Understanding the revelation of digital piracy as a positive sales predictor and sales enhancer : a study of signaling theory in the motion picture industry

(1)

Understanding the revelation

of digital piracy as a positive

sales predictor and sales

enhancer

A study of signaling theory in the motion picture industry

Anastasia Caresa

10712240

Master Thesis

MSc in Business Administration, Marketing track

Faculty of Economics and Business

Dr. F.B. Frederik Situmeang

Dr. Umut Konuş

(2)

Abstract

Rapid availability and development of Internet have created proliferation of digital piracy acts among consumers. For a long time, digital piracy remains an interesting topic for academic scholars. While majority of academic findings have concluded on the detrimental effects of digital piracy on sales, a few have established that digital piracy is beneficial for sales. This study was conducted to provide understanding on how digital piracy could be of advantage for product sales performance and how piracy can moderate the effects of predictors on sales. Using motion picture industry and picking up several other predictors, such as e-WOM volume and valence, star power, director power, box-office performance and movie sequel, the first test of this study reveals that piracy through the mechanism of signaling has counterintuitive positive impact on DVD and Blu-Ray sales. Furthermore, the second test of the study has tested the moderating effects of piracy, expressed in different type of download qualities, on the relationship between the above-mentioned predictors and sales. Results of this test acknowledge the apparent positive moderating effects of piracy in helping to improve sales of DVD and Blu-Ray for movies with less popular stars and directors. Low quality piracy positively moderate the effects and interestingly, the positive moderating effects of piracy are persistent for high quality piracy. The findings of this study are foreseen to provide insights for business practitioners in creative sector, particularly those with less popularity, to see piracy as a signaling tool that can help consumers to sample product quality, make better-informed purchases and eventually improve sales.

(3)

Statement of originality

This document is written by student Anastasia Caresa, who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

(4)

1. Introduction

Since the rapid advances of Internet connectivity, file sharing or piracy probably has been the most controversial issue for industries in creative sector until today. Internet connectivity advances brought with it digital compression technology and broadband capabilities, which have dramatically increased piracy and online sharing of digital materials (Bhattarcharjee et al., 2003; Bender & Wang, 2009). Consequently, the practice of piracy has become very popular with at least 60% of Internet traffic consists of file sharing (Oberholzer-Gee & Strumpf, 2010). Geographically, the majority of digital piracy sites are hosted in advanced markets; 67% of digital piracy sites are hosted in North America and Western Europe. Digital contents that are pirated vary but those that are mostly pirated are movies, music, software and games. Out of all digital piracy activities, movie piracy makes up to 35%. After movie content, games and software are the second with 6.7% of total piracy acts. 42% of total software run worldwide is illegally downloaded (Fortune, 1994) and one-fifth or 20% of computer games in the U.S. and Canada were pirated, according to Entertainment Software Association (Woollacott, 2013). Furthermore, music piracy makes up 2.9% of total piracy acts with 95% of music downloaded online are illegal (Go-Gulf, 2011). The prominence of piracy among creative industries makes these industries the sector that is mostly affected by digital piracy.

The effects of piracy on sales performance remain a topic of interest for many industrial representatives in creative sector and current marketing scholars. Most of the industries claimed that piracy is bad for the economy, hurting sales performance and that copyright laws should be encouraged. Industries have proclaimed piracy as a crucial issue that affects negatively the productivity of artists and survival of the industries. On the academic side, digital piracy itself remains to be an active interest for many scholars. Scholars have attempted to examine the effect of such relationship but results stay inconclusive. Throughout the time, two opposing negative and positive effects on sales performance have been found. As a result, piracy continues to be a challenge for creative industries as there are pros and cons when it comes to allowing or combating digital piracy.

On the negative side, many industrial claims have been made to alert pirates and consumers about industries’ sales drops and jobs losses that were undergone due to piracy. This could significantly threatens the economies since overall entertainment industry grew 66% from 1998 and 2010 (Masnick, 2012). Many have asserted the detrimental effects of piracy in some major world regions. In the United States, according to Motion Picture Association of America (2014), piracy is largely devastating to performance of the movie industry. MPAA

(7)

reports that copyright laws will add $ 1 trillion and nearly $ 5.4 million USD direct jobs. In music industry, Recording Industry Association of America claims that although music piracy does not feel as a serious crime, the accumulative impact of downloading millions of songs illegally is devastating (RIAA, 2014). Statistically, it imposes an annual harm of US$ 12.5 billion in losses to the U.S. economy plus more than 70,000 job losses and US$ 2 million in lost wages to American workers (Siwek, 2007). Figures say that nine out of ten artists will still lose money despite the wide availability of legal music content, i.e. music streaming (Mason & Smith, 2014). In Europe, it is reported that throughout 2008 – 2014, piracy has been causing an increasing retail losses of predicted €30 billion loss in 2014 and job losses of over 555,700 employees in 2014 (TERA Consultants, 2010). Software industry suffered approximately US$ 59 billion in lost revenues with the most prominent rate of software piracy in emerging markets, including China, India, Russia and Brazil (Business Software Alliance, 2012). United Kingdom suffered US$ 2.31 billion lost sales in 2010 as well as around 1000 lost jobs (Deleon, 2011). Total losses caused by video game piracy amounted to US$ 1.1 billion (Encoff, 2014).

Negative claims have not only been made by the aforementioned representative organizations. Scholars, through their researches, have examined the influence of creative contents’ piracy carries over to sales performance. The vast majority of academic literatures have empirically asserted that digital piracy significantly reduces sales performance. For movie industry, piracy brings down the sales performance of both box office sales and the video sales, i.e. subsequent DVD videos and Blu-Ray discs sales (Bhattarcharjee et al., 2003; Malin & Fowers, 2009; Bender & Wang, 2009). Illegal burning of DVDs and downloading reduce certain percentages of paid consumption (Rob & Waldfogel, 2007; Bai & Waldfogel, 2012). These negative effects on sales performance were also evaluated as negatively affecting the growth of other partner industries, such as advertisement, consumer electronics and retail (Liebowitz, 2005). For music industry, many scholars have found empirical evidence that piracy has brought negative impact on sales (Peitz & Waelbroeck, 2004; Zentner, 2006; Bender & Wang, 2009); increases in piracy reduce music purchase by significant percentages.

There are several reasons why consumers still pirate despite their awareness of knowing the negative effects of piracy. Several studied have attributed financial reason as the main motive (Chen at al., 2008; Cox & Collins, 2014). Next to that, many other studies have linked the cause to psychological aspects in which the behavior is triggered by the probability of getting high quality downloads (Fetscherin, 2005), low punishment risk perceived by consumers (Nandedkar & Midha, 2012) and low self-control (Malin & Fowers, 2009). Finally, cost structure of digital products (Nunes, Hsee, & Weber, 2004) has also been identified as the

(8)

cause of consumer behavior of pirating. All these drivers not only explain the reasons behind piracy but when such attitudes continuously drive piracy, piracy can only be detrimental to the survival of creative industries.

