EXPRESS: Subscription vs. Selling for Digital Goods Supply Chains in the Presence of Piracy

Recent press coverage of piracy and digital goods touts the practice of subscription (as opposed to selling) as a “piracy killer.” However, the effectiveness of digital goods subscriptions remains controversial in terms of the profitability for different supply chain members, including content providers and retailers. Specifically, the dearth of existing studies concerning business model choices in distribution channel structures indicates that the literature has yet to provide a comprehensive answer to this question. Therefore, we develop an analytical model to investigate the optimal business model choices for digital goods firms in the presence of digital piracy in a centralized supply chain (CSC) or a decentralized supply chain (DSC), explicitly considering heterogeneous consumer usage rates (both heavy and light). Unique to the current literature, we find that illegal copies serve as a substitute for a different set of consumers, depending on the business model used by the firms. In particular, there are circumstances under which the firms optimally allow heavy-usage consumers to adopt illegal copies in the subscription model. In contrast, illegal copies can also serve as a substitute for the light-usage consumers in the selling-ownership model. Unlike current literature, we identify situations in a CSC whereby the selling-ownership model (a) is more profitable and (b) has fewer illegal goods adopted than the subscription model when piracy is present in the market. When analyzing a DSC, we find that the existence of piracy can actually aid in the coordination of the supply chain because digital piracy serves as a shadow competitor that effectively mitigates the double marginalization between the two supply chain partners. More specifically, there are situations where both players prefer the subscription model, and there are other situations where they both prefer the selling-ownership model. This study bridges the literature gap between business models for digital goods and the impact of digital piracy. Our findings provide a possible explanation for the coexistence of various business models within digital goods markets, particularly when piracy is prevalent. Furthermore, we introduce actionable plans for practitioners such as providing incentives to retailers that may be apathetic to eradicating piracy and enhancing supplementary subscription-based services for better coordination.