Abi  

By:  ABI  DODBIBA      

¡  A  modelling  methodology        ¡  Helps  in  creating  virtual  representations  of  complex  systems  dominated  by  feedbacks  

 ¡  Systems  are  complex  (non-­‐linear),  closed  and  change  over  time  

 ¡ Most  important  principle  of  SD:  Structure  generates  behaviour!  

 

¡  Actually:  from  Soap  (solid  vs.  liquid)  

¡  Another  important  example:  Cameras  (analog  vs.  digital)  

¡  However:  there  are  differences  with  the  case  of  digital  distribution  of  creative  work  

   ¡  The  creative  industries  throughout  the  world  

are  claiming  that  piracy  is  the  cause  behind  their  loss  in  profit.  

 

¡  Technological  development:  increased  access  to  the  Internet  and  increased  usage  of  personal  devices    

¡  Attitudes  towards  consumption  have  changed    

¡  In  the  meantime,  the  distributors  of  content  and  legal  institutions  have  not  kept  up  with  the  pace  of  tech  innovation  

¡  Lack  of  definition  on  what  piracy  –  where  do  you  draw  the  line  of  legal  vs.  illegal  

¡  Young  adults,  mostly  students  and  males  ¡  Lower  income  –  could  be  related  to  the  young  age  ¡  Usually  assign  to  creative  content  a  lower  value  than  its  retailing  price  

¡  Risk  lovers  –regulations  seen  as  a  challenge,  rather  than  an  prohibition  

¡  Skilled  internet  users  ¡  Tend  to  apply  neutralization  techniques  -­‐  denial  of  responsibility,  denial  of  injury,  denial  of  victim,  “everybody  else  is  doing  it”,  entitlement  

¡  Feel  low  magnitude  of  consequences  

¡  Piracy  eliminates  the  notion  of  scarcity  à  Supply  is  substantially  increased  

 ¡  Also,  supply  and  demand  are  not  clearly  distinct  

¡  3  main  sections  in  the  model:    

§  Content  distribution  –  how  do  people  acquire  content?  

§  Revenues  of  the  creative  industries  –  how  does  the  industry  earn  their  income  

§  Employment  –  how  many  are  employed  in  the  sector  

Content  distribution  

3  channels  of  distribution  that  make  it  possible  for  consumers  to  get  ownership  of  content    1.  Physical  

distribution  –  physical  purchase  of  content  in  CD,  DVD,  or  hard  copy  print  format  

2.  Digital  distribution  –  purchase  of  content  in  digital  format  

 

Content  distribution  

Content  distribution  

3.  Pirated  consumption  –  illegal  downloading  of  copyrighted  content  

 

¡  Total  Revenue  =  physical  sales  +  digital  sales  +  streaming  subscriptions  +  alternative  consumption  

¡  Streaming  subscription  –  access,  but  no  ownership  ¡  Alternative  consumption  –  revenue  coming  from  

purchase  of  derivative  products  of  creative  content,  such  as  live  events  and  other  merchandise  

¡  +  Sampling  effect  –  purchase  in  digital  format  that  comes  from  piracy:  consumers  test  content  before  deciding  to  purchase  

¡  The  part  of  sales  revenue  that  remains  after  covering  production  costs  for  physical  distribution  and  paying  the  Government’s  fees  defines  employment  

 ¡  The  base  of  employees  is  divided  

into  core  and  non  core  employees,  with  the  ratio  between  the  two  favouring  core  employees  

¡  Core  employees  are  responsible  for  the  creative  process  and  are  paid  more  than  non  core  employees,  who  are  responsible  for  the  production  of  complementary  goods  

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¡  Revenue  -­‐  decreasing  prior  to  2013,  because  the  cost  of  physical  production  is  too  high  compared  to  total  sales.  This  leads  to  firing  of  employees  and  slowing  of  production.  

¡  Towards  the  end  of  2012,  digital  sales  become  higher  than  physical  sales,  which  leads  to  the  reawakening  of  the  industries.  After  2013,  the  continued  increase  in  digital  sales  drives  up  total  sales,  employment  and  profits.  

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¡  The  fall  in  total  sales  until  2013  leads  to  an  decrease  in  the  number  of  employees  (core  and  non  core)  working  in  the  industries.    

¡  Employment  picks  up  after  2013,  when  total  sales  start  increasing.  

