Has piracy EVER resulted in a developer getting shut down? That is, has piracy ever been so detrimental that it brought about the downfall of a game studio? If I were to release a game, should I be extremely wary of pirates and plan accordingly, or is it safe to assume that it won't damage me or my studio whatsoever?
After a little running around the internet I found an interesting article that shows a good example of how pirating can affect a game directly and shutdown a project.
In this article, Hunted Cow, the developers behind the iOS game Battle Dungeon ended up shutting down their servers. The reason they gave as quoted:
“Unfortunately we have taken Battle Dungeon down for the forseeable future. This was due to high levels of server load created by large numbers of pirated copies of the game. The high load revealed technical issues which we don’t feel we can fix to the level that our paying customers deserve.”
I found this interesting because it shows that the piracy directly affected the performance of the servers rather than the revenue the developers were receiving to continue with development. Essentially (for those just wanting to skim the article) the pirated copy of the game hit the torrents of the web and multiplied the number of active players on their servers so drastically it reduced performance to a non playable standard. This resulted in them shutting down the project on December 3rd 2012.
Since then they have upgraded their server hardware and rereleased the app on the iTunes Store on April 8th 2013. However the piracy is what caused them to make these changes, costing money to company, down time of more than 4 months for the paying players and a reworking of their website which would have taken up valuable resources from their planned work.
Piracy may not affect companies directly from losing money from the initial sale, but as with Hunted Cow it can really set you back and potentially enough to shut you down. Hunted Cow were able to readjust and solve the problem after it happened, potentially with user based access to servers being validated for paying customers - however that is my own assumption.
It is something that you can prepare for in many different ways (DRM, payment authentication, server load access restrictions) and still be affected in ways you won't predict. Do your best to estimate what can happen to your services with extra pirated copies (extra load on servers, potential player griefing etc) and account for it as best you can within your budget so it doesn't affect your fair paying customers.
I've never heard of this happening as a loss of sales. There are situations where a company has had a direct loss of money that can be attributed to piracy.
Project Zomboid faced issues with this a few years ago when their updater was cracked. The updater was hacked to allow pirates to download the latest release of the game from Project Zomboid. Since Project Zomboid was using Amazon Cloud services to distribute their updates, the additional downloads were costing them money. This resulted in them taking the game down for a while.
This example, including the example in Blue's answer both show situations where, if the conditions were right, it could have caused the game company to go under.
These examples show that when a company offers a service as part of their business (online servers, or even direct download updates), this service can be taken advantage of and cost the company more money than it generates.
These examples show that it's possible to lose money directly as a result of piracy. This means it is possible to go out of business as a direct result of piracy, but as with both examples, the companies can take measures to avoid the continued "unauthorized expenses".
A case where it didn't take down the studio, but it must likely hurt sales and cost money:
Demigod by Stardock was pirated before launch and had a massive server load - 18,000 validated users and 140,000 concurrent users. This prevented everyone from playing:
"Our stress tests had counted on having maybe 50,000 people playing at once at peak and that wouldn’t be reached for a few weeks by which time we would have slowly seen things becoming problematic... So during the day today, people couldn’t even log on, and in some cases, the Demigod forums, which use one of the affected databases for some piddly thing were even down," he wrote. "Even getting the game running was a pain today because a simple HTTP call to see what the latest version would get hung leaving people looking at a black screen. Stuff of nightmares."
The game took a huge hit in reviews - it was a multiplayer game where the multiplayer didn't seem to work.
As I remember, Stardock had to call people in over the weekend ($ for overtime), they had to spin up the servers sooner ($$ and time), and they had to sink more man hours in patching (probably would have happened anyway, but maybe not on "no one goes home tonight" urgency).
It's actually saved companies before! Leisure Suit Larry was not a very popular game before it was passed around on pirated floppy disks. I remember Al Lowe saying that they sold more strategy guides than copies of the game.
There were no plans on a second game until the piracy eruption(pun intended).
