I'm researching financial loss for companies when their products are being pirated, and the effect massive loads of illegal downloads can have on a single company. This excludes the obvious worst case scenarios. I'm looking for more information on inner workings against piracy. I can't go assuming the shelf price of a product is a constant, since I doubt the value of a product to a company is nearly as high as the price tag. I do not even know where piracy "strikes a blow" against an organization seeking profit. At one point I spoke to a programmer and he told me that piracy is not of much concern to his department, and it was the problem of... I think it was marketing. I have gone to several P2P sites used for piracy and have seen very expensive software have enough downloads to make me wonder why business even continues for some organizations! Part of me wonders: How bad can piracy really be? Is it such a threat as to take down an entire business, or is it just an overhyped moral issue? PLEASE NOTE: With some contrast to the above question, I want to stress that this topic is not meant to spark posts asserting subjective views on pro or anti-piracy. I really do not want to start some political debate on the implied "morality" of the subject! I'm just an undergrad trying to understand things. I just want to know... What determines lost profit from piracy in the software industry, and where is this effect had if we just look at one company? I'm still a student, so please speak to me like one. I have little idea on anything about it, really. [looksaround]

Quote: Original post by zyrolasting
I have gone to several P2P sites and viewed the torrent swarms and have seen very expensive software have enough downloads to make me wonder why business even continues for some organizations! Part of me wonders how bad piracy can really be.

A lot of that very expensive software is targeted at companies. Companies aren't going to want to download their software off of The Pirate Bay. Beyond the fact that you're likely to get a trojan or virus doing so, you won't get technical support on those products. If the company producing the software notices that you seem to be heavily using their software without paying for licenses, you're likely to get slapped with a costly lawsuit. All being said and done, its easier for a mid-to-large company to just shell out the money and avoid worrying about the problem.

As for less expensive software like games? People like me buy the software because:
1) We want to support the company
2) We want boxes/cases/physical disks/manuals
3) We don't want to bother with torrents, and all the problems that software piracy entails (time invested in finding a good copy, malware, no updates, no support)

I'm at the point in my life where I don't have a problem dropping $30 to get a known good copy of a game, with support, immediately. I suspect a lot of people are like me.

Quote: Original post by zyrolasting
I just want to know... What determines lost profit from piracy in the software industry, and where is this effect had if we just look at one company? I'm still a student, so please speak to me like one. I have little idea on anything about it, really. [looksaround]

I get the feeling that a lot of companies tend to computer it as: LostSales = NumPiratedCopies * Price, which is incorrect for a host of obvious reasons. But it produces a big number that makes Congressment write nice juicy laws protecting your business.

Since forums like this one exist, I never needed support from a company on one of their products. That's just me. As for supporting the company, just for the sake of argument, let's remember that piracy can assist market shares. References here and here.

Quote: I suspect a lot of people are like me.

The Swedish would disagree. I bring up the Sweidsh for the sake of keeping the line of thinking in this topic on a global scope. Everyone with an internet connection can nab a copy of Autodesk Maya or collect the entire Simpsons series.

Not trying to dock down your points here... I have no problem with them, and I'm not trying to encourage anything pro-piracy (Covering my a** from the mods. [smile]). I just don't understand how it applies to the "world at war" over piracy. Could you elaborate further? I mean, is piracy at a point where it's all subjective?

[Edited by - zyrolasting on October 6, 2009 4:49:24 PM]

I don't think you can group all companies who sell software together. Autodesk is a great example of a company whose products are widely pirated but as a result completely dominate the market because the students that pirate their software can't use anything else when they enter the workforce. So their income loss from piracy is essentially negative. There are plenty of other good examples, e.g. Adobe with Photoshop and The MathWorks with Matlab. I think they recapture part of that market by offering relatively low priced versions, but on the whole they are not very affected by individual piracy, making their money back from businesses. Microsoft's Windows products are not very affected either - even aside from the lock-in factor, it's hard to buy a computer without Windows because of their deals with hardware manufacturers. Microsoft has shown time and again they willingly pay for market share (see Bing cashback).

Game companies, on the other hand, the situation is a whole lot murkier. Piracy may increase audiences but the whole business lock-in structure isn't there. I'm not sure you'll be able to find a one-size-fits-all explanation and remedy for the effect of piracy on the games industry. I don't think that even exists. DRM's bad because it drives away customers, but some companies will not release anything without it. No DRM means no protection, and you're basing your success on the lawfulness of the people who want to play your game, but some customers won't buy anything with it. There might be an optimal medium in there somewhere, but there will always be a large percentage of people who don't like it.

As for me, well I'm lucky enough to be a hobbyist, and life is simple and good on the open source side of life. Open source games have a 0% piracy rate!

Quote: Autodesk is a great example of a company whose products are widely pirated but as a result completely dominate the market because the students that pirate their software can't use anything else when they enter the workforce. So their income loss from piracy is essentially negative.

