Converting Pirates Without Cannibalizing Purchasers: The Impact of Digital Distribution on Physical Sales and Internet Piracy

The availability of digital channels for media distribution has raised many important questions for marketers, notably, whether digital distribution channels will cannibalize physical sales and whether legitimate digital distribution channels will dissuade consumers from using (illegitimate) digital piracy channels. We address these two questions using the removal of NBC content from Apple's iTunes store in December 2007, and its restoration in September 2008, as natural shocks to the supply of legitimate digital content, and we analyze the impact of this shock on demand through BitTorrent piracy channels and the Amazon.com DVD store. To do this we collected two large data sets from Mininova.com and Amazon.com, documenting levels of piracy and DVD sales for both NBC and other major networks' content around these events. We analyze these data in a difference-in-difference model and find that NBC's decision to remove its content from iTunes in December 2007 is causally associated with an 11.4% increase in the demand for NBC's pirated content. This is roughly equivalent to an increase of 48,000 downloads a day for NBC's content and is approximately twice as large as the total legal purchases on iTunes for the same content in the period preceding the removal. We also find evidence of a smaller, and statistically insignificant, decrease in piracy for the same content when it was restored to the iTunes store in September 2008. Finally, we see no change in demand for NBC's DVD content at Amazon.com associated with NBC's closing or reopening of its digital distribution channel on iTunes.