Operational Decision Making Around Movie Piracy and Theatrical Release: A Structural Model of Movie Piracy vs. Legal (in-Theater) Consumption

Problem definition : We examine moviegoers’ choices between consuming content via legal theatrical channels and illegal piracy channels. We focus on how two important factors affect this choice: the picture quality of piracy sources (a function of studio security investments) and the costs associated with legal channels, including consumer transportation costs (a function of screening volumes) and ticket prices. Methodology/results : We formulate a structural model and conduct counterfactual simulations. Our findings indicate that consumers’ choice between legal and illegal channels is significantly influenced by the quality of pirated sources and the costs of legal consumption. The emergence of high-quality piracy sources in the first week of a movie’s theatrical release leads to a 7.9% reduction in theatrical revenue during the first eight weeks of release, as compared with a scenario where only low-quality pirated sources are available. We also find that high-quality piracy sources pose a greater threat to the sales of smaller movies than of blockbusters. Managerial implications : Our work provides a rare insight into the operational decisions faced by movie studios around the theatrical delivery of movies. Our counterfactual simulations explore the potential for movie studios to manipulate the supply, cost, and quality associated with legal content to mitigate piracy and increase profit. Our results indicate that the potential for cost reductions is limited, as changes in ticket prices or screen volume have minimal impact on legal consumption. However, a moderate improvement in the value or quality of the theatrical experience (e.g., via one-time investment by theaters in upgrading equipment or technology) can effectively offset the impact of high-quality pirated content.