That's really neat, but by "can't use anything else", do you mean the student does not feel obligated to learn anything else, or the company is so renowned that it's software is effectively the sole standard for the relevant field and the student feels obligated to go with the flow?

But for Autodesk... It looks like they have multiple personalities on the subject...

Autodesk - Anti-Piracy

Autodesk - Submissive/Struggling

Autodesk - Pirates?

Do you have a reference for your information I can look at? I'm not seeing it on google. (In fact, the above links were found instead.)

Quote: There might be an optimal medium in there somewhere

Probably just creativity. I've had a lot of fun messing with cryptography in completely non-standard fashions. [smile]

EDIT: I got done speaking to a good friend of mine who makes the point that piracy runs on a communist mindset, and the prices of products are completely judged by the people. This can make a "fixed value" for the product. The price will hover around what people will pay, even if they don't really like it. He takes Econ, and I don't, so I did not know how to respond. I can see some logic to it, but something does not feel right about it. From what you've told me, there are workarounds to piracy but there is still an economic danger since communism doesn't really have a reputation of... you know, working.

[Edited by - zyrolasting on October 6, 2009 7:30:03 PM]

Quote: Original post by zyrolasting
Since forums like this one exist, I never needed support from a company on one of their products. That's just me.

Your needs are different from a large company's needs. I'm guessing that forums may cut it for small-to-medium businesses, but huge companies love support contracts. There's a reason that Red Hat can stay in business even though you can download Linux for free. You wouldn't believe the kind of money my last job paid to have a direct support line to the developers of the products we were using.

Quote: Original post by zyrolasting
As for supporting the company, just for the sake of argument, let's remember that piracy can assist market shares. References here and here.

Yes, for certain types of products, piracy acts as marketing and training, and can actually support the product. There's huge amounts of amateur 3d artists learning on pirated copies of Maya, which will translate to sales when those amateur artists turn into professionals.

Quote: Original post by zyrolasting
The Swedish would disagree. I bring up the Sweidsh for the sake of keeping the line of thinking in this topic on a global scope. Everyone with an internet connection can nab a copy of Autodesk Maya or collect the entire Simpsons series.

The Pirate Party doesn't really support free-for-all pirating, though. They promote removing fines for non-commercial use, so you can pirate your copy of Maya, but EA can still get hit by a lawsuit. They also support dialing back the fairly draconian laws that have sprung up to protect the interests of business based solely on intellectual property. As with any political party, the reasons behind support can be varied and nuanced.

For example, I support slapping down the RIAA and MPAA, and making it significantly harder, if not impossible, for them to sue college students into oblivion. That doesn't mean I support copyright infringement, and it doesn't mean I'm unwilling to pay for music and movies.

Quote: Original post by zyrolasting
Not trying to dock down your points here... I have no problem with them, and I'm not trying to encourage anything pro-piracy (Covering my a** from the mods. [smile]).

Don't worry so much about it. I'm not worried about you knocking down my points. After all, that's the whole point of a debate. People who are afraid of dissenting opinions should probably not be posting to internet forums.

Quote: Original post by zyrolasting
I just don't understand how it applies to the "world at war" over piracy. Could you elaborate further? I mean, is piracy at a point where it's all subjective?

I'm afraid I don't know exactly what you're asking. I'd think piracy, and the relative morality thereof, does have some subjectivity. The main point in copyright infringement is that you're not depriving the creator of anything tangible. At best you are denying them of potential revenue.

Speaking from the US point of view, copyright is justified via the US Constitution as a temporary measure to promote science and art. What this tells me is that copyright, as originally envisioned, is not a natural right, and is applicable only to the degree that it encourages the creation of new works.

I think, as a result, that many people have different views on the morality of copyright infringement. I personally think that it is wrong, but not morally equivalent to stealing. But I also feel that, while not morally equivalent to stealing, that copyright infringement is wrong. I also feel that 70-year copyright durations are morally wrong, however. I think that these feelings are closer to the views of the Pirate Party than they are to the RIAA's. ;)

It's nice to hear a non-biased view on the subject. It makes the entire thing seem less worrisome. [smile]

In fact, your post seems to advocate that piracy's impact on companies with that "lock-in" almost seems excusable despite moral dilemmas. It seems perfectly logical to me to download several professional grade apps for educational purposes and purchase licenses on entering an industry. But wouldn't a massive amount of piracy cause an economic apocalypse if of a high enough magnitude anyway?

I have many more questions, but I think they would best be answered by me formally studying business as a whole. Fortunately I have a market guide in storage...

Did you catch my last edit there about my conversation with my friend? Is that also up in the air?

Quote: Original post by zyrolasting
Did you catch my last edit there about my conversation with my friend? Is that also up in the air?

