Piracy really costs the economy nothing

By On January 6, 2012 · In Economics

Brad Plumer wrote an article yesterday trying to determine how much online piracy costs the economy. The Movie Picture Association of America claims it costs $20.5 billion per year. Other analyses of the cost — including one from the Government Accountability Office — call that figure absurd. But this debate is completely wrong from the beginning.

Online piracy necessarily costs the economy as a whole nothing. There are two kinds of people who pirate: those who would purchase the product if they could not pirate it and those who would not. For those who would purchase the product, the fact that they pirate it instead does not cost the economy as a whole anything. The firms that sell movies, music, and whatever else do not get as much revenue, but the economy as a whole does not suffer. That person eventually spends the money they would have spent on that song or that movie on something else.

For those who would not purchase the product if they could not pirate it, neither the media content firms nor the economy suffers from their pirating. If they could not pirate, the firms would still get absolutely nothing just as they do right now. Those kinds of pirates would not be spending any extra money in the alternative non-piracy world, meaning the net effect of their pirating on the economy is still zero.

Talking about the costs of piracy as if they are costs to the economy is just totally confused from the beginning. It is confused about the economics of file-copying and confused about the nature of copyright itself. Copyright protection does not exist to prevent costs to the economy. It exists to create a market distortion that makes content creation profitable when it otherwise would not be. Our concern with the costs of piracy should be about its impact on content creators. Is piracy so bad that content creators can not make enough money to fund content creation or not? The answer right now is unequivocally no. Big and small media companies are still making plenty of money despite piracy.

 
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  • Anonymous

    I agree with your concluding paragraph, but not your opening statement. If piracy undermines a content producer to the extent that production becomes unviable then this *will* have an impact on the economy. It is understandable that wealthier countries in particular, who have moved manufacture abroad and become more dependent on the service sector, are concerned about this impact. Should creative firms shut up shop, its workers are now less easily redeployed, particularly when their talents are industry-specific.

    Still, there has been scant analysis of downloaders who go from pirate-to-purchase. This is a net benefit for the producers. The real issue in this case is that of firms failing to take advantage of new modes of distribution. Furthermore, the increased (and free) coverage which comes from new media leaking (when done deliberately or unintentionally) is another aspect which should be quantified, or at least considered.

    • Anonymous

      It will have an impact on the economy, but that impact could not be understood as “costing the economy.” At best if piracy made content creation totally unprofitable, it would just create a structural shift in the economy away from that industry to something else. That structural shift might be painful and it certainly might not be desirable (after all, we like media content and like that people produce it). But since piracy does not actually involve stealing in the traditional sense, it still cannot cost the economy in the sense that people usually think about it.

      I think we are on the same page though here. It’s just the vocabulary getting in the way.

      • rainmatt

        if you consider that copyright was created to protect authors from unscrupulous publishers, then piracy is people enjoying the work of the original author. When people like something, they will invest in it. the problem today is obscurity. check out Cory Doctorow at craphound.com and his viewpoint on RIAA, DRM, crippleware, and piracy. We’re all in the same boat. let’s not drill holes in it.

  • Dsmithdrk980

    Smoke crack much?

    • http://pulse.yahoo.com/_MJMG64CKMHHZM6OUT3RKQ2OUM4 the

      Type facile comments into blog posts much?

    • guest

      constructive much? apparently not

  • Aadsfa

    To quote Gabe Newell of Valve Corp. “In general, we think there is a fundamental misconception about piracy. Piracy is almost always a service problem and not a pricing problem. For example, if a pirate offers a product anywhere in the world, 24 x 7, purchasable from the convenience of your personal computer, and the legal provider says the product is region-locked, will come to your country 3 months after the U.S. release, and can only be purchased at a brick and mortar store, then the pirate’s service is more valuable. Most DRM solutions diminish the value of the product by either directly restricting a customers use or by creating uncertainty.” (http://games.ign.com/articles/121/1213357p1.html)

    if the recording and motion picture associations of america spent as much money on improving their service as they did on lobbying, they’d see a drastic fall of piracy and an exponential increase in profits

  • Jwoinbdo9

    There are some errors in your final paragraph. You state that ” Copyright protection does not exist to prevent costs to the economy. It exists to create a market distortion that makes content creation profitable when it otherwise would not be.” While the first sentence is correct, the second is not. The purpose of copyright is to encourage the creation of more works of art and science (“content” if you will). The market distortion you reference is merely the means used to encourage the creation of more content. Following that, you state that “Our concern with the costs of piracy should be about its impact on content creators.” Our concern should not be the impact on content creators, but on the good of society as a whole.

    • Anonymous

      Thank you for your correction. This is actually what I meant, but I guess I did not take it far enough. When I say the point is to make content creation profitable, I mean as you have said that the point is to encourage more works of art (making it profitable will do so). When I say our concern ought to be with its impact on content creators, I simply mean (as I followed up) that we should be concerned about whether content creators can still make money through doing so (thus encouraging content creation, and causing social benefit from that content).

      We are on the same page; it is just a matter of how far down we each explain it.

  • Anonymous

    For the sake of argument I’m taking all of your assumptions as true, but nonetheless it depends entirely on what you mean by “The Economy”. The World Economy is unaffected, as you say, but remember that the USA is a major exporter of media, so there may be an effect on The Economy of The USA. If non-US pirates fail to spend money on US media, they will still spend that money, but there’s no guarantee that they will spend it on another US export. So the US balance of trade could be affected by international piracy.

    • Anonymous

      This is true, but if we want to get real free markety about it, we would just say that the US economy would restructure in that case. Anyhow, as you point out, the analysis here would need to be different than “costs to the economy” in some dollar terms based on how much piracy is going on which is what these estimates linked to are about.

      • http://robertskmiles.com/ RobertSKMiles

        Oh, no doubt these ‘costs to the economy’ claims are meaningless, but I maintain that an unclear definition of ‘the economy’ will hold back any meaningful discussion of the issue. We can’t figure out an impact on something if we haven’t pinned down what that something actually is.

  • Theartteacher

    This blog is superb.

    I’d like to ask something and see what people think. Can piracy cost an economy in the long term by inhibiting creative work, thus damaging the future culture/culture industry of a country? Over time will less people aspire to enter creative work because of money being filtered away from such professions?

    I will say that the way, for example, big music companies control production and take large amounts of profits away from artists is clearly damaging, culturally and I think in fact economically.

    In economic terms will a key business sector (in the US/UK) be destroyed through the lack of protection of ‘content creators’ by copyright or by large media organisations wielding inordinate power to homogenize and undercut the goose that lays the golden egg?

    • http://mattbruenig.com/ Matt Bruenig

      Some of this turns on what it means to “cost the economy.” Suppose hypothetically that the entire content creation industry fell apart. That would not cost the economy anything in the aggregate; it would cause the economy to restructure. The people working in the culture industry would work elsewhere as the money currently going to the culture industry would be spent elsewhere.

      There is a worthwhile argument to make that says we should try to drive money to the culture industry because we particularly value it and free-riding problems will kill it if we do not. But that is not the same thing as saying the economy is losing out on some dollar amount of money due to piracy. That is what I am criticizing here, and that is what the content creation industries are talking about mainly when they talk about lost revenue.

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