Although detrimental effects of piracy on sales are widely acknowledged, there are perhaps some positive benefits resulted from piracy. This research will focus on another form of consumer behavior that uses piracy as a means to indicate the quality of the product content, which is argued to have positive counter-effect on sales performance. Derived from signaling theory (Kirmani & Rao, 2000; Connelly et al., 2011), piracy could act as signal in such a way that the number of pirates indicates that people are interested and therefore signals the quality and level of interest for the products. This, in turn, can improve the success of sales performance. Similar to other signals, e.g. valence and volume of reviews, piracy in this case plays its role as a signal that can improve sales. Other than piracy, there are many other signals that might improve sales. Taking an instance of movie industry, other signals include valence and volume of reviews, star power and director power. Box office performance and movie sequel can also indicate DVD and Blu-Ray sales performance through the awareness that the box office success and parent movie success have created. However, these signals and awareness are still abstract without concrete experience. Consumers still need experience to reduce their curiosity about the quality of the product contents especially given the fact that the contents of creative goods have some unknown values in them. In the study by Shapiro & Varian (1999), this is called experience good property – individuals do not know the value of such good to them until they experience it. One may argue that mere signals and awareness do not suffice to fully convince consumers to purchase; consumers will need a role of sampling of the products prior to purchase decision. As such, piracy can play its role as a media that attends to consumers’ sampling needs. If after sampling consumers think that the product content meets or exceeds their expectations, e.g. good story line for movies or deep affection for a certain sampled music, then there would be higher probability for consumers to buy the products compared to when consumers had not been given the chance to sample. Moreover, given the possibility that through sampling satisfied consumers might spread positive word-of-mouth, sales might be more inflated. This particular mechanism has illustrated the argument that other than being a signal, piracy can also play its role as a signal enhancer and awareness enhancer. Both roles of piracy as signal and signal and awareness enhancer are argued to impact sales performance positively.

Literatures have not specified the role of piracy as a signal that could improve sales. However, the evidence of the existence of piracy as a factor that improves sales has been

(9)

present in many studies. Despite vast majority of studies acknowledging negative relationship between piracy and sales performance, some studies indeed show that piracy increases sales performance in many industries in creative sector. For software industry, increased number of piracy leads to increased number of users, which in turn creates possibility of software adopters to become buyers (Givon, Mahajan, & Muller, 1995) and thus implying that not doing software piracy protection might be for the best (Conner & Rumelt, 1991). By pirating, satisfied pirates can recommend the software to others. In fact, Givon et al. (1995) evaluated that 80% of software purchases were the result of pirates’ influence. Meanwhile, in the music industry, it is argued that when looking at the music artist popularity, piracy is most beneficial to most popular artists (Piolatto & Schuett, 2012). In fact, statistics showed that while spending on record music dropped between 2004 and 2013, the total revenues on live music – the complementary product – increased over the last decade and were now higher than the spending on recorded music (Mason & Smith, 2014). This provides evidence, supporting the argument that piracy is in fact not that detrimental as assumed in previous studies, and in fact could be beneficial for the industry when taking into account the much higher fees that are charged for attending live music performances. Moving on to movie industry, several studies have attempted to prove direct and indirect positive effects of piracy. One study by Minniti & Vergari (2010) empirically proves that firms benefit from file sharing in emerging markets. The reason being piracy allows firms to reach larger share of customers who otherwise would not buy at all. Indirectly, increased broadband Internet penetration in year 2000-2003 resulted in increase of DVD sales, according to Smith & Telang (2010). More interestingly, a recent report released by LSE (London School of Economics) Media Policy Project, provided empirical evidence that contrary to the industrial claims, creative industry is not devastated by piracy and that the culture of sharing has several benefits. The report says that Hollywood achieved record-breaking global box office revenues of $ 35 billion USD in 2012, an increase of 6% over 2011 (Cammaerts, Mansell, & Meng, 2013). These findings support the notion that piracy is a signal that has positive impact on sales performance.

Despite the availability of studies establishing the positive relationship between piracy and sales performance, studies have remained silent in evaluating the role of piracy as a signal and awareness enhancer. Intended to fill such academic gap, apart from attempting to examine the role of piracy as a signal that can positively influence sales performance, this research also aims to contribute to existing marketing literatures by investigating the role of piracy as a signal/awareness enhancer or moderator. The mechanism of piracy as signal enhancer and awareness enhancer are argued to be dependent on the download quality of the pirated products, i.e. audiovisual quality for pirated movie or audio quality pirated music products. Due

(10)

to the experiential characteristic of creative products, consumers pirate out of curiosity for the product content. When the content quality is known, purchase probability is increased, e.g. good and meaningful storyline for movie, a music album worth adding to the Christmas collection. Download quality of pirated products is presumed to be generally lower than the quality of purchased contents. Here different download qualities of piracy would start playing their moderating role; arguably, purchase would happen only when the download quality of the pirated contents are relatively poor. High download quality of pirated content might result in no quality difference perceived between pirated and purchased quality, which in turn identical qualities will eliminate the need for consumers to still purchase the products. Indeed, when the quality of the pirated content is high, piracy could replace sales and vice versa; low quality of pirated content could improve sales.

Derived from these arguments, the following research questions are developed for this research.

RQ 1: How is piracy as a signal related to sales performance?

RQ2: How does piracy as an enhancer play its role in moderating the effect between signals/awareness and sales performance?

Finally, this research hopes to offer refreshed perspective in the way we see piracy and marketing implications of such perspective which might be useful for many industries in the creative sector.

1.1 Structure of the Report

The structure of this research is as follows. Next section will provide review of prior literatures that shape this study. Literature will start on the description of piracy and its contradicting effects on sales. Further, the evaluation will go on about the role of piracy as a signal and importantly as the main contribution of this research, the role of piracy as moderator, enhancing both signals and awareness. Hypotheses according to the research objectives will be presented on this section. Following literature review, quantitative methodology of data collection using a dynamic panel data and procedures prior to hypotheses testing will be explained. Results of data analyses will be presented afterwards to elaborate the study’s findings. On the final section, discussion which consists of summary of results and how these results link back to the theory, will be provided. Lastly, conclusions will offer some theoretical and managerial implications and suggestions for future research.

(11)

2. Literature Review

This section serves to provide comprehensive theoretical background that underlies research objectives and develops from the key research questions.

2.1. Piracy

2.1.1 Definition, history and motives

Piracy refers to the unauthorized act of copying and distribution, though not necessarily often for commercial gain, of copyrighted content. Copyright, in essence, establishes an ownership rights to the holder over particular form of expression and to exploit it (Yar, 2005).

