OPINION: By the numbers
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By Paul Sweeting -- Video Business, 10/5/2007
OCT. 5 | THE INSTITUTE for Policy Innovation, a Texas-based pro-business think tank, released a report this week that estimates total losses to piracy for four “core” U.S. copyright industries at $58 billion per year.
Paul Sweeting is editor of Content Agenda
Those losses cost American workers 373,375 jobs and $16.3 billion in annual earnings, according to the report. Lost tax revenue costs the government $2.6 billion per year.
The report is the latest salvo in what has become a war of numbers between the copyright industries and groups who oppose their policy agenda.
Last month, the Computer and Communications Industry Assn. released a report claiming that companies “benefiting from limitations on copyright-holders’ exclusive rights, such as fair use,” are responsible for $4.5 trillion in annual revenue for the U.S.
That followed a report from the International Intellectual Property Alliance, which estimated the “core” copyright industries contributed $1.3 trillion to U.S. GDP last year, or 11.12% of total GDP.
Like all such studies, the copyright reports rely on assumptions—including counter-factuals of the “but for this, then that” variety.
They also rely on economic models to calculate the “multiplier effect” of gains or losses in one sector of the economy on related sectors (such as upstream suppliers and downstream retailers).
In the case of the latest IPI report, for instance, the researcher, Stephen E. Siwek of Economists, Inc. (Siwek also authored the IIPA report), relies on multiplier models developed by the U.S. Commerce Department’s Bureau of Economic Analysis to calculate the impact of direct losses from piracy suffered by producers on related industries.
Thus, direct losses of $23 billion in 2005 result in $2.55 billion in additional losses suffered by downstream retailers. The result is total losses of $25.6 billion.
THERE’S NOTHING inherently wrong with that methodology, so long as the assumptions are disclosed and the models are transparent.
Assumptions can be debated and models can be tested. If they’re found wanting, new estimates can be derived using different assumptions or tweaked models, and the results can be compared for reasonableness.
That’s how scholarship advances.
The IPI study released this week, however, has an additional problem. The inputs it uses are unknown.
Siwek relies on a variety of data sources to establish the direct losses from piracy suffered by the four industries, which he then plugs into his models.
For movies, he relies on a 2005 study by LEK Consulting that pegged piracy losses for MPAA member companies at $6.1 billion.
For sound recordings, business software and videogames he relies on internal estimates of piracy losses compiled by the industries themselves, estimates from Special 301 filings with the U.S. Trade Representative (also compiled by the industries), sales data and rates of piracy compiled by industry groups as well as press reports.
Much of the industries’ internal data, however, are confidential and not disclosed in the report.
“Each of the copyright industries that were studied in this report was able to provide certain internal statistics on piracy losses,” the report says. “Some of these statistics were confidential estimates that cannot be reported directly in this study.”
Siwek also made certain assumptions about the degree of substitution between pirated product and legitimate goods, which obviously would affect the estimates.
But again, he can’t say what those assumptions were because they were derived from confidential industry data.
He does note that the different industries made different assumptions about substitution, and that he made “adjustments” to the data to try to smooth out the variation. But by how much and in which direction, again, we don’t know.
That’s not a criticism of Siwek. He obviously had to work with the data he was given on the terms under which he was given them.
But it’s pretty hard to know how much to credit an estimate when you don’t know the inputs that went into it.
Paul Sweeting is editor of Content Agenda. Get more of Sweeting's analysis here.
