The Pirate Bay Case Study

The Pirate Bay website is one example of virtual enterprises that exist on the exchange of value to consumers without the cost and overhead structure of product and minimal infrastructure to conduct its business. This virtual enterprise structure has gained wide appeal to businesses for the minimizing the risks of fixed costs in volatile markets, both within the way they operate and the product or service they provide. However, this ease of entry and operation may also facilitate a blur of the boundaries established with traditional transactions, such as privacy and intellectual property rights. The successful prosecution of theft of intellectual property from the music industry has made sustaining this business model very difficult for The Pirate Bay and other music and video file sharing sites, and new cloud based services are further changing how the consumer demand is met.

Introduction

After a surge of litigation from the music industry against the file sharing websites such as The Pirate Bay, in 2005 the U.S. Supreme Court decided against file sharing sites to find them liable for copyright infringement on the intent to induce, enable, and encourage users to share music that was owned by record companies (Laudon and Traver, 2012). The legal actions did put many of these services out of business and slowed the movement toward illegal downloading; however, the model still exists to enable legal and illegal downloading. This paper will examine the business model that The Pirate Bay operates, the record industry’s right to shut out this means of accessing their property, and the alternative cloud based model.

The Pirate Bay’s Business Model

The Pirate Bay operates a virtual enterprise, where value to the consumer is transferred within the system and without physical transfer of goods or services. This occurs by connecting consumers to the desired product, free downloading of music, across a peer to peer network. In other words, The Pirate Bay acts as a broker to connect the users to the product they seek through a search but does not physically own the product or the means of transfer. The popularity, and thus success, of this model depends on what Laudon and Traver describe as the network effect where “users receive value from the fact that everyone else uses the same tool or product” (2012, p.33).

Since there is no physical sale of goods or the infrastructure to download the file, The Pirate Bay makes its money through this network effect, by drawing traffic and then monetizing it through advertising. Other common means for making money in this virtual enterprise model is through subscription or premium service options, through the partnership of application services, or through the ownership and sale of consumer data.

This business model allows ease of entry and flexibility within a volatile market and economy. Traditional business models rely on capital investment and infrastructure to make, store, or deliver the good or service. Cash flow is subject to greater sensitivity to consumer demand when investment is made in anticipation of this demand. The virtual enterprises can instead follow a variable cost model that enables them to respond more readily to changes in demand (Hugos and Hutley, 2010). However, the open network of internet commerce brings its own risk of violating protected boundaries such as theft of intellectual properties.

The Record Industry’s Right to Block this Network

The record industry is justified in attempting to shut down peer to peer sires that enable the free downloading of copyrighted material for protecting its right to that property and its revenue. As the Supreme Court ruling indicated, sites like The Pirate Bay are enabling and encouraging the theft of property, and this does result in harm to the music labels. CD sales in 2010 were less than half than 2005 sales (Laudon and Traver, 2012). While this can be a normal market shift of consumer demand for a more immediate and more customized product (single song versus a whole C.D) that the industry must adapt to, the information is owned by these labels and therefore the exchange should involve transfer of value to them. Further, the artist is not receiving value from the transfer of their music or video, and so the illegal transfer is affecting their income.

Cloud-Based Enterprises

The concept of the cloud has been around for a long time in many different incarnations in the business world. It technically refers to a grid of computers serving as a service-oriented architecture to deliver software and data ((Laudon and Traver, 2012). Instead of running applications directly on the computers or servers, the cloud utilizes the resources from the computers as a collective virtual computer_,_ where the applications can run independently from particular computer or server configurations. They can be considered as floating around in a “cloud of resources”, making the hardware less important and less limiting.

Digital media downloads are no longer limited by the hard drive storing it and less resources are required to transfer the digital media. Users will take advantage of the “clouds” storage capacity and will have access to the media upon demand. Unlike the peer to peer model, it will not require the third party software to download the files, which is an advantage for consumers, but also limits this source of revenue. Instead, the cloud services will need to draw revenue from subscription or access fees as they will be able to offer a value of this convenience and freedom from data storage and clutter. Additionally, advertising will be a viable source of revenues due to this value-add.

Conclusion

An examination of The Pirate Bay enterprise offered a comparison of the capabilities and risks of the digital media sharing business models. Once boundaries for the ownership of intellectual property were shown to be enforceable, the risk of enabling illegal acquisition of this property may restrict this model’s capability. Other business models are emerging to fill the established and growing demand for instant access to a variety of media files, and cloud computing is providing a viable medium to add value to this otherwise limited file transfer network enterprise.

References

Hugos, H.; Hulitzky, D. (2010). Business in the Cloud : What Every Business Needs to Know About Cloud Computing. Wiley. Retrieved April 16, 2012, from Ebook Library.

Laudon, K.; Traver, C. (2011). E-commerce: Business, Technology, Society. Pearson Education: New Jersey.