If you’ve paid attention to copyright debates in recent years, you’ve probably seen advocates for more restrictive copyright laws claim that “counterfeiting and piracy” cost the US economy as much as $250 billion. When pressed, those who make these kinds of claims are inevitably vague about exactly where these figures come from. For example, I contacted Thomas Sydnor, the author of the paper I linked above, and he was able to point me to a 2002 press release from the FBI, which claims that “losses to counterfeiting are estimated at $200-250 billion a year in U.S. business losses.”
There are a couple of things that are notable about this. In the first place, notice that the press release says counterfeiting, which is an entirely different issue from copyright infringement. Passing stronger copyright legislation in order to stop counterfeiting is a non-sequitur.
But the more serious issue is that the FBI can’t actually explain how it arrived at these figures. And indeed, it appears that nobody knows who came up with these figures and how they were computed. Julian Sanchez has done some sleuthing and found that these figures have literally been floating around inside the beltway for decades. Julian contacted the FBI, which wasn’t able to point to any specific source. Further investigation led him to a 1993 Forbes article:
Ars eagerly hunted down that issue and found a short article on counterfeiting, in which the reader is informed that “counterfeit merchandise” is “a $200 billion enterprise worldwide and growing faster than many of the industries it’s preying on.” No further source is given.
Quite possibly, the authors of the article called up an industry group like the IACC and got a ballpark guess. At any rate, there is nothing to indicate that Forbes itself had produced the estimate, Mr. Conyers’ assertion notwithstanding. What is very clear, however, is that even assuming the figure is accurate, it is not an estimate of the cost to the U.S. economy of IP piracy. It’s an estimate of the size of the entire global market in counterfeit goods. Despite the efforts of several witnesses to equate them, it is plainly not on par with the earlier calculation by the ITC that many had also cited.
It’s not surprising that no one is able to cite a credible source because the figure is plainly absurd. For example, the Institute for Policy Innovation, a group that pushes for more restrictive copyright law, has claimed that copyright infringement costs the economy $58.0 billion. As I’ve written before, these estimates vastly overstate losses because IPI used a dubious methodology that double- and triple-counts each lost sale. The actual figure—even accepting some of the dubious assumptions in the IPI estimate, is almost certainly less than $20 billion. But whether it’s $10, $20, or $58 billion, it’s certainly not $250 billion.
There are a couple of important lessons here. One concerns the importance of careful scholarship. Before citing any statistic, you should have a clear understanding of what that figure is measuring, who calculated it, and how. The fact that this figure has gotten repeated so many times inside the beltway suggests that the people using the figure have not been doing their homework. It’s not surprising that lobbyists cite the largest figures they can find, but public servants have a duty to be more skeptical.
The more important lesson is for the journalistic profession. Far too many reporters at reputable media outlets credulously repeat these figures in news stories without paying enough attention to where they come from. If a statistic is provided by a party with a vested interest in the subject of a story—if, say, a content industry group provides a statistic on the costs of piracy—reporters should double-check that figure against more reputable sources. And, sadly, a government agency isn’t always a reliable source. Agencies like the BLS and BEA who are in the business of collecting official statistics are generally reliable. But it’s not safe to assume that other agencies have done their homework. The FBI, for example, has made little effort to correct the record on the $250 billion figure, despite the fact that it is regularly cited as the source of the figure and despite the fact that it has admitted that it can’t explain where the figure comes from.
Julian gives all the gory details on the origins of the $250 billion figure. He also digs into the oft-repeated claim that piracy costs 750,000 jobs, which dates back even further (to 1986) and is no more credible. And he offers some interesting theoretical reasons to think that the costs of copyright infringement are much, much less than $250 billion.
I have been pointed to the following sources for the figure:
– International Intellectual Property Association.
– Price Waterhouse coopers.
Apparently both groups have computed the 250 billion dollar figure and convinced elected officials of it.
The FBI has a long history of abusing statistics directly and indirectly.
During the 80’s missing/murdered children scares, the FBI used to place its imprimatur upon statements that 50,000 children were murdered every year. Of course that number was greater than all the murders. The true number was about 500. Terrible, yes. But why was the number inflated 100x?
There were also estimates of 2-3 million abductions every year. Another clearly inflated number. It turns out that the statistic included all calls to the police, even cases where children were less than two hours late returning home from play.
We can never believe anything without first checking for reasonability, and then for documentation. All too many “statistics” don’t even pass the first test. Far too many officials of our government are willing to lie overtly or passively.
Timothy B. Lee wrote:
“If you’ve paid attention to copyright debates in recent years, you’ve probably seen advocates for more restrictive copyright laws claim that “counterfeiting and piracy” cost the US economy as much as $250 billion. When pressed, those who make these kinds of claims are inevitably vague about exactly where these figures come from.”
