Does Online Piracy Hurt The Economy? A Look At The Numbers

Julian Sanchez has an excellent piece in Ars Technica which takes a look at the claim that content creators are being discouraged from creative pursuits due to online piracy – a claim that has fueled the recently stalled anti-piracy legislation in congress.

Whether SOPA and PIPA would have actually worked is an open question, but whether they were ever even necessary to begin with is even more important.

Sanchez looks at the music and movies industry and finds that, relative to many other struggling industries, these entertainment industries have done far better on average during the recession:

Since the core function of copyright is to incentivize the production of creative works, it’s also worth looking for signs of declining output associated with filesharing. Empirically, it’s surprisingly hard to find an effect. Rather, a recent survey study by Felix Oberholzer-Gee of the Harvard Business School concluded that “data on the supply of new works are consistent with the argument that file sharing did not discourage authors and publishers” from producing more works, at least in the US market.

So, for instance, Nielsen SoundScan data shows new album releases stood at 35,516 in 2000, peaked at 106,000 in 2008, and (amidst a general recession) fell back to mid-decade levels of about 75,000 for 2010. That’s against a general background of falling sales since 2004—mostly explained by factors unrelated to piracy—which finally seems to have reversed in 2011. The actual picture is probably somewhat better than that, because SoundScan data is markedly incomplete when it comes to the releases by indie artists who have benefited most from the rise of digital distribution.

If we look at movies, the numbers compiled by the industry statistics site Box Office Mojo show an average of 558 releases from American studios over the past decade, which rises to 578 if you focus on just the past five years. The average for the previous decade—before illicit movie downloads were even an option on most people’s radar—is 472 releases per year. (As we learn from a recent Congressional Research Service report, it’s weirdly hard to detect a strong overall correlation between output and employment in the motion picture industry, which actually fell slightly from 1998 to 2008, even as profits and CEO pay soared. One reason is the growing trend in recent decades for “Hollywood” features to actually be produced in Canada or Australia.)

But wouldn’t these numbers be even higher minus piracy? Well, not necessarily, Sanchez argues. He points out that the top pirated movies also tend to be at the top of the box office.

The whole thing is worth the read. Sanchez argues convincingly that the economic impact of piracy and the impact on employment is being wildly inflated by the entertainment industry and that steps to reduce piracy would actually likely have very little effect.

This makes sense. I suspect a great deal of piracy stems from either people who already spend their budget on entertainment goods and simply can’t afford more – and thus would have no additional economic benefit sans their piracy – or from people who don’t have access to those goods online without resorting to piracy.

In other words, as these pirates earn more they’re going to be more likely to spend it on the goods they now pirate, and as content creators find ways to monetize their content online more people will switch to legal streaming as opposed to downloads.

The data simply doesn’t suggest that piracy is causing any serious economic harm to the US economy or the entertainment industry. Heavy-handed approaches to preventing piracy are wrong-headed and reveal a dangerous level of short-term thinking on the part of both lawmakers and industry leaders. Worse, the impetus to crack down on piracy is based largely on industry data that wildly inflates the problem:

As a rough analogy, since antipiracy crusaders are fond of equating filesharing with shoplifting: suppose the CEO of Wal-Mart came to Congress demanding a $50 million program to deploy FBI agents to frisk suspicious-looking teens in towns near Wal-Marts. A lawmaker might, without for one instant doubting that shoplifiting is a bad thing, question whether this is really the optimal use of federal law enforcement resources. The CEO indignantly points out that shoplifting kills one million adorable towheaded orphans each year. The proof is right here in this study by the Wal-Mart Institute for Anti-Shoplifting Studies. The study sources this dramatic claim to a newspaper article, which quotes the CEO of Wal-Mart asserting (on the basis of private data you can’t see) that shoplifting kills hundreds of orphans annually. And as a footnote explains, it seemed prudent to round up to a million. I wish this were just a joke, but as readers of my previous post will recognize, that’s literally about the level of evidence we’re dealing with here.

As Sanchez concludes, “On the data available so far, though, reports of the death of the industry seem much exaggerated.”