Consider two goods (Good A and Good B) that are substitutes for each other. Consumers consume one of the goods, or the other. When one of those goods becomes more expensive, some (but not all) consumers will switch to the other good. When one of those goods becomes less available (or unavailable), many (but not all) consumers will switch to the other good.
So, what happens when a movie is no longer available on Netflix? Some consumers will simply watch other movies instead. Other consumers will try to find the movie that they really wanted to watch on some other service. Those other services include illegal streaming. How much will illegal streaming increase when a movie is removed from Netflix? That's essentially the question that this 2023 article by Sarah Frick (UC Berkeley), Deborah Fletcher (Miami University), and Austin Smith (Bates College), published in the Journal of Economic Behavior and Organization (sorry I don't see an ungated version online) tries to answer.
Frick et al. focus on a particular natural experiment:
Epix is an entertainment cable network that features movies and TV shows distributed by Paramount, Lionsgate, and Metro-Goldwyn-Mayer, and its movie content varies from large blockbusters such as The Wolf of Wall Street to smaller independent films... Epix and Netflix upheld an exclusive licensing agreement from 2010 until September 2015 when Netflix announced its decision not to renew the licensing contract with Epix, citing the company’s plan to shift towards hosting its own original content... In response to this, Epix entered into a multi-year agreement with Hulu... Thus, all titles owned by Epix were removed from Netflix on October 1st, 2015 and appeared on Hulu for streaming that same day.
The shift of movies from Netflix to Hulu represents a reduction in availability because:
At the time of the switch, Netflix had roughly 4 times as many subscribers as Hulu, and between July 2015 and December 2016 (the time frame for this study) Google trend searches for “Netflix” were, on average, 5.6 times higher than searches for “Hulu”...
Frick et al. then look at the effect of this change on Google searches of free streaming of each movie that was removed from Netflix as a result of the change. Specifically:
We measure searches in the United States for “watch movie title free online” per month for each movie using Google Ads Keyword Search Planner. This tool provides the absolute number of searches rounded to the nearest tens for values less than 1000 and rounded to the nearest hundreds for values greater than 1000.
...we collect piracy search rates from July 2015 to December 2016 - three months prior to the switch and 15 months after the switch.
They use a difference-in-differences approach, which compares the difference in searches between movies that were, and were not, removed from Netflix, between the time before removal and the time after removal. The control group contains 501 movies that were never removed from Netflix over the period considered (and were also not available on Hulu), while the treatment group includes 141 movies that moved from Netflix only to Hulu only. In this analysis, Frick et al. find that:
...moving Epix movies from Netflix to Hulu results in a 20-22% increase in intent to pirate those movies compared to movies that remained on Netflix. There are distinct heterogeneous effects by movie release year; older movies experience almost three times the increase in piracy following their removal from Netflix compared to newer movies.
Frick et al. go a bit further than that, estimating the cost of illegal streaming:
We calculate that the annual piracy streaming in 2015 for a popular movie in our sample, Hunger Games: Catching Fire was approximately 100 million streams... Assuming each view is linked with at least one search, our 20% result yields an expected 20 million additional piracy searches after this movie was removed from Netflix. Applying estimates from Blackburn, Eisenach, and Harrison (2019) that each illegal viewing displaces 0.14-0.34 paid viewing, the implied impact of removing a movie as popular as Hunger Games: Catching Fire from Netflix is a reduction of 2.8-6.8 million paid viewings annually. To arrive at a dollar cost of these lost viewings for content producers, we multiply these lost views by the $0.41 average revenue per viewing on a streaming platform from Blackburn, Eisenach, and Harrison (ibid.), which yields an average annual lost revenue per movie of $1.15 -$2.79 million.
Given that some 141 movies were moved by Epix from Netflix to Hulu, that may have cost Netflix hundreds of millions of dollars in lost revenue. Of course, there are lots of assumptions embedded in that estimate, not least of which is that subscribers to Netflix don't pay per movie viewing, so actually the marginal revenue to Netflix from one additional viewing is actually zero. The real question is whether losing access to the Epix movies caused Netflix to lose subscribers, since that would be what would really impact their revenue.
So, putting the lost revenue aside since the estimate isn't particularly robust, these results really tell us that when movies are no longer available on Netflix, there is more illegal streaming of those movies. That also implies that having a movie available on Netflix decreases illegal streaming. Which is pretty much exactly how we should expect things to work for substitute goods.
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