Mommy, Where Do Piracy Loss Estimates Come From?

Aram

June 14, 2012

¶ 1 Leave a comment on paragraph 1 0 I have spent the bulk of the last two chapters deconstructing myths about P2P and “piracy” – specifically, the music industry’s claims that online music sharing is antagonistic to musical culture and industry, and its attempts to pin the blame for recent sales declines on P2P. Before I conclude this chapter, there is another myth that must be addressed: namely, oft-quoted figures purporting to tally the total economic impact of “digital piracy,” in terms of both lost revenues and lost jobs. Nor is the music industry solely responsible for this myth; similar claims have been made by the film industry and the software industry, who often partner with the IFPI and the RIAA to lobby for stricter copyright, surveillance and censorship laws, and in their legal and extralegal efforts to shut down unlicensed content distribution and punish those responsible.

¶ 2 Leave a comment on paragraph 2 0 The news media, government reports, and scholarly articles are rife with quantitative estimates of the economic impact of unlicensed goods and content, most of them attributed to seemingly reputable sources, including trade groups, government departments, commercial research firms, and scholarly researchers. The most commonly repeated claims are those that the US Chamber of Commerce (USCC) has promoted on its website at least since 2007, namely that “counterfeiting and piracy costs the US between $200-250 billion in lost sales each year [and] have resulted in the loss of 750,000 jobs in the United States.”[1] More recently, the USCC has commissioned a research report by self-described “brand protection” company MarkMonitor, which finds (unsurprisingly) that “the worldwide economic impact of online piracy and counterfeiting” amounts to $200 billion annually.[2] It is not clear from either organization’s publications whether this “staggering” online problem is a very large subset of, or an addition to, the $200-250 billion in annual costs the USCC had previously ascribed to piracy in general. If the former (which seems more likely), it doesn’t leave much room for the economic impact of off-line piracy.

¶ 3 Leave a comment on paragraph 3 0 Elsewhere, the USCC cites a different study, authored by research firm Frontier Economics and commissioned by the International Chamber of Commerce (ICC), which found that “approximately 2.5 million jobs [annually] have been destroyed by counterfeiting and piracy.” This report also claims that the “global economic value of counterfeited and pirated products” was $650 billion in 2008, and is expected to grow to about $1.2 trillion by 2015. The portion of this figure ascribed specifically to “music digital piracy” was “between $17 billion and $40 billion in 2008, and was most likely closer to $40 billion.”[3] In other words, according to the ICC, the value of music piracy actually significantly exceeds the value of the entire recorded music industry.

¶ 4 Leave a comment on paragraph 4 0 The ICC report itself takes some pains to explain that the music industry hasn’t actually lost more to piracy than it earns. The authors emphasize that their figures “provide an estimate of the total value of unlicensed digital files available on line [but] are not an estimate of the business losses associated with digital piracy, and should not be interpreted as doing so,”[4] explaining that such losses would be methodologically impossible to capture. Predictably, these numbers have been consistently misinterpreted in exactly way the report’s authors warned against. For instance, US Senator Chuck Grassley recently gave a statement at a Senate hearing on intellectual property claiming that the “global impact of counterfeiting and piracy” is $650 billion – in other words, painting this figure as representative of costs, rather than value. Even the USCC has misrepresented the ICC’s findings, citing the report on its website to support the disingenuous claim that “counterfeit and pirated products account for $360 billion in losses in international trade annually.”[5] (This is actually the figure the report describes as the maximal value of internationally traded counterfeit and pirated products, a subcomponent of their $650 billion estimate).

