If You Think The Cost Of 'Piracy' Is High, What About The Cost Of Enforcement?

from the why-is-that-always-missing-from-the-equation? dept

We’ve all seen the crazy high claims by the legacy entertainment industry about the “costs” of infringement. Most of these reports have absolutely no basis in reality and have been widely debunked — even by the US government itself. But, even if we grant that there are some “costs” to infringement, why is it that we rarely — if ever — hear about the costs of enforcement? Julian Sanchez has a great post riffing off of the news that Hulu is thinking of requiring proof of pay TV subscriptions to get any free content, and does a neat little thought exercise on how distorting the “cost of piracy” discussions are if you don’t also look at the cost of enforcement. He puts forth a hypothetical:

To illustrate, let’s imagine television show that initially streams online for free with advertising, garnering a million viewers per episode and earning $1 per viewer in ad revenues, for a total of $1 million. A small number who really dislike ads, or have connections too slow for streaming, let’s say 5,000, download pirate copies anyway—but the vast majority watch legally. After building an audience and generating some good word of mouth, the accountants suggest that it might be more profitable to stop the free streaming and instead sell ad-free episodes for $4, in hopes that enough dedicated fans will pony up to compensate for the predictable drop in viewership once the program is no longer free to watch. The paying audience does indeed drop to 255,000, which still leaves the company slightly better off for the switch, but 100,000 viewers decide to keep up with the show (at least initially) by downloading pirated copies. A subsequent price hike to $10, however, turns out to be a money loser. Now the show has only 80,000 paying viewers, while 150,000 are engaged in piracy.

Undoubtedly that piracy is costing the show’s producers something: If piracy were impossible, some unknown fraction of those who download illegally would be willing to pay the asking price. But just crudely using the actual market price at each stage—even if modified by some constant “displacement rate” to acknowledge that not every illicit download represents a lost sale at that price—yields some perverse results. As the pricing strategy for the show changes, the “cost” of piracy rises from $5,000 to $400,000 (even as revenue rises) to $1.5 million (while revenues drop by $20,000). Obviously, something is wrong here.

It’s no great mystery what: The problem is that the rate of piracy, the price of a digital good, and the “displacement rate” (the percentage of the pirates who’d buy at that price in a world of perfect copyright enforcement) are not independent variables. And, of course, the interdependency runs both ways: Pricing decisions are influenced by the knowledge that we don’t live in a world of perfect enforcement, and you can tell plausible stories according to which this might keep prices higher or lower than they’d be under perfect enforcement, depending on your assumptions about the conditions under which a particular audience will substitute the pirate for the legal good.

But it goes further than that, which is that when you factor in the cost of enforcement, the equation changes somewhat:

Returning to our imaginary program, suppose that under perfect enforcement—a zero piracy world—there would be 110,000 paying viewers at $10 per episode, netting the creators an additional $80,000 over what they’d make with their revenue maximizing strategy ($4 per episode) in the world of imperfect enforcement. That’s great for them, if not for consumers, but we haven’t factored in the costs of enforcement. Some of these are likely to be borne by the creators themselves—hiring lawyers to hunt down pirate copies circulating online and the like—but in practice they’re often shifted to taxpayers, in the form of direct enforcement expenditures, or to other parts of the economy, in the form of DMCA compliance costs or innovative services that are deterred entirely. It’s possible that, in this hypothetical scenario, the revenue maximizing strategy for the producers is to charge $10 while externalizing the costs of perfect enforcement, but the socially efficient outcome is to accept imperfect enforcement and let the producers revenue maximize against that background at a $4 price point.

As Sanchez admits, many of these numbers are theoretical, just for the sake of the thought exercise. But what we know in reality is that the cost of enforcement — whether direct or through externalities — almost never enters into the discussion in any meaningful way, even though it’s absolutely there.

What’s amazing is that even when the costs are explicit, they barely enter the conversation. Take, for example, the predecessor to SOPA/PIPA: the ProIP Act, which passed in 2008. A report by the Congressional Budget Office showed that the cost of this bill, which is almost entirely focused on increased enforcement was $435 million. Yes, you read that right. Taxpayers have been on the hook for nearly half a billion dollars for the increased enforcement initiatives — like the spectacular flop known as Operation In Our Sites. Is this really a wise use of taxpayer resources?

Add to that, of course, the negative externalities created by such enforcement — such as the chilling effects of increased censorship, expensive court cases and other such efforts, and it’s kind of amazing that these costs never seem to even enter the public debate, even though many of them are a lot more real than the “costs” presented by the industry for “piracy.”

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Companies: hulu

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Comments on “If You Think The Cost Of 'Piracy' Is High, What About The Cost Of Enforcement?”