I would be quite wary of such reports, if there are any. Unless you have been or have worked for such an unfortunate developer and know the reason first hand, there is always the possibility that piracy is being used as a scapegoat, or a convenient quarter- to half-truth.
After all, "Our game is SO awesome that it was crushed by its own success and because people are scumbags." sounds a lot better to future customers and/or investors than the myriad reasons for why companies usually fail - all kinds of mismanagement, poor quality or desirability of the product, insufficient marketing, wrong time and place for the product, etc. etc.
See FUD for examples of that strategy.
I can think of one off of the top of my head where DRM and piracy caused a game to have poor(er) sales, and the company ultimate went defunct which may or may not have been directly related to the sales of the game.
Titan's Quest made by Iron Lore Entertainment had DRM where pirated copies were extremely glitchy and crashed a lot, and the pirates spread horrible word of mouth about it around and this affected the sales
I'm not sure if it was directly linked to them going defunct, but I'm sure it didn't help the situation.
I should clarify that a developer's job is not lost. Reason: It is not one game that is being pirated, there are loads of it, the piracy of games might increase the word of mouth for those games provided they become popular say GTA series and more. So if a game becomes popular because of piracy and if they achieve the cult status, the requirement of a new version for the same with more graphics, detailing and programming will come as a public demand. Hence a developer job is not lost, but increased.
If we look at the other way where the popularity too fails, the company making that game will either shut in worst case scenario or will make a new version, but in any case, the developer will have his most precious intellectual property and will invest in a new venture or product. So in this case also, his job is not lost.
I can't find the article right now but a while ago I read one about how the developers of one of the Spyro games spent 1/5 of the budget and development time on an experemental DRM system.
They calculated that this system slowed hackers down by only 6 days and increased revenue by almost 30%.
Though these are not studio closing numbers it does give you an idea of the effect piracy can have on a game. You should most definitely consider the impact it will have on you and plan accordingly.
This is impossible to prove because "loss of sales" is a complete fiction. It compares the actual world and events that have happened to an imaginary parallel universe in which all the users who copied the program were forced to pay for the program (whether or not they still wanted to use that program if they had to pay, and whether or not some of them could afford it).
If a game dev fails, whereas others are surviving, this is probably caused by differences between that game dev and others, since everyone is affected by piracy, but not everyone shuts down.
GreenHeart games was also hit by piracy quite hard, even tough they managed to punch back in a very unique manner.
They uploaded the game themselves to the torrent scene, but it was a modified version. Their game, GameDev tycoon, was modified for this release, so that your virtual game development company would go bankrupt sooner or later because of piracy.
They even had pirates posting at their forums about "piracy ruining them".
In this article you can also see statistics of genuine vs cracked versions.
While they didn't go bankrupt, I read another article, that I can't find, that stated the game didn't bring any profit, this also had a negative psychological effect on game developers not wanting to continue, in the end they did, and since it seems their game has taken off.
It's not mentioned yet, but some people cite the very piracy friendly CD format of the Dreamcast discs (you just had to burn the iso's, no modding just a bootloader) as one of the major factors in the system's failure. It didn't result in the total collapse of Sega, but we'll never see any hardware from them again.
It can be good and bad. The good is it helps to popularize the software (I'm talking in general). Microsoft is the best example. They actually 'allowed' piracy, now 95% of the computers in the world has their software and now, we can't live without them.
Another theory is, don't worry much. If the user is using pirated version, he'll never pay for a non-pirated one, if pirated is not available. I mean, why he is using pirated, because he don't want to pay. So there is not much about lost sales, it may actually increase sales by the popularity and the 'good' people who want to buy. Give an option to register/buy. But the developer will feel bad when they see their software cracked.
Movies is a different game. Pirated will directly attribute to lost sales.
Edit: For those who are looking for source, here is a quote from M$. Just what I was saying about Microsoft. Most of their business strategies are opponent crushing ones.
Bill Gates famously said: "As long as they're going to steal it, we want them to steal ours. They'll get sort of addicted, and then we'll somehow figure out how to collect sometime in the next decade."