GAO Report Debunks Claims that Piracy is a Major Threat to U.S. Economy

Our legal intern Victor Cohen noticed a curious juxtaposition recently:

At the same as the copyright industry was saying unauthorized copying is more of a threat than ever to economic health, the U.S. government was saying… it’s not. Or at least, that there’s no convincing evidence it is. Thanks to Victor for writing up this analysis, and, along the way, for calling out the GAO on their confusion of counterfeiting and unauthorized copying — a frequent problem with the U.S. government and one we’ve noted before.

A couple of months ago, a collection of seven entertainment industry groups including the RIAA, the MPAA, and the Screen Actor’s Guild submitted a filing in response to the Intellectual Property Enforcement Coordinator’s request for comments on its upcoming “Joint Strategic Plan” to carry out its enforcement duties. Their main concern is that digital piracy “undermines our economy, steals our jobs and threatens our national interest.” [1] As a remedy, the industry puts forward a breathtakingly draconian wishlist of enforcement measures, including:

• ISP-level monitoring and filtering of files or traffic, website blocking and redirection, bandwidth throttling, and monitoring software installed on individual users’ computers to check for copyright infringement. [2]

• Bypassing the Digital Millennium Copyright Act’s notice-and-takedown procedure by allowing copyright owners to create databases of works or digital files and force ISPs — in order to qualify for the DMCA § 512 safe harbor — to automatically take down any matching content uploaded to their network and to prevent matching content from being uploaded or linked to at all. [3]

• Making the Department of Justice and the Department of Homeland Security follow the industry’s schedule by coordinating piracy interdiction efforts with new releases of blockbuster movies. [4]

In order to argue for such a staggering array of privacy invasions, network neutrality violations, ISP-burdening expansions of the DMCA, and reallocations of federal agents away from preventing more life-threatening crimes, the industry groups that made this filing must have a solid mountain of evidence that piracy poses a major threat to the American economy and the very existence of the entertainment industry, right?

Unfortunately they don’t, says the U. S. Government Accountability Office. On April 12, the GAO released a report entitled “Intellectual Property: Observations on Efforts to Quantify the Economic Effects of Counterfeit and Pirated Goods” that closely examined the data and research methodologies that have been used to argue and formulate government policy on exactly this issue. The report’s conclusion is vastly different from that of the industry: “Each method has limitations, and most experts observed that it is difficult, if not impossible, to quantify the economy-wide impacts [of piracy and counterfeiting].” [5] Though it did call piracy a “sizeable” problem, it cast serious doubt on the three main studies that the industry has used to make its case: a 2002 FBI economic impact study had “no record of source data or methodology,” a 2002 DHS Customs and Border Protection division estimate of lost revenue and jobs had been discredited, and the FTC was unable to locate any record of making a lost sales estimate that is attributed to it. [6]

The GAO went on to highlight weaknesses it found in the Business Software Alliance’s 2009 piracy estimates and a similar study published by the MPAA’s international counterpart, the Motion Picture Association. It was important to consider, noted the GAO, that there is not necessarily a one-to-one rate of substitution between pirated works and lost sales. In other words, not every pirated album equates to a lost sale, since consumers sometimes like a song or an album enough to download it for free, but not enough to purchase it. Also, piracy estimates made in one country are not necessarily easily extrapolated to another. [7] In addition, studies that use a set of multipliers known as the RIMS-II multipliers to show how capital changes in one industry affect another generally do not take into account the effect of the extra disposable income that downloaders will have available to spend in other parts of the economy as a result of not having paid for the content. [8] In a nutshell, this money does not vanish into thin air, it is spent in other ways so that there is no net loss to the economy as a whole.

Finally, the GAO lamented the lack of data showing the positive effects that piracy can have on the economy. These include the benefit to consumers of having lower-priced goods available and the ability of consumers to sample music or other copyrighted works before they purchase them as a means of encouraging further sales. [9]

While the industry’s wishlist is just a set of recommendations at the moment, proposals as extreme as the ones listed above can easily find their way into other forms of regulation. Right now, the U.S. is in the middle of negotiations for the Anti-Counterfeiting Trade Agreement, which even in its current draft form discusses an enhanced, global version of the Digital Millennium Copyright Act as well as ISP filtering and three-strikes policies for copyright infringers. The United Kingdom has already become the victim of bad figures, when they helped pass the Digital Economy Act on April 12th. France’s highly unpopular HADOPI law, which incorporates a three-strikes disconnection policy, has been in place since October, 2009.

The industry groups’ proposals are drastic, broad, and devastating to the internet, to privacy, and to free expression online. Before the IPEC or any government body considers them, it should heed GAO’s warnings and demand better evidence that piracy is indeed as much of a threat to the economy as the industry claims. We must be vigilant that our own treaty negotiations, agency rulemakings, and legislation are based on solid data that takes into account all the effects, positive and negative, that piracy can have on our economy.

References:

[1] Comments of Creative Community Organizations, pp. 2, March 24, 2010: http://www.dga.org/news/pr-images/2010/Joint-submission-re-IPEC.pdf; last accessed 04/25/2010. [2] Id at 10. [3] Id at 17. [4] Id at 12-13. [5] United States Government Accountability Office, Intellectual Property: Observations on Efforts to Quantify the Economic Effects of Counterfeit and Pirated Goods, (this page is not numbered, please see the page titled “Highlights”), April 12, 2010: http://www.gao.gov/products/GAO-10-423; last accessed 04/25/2010. [6] Id at 18-19. I must note GAO’s confusing language here: it refers to the studies individually as pertaining to counterfeiting, which is a separate issue from piracy, but then collectively as “referenced by various industry and government sources as evidence of the significance of the counterfeiting and piracy problem to the U.S. economy.” [7] Id at 22 [8] Id at 23 [9] Id at 14-15