The numbers are staggering: worldwide in 2008, digital piracy cost software companies an estimated $53 billion. In China and Vietnam, the piracy rates are above 80 percent. In Georgia—the country, not the state—the rate is higher than 90 percent.

Despite those large numbers, software companies could actually benefit from unlicensed use of their products, says new research from Sanjay Jain, professor of marketing at Texas A&M University’s Mays Business School. In fact, society as a whole may benefit.

“Piracy is not necessarily all bad,” says Mays marketing professor Sanjay Jain. “It can hurt you, but there are also positives.”

The first thing to understand about these numbers is that they are somewhat deceptive, says Jain. “The retail price determines how much is lost, but that’s actually not correct. It assumes that you’d be able to sell these products to people at that retail price,” he said. The reality is many who pirate software would not purchase the software, whether from lack of economic ability or desire. Therefore, the projected loss in sales attributed to piracy represents a dollar amount the company would not have achieved even had there been no piracy.

Moreover, Jain says that the gains created by “the network effect” offset any losses experienced by a corporation. The network effect principal says that the more people have a technology, the more valuable that technology is, as it becomes the industry standard. So, for example, if everyone you know uses Microsoft Office, you’re more likely to buy Microsoft Office because of its familiarity and the ease of sharing files between your computer and others’. In this instance, piracy can flood the market with a particular product, affecting its popularity and driving out competition from other sources. However, the potential benefit of this effect is reduced when the software in question already occupies a monopoly in the market, Jain noted.

Piracy also enables companies to charge more for their products, as the most price sensitive consumers (those that are likely to pirate) are removed from the equation. “People who pirate are different from people who don’t pirate in terms of their willingness to pay…What happens is that you don’t have to decrease your prices to go after them,” says Jain. “If the market is competitive, that can reduce price competition.”

Being able to charge higher prices for their software means companies can invest more in research and development. Jain posits, therefore, that piracy boosts innovation. In that way piracy can benefit society, as it stimulates new technology.

While Jain stated that he does not condone piracy and encourages others to purchase software, he says it makes sense that some organizations are arguing for weaker intellectual property policing in order to spur innovation and growth. “Piracy is not necessarily all bad. It can hurt you, but there are also positives. In fact, that’s the reason some firms may not want to be very active in completely eliminating piracy,” he said.

For more information

Jain, Sanjay. “Digital Piracy: A Competitive Analysis.” Marketing Science 27(4) 610-626.