Saturday, January 21st 2012

The Truth:  Lying Liars Lie

The Bullshit Piracy Figures Congress Fell For

By Skwerl

So during the long lead-up through COICA and ultimately to last week’s battle over SOPA & PIPA, we have heard more than a few US Senators talking about the huge piracy problem, assessing the damage to American businesses at up to $250 billion and 750,000 jobs each year.

We wondered where such ridiculous and wildly fluctuating numbers could possibly be coming from, and as it turns out, we weren’t the first to do so. Researcher Julian Sanchez tracked them down:

The $200–250 billion number had originated in a 1991 sidebar in Forbes, but it was not a measurement of the cost of “piracy” to the US economy. It was an unsourced estimate of the total size of the global market in counterfeit goods.

The 750,000 jobs number had originated in a 1986 speech (yes, 1986) by the secretary of commerce estimating that counterfeiting could cost the United States “anywhere from 130,000 to 750,000″ jobs. Nobody in the Commerce Department was able to identify where those figures had come from.

These figures, produced from thin air as far as anyone can tell, persisted in talking points through 2008, and even through this year were occasionally cited by supporters of SOPA. This despite the fact that in 2010, the Government Accountability Office released a report stating that the figures “cannot be substantiated or traced back to an underlying data source or methodology.”

So the new number became $58 billion annually, and 19 million American jobs, according to Mark Elliot, an executive from the US Chamber of Commerce.

Sanchez tracked this new number down, to a paper released by the Institute for Policy Innovation, and authored by one Stephen Siwek, an MBA and principal of a consulting firm called Economists Incorporated that produces economic analysis for hire on behalf of (among others) businesses seeking to influence policy makers.

This only means that it was not an impartial academic study. This fact alone doesn’t invalidate the figure. What invalidates the figure is the method by which a much smaller, relatively less dubious estimate was multiplied; doubled and tripled, through troll logic. As Sanchez put it, Siwek used a method that’s useful for analyzing where in the economy we will likely see the effects of demand shifts, and pretending that it somehow reflects aggregate economic losses.

In other words, Siwek implied that the value of a stolen DVD is equal to the cumulative total of every dollar exchanged on its behalf, all along the way, from pressing plant to consumer. Sanchez’ colleague Tim Lee explains the fallacy in plain terms:

[I]n IPI-land, when a movie studio makes $10 selling a DVD to a Canadian, and then gives $7 to the company that manufactured the DVD and $2 to the guy who shipped it to Canada, society has benefited by $10+$7+$2=$19. Yet some simple math shows that this is nonsense: The studio is $1 richer, the trucker is $2, and the manufacturer is $7. Shockingly enough, that adds up to $10. What each participant cares about is his profits, not his revenues.

So Siwek took an estimate of $6.1 billion in net losses to piracy for the movie industry, and by piling on the cumulative total of every single transaction in between manufacture and sale, came up with a more impressive sounding $20.5 billion in damages to the American economy. Further, Sanchez notes:

The original $6.1 billion figure, by the way, was produced by a study commissioned from LEK Consulting by the Motion Picture Association of America. Since even the GAO was unable to get at the underlying research or evaluate its methodology, it’s impossible to know how reliable that figure is, but given that MPAA has already had to admit significant errors in the numbers LEK generated, I’d take it with a grain of salt.

But we’re only scratching the surface. Even if that $6.1 billion estimate was accurate, it was an estimate of global movie piracy. In other words, it includes cases where, say, a Bollywood movie is pirated in China. Obviously, this has little to no impact on the American economy.

They took the impact of global piracy, exaggerated it by lumping in every associated transaction all along the way, and then that grand total was bandied about as damage to the United States economy. So at this point, Sanchez has dug through all of the layers of exaggeration to find a flat-out lie at the heart of the so-called “research.”

Despite having no access to the full text of the LEK study, Sanchez  managed to find a paper of Siwek’s that reproduced some of its PowerPoint slides, which break down the figures: Of the total $6.1 billion in annual losses estimated to MPAA studios, the amount attributable to online piracy by users in the United States was $446 million.

So now we’re down to $446 million in damages to the US economy from movie piracy. Remember, according to a report commissioned by the MPAA, the research for which has been kept secret, the proven inaccuracy of which the MPAA has already had to apologize for. Surely still a grossly exaggerated figure, which Sanchez devilishly points out is roughly equivalent to the global gross from the latest Alvin And The Chipmunks movie.

And yet even if the research behind the figure was sound, the context it’s put into is disingenuous at best. A common-sense economic principle called the “broken window” fallacy comes into play. To update the analogy for the 21st century, if your car window is broken, it may cost you $60 to fix. But that loss is not the economy’s. Had you not have to have fixed that window, would you have… eaten the $60? No, you would have spent it on a video game, or clothes, or groceries. Or maybe a night out at the movies.

An expert in the GAO report asserts this in saying that the “effects of piracy within the United States are mainly redistributions within the economy for other purposes and that they should not be considered as a loss to the overall economy.”

But are they even quantifiable losses for the movie industry? Sanchez dismisses all but a small fraction of these fantasy damages:

In many cases – I’ve seen research suggesting it’s about 80 percent for music – a US consumer would not have otherwise purchased an illicitly downloaded song or movie if piracy were not an option. Here, the result is actually pure consumer surplus: The downloader enjoys the benefit, and the producer loses nothing.

Sanchez doesn’t link to said research, and in fact it would be extremely difficult to accurately determine where illegal downloaders’ money would be going otherwise, but it was easy for us to find even more extreme (credible) estimates than Sanchez’ 80% spent elsewhere in the economy. Frances Moore of The International Federation of the Phonographic Industry, a non-profit advocacy group for the global recording industry, estimated that only one out of every ten downloads represents a lost sale. But even then, the “loss” is not physical merchandise disappearing from a truck or warehouse. It’s simply money that the industry would have gotten, in a perfectly honest world.

But at this point, the entertainment industry’s so-called “research” should indisputably prove that the world that we live in is anything but honest. This industry, determined to preserve the problems that it solves by criminalizing others’ solutions, will continue to lie to gullible and/or technologically ignorant lawmakers to get their way. But only for as long as we continue to allow it.