GAO piracy report: A deeper look

Copyright owners are in need of some good researchers.

I've already written a news story about the report on piracy and counterfeiting issued Monday by the U.S. Government Accountability Office (GAO) that called into question some of the assertions made by copyright owners about the effects of piracy on their businesses.

Because the claims about piracy's effects could influence copyright legislation in the future, it's worth taking a closer look at the GAO's year-long investigation. I also wanted to cover some points I wasn't able to make in the previous story.

First, the GAO report is one of the first attempts by the government to understand the size and scope of pirated and counterfeited goods in the digital age and determine how piracy's effects on the country can be measured. The investigative body concluded that it may be impossible.

"Most experts we spoke with and the literature we reviewed," the GAO said in the report, "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."

The report potentially undermines attempts by some copyright groups to tie illegal file sharing to the ailing U.S. economy. The film and television sectors in particular have aggressively tried to link some of the country's overall economic woes to piracy. The GAO said it had trouble finding those links.

"Three widely cited U.S. government estimates of economic losses resulting from counterfeiting cannot be substantiated due to the absence of underlying studies," the GAO wrote in the report. "The illicit nature of counterfeiting and piracy makes estimating the economic impact of (intellectual property) infringements extremely difficult, so assumptions must be used to offset the lack of data."

The GAO said it found plenty of evidence that piracy harms industries and consumers and could slow U.S. economic growth. But when it came to quantifying that harm, the GAO found more questions than answers.

The investigative body found flaws in the way some copyright owners calculated lost sales as a result of piracy. One big concern was how they determined "substitution rates." This is a measure of how many people who buy pirated merchandise would have otherwise purchased legitimate products had the illegal material not been available. Would a person who downloaded a pirated copy of the hit film "Avatar," have bought a legal DVD from Wal-Mart or a legal download from iTunes had the pirated copy not been there for the taking?

Some people who illegally share movies or music may never have bought legal versions of the films or songs. Calculating this accurately is daunting because, again, it involves tracking the purchase of illegal goods, according to the GAO report.

I included some of the report's highlights below:

• The development of technologies that enable the unauthorized distribution of copyrighted works is widely recognized as leading to an increase in piracy.

• To the extent that counterfeiting and piracy reduce investments in research and development, these companies may hire fewer workers and may contribute less to U.S. economic growth, overall.

• The U.S. economy may also experience slower growth due to a decline in trade with countries where widespread counterfeiting hinders the activities of U.S. companies operating overseas.

• There is no government agency that systematically collects or tracks data on the extent of digital copyright piracy.

• Many of the experts we interviewed identified lost tax revenue as an effect of counterfeiting and piracy on governments. IP owners or producers of legitimate goods who lose revenue because of competition from counterfeiters pay less in taxes. The U.S. government also incurs costs due to IP protection and enforcement efforts.

• Some authors (of studies on this issue) 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.

• Commerce and FBI officials told us they rely on industry statistics on counterfeit and pirated goods and do not conduct any original data.

• According to experts and government officials, industry associations do not always disclose their proprietary data sources and methods, making it difficult to verify their estimates.

• There is no single methodology to collect and analyze data that can be applied across industries to estimate the effects of counterfeiting and piracy on the U.S. economy or industry sectors.

• The Business Software Alliance publishes piracy estimates based on a set of annual surveys it conducts in different countries. Based on its survey results, the industry association estimated the U.S. piracy rate at 20 percent for business software, carrying a loss of $9 billion in 2008. This study defined piracy as the difference between total installed software and legitimate software sold, and its scope involved only packaged physical software. While this study has an enviable data set on industries and consumers located around the world from its country surveys, it uses assumptions that have raised concerns among experts we interviewed.

• Another example of the use of surveys is the study by the Motion Picture Association, which relied on a consumer survey conducted in several countries. This study found that U.S. motion picture studios lost $6.1 billion to piracy in 2005. It is difficult, based on the information provided in the study, to determine how the authors handled key assumptions such as substitution rates and extrapolation from the survey sample to the broader population.

• In a smaller-scale example of a survey method, [researchers] Rob and [Joel] Waldfogel surveyed students in American universities during parts of 2003 and 2004, asking not only about the amount of music albums they purchased and illegally downloaded, but also the titles and their valuation for the albums they purchased and illegally downloaded.

Their main findings are: (1) downloading reduces legitimate purchases by individuals by 20 percent in the sample, that is, every five music downloads substitute one legitimate purchase; (2) on average, respondents downloaded music that they valued one-third to one-half less than their legitimately purchased music, suggesting that some of the music that was downloaded would never have been purchased as an album; and (3) while downloading reduces per capita expenditures by $25, it raises per capita consumers' surplus by $70.

The study indicated that downloading illegal music can have a positive effect on total consumer welfare. However, as explained by the authors, this experiment cannot be generalized; the data consist of a snapshot of undergraduate students' responses, which is not representative of the general population.