Finally Calling Time on Piracy FUD

One of the striking features of reports purporting to estimate the “damage” caused by piracy - both of software and content - is that without exception, as far as I can tell, their numbers and methodology simply do not withstand close...


One of the striking features of reports purporting to estimate the "damage" caused by piracy – both of software and content – is that without exception, as far as I can tell, their numbers and methodology simply do not withstand close scrutiny.

The trouble is, when it's a question of lone voices like mine or even that of Techdirt's Mike Masnick, probably the most dogged debunker of piracy FUD, the content industries can ignore such posts, presumably in the belief that our quick analyses somehow don't count.

But that's not possible when the same points comes from a respected organisation like the Social Science research Council, "an independent, nonprofit international organization founded in 1923", especially when they appear in a meticulously-researched 400-page report:

Media Piracy in Emerging Economies is the first independent, large-scale study of music, film and software piracy in emerging economies, with a focus on Brazil, India, Russia, South Africa, Mexico and Bolivia.

Based on three years of work by some thirty-five researchers, Media Piracy in Emerging Economies tells two overarching stories: one tracing the explosive growth of piracy as digital technologies became cheap and ubiquitous around the world, and another following the growth of industry lobbies that have reshaped laws and law enforcement around copyright protection. The report argues that these efforts have largely failed, and that the problem of piracy is better conceived as a failure of affordable access to media in legal markets.

You can read it online, or purchase it under a rather tongue-in-cheek "Consumer's Dilemma licence".

Although the report focuses on emerging economies, the points it makes are more general, and should be of interest to anyone who reads this blog. In particular, the first chapter, "Rethinking Piracy" is perhaps the best and most rigorous analysis of this topic currently available.

One of the biggest flaws with industry reports is the fallacy that piracy takes money out of a national economy. This is something I've commented on before, and it's good to see the SSRC report thoroughly debunking this central myth:

domestic piracy may well impose losses on specific industrial sectors, but these are not losses to the larger national economy. Within a given country, the piracy of domestic goods is a transfer of income, not a loss. Money saved by consumers or businesses on CDs, DVDs, or software will not disappear but rather be spent on other things housing, food,other entertainment, other business expenses, and so on. These expenditures, in turn, will generate tax revenue, new jobs, infrastructural investments, and the range of other goods that are typically cited in the loss column of industry analyses.

To make a case for national economic harms rather than narrower sectoral ones, the potential uses of lost revenue need to be compared: the foregone investment in the affected industries needs to represent a better potential economic outcome than the consumer surplus generated by piracy. The net impact on the economy, properly understood, is the difference between the value of the two investments. Such comparisons lead into very complicated territory as marginal investments in different industries generate different contributions to growth and productivity. There has been no serious analysis of this issue, however, because the industry studies have ignored the consumer surplus, maintaining the fiction that domestic piracy represents an undiluted national economic loss. For our part, we take seriously the possibility that the consumer surplus from piracy might be more productive, socially valuable, and/or job creating than additional investment in the software and media sectors. We think this likelihood increases in markets for entertainment goods, which contribute to growth but add little to productivity, and still further in countries that import most of their audiovisual goods and software – in short, virtually everywhere outside the United States.

Another persistent myth is that piracy is somehow helping to fund organised crime, or – more fashionably – even terrorism. The report shows how this myth has grown through time in the echo-chamber of sponsored reports, even though there is practically no evidence it is true today in any of the countries studied. In fact, the report makes a very interesting observation that the rise of cost-free sharing of content is actually rendering life extremely difficult for traditional counterfeiters:

Production costs and profit margins on optical discs have plummeted, leading to a collapse in prices. In 2001, quality DVDs typically cost five dollars or more on the street. In 2010, they are under a dollar at retail in many parts of the world. Burners and blank discs are now commodity items, and their greater availability has led to a massive expansion of local production, the displacement of smuggling, and in many countries a reorganization of production around small-scale, often family-based, cottage industry. Pressure on profit margins has increased, too, due to the rise of the massive non-commercial sphere of copying and distribution on the Internet, which has all but eliminated commercial optical disc piracy in high-income countries and appears poised to do so further down the GDP ladder. Increasingly, commercial pirates face the same dilemma as the legal industry: how to compete with free.

This decline in costs is, in our view, the primary factor shaping pirate markets and a growing disincentive for traditional organized-criminal involvement. Yet, to the best of our knowledge, no industry or law enforcement statements about alleged criminal connections have thought this worth mention. As in other contexts, the issue is avoided by conflating piracy and counterfeiting under the rubric of what Interpol calls "IP crimes." IP crimes include the counterfeiting of cigarettes, medicines, machine parts, and a variety of other industrial goods.

