First published in MCV (The Market for Computer & Videogames), issue 190 (14th June 2002)

The trade press has recently focussed on various issues surrounding piracy, including the fact that much piracy originates from within the industry. I have enjoyed the way in which MCV has attempted to open up the debate on piracy, but there are several oversimplifications at work in the debate that I feel need to be pointed out.

Firstly, the loss that the industry makes is not calculated by the formula [Number of pirate units sold x cost per unit at retail]. This assumption rests on the people who buy pirate games definitely purchasing the game through retail if they cannot get hold of a pirate copy, which is a vast simplification.

What is needed is a calculation of Implied Loss of Revenue (ILR), and to do this you need a measure of retail erosion - that is, the percentage of customers who would have purchased at retail had they not got hold of a pirate copy. The formula is ILR = [Retail Erosion x Number of pirate units sold x cost per unit at retail], with Retail Erosion stated as a decimal percentage.

Piracy is most common in 18-35 males (which is a key demographic for the industry) but it is also most common in the lowest income brackets. People in these brackets (the unemployed, students) do not buy games often because they cannot afford to do so, meaning that the degree of retail erosion is usually very much lower than 100%.

Consider a typical "casual downloader" who downloads 100 games from Warez in the space of a year. The same person *might* have bought two or three games second-hand in the same period of time, but the fact they have 100 pirate games does not indicate the loss of revenue from 100 games. The demographics suggest that those who *can* afford to buy games new are the least likely to engage in purchasing pirate copies.

This doesn't mean that piracy isn't a problem, but it is not as simple as it is often portrayed. For a company such as Miles Jacobsen's Sports Interactive, the retail erosion for a product such as Championship Manager could be as high as 75% (in part because of the demographic overlap between piracy and the game's audience). But for a company such as the Oliver brother's Blitz Games with a wide-reaching demographic base for their products, retail erosion is likely to be under 10%.

Not only is the problem not black and white, neither is the solution. ELSPA is a valuable part of the industry, but it's suggestion to maintain 'military discipline' with regards to piracy ("...recognise the seriousness of being involved in software piracy by making it a dismissible offense for all employees") is misguided. From the nineties onwards, tech companies have paid closer attention to employees needs, and cast off the 'employee = slave' image that dominated the mid twentieth century. To impose this level of discipline is to encourage the continued drain of programmers into mainstream IT and artists into film and media.

Modern workers tend not to believe in prohibition scenarios, having seen them fail repeatedly. To prevent piracy originating with employees, what is needed is for employees to share in the rewards of a game's success. Promises of royalties do not work, as most employees have been promised royalties at some point and have never seen them - but a cash bonus underwritten by the publisher for meeting certain targets in fighting piracy could go a lot further than brandishing a largely ineffective whip.

Finally, the recent ruling to effectively outlaw modchips may in fact be bad news for the industry. Grey marketeers, shipping imports to a small but significant proportion of the hardcore gaming community (who up until now have been able to purchase imports legally) now have no choice but to be driven underground. Denied a legal route to get to imported games, they are now forced to turn to piracy. I would estimate an increase in retail erosion of several percent will result - this could amount to additional losses of at least £50-200 million for the industry in the UK alone.

To deal with the problem of piracy, we must learn to see it in less black and white terms.

Chris Bateman
Managing Director
International Hobo Ltd