The Origins of Europe's Suicidal Copyright Policies

One of the most important recent pieces of research to appear in the field of copyright and its enforcement was "Media Piracy in Emerging Economies".  If you haven't read it, please do so now - I'll wait...

The author of that study, Joe Karaganis, has now penned perhaps the best short explanation of why Europe's policy on strong enforcement of copyright does not make economic sense:

where do the EU’s economic interests lie?  Let’s look at the numbers:

*** According to the World Bank, Europe’s audiovisual imports exceed its exports by a ratio of around 4-1.  In 2008, Europe (EU 27) imported roughly $14.7 billion in audiovisual and related services (basically, licenses for movies, TV, radio, and sound recording).  In contrast, it exported about $3.9 billion, for a net trade deficit of $10.8 billion  (International Trade Statistics 2010: 156).

*** About 56% of those imports ($8.35 billion) come from the US.  The EU, in turn, exports about $1.7 billion to the US, resulting in a net negative trade balance of around $6.65 billion.  This does not include software licenses, where US companies monopolize larger parts of the European consumer and business markets.

*** The US, in contrast, is a large net exporter of audiovisual goods, with roughly $13.6 billion in exports and $1.9 billion in imports.

 Therefore:

For countries or regions that are net importers of copyrighted goods, higher IP standards and stronger enforcement will result in increased payments to foreign rights holders.  Because the US thoroughly dominates European audiovisual markets, stronger enforcement in these areas is, in practice, enforcement on behalf of Hollywood.

So pirating of US audiovisual products actually reduces the outflow of money from the European economy.  Ah, yes, the industry pundits will retort, but what about the loss of revenue due to pirating of copyright works that circulate purely within the EU?

Domestic piracy may well impose losses on specific industrial sectors, but these are not losses to the larger national economy. Within a given country [or in this case, region], 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 (Sanchez 2008). 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.

This is a point I've made elsewhere, and which is almost universally overlooked in analyses of the economic impact of piracy.

The paper then provides a fascinating analysis of one particular industry, that of films.  It looks at what films are made in which countries, and who really benefits.  Not surprisingly, it reveals that the European film industry is completely in thrall to Hollywood, and it is this that is guiding copyright policy in Europe:

It’s this junior partnership that should be weighed against the wider sacrifices of privacy and freedom of speech built into so many recent national and EC-level IP enforcement policies, such as the French ’3-strikes’ plan, which will cut French citizens off of the Internet for the piracy of Hollywood productions.  Strong enforcement reinforces status quo positions in the market, but at an escalating public cost as consumer behavior becomes the real focus of enforcement activities.  There is nothing in these policies will alter the balance of cultural power or change the direction of payments.  That’s why I’ve characterized the EC enforcement plan as: “send money to the US.”

Moralizing IP rhetoric is also a handicap in this context.  Continuing to defend IP as a fundamental right long after it has been made an object of trade policy is to surrender any real leverage in making deals.  A trade negotiator would be very lucky have such a partner on the other side of the table.  

And that's precisely what the US has in Europe, not least thanks to Sarkozy, who has been the main proponent of Europe's counterproductive copyright infringement agenda.  The key statement of that topsy-turvy policy was made by him during the global joke known as the e-G8 meeting:

I know and understand that our french conception of author’s rights isn’t the same as in the United States or other countries. I simply want to say that we hold to the universal principles proclaimed in the American constitution as much as in the Declaration of the Rights of Man in 1789: that no one should have the product of their ideas, work, imagination–their intellectual property–expropriated with impunity.

Each of you understands what I say here because each of you is also a creator, and it is in virtue of these creator’s rights that you have founded businesses that today have become empires. The algorithms that give you your strength; this constant innovation that is your force; this technology that changes the world is your property, and nobody contests it. Each of you, each of us, can thus understand that the writer, the director, or the performer can have the same rights. – French President Sarkozy, opening the ‘e-G8? conference that he convened this past April.

As Karaganis points out:

With this fulsome praise of tech and media CEOs at the e-G8, Sarkozy expressed the basic European cognitive dissonance on IP:  the embrace of universal rights as a way of pretending equality with the real powers in the room.

The rest of his piece looks at how Europe ended up in this position where it would be arguing strenuously for an approach that was against its own best interests.  As such, it provides invaluable context for today's moves, and should be read by anyone wanting to understand them - and to counter them.

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