Illegal Online File Sharing, Decision-Analysis, and the Pricing of Digital Goods

Michael I. C. Nwogugu

• Publisher: CRC Press
• Year: 2016
• ISBN:
  9781315349336
• Edition: 1
• Topic: Business
• Subtopic: Management
• Index: Business

Illegal online file sharing costs companies tens of billions of dollars of lost revenues around the world annually and results in lost productivity, various psychological issues, and significant reduction of incentives to create and innovate. Legislative, technical, and enforcement efforts have failed. This book presents psychological theories about why people illegally share files online; analyzes and characterizes optimal sanctions for illegal online file sharing; introduces new models for pricing of network-access and digital-content to help reduce illegal online file sharing; introduces new content control and P2P systems; and explains why game theory does not work in pricing of network access.

Chapter 1

Introduction^*

This book is intended for university professors, PhD researchers in industry (computer science, theoretical economic psychology, and operations research), and PhD-level policy analysts in government. Illegal online file sharing (IOF) has resulted in millions of dollars of losses for many companies and substantial lawsuits by trade groups and entertainment companies.¹ Illegal downloads affect the economics, profitability, and business models of companies in many industries such as entertainment, education, travel, investments/finance, and any business where knowledge has value. In the United States, the Napster case illustrates some of the policy, technological, and economic issues inherent in systems for downloading content. The volume of file sharing continues to grow despite lawsuits and criminal prosecution (by the Recording Industry Association of America and other trade groups), introduction of new digital rights management (DRM) systems and legal content downloading portals. However, video traffic has become a larger component of Internet traffic.

IOF has or can have significant negative economic multiplier effects in and across national economies. When IOF occurs, (1) content-production companies and persons lose substantial revenues; (2) as a result, employees of content-production companies are either laid-off or their salaries are reduced, which results in reduced household spending and consumer confidence, and can increase consumer debt; (3) in addition, the content-production companies become less financially stable and have to reduce their investment in content production and/or R&D, all of which results in bad economic news that also has adverse multiplier effects; (4) government spending declines because of both actual and lower anticipated tax revenues, and the government may have to borrow more money to cover budget deficits; (5) consumers become less likely to physically visit retail stores and thus retail revenues and transportation revenues (and government revenues from such activities) are likely to decline; and (6) consumers become more likely to conduct more online searches and to spend more leisure time (and even some work time) on their computers, which increases health risks and associated costs and reduces or can reduce employee productivity. The TERA (2010)² study predicted that digital piracy would cause the loss of much as 1.2 million jobs and €240 billion in retail revenues by 2015 if the trend continued. Risen (2013),³ RIAA (2015),⁴ and Scholes (2014)⁵ summarized the extent of the global IOF problem (including multiplier effects), which has not abated. Scholes (2014)⁶, Kigerl (2013); Yu (2014); Yoon (2011); Wu and Yang (2013); Wohlers (2012); Hinduja (2012); Dolinski (2012); Coluccio (2013); Chan and Lai (2011); Bateman et al. (2013); Arias and Ellis (2013); and Suzor (2014) made some useful comments about the prevalence of ethical issues and problems inherent in, IOF and software piracy. According to Gavaldà-Mirallesa et al. (2014), BitTorrent (a type of peer-to-peer [P2P] network) alone is used by millions of people each month and accounts for more than one-third of the total worldwide Internet traffic. Peer-to-peer (P2P) Internet traffic represents 40%–70% of overall ISP traffic (the variations are by country, time, and type of Internet traffic).

IOF also causes negative economic contagion within and across national economies because when IOF occurs, (1) countries tend to tighten import and trade restrictions against countries where IOF volume is deemed significant; (2) foreign direct investment (in countries that produce substantial legal digital content) can be reduced; (3) the stock prices of international companies (that produce and/or distribute digital content) are negatively affected—many of such companies have international operations; (4) interjurisdictional enforcement waves (most often across countries) change the structure of IOF activity in regions in terms of both development and use of IOF software; and (5) the effects of public announcements of enforcement activity on the opportunity costs of IOF activity affect or can affect prices of digital content across countries and the nature of discounts/promotions that are offered by producers/distributors of digital content.

The International Federation of the Phonographic Industry noted in IFPI (2009) that 95% of more than 40 billion files that were used in BitTorrent and Gnutella were used illegally and infringed copyright holders’ rights. The number of illegal downloads is much more than legal downloads: (1) according to U.S. newspaper articles, more than 3.6 billion songs are illegally downloaded each month in the United States, and (2) according to the RIAA (a U.S.-based industry trade association), at least 2.6 billion copyrighted files (mostly music) are illegally downloaded each month, and at any given time, more than 5 million online users are sharing an estimated 1 billion files.

