[Infowarrior] - Putting a Price Tag on Film Piracy

[Richard Forno]

 April 5, 2013, 11:42 PM

Putting a Price Tag on Film Piracy
By Carl Bialik

http://blogs.wsj.com/numbersguy/putting-a-price-tag-on-film-piracy-1228/

My print column examines dramatic changes in research into the economic effects of movie piracy — and how those changes have been reflected in the numbers used to quantify the impact of illegal downloads, bootleg DVDs and the like.

From their publication in 2006 through the debate over the Stop Online Piracy Act that ended early last year, the film industry frequently has cited the findings of a study by the Institute for Policy Innovation, a Lewisville, Texas-based think tank that found film piracy was costing the U.S. economy $20.5 billion annually. That IPI study and a subsequent one in turn built on a study funded by the studios’ trade association, the Motion Picture Association of America, and conducted by L.E.K. Consulting, which was based on over 20,000 surveys of consumers conducted in 22 countries. L.E.K. found that piracy was costing studios $6.1 billion a year.

The MPAA shared some details of the study, but not the questionnaire, how respondents were selected and details of how the dollar figures were calculated.

Bill Frack, a Los Angeles-based L.E.K. vice president who has studied piracy for the past decade, said one challenge the study faced was, “How do you actually talk to a pirate?”

“The study undertaken by the MPAA was a relatively comprehensive effort against a very hard topic,” Frack said. He added, “There’s not a lot of certainty in the space.”

IPI President Tom Giovanetti said that the IPI study was an early attempt to answer a tough question, and an improvement on the status quo, in which economic-impact statistics — such as that 5% to 7% of all goods were pirated — were cited without any basis other than vague industry estimates. “There were so many numbers being bandied about, and any time we looked into it, people were quoting each other,” Giovanetti said.

“When you do something like this, you’re not going to come out and say, this is the accurate number,” Giovanetti added. “We know there is more art than science.”

Some writers and economists criticized the IPI study’s use of multipliers to estimate the effect of piracy on the broader economy. “It says that a dollar less in film spending actually has a larger impact since it impacts other parts of the economy,” said Koleman Strumpf, an economist at the University of Kansas School of Business. “But if file-sharing leads to less spending on films, consumers have more money to spend which will completely offset these effects. There is no multiplier effect at all.”

Giovanetti rejected the argument that theft, of intellectual property or anything else, freed up money for the thieves to spend elsewhere. “You could use that argument about any act of theft,” such as of automobiles, Giovanetti said. He added that piracy is “skewing the economy” by reducing investment in products people want but some aren’t paying for.

The IPI receives some funding from copyright holders. “The people who like the work you do, want you to do more of it,” Giovanetti said. He added that the group also receives funding from other industries that “arguably benefit from piracy.”

He’d like to see a reprise of the study. “We do think it’s long past time the work has been refreshed and updated,” Giovanetti said. “Because of changes in the marketplace. There are many legal options now. It wouldn’t surprise us if some of these lines haven’t now crossed where the industry is now making enough money from digital models to compensate for piracy.”

But the MPAA is focusing elsewhere, and no longer citing the earlier studies, after an internal review that followed the SOPA debate, MPAA spokesman Howard Gantman said. “At the current time we do not actively cite the figures directly relating to movie piracy, as the landscape has changed significantly since these studies were conducted both regarding the growth of broadband and the development of streaming technology, as well as the introduction of hundreds of new sites world-wide for viewing legal online content,” Gantman said.

Gantman added, “One can reasonably ask whether any one study got it right down to the dollar, but the bottom line underlying all of the studies is that piracy is a serious economic problem that needs to be addressed.”

The MPAA’s focus now is on collaborating with academic researchers, who are taking a new approach to evaluating the effects of piracy. “We’ve seen some increased willingness on the part of industry to partner with academics to produce these studies,” said Michael D. Smith, professor of information technology and marketing at Carnegie Mellon University.

All piracy economic-impact studies face a common set of challenges: They are studying an illegal activity, tough both to measure and to get people to disclose accurately in surveys. “It’s difficult to come up with numbers, whether it’s illegal drugs or any other prohibited activity,” said Loren Yager, managing director of international affairs and the trade team at the U.S. Government Accountability Office and author of a 2010 GAO report on the effects of piracy. “Policy makers certainly like to get numbers on the scale of the problem, and I can understand how it can be valuable, but it’s unfortunately difficult to get reliable numbers.”

The studies also require answering a hypothetical question: What would sales be if piracy didn’t exist?

The digitization of both legal and illegal consumption of film has helped bypass the challenges on illegal activity: Sales and piracy activity both are easier to track now that digital consumption creates a digital trail. “The fact that sales are turning more to digital channels makes collection of data a lot easier,” said Wellesley College economist Brett Danaher, co-author with Smith of a paper last month on the effect on digital sales of the 2012 closure of the film-sharing site Megaupload.

“Researchers have gotten more and more interested in this. We’re looking for natural experiments that allow us to tease out the causal impact of piracy on sales,” Danaher said. “If Megaupload shuts down, that’s a random negative shock to piracy.”

The Megaupload study found that digital sales from two major studios rose 6% to 10% after the shutdown of Megaupload. Smith’s review of other natural experiments, co-authored by his Carnegie Mellon colleague, Rahul Telang, indicates that some studies found bigger effects from movie piracy, while others found no effect. The MPAA-funded review generally criticized the findings of no effect from movie or music piracy.

Strumpf, a co-author of one of these studies, called the review a “counting exercise” and said his and other papers finding little negative impact from piracy generally were stronger studies. “I think the jury is still out on this,” he said. “The aggregate data is conflicting” — box-office and digital revenues are rising while DVD sales have been falling.

On the other end of the spectrum, Stan Liebowitz, an economist at the University of Texas at Dallas, said “It is likely that digital piracy, in the U.S., is having a large effect on sales.” He said the upper bound on the effect is a loss in sales of $18.5 billion per year, mostly in prerecorded films — or far more than the L.E.K. estimate, produced in an era that preceded the rise in online piracy. “This is probably higher than best my point estimate, if I needed to give one, but it is plausible and might not be too far off,” Liebowitz said.

“The vast majority of studies say file sharing is hurting sales,” Danaher said. “There can be some quibbling over the actual number.”

“There is a real effect but perhaps not the catastrophic effect the industry likes to claim when asking the government to pick up the tab for being the piracy police,” said Julian Sanchez, a research fellow at the libertarian Cato Institute.

There are some commonalities between research into piracy on music and movies, but also some important differences, researchers say. Most notably, music piracy was widespread long before movie piracy was, in large part because movie files are bigger and require more bandwidth, Smith said — about 30 times more per minute, according to a back-of-envelope calculation he made using two files in his iTunes library. Therefore music piracy increased alongside broadband penetration, whereas film piracy proliferated later, after broadband was already widespread — so the two trends couldn’t be correlated.

While researchers continue to probe piracy’s effect on sales, they find also are exploring other, related research questions. Among them:

•What potential economic benefits can piracy have? These could include boosting other industries, such as broadband; or even, more controversially, increasing buzz and box office, at least for certain films.

•How effective have various strategies been at mitigating piracy? These include legal efforts and offering attractive alternative services.

•How piracy has affected the supply of creative work.

“There is a legitimate discussion to be had here about the impact of the declining revenues on production, but that has not occurred as yet,” Liebowitz said.


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