For the last two decades, Internet has been rapidly developing. Since the Internet era, consumers have been provided with opportunities to illegally obtain free copies of digital contents (Smith & Telang, 2010). Bhattarcharjee et al. (2003) mentioned that in the early 2000s, along with the common practice of music piracy, it was only a matter of time that better compression file technology and increased bandwidth would be introduced for full-length movies to be shared the same way as music was. This concern has become true nowadays. Broadband capabilities have shortened the time span needed to download a file (Bender & Wang, 2009). Together with rapidly growing file compression technology, Internet has facilitated a great deal of information transfers among consumers and has transformed the way creative product contents such as movies are created and distributed (Jeong, Khouja, & Zhao, 2012). Digital piracy acts have become even more prevalent as the rapid growth of technology has allowed the availability of high quality pirated contents. In sum, Internet and technology have aided to the proliferation of digital piracy due to the availability, ease and convenience of downloading through piracy websites or peer-to-peer file sharing networks. Consequently,

more than 60% of Internet traffic is attributed to file sharing activities (Oberholzer-Gee & Strumpf, 2010). This has raised an increasingly serious problem of intellectual property rights theft and its controversial effects on sales.

The controversial topic of piracy is believed to have emerged since 1999 when Napster was created. Napster represented the first P2P file sharing program that allowed users to connect and swap copyrighted digital contents, mainly mp3 music files on their computers to other users, thus providing a way to get free music contents online (Bender & Wang, 2009). After the collapse of Napster in 2002 due to legal issues, many other P2P file sharing programs had emerged. Kazaa, Morpheus and Limewire earned popularity after Napster’s collapse,

(12)

offering similar services to their users. All mentioned file sharing portals post-Napster discontinued their services due to legal challenges faced from the music companies and were forced to file bankruptcy. In the meantime, BitTorrent arrived, revolutionizing P2P software by enabling large quantities transfer of data without needing a large storage space (Bender & Wang, 2009). Even then, a major online Hong-Kong based piracy site company, Megaupload, which was established in 2005, became a huge concern for the motion picture industry, and was shut down in 2012 by the U.S. government (Danaher & Smith, 2014).

Table 1 Key events in file sharing (Oberholzer‐Gee & Strumpf, 2010).

These shutdowns of major file sharing networks and piracy websites had occurred due to copyright violations and the accusations that they were hurting sales of the creative industries, i.e. music and movie industries. However, on the contrary, some argue that these services have promotional power rather than sales destruction power, e.g. the case of huge number of downloads of Kid A music album before its release that had brought this particular album to number one place on Billboard 200 (Menta, 2000).

(13)

A vast number of literatures have tried to identify the motives behind piracy. Depending on the cost structure of the product, consumers believe that they cause less harm if their failure to pay prevents a seller from recovering fixed costs than if their failure to pay helps a seller recoup variable costs (Nunes, Hsee, & Weber, 2004). Creative products, e.g. movies, music, software, bear high fixed costs and much lower variable costs, i.e. film/music production costs are significantly much more than the costs to produce one copy of video DVD or music CD. As such, consumers will tend to find justification in failing to pay for the product or to pirate than to purchase and will still feel less guilty about it. Two factors influence consumer demand for pirated copies: probability of getting high quality copies and the risk associated with copying (Fetscherin, 2005). Related to risk factor, optimism bias is said to be a factor that motivates piracy; consumers consider themselves to be at lower risk of getting caught than the average group (Nandedkar & Midha, 2012). Established by Chen et al. (2008), rationales of piracy are cost saving and low moral reasoning ability. The moral reasoning is described as value maximizing behavior, in which consumers think of pirated material as a substitute of the purchased one and triggered by cost saving motive, will choose free illegal content over paid legal content. The cost saving reasoning is also supported by a later study, which expressed that financial reason is the main reason for piracy (Cox & Collins, 2014). Low self-control and opportunity, e.g. computer ownership, are evaluated to be the causes for music piracy, which is logically applicable to piracy in movie industry (Malin & Fowers, 2009). Other drivers related to social cognitive perspective have been articulated, such as the desire to consume many different and new contents, the social environment and perceived attitudes toward the behavior, and the degree to which downloading has embedded itself in the daily routine (Jacobs, Heuvelman, Tan, & Peters, 2012). Redondo & Charron (2013) through cognitive dissonance theory defined characteristics differences among three different payment patterns: downloaders who never pay are those who have negative attitudes towards newness, downloaders who always pay have shorter Internet use history, and participation in a greater breadth of online activities distinguishes eclectic downloaders.

2.2 Piracy as a signal for sales performance

There are vast numbers of studies that have discussed and proved the negative impact of piracy on the success of sales. Music industry found an increasing trend of sales losses over time because of piracy (Peitz & Waelbroeck, 2004). The industry suffered 10% reduction of sales in the 1998-2002 periods worldwide. Using a cross-sectional survey to 15,000 European consumers, Zentner (2006) revealed that sharing files reduced the probability of purchasing music by 30% and a later study revealed that 1% increase in piracy rate would result in

(14)

staggering 0.6% decrease in music sales (Bender & Wang, 2009). Contrary to the finding of Gopal et al. (2006) – evaluated by Liebowitz (2005), sampling of copyrighted material was expected to have negative impact on the copyright owners, suggesting that file sharing and particularly sampling, harms the sound recording industry.

Movie industry in particular suffers similar losses due to piracy according to both industrial claims and academic studies. International Intellectual Property Alliance estimated as of 2008, the United States has lost US$ 1.3 billion from movie piracy acts (International Intellectual Property Alliance, 2008). A report estimated that piracy costs the U.S. economy US$ 58 billion annually in total output (Siwek, 2007). According to IIPA report (IIPA, 2013), the U.S. copyright system added over US$ 1 trillion to the national economy and nearly 5.4 million direct jobs in 2012. India as a country with one of the highest piracy rate was reported to have an estimated loss of US$ 1.1 billion in 2012 due to movie piracy, an increase of 15.79% from 2008 (Froman, 2014). The crime of piracy has serious negative effects on the music and movie industries economically and socially (Malin & Fowers, 2009). Movie and also video games industries claim that piracy has caused substantial decrease in the sales of their product (Bender & Wang, 2009). When testing the negative effect, illegal burning of DVDs and downloading creates unpaid consumption and this reduces paid consumption by 3.5% (Rob & Waldfogel, 2007). The effect of unpaid consumption displaces an astonishingly 14% paid consumption instances according to a study of the Chinese consumers (Bai & Waldfogel, 2012). A recent finding estimated that the impact of a major piracy site, i.e. Megaupload shutdown in the U.S. had brought a tremendous 6.5-8.5% digital revenues increase for three major motion picture studios (Danaher & Smith, 2014). Movie industry is an excellent media in which advertisements can reach large audiences. As such, the negative effect of movie piracy could easily have a negative impact on the well being of related industries (Liebowitz, 2005).