IOF is the product (and sometimes the cause) of the continuously changing confluence of, and symbiotic relationships among legal, technological, behavioral, and industrial organization factors, which have remained insufficiently analyzed, coordinated, and regulated in many countries. Interdonato and Tagarelli (2015); Adermon and Liang (2014); Stalla-Bourdillon et al. (2014); Sang et al. (2015); and Wu et al. (2014) studied some of these issues. In many countries and jurisdictions, the liability of intermediaries remains heavily debated—as discussed in EDRI (2012), Man et al. (2013), Synodinou (2015), Werkers (2011), Edwards (2009), Manta (2011), and Oguer (2011). Intermediaries include internet service providers (ISPs), and companies that develop file sharing software, and companies that facilitate third-party file sharing in any manner. IOF has caused and is also a product of regulatory contagion within and across countries wherein: (1) industry trade groups in many countries communicate and have been using similar monitoring and enforcement methods; (2) the antipiracy statutes and penalties in some countries (e.g., the United States and the United Kingdom) are conceptually similar in terms of format, procedure, deterrence effects, etc.; and (3) enforcement of antipiracy statutes often requires coordination and cooperation among law enforcement agencies in many countries and they tend to develop and use similar methods—and sponsors/developers of IOF software/systems are familiar with their methods.

Another major issue is the significant unreliability of empirical research methods used in articles that are published in top-ranked psychology and computer science (e.g., human–computer interactions) journals. These defects were discussed in Open Science Collaboration (August 2015), Bohannon (August 2015), Ioannidis (2005), and BEC Crew (August 28, 2015).⁷

P2P traffic is a major security risk for companies and a major bandwidth constraint, and unfortunately, most of the existing solutions function at the server level or at the gateway/router level. P2P is often disguised as other types of traffic, and P2P traffic bypasses firewalls and proxies. In the analysis of illegal file sharing, the following constraints affect the efficiency of networks/systems: (1) cost of bandwidth; (2) cost of storage capacity; (3) costs of security; (4) network congestion costs; (5) pricing difficulties (determining the exact number of players and the number of times each digital-content file is played); (6) the cost of hardware for playing content (introducing specialized hardware will only increase the final cost of downloading digital content); (7) the form of content that will be transferred (different companies have different file formats); (8) the control of content; and (9) the cost of enforcing intellectual property rights (lawsuits, investigations, staff, etc.).

In many countries, there have been a wide range of antipiracy methods ranging from lawsuits and fines/penalties to shutting down IOF websites and IOF sponsors, to Hadopi methods in Europe (which involve monitoring of P2P networks), and to initiatives launched by industry trade associations.⁸ Rayna and Barbier (2010), European Publishers Council (2011), Geiger (2007, 2011), Sinha and Mandel (2008), Dimita (2010), Lefranc (2010), Guibault et al. (2007), Strowel (2010), Lovejoy (2011), Meyer and Van Audenhove (2010), and Moiny (2011) discussed some of these antipiracy efforts. It has become obvious that given the civil and criminal penalties in most countries during 2000–2015, lawsuits were not the best solution for combating IOF, primarily because of the substantial transaction costs, reputation effects, weak/low deterrence effects, and the substantial monetary/nonmonetary litigation costs and monitoring costs that are involved. In addition, there is also a free-loader effect that distorts antipiracy efforts and is characterized by the following: (1) users may believe that content owners should make such content available after a certain period of time after initial release—probably because the entertainment/educational value of the digital content is perceived to decline over time, (2) users may believe that the actual cost of creating the content is minimal compared to the price charged for the content and, thus, illegal downloading is justified in order to prevent a perceived rip-off, and (3) users may believe that once the original downloader has paid for the content, he/she has final rights to it and therefore can freely transfer such content to anybody—this is irrespective of the fact that the value of any given content is wholly or partly dependent on the number of people that download or have access to it and the number of times each such person plays such content. This free-loader effect is distinct and different from the free rider problem in P2P networks, which has been studied and written about (wherein which many P2P users do not contribute their fair share in P2P networks). Shutting down the illegal file sharing websites has the following limitations: (1) it can be applied only to client–server networks that use dedicated websites—the third-generation and fourth-generation P2P networks do not have any identifiable websites and, rather, operate from hard drives of network members; (2) sponsors of such client–server networks and P2P can and do re-create similar new sites once their former websites are shut down; and (3) this method P2P networks can incur substantial monitoring and prosecution costs with low probability of deterrence since sponsors often maintain various similar file sharing websites and can launch new websites.

