Beware Copyright Statistics

Dean Baker is unimpressed by studies showing vast losses to the US economy from piracy of intellectual property. He picks on a Washington Post article by Frank Ahrens, which quotes a study concluding that "intellectual property piracy -- theft of music, movies, video games and software -- costs the U.S. economy $58 billion per year and 350,000 lost jobs in the entertainment industry and its supplying industries."

Baker doesn't like the economics:

The article wrongly claims that these violations cost the economy money. This is untrue on its face. The losses to the industry are gains to consumers, and those who know economics would know immediately that the gains to consumers vastly exceed the losses to the industry. Some economic analysis would be useful in this article.

Baker's right that the study, from the IPI, makes no attempt to calculate the gains to consumers from IP piracy. But in fact the study is worse than that, because it also makes no attempt to calculate the gains to the entertainment industry from IP piracy.

The methodology of the study is simple. The researchers (the author of the study is Stephen Siwek) take their best guess of how many CDs and DVDs are illegally copied or downloaded each year. In the case of CDs, they reckon that 1.4 billion copied CDs are sold, along with 20 billion illegal MP3 downloads. They then assume that 65.7% of purchasers of counterfeit CDs would have bought the real thing instead, had the counterfeit not been available, and that 10% of people downloading songs illegally would have paid for their music at a legitimate download site such as iTunes instead.

From these numbers they come to the conclusion the entertainment industry loses $1.6 billion to fake CDs, and another $3.7 billion to illegal downloading. They then add those numbers together, to get a total of $5.3 billion, and apply a "multiplier" which allows them to reach the conclusion that the total loss to the US economy is $12.5 billion per year.

At no point in the study is the idea considered that wider dissemination of music might actually help the music industry at all: I'm almost surprised that Siwek doesn't calculate the number of people who might buy CDs but don't because they can hear music free on the radio instead. Music is naturally viral: the more people who listen to any given artist, the more people who are likely to go out and buy that artist's music. And then, of course, there's all the extra revenue to the music industry from merchandise and concert tickets which are sold to people who didn't buy the CD but still became fans.

Now I'm not saying that any of these effects completely couteract the losses due to piracy, because I have no idea whether they do or not. But these effects do exist, and it might be intellectually honest to at least take a stab at estimating their magnitude before coming to the conclusion that the US entertainment industry "loses" tens of billions of dollars a year to piracy.

In fact, of course, one can simply look at the stock price of entertainment-industry companies to see that the advent of piracy doesn't seem to have done them a vast amount of visible harm. That's why they need to wheel out researchers such as Siwek to try and demonstrate assertions which, as Baker quite rightly says, are untrue on their face.

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