17 February 2011

The Economic Consequences of Piracy

I've noted elsewhere that there is a major piece of FUD being put about by content producers: that piracy causes massive damage to a country's economy. But as that post explained with regard to the BSA's claims about the harm of software piracy, here's the reality:

Reducing software piracy will not magically conjure up those hundreds of billions of dollars of economic growth that the BSA invokes, or create huge numbers of new jobs: it will simply move the money around - in fact, it will send more of it outside local economies to the US, and reduce the local employment.

The basic idea is really pretty simple to understand. When people make unauthorised copies of content or software, they save money. But that doesn't mean they put it in a bank: human nature being what it is, that money is generally spent elsewhere in the local economy.

And yet despite the simplicity of this crucial idea, report after report seems to have difficulty grasping it. Here's another [.pdf], this time on film piracy, put together by UK Ipsos MediaCT and Oxford Economics for AFACT (the Australian Federation Against Copyright Theft). The top-line "results":

6,100 Full Time Equivalent (FTE) jobs were forgone across the entire economy (equivalent to more than six times the number of job cuts announced by Telstra in October 2010) including nearly 2,300 forgone directly by the movie industry and retailers. These impacts of piracy on employment persist as long as piracy persists.

Allowing for effects on other industries, some A$1,370m in Gross Output (Sales) was lost across the entire Australian economy.

This was equivalent to a loss of GDP of A$551m across the Australian economy – reducing national economic growth and Australia’s ability to invest in its future.

Tax losses are A$193m, representing money that government could employ for other social uses in areas such as education and healthcare.

What's sad is that the report does try to make reasonable assumptions about piracy:

We do not assume that every pirate version equates to a lost sale.

We do allow for ‘sampling’ - those who see an authorised version subsequent to the pirate version are not treated as contributing to lost revenue. In fact, we make the very cautious assumption that no lost revenue results from piracy if any authorised version is seen subsequently.

We do allow for ‘over-claim’ – we apply a ‘downweight’ to those claiming they would have paid for an authorised version (had the pirate version not been available).

But this laudable attempt at rigour is completely undermined by the fact that nowhere in the report is there any recognition that all this "lost" money does *not* disappear, but is simply channelled elsewhere in the Australian economy, where it might actually create more jobs than it would if spent on films (because of revenue outflows to the US, and the fact that local money would be spent on more labour-intensive industries like retailing or catering.) Similarly, it *does* produce tax revenue for the Australian government, just from different sources.

It would be far more conducive to producing an honest debate about the *real* effects of unauthorised copies on national economies if these key facts were included for a change; by continuing to ignore them, these misleading and one-sided reports amount to little more than industry propaganda.

Follow me @glynmoody on Twitter or identi.ca.


Peter said...

The new aggregate demand, accounting for FUD: C + I + G + (X-M) - P

Martin Thompson said...

I agree that there is a serious amount of FUD being distributed by producers.

Lets face it, if the software publishers wanted to eliminate piracy - they could if they put their minds to it.

But they won't because piracy is a business model. Laissez faire licensing equals business development.

I also get irritated by the jobs and revenue 'forgone' by piracy. This is the equivalent to saying that there would be a huge growth in the consumers electronics industry if burglars started buying tvs and microwaves instead of nicking them. It's corrupt logic.

Glyn Moody said...

@Peter: er, maybe: could you define those variables, please?

Glyn Moody said...

@Martin: yes, piracy is convenient when they want it...

Peter said...

C (consumption)
I (investment by firms)
G (government spending)
X - M (net exports - i.e. exports minus imports)

and P (piracy)


Sorry, as an economics teacher I couldn't resist the joke. :)