The True Costs Of Piracy?

| 8 Oct 2008 20:52

A report by Ars Technica says the two figures most commonly cited in discussions about the impact of piracy on the U.S. economy are actually "utterly bogus," based on outdated and fallacious sources.

According to the article, it's a widely held and quoted "fact" that intellectual property theft has resulted in 750,000 lost jobs and cost $200 to $250 billion to the U.S. economy. Those numbers are cited by the U.S. Department of Commerce, U.S. Customs, the U.S. Chamber of Commerce and other agencies, and have also been quoted by industry site and the deputy director of the U.S. Patent and Trademark Office. Yet a closer look at the figures shows them to be somewhat less than iron-clad.

The 750,000 jobs lost, for instance, is typically attributed to U.S. Customs and Border Protection, most recently in a press release from 2002 which gives the number as a Customs estimate. But when asked, a Customs representative said it was actually an error; the number had in reality been determined by someone else entirely and mistakenly ascribed to the agency. Ultimately it was found that the number dated back at least as far as 1986, when Malcolm Baldridge, then the U.S. Secretary of Commerce, estimated the number of jobs lost to counterfeit goods as "anywhere from 130,000 to 750,000."

The $250 million cost to the economy is similarly difficult to nail down. As it turns out, the number isn't actually an estimate of the cost to the U.S. economy of IP piracy at all, but rather an estimate of the entire global market for counterfeit goods. Furthermore, a presumably more accurate and much lower estimate comes from a study based on industry-supplied figures which the authors say "could admittedly be biased and self-serving."

Also to be considered is the fact that determining the actual economic impact of piracy is anything but straightforward. Julian Sanchez, the author of the article, wrote, "When someone torrents a $12 album that they would have otherwise purchased, the record industry loses $12, to be sure. But that doesn't mean that $12 has magically vanished from the economy. On the contrary: someone has gotten the value of the album and still has $12 to spend somewhere else."

"In economic jargon, charging anything for pure IP - which has a marginal cost approaching zero once it has been produced - creates a deadweight economic loss, at least in static terms," he continued. "The actual net loss of IP infringement is an allocative loss that only appears in a dynamic analysis. Simply put, when people pirate IP, the market is not accurately signaling how highly people value the effort that was put into creating it, which leads to underproduction of new IP. To calculate the net loss to the economy over the long run, you'd need to figure out the value of the lost innovation in which IP owners would have invested the marginal dollar lost to piracy, and subtract from that the value of the second-best allocation-which is to say, whatever the consumer of the pirated good spent his money on instead-and the value of the deadweight loss (free music or software is a net economic benefit to someone) incurred by pricing IP at all. If that sounds incredibly complicated, it is."

The end result? Two numbers being tossed around by both industry and the U.S. Congress that are, "at best, highly dubious." There's no doubt that piracy and IP theft has an impact on the U.S. economy, but the actual weight of that impact remains largely unknown and unproven. It gets a bit wonky in spots, but for gamers legitimately interested in the ongoing battle against piracy and copyright violations its an excellent read. The full article is available here.

via: GamePolitics

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