Copyhype

How much evidence about the negative effects of online piracy can be ignored?

This week, the Canadian Intellectual Property Council released a report on The True Price of Peer to Peer File-Sharing. The report re-examined Don’t blame the P2P file-sharers: the impact of free music downloads on the purchase of music CDs in Canada, a 2007 report that cast doubts on the link between online piracy and music sales.

Using the same data from the 2007 report, analyst Dr. George Barker found the original conclusions to be incorrect.  Dr. Barker instead discovered:

1. three out of every four respondents said that if P2P were not available they would have purchased some or all of the music; and

2. almost two-thirds of the “hardcore” P2P downloaders (those who indicated in the survey that they acquired music by P2P only) said they would have purchased one-third of the tracks they downloaded if the songs were not available on P2P networks — this amounts to an average expense of $168 per person, adding up to hundreds of millions of dollars in extra revenue for the music industry per year from this group alone.

Based on this data, Dr. Barker concluded “that P2P downloads have strong negative effects on legitimate music purchases” and, contrary to the original analysis of the data, P2P downloading acts as a substitute for legitimate music purchases. Dr. Barker’s analysis infers that stronger copyright laws “would substantially increase music purchases and music industry sales revenues and, by implication, increase artist income and industry employment and contribute to both economic growth and higher government tax revenues in Canada.”

While it’s significant that a closer analysis of the original data reveals entirely different conclusions, this isn’t the first time the conclusions of the original report have been challenged. Noted economist Stan Liebowitz examined the original report’s conclusions when it first came out and found them “not only implausible” but actually “impossible to be true.”

Other studies independently confirm that reducing online piracy leads to increased sales. ¹David Blackburn, On-line Piracy and Recorded Music Sales, Working Paper, Harvard University (2004), finding 30% reduction in files available online leads to 10% increase of industry sales in 2003; Kristina Groennings, An Analysis of the Recording Industry’s Litigation Strategy Against Direct Infringers, 7 Vanderbilt Journal of Entertainment & Technology Law 389 (2005), finding RIAA’s litigation strategy led to initial decrease in P2P filesharing and increase in album sales in 2003 and 2004 after several years of decline. Taking a broader perspective, one economic study of stock prices found that “current and past efforts by the media industry to check illegal file-sharing over P2P networks through stricter copyright laws and lawsuits against violators have a significant positive impact on expected long-term profitability and economic viability of major media firms. ²Sanjay Goel, Paul Miesing, Uday Chandra, The Impact of Illegal Peer-to-Peer File Sharing on the Media Industry, 52 California Management Review 6 (2010).

The conclusions of the CIPC report — “people buy things they like unless they can get them for free — seem obvious enough not to need studying in the first place. But despite study after study and piles of evidence that show the harmful effects of online piracy, there are those who continue to insist that piracy is not a problem. The arguments are not that this approach or that approach to diminishing piracy is unwise for whatever reason, but that the harm doesn’t even exist in the first place.

Prove It

The academic consensus is that online piracy has had a significant negative effect on music sales. I listed a number of major studies on the issue in a previous post here. Olberholzer-Gee and Strumpf provide a similar table of major academic studies on the effect of online piracy in their paper File-sharing and Copyright (Table 5). Studies since then reveal similar findings; for example, Choi and Kim found that piracy has a negative effect on online music sales in Korea in a 2010 study. ³Dongook Choi & Yeonbae Kim, Effects of Piracy and Digital Rights Management on the Online Music Market in Korea, TEMEP Discussion Paper No. 2010:72 (December 2010). While a handful of studies have argued that online piracy has no effect, or even a positive effect, on music sales — most notably an earlier study by Olberholzer-Gee and Strumpf — these studies are in the minority.

The effect of online piracy on music sales around the world is easy to see. Countries which have improved legal responses to online piracy in the past few years, like South Korea and Sweden, have seen music sales rise. In contrast, countries like Spain and Brazil, where copyright laws are lax or ineffective against digital infringement, have seen music sales fall at a rate above the global average. ⁴See IFPI Digital Music Report 2011 and IFPI Recording Industry in Numbers 2010.