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Skeptical Cynic (profile) says:

It turns out the MPAA and the RIAA are not so stupid...We are!

The Media Outlet Representative OrganizatioNS (MORON for short)are smarter than we are because they have found a way to Outsource the cost of limiting piracy. They just get the tax payers to foot the bill!!!!

(Head Slap!)

I wish I could come up with a way to get the tax payers to foot the cost of the way I do business.

Wow, we are dumb.

Mike, maybe you could create an Insight Case on “How to get the tax payers to pay for the half of the cost of your business model.”

MrWilson says:

Re: Re: Re: It turns out the MPAA and the RIAA are not so stupid...We are!

Unless you live in a jurisdiction where the police are underfunded and so they decline to investigate alarms unless an actual emergency is reported or confirmed by a homeowner who is present at the scene – making alarms virtually useless if the homeowner isn’t home (and thus potentially in danger and unable to get to a phone).

ltlw0lf (profile) says:

Re: Re: It turns out the MPAA and the RIAA are not so stupid...We are!

Home security systems. Every alarm (true or false) requires a police response at taxpayer expense, of course.

I pay for a permit every other year, and along with that permit comes one free alarm. After that, I pay $50 for the first alarm, $100 for the second alarm, and $150 for each alarm after that. They don’t pay that police officer $150 for the 15 minutes to walk around the house (but then again, I don’t have my alarm going off.) I wouldn’t have it any other way though…I should be asked to pay for the services rendered, and I believe I get what I paid for.

Some cities don’t charge for alarm calls, but many do. My city even went so far as to attempt to collect fees for traffic accidents (when police are called,) but that was rejected by voters.

Machin Shin (profile) says:

Re: Re: Re: It turns out the MPAA and the RIAA are not so stupid...We are!

“My city even went so far as to attempt to collect fees for traffic accidents”

Well that is great example of trying to double dip into peoples pockets and that is why it was rejected. If your in a wreck and police come then there is going to be a ticket written probably 90% of the time.

ltlw0lf (profile) says:

Re: Re: Re:2 It turns out the MPAA and the RIAA are not so stupid...We are!

Well that is great example of trying to double dip into peoples pockets and that is why it was rejected.

Oh, I agree. I voted it down personally myself, not because of the fact they were going after the money, but because they were going to charge both parties (multiple parties) the same fee regardless to who caused or was mostly at fault for the accident. If I am following all the rules and someone runs into me, I don’t see why I should have to pay for it.

However, for cash strapped cities, it is only a matter of time before they look to new and innovative ways to screw the citizen who is already paying taxes. For alarm calls, I don’t mind paying, as it forces folks to keep their alarms in good working order (and I have not had a single false alarm in a very long time.) However, asking for citizens to pay for fees to access law enforcement when they need it when they are already paying for it through taxes is not the way to go.

gorehound (profile) says:

Re: It turns out the MPAA and the RIAA are not so stupid...We are!

Washington is the Cancer of the USA
More and more Debt piled on the Nation by Asshole Corrupted Individuals who do not Represent their Nation as it should be.Their day is going to come and even my Far-Rightie Brother sees that one.I am a Lefite.We both love America but we hate the Government.He hates his Republican Party in its present form and I hate the Democrats in their present form.We figure really bad stuff is coming to USA in 5 – 10 years from now.
Hope we are wrong in our prediction.And he has a ton of money and I can barely handle my Rent so we are of two different Economic Standings.

John Doe says:

Where can I get a Jolly Roger flag?

I have stated here in the past that I don’t pirate anything but that I would start pirating once the industry costs me money. Now I realize that they have been costing me money indirectly. No, I am not being taxed on my blank CD-Rs or my broadband connection, but I am being taxed to pay for IP enforcement that neither works or is needed. Maybe it is time I fly the Jolly Roger, hoist the main sails and load up the cannons?

Gwiz (profile) says:

Re: Re: Re: Where can I get a Jolly Roger flag?

…at least the numbers behind the war on drugs is more reasonable…

Not so sure of that.

If you calculate the costs of incarcerating all those convicted under drug laws with mandatory sentencing where rehabilitation, parole, fines or community service might have been wiser options along with the massive increases in law enforcement budgets to fight this so called drug war, you’d be surprised at the amount of tax payer money wasted on this.

CBS had an article just the other day that stated that marijuana use is on the rise in teenagers. Doesn’t seem like we are even coming close to winning this “war”.

Anonymous Coward says:

Re: Re:

It depends a lot, I know for a matter of fact that stream services that have AD revenue with the content provider – like youtube’s partnership program – pays something like a fraction of a cent/penny to the person offering the content. Google being the chief of the AD Network though takes a much higher cut though.

