• i. Sub-question Every minute, people are pirating and there is no stopping that. If people see 0.99 for a song on iTunes and 0.00 for a song on a torrent site, I don't see anything stopping majority of people from going to that torrent site in the same way I don't see anything stopping them from going to a library or asking a friend to borrow a book instead of buying the book in Borders or taping a song off the radio. In particular, there's betamax. It was thought illegal until this case or something.

• (Anyway that's about legality not economic benefit/loss. Also betamax is more like is or positive rather than should or normative, I guess.)

• So, why don't companies, like the RIAA or MPAA, release their songs, movies or ebooks for free but put in ads kind of like how cable TV was/is done? In my opinion, companies incur a huge opportunity cost

• ii. Sub-question What I guess is that they think they can actually stop piracy with things like DRM or scaring people into believing that they will be caught even though such is unlikely so as to keep making money on iTunes, Netflix or whatever.

• However, I read that in a documentary, Chairman and CEO of the Motion Picture Association of America (MPAA) Glickman 'concedes that piracy will never be stopped, but states that they will try to make it as difficult and tedious as possible.'

• So he ADMITS piracy cannot be stopped, which makes my guess wrong. So what, are the RIAA and MPAA actually irrational?

1. Question: What are some economic concepts or theories involved in file sharing/piracy besides opportunity cost and free rider problem?

Note:

1. This can also extend to games, apps, etc.

2. To clarify, I don't mean to ask why songs, movies and ebooks are not given ONLY for free. They should continue to be given for payment since there will still be demand. If people want to buy CDs, DVDs or ebooks, attend concerts or go to cinema before songs, movies and ebooks would be given free, they would likely not want to do less if ever songs, movies and ebooks would be given free, I think because it seems that if people like the cinema or concert experience, don't have Internet access or like smelling books, they will continue to purchase as much.

3. My question is not 'Why do people go to netflix instead of torrent?', a question focused on the consumers given the law and the companies' decisions. My question is instead 'Why aren't songs, movies or ebooks given for free?', a question focused on the law and the companies' decisions given, well:

Pirate Coelho's 'Sharing is part of the human condition. A person who does not share is not only selfish, but bitter and alone.'

4. Btw I just discovered artificial scarcity.

• Why does a restaurant/movie theater/football stadium charge money instead of putting in ads? – Giskard Jul 1 '15 at 9:09
• Either I don't understand what you mean in Note 3 (this seems likely) or I don't understand why your Note does not answer your question. – Giskard Jul 1 '15 at 9:17
• "They can earn more if they charge for food instead of giving it away for free with ads." Yes, but why does this argument not hold everywhere? – Giskard Jul 1 '15 at 9:22
• I produce e-books. Technically, there’s no good way to bundle ads with e-books. People can read the book years in the future, and disconnected from the internet (after the initial download onto an e-reader). How is the ad placed, and what advertiser would pay for it? Newspapers/magazines have ads, but those publications are normally read soon after publication. It’s only with the rise of ebook subscriptions (monthly borrowing model) that ad support might work. – Brian Romanchuk Sep 17 at 16:48

It's called a Principal-Agent Conflict.

The RIAA/MPAA act as agents on behalf of the people who actually produce content (and consequently end-consumer value).

To maintain relevance to their principals', the RIAA/MPAA must signal value to them (i.e. claim loudly and repeatedly that they do something good for them [regardless of the validity of that claim]).

Firstly, this signaling is demonstrably an example of the Principal-Agent problem, in that it diverts resources away from actually advancing the principals' interests, but more so in that it creates a perverse incentive for lobbying groups to fight imaginary fires.

The impact of piracy on the broad economy is believed to be near zero, so IP laws are effectively just rent-seeking $$^{[2]}$$ anyway.

Whether or not that particular type of rent-seeking is always a drain on the broad economy (in that it distorts markets producing deadweight loss in excess of the externalities corrected) is up for discussion, though it is known to be possible (insofar as the existence of an optimal tax [or government induced market distortion] is necessarilyy proof of the existence of an excessive tax).

