Megaupload Shutdown Hurt Box Office Revenues

A new paper suggests that box office revenues were negatively impacted after the shutdown of Megaupload. The dip in revenues was most visible for average size and smaller films. According to the researchers this may have been caused by the loss of word-of-mouth promotion by people who used the popular file-hosting site to share movies. For blockbuster movies the Megaupload shutdown had the opposite effect.

In common with every file-sharing service, Megaupload was used by some of its members to host copyright-infringing movies.

For this reason the MPAA was one of the main facilitators of the Megaupload investigation, which ultimately led to the shutdown of the company in January.

The movie industry was quick to praise the government’s actions, but a new report suggests that Megaupload’s demise actually resulted in lower box office revenues.

Researchers from Munich School of Management and Copenhagen Business School published a short paper titled “Piracy and Movie Revenues: Evidence from Megaupload.” The study analyzes weekly data from 1344 movies in 49 countries over a five-year period, to asses the impact of the Megaupload shutdown on movie theater visits.

The researchers theorize that some films may actually benefit from piracy due to word of mouth promotion, and their findings partly support this idea.

Comparing box office revenues before and after the Megaupload raids shows that overall box office revenues went down. The effects are small, but consistent across different sample designs when taking into account factors such as inflation, Internet penetration and the popularity of Megaupload in each country.

“In all specifications we find that the shutdown had a negative, yet in some cases insignificant effect, on box office revenues,” the researchers write.

The researchers therefore believe that their findings may support the notion that piracy can act as promotion. Those who pirate movies may talk about them to friends, who unlike them do pay for movie tickets.

“Our counter-intuitive finding may suggest support for the theoretical perspective of (social) network effects where file-sharing acts as a mechanism to spread information about a good from consumers with zero or low willingness to pay to users with high willingness to pay,” they write.

The researchers did find, however, that this effect does not occur for blockbuster movies that are shown on more than 500 screens. For these films box office revenues got a relative boost after Megaupload’s demise.

This suggests blockbuster movies may be less prone to word-of-mouth promotion by movie pirates.

“The information-spreading effect of illegal downloads seems to be especially important for movies with smaller audiences. ‘Traditional’ theories that predict substitution may be more applicable to blockbusters,” the researchers explain.

While the results are promising and controversial, more research is needed to prove causality of the effects that were found. Whatever the case, we don’t think the MPAA will cheer on Kim Dotcom anytime soon.

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