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Defending online piracy

Many heated discussions have taken place about piracy, freedom of information and copyright, and it's hard to say if these controvercial topics would ever sieze to exist. For example, lets consider this issue of downloading of music on-line.

Let's assume that someone has (illegally) downloaded 20 gigabytes of music, which is a realistic, if not a rather small amount of what many young people download these days. That corresponds to approximately 4000 songs. Online music shops like iTunes offer songs for about 1$ apiece. Thus, to legally obtain the amount of music our hypothetical pirate has downloaded, he would have to spend several thousand dollars. How likely is it that this kind of person would actually spend so much money for music? Rather unlikely, I'd say. This person most probably would be content with much smaller amount of stored tracks or even switch to a free internet radio station, of which there are plenty. Hence the music industry wouldn't earn much profit from these kind of consumers, and definitely much less than the market equivalent of the downloaded content.

It can be argued that piracy provide means for ensuring price discrimination, meaning the possibility to pay different amounts depending on the readiness to pay (an example of price discrimination in "real life" would be reduced ticket prices for students and seniors/retirees). So those people who are not prepared to pay the price required by the manufacturers get the ability to pay the price they are ready to pay - which, in our case, is zero. It should be mentioned that ideal price discrimination (where everybody pays an amount exactly equal to their readiness to pay) in a situation when costs of producing another copy are zero (and that is just the case with digital contents) is the optimal price-setting mechanism for both the producer and the buyer, for the buyer pays no more than he is ready to, while the producer gets paid even by those buyers who wouldn't have bought the product at all if it was offered for a too-high fixed price. However, two problems occur. The first is that if the price is set equal to zero, as in the case of online piracy, the producer doesn't get any profit from sector of "buyers", making it impossible to recoup prior investments. The second problem is common to many price discrimination models and is called the arbitrage problem: price discrimination often allows a person who, in principle, would be ready to pay a higher price, to get it for a lower price. You can imagine that if a bakery offered "ideal price discrimination", many would be tempted to pay nothing although, if offered only a fixed price, they would be ready to pay that price. If the second problem could be solved, that would largely makes the first one irrelevant, as those people who don't pay would be exactly those who wouldn't pay no matter what. However, if it is not solved, there can be a first-order approximation for losses from piracy, because some of those who download music for free would otherwise have paid for it.

There still isn't a generally applicable solution to this problem, or price discrimination would be used everywhere. If we go back to our example of music download, several alternatives may be chosen, among them the publishing of albums featuring extra art or autographs which will be bought by fans despite the possibility of downloading the same music for free; incentives for buyers like mentions on the band's webpage or lotteries for VIP concert tickets, which can also be desirable for hardcore fans; or an appeal to everybody who cares for the band to make direct donations or buy CDs along with downloading music for free. However, it seems that at least of now, such methods don't give satisfying results.

However, even in today's situation piracy affects different musicians to a different extent and this effect isn't always negative. Little-known bands experience a positive effect from the availability of online downloads, as the possibility to sample new music for free makes it possible to learn about new bands for an increased number of people who wouldn't have paid 10$ for the album of an artist they've never heard about. That leads to an increase in popularity which, in turn, provides better concert attendance and also secures higher numbers of potential buyers for official records. It is quite realistic that these positive effects compensate and over-compensate the negative effects. Many musicians have come to understand that and make their songs more available, either via the band's oficial website or other internet ressources.

The above arguments for the music market largely retain their validity for other markets affected by piracy. The role of piracy as means of price discrimination remains the same, while the possible advantages for the authors take on somewhat different forms for different markets. Take for instance books, readers who have downloaded a book (possibly by an author previously unknown to them) later on can prefer to buy a non-digital version of this book as well as other works by the same author. There are plenty of people who consider it more comfortable to read a non-digital book, besides, a "real" book edition can also represent some visual graphics (e.g. illustrations) and collectible value. When it comes to movies the obvious choice is to watch it at a movie theatre, besides that, many films spawn a trade in merchandising items like t-shirts, mugs, action figures and other accessories for fans. Unlike the situation with music, producers of better-known movies gain more in the merchandising sales is mostly centered on the popular films. The situation is more complicated for computer software and gaming industry, as the use of those products is limited to the digital/virtual world and thus there are no additional features reserved for paying users which cannot be simulated - or, to speak plainly, hacked. The manufacturer has only the option of offering enhanced support or online services for "legal" users. Yet, at least one prominent case where a software manufacturer gained significantly from piracy is known: the distribution of Microsoft products (Windows OS and Office software) in Russia during the 90's. When computerization started in Russia on a mass scale, the price of Microsoft products was clearly far too high for the average Russian consumer to buy. Look at it this way, the Russian software market was just emerging so at that time Microsoft didn't have near-monopoly power yet. So if it wasn't for the pirated versions of MS Windows that were distributed at much lower prices, the history could have taken a different turn and alternative cheaper versions of operating sytems could have flooded a new emerging market. But thanks to pirates Microsoft OS became dominant in Russia. As more and more people became able to afford a licensed copy of Windows, they switched to it rather than reverting to alternatives like Linux. However, this story is rather the exception than the rule. Anyway, it's exactly the software developers who have a strong movement of Open Source. They often try to wholly leave the accustomed market practices and develop new ones, for example in the forms of voluntary donations. Judging by this movement's popularity this way doesn't neccessary mean losses, as is somtimes depicted.

Two possible scenarios can be envisioned for the attitudes of the creative industries towards piracy. It is possible that the current course of action will be continued, which would lead to an endless "arms race" between the industry and the pirates, where every newly released technical protection or legal act leads to the invention of a method to break that protection or to circumvent the law. As the existence of piracy is absolutely justified by economic reasons, as shown above, this can only end if the death penalty being applied to copyright infringers, which will hopefully never happen in any civilized country. The other option would be the change in the attitude towards piracy, when all affected parties acknowledge its existence as a fact of life, analyze the positive effect stemming from free information flow, and develop business models which would allow for a fair compensation of creative works, despite - or even thanks to - the free availability. Only time will show which of these paths will be chosen.