Although to a rare number of academic findings, positive effects of piracy on sales have been established by several studies. Early studies on the effect of piracy have focused on the software industry, saying that software piracy might actually give advantages to software firms because it increases the total number of users and not doing piracy protection can be the best policy, both raising firm profits and lowering selling price (Conner & Rumelt, 1991). As such, in the case that substantial piracy exists, it is possible for increased protection to harm both manufacturer and the buying customers. Further study proved that software pirates play a crucial role in influencing potential consumers to adopt the software and some of the adopters may become buyers. These pirates were responsible for generating more than 80% of new software buyers (Givon, Mahajan, & Muller, 1995). It is also important to notice that piracy in

(15)

this case gives an opportunity for software consumers to adopt the product and to let the adopters switch to buyers. The situation in which potential consumers pirate to be an adopter of the product and then switch to buyer afterwards is called sampling. Consumers can pirate as a means to sample and subsequently make more informed purchase decisions (Bhattacharjee, Gopal, & Marsden, 2006). Consumers with faster Internet are indicated to be more likely to sample (Gopal, Bhattacharjee, & Sanders, 2006). In the movie industry, most of the industry representatives claimed the negative impact of piracy with relatively none claimed piracy to be beneficial. In contrary, a few academic studies have recognized positive impact of piracy on sales. Smith & Telang (2010) acknowledged that the US$ 14.1 billion increase in DVD sales during the study periods of 2000-2003 could be attributed to increased broadband penetration. However, when relating this to movie piracy, broadband penetration cannot be assumed to be a direct measure of piracy. Another study found that firms benefit from piracy in emerging markets (Minniti & Vergari, 2010). Similar to the piracy effects found by Givon et al. (1995), the study suggested that piracy in such market would allow firms to reach a larger share of customers who otherwise would not buy at all. This positive effect is after all missing in developed markets where firms want to be protected from piracy. Last but not least, the most recent report released by LSE (London School of Economics) Media Policy Project sensationally provided empirical evidence that movie piracy is beneficial. It estimated that instead of plummeting sales, in 2012, Hollywood achieved an increase of 6% over 2011 – record-breaking global box office revenue of US$35 billion (Cammaerts, Mansell, & Meng, 2013). As for the music industry, file sharing was said to have increased social welfare (Rob & Waldfogel, 2006).

The destructive side of piracy is acknowledged for many industries in the creative sector, as mentioned above. However, as few literatures found contradicting positive effects of piracy on sales performance, there are perhaps some characteristics of piracy that indicate the quality of the product content and eventually result in improved sales. Several arguments on how this might be the case have appeared, including the mediating role of positive feedback mechanism of reviews (Duan, Gu, & Whinston, 2008) but no literature has yet specified the role of piracy as signal that could improve sales. According to signaling theory (Kirmani & Rao, 2000; Connelly et al., 2011), signals refer to any form of communication that is useful to reduce information asymmetry between two or more parties in a transaction. The number of people that illegally download a product content or the quantity of pirates might signal the unobserved quality of the product content, indicating that the content might be of good quality since people are interested in getting the content or it invites a high level of interest among consumers. When the quantity of pirates is read as product quality signal, uncertainties to purchase the product would be reduced and this could result in improved sales.

(16)

H1 Piracy is a positive signal of product quality. The total quantity of illegal downloads has a positive effect on sales performance.

2.3 Piracy as signal enhancer

Various studies have proven the effects of several predictors as positively influencing sales performance. Derived from the signaling theory (Kirmani & Rao, 2000; Connelly et al., 2011), to fill in the information asymmetry between producers and consumers, consumers tend to read signals from those predictors when confronting purchase decision. These signals indicate that the contents of such creative products are of good quality, which in turn would increase sales. In the movie industry, such signals include volume and valence of online reviews/electronic word-of-mouth (Duan et al., 2008; Yuan-yuan et al., 2008; Dhar & Chang, 2009; Rui et al., 2013), star power (Elberse, 2007; Jung & Kim, 2010) and director power (Ainslie et al., 2005; Jung & Kim, 2010). User-generated content or online review is argued to be a strong signal of the content quality. Movies with good valence and high volume of reviews signal the good quality of movie contents. Products that are equipped with good features signal products with good quality. For instance, popular movie stars and film directors for movie industry indicate the achievements or successes that they have had in the past and therefore are signals for the good quality of movies they star or direct.

Signals, such as mentioned above, are important indicators prior to purchasing products, i.e. DVD or Blu-Ray discs for movie industry. However, those signals are still abstract as they are attempts without concrete experience from consumers themselves. Since creative product contents are greatly experiential, which means that consumers do not know the values of the products until they have experience the contents themselves (Shapiro & Varian, 1999), the role of sampling has become necessary in order to decrease the uncertainty of the quality of the product content. For this reason, piracy can facilitate to reduce the remaining curiosity of consumers through sampling. A case illustration of the role of piracy as a means to sample is as follows. One consumer is aware of the valence and volume of e-WOM for a particular movie but he remains doubtful about the decision to purchase the DVD because he is still curious about the value of storyline for himself. By pirating movie content, this consumer would then be able to reduce his uncertainty and in the case that the storyline of the movie meets his expectation, he would purchase the DVD. In other words, given signals of product quality, piracy as a means to sample can help enhance the probability of sales compared to when consumers had not been given the chance to sample. Also, piracy through the role of sampling would add the number of pirates. The quantity of pirates, as argued in previous section, is another quality signal of

(17)

consumer interest, which can attract other consumers. Thus, when potential consumers were faced with an initial signal, e.g. good e-WOM, high number of pirates as an additional signal would enhance the positive effects and therefore would improve the probability of sales. Through this sampling mechanism, piracy can be signal enhancer.

While considering the role of piracy as a means to sample product content, download quality of pirated products, i.e. audiovisual quality of pirated movie content, arguably plays a crucial role. Nowadays, piracy websites facilitate the sharing of different types of content quality releases from low to high quality files. Particularly for pirated movie files, there are various types of quality releases ranging from low definition, i.e. DVD Rip, to high definition video files, i.e. Blu-Ray Rip. It is argued that through the role of sampling, piracy moderates the positive effects of signals on sales performance in such a way that the probability of purchase will be higher among consumers that pirate lower download quality of pirated contents. Too good pirated quality would diminish sales because higher download quality of pirated contents will potentially close the perceived quality gap between purchased content and pirated content and therefore will eliminate the need to purchase the products. On the other hand, low download quality of pirated contents serve the real role as sampling and therefore will potentially increase sales.

2.3.1 Valence and volume of e-WOM

Definition, history and motives

Word of mouth refers to all types of information exchange between people. Electronic word-of-mouth (e-WOM) is defined as any positive or negative statement made by potential, actual, and former customers about a product or a company via the Internet (Hennig-Thurau, Gwinner, Walsh, & Gremler, 2004). With the rapid progress of technology development and Internet use, e-WOM has been increasingly used.

Increased Internet penetration and its development to Web 2.0 applications allow consumers not only to consume information but also to produce information, and therefore have empowered based power among consumers. Consequently, information-based power consists of two ways: information-information-based power through content consumption and information-based power through content production, i.e. the ability to produce user-generated-content. For user content producers, online reviews enable empowerment by providing an outlet for self-expression, extending individual reach, and elevating the potential for individual opinion to influence market (Labrecque, Esche, Mathwick, Novak, & Hofacker,

(18)

2013). For user content consumers, this can serve as means to seek information, support or even justification to their potential product purchases. Online reviews is one of many ways in which consumers can get signal about quality of the unobserved product, i.e. signaling theory (Connelly, Certo, Ireland, & Reutzel, 2011).

