Piracy–Part 2

(For Part 1, see here.)

Well, the anti-piracy bills have been called off for the time being in Congress. I’d be surprised if we see them again before elections..and by then who knows what other crisis we’ll be dealing with. This post was planned to present my findings of a week of research on the topic of piracy of intellectual property. I spent many hours on the topic, read through hundreds of online and other sources, yet was disappointed with the lack of hard facts from reliable sources. One would think that a topic which is costing the US economy an estimated (by one source, more on the numbers later) $58,000,000,000 and more than 370,000 jobs in 2010 would have an abundance of reliable statistics, but credible third-party sources outside of the music or movie industry are very hard to find.

The term “sources” as used in this post refers to online news or blog posts that look credible; however most of the time these sources are merely purveyors of feed harvesting, the modern equivalent of hearsay. When the original sources were cited, I went to those sources to get the facts as close to the source as possible. Reliable sources have inline citations. So, if it’s cited, it’s reliable (check the link for yourself); if not, take it with professional skepticism—as they say in accounting lingo. Some of the links are merely definitions from Wikipedia.

What is online piracy? Piracy is a broad term, but the definition in the target of recent bills concerns unauthorized access to intellectual property protected by national copyright laws. Pirates object to the term stealing because piracy usually involves copying property rather than displacing it or revoking the rights of the original owner. There is a difference; if a thief came to your house would you endure the same loss if he or she merely took pictures of the contents of your house and left, or if the thief took all your belongings and left you with an empty house? Obviously, this illustration is flawed, as are the many other examples used by intellectual property owners (IPs) and pirates alike to explain the intricacies of online piracy to Congress and other simple folks.

TV shows, movies, and music are the most commonly pirated entertainment products. Subscription-based “file cabinet” websites such as recently headlined Megaupload.com (now closed by FBI, the top execs hauled off to prison) are repositories where people upload files to share with other unknown users. The owners and management claim no responsibility for the site’s content as all content is owned by the users and shared at the users’ discretion. This works okay until the FBI shows up at the door. Peer-to-peer (P2P) file sharing is the bigger threat to IPs, though. This completely legitimate technology allows people to share massive files across the internet in a peer-to-peer fashion—no huge centralized file server necessary. However, this same technology allows sharing of music and media files, which enables teenagers and grandparents everywhere to trade files. It’s Napster on steroids.

The good news first. The United States ranks lowest in piracy among the countries of the world. We have the lowest software, movies, music, and IP piracy rates in the whole world according to almost any piracy ranking chart you’ll find on the internet. There is still reason for concern. Some good, solid numbers would be helpful here. The Recording Industry Association of America (RIAA) and the Motion Picture Association of America (MPAA) put out some numbers that peg the 2010 loss from piracy of IP at $58 billion, with 373,000 foregone jobs (Source). 29 million Americans have participated. Quick math shows us that the average American pirate would have spent $2,000 more on music and movies in 2010 had piracy been under control.

Let’s examine this a bit more. Sources say the MPAA uses a 1:1 factor to calculate loss due to piracy. This means that it figures a lost sale for every single item downloaded or shared illegally. Is the person who trades a flash drive full of files with a friend really causing a 1:1 loss of sales for every file shared? Many file sharing sites are set up with an artist’s album or entire discography available in a single download. Suppose you want a single song; you could well end up downloading the entire discography (1,000 or more songs) in order to get that one song that you may or may not have bought legally on iTunes for less than a dollar. RIAA counts that incident as $1,000 or more in lost sales. College students, many of whom can’t afford food, are downloading thousands of songs and watching dozens of movies from illegitimate sites; is it reasonable to count this as millions or perhaps billions in lost sales? This is juicier accounting stuff than mark-to-market, SPEs and derivatives were back in the early 2000s.

Back to the $58 billion number: In 2009, the entire music industry was worth $6 billion according to RIAA. Legitimate music sales are only a fraction of their lost sales amount. This is like making money by going shopping; you get rich quick when you add up the value of the things you didn’t buy. Another claim is that pirate activity accounts for 25% of America’s bandwidth. This seems like a lot until you compare it to Netflix’s bandwidth (Netflix is a legal provider of online movies) at 40%. MPAA doesn’t mention this statistic. Other sources put entire P2P traffic estimates at 8%, including legitimate uses of the file transfer protocol (Skype, Google Talk, etc).

This research project just kept getting more muddled for me. Is the sky falling or do we just need to get some good numbers? Or, perhaps, we just need to believe the numbers we already have. America has the lowest piracy rate, the largest for-profit entertainment industry in the world, the most reputable artists and filmmakers…and we’re complaining of piracy? What do the artists think? As Scott Adams, of Dilbert fame, puts it,

“I have one of the most widely stolen intellectual properties in the history of the world. Emotionally, I’m okay with that. It feels like a compliment. Financially, I have no idea if piracy has hurt me in any meaningful way. I made the decision years ago to make Dilbert available on the Internet, including the entire archive. To the surprise of most observers, sales of Dilbert to traditional newspapers continued to grow briskly” (Dilbert blog).

My gut feeling is that innovation is the friction here. Innovating is hard and uncomfortable work, and the old blood at the RIAA and MPAA does not like change. Cigars, golf, and schmoozing are more enjoyable than digging out the slide rules and figuring out how to sell online material that competes with pirate sites. Passing laws that put the competition out of business are less painful than taking business risks. Why else would the MPAA hire long-time Senator Chris Dodd (CT) as their new CEO? Was it because of his prowess in the Internet wires or his familiarity with Congress chambers?

America is not dead. The People were heard on January 18 and Congress responded by shelving the project. For now.

Sources—credible and otherwise: