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Megaupload Shutdown Boosted Digital Movie Sales and Rentals, Study Finds

Sales and rentals of digital movies increased in 12 countries in the days after Kim Dotcom's arrest

The shutdown of Megaupload last year represented a big shot in the arm for Hollywood studios, a new study finds.

The closure of the video-locker service came after U.S. authorities charged founder Kim Dotcom, also known as Kim Schmitz, and Megaupload's management team with violating copyright laws and distributing pirated material.

Getty ImagesA new report by the Initiative for Digital Entertainment Analytics at Carnegie Mellon University found that revenues from digital sales and rentals were 6 to 10 percent higher than they would have been if Megaupload hadn’t been closed.

With fewer places to go to find free copies of movies, users in countries where the service was popular were forced to pay to watch the latest blockbusters.

Also read: Megaupload Charged With Piracy in One of Largest Copyright Cases in History

"If you make it harder for consumers to get access to pirated content, then some consumer who would have stolen content will buy it instead," Michael D. Smith, the study's co-author and a professor of information technology and marketing at Carnegie Mellon, told TheWrap.

The scope of the study is limited to the 18 weeks after Megaupload was shut down on Jan. 18 and only examines the digital sales and rentals of two Hollywood studios. It does not look at sales and rentals of physical products like DVDs and Blu-rays, partly because the authors say that information is less readily available.

Also read: MPAA Sounds Piracy Alert for Kim Dotcom's New File-Sharing Site

To get their numbers, the study's authors chose to look at a dozen countries where Megaupload was accessible, including Australia, the United States and Spain. It found that there was a 4 percent to 7 percent increase in digital rentals, with weekly rental units spiking from 13,700 to 24,000 due to the Megaupload shutdown.

Over that same time frame, the report found that digital sales jumped between 7 to 10 percent, with weekly sales units increasing from 10,500 to 15,300.

Smith and his co-author, Wellesley College Assistant Professor of Economics Brett Danaher, say that the study's findings imply that piracy does have a deleterious impact on movie sales, a conclusion that some academics and analysts have viewed with skepticism. 

Though it would be tempting to place responsibility for the sales bump on the shutdown, Smith believes that Megaupload's troubles may have had a chilling effect on other video lockers, who decided to clean up their sites in order to avoid legal repercussions.

"When they saw Kim Dotcom get arrested, other cyberlockers made it harder to post pirated material," Smith said. "So I'm not sure whether it was Megaupload getting shut down that caused the spike in sales or if it was the net effect of it being harder to get this stuff for free."

Also read: Megaupload Founder Discovered in New Zealand Safe Room With Gun

This is not the first time that Smith and Danaher have examined the impact of anti-piracy laws and found that there was a correlation between harsher penalties and better sales for content creators.

Earlier, the researchers looked at the Hadopi law in France, which was adopted in 2009 and relies on an escalating series of warnings and fines to discourage copyright abuse. They found that adoption of those laws resulted in a 20 to 25 percent increase in the country's music sales.

Hollywood studios and trade organizations like the Motion Picture Association of America are likely to trumpet the pair's latest findings as proof that piracy is an economic problem that must be policed. However, Danaher cautioned that it would be dangerous to extrapolate too much from the report.

"I wouldn't interpret this data as saying that every anti-piracy policy is a good," he said. "Just because one segment of revenue increased doesn't mean that enforcement policies shouldn't be balanced against the costs. There are intangible costs that are hard to measure, such as the restriction on the free exchange of information, which may be hindered by these sort of measures."

The MPAA, which is Hollywood's main lobbying arm in Washington, D.C., has been a big proponent of tighter restrictions on copyright violations. Last year, it backed two controversial pieces of anti-piracy legislation, the Protect Intellectual Property Act (PIPA) and the Stop Online Piracy Act (SOPA).

Both ran aground in congress amid concerns that they were too far-reaching and violated freedom of speech.

The MPAA also provided the unrestricted gift that helped Carnegie Mellon launch the Initiative for Digital Entertainment Analytics in 2012. Smith said that although the study's authors received data from two studios about their digital revenues, there were no restrictions on their ability to publish their findings.

He added that the pair did not use any outside funding from the MPAA or other organizations to conduct the research. "The research was totally independent and, while the center helped us get the data, there was no industry money involved at all," Smith said.

As for Megaupload's fate, last January the site was re-launched as Mega, a date picked to coincide with its shutdown. Dotcom has said he is hoping to launch an initial public offering for the service.

His attorney's are still challenging the Megaupload founder's extradition from New Zealand, where he was captured, to the U.S., where he faces up to 20 years in prison if convicted of all copyright infringement charges.