With respect to the importance of online reviews, a recent study revealed that 79% of consumers trust online reviews as much as personal recommendations (Anderson M. , 2013). A survey conducted by Dimensional Research (Gesenhues, 2013) exposed that 90% of customers’ buying decisions are influenced by online reviews. In addition, an academic study found that online reviews significantly influence consumer purchasing decisions (Channel Advisor, 2010); 91% of respondents consult online reviews, blogs and other user-generated contents prior to purchasing product, 46% of which were then influenced in their purchasing decisions.

Drivers for articulating e-WOM have been associated with desire for social interaction, desire for economic incentives, concern for other consumers and the potential to enhance own self-worth (Hennig-Thurau, Gwinner, Walsh, & Gremler, 2004). Due to powerful influence of online reviews on purchasing decisions, research shows that often companies manipulate e-WOM in order to gain more customers (Hu, Liu, & Sambamurthy, 2011), suggesting that manipulation in order to increase sales is one of the drivers of producing e-WOM.

Volume of e‐WOM

Several studies have evaluated positive effects of e-WOM volume on sales performance. Duan et al. (2008), whose study was focused on the consumer reviews, asserted that higher e-WOM volume leads to higher revenues. A research by Dhar & Chang (2009) supported this by highlighting the importance of e-WOM volume as one of the leading indicators of future sales.

Piracy as enhancer of e‐WOM volume signal

As a leading indicator of future sales, i.e. higher e-WOM volume indicates higher future sales; this implies that e-WOM volume certainly signals the quality of the product contents. However, e-WOM volume is only a signal without real experience yet. In addition to obtaining product quality signal from e-WOM volume, when consumers pirate to sample, they become more certain of the product quality. Due to the eliminated doubts, the probability of purchase might become higher. Further, sampling can increase the number of pirates, which in turn can create an additional signal of quality and consumer interest that can attract other potential customers. In this way, piracy can enhance the positive effect of e-WOM volume on sales performance. In

(19)

addition, sampling through piracy might also trigger higher e-WOM volume, which might moderate the effect of e-WOM volume on sales. The moderating role of piracy is nonetheless dependent on the download quality of the pirated contents. As previously stated, the two different download qualities, i.e. high and low download qualities of pirated contents determine the moderating role of piracy.

H2a. The quantity of different quality types of illegal downloads moderates the effect of e-WOM volume on sales performance in such a way that low quality downloads positively moderate the effect and high quality downloads negatively moderate the effect.

Valence of e‐WOM

When reviewing a product, emotions are one of the several potential determinants of overall evaluation or attitude; for hedonic products like movie DVDs, pleasure and arousal are the antecedents (Kempf, 1999); the more positive the attitude towards a movie, the more positive the e-WOM valence. Positive valence on e-WOM in particular can be attributed to motivation such as “helping the company” in which customer is motivated to engage in positive e-WOM communication to give “something in return” for a good experience because the consumer considers the company as worthy of support. The intended effect of this communication is that the company will become or remain successful (Hennig-Thurau, Gwinner, Walsh, & Gremler, 2004).

In relation to sales, Duan et al. (2008) expressed that valence of e-WOM has little persuasive effect on consumer purchase decisions. However, Rui et al. (2013) implied that valence of reviews mattered; positive Twitter e-WOM is associated with higher movie sales. Yuan-yuan et al. (2008) exerted in their findings that e-WOM valence positively impacts movie sales. Interestingly, few studies have asserted that negative review has a stronger impact on consumers’ attitudes and sales probability than positive reviews (Podnar & Javernik, 2012; Chevalier & Mayzlin, 2006). In other words, valence of e-WOM signals the quality of product contents in a way that the more positive the e-WOM valence, the higher the sales.

Piracy as enhancer of e‐WOM valence signal

Even though e-WOM valence contributes significantly in signaling the quality of product content, it is not yet concrete because it is an attempt without opportunity to sample. For that reason, piracy is needed. Piracy through sampling is argued to enhance the effect between

(20)

e-WOM valence and sales with similar mechanisms as e-e-WOM volume as follows. In addition to getting signal that positive e-WOM valence indicates good quality of product content, piracy through sampling allows consumers to get concrete experience of product content and thus eliminates the remaining doubts. As a consequence of sampling, the increased piracy expressed in the number of pirates signals that a product is of good quality because consumers are interested. In other words, other potential consumers might be attracted to purchase due to the enhanced signal that comes from piracy. Thus, adding piracy to the initial e-WOM valence signal would arguably strengthen the positive effect of e-WOM valence on sales. Additionally, sampling would bring out the probability for consumers who already pirate to alter the valence of e-WOM. With regard to the moderating mechanism of piracy, as previously explained, lower download quality will moderate sales positively whereas higher download quality will tend to discourage consumers to purchase.

H2b. The quantity of different quality types of illegal downloads moderates the effect of e-WOM valence on sales performance in such a way that low quality downloads positively moderate the effect and high quality downloads negatively moderate the effect.

After observing product signals generated by second party, i.e. e-WOM volume and valence, next section will explore the product features as signals. Especially for movies, these are star power and director power.

2.3.2 Star power

Definition

Star power refers to the role of superstar in driving the success of a movie. If a product feature were well known for its good quality, i.e. popular movie stars who have made excellent acting contributions and won several movie awards or popular singers who have excellent voices, this feature would signal the quality expectation of the product. Purchasing creative products, such as DVD or Blu-Ray disc is a risky decision as these products are experience goods. Thus, star power, just like online reviews can serve a role as quality signal of the movie. Especially in the movie industry, superstars that were rated highly in the previous movies in which they have appeared in and have excellent image or reputation for their performance capabilities will bring higher expectations of movie quality, which consequently will increase sales.

(21)

Empirically, in prior studies star power is expressed in the popularity rank of the star (Ainslie et al., 2005; Elberse, 2007; Karniouchina, 2011); the lower the star ranks the higher the star power. In investigating such star power role as a signal of movie quality, a larger number of prior literatures have found positive effect on movie sales performance. It is examined that the involvement of superstars was proved to increase the expected theatrical revenues: on average, stars are worth US$ 3 million in theatrical revenues (Elberse A. , 2007). Observing Korean film industry, there was a statistically significant association that movie star will make a movie a hit; the appearance of star actors increases the probability of a movie hit by 15-19% (Jung & Kim, 2010). The positive impact of star power as signal on sales performance has also been proved as positively influencing sales indirectly through the role of WOM; star power creates boost in sales performance through the power of movie buzz about the individual stars prior and throughout the theatrical release (Karniouchina E. V., 2011). Recent study has come up with similar findings; focusing on the post experience of consumers and critics, star performance quality positively influences both moviegoers’ evaluations and critic reviews (Zhuang, Babin, Xiao, & Paun, 2014). E-WOM in turn would positively affect sales performance.

