Roudi said:
Publishers have got to stop seeing every pirated copy of their book as a lost sale.
This point is so important, I feel the need to bring it up again. The problem is that publishers who do this are comparing apples to oranges, not apples to apples, as I'll explain below.
Simple supply-demand economics tells you that as price for an item decreases, demand for that item will increase until it reaches saturation; thus at a price of "zero," the demand is at saturation - everyone who wants a copy will get one (the, "if it's free, there's a line" theory).
Pirated works carry some non-dollar costs with them, however, so their cost is not quite truly zero - worries about illegality and guilt, for instance, may deter someone from grabbing a pirated copy (I am going to go out on a limb and state that the "monetary value" of this is less than one cent - I think a product that costs one cent and is legal will have less people grab it than one that is free and illegal). So, assuming that they are released in the same distribution channels (i.e., to the same audience), a "free and legal" product should have a larger number of copies distributed than a "free and illegal" product when it reaches saturation.
The point most publishers - and the RIAA/MPAA seem to miss, is that as the price moves away from zero, demand WILL decrease. Plotting that demand curve is of course tricky, but my guess is that even a price of "$0.01 and legal" will shift the demand curve to a lower number than "free but illegal" because there is some time cost and inconvenience cost even to pay $0.01. And of course, as the price continues to climb, the demand curve continues to drop.
The reality, however, is that the distribution channels are not equally populated... and in fact by nature cannot be (P2P networks, the most famous of which is Kazaa, for example, have no mechanism by which someone can pay for a download, hence, it is impossible to distribute a "pay for this and own it legally" PDF in the exact same channels as a "free but illegal" one). Furthermore, different populations inhabit each distribution channel - some of them cross over, I am sure, but I would hazard a guess that for the most part, those who purchase things over legal channels rarely frequent pirate channels and the vast majority of those who pirate things rarely purchase things via legal channels (obviously, some of them do, because you have to have at least one "seed copy" purchased through legitimate channels in order to pirate it, but my guess is that it's probably more or less the same small dedicated group of "seed providers" that crosses over - most of the downloaders don't).
I say this for the simple reason that in essence, the two channels are offering the same product for a different price... i.e., the product is competing with itself... one version is "for pay and legal" and the other version is "for free and illegal."
Obviously, in strict economic terms, for some people there must be some perceived benefit to "legal" because otherwise, legal channels would only see a few sales (the "seed copies") before everyone chose the free copies. So we know that for some consumers, "legal" is demonstrably worth the $1 or $5 - or $35 difference - these are the customers who choose the "for pay and legal" over the "for free and illegal."
However, the million-dollar question remains unanswered... "how much of the demand curve for the 'pay and legal' copy was eaten up by competition from the 'free and illegal' copy?"
And it is here that we understand the logical fallacy that publishers are running into:
PREMISE: At a given cost point, there is a given demand for a product.
PREMISE: As the price point increases, demand will decrease, and vice versa.
PREMISE: A given cost point can be expressed as a function of Monetary Price Point and Liability Price Point, where Monetary Price Point is the cost in money of obtaining the product and Liability Price Point is the potential liability that obtaining the product exposes the receiver to.
DEFINITION: A "for pay and legal" copy of a Product has a Monetary Price Point A and Liability Price Point of zero (since legally obtaining a copy exposes you to zero liability).
DEFINITION: A "for free but illegal" (a.k.a. "pirated") copy of a Product has a Monetary Price Point zero and Liability Price Point of B (since illegally obtaining a copy exposes you to some amount of liability).
ASSUMPTION: For the purposes of this exercise, we will assume that only two versions of the product are available - "for pay and legal" and "for free but illegal."
CONCLUSION ONE: For the "for pay and legal" product, at Monetary Price Point A, there are X number of people who will demand a product. X(1) of them will purchase it legally. X - X(1) of them will decide that Monetary Price Point A is greater than Liability Price Point B and thus will choose the product they perceive as less "expensive" (paying B in assumed liability rather than A in money).