File sharing in any form compounds pricing of content, because the owner does not know the exact number of users/players and the number of times each user downloads the content. File sharing violates most intellectual property laws and provisions inherent in digital content. Owners of digital content should obtain the full value of their works. Digital content provides a certain level of utility or disutility to each consumer. Unfortunately, due to technological limitations and improper business models, most content owners cannot obtain the full value of their digital content. Most digital content is sold using one of the following models: (1) subscription model, in which users pay a fixed periodic fee for the right to download a specific number of file, (2) pay-per-download model, in which users pay a fixed fee per download, and (3) the free illegal P2P networks. In these models, the consumer has to download content onto a device, and thus has full control of such content, and can subsequently share said content with others illegally. Some companies have attempted to use DRMSs to control/limit sharing of content—however, such systems still result in leakages because downloaded content can still be copied.

The omissions in the existing literature on the economics and pricing of digital content include the following:

1. An accurate analysis of the economics and cost structure of digital content within the context of IOF and the legal framework for intellectual property rights.
2. Accurate valuation of digital content within the context of IOF and the existing legal framework for intellectual property rights.
3. Technical solutions to the content-control problem in networks, which consider economic analysis, compliance, and IOF.
4. The dynamics and effects of time within the context of allocation of household resources.
5. The symbiotic effects between network structure and prices of digital content.
6. The effects of the consumers’ and content-producers’ opportunity costs and regret (e.g., regret-minimizing behavior).

1.1 File Sharing Systems

Several companies have developed systems for digital entertainment—Napster, Mashboxx, StreamCast Networks (Morpheus), Swarm Systems, eXeem, Grokster, and Snocap. However, many of these systems involve P2P networks and are used for illegal file sharing. Many of such companies have been sued in the U.S. courts for IP infringements. Some courts in some countries have imposed criminal and civil sanctions on some of these companies. Other content distribution systems⁹ include iPod/iTunes, www.skype.com, Peer Impact, Microsoft, university-based download services (Ruckus Networks, Real Networks Inc., Sea Blue Media LLC, etc.), and F.Y.E.

File sharing systems have evolved from a centralized model (Napster, etc.) to second-generation hybrid decentralized systems (Direct Connect Servers, eDonkey, etc.) and third-generation and fourth-generation wholly decentralized systems (Kazaa, BitTorrent, Videora, etc.) primarily because of lawsuits and criminal prosecution, technological advances, continuing consumer demand, and the low deterrence effects of penalties in many countries. A new type of third-generation system emerged—which is the legal/authorized file sharing systems such as redswoosh (www.redswoosh.com), which were implemented on some university campuses.

1.2 The Law and Illegal File Sharing

Eivazi (2012), Man et al. (2013), Stalla-Bourd...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Dedication
• Contents
• Author
• 1 Introduction
• 2 Economic Psychology Issues Inherent in Illegal Online File Sharing by Individuals and Institutions and Illegal Online File Sharing as Production Systems
• 3 Illegal Online File Sharing and Information Producers’ Strategies
• 4 Complexity and Optimal Sanctions for Illegal Online File Sharing under Unconstrained Transferable Utility and Varying Compliance
• 5 Economics of Digital Content: New Digital Content-Control and Anti-P2P Systems/Methods
• 6 The Free Rider Problem, Inequality in Networks, and a Critique of Tit-for-Tat Mechanisms
• 7 Pricing Digital Content: The Marginal Cost and Open-Access Controversies
• 8 New Models of Dominance of Allocations (in Network Games) That Solve Some of the Problems Inherent in Lorenz Dominance, Higher-Order Stochastic Dominance Models and Higher-Order Prospect Theory
• 9 Consumer Surplus, Producer Surplus, Equilibrium Prices, and the Enterprise Value of Digital Content
• 10 Human Decisions, Optimal Search, and Stopping, the Pricing of Differentiated Digital Goods in Legal P2P and Client–Server Networks under Unconstrained Transferable Utility and Unknown Demand, and Three New Network-Allocation Mechanisms
• 11 Shapley Value Cannot Be Used in Network Access Pricing, Network Cost Allocation, the Pricing of Digital Content, or Analysis of Electricity Distribution Networks
• 12 Stackelberg Analysis Cannot Be Used in Network Access Pricing, Network Cost Allocation, or Pricing of Digital Content
• 13 Illegal File Sharing and Network-Access Pricing
• 14 Conclusion
• References
• Index