Piracy as enhancer of star power signal

Popular movie stars indicate good expectation of the movie quality, but expectation might still result in curiosity about the actual performance of these movie stars in a particular movie and the overall quality of the movie itself. This is when piracy is needed, in which it can facilitate consumers’ curiosity through the role of sampling. If upon sampling consumers think that the signal, i.e. movie star quality, corresponds with or exceeds expected quality, the probability of purchase will be higher compared to when consumers were left to remain doubtful with no opportunity to sample. Further, sampling increases the number of pirates, i.e. signaling level of consumers’ interests and possibly good quality of product, which in turn could strengthen the signal of star power. Thus, piracy as additional signal can moderate the positive effects of star power signal on sales performance.

H2c. The quantity of different quality types of illegal downloads moderates the effect of star power on sales performance in such a way that low quality downloads positively moderate the effect and high quality downloads negatively moderate the effect.

(22)

2.3.3 Director power

Definition

Similar to movie stars, movie directors signal movie quality. Directors with proven track record of directing successful movies in the past might indicate good quality of subsequent movies they direct. Therefore, director power can be defined as the role that movie director has in signaling the success of a movie.

Few researches have been done to examine the relationship between director power and movie sales performance. Directors have a more indirect effect on consumers’ movie choices and thus sales performance (Ainslie, Dreze, & Zufryden, 2005). However, a more recent study by Jung & Kim (2010) resulted in a finding that appearance of popular director increases the probability of movie success by 10-15%. Thus, in general director power positively affects sales performance.

Piracy as enhancer of director power signal

Director power as a signal to indicate the good quality of movie due to prior successes and achievements in directing past movies, has positive effect on sales. It is argued that this positive effect of director power on sales can be enhanced by piracy. Popular directors with proven success record will create expectations of subsequent movies they direct. Piracy as director power signal moderator is argued to work in the same mechanism as star power moderator; piracy could facilitate the curiosity that results from the expectations through sampling. Further, sampling results in increase of number of pirates, which is argued to amplify the initial signal from director power. Thus, positive effects from director power on sales can be enhanced by piracy through the role of sampling.

H2d. The quantity of different quality types of illegal downloads moderates the effect of director power on sales performance in such a way that low quality downloads positively moderate the effect and high quality downloads negatively moderate the effect.

2.4 Piracy as awareness enhancer

Other than signals, products’ awareness has been demonstrated in many studies as factors that positively affect sales performance. The awareness here refers to consumers’ awareness of products, e.g. brands, albums, movie sequel. In other words, such mentioned products would

(23)

have had products that precede them, in which this predecessor product played a crucial role in setting up the product’s image and creating initial awareness. In study literatures, these predecessor products are called parent-brands and the products that follow are termed extension product. It is established that the success of extension product is highly dependent on the fit between parent brand and extension product (Volckner & Sattler, 2006), in which experiences and awareness from the parent brand are important determinant of the fit. In their study, Hennig-Thurau (2009) proved empirically the importance of parent-brand awareness as the strongest influencer of extension product’s success.

Particularly for movie industry, box-office performance (Lang et al., 2011; McKenzie, 2010) and movie or product sequel (Yeh, 2013; Situmeang et al., 2014) are identified as factors that positively influence sales performance by creating awareness. Box-office revenues give an indication of consumer awareness toward the movie because they purchased movie tickets in the theaters and have gone to see the movie. The sales of DVD and Blu-Ray as extension product are argued to be dependent on the awareness created by box-office success as parent-brand. On the other hand, movie sequel as an extension product depends heavily on the awareness created by parent-movie. Renowned parent-movies with high number of evaluations, pinpoint consumer awareness as well, indicating that consumers have seen the parent-movie or the past editions of the movie.

2.4.1 Box-office performance

Definition

Box-office performance is defined as theatrical revenues that are retrieved from ticket selling at the motion picture theaters. In most cases, box-office performance precedes the release and sales of DVDs and Blu-Ray discs. Following the term of parent-brand from a study by Hennig-Thurau (2009), as a predecessor, box-office performance can be referred to as parent-brand of product extensions, which are DVD and Blu-Ray sales.

High box-office revenues indicate high consumer awareness – that many consumers have gone to the movie theaters, have seen the movie and are aware of the movie. Hennig-Thurau et al. (2009) have asserted that awareness of parent-brand is very important determinant of extension product success. Linked to this, the awareness created by box-office performance would be an important determinant of revenues for DVD and Blu-Ray as the extension products. Out of the total movie studio revenues, box-office revenues were estimated to account for more than half (Lang, Switzer, & Swartz, 2011). Despite the deterioration in the

(24)

conversion rate between box-office performance and DVD unit sales (Sweeting, 2009), later studies have suggested that box office performance, through the awareness created, results in positive impact on video sales performance and that previous box-office success has strong positive effects on DVD sales (Lang, Switzer, & Swartz, 2011). In addition, using an extensive Australian DVD industry dataset over the period of 1997-2007, McKenzie (2010) observed high positive correlation between initial theatrical release and DVD revenue across all genres.

Piracy as enhancer of box‐office awareness

Movie with successful box-office performance indicates high movie awareness not only among the moviegoers who have seen the movie but also among the other potential movie consumers. Popular box-office movies trigger curiosity to potential consumers. Due to the nature of experience good, potential consumers would want to sample movie content in order to be certain of their purchase decision. Here, piracy facilitates the sampling need. When the certainty is increased, the probability to purchase will increase as well. Further, piracy can trigger consumers that have seen the pirated content to talk to other potential consumers about the movie. Spreading words obviously would add awareness about the movie among both existing and potential consumers. With the increased awareness, probability of purchase of DVD and Blu-Ray is expected to increase as well. Thus, in this sense, piracy can enhance the awareness created by box-office performance and therefore moderate the positive effect on sales performance. As previously explained, piracy can positively moderate sales when the download quality of pirated movie is lower. When the download quality of pirated movie is too high, this will diminish consumers’ desire to purchase.

H3a. The quantity of different quality types of illegal downloads moderates the effect of box-office performance on sales performance in such a way that low quality downloads positively moderate the effect and high quality downloads negatively moderate the effect.

2.4.2 Sequel

Definition

A sequel is defined as a brand extension of experiential goods (Sood & Dreze, 2006). Hennig-Thurau et al. (2009) have highlighted the importance of awareness by proving that awareness of the parent-brand is the most influential factor in determining the success of extension product. Successful parent-brand indicates high awareness of the product’s brand – implies that

(25)

a lot of people have consumed, enjoyed and were aware of the product and this in turn positively influences the success of product extension, i.e. product sequel.