• Do you really believe that without a principal agent problem (without RIAA/MPAA), music and movies would be handed out for free over the internet? – FooBar Jul 3 '15 at 10:18
• I believe they would practice price discrimination better, and possibly release things for free eventually. – Jason Nichols Jul 3 '15 at 12:30
• To clarify I mean something like the Hardcover/softcover paradigm, maybe releasing a high quality for some price, a regular quality for less, and finally at some later time a low quality for free. – Jason Nichols Jul 3 '15 at 12:32
• I really like this answer. Quite well referenced as well. I do think @FooBar has a point. This can't possibly be the whole answer but I don't doubt it is at least a contributing factor. – Jamzy Jul 7 '15 at 2:10
• Evidence in support: small indie labels have begun releasing their albums on vinyl bundled with a code to download the album, in effect practicing price discrimination. Large record labels misinterpreted this as a simple resurgence of vinyl and are re-releasing older albums on vinyl. – Owen Sechrist Nov 23 '15 at 12:46

The simple answer is that they don't think they would make as much money.

In many countries illegally downloading music or movies is getting harder and harder. The recording industry has achieved this by persuading governments to instruct the ISPs to block torrent sites, torrent proxy sites and sites that list proxy sites completely so no one can access them.

Also, a lot of people who legally download music/movies do it more because of the convenience despite the financial disadvantage. If you own an iphone or ipad, for example, it is much simpler to download what you want from itunes or subscribe to netflix than to find a way to get it illegally.

Finally, your example of cable companies also seems a little odd as you always pay a subscription fee as well as having to watch the ads.

• @BCLC such as Germany, see torrentfreak.com/… – Giskard Jul 1 '15 at 9:21
• @BCLC 28 countries listed at en.wikipedia.org/wiki/… . – felipa Jul 1 '15 at 9:22
• @BCLC 2. I mean "illegally". The point is that they can often easily be persuaded to move to legal means by making the legal means more convenient. For example by itunes, netflix etc. – felipa Jul 1 '15 at 9:23
• @BCLC The relevance is that the recording industry is not obviously losing the piracy battle. The basis of the OP's question is that they are. – felipa Jul 1 '15 at 9:27
• I find it much simpler and more convenient to download stuff through torrents than through iTunes or Netflix. – Kenny LJ Jul 5 '15 at 21:22

What I don't see here is an economic model, however rudimentary, that will allow us not to definitely answer the question but to clarify what are the critical issues. So here's one (totally rudimentary):

Consider a work of digitized and mass-commercialized content $$x$$, like a song, a movie, or a book. Assume that in the short run, demand (desire) for it is fixed (unknown but presumaby estimable by past experience), $$Q_T(x) = \bar Q_x$$.

The agent that can trade $$x$$ contemplates two options:

Scenario $$A$$ : sell $$x$$ at price $$p_x$$ and incur costs $$C_{pir} > 0$$ to fight piracy.

Scenario $$B$$ : offer $$x$$ for free subject to the consumer being exposed to advertising, while in parallel sell $$x$$ at the same price $$p_x$$ free of any advertising. Assume that under scenario $$B$$, pirated copies will still be offered, touting that they are free of cost and free of advertisement also. But we do not fight piracy here.

For scenario $$A$$, denote $$Q_{p,A}$$ quantity sold, $$Q_{pir,A}$$ quantity acquired through piracy by the consumers.

For scenario $$B$$, denote $$Q_{p,B}$$ quantity sold, $$Q_{f,B}$$ quantity acquired from the producer for free and $$Q_{pir,B}$$ quantity acquired through piracy. Denote $$p_a$$ the advertising revenue per copy.

Under the assumption that total desire for $$x$$ s fixed, we have

$$\bar Q_x = Q_{p,A} + Q_{A,pir} = Q_{p,B} + Q_{f,B} + Q_{pir,B} \,.\tag{1}$$

To evaluate financially the two scenarios, note that production cost has been already incurred, so it is sunk and out of economic consideration. Abstract from taxes and also from intermediaries. Then profits are:

$$\pi_A = p_xQ_{p,A} - C_{pir} \tag{2}$$

$$\pi_B = p_xQ_{p,B} + p_aQ_{f,B} \tag{3}$$

The purely economic argument for scenario A is that by fighting piracy we force more consumers to buy the product, than "otherwise". But the "otherwise" in this argument is not scenario $$B$$: it is the "we do not fight piracy but we also do not offer $$x$$ for free+ads" alternative. But we do not care about this scenario here. Still, let's accept the possibility that under scenario $$B$$, perhaps some consumers that under Scenario A would have paid for $$x$$, now they opt to acquire it for free and suffer through the advertisements. So let's accept for this reason, that

