The Truth About Pirates and Profits: A Market Failure, Not Legal One

Trademark and copyright holders frequently characterize piracy as a legal failure, arguing that tougher laws and increased enforcement are needed to stem infringing activity. But my weekly technology law column (Toronto Star version, homepage version) notes that a new global study on piracy, backed by Canada’s International Development Research Centre, comes to a different conclusion. Following several years of independent investigation in six emerging economies, the report concludes that piracy is chiefly a product of a market failure, not a legal one.

The Social Science Research Council launched the study in 2006, identifying partner institutions in South Africa, Russia, Brazil, Mexico, Bolivia, and India to better understand the market for media piracy such as music, movies, and software. The result is the most comprehensive analysis of piracy to date.

The 440-page report challenges many of the oft-repeated claims about piracy and how address it. For example, it finds that contrary to repeated claims that there are strong links between piracy and organized crime, no such link exists. Instead, the authors conclude that “decades-old stories are recycled as proof of contemporary terrorist connections, anecdotes stand in as evidence of wider systemic linkages, and the threshold for what counts as organized crime is set very low.”

Similarly, it finds no evidence that anti-piracy “education programs” – some of which have been launched in Canada – have any discernable impact on consumer behaviour. As of 2009, researchers identified over 300 anti-piracy education programs, yet were unable to find any benchmarks or attempts to determine whether they actually work.

The report also rejects the conventional wisdom that tougher penalties provide a strong deterrent to piracy activities. It notes that judges frequently face overwhelming caseloads that involve violent crime such as murder and assault.  While the law may call for lengthy prison terms for selling counterfeit DVDs, many local judges engage in a “judicial triage” where economic harms to foreign rights holders take a back seat to local criminal activity that poses threats to public health and safety.

While setting the record straight on piracy myths is valuable, the report’s most important contribution comes from chronicling how piracy is primarily a function of market failure. In many developing countries, there are few meaningful legal distribution channels for media products. The report notes “the pirate market cannot be said to compete with legal sales or generate losses for industry. At the low end of the socioeconomic ladder where such distribution gaps are common, piracy often simply is the market.”

Even in those jurisdictions where there are legal distribution channels, pricing renders many products unaffordable for the vast majority of the population. Foreign rights holder are often more concerned with preserving high prices in developed countries, rather than actively trying to engage the local population with reasonably priced access.  These strategies may maximize profits globally, but they also serve to facilitate pirate markets in many developed countries.

The study concludes that local ownership makes a significant difference in developing country markets, finding that “domestic firms are more likely to leverage the fall in production and distribution costs to expand markets beyond high-income segments of the population. The domestic market is their primary market, and they will compete for it.”

Although the study is limited to the six emerging economies, there are important lessons for Canadian policy makers. Groups such as the Business Software Alliance have acknowledged that Canada is a low-piracy country, yet the lack of access to some content may lead some Canadians to turn to unauthorized channels. Although the failure to serve the Canadian market does not legitimize infringing activity, as in the developing world, it does help explain it.


  1. pat donovan says:

    speaking of failures
    (spring, eh? HA!) 9:36 am est

    assume i made nasty remarks about the broadcast treaty making that turkey-ish ‘download and copyright found material’ legal.(in the us)

    until the secret treaties try it worldwide, natch.

    upgrading my tinfoil hat to nickel now.


  2. Market failure indeed …
    I have lived in a number of developing countries and the level of access to legal media varies wildly. In Suriname for instance there was none, they had nice ‘stores’ but everything was pirated, there was not a legal copy to be found. In the Philippines, the malls had places to buy legal copies but the price for a DVD was HIGHER than in North America. While outside the mall entrance was a carpet covered in the latest releases for the equivalent of 50 cents.

    When you are earning $2-$10 a day buying legal is obviously impossible, is it unreasonable to expect someone to buy off the carpet instead? Would you in that same situation?

    The infringement situation in developed countries is a different (and less excusable) issue but stems from similar roots … access. Those who pirate works available here just because they can (and are cheapskates) have no sympathy from me. At the same time the frustration of not being offered what is available elsewhere leads to at least understandable attitudes. Where did Pandora go? Why is the Canadian Netflix a poor shadow of it’s American parent? Why is the latest TV show on the network site geoblocked?