Prior researches have indicated that there is a positive relationship between the success or image of parent brand and the extension products (Hennig-Thurau et al., 2009; Yeh, 2013; Situmeang et al., 2014). As stated by Volckner & Sattler (2006) and Sichtmann & Diamantopoulos (2013), the fit between parent brand and extension product is the most important driver of brand extension success. In the game industry, it is proved that evaluations of past editions positively influence the success of sequel (Situmeang, Leenders, & Wijnberg, 2014). For movie industry, parent-movie is the parent-brand and movie sequel is the product extension. Movie sequels draw consumer attention and eventually become successful, especially when the original movies or parent movies were rated highly (Yeh, 2013). This carry-over effect of parent brand to the extension product, according to Hennig-Thurau et al. (2009), is known as “forward spillover”. In other words, movie sequel benefits from the success of its parent movie. The spillover effect often helps sequels dominate other original movies in box office revenues (Yeh, 2013). Thus, it can be argued that due to the awareness created by the success of the parent-movie, movie sequels will be likely more successful than the other original movies.

Piracy as enhancer of movie sequel awareness

Movie sequels are often more popular than original movies when launched at the same time because successful parent movies are the ones that breed sequels. This being said, successful parent movie implies that a lot of consumers have seen the movie and further this awareness carries over to the movie sequels. Success from the parent-movie or the previous sequel editions creates excitement and anticipation, which leads to high expectations (Anderson R. E., 1973). These expectations might result in curiosity about the actual performance of quality of the movie sequels. To aid consumers’ curiosity, piracy can play a role as a means to sample. Through sampling consumers are able to reduce the curiosity and doubts that had remained and thus this allows consumers to have a more informed purchase decision. Piracy through sampling is argued to amplify the awareness by creating possibilities for consumers who have confirmed the quality of the sequels to talk to other people and thereby create additional awareness. The additional awareness might then generate curiosity to other potential consumers and attract them to purchase of DVD and Blu-Ray. Thus, piracy creates additional awareness, which enhances the positive effects of movie sequel on sales performance. Again, piracy will positively moderate the awareness effect when the download quality of pirated content is low and negatively moderate when download quality of pirated content is high.

(26)

H3b. The quantity of different quality types of illegal downloads moderates the effect of movie sequel on sales performance in such a way that low quality downloads positively moderate the effect and high quality downloads negatively moderate the effect.

2.5 Proposed Research Conceptual Framework

Based on the suggested hypotheses above, the following conceptual framework is presented.

(27)

3. Research methodology

3.1. Movie piracy as research topic

Apart from its controversial effects on sales based on studies, several reasons brought the attention on why this research focuses on movie piracy and why movie piracy is an interesting topic for this research.

First, movie industry is one of the most productive, profitable industries among the creative sector and also the most influential industry that shapes consumers’ lifestyles. Other than offering attractive entertainment content, the industry also plays a significant role in bringing new jobs and economic opportunities. In the United States, it contributes $ 38 billion USD to over 330,000 businesses annually by supporting almost 2 million jobs and generates $14.3 billion USD in exports worldwide (Motion Picture Association of America, 2014). Furthermore, movie industry has started to become big as well in several other parts of the globe. Three markets with booming film industries with large productivities other than the United States are South Korea, Nigeria and India: South Korea has larger domestic films earning than foreign films that are brought in, India is the world’s largest film producer and Nigeria is the second largest film producer (Redfern, 2013). According to Financial Times (2014), very recently South Africa’s booming film industry has also boosted its economy, contributing R 3.5 billion to GDP, with a growing focus on local production and filmmakers to decrease the dependence on foreign projects. In Europe, film and video industries were leading in terms of productivity and profitability among all other industries in the cultural and creative sector: 11.7% of operating margin (KEA European Affairs, 2006). All of these signify that movie industry is a global economy key player in the entertainment sector. Given the importance of movie industry, the concern has gone to the prevalence of movie piracy. Nowadays, with the Internet facilitations, movie piracy has grown exponentially (Malin & Fowers, 2009). For movie piracy to happen all it takes is one camcorder copy to trigger the mass reproduction and distribution of millions of illegal Internet downloads (International Intellectual Property Alliance, 2013). Out of total piracy act, which accounts for 60% of Internet activities (Oberholzer-Gee & Strumpf, 2010), movie piracy contributes to around 35% of total piracy acts (Go-Gulf, 2011). Furthermore, a more recent study among Chinese college students in China found that three quarters of their movie consumption is unpaid (Bai & Waldfogel, 2012). With such high rate, a research in this sector will have important managerial implications to creative industries in general and movie industry in particular.

(28)

Second reason is taken from the legislation point of view. Many countries and government instances are still indecisive about anti-piracy law, e.g. Dutch government and lobbyists are still unclear about the current legislation on the piracy behavior (Jacobs, Heuvelman, Tan, & Peters, 2012). Inconclusiveness of the effects of piracy makes it difficult for governments to take a proper action against piracy. Particularly for movie industry, this is an important issue that continues to be a challenge as there are pros and cons when it comes to allowing or combating movie piracy.

Third, the motives behind pirating movies or video files are considered more complex, i.e. when compared to pirating music. In terms of quality, while audio file quality is unnoticeable – more than 90% of students in a study sample were unaffected by the difference between the mp3 quality and CD quality (Bhattarcharjee, Gopal, & Sanders, 2003) – video file quality is arguably noticeable. Although video quality improves over time, compressed quality of pirated movies to this day is still considered worse than the original purchased DVD. This may result in consumers’ tendency to still purchase DVD or Blu-Ray even after illegally downloading movie files and thus, pirate as a means to sample. In addition, DVD videos are usually equipped with several other useful features, such as language and subtitle options, easy navigation to different chapters and extra features, e.g. documentary features, audio commentary, deleted footage, etc., which increase the likelihood for consumers to still purchase DVD or Blu-Ray post-sampling. To be able to obtain a good quality of pirated video download, a decent Internet speed is required for the piracy acts to be realized at a bearable download time because video files are large in size. It is possible that consumers would turn away to purchasing DVD videos or Blu-Ray discs if they think pirating would be too time consuming. A study has supported this notion, stating that consumers with slow Internet connection are willing to pay higher than those with fast Internet connection (Bhattarcharjee, Gopal, & Sanders, 2003). Another support to sampling movie content rather than audio content is that movie downloaders demonstrate greater willingness to purchase the legal alternatives than fellow prolific music downloaders (Cox & Collins, 2014). Last but not least, movie is a longer-duration experiential product, which implies that a larger proportion of movie content is unknown to consumers. In this way, one can say that movie contains higher level of experience good property and yet, with more expensive prices than audio products’ prices, consumers can easily be exposed to higher financial risks when deciding to purchase videos. Therefore, potential consumers of movie products will exhibit more tendencies to pirate in order to sample.

(29)

3.2 Determinant of moderating role of movie piracy

When considering the role of movie piracy to sample as a moderator, download quality of videos pirated is argued to play a significant role in determining the moderating effects. Sampling mechanism might still work for pirated videos with lower quality because this allows consumers who pirate lower video quality to still perceive video quality gap between pirated and purchased versions. The perceived gap will further create possibilities for consumers to purchase DVD or Blu-Ray post-sampling and therefore potentially increases sales. However, higher pirated video quality will tend to close such gap in the minds of consumers, which could diminish the role of sampling and discourage consumers’ initial intention to purchase. Thus, as a moderator of signals and awareness, pirated movies with low quality are argued to positively moderate the effects of signals and awareness on sales whereas pirated movies with high quality would negatively moderate the effects of signals and awareness on sales.