And ineffective copyright enforcement around the world is not just a concern of major media industries. Jiarui Liu looks at the problem of piracy in emerging markets by examining the music industry in China. While it may seem that copyright enforcement in such countries is only a foreign problem, it turns out that rampant infringement has a profound effect on local artists:

In many cases, piracy of foreign works could be more devastating to domestic companies than to foreign companies. Because the competition from low-priced pirated works both online and offline undercuts stable income from royalties, Chinese musicians have witnessed the entire music industry becoming increasingly dependent on alternative revenue streams such as advertising, merchandizing, and live performance. The pressures of paid appearances and extended tours have started to squeeze the time that artists need to spend on music production. The alternative revenue streams also force many music companies to abandon traditional album contracts and operate in a way more like talent agencies that control all aspects of an artist’s career. Music companies are inclined to sign talents at a very young age with a long-term agency deal in order to exploit the full value of artists in the advertising market. In addition, the need to attract sponsorship opportunities puts more emphasis on non-musical qualities, such as a fresh appearance and healthy public image, which to some extent marginalizes “pure” musicians who have less value in those alternative markets.

Most importantly, as copyright piracy obstructs the communication of consumer preferences to musicians, an increasing number of musical works are created to accommodate the tastes of entrepreneurs (e.g., sponsors and advertisers) rather than those of average consumers, and this has caused a fundamental shift in the creative process of the Chinese music industry. Although entrepreneurs should arguably be willing to take whatever is popular among music fans as a draw to their own products, the expectations of entrepreneurs and consumers do not always meet in a dynamic market setting. For this reason, the interests of less commercial artists and new artists are more likely to be compromised. ⁵The Tough Reality of Copyright Piracy: A Case Study of the Music Industry in China, 27 Cardozo Arts & Entertainment Law Journal 621 (2010).

Commitment to effective intellectual property laws has ripple effects in a nation’s economy beyond the media industries. On Tuesday, attorney Lawrence J. Siskind, writing in The Recorder, asked Has Israel’s Approach to IP Law It Strong? In the article, he attributes some of Israel’s national growth over the past several decades to strengthening its approach to intellectual property. He quotes one report that says, “Israel, by 1990 was still mostly barren of technology and finance. … Israel generated few significant companies or technologies, no significant financial institutions, and little important science.” The country was known for wide-scale piracy at the time. But this changed by the turn of the new century (in part due to trade pressures from the US). “As Israel’s image morphed from IP pirate to IP protector, the country became a magnet for global investment.”

Courts, which are in the business of judging evidentiary claims, recognize the harms of online piracy. For example, the court in A&M Records v. Napster was convinced that “Napster use is likely to reduce CD purchases by college students.” Napster’s expert did not “provide credible evidence that music file-sharing on Napster stimulates more CD sales than it displaces.” Napster also tried to argue that the “sampling” of music its service provided (try-before-you-buy) stimulates retail music sales. The court was still not persuaded, calling the evidence used to support this argument “unreliable” and accepting “that the activity defendant calls sampling actually decreases retail sales of their music.” ⁶114 F.Supp.2d 896, 910-914 (ND Cali 2000).

Yet, some still find ways to rationalize away the conclusions revealed above.

Yes, But…

These ways include focusing a lot of attention on less-than reliable studies or distorting the literature that is out there.

As mentioned above, one of the favorite studies of the piracy-is-not-a-problem contingent is Olberholzer-Gee & Strumpf’s 2007 paper, The Effect of File Sharing on Record Sales: An Empirical Analysis. But the study looked only at a small period of time (17 weeks at the end of 2002) and uses some curious methodologies (“Our most important instrument  is the number of German secondary school kids who are on vacation in a given week”). Stan Liebowitz has been especially critical of the study, and has published several responses worth a read here, here, here, and here. But the biggest surprise comes from Olberholzer-Gee and Strumpf themselves, who backed off from their earlier claims in a 2010 paper.