    Until these issues at home and abroad are addressed the battle against infringement is already lost.

  3. RE: Canadian Netflix

    What I heard is that they are having problems negotiating contracts in Canada because of the big three holding exclusive rights in said country for a pile of the content. This makes it hard for anyone to move into the market outsider or not.

  4. lack of access
    > yet the lack of access to some content may lead some
    > Canadians to turn to unauthorized channels

    This can happen for technological reasons in addition to economic ones.

    Take movie distribution media and playback for example. DVDs and more-so (since deCSS), Blurays come with anti-consumer, er I mean anti-piracy mechanisms on them. One of these is HDCP, which prevents display device (i.e. TV) manufacturers from being able to present the media being played in all of it’s intended glory.

    Due to these restrictions a 5.1 or 7.1 soundtrack on a DVD or Bluray being played through a television on an HDMI connection (with the DVD or Bluray player) cannot be passed through said television set to a receiver to be decoded for the enjoyment of the legitimate viewer. Instead the viewer gets (only) a stereo downmix of the surround-sound audio track.

    What options does such a viewer have to enjoy the media to the fullest, for which they (would) have paid?

    From what I hear, this is the reason many turn to pirated copies, which have this restriction removed. It’s actually quite ironic. Here we have an example of consumers being forced into the piracy channels because of restrictions put on the media to discourage piracy.

    Do you think these technological restrictions are actually preventing pirates? I think not. All they are doing is frustrating would-be-legitimate consumers into the piracy underground where they can get copies of the media they would otherwise buy, and enjoy it the way it was meant to be.

  5. Market Failure – not
    Why do you call it a market “failure”? It is the perfect example of “free market” success, where through successive mergers and buyouts it ended in a quasi-monopoly that tries to keep prices unreasonably high.


  6. Now I don’t download that much but I still do. I got 600+ cd so sometimes its way faster to download the to rip a cd. Also goes for movies. Now up to about 2004 I never bothered to download, it was a waste of time for me untill I realized that I had to give my own money to some music association when ever I backup my photos or wanted to try out a new linux distro. After that I said screw it…

    Funny things about this piracy thing is that the record/movie/media companies at least in Canada haven’t bothered one bit with giving me easy access to all music and movies. I’m also not talking about iTunes or other services that tie me to a certain system. Also I have no intention of paying $1 for a track or $5 dollars for a movie with the files being DRM’d to hell and not transferable to any media device of my choice. Why would I buy those files when I can already do that with cd’s and dvd’s.

  7. Un-trusted Computing says:

    Market in action
    It would be a bit disingenuous to call it a market failure.

    What’s going on is the market in action. A competitive good (eg: Pirated copies) has come to market and is for sale at a price consumers agree on (free or cheap depending on the amount of effort you want to put in) it isn’t legal, it’s copyright infringement, but it isn’t a market failure. The good comes to market and people buy it, is the very definition of a successful free market in action. 🙂

    Conversely, Netflix is an example of a legitimate good coming to market and my purchasing it. Why, because unlike piracy, I’m guaranteed to get the video in a language that I speak, a format that plays on my PS3/PC/Boxee Box and there are no commercials, previews, and the interface is quite responsive.

    Would I pirate it if I could get it on Netflix? No, in this case Netflix has shown itself to be the winner in the market over piracy.

    Both cases the market clearly chooses, what’s going on in the case where consumers choose piracy is that the industry itself has failed to provide good value for money. Don’t blame free markets because one of its vendors won’t compete.

  8. Ryck Marciniak says:

    Piracy Due to Market Failure
    Chris Anderson,author of Free: The Future of a Radical New Price, posited that it was the recognition of marginal costs approaching zero that underpinned piracy. Now IDRC is claiming it’s the market’s fault. Neither theories hold water in my opinion. Piracy is the result of some basic factors: first, economic scarcity (lack of cash) and opportunity cost (I’d choose to spend my money on other things) provide the key motivation for people to pirate; also, the technology available today makes it easy to copy and distribute software, movies, music, etc.; finally, it’s not easy to track down the pirates and convict them, so there is not much of a deterrent. The bottom line is that the risk-reward is tipped in favour of the cheap, easy reward.

