Tuesday, March 8th, 2011

The price of counterfeiting

Those who believe that information must be free argue that free media – like music or movie downloads– will help rather than hinder musicians and moviemakers: by allowing consumers to sample their work free of charge, downloads work like ads, exposing their art to a broader public and increasing potential demand.

There has been little empirical evidence to sustain this proposition. But now data is emerging from an related industry: Chinese counterfeit sneakers. The sneaker story supports the case for free stuff as marketing, up to a point: counterfeits can serve as ads for the real thing. But they can also kill the real thing’s sales.

A recent study (gated) looked at sales of authentic brand-name shoes in China before and after a change in regulation in 1995 that took regulators’ eyes off the bootleg shoe industry. Sales of fake brand-name shoes soared after the policy change. And sales of legitimate brand-name sneakers felt the impact:

The change proved that the piracy-as-advertising argument is true, for a certain class of products. Counterfeiting seems to boost the sales of authentic high-end shoes. That’s because it exposes potential new customers to footwear that they would have otherwise never encountered. But at the low end of the market, the effect of counterfeit shoes is completely different: sales of legitimate branded shoes falls, as consumers substitute them with cheaper bootleg copies.

Businesses respond: a study of shoe sales in China found that the policy change induced a change in the mix of shoes sold by legitimate producers: before the change, low end shoes accounted for nearly a third of sales. But their share dropped to only 16% after regulators took their eye off of footwear. Conversely, the share of high-end shoes in their share mix increased from 14% to 23%.

This does not provide much hope to musicians and other makers of mass media. Free downloads of music are more likely to substitute sales of the real thing than to expose new consumers to music that they will buy legally. That’s unless artists can offer the equivalent of the high-end shoe. Maybe a boxed CD set that comes with beautiful liner notes and a one-of-a-kind t-shirt… That sounds a little bit like Radiohead.


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