Quote: Original post by zyrolasting
I got done speaking to a good friend of mine who makes the point that piracy runs on a communist mindset, and the prices of products are completely judged by the people. This can make a "fixed value" for the product. The price will hover around what people will pay, even if they don't really like it. He takes Econ, and I don't, so I did not know how to respond. I can see some logic to it, but something does not feel right about it. From what you've told me, there are workarounds to piracy but there is still an economic danger since communism doesn't really have a reputation of... you know, working.

I'd disagree with your friend. Citing from Wikipedia on communism:

Quote:
Communism is a family of economic and political ideas and social movements related to the establishment of an egalitarian, classless and stateless society based on common ownership and control of the means of production and property in general, as well as the name given to such a society.

From a high-level point of view, many advocates of piracy do claim that culture is a common shared experience that they have a right to, and that could be likened to "common ownership and control of ... property." However, that's a rather superficial analysis.

Your friend's claims about the price of products being judged by the people isn't quite accurate. In capitalism, the price of products are judged by people. If you charge $x,then only people who feel that $x is fair will buy your product. If $x is too high, then no-one will buy your product. If $x is too low, then your product is not profitable and you will probably go out of business.

The difference here is that prices are not fixed by a central authority, as it would be in communism. Last time I checked, there was no cabal of pirates trying to fix prices. Most people who pirate games have simply made individual decisions about how much they are willing to pay for a game. That most are unwilling to spend money when there are free alternatives does not make the decision communist or socialist.

The problem with creative works, economically, is that they are goods with large up-front fixed costs but trivially low marginal costs. Also, the very nature of digital products means that anyone has the ability to reproduce the product. Generally speaking, without any sort of legal restrictions, the price of goods in this market would tend to zero, because the marginal cost here is zero.

So I'd say that piracy is the natural result of trying to push the price of a good with no marginal cost and near-infinite reproduction above zero in a capitalist environment.


Edit: Keep in mind that this is based on my fairly low-level Econ 101 knowledge. I'm a software developer, not an economist. ;)

Quote: Original post by Rycross
The problem with creative works, economically, is that they are goods with large up-front fixed costs but trivially low marginal costs. Also, the very nature of digital products means that anyone has the ability to reproduce the product. Generally speaking, without any sort of legal restrictions, the price of goods in this market would tend to zero, because the marginal cost here is zero.

That is the crux of the issue, yes.

Looking over to another industry, consider prescription medicines.

They may require significant investments in research, development, testing, and government regulations. Once the formulas are created, there is a large initial cost for equipment to manufacture them. After these big initial expenses, the final cost of goods is very small. You can get these physical objects very cheaply, as evidenced by the daily spam. However, those cheap objects are may or may not be official, and have not gone through the proper channels, and may be a bad product disguised to look like the real thing.

There are government regulations in place to protect those who paid the initial costs. There are also government regulations in place to protect the public from themselves (such as buying drugs mail-order from a 3rd-world country) and from others (by requiring verifiable trail from the manufacturer to the pharmacy).




Similar to software, there are significant costs in researching, developing, and testing the software. There is a large cost to manufacturing and distributing the software if done in boxes and physical stores.

Unlike medicines, a bad dose of software is unlikely to kill you, although it can cost businesses a fortune in removing malware. It is unlikely that we will see government intervention on those grounds.

There are incentives to protect the content manufacturer's revenue stream. Economically it is necessary to protect revenue streams in order for additional products to be created and released. If you don't buy that argument, governments get tax money from sales, so they want to keep sales as high as possible.


I believe we will continue to see additional government regulations until a stable equilibrium is reached. We are not there yet, and in some areas we have gone too far. Regulations of software have stabilized relative to where they were 30 years ago, and as far as I have heard about before that.

Quote: Original post by zyrolasting
I just want to know... What determines lost profit from piracy in the software industry, and where is this effect had if we just look at one company? I'm still a student, so please speak to me like one. I have little idea on anything about it, really.

It is different for every company.

You are a student, but you should pay more attention to how you use the words "profit" and "revenue". Every sale generates revenue, but you don't have profit until after your costs have been recuperated. Lost profit and lost revenue are very different things.



I look at the number of active players using our in-game telemetry, and compare it to the number of sales. When we sell 2M units and there are 3M active users, we have at least 1M in pirated copies that should have paid. Because they are obviously using the product and continuing to cost us resources in online support, I'm counting them as lost revenue.


Note that not all users show up in telemetry, and that the telemetry changes over time. I would expect that just after the sale we have about 90% show up, dropping to 50% over 2-3 months, and dropping out to a long tail that continues indefinitely.

In a few particular regions we have many times more active users than we have sales. In one recent game, certain parts of Eastern Europe had about 30X more active customers than we had total sales. If we assume the same telemetry numbers as the low-piracy regions it is easy to create a lost sales estimate.

I am a student too, so I don't have any experience with business but I have a question for you frob... how are you measuring the amount of players? I hope you aren't using the number of unique IPs, because in Europe most people have dynamic IP, which can really distort such numbers (when your IP changes every few hours).