In order for you, as the CEO, to understand the possible effects piracy may have on your industry, the accountant first decides to show you the similarities between the music and movie industries.
The Copyright Act and the Free Rider Problem
A comparison between the music and movie industry is helpful because they are both entertainment industries that greatly depend on copyright protection in order to make a profit.14 The Copyright Act grants a copyright owner the exclusive right to reproduce the copyrighted work, to prepare derivative works based upon the work, to distribute copies of the work to the public, and to perform and display the copyrighted work publicly.15 Therefore, in the music industry, copyright holders of a song make money only based on the enforceable rights they have over deciding who can play their songs and preventing exploitation of their work, whether at the cost of a royalty for a radio or jukebox play, a CD to a consumer, or the use of a song in a movie or commercial. The movie industry similarly relies on copyright protection by making the majority of their profit from the enforceable rights they have over who can see their movies and when, initially at the cost of a box office ticket and then later at the cost of a DVD sale or rental.
Piracy, in both cases, results in what is known as the free rider problem.16 A free rider is someone who receives a good or a benefit without paying anything towards its cost.17 Free riding can increase to a level that leads to the non-production or under-production of a public good.18 The average cost of making a movie is around $106 million.19 The music industry has already been struggling to make back its production costs of CDs, a much lower cost than movies, because of free riders. As the number of free riders of movies increase, it will become harder to recoup massive movie production costs and still turn a profit.20