[Infowarrior] - How The BSA Misleads With Piracy Stats

[Richard Forno]

A Detailed Explanation Of How The BSA Misleads With Piracy Stats
from the and-on-and-on-it-goes dept

http://techdirt.com/articles/20080718/1226541724.shtml

A couple months ago, when the Business Software Alliance (BSA)  
released its latest stats on "piracy," it's VP of anti-piracy, Neil  
MacBride, gave me a call to discuss my earlier complaints about the  
organizations methodology. Needless to say, we did not see eye-to-eye,  
and the phone call did little to resolve our differences. I'm still  
hopeful that eventually the BSA will recognize that it's doing more  
damage to its own position by publishing obviously bogus numbers. So,  
with the organization releasing another bogus stat today, it's time to  
explain why it's wrong and misleading.

Today's report is an attempt to get the government involved in  
protecting BSA member companies' business model, by claiming that the  
US is losing out on $1.7 billion in tax revenue due to "pirated"  
software. And, of course, it comes with a lovely quote from Mr.  
MacBride: "The most tragic aspect is that the lost revenues to tech  
companies and local governments could be supporting thousands of good  
jobs and much-needed social services in our communities." And the BSA  
is even so kind as to quantify what that (not really) lost tax revenue  
could do: "For example, the lost tax revenues to state and local  
governments -- an estimated $1.7 billion -- would have been enough to  
build 100 middle schools or 10,831 affordable housing units; hire  
24,395 experienced police officers; or purchase 6,335 propane-powered  
transit buses to reduce greenhouse gas emissions."

Except that this is almost entirely incorrect and it's relatively easy  
to show why:

    1. The report counts every unauthorized piece of software as a  
lost sale. You have to dig through separate PDFs to find this info,  
but when you finally get to the methodology it states:

           The software losses are based on the piracy rate and equal  
the value of software installed not paid for.

       That's a huge, and obviously incorrect assumption. Many of the  
folks using the software likely would not have paid for it otherwise,  
or would have used cheaper or open source options instead.
    2. The report makes no effort to count the positive impact of  
unauthorized use of software in leading to future software sales. This  
is something that even Microsoft has admitted has helped the company  
grow over time. But according to the BSA's report, this doesn't matter.
    3. The report also proudly notes: "Software piracy also has ripple  
effects in local communities." However, "ripple effects" are easily  
disproved as double or triple counting the same dollar. Using ripple  
effects like that inflates the final number by two or three times. In  
the link here, Tim Lee explains this (in reference to an MPAA study  
done by IPI, but it applies here to the BSA study done by IDC as well):

           If a foreigner gives me $1, and I turn around and buy an  
apple from you for a dollar, and then you turn around and buy an  
orange from another friend for a dollar, we haven't thereby increased  
our national wealth by $3. At the beginning of the sequence, we have  
an apple and an orange. At the end, we have an apple, an orange, and a  
dollar. Difference: one dollar. No matter how many times that dollar  
changes hands, there's still only one dollar that wasn't there before.

           Yet in IPI-land, when a movie studio makes $10 selling a  
DVD to a Canadian, and then gives $7 to the company that manufactured  
the DVD and $2 to the guy who shipped it to Canada, society has  
benefited by $10+$7+$2=$19. Yet some simple math shows that this is  
nonsense: the studio is $1 richer, the trucker is $2, and the  
manufacturer is $7. Shockingly enough, that adds up to $10. What each  
participant cares about is his profits, not his revenues.

       This is a huge fallacy that the BSA an IDC refuse to  
acknowledge. When I discussed it with them in May, they insisted that  
they only wanted to talk about piracy rates, not the loss number. I  
wonder why...
    4. Next, if they're going to count ripple effects in one  
direction, it's only fair to also count them in the other direction.  
That is, they complain that:

           Lost revenue to technology companies also puts a strain on  
their ability to invest in new jobs and new technologies. For example,  
the $11.4 billion in piracy losses to software vendors and service  
providers in the eight states would have been enough to fund more than  
54,000 tech industry jobs.

       But what they don't acknowledge is the ripple effects in the  
other direction. That is, if (going by their assumption, remember)  
every company that uses an unauthorized copy of software had to pay  
for it, that would represent $11.4 billion in money that all of those  
other companies could not use to fund jobs at those companies. What  
about all of those jobs?
    5. The BSA/IDC stat on lost tax revenue also miscounts on the  
point above, since it includes the lost income tax revenue from those  
54,000 lost jobs, but does not count the equivalent income tax revenue  
from those other jobs. In fact, in the fine print, the report notes:

           "Employment losses are calculated from revenue losses, and  
only apply to employment in the IT industry, not IT professionals in  
end-user organizations. Tax revenue losses are calculated from revenue  
losses (VAT and corporate income tax) and employment losses (income  
and social taxes)."

       In other words, the income tax losses only count one side of  
the equation and totally ignore the lost income tax revenue from the  
lost jobs on the other side of the equation. Oops.
    6. It seems likely that the eventual tax benefits of the  
unauthorized use of software is most likely to greatly outweigh the  
lost tax revenue elsewhere. That's because the use of software within  
industries is a productivity tool that increases overall productivity  
and output, which would increase taxes beyond just the income taxes of  
the employees. The study, of course, ignores this point.
    7. Worst of all, the report seems to assume that direct software  
sales are the only business model for the software industry, ignoring  
plenty of evidence from companies that have adopted business models  
that embrace free software -- generating billions of dollars for the  
economy (and in taxes). And that's what this really comes down to.  
It's a business model issue. If others started adopting these business  
models as well, there wouldn't be any "losses" at all.

Oh, and just for good measure, the report also falsely claims that:  
"What many don't realize or don't think about is that when you  
purchase software, you are actually purchasing a license to use it,  
not the actual software." That's not exactly true and goes directly  
against a recent court ruling that said the opposite and goes through  
a detailed explanation for why a piece of sold software is a sale with  
restrictions, rather than a license, using previous court precedents.

Most of these points have been made to the BSA and IDC in the past,  
and both organizations chose not to address them. The fact that  
they're continuing to use these obviously false numbers and  
methodology to now push for the government to prop up an obsolete  
business model should be seen as troubling not just for the dishonesty  
of it, but for the negative impact it will have on the software  
industry and our economy as a whole.