Pirate Management

Like any other economic activity, legal or otherwise, pirates have surfaced wherever the balance between risk and reward made sense. The most notable recent iteration of the trade are the pirates operating from the coast of Somalia, which in practical terms is more a geographical than a political location. With no alternative source of income or local law enforcement, the prospect of attacking rich and poorly secured ships traveling close to the coast required only boats and guns — both of them easily available in the formerly fishing towns of Somalia &mdash and for a given level of risk offered the possibility of enormous rewards. But the pirates of past ages, like those of the piratical heyday of the 17th and 18th centuries, faced a much different environment. Piracy required not only weapons and a ship, but also a surprisingly sophisticated ‘business structure’ that was in many cases ahead of its time. We’ll describe some of its characteristics, based on Peter T. Leeson’s An-arrgh-chy: The Law and Economics of Pirate Organization (Journal of Political Economy, 2007).

Ships at sea present an interesting organizational problem. The owners of merchant ships lived on land; usually a handful of merchants would pool together capital, acquire a ship and goods, and organize a trading trip, but would not command the ship itself. As travel was relatively slow and long-distance communication only as fast as the ships themselves, direct supervision was impossible, and there was a serious principal-agent problem. How could owners make sure that the ship would follow their trade plan, and that they would receive the appropriate profits? The solution was to choose captains with strong social and personal ties to the owners (for example, family ties), sometimes even with a small share of the benefits of the trip, and grant them absolute, autocratic control over the ship. The captains’ personal interest was aligned with the ship’s owners, and the strict hierarchy, and the extreme and arbitrary punishments allowed by the naval law of the time and fully backed by the State, facilitated their control of the ship.

The situation for pirates was different. They owned their own ships, in the sense that they had stolen them, and the main economic input they required was labor. But, being illegal organizations, they could not count on the State to impose and enforce an external organizational framework. In any case, the penalty for piracy was death, so any further threats from pirate leaders would have a dubious effect.

Pirates developed a very modern structure with checks and balances to power. Unlike merchant ships, pirate crews could and often did vote to replace their captains with new ones when they felt their leadership lacked vision or courage. Also unlike merchant ships, power was distributed between two different offices: the captain, with absolute control of strategy and tactics during battles, and the quartermaster, in charge of ship logistics, the distribution of rations, punishments, and other internal affairs. This curbed much of the ability of pirate captains to profit economically by abusing their crews, a practice fairly widespread through legal merchant ships.

Financially, as well, pirate ships were run on a very organized manner. Costs were subtracted from revenues (the loot), and then the remaining profit was split according to a rigorous, predefined procedure, with most sailors getting one share, and certain officers getting two or more shares — but, unlike many organizations in the 21st century, without the possibility of practically discretionary bonuses for management.

Another interesting feature of pirate organization was a form of health insurance practically unheard of at the time. Pirates who lost, for example, an arm or a leg, would receive an extra payment according to an established scale. These organizational characteristics, together with the riches that successful pirates could accumulate, made the pirate career an attractive one, despite the continuous violence and the very likely prospect of an execution at the end of it.

Although the business models of pirates wasn’t innovative — near the time Julius Cesar conquered Gaul, another very important military victory of the late Roman Republic was the eradication of the then-endemic pirates from the Mediterranean — they had to be tactically creative, and were, for decades, very successful despite the pursuit of States. Instead of investing in complex hierarchical controls, they chose, or had no option but to develop, an attractive work environment, agile management that was nonetheless strongly aligned with the interests of the business as a whole under threat of immediate demotion, extensive, non-discretionary profit sharing with the labor force, and universal health benefits. Pirate ships, despite their depiction in movies and literature, were well-run, generally as well disciplined as merchant ships (although with much less violent means), and with extremely motivated crews.

Whatever perilous seas you have to navigate these days, these ‘modern’ organizational ideas are worth keeping in mind.

Mutants, Pirates, and Business Models

The movie “X-Men Origins: Wolverine,” widely expected by fans, opened in some theaters Wednesday, April 29th. Yet a month before numerous entertainment sources had already reported that an unfinished copy of the movie was circulating through the internet. It’s impossible to know the number of people who have seen this copy, but it has certainly been one of the most publicized cases of movie piracy of the last months.

It’s not often than unfinished copies — called ‘workprints’ — get leaked to the internet before the movie has been shown in any commercial cinema. Most of the time, the earliest pirated copies available for downloading were filmed with small cameras inside theaters and then released, although they are usually quickly replaced by better-quality copies. The leak of such a high-profile movie more than a month before its official release is a very unusual situation, an unintended, unmonitored experiment, perhaps, about the future of the movie industry.

The response from the company making the movie, Fox, was to indicate that the workprint lacked key scenes, some music, and many computer-generated special effects. Nonetheless, reports from people who have seen both the leaked movie and the final release have indicated that these differences are in fact minor.

Now that the movie has been released, there’s probably going to be speculation about the impact of the early leak on the box office. If the movie does well, the studio is likely to claim that it would have done better had it not been leaked, and if the movie has a bad performance, then it’s certain that piracy will be blamed for this.

Unfortunately, this is an uncontrolled experiment, so there will be no way to adequately gauge the true influence of the leak. It can be argued, although the studio won’t do it, that the leaked workprint functioned as free advertising, and that people who watched the movie on their computers and liked it were specially motivated to see it on the big screen. Alternatively, if there was a negative influence of the leak on the movie’s box office performance, it could have been because people who saw the leaked movie didn’t like it, and negative word of mouth (both literal and online), hurt the movie’s financial results.

Whether its ultimate financial effect, it’s clear that the leaking and distribution of the unfinished version of the movie flies against the core of the movie business model and was illegal according to the current legislation, and it’s equally clear that it’s technologically impossible to prevent with certainty this from happening again (at least not without deeply curtailing the very features of the internet that make it such a rich economic and cultural force, a cost much higher than any damage to the movie industry).

But business models can change when technology does, and there are precedents in other media that ‘internet piracy’ is not always opposed to profits. A growing number of authors are making freely available digital copies of their books, sometimes together with the release of the printed book, a marketing choice that doesn’t seem to have hurt their sales. Physical books, they argue, are valued nowadays as objects — symbols of a person’s interests and readings, both to himself and to other people — as much as they are for the actual text they contain, a text that can often be obtained and read for free, even for authors who don’t choose to make their books available in this manner. In a way, it is the equivalent of allowing the distribution of photographs of a painting: while they reproduce the content of the painting, they don’t decrease its value, and in fact they generally increase it.

Movies aren’t objects, but in many senses they are events. Going to the movies is often a social event, and sometimes a romantic one, a value that cannot be captured by a digital copy. Why not build on this experience as the source of value? People who illegally download MP3s, as a matter of fact, both buy music legally, too, and they go to concerts.

Although so far the business model of movie studies, a business model established generations ago, has focused on restricting access to the content, this is a losing proposition for any society with free access to computers and networks. There are alternatives to this, and although the big movie studios are perhaps too invested on the status quo to explore them, this represents a window of opportunity for smaller and newer organizations. Legally justified or not, the war against piracy cannot be won. It’ll be far more profitable to focus on the possibilities of peace.