Calculating the Economic Impact of Counterfeiting and Piracy: It’s in the Hundreds of Billions

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Who says that piracy doesn’t really hurt anyone or have much of an economic impact? A recent report released in early February and published by Frontier Economics on behalf of the International Chamber of Commerce and BASCAP (Business Action to Stop Counterfeiting and Piracy), along with INTA (International Trade Mark Association), reports the disturbing figure that the value of international and domestic trade in counterfeit and pirated goods in 2013 reached a total of $710 to $ 917 billion. In addition, the study estimates that the global value of digital piracy in movies, music and software in 2015 was $213 billion. At the high end, that totals 1.13 trillion dollars in trade in counterfeited and pirated products, both physical and online. It gets worse. The study estimates this amount will grow to between 1.9 and 2.8 trillion dollars by the year 2022. This translates into digital piracy in film, music and software being valued at between $384 and $856 billion in 5 years time. As a result, the estimated employment losses due to counterfeiting and piracy will surpass 5 million by 2022.

These are big and scary numbers. The study points out that the losses come from the diversion of public and private resources from more productive ends into the illegal acquisition of intellectual property (IP), added to which are the costs of defending against IP theft by rights owners, combined with reduced returns to innovators and creators. These costs are a significant drag on the growth of knowledge-based economies.

You need to be an economist to fully understand the assumptions and methodologies employed in the study, but suffice to say that the research is credible and thorough. It builds on existing OECD studies, except in the area of digital piracy, where it breaks new ground. In an earlier blog, I noted Mark Twain’s aphorism that there are “lies, damned lies and statistics”. Economics is a science, but not always an exact one. This in part explains the range of predictions with regard to illicit activity and losses. Ask any economist and they will tell you that the answer depends on the assumptions (which is maybe why I am not an economist).

To estimate the value of digital movie piracy, Frontier Economics uses what it calls a “bottoms up” approach. It starts with an estimate of the number of illegal movie downloads in a year–around 23% of bandwidth globally is used for infringing activity. Using various measurements, the researchers came up with a figure of 47.8 billion illegal downloads of movies in 2015, which was multiplied by the average cost of legal movie consumption. This average cost was itself difficult to estimate but a price was constructed by inferring how movie consumers split their consumption across different platforms. This resulted in a per movie average price of $3.35, yielding an estimated total piracy value of $160 billion.

For music, the dollar amount of digital piracy in 2015 was estimated at $29 billion. It is interesting to note that the growth of streaming over the past couple of years has had an important impact on the reduction of illegal music downloading via P2P file-sharing. Looking at various forms of music piracy such as stream-ripping, BitTorrent, Lockers and MP3 sites, Frontier came up with an estimate of 27.4 billion illegally downloaded tracks across all forms of music piracy in 2015. Once again, the challenge was to calculate the average price per track in order to ascertain the amount of total loss. The report notes that “we generated a weighted average price across all different forms of legal music consumption (CDs and other physical discs, digital permanent downloads, digital subscriptions and streaming), using sales volumes as weights” in order to yield a per-track price of $1.06. Multiplied by the number of illegally downloaded tracks, this per-track cost yielded the piracy value number of $29 billion. (Even I can do that math!)

Finally the value of digital piracy of software was estimated to amount to $24 billion. I was personally surprised that this total was not higher. The total sales of software (including video games) in 2015, both physical and digital, are estimated to be $444 billion with an increasing share going to digital sales. The study estimates that 45% of pirated software comes from online sources and based on a Business Software Alliance estimate that the worldwide rate of pirated software installation is 39%, or $52 billion, multiplying that number by 45% yields the $24 billion figure. Movie, music and software piracy combined in 2015 totalled $213 billion.

Projecting the 2015 value of digital piracy forward engages a huge new range of variables, thus the wide spread between $384 billion on the low end and $856 billion at the high end. The low end projection is based on the premise that the share of digital piracy relative to counterfeiting and piracy overall will remain stable over time whereas the high forecast assumes that the share of piracy grows in line with a projected growth in global IP traffic. Frontier takes great care not to inflate the numbers, and indeed comments that if anything, its numbers underestimate the value since piracy in a number of areas such as TV series, OTT content like Netflix, e-books, or mobile gaming has not been assessed. While one can never be sure of the exact total value of digital piracy, it is clearly staggering.

Will it all turn out as badly as estimated? We can’t see the future and economists are notorious for making projections that later have to be revised because the inputs have changed. This could happen particularly in the digital world where change occurs rapidly. I have already noted how legal streaming services in music have led to a drop in the rate of piracy. Legal measures in a number of countries such as disabling online access to large-scale pirate sites have also been shown to be effective, and could lead to a decline in movie and video piracy, or at least in the projected rate of growth of such piracy.

While it is impossible to predict with absolute accuracy how large trade in counterfeit and pirated goods will be in future, like the GIPC IP Index produced by the US Chamber of Commerce, Frontier Economics provides convincing data that piracy and counterfeiting have significantly negative impacts on economic activity, tax, employment and investment. The negative effects are broad;

Erosion of intellectual property rights is associated with poorer standards of governance and transparency, reducing incentives to invest or innovate, impacting on the long-term growth path of a country. The displacement of genuine activity by illicit activity is also likely to reduce efficiency, as the ‘underground’ economy is likely to have more irregular supply chains that do not optimally allocate resources. The diversion from genuine to criminal activity reduces government tax revenues and may also have serious consumer impacts due to regulatory non-compliance.”

Intuitively we know this, but this impressive economic study by Frontier Economics on behalf of ICC/BASCAP provides the statistical underpinning and the academic credibility that convincingly makes the economic case against piracy. These statistics don’t lie.

© Hugh Stephens 2017. All Rights Reserved.

Since posting my original blog on this subject, I have been given the benefit of comments by a reader who is more schooled in economics that I am. It was pointed out that the Frontier Economics study did not measure actual losses owing to counterfeiting and piracy, but rather the value of counterfeiting and piracy, from which losses to industry and governments could be inferred. Nor do these numbers represent the economic benefit received by counterfeiters or pirates, since the estimated value is a composite of losses to legitimate industries and creators, costs to defend against IP infringement, losses of government revenue, etc. In other words, the costs or losses to society are greater than any transfer or “payment” to the bad guys. These points do not diminish the conclusion of the study, which focuses on the size of the counterfeiting and piracy problem, but it is important to report the conclusions accurately. Having been given the benefit of this sound advice, I have updated the blog to reflect more accurately (I hope) the conclusions of the Frontier Economics study.

 

 

One thought on “Calculating the Economic Impact of Counterfeiting and Piracy: It’s in the Hundreds of Billions”

  1. I had to share this on my Facebook page. One of the few discouraging elements in my working with young writers has been the fact they don’t think of their downloading/streaming films, TV series, and music as something that is bad or that will impact them professionally. That one line alone–“As a result, the estimated employment losses will surpass 5 million by 2022.”–should have them feeling the quicksand under their feet. Another terrific blog post!

    Like

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