The Dual Impact of Movie Piracy on Box-Office Revenue: Cannibalization and Promotion

There are two main effects from movie piracy: a cannibalization effect which reduces legitimate sales, and a promotional effect which increases word-of-mouth and stimulates sales. While these two effects have been hypothesized, the extant literature has not been able to disentangle them. We show how this decomposition can be measured using a hidden Markov model adapted from MOVIEMOD. Using data from all wide release movies in the US from 2006 to 2008 we predict that if piracy could be eliminated from the theatrical window then box-office revenues would increase by 16% or $1.3b per year. Our decomposition of piracy into separate cannibalization and promotional effects shows that the negative effects from piracy due to cannibalization dwarf any positive, promotional benefits. The silver lining is that if piracy did not generate promotional effects through word-of-mouth communication then box-office revenues would drop by another 1.5%. We do find that in rare instances (less than 3% of movies) pre-release piracy could increase revenue compared to piracy that occurs at release because of the promotional effect of piracy.