$$Q_{p,B} \leq Q_{p,A}.$$

To go for scenario $$B$$ we want

$$\pi_B > \pi_A \implies p_xQ_{p,B} + p_aQ_{f,B} > p_xQ_{p,A} - C_{pir}$$

$$\implies C_{pir} + p_aQ_{f,B} > p_x[Q_{p,A} - Q_{p,B}] \tag{4}$$

Condition $$(4)$$ gives us the factors that we should quantify and estimate:

1. How much fighting piracy costs?
2. How large will be the reduction in quantity sold when it is offered side-by-side with the option "free+ads"?
3. What kind of revenue from ads can we expect to have?

Note that if fighting privacy costs a lot, and the reduction in quantity sold is not expected to be large, it may be the case that even a modest advertising revenue would be enough to make Scenario $$B$$ more profitable.

But question 3) also reveals that the picture painted above is for those artists whose popularity can more or less guarantee that advertisers will be willing to pay in order to be advertised next to their creations.

But even for them, we should not underestimate the ethical push-back (however hypocritical it may appear), for linking, actually bundling, advertisement and art (even fully commercialized art) so closely. Even consumers may be repelled by it, which may put the fame, and so also the commercial brand, of the artist in serious jeopardy.

And in fact, it is my suspicion that this is one of the main reasons why the scheme contemplated by the OP has not become the norm, at least not yet: businesses believe that consumers don't want to feel that their art consumption is so much like any other consumption (because, hey, it isn't). Assuming that this is the case, is this irrational from the part of consumers? No. What goes into my utility function and increases/decreases my utility is the last shelter of individual choice. Rationality comes after that.

• Thanks Alecos Papadopoulos! I didn't really full analyse the maths yet, but for the non-maths parts... – BCLC Aug 13 at 21:52
• Follow-up 1: About the penultimate paragraph ('But even for them, we should not underestimate the ethical push-back...'), wait, are you saying consumers might not want ads? If not, then what do you mean? Follow-up 2: If so, then why can't they have the option to pay for ad-free? – BCLC Aug 13 at 21:54
• Follow-ups 3 and 4: About the last paragraph, you say 'businesses believe that consumers don't want to feel that their art consumption is so much like any other consumption' : Follow-up 3: What exactly do you mean by this? Follow-up 4: And where does this fit in the condition (4)? – BCLC Aug 13 at 21:55
• @BCLC 1) Yes consumers might not want ads especially related to art products. 2) Even if they have the option to pay for ad-free, they may be turned off to see their cherished art products being so blatantly commercialized. 3) The meaning is the same as in 2). 4) That demand may be significantly reduced overall, if such commercialization blemishes the artistic credentials of the creator. – Alecos Papadopoulos Aug 14 at 0:47
• thanks! 'they may be turned off to see their cherished art products being so blatantly commercialized' --> ok what does this mean then? what's commercialised about an ad-free purchase? i don't really get it. please give an example maybe? – BCLC Aug 14 at 3:39

That causes a problem. Revenue from ads relies on giving many ads to many people. Each time you listen to a song the provider needs to be able to provide a new ad. If you download a song or book with ads then those ads are fixed. So you might listen to it 100 times but no advertiser will pay 100x as much because it is not valuable to give the same ad to the same person many times.

Secondly you would need some added security on the files to make it hard to simply remove the ads. That is easily as difficult and expensive as DRM anyway.

The third problem is ads are annoying. I think for many people an ad would be more incentive to pirate than a small cost. Early music DRM eventually failed (in part) because it was to motivate piracy in itself. Xkcd had a nice comic on that idea.

And that leads to the forth point. Much of economics is about equilibria and long run expectation. In reality everything takes time and big bold change is even harder to start. Initially music was DRM protected but they eventually realised most people will pay 99c to avoid the hassle of piracy, but will pirate to avoid DRM Nothing changed in the economics, it just took time for the industry to realise that was a better way yo do things. There may well be a book publisher out there working on an ad supported eReader library, but it will take time.

To put the price of a song in context:

The US median hourly wage is \$17.091, the median song length of the top 100 iTunes songs is 223 seconds2. So 50% of US workers earn \$1.06 in the time it takes to play a song.