¶ 5 Leave a comment on paragraph 5 0 Other figures abound as well. For instance, The Institute for Policy Innovation, an archconservative think tank founded by US Congressman Dick Armey, still prominently promotes a 2007 report it published called “The True Cost of Sound Recording Piracy to the U.S. Economy.” According to this report, “the U.S. economy loses $12.5 billion in total output annually” (or nearly half of the recorded music industry’s total value) due to “piracy of sound recordings.”[6] The report, which was authored by an economist who, according to his own bio, “has been instrumental in furthering the global efforts of the World Intellectual Property Organization,”[7] also claims that Americans lose over 71,000 jobs annually – a number that is hard to reconcile with RIAA chief executive Cary Sherman’s claim that “direct employment in the industry” has fallen by only about 10,000 in the past 13 years.[8] Yet this report, too, has been widely repeated without critique in the press, and is called a “credible study” on the RIAA’s website.[9] Along similar lines, a 2010 report commissioned by the ICC claims that European content industries will lose 1.2 million jobs and 240 billion euros in retail revenue by 2015 due to “illegal downloading.”[10]

¶ 6 Leave a comment on paragraph 6 0 Despite the consistency with which these contradictory and often illogical figures get repeated in the press and elsewhere, I am hardly the first researcher to call the various claims of piracy’s economic impact into question. Ars Technica journalist Julian Sanchez published an in-depth investigative piece in 2008, concluding that the $250 billion and 750,000 jobs figures promoted by the USCC are “at best, highly dubious. They are phantoms. We have no good reason to think that either is remotely reliable.” He also points out that, despite recent reports apparently validating these numbers, they are both “seeming decades old, gaining a patina of currency and credibility by virtue of being laundered through a relay race of respectable sources.” Apparently, they have no foundation whatsoever in concrete economic analysis. When he contacted the government agencies which ostensibly served as the sources of the dollar figure, for instance, he was told that they couldn’t “find any record of how that number was computed.”[11] Sanchez has revisited this subject over the years; in an extensive blog post for the Cato Institute in 2012 titled “How Copyright Industries Con Congress,” he connects the dots between research and policy, demonstrating that his “phantom” numbers were a central element in the recent efforts to legislate internet censorship via the Stop Online Piracy Act (SOPA).[12]

¶ 7 Leave a comment on paragraph 7 0 The US Government Accountability Office (GAO) has also taken pains to source many of these figures, pursuant to the Prioritizing Resources and Organization for Intellectual Property (PRO-IP) Act, which was signed into law in 2008. Interestingly, the GAO’s findings were somewhat at odds with the rhetoric of the law’s proponents. Specifically, the authors found that “Three widely cited U.S. government estimates of economic losses resulting from counterfeiting [including the $200-250 billion figure cited by the USCC] cannot be substantiated due to the absence of underlying studies.” Even further, the report conceded that any such figures cited in any context are most likely spurious, given that “it is difficult, if not impossible, to quantify the economy-wide impacts” of piracy.[13]

¶ 8 Leave a comment on paragraph 8 0 Ultimately, then, the entire case for digital piracy’s economic impact is a castle built on quicksand – or perhaps a more apt metaphor would be the mythical Ouroboros, a snake that devours its own tail. A lobbyist (RIAA) aims to amplify its credibility by citing a study produced by a quasi-independent think tank (IPI). The IPI’s study repeatedly explains that it is “building on the OECD methodology” and “building on the OECD work,”[14] thereby increasing its own credibility by resting its case on the findings of a multigovernmental economic organization. The OECD, in turn, gains credibility by basing its analysis in part on figures sourced to government agencies – specifically, the US Federal Trade Commission (FTC). The US government’s own Accountability Office investigates these figures and finds that FTC officials “were unable to locate any record or source of this estimate within its reports or archives, and officials could not recall the agency ever developing or using this estimate.”[15] Yet, regardless of this fundamental absence of substantiation, the RIAA successfully lobbies Congress, the White House, and international treaty organizations to aggressively promote legislation based on their claims, and to police, arrest and punish those allegedly responsible for the putative damages. Dissenting voices are systematically excluded from the debate and erased from the news coverage. The cycle, unchecked, repeats itself ad nauseum.