We aren’t big nonfiction readers but over the years we have recommended a few books to others, Freakonomics and its sequel SuperFreakonomics being one of them. Humans respond to incentive — that is the underlying theme of this series by authors / economists Stephen Levitt and Stephen Dubner. Those of us at AGG will now apply the theory of Freakonomics to software piracy, a phenomenon that has existed since the dawn of personal computers and predated the Internet, an abnormality that is worthy of study. We aren’t advocates of piracy, nor are we personally against piraters or pirateers (oddly appropriate words that we made up), we simply stand on the sidelines and step into the shoes of cold-hearted economists, studying the intricacy of the statistics that govern piracy.
Piracy is a lot like prostitution. Piracy exists because people want more software than they can afford. Since the dawn of time, prostitution has existed because men demanded more sex than they can afford, and women are there to provide it. An economist doesn’t study morality, but recognizing the innate human nature to only respond to incentives; and morality, whether it is from religion, karma, the law, is simply a created system to alter the value of incentives. Prostitution used to be legal, and so was piracy — at least it wasn’t viewed as theft of intellectual properties 2 decades ago. As a child I grew up in Hong Kong, where piracy was so rampant it was viewed as a tourist attraction, and the only means for a kid to afford games, during the golden age of gaming. That was the early 80s, as a kid I frequented a computer mart like plaza in Sham Shui Po, Hong Kong, called Golden Plaza, an electronic mall that was a combination of modern day computer chop shop to vendors that simply copied pirates computer software for a fee. It still exists this day and age but looks drastically different. How much it cost to copy a game onto the boxes of blank diskettes in hand depended on how many discs the game / program spanned. I can’t accurately recall the price — most likely somewhere around a US dollar you could fill a 5 1/2 disc, and it probably takes somewhere from 3 to 5 bucks to get a pirated version of Leisure Suite Larry or Monkey Island 1. Not many merchants sold original copies which cost anywhere from 30 to 60 US dollars, because it didn’t make economic sense for them. Then there was the Nintendo Famicom era, and original Japanese cartridges were expensive, and only the rich kids can afford them, and even if you were rich you couldn’t possibly keep up with every good game that came out. That era was not called the golden age for nothing, for innovation was legion. Nowadays provided you own every consoles and handheld systems you can probably get away with buying a game every 2 weeks to almost own everything that is worth playing out there (provided you have something resembling sensible taste). Back then you probably have to at least get 3 games a week if you had a personal computer and a Famicom, for every game was developed to be awe-inspiring, that they managed to do something that had never been done before. Pirated cartridges were made back then and I owned a couple of those, they cost about a fifth of the original. Then the advent of the disc system was godsend, for with its release we could get Famicom disc games for the price of what we paid for computer games, and none of them spanned more than a disc. The disc systems pushed for the Game Doctor, which was an early adoption of the nowadays R4 concept for the Nintendo DS. The Game Doctor allowed Famicom owners to play cartridge games on discs.
Back then nobody taught us kids about the adverse effects of piracy, that the developers don’t get a cut for the work they have done, that piracy is equivalent to petty theft. But as a grown-up now looking back at the economy as a scholar, we can’t help to realize that there isn’t such a thing as right or wrong. The child version of us living in Hong Kong demanded piracy because we had limited funds and demanded more games than we could afford, so our demands were met and merchants profited off us, and you would think at the expense of all the game developers from that era. But this wasn’t the case, not ever once in history did piracy cost the collapse of a software company. If enough people loved a product, it simply would sell like hot cakes, even if a lot of people didn’t pay for that product, and eventually the money would go back to its creators. And that theory applies to everything in the present day as well. This isn’t to say I advocate piracy, but as a game developer and novelist myself, I recognize the fact that the biggest fear to an artist is obscurity. It isn’t nearly as menacing that everyone in the world pirates your software so you are not making as much as you should, for good work will be rewarded in more ways than you can think of, than nobody even knowing the existence of your work.
In the present day piracy isn’t as big a problem as you think it is. Like for the Nintendo DS and its R4, I have to stand on the sidelines and say that Nintendo sold many more units because the R4 existed, for I know many gamers who would not have bought the system if not for the convenience of its piracy. The same phenomenon applies to the PSP and the Wii. But you are going to ask, even if Nintendo has directly benefited from piracy, what about 3rd party developers? Sure a lot of their efforts aren’t directly paid for but they are exposed to a larger audience and their work is paid off in other unseen and unforeseeable ways. In essence, people who play pirated games are people who watch TV and mute it during commercials, or people who frequent their favorite websites (like this one) and never once clicked on the ad banners. But in essence, your favorite magazine and blog sites are funded by ad clicks and similarly, your favorite TV drama is funded by companies which are willing to pay millions for that golden prime-time slot. But by not paying attention to the commercials, are you contributing to the downfall of free television? Being an economist is different from being a philanthropist, or that of a priest, it is the recognition of patterns, and not being adamant about the fact that converting 1 person changes society. Typically for an iPhone developer, if it was his decision to make their apps free with ads, they can work off this known statistics that on average, 3% of your users will become your revenue stream, in other words they are the ones that click on your ads. So the key to making revenue here isn’t to convert the other 97% of your users to be ad-clicking maniacs, but recognizing that the more users your app is exposed to, the more ad clicks you will get. Now extrapolate that idea to piracy, and I sincerely wished I had real scientific research data to back up my claims but I have to admit, we simply lack the funds to do this kind of research, 3% of our readers don’t really pay us off. We divide gamers whether they will pirate or not based on the following criteria and percentage out of the population:
1) Those who buy every piece of their software — now this can mean they lack the means to pirate, or have a moral stance against piracy — 40%
