Via Boing Boing, I find this howler in an article on a joint MPAA/RIAA effort to get Congress and the executive branch more serious about cracking down on the scourge of piracy:
“Our law enforcement resources are seriously misaligned,” NBC/Universal general counsel Rick Cotton said. “If you add up all the various kinds of property crimes in this country, everything from theft, to fraud, to burglary, bank-robbing, all of it, it costs the country $16 billion a year. But intellectual property crime runs to hundreds of billions [of dollars] a year.”
Now, this is just insane on its face, but it’s worth taking a moment to pinpoint exactly how insane. First, there’s little doubt that the “hundreds of billions” estimate is based on the bogus method of counting each instance of illicit copying as the loss of a sale at full retail price, which is clearly false. College students who download cracked copies of Photoshop would mostly be doing without or using open source alternatives, not shelling out $600 for the legal product.
Leave that aside, though, and recall that there’s a big difference between a the cost of theft to an industry or firm and the cost to the country. If I steal your bike, I’ve cost you one bike, not America. America still has the same number of bikes in it. The cost to the country of the theft of physical resources is not the cost of the resources themselves, typically, but rather the efficiency loss of shifting those resources to less valued uses, the cost of resources expended preventing or prosecuting it, the opportunity cost of the effort expended on a zero-sum transfer, and so on. By contrast, piracy is actually positive sum in static terms: Nobody has any fewer programs, songs, or movies, while the pirate has (at least) one more. Nothing has been redirected to a lower-valued use. So the only actual loss in this case is the value of new IP that doesn’t get created because piracy prevents prospective creators from fully internalizing its value. (There may be further losses if we think piracy induces companies to raise the prices of their products, and there are consumers who are priced out of the legal market by this, but don’t avail themselves of pirate copies.) I don’t know how significant that number is—or even how you’d measure it accurately—but “hundreds of billions” just doesn’t pass the straight face test.
A software industry study released a few years back tried to translate piracy losses into job losses in the tech sector. And again, even if we take that number at face value, just looking at one specific sector is worse than useless. By that mode of reckoning, Bastiat’s satirical “Petition from the Manufacturers of Candles” should be read as a serious guide to policy.
In related news, Rep. Mike Doyle appears to be a rare congressman-with-a-clue; he’s looking for ways to reform copyright law to make room for innovative mash-up artists like Girl Talk
7 responses so far ↓
1 Jadagul // Jun 17, 2007 at 7:34 pm
On reading this post, something struck me that hadn’t occurred to me before: what these studies actually measure is the gross gain to the economy: if a copy of Photoshop is really worth $600 and I pirate it, then I’ve increased my wealth by $600 and reduced no one else’s directly; so the quote should read that IP theft benefits the country hundreds of billions of dollars a year. Of course, this number is almost equally bogus, since it totally ignores the second-order effects (which I believe are large enough to justify an IP protection regime, if not the insane one the MPAA and RIAA are pushing—another case of “why am I stuck agreeing with you?”). But I’d love to see an industry spokesman’s response when confronted with that claim. 🙂
2 Gil // Jun 18, 2007 at 7:21 pm
Also, I don’t think there’s price-raising because of piracy. If anything, I’d expect that the move would be in the other direction; to capture more of the buyers who might be on the fence between buying and downloading.
You can’t make more money by raising prices just because you feel like it. Unless more downloads indicate higher demand for purchasing the IP, raising prices because of downloads will reduce profits.
3 Greg // Jun 18, 2007 at 10:24 pm
Hmm, good to know about Doyle, who happens to be my representative. However, he did vote for that pernicious bankruptcy bill…
4 Julian Sanchez // Jun 19, 2007 at 12:01 am
Gil-
My thought was that there might be a firm that, in the absence of piracy, could maximize its revenue with a significantly cheaper product that moved many more units. But it might be that there are a cluster of very price-inelastic users, and then a much broader group who would buy it at a lower price in the absence of the pirate alternative, but will pirate even at the lower price rather than buy. Under those circumstances, the firm’s rational response is to squeeze all they can from the price inelastic “hardcore” users. This is obviously speculative, but there are also some intuitive reasons I’m sure you can come up with why at least *some* software markets might look this way.
5 Kevin Carson // Jun 21, 2007 at 2:10 am
The “pirates” are Bill Gates and the copyright Nazis of the RIAA and MPAA. The “cost,” to the individual consumer, is the monopoly premium he pays to the holder of government privilege. The cost to society comes from the tolls levied by corporate gatekeepers on the free flow of information, and from the protection they receive from the need to remain competitive when they can simply live off the rents of past creation.
6 Vanmind // Jun 21, 2007 at 11:38 pm
Yep, Jadagul, there is no such thing as a national income.
7 Whatever-ishere // Nov 21, 2007 at 10:24 am
thanks for the GREAT post! Very useful…