Piracy may not be such a bad thing after all – it seems to work in favour of companies' marketing efforts by creating the word-of-mouth effect.
Piracy is a universal problem for businesses. From bootlegged novels on the roadside to fake luxury goods to pirated versions of your favourite computer games, music, movies and office software, pirated goods present potential losses of billions of dollars for each of these industries.
Why, then, is it so easy to pirate software goods and get away with it? Are multibillion-dollar companies like Microsoft, Netflix and Universal Studios so helpless that they have given up on trying to secure their intellectual property? Also, shouldn’t such large-scale piracy deter further innovation?
To analyse the problem of piracy beyond a common-sense approach, we need to consider two factors: one, would the consumer of the pirated good have actually paid for the legitimate product anyway; and two, has the legitimate product benefited from the word-of-mouth publicity effected by the pirated product? Both these answers are fairly complicated, and have puzzled business academics for a while.
Companies may have control over their marketing actions, but consumer decisions are, to a large extent, influenced by word of mouth, which is beyond their control
Inspired by epidemiological models of viral spread, Frank Bass proposed a differential equation for the rate of adoption of a new product, where he assumed that every new product has a fixed number of potential consumers, called market size, and each of these are affected partly by marketing, and partly by word of mouth.
So how does word of mouth work? If we have a total of ‘m’ people comprising a market, out of which ‘N’ have adopted the product at any given time, the Bass model assumes a word-of-mouth effect proportional to N(m–N). Conceptually, the adopters (N) have an effect on the remaining (m–N) people in the market. However, as N increases, (m–N) duly decreases. Thus the word-of-mouth effect is interestingly nonlinear in nature. In comparison, marketing efforts have an effect proportional to just the number of remaining non-adopters (m–N), thus becoming increasingly ineffective as more people adopt the new product.
Bass’s model was remarkably accurate in predicting the dynamics of sales of durables in post-war America, helping companies optimise their marketing budgets and activities, apart from planning their inventories. The Bass model is a landmark study in marketing, and has spawned hundreds of papers, like modelling how to space two generations of a new product, optimal pricing decisions, and even modern-day research on social networks.
Say your friend downloads a Torrent of Dangal, and then writes a glowing review of it on her Facebook wall. The word of mouth spread by her is indistinguishable from that spread by you, who has watched the movie legally
Studying sales data of an office software in the UK, researchers estimated that six out of every seven users were using pirated copies, but these pirated users helped generate about 80% of the legitimate sales of the same product