Another report widely cited as evidence against the harm of piracy is the US Government Accountability Office’s April 2010 Observations on Efforts to Quantify the Economic Effects of Counterfeit and Pirated Goods. After the release of this report, many declared the debate over the effects of piracy over — most notably a number of interest groups in a full page ad that said “Content Industry Piracy Claims are Bogus.” ⁷Other examples include an article in Ars Technica titled “US government finally admits most piracy estimates are bogus.” But is that really what the report said?

No. Far from looking at all or even most piracy claims, the report only examined a small percentage of independent reports — and even then, it merely highlighted some of the limitations inherent in those reports. It’s most damning conclusions were aimed at only three government agency figures that have been used — an FBI estimate used in 2002, a CBP estimate also used in a 2002 memo, and an estimate used by the Motor and Equipment Manufacturers Association in 2005 attributed to the FTC. The GAO’s conclusion? It couldn’t substantiate these estimates. The broader takeaway of the GAO report reflects the consensus: piracy has significant negative effects, but it’s difficult to nail down a specific number or dollar figure on the harm caused.

A particularly telling example of distortion can be seen in an article on Torrentfreak, Pirates are the Music Industry’s Most Valuable Customers. The site draws that conclusion from an IFPI commissioned survey carried out by Jupiter Research. Torrentfreak highlights the survey’s results that, compared to music buyers, music pirates are “31% more likely to buy single tracks online, 33% more likely to buy music albums online, 100% more likely to pay for music subscription services, and 60% more likely to pay for music on mobile phone.” That sounds like a big deal until you look at the actual report. There, you’ll see that Torrentfreak played a little numbers game — the percentage of either group of participants to engage in any of these activities is small, so that even a few percentage points difference results in an impressive-sounding “more likely” figure. For example, only 2% of “music buyers” paid for a music subscription service compare to 4% of “music pirates.” Not as impressive when you put it that way.

While that kind of statistical shenanigary might be overlooked, what’s truly misleading is that if you look at the total figures provided by the report, the total music spending by “music pirates” is less than the total of “music buyers” (and every other segment surveyed).

Well What About…

Maybe there are causes besides piracy of decreasing music sales, the final argument goes.

Not so, according to Stan Liebowitz, who has examined data over the past 30 years to arrive at his conclusion. While some factors may have played some role, that role is at best secondary and at the very least only negligible. Nothing else — the general economy, shifts in consumer spending to other forms of entertainment, etc. — has caused as big an impact as the advent of online piracy. The data doesn’t support the idea, and neither do economic theories. ⁸Liebowitz’s own site summarizes his research in file-sharing and links to his papers on the subject.

Is it possible that piracy has positive benefits? The GAO report considered this question, as have several other studies. Maybe network effects increase the value of copyrighted works. Maybe the “sampling” of digital files that file-sharing allows lead to more purchases.

Again, the consensus among researchers is that any possible positive benefits of piracy are far outweighed by the negative effects. ⁹Note that these questions of “benefits” are mostly limited to economic benefits. Not addressed in this discussion are the equally, if not more, important personal considerations of creators: their free speech interests and the chilling effect of piracy, to name just two. Going back to Liebowitz, “sampling” is more likely to decrease sales rather than increase them. This seems like common sense if you think about it: if you can “sample” an entire work, over and over again, whenever and wherever you want, why would you ever buy it? Never mind that if piracy’s positive benefits were greater than the negative effects, we wouldn’t be having this debate, since creators and media industries would be doing better rather than worse after a decade of file-sharing.

Most creators don’t need to be convinced that piracy is a problem — the real question is how best to deal with it, whether that involves legal, technological, or business model solutions (or, most likely, some combination of the three). But despite all the evidence about the harms of online piracy, there will still be those who keep believing it is not harming creators and the media industries that invest in them. New research and studies will continue to be ignored or distorted. Alternative theories about piracy will be made that may sound nice, but without evidence to substantiate them, they are mere speculation.