Government Says Data Estimating Piracy Losses is Unsubstantiated

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We've all heard the MPAA and the RIAA whine, whine, whine about how Internet piracy has basically destroyed the movie/TV/software/music/video game industry--citing famous studies that estimate as much as $200 billion and 750,000 jobs lost in a year. But now the government is stepping in and admitting what many kind of suspected--those studies are often misleading.

A yearlong study on the effects of piracy and counterfeiting on the U.S. economy has led the Government Accountability Office (GAO) to this conclusion: it's difficult, if not impossible, to quantify the economy-wide impact.

The 32-page report [PDF link] published Monday, acknowledges that piracy and counterfeiting certainly has negative effects on the economy--including lost sales, reduced incentives to innovate, and possibly threats to national/civilian safety--but that at least three widely-cited studies that claim quantifiable losses cannot be substantiated.

The GAO specifically addresses three reports that are often linked to the government:

"Three commonly cited estimates of U.S. industry losses due to counterfeiting have been sourced to U.S. agencies, but cannot be substantiated or traced back to an underlying data source or methodology.

First, a number of industry, media, and government publications have cited an FBI estimate that U.S. businesses lose $200-$250 billion to counterfeiting on an annual basis. This estimate was contained in a 2002 FBI press release, but FBI officials told us that it has no record of source data or methodology for generating the estimate and that it cannot be corroborated.

Second, a 2002 CBP press release contained an estimate that U.S. businesses and industries lose $200 billion a year in revenue and 750,000 jobs due to counterfeits of merchandise. However, a CBP official stated that these figures are of uncertain origin, have been discredited, and are no longer used by CBP. A March 2009 CBP internal memo was circulated to inform staff not to use the figures. However, another entity within DHS continues to use them.

Third, the Motor and Equipment Manufacturers Association reported an estimate that the U.S. automotive parts industry has lost $3 billion in sales due to counterfeit goods and attributed the figure to the Federal Trade Commission (FTC). The OECD has also referenced this estimate in its report on counterfeiting and piracy, citing the association report that is sourced to the FTC. However, when we contacted FTC officials to substantiate the estimate, they were unable to locate any record or source of this estimate within its reports or archives, and officials could not recall the agency ever developing or using this estimate."

There are a couple of reasons why quantifying the effect of piracy and counterfeiting on industries and the economy is so hard, the GAO reports. Since there is a lack of data on illicit trade to begin with, certain assumptions must be made in order to calculate economic losses from piracy. One of the key assumptions is the "Substitution Rate," or the rate at which a consumer is willing to switch from purchasing (or downloading for free) a counterfeit good to purchasing a genuine product at full price.

The Business Software Alliance published a study in 2008 that estimated a loss of $9.1 billion in software piracy in the United States alone--but they also used a one-to-one substitution rate, which the GAO says raises concerns among experts.

A 2005 study by the MPAA reported that the U.S. motion picture industry lost $6.1 billion in revenue to piracy, but the GAO says it is "difficult to determine how the authors handled key assumptions such as substitution rates and extrapolation from the survey sample to the broader population."

Another thing to note about the MPAA's 2005 study? They famously fudged some numbers to exaggerate the impact of college students (stating that college students accounted for 44 percent of industry losses, when the number was in fact closer to 15 percent).

Still, piracy is not a good thing. The GAO's report finds that, although "some literature and experts suggest that negative effects may be overstated, in general, literature and experts indicate the negative effects of counterfeiting and piracy on the U.S. economy outweigh the positive effects."

However, because there is no data concerning these effects (positive or negative), the GAO can do naught but conclude that the economy-wide impact of piracy is pretty much unknown. An expert even suggests that the "effects of piracy within the United States are mainly redistributions within the economy for other purposes," and should thus not be regarded as a loss to the overall economy.

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