That conflation, of course, is central to ACTA and to the Trans-Pacific Partnership agreement.

The content industries will point out that the problems of the counterfeiting world are cold comfort to traditional recording companies that also find it hard to "compete with free". This is usually accompanied by dire warnings about the imminent collapse of the all music culture if such a state of affairs is allowed to continue. But the report has a rather interesting counter-example to this view:

The limit case, in our studies, is Bolivia, where the impasse of high prices, low incomes, and ubiquitous piracy shuttered all but one local label in the early 2000s and drove the majors out altogether. The tiny Bolivian legal market, worth only $20 million at its peak, was destroyed. But Bolivian music culture was not. Below the depleted high-end commercial landscape, our work documents the emergence of a generation of new producers, artists, and commercial practices – much of it rooted in indigenous communities and distributed through informal markets. The resulting mix of pirated goods, promotional CDs, and low-priced recordings has created, for the first time in that country, a popular market for recorded music. For the vast majority of Bolivians, recorded music has never been so prolific or affordable.

This is a very important point: it suggests that even in the absence of enforceable copyright – and therefore also in the absence of copyright – music will not only thrive, but may actually reach more people than ever before. Copyright and the resultant higher prices can be a barrier to culture, not necessarily a stimulant to its production and wider distribution.

Of course, this is only one case study, about music, and in a rather exceptional country at that. But the SSRC report also makes a very telling comment about the state of cinema in the developed world:

The cross-marketing of key movie "properties" makes revenue figures hard to disaggregate: movies, games, books, and other products are increasingly part of an integrated media mix that generates revenues – and audiences – across sectors. According to Disney, licensed merchandise alone generated $30 billion in 2008, including $3.7 billion from the 2006 film Cars and $2.7 billion from Hannah Montana tie-ins.

Merchandising, cross-media franchising, and other sources of income are also largely independent of these changes in the distribution channel. Unlike the major music labels, the studios control these other revenue streams, leaving them in a far better position to maintain their core business model. If the DVD market collapses as quickly as the CD market, Americans may one day face a $50-60 billion domestic movie industry rather than a $60-70 billion one.

This is a hugely important point. It shows that already the film industry is making huge amounts of money from products and services based on content, than purely on the content itself. This is exactly the situation in the world of open source, where money is generally generated from services and products around the core code, not the software itself.

The report also has some shrewd observations about software piracy:

the relationship between piracy and network effects appears to be well understood elsewhere in these firms -including among such industry leaders as Bill Gates, who has referred repeatedly to the importance of piracy in securing market share and undercutting Linux adoption in China.

As Microsoft executive Jeff Raikes observed: "In the long run the fundamental asset is the installed base of people who are using our products. What you hope to do over time is convert them to licensing the software"

That is, in the world of software, piracy is actually beneficial in the short term, since it helps establish the products concerned as de facto standards, and that produces lock-in that can then be exploited. In fact this is so beneficial, that companies routinely give away their products to reinforce the effect:

Credible threats of open-source software adoption in Brazil, Russia, India, South Africa, and many other countries also place a sharp upper bound on business software enforcement strategies. Once again, the logic is simple but rarely acknowledged: the most likely consequence of the widespread enforcement of licenses in Russia or China would be the widespread adoption of open-source alternatives – and very possibly a spur to development of alternatives where no open-source equivalents yet exist, as in the case of Autodesk's specialized AutoCAD tools.

As we detail in our Russia and India chapters, these risks are not hypothetical: Microsoft and other vendors go to great lengths to underbid open-source providers in institutional contexts to ensure that open-source adoption does not reach the point where it generates comparable network effects. Where the institutional or symbolic stakes are unusually high, this competitive dynamic can push licensing fees to zero.

Those perceptive comments on the world of open source give a hint of the unusual sophistication of the analysis the report contains. That's why I strongly recommend at least skimming through the online version in order to glean some of the other insights it contains.

Given the scope and rigour of this report, I think it will go down as a decisive moment when the discourse around piracy changed fundamentally, with the content industries being forced, finally, to explain and justify their methodologies, rather than simply stating their claimed results. And once this level of rigour is brought to bear on the subject, we will start to see very different figures being quoted, and maybe even different policies being put in in place as a result. That's bound to happen one day, when reality finally catches up with the content industries: it's just a question of time....

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