• I agree with the economics of your reasoning but it is worth pointing out that there were books in the 20th century with ads in them. These ad spaces can obviously not be resold. Here is a reference on NPR: npr.org/templates/story/story.php?storyId=16804462 I don't think it gives much additional credibility to the story but I own such a book myself. In my book the ad is not annoying because you can just turn the page. Also it is on old school ad with a lot of design and obviously no flashing. – Giskard Jul 2 '15 at 8:36
• @denesp fantastic observation! That's really interesting, especially the bit about Dr Spock books starting it - those would have been ads that were really well targeted and so command a very high price (baby products in a Dr Spock book would be presumed to have a massive "click through rate"). Worth noting, however, that the books still had to be bought, so the adds didn't cover the full costs. My point (which I know you weren't disagreeing with) is not that an advertiser would pay, but that the revenue is much less than in streaming services. – Korone Jul 2 '15 at 8:47
• 1, 2, 3 I am not thinking ads be included in the files. Likely someone will crack (or w/e is the term) those files to remove the ads from them and then people will just go to those torrent sites. I am thinking ads only when people go to the site to download kind of like YouTube. 4 'most people will pay 99c to avoid the hassle of piracy' --> MOST? in some parts of the world 99c is one meal. If you mean Apple, people can always jailbreak 5 lol xkcd.com/488 – BCLC Jul 12 '15 at 12:46
• 4 cont So in short you're saying songs, movies and books aren't given away music free to download (accompanying ads in the download site similar to TPB in the sense that there is no practical difference between them) because 'most people will pay 99c to avoid the hassle of piracy' ? So like why? Why will most people do that? – BCLC Jul 12 '15 at 12:52
• @BCLC indeed for some 99c is a lot, but they are not likely to be useful to advertisers. If you target audience has sufficient disposable income to attract advertisers then 99c is not a lot of money. – Korone Jul 13 '15 at 11:06

Isn't this mostly an issue of pricing at a level where most people feel it's worth paying to avoid the hassle (and potential legal issues) of piracy?

Take music singles for example: when I was a teenager (late 90's), a CD single cost £3.99 in the UK. When it became possible to download songs for free that someone else had ripped and uploaded, many people started doing that. When iTunes came along and you could legitimately buy the same song for £0.99 (later £0.79 I believe - it may have gone up again since), I had no objection to paying that amount, and managing an iTunes library was all-round easier than random mp3 files on my HDD.

Nowadays I use Spotify, and £9.99 a month seems reasonable considering I stream music for 6+ hours a day at work. But I understand the industry is rallying against Spotify because they aren't getting enough royalties from it (boo hoo).

The issue I have today is that the same price correction has yet to happen for movies and eBooks which are, IMO, way too expensive in digital form. Take Kindle books for example, a new release can still cost £6 or £7 - the same price I could get the printed copy from my local superstore. How can they possibly justify charging the same amount when it simply cannot cost them as much for a digital copy as the printed media?

Movies are even worse: services like Google Play, Apple and Amazon charge (I believe) £5 - 7 to rent an HD movie for 48 hours. In a lot of cases I could buy a physical version of the same film from a shop for £10 that I can play as often as I like. A one-off digital consumption should be significantly cheaper than an unlimited-use physical version.

When movie studios and book publishers realise that their products no longer attract the same premiums they used to, and adjust prices accordingly, I think the number of people prepared to pirate will be pretty small, and limited to those people who will always take free over paid-for, even if there is effort/risk involved. If eBooks were £2-3, or movies £1.99 to rent for 24 hours, I'd probably pay that several times if I wanted to re-watch the film later.

