about competing with free.

    "We can't compete with free" is just an excuse that grossly outlines how unaware they are not in the business of selling plastic discs. It's foolish to even try to sell copies with the expectation that it will be treated like the physical media it's stored on.

    If they want to make a living from creating art, they need to stop looking at it from the mindset of a manufacturer and see it from the perspective of a contractor, mason, or landscaper. They don't cry that they're not getting paid every time someone sees the work they did, they were paid for the job already.

    When I came to this realization about the truth of earning a living as an artist, I started to see the content world in a very different light. I went to a Best Buy the other day just to browse and when I got to the DVD/Music/Games area of the store (usually the central and largest section), I started to see the items on the shelves very differently. I didn't see products to buy, I saw the same job replicated over and over. I thought to myself, "Why would I want to buy this stuff? Why would I want to pay someone that did nothing to produce this stuff when the people that actually do the real work already got paid?"

    It's one huge lie that sharing content hurts artists. The artists that create the games, movies, and music we enjoy already were paid. It's the publishers, the leeching middlemen, that are the ones supposedly hurt by "piracy". Think about it. Would the studios make content that the publishers sell to us if the publishers didn't pay them? No! Would the publishers make it themselves? Maybe, but I doubt it. So then, the fact remains that if the art is worth creating, there are enough people out there that think it's worth paying someone to make it.

    Paul Ellis has figured this out. ZeroPoint Software has figured this out too. The era of treating copies like physical products is coming to an end, but I fear there will be blood before it is over.

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