    There is a different argument to be made regarding the formation of markets and distribution channels in developing countries. However, this poses some significant challenges for businesses wishing to capitalize in these markets. If an organizaiton decides to set pricing appropriately in a devleoping market, for instance, they may unknowingly be fostering arbitrage opportunities or gray markets, that will erode their margins in developed countries and their ability to reinvest in continuing research and development.

    Lack of access can present problems, but to infer that is is the cause of piracy, I think, misrepresents the true causes of piracy. From your article on the IDRC report, it almost appears to provide a justification for piracy.

  9. Jack Robinson says:

    The Real Pirates are the Would Be CETA Profiteers
    Okay, I’ll admit right outta the blocks that most of the arcane, Devil in the Details minutae that I read on this site, while not incomprehensible to someone with a background in Labour Relations and Government Benefits advocacy… reaffirms my lifelong belief that the complexities of Legal Doublespeak are only intended to obscure the actual motives of those who would benefit most from the protracted arguments, briefs and judiciary challenges they inevitably spew like sludge… namely the Owners by self-vested Entitlement and their cadres of pin-striped pit bulls.

    The very fact that these CETA, ACTA, IAPP and all the other sinister acronym cabals are convening behind closed doors like bad actors from a Grisholm novel tells me that not only The Fix Is In… but that I’m very likely going to find myself in the cross-hairs as a criminal consumer Enemy of the State.

  10. Devil in the Details minutae that I read on this site
    namely the Owners by self-vested Entitlement and their cadres of pin-striped pit bulls.

  11. Trademark Litigation says:

    Similar story
    Here is a similar story

    Market failure has become an increasingly important topic for students at A level .There is a clear economic case for government intervention in markets where some form of market failure is taking place. Government can justify this by saying that intervention is in the public interest. Basically market failure occurs when markets do not bring about economic efficiency.

    Government intervention occurs when markets are not working optimally i.e. there is a Pareto sub-optimal allocation of resources in a market/industry. In simple terms, the market may not always allocate scarce resources efficiently in a way that achieves the highest total social welfare.

  12. DRM
    Availability and pricing are plausible causes of piracy in the developing world. Even some European countries still do not have their iTunes. So how about making it available at relatively reasonable prices, whilst protecting the content through technical and legal measures? It may lead to portability arguments that have arisen in France and possibly led Apple to drop DRM altogether, but it still seems to be a good shot at making people switch from pirated to legal stuff, if the convenience of the latter outweighs the free nature of the former.

  13. @Trademark Litigation: “In simple terms, the market may not always allocate scarce resources efficiently in a way that achieves the highest total social welfare.”

    Remember that the Western definition of “the market is efficient” is when a product sells at the maximum price the buyers can bear. Add the fact that some “products” are mandatory (vital) not optional. Add the fact the “the market” is not that idealistic thing where you have a large number of competing sellers and buyers, but monopolies and cartels controlling resources needed by everyone else. Add the fact that certain favored players can print back the money they lost while others can’t.

    How exactly could this “achieve the highest total social welfare”?

    And why would you want that? You Socialist Separatist Radical Extremist Pirate!!!!

    Nap. 🙂

  14. It Doesn’t Matter
    It’s becoming apparent that the record labels are trying to use copyright and DRM to create a world-wide monopoly on music. So it doesn’t matter how many reports are generated showing they will get more money if they do an about face. They going to keep push for draconian legislation until they get their monopoly.

  15. 13 record companies are trying to sue Limewire for $75 Trillion:

    How about we stop the madness and abolish copyright once for good.


  16. What I interesting is that there are many places in Europe that are more affluent than Canada or the U.S. that have higher rates of DVD and video game piracy. These are also regions where consumers get shit on with price gouging, regional lockouts, needless release delays, and missing content relative to what we get here.

    Nintendo is going to get massacred by piracy because of their decision to impose regional lock-outs on owners of their new 3DS handheld, and I for one look forward to watching them whine as they learn their lesson.