Yesterday the Broadband Breakfast Club hosted a panel discussion titled “The Costs of Global Intellectual Property Piracy: How Can the Phenomenon Be Empirically Quanitified?” The event featured speakers who have conducted studies for GAO and the IIPI, two representatives from private companies, and PIJIP’s Sean Flynn.
Click here to view the webcast.
Loren Yager, Director of Internal Affairs and Trade for the U.S. Government Accountability Office (GAO) opened the panel with a description of GAO’s 2010 study on the economic effects of piracy. The report examined the significant contribution of intellectual property to the US economy, classified some of the effects (both positive and negative) of infringement, and looked at the incentives that piracy creates for consumers, producers, and traders.
GAO tried to track down some of the studies that are commonly cited as sources of industry losses due to piracy. It found that some of the studies “never existed at all,” including the FBI study claiming piracy cost U.S. businesses $200 billion.
Congress had given GAO a mandate to come up with the economy-wide cost of counterfeiting. In trying to do this, GAO ran into a number of things that made the task difficult:
- Figuring out the substitution rate. How many legitimate goods would be purchased in the absence of infringing ones? This is difficult because the rate will be different for different types of products. Some studies assume a substitution rate of one to one, but this is not likely to hold in many situations.
- Estimating the value of counterfeit goods. Do you value the goods at the production cost, the price of the fake, or the price of the legitimate good? What you choose will enormously affect the final estimate of losses.
- Markets differ from one place to the next and they change with technology. One may not be able to generalize losses from one market to the next.
Therefore, a study cannot take industry-gathered data, add it all together, and have a complete picture of the cost of piracy to the economy. Some industries have not gathered the raw data, and others are not anxious to have information about counterfeit versions of their products in the public domain. Finally, the dynamics of each market differ.
Yager concluded by saying Congress had given GAO a mandate to estimate a dollar figure of US economic losses to piracy, but it was decided that the necessary information to come up with a credible estimate was lacking.
Bruce Lehman, President of the International Intellectual Property Institute (IIPI) described his organization’s work with developing countries, where piracy and counterfeits dominate the markets for IP-intensive products. The small, USPTO-funded organization works with locals to develop intellectual property systems to contribute to local economic development.
IIPI also conducts studies at USPTO’s request, including an ongoing study of camcording in the Asia-Pacific region and its impact on the distribution of copyrighted movies (both online and on disks). When figuring out how to quantify losses, the IIPI ran into the problems that Yager described. Determining the substitution rate is very difficult in a developing country market, where there is nearly universal market domination by infringing products, but there is not necessarily a one-to-one substitution rate. IIPI is trying to design a study with this in mind. The way we are going to measure losses is to look at the period of time between the theatrical release of a motion picture, and when the camcorded versions hit the street. We are going to look at the first week or so revenues, and then see what happens after the camcorded copies enter the market.
IIPI is conducting a second study on the impact of counterfeiting on US exports, and how this changes when countries implement TRIPS-plus free trade agreements. This study will look at the impact before and after the agreements are implemented.
In the broad picture, everyone knows that piracy and counterfeiting exist on a large scale and have a negative impact on US exports. This is a big issue with China, and for the US economy in general. There is a sense of imbalance with emerging economies is creating a political crises in this country.
The next panelist, Stephen Siwek, from Economists, Inc. has published multiple piracy studies for the International Intellectual Property Alliance (IIPA) and the Institute for Policy Innovation (IPI). The IIPA studies have received a lot of attention, and are being reproduced around the world. Under the auspices of WIPO, 30 to 35 similar studies have been conducted.
Siwek said that IP industries are high performing, doing well in foreign markets and creating many high-paying jobs. There is ample reason to want to protect these industries, and the biggest problem they face is piracy.
The moderator asked Siwek to respond to the assertion that you can’t generalize results across industry. He answered that one of the main reasons the IIPA formed was to present a unified front, but that raw loss estimates still proceed on an industry by industry basis.