• Thanks Will Appleby! So to clarify your answer is that movies and books don't yet have an analogue of Spotify, and the reason is in your first sentence? – BCLC Jul 31 '18 at 12:57
• Indeed. My recollection isn't perfect but I am sure there was a fairly significant price correction in the music industry when digital music went mainstream (and later with Spotify). This hasn't happened with digital movies and books, or least hasn't gone far enough. Movie studios want to have their cake (inflated digital prices) and eat it (no piracy). – Will Appleby Jul 31 '18 at 13:17
• PLEASE INCLUDE LAST SENTENCE IN YOUR ANSWER. THAT IS THE MOST BRILLIANT EXPLANATION I'VE HEARD OF FILE SHARING, PIRACY, ETC IN THE LAST 8.5 YEARS THAT I'VE BEEN FOLLOWING THIS TOPIC (It all started with a topic paper in a university course in english. Lol) – BCLC Jul 31 '18 at 13:22
• Will Appleby, just curious, what brings you to Economics SE? Did you come here from Stack Overflow or when you were looking up piracy for codes or something? – BCLC Jul 31 '18 at 13:24
• I came from another SE site. I quite often read the "Hot Network Questions" down the sidebar and click through for interesting questions. – Will Appleby Jul 31 '18 at 14:31

I will only address e-books (and other text), and discuss the technical issues. These technical issues make e-books distinct from other electronic media.

An e-book is a compressed file that contains what are essentially web pages (each a “chapter”), with meta-data in XML. Typical size is small (a couple megabytes), with size possibly increasing due to images (the standard is 300 dpi, versus 90 for webpages).

The problem is where would they go? Publishers and readers would explode in anger if content was mangled if ads were put in the middle of content - breaking formatting. You would need a special e-reader to allow for banners that are not connected to the book contents. (An app on a tablet could do this easily, but existing specialized e-readers are engineered to only display the existing file format.) Given the existing small screen size on most e-readers, readers will be unhappy with the reduction.

There are ads in books - typically for other books, at the beginning and end. They are skipped over by default by e-redears, and easily skipped.

The other issue is that books are often bought years after publication, and read much later. What advertiser has products they want to advertise that are not time-sensitive? The only common item is other books, which is why they already appear in books.

(Newspapers and magazines are read in a timely fashion, and are ad-supported. Typically not enough revenue to make them free.)

The only model that deals with the timeliness problem is the monthly “library rental” model. This model ensures that the e-book was in touch with the service servers in the past month. This model could allow for ads. However, the ads would be used to reduce the cost of the rental subscription, and the publishers would be paid on a usage basis (as those models do now).

The library rental service would need to solve the technical problems of selling ads, and would need readers willing to put up with them. I have not yet heard of any attempts to do so.

• Thanks for the info. – BCLC Sep 19 at 22:44

This analysis also ignores non-dollar prices of piracy and the fact that pirated goods are not perfect substitutes for the legitimate good.

In the real world, consumers do not have perfect information and have to spend valuable time searching for pirated media and filtering through versions that no longer work, have no seeders, or are otherwise inadequate (terrible cams, virus laden, mislabelled, etc).

In addition, legitimate media may come with other features such as album artwork and proper metadata. Some consumers may care about this, and replacing this data incurs a cost.

Finally, legitimate goods can be more convenient and allow for immediate gratification. You need to discount the value of a pirated song a few hours from now versus a song right now. Legitimate media is backed by extensive distribution networks and can usually be accessed quickly and while away from a desk (e.g. downloading from Google Play/iTunes on your phone, or more recently streaming services like Spotify/Netflix)

• You mean to say that convenience is a reason people prefer legitimate goods over pirated? I don't see how convenience is so expensive when more and more goods are demanded. Consider torrentding 100 movies vs paying for it. The time spent looking for torrents is certainly worth not having to pay for it. – BCLC Nov 23 '15 at 14:10
• While I can't quite say as much for music services, my experience with Netflix has been that yes, in fact, the convenience of it makes me strongly prefer that to pirating whenever possible. It doesn't take up space on my hard drive, it autoplays, it even makes suggestions. (vs. finding each episode individually, verifying that it's legitimate and of reasonable quality, etc.) It's worth it for me, and many people I know. – Cat'r'pillar Nov 23 '15 at 22:03
• wait actually perhaps you are not really answering the question? it sounds like you're answering 'Why do people go to netflix instead of torrent?', a question focused on the consumers given the law and the companies' decisions. however, my question is 'Why aren't songs, movies or books given for free?', a question focused on the law and the companies' decisions given, well, 'Sharing is part of the human condition. A person who does not share is not only selfish, but bitter and alone.' – BCLC Jun 13 at 20:24
• Added bounty btw. Didn't think to mention earlier. – BCLC Aug 11 at 2:46
• Added another bounty just now. – BCLC Aug 12 at 21:28