Unique pieces

Marketable pieces

Pieces for digital use

Creation rateCore employeesCreative Coefficient

+

+

+

Pirated distribution

+

Market multiplier

Commercializationrate

+ +Physical

distribution rate

Yearly physical sales

Yearly digital sales

Number of streaming orpreview subscriptions

Alternativeconsumption

Avg physical price

Avg digital price

+

Sales Revenue

+

+

+

+

Avg streamingsubscription yearly

price

Avg price of altconsumption

Streaming revenue

Revenue from altconsumption

+

+

+

+

+

+

Industry profit

Industry costs

+-

-

Digitaldistribution rate

++

-

Employment cost

Production cost

+

+

Sampling effect

+

+

Discard rate

Extinction rate

-

-

Cost per core employeeCost per non core

employee

Non core employees

+ ++

Wage worth

Max new numberof hirings

Core hiring

Core firing

Non core hiring non core firing+

-

+ -

++

Gov's revenue

+

Gov's rev fraction

+

Propensity forphysical purchase

+

Effect of price gapon distribution

-

+

Propensity fordigital purchase

+

Trend of spendingdisposable income over

time

-

Avg shelf time

Digitalization trend

Avg extinction time

+

-

-

Reproduction rate

Reproduction factor

+

+

+

+

Piracy multiplier

Technical dexterity

Propensity to pirate

Effect of averageprice on piracy

Effect of releasetime delay

Forgone revenue

++ + +

-

+

Total reach+

+

+

+

+

<Physicaldistribution rate>

+

+

+

Avg unitary cost

+

Effect of HBC

+

<Effect of HBC>+

Total employmentcapacity

+

-<Production cost>

-

-

<Avg digital price>

Total newemployment needs

+

+

--

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¡  Model  construction  was  focused  on  distribution  

¡  The  structure  for  the  creative  process,  employment  and  cost  are  simplistic  

¡  It  is  not  possible  to  distinguish  between  the  various  smaller  markets  within  the  model  (music,  film,  book,  and  software  market  respectively)    

¡  Prices  stay  constant  even  though  they  can  be  a  mechanisms  to  offset  the  negative  impacts  of  piracy  

¡  No  capacity  limitations,  which  causes  the  model  to  grow  exponentially  in  the  long  run  

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¡  Fragmented  body  of  definitions  

¡  Difficulty  in  obtaining  data  à  some  had  to  be  “guesstimated”  

¡  Some  variables  were  conceptually  derived  from  the  readings,  and  their  values  are  based  on  the  reported  trends,  but  there  are  no  exact  estimates,  mostly  perceptions  of  magnitude  

¡  Piracy  is  not  confined  by  national  borders  à  hard  to  track  pirates  down  and  understand  where  they  operate  from  

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¡  Scenario  1:  stop  physical  production  after  2020  §  Rationale:  eliminate  

production  costs  §  Method:  production  is  

stopped  in  2020,  but  the  stock  physical  content  is  drained  a  little  later.  Digital  production  is  increased.        

§  Result:  Profits  substantially  improve  compared  to  the  base  future  run  

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¡  Scenario  2:  Pirate  and  legal  partnership  for  providing  dual-­‐valuation  copies  of  creative  content.    

§  Rationale:  Foster  the  collaboration  of  pirates  and  legal  creators,  taking  advantage  of  their  best  assets  

§  Method:  using  the  pirates’  platforms  for  downloading  to  sell  content  legally;  offering  two  purchasing  options  with  different  valuation  –  a  higher  priced  and  higher  quality  version  of  content  +  extras,  and  a  lower  priced,  lower  quality  copy  

   

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¡  Young,  tech-­‐savvy  consumers  with  a  tendency  to  pirate  are  entering  the  market,  whereas  mature,  paying  consumers  are  exiting  it  

¡  The  goal  of  pirates  is  not  profit  ¡  Need  for  unified,  international  legislation  ¡  Advertising  as  a  source  of  revenue  since  the  advent  of  free  alternatives  (such  as  unpaid  streaming)  

 

¡  Piracy  à  not  as  detrimental  to  the  creative  industries  as  it  is  claimed  –  in  fact,  it  might  even  be  a  positive  factor  in  promoting  digital  sales  (sampling)  and  alternative  consumption,  thus  expanding  the  customers  base  

¡  Survival  in  the  market  is  dependent  upon  the  realization  that  companies  need  to  embrace  the  digital  aspect  of  business  

¡  Successful  business  models  for  the  digital  world  are  still  in  the  making  

¡  Companies  with  higher  adaptability  to  change  are  better  suited  to  the  new  digital  environment,  therefore  start  ups  and  new  comers  in  the  market  are  more  likely  to  succeed  

¡  Incumbent  companies  need  to  learn  to  partner  up  with  new  comers  

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Feel  free  to  ask  questions!