Siwek explained how the methodology to estimate losses basically relies on three variables.
- Number of infringing goods in a market
- Prices for the legitimate goods. This can be complicated, due to differences in prices for different delivery methods (for instance, viewing movies in theaters, or on a DVD, or through a download).
- Substitution rate. This is often determined by surveys.
Sean Flynn, Associate Director of AU Washington College of Law’s Program on Information Justice and Intellectual Property said that Media Piracy in Emerging Economies (MPEE) describes many of these issues. There is not a lot of debate about prices for legitimate goods in developing countries, but it is very difficult to estimate the substitution rates. Some existing studies claim to have data on substitution rates, but do not make the data public. Much of what people say they know about piracy and counterfeiting is based on industry research with opaque methodology. Some industry groups have been assuming a substitution rate of one-to-one. For example, the BSA used this substitution rate last year. This is an industry failure. (To his credit, Siwek does not use this methodology.)
MPEE argues the primary cause of piracy in developing countries is exclusionary pricing practices by producers. Legitimate goods sell for the same prices in developing countries as they do in the U.S., but purchasing power is far lower. This pricing coexists with technology that makes piracy very easy. The result is that you find pirate markets with low production costs and marginal-cost pricing. In this type of a market, you have very low substitution rates – radically different than the substitution rates you’d find in the US. Flynn said that copyright owners need a realistic business model to deal with these markets – not draconian enforcement methods, but a way to satisfy the markets.
Morgan Reed, Executive Director of the Association for Competitive Technology, noted that piracy studies serve various purposes. One is to determine how many resources to expend on IP enforcement, and another is to determine potential market size. If the market in India is only 8% of the population, that is still many millions of people. There are 200 million people in China that can purchase like Americans. These are huge markets, and they are growing. There may be low substitution rates now, but in the future companies plan on selling more to these markets.
The next panelist was Matt Robinson, General Counsel for Attributor, a firm that tracks internet traffic. Attributor has a wide client base including many types of content owners. Attributor works with companies making up 50% of the publishing industry. An example of their work is a 2010 survey which found 9 million infringements of 1000 books in two weeks.
Robinson claimed that cyberlockers are the biggest threat facing the copyright industries today. Data on the number of downloads is no longer available. (The number of downloads per title grew dramatically, and then the cyberlockers stopped listing the number of downloads.)
Attributor tries to have infringing products removed from circulation, and it is experimenting with ways to steer people towards legitimate products. It just launched the ‘fair notice feed,’ which replaces links to infringing copies with a link to the legitimate product when someone tries to obtain a pirated copy. People are looking for cheap copies of publishers’ products (we found 2 to 3 million searches for free copies of top seller books in one of our surveys) and if there is a way to harness that energy into sales, Attributor wants to find it.
The moderator asked Yager what he thought was the most reliable way to measure demand. Yager answered that there is good data available, such as survey data on willingness to pay. Other helpful data on pirated counterfeits exists that can inform policymakers trying to allocate law enforcement resources, such as seizure statistics from Customs and Border Patrol.
The moderator asked the panel if they thought it was appropriate for Senator Leahy to cite Siwek’s figure that piracy costs the US economy $100 billion a year. Siwek answered that it is necessary for Congress to note that there are large losses, and to respond to the problem. Reasonable people can disagree on exact numbers, but it is important to think about the numbers. If the U.S. government wants other countries to change their IP laws or policies, it needs to have these types of studies.
Flynn said that there is more non-industry research on the topic than there used to be, so hopefully there will be more open data. With industry data, an observer cannot tell what is true because the underlying data is private, not open. Furthermore, while everyone agrees there is a high level of piracy in the world, there is not agreement that it should be a high priority for law enforcement resources. Countries need to know how to allocate law enforcement in the best possible way. It also may be more beneficial to U.S. companies to improve enforcement in developed countries with higher substitution rates in emerging markets. It might make more sense to fight the 8% of piracy in US market than the 90% of piracy in India because you’d get more bang for the buck. The research we have now is not testable, so it can’t help make these types of decisions.
