Email responses to PolitiFact Texas, Julian Sanchez, research fellow, Cato Institute

Jan. 25, 2012, 1:50 pm

I hadn’t looked at this particular study closely.  One thing to stress from the outset, though, is that this whole debate has tended to lump together “counterfeiting” (trademark infringement, usually involving physical goods) and “piracy” (copyright infringement, encompassing both physical media sales and online digital transfers).  From a policy perspective, this is misleading, if not outright deceptive. Whatever amount is spent globally on fake Nikes imported in bulk by retailers, it has very little to do with the debate over policy aimed at shutting down cyberlockers to reduce illicit downloads by individual consumers.  You might as well cite an estimate of the total economic cost of “crime.”  The reliability of those figures is hard for me to independently evaluate, as  they’re based on an OECD extrapolation from national customs interdiction reports, by methods that aren’t entirely clear at a glance from the underlying OECD report.  I have various reservations about the methodology used to generate the digital piracy estimates, but I won’t bore you by getting into those weeds, as it’s not really  necessary for what you’re concerned with.

Smith’s claim appears to be drawn from an appendix to this study suggesting that U.S. consumption of (physical) counterfeit and (digital) pirated goods totals “between $66 billion and $100 billion,” meaning that is the total legal market value of such goods. At the risk of stating the obvious: This is not a measure of “costs” to the U.S. Economy, or even of costs to the affected industries.  Moreover, most of that figure has nothing to do with “online piracy.”  The estimate of U.S. consumption of “digitally pirated products” (TV/movies, music, and software) is “between $9 billion and $25 billion.” But that is STILL not a measure of “costs to the U.S. economy,” or even to the relevant industries.

To figure out how much of that $9-$25 billion in illicit downloads is actually a “loss” to the music, movie, and software industries, you first need to figure out how many people who were interested in downloading something for free would actually have paid for the product if they couldn’t get it free. There are plenty of kids out there who will download a dozen albums, never get around to listening to half of them, play another five once, and actually listen to one regularly. As the report itself notes, survey data suggests that the sales displacement rate for music is about 20% among U.S. college students, and I’d expect it to be even lower for teens with less disposable income. Some of the best designed studies of music filesharing actually find no statistically significant effect on recorded music sales, but pretty much everyone agrees the displacement rate is nowhere near one-to-one in any of these sectors. Assuming the aggregate value of downloaded material is accurate—again, I have no good way to check that—the sales losses are a fraction of that total at most.

And again, the sales losses aren’t “losses to the economy.” Or even, necessarily, losses to those industries.  In the music industry, for instance, live performance revenues have risen significantly even as recorded music sales have fallen.  (There are a lot of piracy-unrelated reasons for that decline. The industry got a bump through the 90s as people replaced their vinyl and cassette collections with CDs; that windfall’s not going to be repeated. The easy availability of single-song legal downloads means you have a lot fewer people willing to buy a $10 album just because they like two songs.) More generally, as the GAO has observed in its own analysis, consumers don’t just set fire to the money they don’t spend on music, movies, and software because they found a pirated copy online. They just spend it on other stuff.  The Internet can do some incredible things, but it can’t just make money disappear—though this does cause a long term allocative efficiency loss, because the market is no longer accurately signaling “real” consumer demand for creative goods.

In short: If Smith is basing his $100 billion dollar claim on this report, it’s misleading at least four times over. First, $100 billion is the high end of a range from $66-$100 billion, which is a pretty big range. Second, most of that $66-100 billion has nothing to do with online piracy. People were manufacturing fake Nikes long before the Internet became a mass medium, so while it might be an interesting factoid to know the size of that market, it’s a red herring if we’re talking about a “Stop Online Piracy Act.” Third, the $9-25 billion that IS related to online piracy is NOT a measure of losses, but of the market value of what people download. As the report acknowledges, we know full well that only a fraction of downloads actually displace legal sales; people download a ton of stuff they never even get around to listening to. Fourth, the fraction of those downloads that do displace sales do not magically remove money from the U.S. economy as a whole. As the GAO has noted, they just displace spending to other sectors.

In short, I believe this is what you folks would call a “pants on fire” claim.

-js

Feb. 2, 2012, 7:45 pm

I did personally believe SOPA was a bad bill, yes—which judging by recent events, places me in the company of a rather substantial majority of Americans who’ve looked at the legislation.  That assessment had very little to do with my analysis of the industry’s loss claims, however.  I have also written critically about the content industry’s use of fabricated piracy data at least as far back as 2008, long before SOPA was even written:

http://arstechnica.com/tech-policy/news/2008/10/dodgy-digits-behind-the-war-on-piracy.ars

  In any event, I don’t think that has much bearing on my analysis of these inflated piracy claims, since (unlike the industries that manufacture these numbers) I’m not asking anyone to simply take my assertions on faith. I explained why the analysis Rep. Smith cited does not establish what he claims, and you can look for yourself at the study in question and determine whether what I’ve said is accurate.  The number he cites is very clearly an attempt to measure the market value of content downloaded by U.S. consumers, and not a measure of lost sales by the content industries, let alone a net loss to the U.S. economy. Even assuming, charitably, that the number is accurate, the authors never claims it is a loss estimate, as you can easily confirm from the text of the study itself.

 Incidentally, this is an extremely strange argument for the congressman, of all people, to make: Does Rep. Smith, who is obviously a strong proponent of SOPA, similarly assert that his own analysis should be discounted for this reason? Are the lobbying groups that supplied him with this data “objective”?  If we actually look to impartial research—of the sort produced, say, by university-affiliated economists not employed by firms with a stake in these political disputes—we certainly don’t find estimates of these magnitudes, which may be why you seldom see these industries referencing such research.  If you want to speak with someone who has actually conducted such research, you might drop a line to Felix Oberholzer-Gee of the Harvard Business School.

As for the question of how to produce an accurate estimate, I’m afraid I agree with the Government Accountability Office ( http://www.gao.gov/products/GAO-10-423 ) that it would be “difficult, if not impossible to quantify” the net effect of piracy on the U.S. economy.    Once you had measured the total quantity of illicit copying—itself an extraordinarily difficult task—you’d have to figure how much of that copying actually represented lost sales on net (after factoring in the possibility that there’s also some countervailing positive effect as people sample more content). Then you’d have to figure out the net effect on output: How much value is lost because there’s less incentive to create new IP, versus whatever value is created in other sectors where the pirates spend their money instead.

As the GAO suggests, I very much doubt it would be possible to estimate that figure with any great degree of reliability. At present there isn’t even agreement in the academic literature on whether the net effect is positive or negative, let alone how large it is. (Though the fact that even the direction of the effect is disputed suggests that it’s probably not very large in either direction.) Again, Prof. Oberholzer-Gee may be able to point you toward the best and most recent research in this vein.

Regards,

-Julian    

On 2/2/12 7:01 PM, "Selby, Gardner (CMG-Austin)" <wgselby@statesman.com> wrote:

Had a couple of follow-up queries.

 

Do you oppose SOPA?

 

What is the most accurate way to gauge the costs of online piracy and counterfeiting to the U.S. economy?

 

Finally, Rep. Smith says your analysis should be discounted. Why? Because you’re opposed to SOPA, he says, you “cannot provide an objective or unbiased analysis.”