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GAO piracy report: A deeper look

NEWS
GAO piracy report: A deeper look

Tuesday, April 13, 2010

A report released by the Government Accountability Office questions Hollywood’s billion dollar losses claims, citing a lack of evidence as the main reason for the doubts. On the other hand, the Congress-commissioned report emphasizes that piracy may also benefit the entertainment industries and third parties.

The PRO-IP Act is a United Stated law that aims to combat copyright infringement by increasing civil and criminal penalties for offenders. As part of the Act, Congress has instructed the Government Accountability Office (GAO) to quantify the impact of piracy on the economy. The results of this investigation have now been published in a report.

The report puts the claimed ‘massive losses’ by the entertainment industries in a different light. After having interviewed many experts and plowed through the relevant literature, GAO writes that it cannot make any solid conclusions about the financial effect piracy has on the economy as a whole.

“Lack of data hinders efforts to quantify impacts of counterfeiting and piracy,” is one of the main conclusions from the report.

One of the problems signaled by the GAO is that government officials admit that they simply reply on statistics and reports from the entertainment industries without conducting research on their own. These reports naturally lack transparency about the source of the figures and are often written to sell a political agenda through lobbying efforts.

Although the GAO report cannot make any strong conclusions on the financial impact of piracy and counterfeiting on the economy, the writers do note that piracy can have several benefits for consumers and businesses.

“Some authors 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,” the report states.

“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.”

Another aspect that was mentioned is the positive impact piracy has on the revenues of third party companies. The example of routers is given in the report, but it is not hard to see that Apple’s iPod might also have benefited from the availability of pirated music.

“One expert also observed that some industries may experience an increase in demand for their products because of piracy in other industries. This expert identified Internet infrastructure manufacturers (e.g., companies that make routers) as possible beneficiaries of digital piracy, because of the bandwidth demands related to the transfer of pirated digital content,” the report reads.

One of the most interesting benefits of piracy mentioned in the report is that it encourages innovation, since this is the exact opposite of what copyright holders always argue. Unfortunately for consumers, this innovation is not always aimed at making a better product.

“While competitive pressure to keep one step ahead of counterfeiters may spur innovation in some cases, some of this innovation may be oriented toward anticounterfeiting and antipiracy efforts, rather than enhancing the product for consumers.”

The overall conclusion of the GAO is that they can’t put a number on what the financial consequences of piracy are for the economy. However, blindly trusting statics and reports from the entertainment industry is probably not a good idea, they say.

It is unclear at this point what impact the report will have on the legislation and anti-piracy measures as proposed by the PRO-IP Act.

Story Highlights:
▪ 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.

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