At this point, the floor was opened up to the audience. The first question was from an academic from Carnegie Mellon University, who asked about the magnitude of problem, and how it justified the resources needed to go after it. Lehman said that the IIPA is often criticized for being industry-sponsored, but there are not a lot of other studies out there. He pointed out that Sen. Leahy and other policymakers have few other sources to cite. Despite this, anyone who has travelled knows that there is extensive piracy overseas, which obviously results in big losses to U.S. companies.
There is a big difference between piracy and counterfeiting in the U.S. and in developing countries. Piracy and counterfeiting exists in the U.S., but it is manageable. It doesn’t dominate marketplace. Overseas, it is an entirely different matter. Those who argue that piracy overseas is not a big deal need to consider that it is a highly organized business. It can involve people in the government and it is corrupting for societies. It is part of a breakdown in the rule of law.
Reed added that when people call emerging markets “developing” countries, this term implies that countries’ markets are growing. The Association for Competitive Technology and its member companies see these markets as huge opportunities for the future.
Next, an audience member from the Innovators Network referred to the MPEE, which he called “disappointing” and “ideological” in its “bias against commerce.” He asked Flynn to defend a quotation regarding the gains to consumer welfare from the availability of pirated goods. Flynn responded that MPEE focuses on a business model problem, and that its view is no more ideological than views held by those who defend the current business model. MPEE sees the current model as serving 8% of a developing country’s population and ignoring the rest. The idea that piracy leads to welfare gains and losses to different sectors of the economy is basic economics. The questioner responded that if countries with high levels of piracy strengthened the level of IP protection, it would boost their own economies.
The moderator asked the panelists to respond to the view that the U.S. was a pirate nation at earlier stages of its economic development, and that other countries will strengthen IP as they develop further.
Lehman disagreed with the notion. It is true that U.S. copyright law did not originally protect foreign authors, and that many other countries did not protect foreign authors before the establishment of the WTO. However, today the TRIPS Agreement establishes global rule of law, and countries have TRIPS-compliant domestic laws. Today’s piracy is in violation of the laws of the countries where it takes place. For the US this has huge implications. We want to produce and export IP-intensive goods and trade them for labor-intensive goods. This is the needed balanced trade relationship we’re going for, but it has not happened.
Flynn agreed that what the U.S. did 200 years ago is not exactly what developing countries should do today, but the different levels of IP protection show the importance of flexibilities in IP law.
The MPEE describes some segmented markets where legitimate sellers have lowered their prices and sell to a fairly sizable portion of the population. Pirate markets have then responded by continuing to serve the most underserved markets, and by differentiating their products in ways that the IP owners will not – such as offering better subtitling for certain languages.
Reed objected to the use of the term “competition” to describe the market dynamics with legitimate producers and pirates. Firms in competition with each other usually have similar costs of production, but businesses that make money by pirating IP do not face the same production costs as creators. He said that his group’s firms are very eager to enter the Chinese telecom market, which has huge numbers of consumers, but they cannot lower their prices much more than they have already cut prices in some markets. (He noted that they have cut prices and used price discrimination in the U.S. as well, with low prices offered through WalMart and with many apps down to 99 cents.)
Robinson agreed that app piracy is becoming a big issue. From the moment of the iPad’s release, there was an obvious uptick in piracy. It is easy to find full catalogs of pirated apps.
Lehman noted that China is taking real steps to improve intellectual property, and suggested that Americans miss this because we focus on IP for the types of products with which we are most familiar. China has intense copyright enforcement mechanisms for textile patterns and other local output, and this has had a positive effect on local economic development.
Robinson noted that none of the top 10 cyberlockers are in China.
