How the iconic business models of Netflix and Spotify point the way to defeating digital piracy

In the late 1990s, digital technology was developing rapidly and being met with ever greater public interest. From this white-hot technological crucible sprung Napster, a US firm that pioneered peer-to-peer file-sharing and arguably ushered in an era of digital piracy.

Napster itself did not flourish for long but to this day digital piracy continues to pose a serious threat to recording artists, film studios, and other owners of copyright and intellectual property. It has proved resilient against both legal and technical responses, and challenged various industries to drastically re-examine and overhaul the way they do business, with varying levels of success.

Digital piracy enables consumers to obtain copies of media such as music, software or film from unlicenced internet sources, thus sidestepping licenced distribution channels and depriving artists and producers of revenue. With the takings of global digital piracy estimated in hundreds of billions of dollars, those industry players affected will have to rethink their distribution strategies and possibly their entire business models in order to survive.

Prior research has examined individual incentives for consumers to engage in piracy, and also the ways in which organisations have responded via pricing mechanisms, educational campaigns, and technical or legal action. Despite these countermeasures, digital piracy continued to thrive. The authors of the paper Business Model Responses to Digital Piracy themselves present a systematic analysis of the digital piracy phenomenon; identifying its three main aspects of creation, access, and consumption, and looking at why firms have failed in competing against it.

They go on to address the question “How can firms design their business model to minimise the negative effect of digital piracy?” The challenge is not trivial, as it is difficult for companies to compete against the “zero-price” value proposition offered by piracy. To this end, two digital businesses whose models have been successful in attracting a loyal customer base in spite of the presence of piracy in their sectors, namely Netflix and Spotify, were studied.

Both of these businesses offer content streaming, subscription plans, and attractive pricing. Both secured support from content owners, and their rise corresponded with a cultural shift in consumer behaviour in which access to content under licence became accepted as a viable and attractive alternative to physical ownership. The appeal of digital piracy was that it provided free and unlimited, albeit often illegal, access to content. Still, piracy might be “zero-price” (as it does not require direct money outlays), but it is not “zero-cost”: piracy users often have to buy specific equipment, face learning costs, and face risks and penalties. The business models developed by Netflix and Spotify, instead, offer an attractive alternative to piracy in the following ways:

• they match the perceived benefit of an “all you can eat” menu of music and film;
• they offer simple and intuitive interfaces that are widely consumer friendly, as opposed to the more esoteric, complex and less convenient routes to content offered by digital piracy;
• they offer guaranteed high quality streaming and ever improving services, whereas the quality of pirated material and access can vary hugely and often be of a poor standard;
• both Netflix and Spotify are a fertile source for social interaction and discussion, as anyone who has heard colleagues talk about Game of Thrones or The Crown could testify. Digital piracy offers limited social and community involvement in comparison;
• both companies facilitate content discovery via sophisticated algorithms that generate personalised recommendations for their subscribers. This helps keep consumers interested and engaged in the platforms. Digital piracy systems offer only primitive tools for content discovery as consumers of pirated content see profiling is a taboo;
• finally, through their agreements with content owners both Netflix and Spotify are able to provide earlier access to material across the globe, shortening the delays in access to some parts of the world which was once a major driver behind people turning to piracy.

It is in offering this superior ‘consumption experience’ and its continual improvement that digital subscription services should outperform digital piracy in the coming years, with technological advances and consumer expectation driving wider content availability and further media convergence. Ironically, it would seem to be the very same innovation that has enabled digital piracy to flourish which will allow businesses to counter its threat.

The accepted version of the paper Business model responses to digital piracy is available for download below and forthcoming in the February issue of California Management Review.