That is because “where these figures come from” is “directly out of a part of their anatomy that they can’t mention in polite company”.
Tony Lauck wrote:
“Please note that I am not advocating that anyone pirate a musician’s recording, any more than I am advocating that someone should pick the musician’s pocket. Both of these actions have moral and legal implications.”
No, only picking the musician’s pocket has moral implications.
Scott S. wrote:
“The true societal cost of any infringement can only be in a reduced output of “progress of science and the useful arts”. So if you could show that infringement caused authors to write fewer books or create fewer songs, you would have a case. That is the only cost that matters to society, and is a proper concern of the general government.”
And there the “cost” turns out to be a negative number. Dividing artists into two groups, “poor struggling” and “making out like bandits”, the main threat to the former is obscurity and to the latter is the complete collapse of civilization, since nothing short of that will wipe them out.
There are plenty of examples of “poor struggling” artists finding out that something of theirs has been “pirated” and it made their day. No more obscurity! In fact, “piracy” levels the playing field.
Who gets by adequately? Currently, all artists just starting out need supplemental income from another source, and this doesn’t change. The point at which they get by adequately mostly depends on if, and when, they cease to be obscure. “Piracy” can only make that point earlier, and so increases the number of potentially-full-time artists, assuming as many enter the profession as otherwise.
That assumption requires examination. If “piracy” prevents a Britney from being able to make out like a bandit, producing a few hits and then retiring on their monthly royalty cheques, then it might conceivably reduce the opportunity cost for people to enter the music business. Some people that might have entered because they might strike it rich now don’t.
However, not all music is created equal, and the music produced by those whose primary reason for entering the industry is to make money rather than to make music tends to be derivative. If “piracy” stops a few people from entering the business, but those people were all Britneys and none Beatles, say, is this a loss, or actually a gain? Right now, perhaps, we have the subsidized production of derivative, Britneyesque music, paid for at the cost of consumer rights and inflated prices for a variety of goods. THAT smells like a deadweight loss to me. Cutting those costs to consumers while increasing the wheat-to-chaff ratio of music might be a good thing indeed.
Ultimately, the market will decide, and absent artificial restraints on trade (such as copyright) it may do a better job than otherwise. If the market truly demands lots of Britneys, it will still reward them. Though they may have to put in concert appearances or continue creating new works to get paid, instead of being able to rest on their laurels once the royalty cheques start rolling in. Which would also be a good thing.
Consider lastly that reduced costs (through the disappearance from prices of copyright rents) for consumers will include reduced costs for artists, and artists that sample will see reduced work expenses when all that rights-clearance nonsense goes away. If their revenues are reduced, but their costs are reduced even more, they make out better than before, and of course all that rights-clearance nonsense is more deadweight loss. So is the duplication of work sometimes used to avoid copyright infringement or rights clearance, when copying existing work would be more efficient.
Really, the progress of science and the useful arts would be very well served by abolishing copyright entirely. The arguments above for musicians work equally well for virtually any industry currently reliant on copyright, and the main money to be made is generally not on content but on ancillary services anyway. Red Hat makes money on software support, and on nicely-packaged software copies, without relying on restricting copying. Many musicians make money primarily on concert tickets and otherwise selling what’s scarce, access to the musicians themselves; for them, “piracy” is free advertising. The one example frequently pointed to of a “copyright-dependent” business model that can’t easily be changed is the $200 million blockbuster movie, but the cost of producing a movie of comparable quality is not really that high. Drop song rights clearance and various other copyright-related rents from production costs and it becomes the $100 million blockbuster. Drop celluloid film for all-digital production and it becomes the $50 million blockbuster. Drop big-name actors for talented no-name actors and it becomes the $500,000 blockbuster, while increasing employment in acting and leveling the playing field. Not as many big stars making out like bandits but lots more “poor, struggling” actors making out reasonably well, and lots more actors period. Finally, replace some of the more expensive location-shooting with virtual sets, which are now up to snuff quality-wise, and it becomes the $50,000 blockbuster. As in, it costs no more to produce one than to buy a small home. Product placement will pay for this on its own, in all likelihood, if it can be predicted to become popular. Nicely packaged DVDs will sell, even given rampant legal copying, to the tune of over $50,000 if it becomes popular. And the amount is cheap enough for a few dozen people to pool together and make such a thing as a hobby. Heck, it’s already happened — something called Star Wreck was produced for under $30,000, copies given away for free, as a hobby. The production values in many respects are comparable to those for Star Trek: Generations.
Copyright no longer serves any useful function, if it ever did.
of any infringement can only be in a reduced output of “progress of science and the useful arts”. So if you could show that infringement caused authors to write fewer books or create fewer songs, you would have a case. That is the only cost that matters to society, and is a proper concern of the general government.
