What’s the effect of piracy to the economy? Nobody knows!

(via Ars Technica) Just a couple of weeks ago yours truly was bemoaning the preposterous abuse of statistics in order to produce a set of dodgy figures about the cost of piracy to the European economy. Now a U.S. government institution has produced a report that pretty much tells us similar points, namely, that it is difficult to try to assess the damage to the economy done by copyright infringement and counterfeiting. The Government Accountability Office has published the report entitled “Observations on Efforts to Quantify the Economic Effects of Counterfeit and Pirated Goods” (pdf here). It makes for a fascinating read.

One of the first points that struck me is that this is a professional document with no evident agenda. It is refreshing to read a document dealing with copyright infringement that does not try to score points, use grandiloquent and overemphasised rhetoric, and that simply tells it like it is. For example, the report goes at great lengths to always distinguish between counterfeiting and online copyright infringement, a small distinction that is sometimes left out in other debates. The report tries to paint a balanced view of piracy effects. For example, while listing various negative effects of piracy, the report mentions some possible positive consequences:

“There are also certain instances when IP rights holders in some industries might experience potentially positive effects from the knowing consumption of pirated or counterfeit goods. For example, consumers may use pirated goods to “sample” music, movies, software, or electronic games before purchasing legitimate copies, which may lead to increased sales of legitimate goods. In addition, industries with products that are characterized by large “switching costs,” may also benefit from piracy due to lock-in effects. For example, some experts we spoke with and literature we reviewed discussed how consumers after being introduced to the pirated version might get locked into new legitimate software because of large switching costs, such as a steep learning curve, reluctance to switch to new products, and search costs incurred by consumers to identify a new product to use.
Some authors have argued that companies that experience revenue losses in one line of business—such as movies—may also increase revenues in related or complementary businesses due to increased brand awareness. For instance, companies may experience increased revenues due to the sales of merchandise that are based on movie characters whose popularity is enhanced by sales of pirated movies. One expert also observed that some industries may experience an increase in demand for their products because of piracy in other industries. This expert identified Internet infrastructure manufacturers (e.g., companies that make routers) as possible beneficiaries of digital piracy, because of the bandwidth demands related to the transfer of pirated digital content. While competitive pressure to keep one step ahead of counterfeiters may spur innovation in some cases, some of this innovation may be oriented toward anticounterfeiting and antipiracy efforts, rather than enhancing the product for consumers.”

The reports main contribution to the debate however, is that it points out what many of us have been saying for quite a while, it is very difficult to assess economic impact because of faulty methodology and lack of data. For example, the report is adamant that data collection is one big issue, as many industry reports rely heavily on “fragmentary and anecdotal evidence”. One of the most important parts of the report is that it downright recognises that economic impact rests largely on substitution rates (the amount of people who would buy something, but do not because they prefer to obtain pirated copies); here we are blind, as we simply do not have a good indication of what substitution rates apply. The report concludes:

“While experts and literature we reviewed provided different examples of effects on the U.S. economy, most observed that despite significant efforts, it is difficult, if not impossible, to quantify the net effect of counterfeiting and piracy on the economy as a whole. For example, as previously discussed, OECD attempted to develop an estimate of the economic impact of counterfeiting and concluded that an acceptable overall estimate of counterfeit goods could not be developed. OECD further stated that information that can be obtained, such as data on enforcement and information developed through surveys, “has significant limitations, however, and falls far short of what is needed to develop a robust overall estimate.” One expert characterized the attempt to quantify the overall economic impact of counterfeiting as “fruitless,” while another stated that any estimate is highly suspect since this is covert trade and the numbers are all “guesstimates.””

So, whenever you read or hear anyone from the industry claiming huge losses, just pass along this report to them. I would like to think that this will be discussed at ACTA negotiations, but I am not that naive.