Converting Pirates without Cannibalizing Purchasers: The Impact of Digital Distribution on Physical Sales and Internet Piracy

With the rise of Napster, BitTorrent, and other tools facilitating Internet piracy, rights holders have understandably become very concerned with the development of strategies to mitigate the impact of piracy on sales. These tools fall into three general categories: litigation, countermeasures, and competition. The literature has addressed the effectiveness of the first two anti-piracy strategies. In this paper we address the third strategy using NBC’s decision to remove its content from Apple’s iTunes store in December 2007 as a natural shock to the legitimate supply of digital content. To address this question we collect two large datasets from Mininova and Amazon.com documenting the levels of piracy and DVD sales for both NBC and other major networks’ content around this event. We then analyze this data in a difference-in-difference model and find that NBC’s decision to remove its content from iTunes is causally associated with a 19.99% increase in the demand for NBC's pirated content. This is roughly equivalent to an increase of 92,612 downloads a day for NBC’s content. Moreover, we see no change in demand for NBC’s DVD content associated with this change.