If you want to go all economic-model, you can also develop an argument that producers make much more money by accepting piracy. If they wanted to eliminate all unauthorized copying, they’d have to lower prices to a level where everyone (ahem) who now pirates would be willing to buy, and that would be a much lower total level of revenues. This way they segment the market into those who are willing to pay full price and those who aren’t (and if they were really smart, they would establish — and regularly raid — their own bootleg distributors, so as to capture part of the lower-price market segment).
Of course anyone with sense would laugh at the above argument, but it’s at least as plausible as the one saying that everyone who now makes an unauthorized copy of something could magically be induced to pay full price.
Even if the numbers are not totally bogus, they are an artifact of how economic statistics are computed. They focus on money transfers because these are easier to add up than the many apples and oranges of real goods of different types, qualities, locations and ownership. The purpose of an economy is not to provide jobs, it is to provide goods and services to people.
The situation is easier to see with a simple example that cuts out all the obfuscation of self-interested middlemen. Suppose a musician makes a recording and produces some number of copies. He then sells one to me. Alternatively, suppose that he produces one fewer and I make a pirated copy myself. As a third possibility, suppose I make a pirated copy and then pay the musician his purchase price. (For simplicity, I neglect production costs, which for Internet downloads are effectively zero anyhow.) In all three cases, every person in the entire economy has exactly the same goods and services. The only difference is that in one of the three cases, I have more money in the bank and the musician has less. Unless there are significant differences between my spending pattern and the musician’s the effect on the economy will be nil, regardless of what any economic statistics may show.
Please note that I am not advocating that anyone pirate a musician’s recording, any more than I am advocating that someone should pick the musician’s pocket. Both of these actions have moral and legal implications. Perhaps the economic statistics can reconcile these two situations, by counting the pickpocket’s revenues (and by the same logic the pirate’s).
The one thing we do know, following Jonathan Dursi , is that DRM and other anti-piracy methods are a deadweight loss resulting from piracy (or its perception). The people engaged in those fruitless behaviors could otherwise be engaged in economically useful activity. The above is pretty much directly from the textbook economic analyses of theft, which is economically neutral in the first order because it merely transfers wealth rather than creating or destroying it. The aggregate cost of theft is in the security precautions people take, whether buying bars/locks/gizmos or avoiding profitable activities that they would otherwise engage in.
In most real-world communities, it’s the second part that imposes the lion’s share of the costs and is one big reason why high-theft areas are also poor. But in the music business, I have yet to see any serious evidence of a song that wasn’t written or an album that wasn’t produced because someone was afraid it would be pirated.
Timothy,
While my opinions on the copyright situation can be easily inferred from my name, I think you touched on an important point: the ease with which the news agencies spout these figures. For me, the time of real journalism has passed and we are, unfortunately, in a period where the depth of the story is of much lower concern than many other factors.
Things like speed of reporting, flashy graphics, shocking headlines, and other nonessentials (to me) have always been there. But now with so much competition between the various methods of getting news, they have become as important as the story itself. So you wind up with tons of people elbowing past each other to get that important first click-through or 15-second spot – and they’re far more concerned with your attention than vetting the story.
It’s a bit sobering to think too hard about. In the situation of copyright “losses”, the readers of this blog have enough domain knowledge to be skeptical. But how many other stories are passing soft facts right past us because we wouldn’t know any better? A general skepticism of all mainstream news is a requirement, but not a particularly fulfilling one to live with.
One saying I hears many years ago went like this:
Have you ever listened to a news story talking about a subject of which you had personal knowledge, and just winced at the level of inaccuracy of the story?
Well, what makes you think the rest of the news is any more accurate?
Even if it were true that, in a brutally-enforced DRM utopia, everyone who would have otherwise chosen copyright violation would instead have purchased the song/movie — which is preposterous — that money didn’t get put into a big pile and set on fire. That money went to buy other stuff, and if it was spent on more productive industries, it would have in fact improved the economy, rather than being a cost. (Of course, who knows where the money went, but the IT sector is very high-productity, and people who have a lot of MP3s also have a lot of electronic gadgets…)
The RIAA have to try to make these sorts of arguments, because `you kids are costing Britney Spears her hard earned money’ doesn’t win much sympathy. But that doesn’t mean that journalists have to blindly transcribe each word of it.
Maybe it’s just that I don’t understand these figures, but what are these “costs to the economy” anyway? Lost sales are certainly “costs” in some sense to the people making the sales, but is that supposed to have some larger economic impact on the rest of society? Am I supposed to feel there is some moral imperative when piracy is against “the economy” rather than against Universal Studios? It’s not like the money disappears and goes to Mars when someone pirates a movie and doesn’t give his money to the movie industry — for all we know, it may very well get spent in a way that has some greater benefit to the economy. Or is that a part of the figure?