CONCLUSION TWO: For the "for free but illegal" product, at Liability Price Point B, there are Y number of people who will demand the product. Y(1) of them will download it and assume the liability. Y - Y(1) of them will decide that Monetary Price Point A is less than Liability Price Point B and thus will choose to purchase the (legal version of) product instead.
CONCLUSION THREE: Total downloads are equal to X(1) plus Y(1).
NOTE: Some crossover must exist between Y(1) and X - X(1). Some crossover also exists between X(1) and Y - Y(1). We know this since the total demand is NOT the sum of the demand at each of the price points. For a quick example, if you personally need one and only one of something and are willing to it something for $5, you're probably also willing to buy it for $2 - which means your personal demand is still only for one item, not for one at $5 and another at $2 for a total of two items.
COMMON LOGICAL FALLACY: Lost sales are equal to Y(1). This is absolutely incorrect. Lost sales are equal to X - X(1), period.
Y(1) tells us only that X - X(1) must be less than Y(1). In English, that just means that the number of Lost Sales to piracy can be no more than the total number of pirated copies (this seems somewhat self-evident).
(END OF FORMAL LOGIC ARGUMENTS)
Here's the problem with the logical fallacy - you're looking at
two different portions of the demand curve and calling each portion the "split" of the curve in each distribution channel (legal vs pirate). You can't do it that way... you should be looking at the
same portion of the demand curve split into the "legal" and "pirate" channels to calculate "lost sales." The only information you can logically derive by looking at the legal and pirate numbers is that Lost Sales are less than or equal to the pirated downloads.
How MUCH difference you think there is between the demand at Price Point A and Price Point B is a matter for debate... though my guess is that the demand difference is several multiples, if not an order of magnitude of difference. In other words, I happen to think that
most pirated copies represent not lost sales, but instead reflect the natural swelling of the demand curve as perceived cost decreases and are simply the difference in demand between the two price points.
For the record, it is my hypothesis that more people perceive Liability Price Point B as less than Monetary Price Point A, and thus the natural demand for copies at Price Point B is higher than the demand for copies at Price Point A... and thus there are more pirated copies than lost sales. I also hypothesize that due to the comparatively low monetary cost of most PDFs, the Perceived Liability Cost for those who choose to pirate must be nearly indistinguishable from 0 to have any piracy whatsoever. Furthermore, if that cost is nearly indistinguishable from zero, it is almost impossible for ANY monetary price other than "free" to compete with that. In fact, I'll take that hypothesis further and say outright that I believe that the monetary price of a good has, essentially,
zero effect on the demand for pirated copies. Whether you price your stuff at $5 or $50, you'd probably see the same number of pirated copies.
Furthermore, I think with stuff so cheap... and still pirated anyway, you can't be seeing much in the way of lost sales as anyone who places any sort of value on legality over liability will pay the cheap asking price (as a side note, by extension, I think this applies to the RIAA... if someone's not going to pay less than a buck per song, clearly, they aren't going to pay money for it at all - the RIAA has apparently figured this out; their lawsuits are clearly trying to increse the Perceived Liability Cost but I don't think it's having much effect). In short, the honest people will be honest and pay you, and the "pirates" will take it if they can get it without paying you, but you can't find a way to turn the "pirates" into paying customers because they simply don't value your product enough (or in many cases, at all).
Long-winded post, and no way to "wrap it up" satisfactorily, but there you have it in terms hopefully even a Pointy-Haired Boss can understand. total illegal downloads are NOT equal to total lost sales, period, and I feel based on the evidence, a pretty good case can be made (due to piracy of even ultra-low-cost stuff) that there's a good chance that not only do total illegal downloads not equal total lost sales, illegal downloads probably do not equal ANY lost sales.
Disappointing to publishers/RIAA who see all these pirated copies and think, "hey, look, there's an untapped market that wants our stuff! How can we sell to them?" (and we'll give publishers the doubt and assume they truly do mean well and are jsut tyring to serve a broader customer base - no snide remarks on their 'true hidden greedy rat bastard' motivations, please) ... because the pirates are not interested in buying. They're just interested in a free lunch... they flat out won't buy no matter what you do. They're not potential customers... they're a mirage, and the farther and harder you chase them, the more you're throwing good money after bad.
--The Sigil