2) Those who are on the fence — basically they buy some, pirate some, depends on convenience and accessibility, and they can be swayed either way — 30%
3) Those who exist just to pirate — they are the ones who are unwilling to pay for anything and they purchase systems based on the fact that they can pirate software — 20%
Now as a developer, you have to recognize the fact that group #3 is a loss cause, they are the ones who created dedicated WOW or Warcraft 3 servers just to bypass copy protection. Now those belonging to group #2 are the ones you need to work on, making the game easily accessible through a paid download service is a easy way to solve this, now this cuts out the traditional retail cost, something online shoppers are usually unwilling to pay, for why should they pay for Electronic Boutique’s rent and the salary of their incessant employees: “Do you want to buy this used for 5 bucks less? Do you want a strategy guide to go with that” — little do they tell you buying used games is equivalent to pirating the game, the developers don’t get a cut from used games sales. Humans respond to incentives — Telltales does this right, their episodic adventure games are easily download-able and affordable; there is little reason to steal their software, unless a user really can’t afford the entry fee. But most of the time, the denizens belonging to group #2 rarely resort to piracy because they can’t afford it, it is simply out of convenience and sometimes necessity. Before the PSP-go was out, there was little reason to buy UMD discs if the hacked firmwares are infinitely superior, shop for a 4 gig Scandisk pro-duo memory stick even if they used to cost more than twice the PSP itself, and you can carry your favorite collection of games anywhere you go, and they even have faster load times than their UMD selves. The same applies to the DS and its R4, not that we are condoning its existence and its use, but it exists because there is a demand for it, that you can learn in Econ 101 at the local community college — the simple curve of supply and demand.
A recent story that a certain iPhone developer is outraged that its app is being used by a plethora of illegal pirates — that their global leaderboard didn’t reflect the actual sales. Their sentiment is that they have lost this amount of dollar that could have gone into their pocket, but as a fellow iPhone developer myself, is that really the case? Now we cant really test this scenario unless we command the power to create parallel worlds, but we don’t think those who jailbreak their phones is going to buy an app anyway, even if it costs only 99 cents. The problem with the app store is the flood of information — hundreds of apps each day, and we recognize the fact that it probably takes more effort to sort out the useful applications from the rest of the craps even if you were to get everything for free, and the only battle an iPhone developer has to face is to gain visibility. For us we are tired of just sifting through iPhone app review sites just to see which game is worth playing (and a majority of them… not), and we simply respond to the incentive that it is easier to buy something through itunes and pay that 99 cents, and that has nothing to do with right or wrong. Now assuming we have access to the parallel world that piracy didn’t exist, will that certain iPhone developer find that his pockets are suddenly well-endowed? What if we told you, it isn’t out of the realm of improbabilities, that the certain iPhone developer may find that he has actually made less sales than his parallel self in the world where piracy ran rampant. If you believe in our hypothesis, you may wonder how this may come to be. It is because of the Tipping Point theory (another book we recommend), that because piratees don’t judge how good an app is by its visibility — a direct result of marketing efforts, or simple word of mouth; a good app is something they will keep on their iPhone just because it is good, useful, and fun. And even scoundrels who pirate software have friends who don’t necessarily have the same vice. If so and so told you they just downloaded a good app, even if they didn’t pay for it, you are not going to mind paying 99 cents to nab that same app onto your iPhone. After all, what is 99 cents but a third of the cost of that cup of coffee you buy every morning? The incentives of people who don’t pirate do not come from a moral higher calling, it is simply easier to not deal with jailbreaking and the constant struggle with updates and having to sniff through the sea of unremarkable apps to find that hidden gem. And their friends who pirate, serve as that powerful source of word-of-mouth, and the tipping point has been reached.
Now, not to say that companies shouldn’t battle piracy, companies like Microsoft and Sony and Blizzard are doing a fine job of it, but that piracy exists sometimes as a sole disease just to spread the art of gaming to those who cannot afford or would not care to have purchased it — like when I was a little kid, it was because of piracy that I was exposed to as many games as possible — and I become who I am now writing this article, developing the next awesome iPhone app, writing the next best-selling novel of all times.
Now not to say the world is better off while piracy runs rampant, but to battle piracy the government would probably have to punish the people who seek pirated software, not the ones who produce them. Getting rid of drugs by going after the drug-dealers isn’t an efficient method, not by a long shot, you reduce the demand for it. Like if a john caught soliciting prostitution was to receive castration as punishment, it would be enough negative incentive for anyone else not to do it. How about a thousand dollar penalty plus jail-time if caught downloading illegal software? Governments would never be able to pull this off just like how they wouldn’t castrate a john, but hay if you are looking for a solution, don’t say we didn’t propose one. What about this? What if people who pirate software are given a chance to donate to their favorite developers, now this way they have all the incentives to do so because they can cut out the publishers and retail and give their funds (considerably much more affordable than retail price) directly to the developers and support their efforts in making great software. You would be surprised at how many would actually make such donation, after all there have been known cases that free software developers can live off of generous donations. The incentives to do so is just as great as not paying premium price for crappy software.
Pirating a game doesn’t destroy the gaming industry as much as one would have thought, no more than watching prime-time television without paying attention to the commercials. Consumers respond to incentives, developers work off the statistics. A coin is thrown into the air and it doesn’t land on right or wrong, but on the edge of grayness. Humans aren’t nefarious by nature, but nor are they altruistic. They simply respond to what makes sense economically. And that’s the interesting way of how the world works, and studying the trends is the interesting micro-economic theories of Freakonomics.