Piracy websites facilitate the sharing of different types of video quality releases from low to high quality video files. The most popular quality releases follow the most popular video types available in the market: DVD and Blu-Ray quality releases. Generally, the most appealing differences of features between the two video types are their definition format and image resolution. Blu-Ray surpasses DVD format with regard to these aspects due to its larger data storage space, which makes Blu-Ray disc a higher quality video type (Monaghan). As the lower quality type of download, DVD quality release type is usually called DVDRip in the piracy website. It has lower definition and has weight of less than 1 GB. The higher quality type of download is Blu-Ray quality and the most popular ones are BRRip 720p, weighing ~4-7 GB and BRRip 1080p, weighing more than 8 GB. Both of them have higher definition than DVD Rip type but consequently BRRip 1080p has higher definition than BRRip 720p. This research focuses on the investigation of moderating role of piracy between high and low download qualities only. Thus, the quantity of low quality downloads consists of the number of DVDRip downloads while the quantity of high quality pirates consists of the number of BRRip 720p and BRRip 1080p downloads taken together.

3.3 Sample and data gathering

Data was collected for eleven weeks, starting from August 5th_{, 2014 ending October 31}st_{, 2014. It}

consists of 330 entries in total, i.e. 30 movies x 11 weeks, in which 136 movies are distinct. The first entry of each distinct movie serves mainly to give the previous-week figures for the subsequent weeks data, i.e. PirDVDLag, PirBRLag, PirTotLag and VidSalesTotLag. Thus, given

(30)

that 136 movies are distinct, the total valid entries that would have sales or number of pirated downloads from the previous week were then 194 entries. The eleven weeks in the sampling period are as follows.

Panel week Day Date

1 Tuesday August 5, 2014 2 Wednesday August 13, 2014 3 Thursday August 21, 2014 4 Wednesday August 27, 2014 5 Thursday September 4, 2014 6 Saturday September 13, 2014 7 Saturday September 20, 2014 8 Saturday September 27, 2014 9 Wednesday October 15, 2014 10 Wednesday October 22, 2014 11 Friday October 31, 2014

Table 2 Sampling period

3.4 Variables

Further, variables used are defined below.

Table 3 Variable names and description

Variable name Type Description

Signal

PirTotLag IV Number of video downloads from the week before; a total of DVD & BluRay ConsVol IV Volume of consumer reviews

CritVol IV Volume of critic reviews

ConsVal IV Valence of consumer reviews (0-100) CritVal IV Valence of critic reviews (0-100)

ActRank123 IV Popularity ranking of three main movie stars; lower ranking signifies higher popularity DirRank IV Popularity ranking of movie director: lower ranking signifies higher popularity

Awareness

BOSalesUS IV Weekly US box office aggregated sales (US$) BOSalesNonUS IV Weekly Non-US box office aggregated sales (US$)

BOSalesTot IV Weekly world (US & Non-US) box office aggregated sales (US$) MovSeq IV Dummy variable; 1 if a movie is a sequel 0 if not

Possible moderator

PirDVDLag MV Number of video downloads from the week before; DVD quality

PirBRLag MV Number of video downloads from the week before; Blu-Ray quality (BRRip 720p + BRRip 1080p) VidSalesTot DV Weekly video (DVD & BluRay) aggregated sales (US$)

VidSalesTotLag IV Video sales(DVD & Blu-Ray) from the week before (US$)

Control

MovID CV Movie ID

PanelWk CV Panel week number

MovRank CV Weekly movie rank, i.e. 1 up to 30

(31)

Controls

Because the dataset were available per movie and video sales data were available in aggregated weekly amount, this study controlled for movie (MovID) and the panel week number (PanelWk). Weekly movie rank (MovRank) was also controlled so that the effects of piracy on sales would be regardless of how movies were ranked weekly.

3.5 Data sources

Secondary data were gathered from three main sources: a Torrent search engine, Torrentz, as P2P piracy website, Metacritic and weekly top 30 movies from The Numbers.

3.5.1 Torrentz

Torrentz was chosen as the piracy website for this study due to its reliability. It has been a leading piracy site for many years. In 2013, 10 years after its initial launch, the site was the third most popular P2P file sharing website after PirateBay and Kickasstorrents (Ernesto, 2014). In contrast with other piracy websites, Torrentz does not host any Torrent files, rather it redirects pirates to other piracy websites or known as torrent tracker website. The site has many domains but .eu is the most popular one and the one that was used for this study.

Data collection methodology

To investigate the role of piracy as predictor and moderator for video sales performance, weekly quantity of downloads was observed from this website. For a period of eleven weeks, the title of each movie listed weekly on The Numbers top 30 movies was searched on the Torrentz.

(32)

The search result administers and displays the numbers of seeders and leechers, which affect the download speed. A seeder is a torrent user that has the entire file available for downloading and a leecher will become a seeder when the download is complete. Thus, the data on the number of seeders for each movie is the one that was noted every week. Due to data abundance on the quantity of seeders, this study took into account only the number of torrent downloads with the most number of seeders. Further, number of downloads observed was distinguished in three most popular categories, based on quality of the video files: DVD, BRRip 720p and BRRip 1080p. This is aimed to investigate the moderating role of piracy. Figure 2 illustrates on which location in the website the weekly quantity of downloads were taken for each movie.

3.5.2 Metacritic

Metacritic is a website that collects and aggregates reviews of several key industries in the creative sector, i.e. movies, games, TV and music. The website aggregates review scores by taking the average of the scores. Unlike other reviewing websites, e.g. Rotten Tomatoes, Metacritic gives out weighted average of critic reviews based on the critic’s fame and stature (Wingfield, 2007).

Data collection methodology

To obtain data from e-WOM as a signal, continuous sets of top 30 movies listed on The Numbers were searched on Metacritic weekly for the eleven-week sampling period. Further, the data of volume and valence of e-WOM from both critics and consumers were gathered. Following figure depicts which data were compiled.

(33)

Figure 3 Review volume and valence from Metacritic

In total, there were four different types of review data that were collected every week as pointed out in the figure above.

1.) Valence of critic reviews.

Metascore is Metacritic’s weighted average of critic rating scores for a movie.

2.) Valence of consumer reviews.

User score is the average of consumer’s ratings. As can be seen, the score is ranged from

0 to 10. For the purpose of data analysis, the score will be multiplied by 10 to provide consistency of score-scale to valence of critic reviews.

3.) Volume of critic reviews. 4.) Volume of consumer reviews.

3.5.3 The Numbers

Dependent variable of this research is video sales performance, taking into account the sum of the DVD and Blu-Ray revenues. The numbers is the only database website that comprehensively and systematically gathers movie financial data. Not only does the website tracks weekly DVD and Blu-Ray sales, it also provides box-office revenues and many other information that are relevant for the purpose of this research.

(1) (2)

Understanding the revelation of digital piracy as a positive sales predictor and sales enhancer : a study of signaling theory in the motion picture industry