Aligning incentives to reduce online piracy

Last week, the movie industry, as represented by the Motion Picture Association of America (MPAA), announced an agreement with Donuts, operator of the .MOVIE, .THEATRE and .COMPANY domain names, among others, “to help ensure that websites using Donuts-operated top-level domains (TLDs) are not engaged in large-scale piracy.” This agreement is significant in two respects. First, it aims at perhaps the most important target in terms of combating online copyright infringement: domain names engaged in large-scale piracy. And, second, it illustrates the potential for the increased competition that has developed over the last few years among new entrants into the domain name space to yield innovative new services. The new domain names administered by Donuts are the result of policies adopted by the Internet Association for Assigned Names and Numbers (ICANN) that allow freer entry into the domain name space.

{mosads}The debate about online piracy and what to do about it revolves around three straightforward propositions: (1) Online piracy reduces legal sales; (2) online piracy hurts consumers; and (3) making pirated content harder to consume increases demand for legal content.

Although these propositions may seem intuitively obvious, questions remain. Nevertheless, there is now empirical support for each of them. The overwhelming number of empirical studies show that piracy does reduce legal sales; it is, in fact, hard to compete with free. There is also evidence (from the film industry) that reducing the profitability of content creation reduces both the quantity and quality of new content. Finally, as might be predicted, increasing the cost of illegal content reduces demand for such content.

The content industries have been struggling with the problem of online piracy for almost 20 years and have implemented a number of voluntary programs. For example, the content community and the five largest ISPs (Internet service providers) formed the Copyright Alert System that warns consumers about their illegal infringement and tries to steer them to legal alternatives. More recently, the advertising industry formed the Trustworthy Accountability Group aimed at combating ad-supported piracy.

Targeting piracy sites is a more direct approach. Under the agreement announced last week, “If Donuts is satisfied that the domain clearly is devoted to clear and pervasive copyright infringement, Donuts may, in its discretion … suspend, terminate, or place the domain on registry lock, hold, or similar status as it determines necessary to mitigate the infringement.” Research shows that if this program is successful in eliminating some pirate domains, some users of those sites will switch to legal consumption. Others will find alternative pirate sites, but overall, legal consumption should increase.

It is obvious why the MPAA wants this agreement, but there is also reason to believe it is in Donuts’s interest. In addition to copyright infringement, piracy sites are associated with the distribution of malware and ad-fraud and generally undermine the safety and security of the Internet. A domain name registry concerned about its reputation would want to prevent its association with such sites.

A registry (or group of registries) is somewhat analogous to a shopping mall. The mall rents space to many tenants — major anchor tenants, such as Nordstrom and Macy’s, as well as a lot of smaller stores — and obviously has an incentive to keep its space rented. However, the overall reputation of the mall and its value to the various tenants depends to a large extent on the other stores in the mall. So the mall owner may not want to rent to a store that engages in illegal activities, such as selling pirated CDs, or even legal activities (e.g., selling pornography or Nazi memorabilia) that diminish the value of its brand. Such stores would produce negative externalities for the other renters and, in turn, for the mall owner.

Thus, the MPAA agreement helps Donuts compete on the basis of the quality of their TLDs, which, with the proliferation of new TLDs, registries can be expected to do. This is the hoped-for result of ICANN’s expansion in the number of new gTLDs (generic TLDs). 

Based on the empirical research, there is reason to believe this new voluntary program may have some success in reducing piracy. This is in the interest of content creators, operators of domain names and, most importantly, consumers.

Lenard is president and senior fellow at the Technology Policy Institute.