I believe that in a service like Hulu (being owned by TV networks and the like) they take way better rates such as 50/50 deal for the service and the studio that produced the show. I’d say that the producers take around 50 cents per view.

Skeptical Cynic (profile) says:

Re: Re:

I just call this smart business. I am sorry but if you are allowed to as you say socialize losses and privatize profits why wouldn’t you?

Businesses are in the business of making money that is their raison d’etre. They have moral, cultural, societal, and environmental responsibilities to uphold to some degree. But those ideals are the first to go if they are not able to make profits.

So if they are allowed to by governmental entities (I am coining this acronym) to “SLaPP” us with the losses they have a fiduciary obligation to the owners of the company to do so. Otherwise they are going to be at a competitive disadvantage.

So getting angry at the big bad guys on Wall Street for doing so is just a case of misplaced anger, just like the MPAA does when they blame piracy for their imagined losses.

Our great leaders (Or Rulers) have abandoned their fiduciary obligation and raison d’etre in favor of more power and financial rewards for themselves. They have forgotten that they are their to provide us the tax payers with the best value for our money and to do so with their moral, cultural, societal, and environmental responsibilities first and foremost.

John Fenderson (profile) says:

Re: Re: Re:

I just call this smart business. I am sorry but if you are allowed to as you say socialize losses and privatize profits why wouldn’t you?

While I wouldn’t do it myself (since I’m a human being, I have a sense of ethics), it is indeed “smart business” when looking short-term. But if corporations are people, then the DSM says they’re classic sociopaths.

This is one of handful of extremely strong reasons that we need to get business completely out of the government, particularly the legislative branch.

Skeptical Cynic (profile) says:

Re: Re: Re: Re:

Everybody has a sense of ethics. Even corporations as they are run by people. But ethics is a soft target and of all the reasons we choose to do something right or wrong it is the least influential because it is the most referential. It is based on your frame of reference. Your perspective.

If your perspective involves seeing what other companies (people) are doing and are able to do then your “ethics” are going see it as acceptable when you do as your peers are doing. I can show you proof after proof that ethics can be distorted in this way but I will just give you one landmark study that gives a good summation of my point.

Even good people can do bad.

John Fenderson (profile) says:

Re: Re: Re:2 Re:

Even corporations as they are run by people.

I don’t think the evidence bears this out (about corporations having a sense of ethics, not being run by people). Or, said another way, “corporate ethics” have nothing to do with the impact of their behavior on people aside from the ability to earn profit.

Being run by people doesn’t make corporations behave ethically. The few people with power in companies who make business decisions with a moral sense are outvoted by the others in the company who judge everything based purely on what’s good for short term business.

Jay (profile) says:

Operation in Our Sites costs

Mike, there’s more to this cost than meets the eye.

Let’s factor all of the sites taken down from Operation in Our Sites – 758

Let’s factor that there have been a number of arrests and detainments such as Hana Bashara, Richard O Dwyer, and Yonjou Quiroa.

Now let’s factor in the costs to the Solicitor Generals to deprive these people of their rights. And knowing that Neil McBride is doing everything he can to make this cost effective, I’ll put that he’s going to be a very expensive General to have on your side. Looking at the DoJ Budget Request they have spent $4.8 million on criminal copyright enforcement so far. That number will only increase as Verisign and ICANN make domain seizures easier with less due process.

Another factor here is how much traffic these sites have lost and how much less revenue is being generated to be taxed through ICANN. If you look at the ripple effects that have already occurred, you’re looking at even more devastation.

I think that $435 million is a generous low-ball number. I would estimate that number (factoring in costs to enforce these laws, house the “culprits”, and loss of business revenue that’s taxable to the economy) may be in the billions.

The Piracy War is quickly becoming the same as the Drug War. Unwinnable and just a loss of time, resources, and taxpayer dollars.

mikey4001 says:

We may be forgetting that, according to MAFIAA logic, any dollar that is not spent on their specific product is a dollar that is completely removed from the economy. Money spent on things that are not content is therefore money that is not counted. Money that is not counted, by definition, doesn’t count. So, if I’m doing the math right, enforcement is free.

Anonymous Coward says:

Great Point

I think the article makes a great point. This is what probably was behind moving copyright infringement from the civil courts to the criminal world.

“In civil law, a private party (e.g., a corporation or individual person) files the lawsuit and becomes the plaintiff. In criminal law, the litigation is always filed by the government, who is called the prosecution.”

Why spend millions prosecuting pirates when the government can do it for you — and also lock the crooks up — whereas before the most you could get were treble damages (if you could prove any monetary damages)!

bob says:

It’s a fair exchange. We will either get you all to pay for content regardless of whether you want it, or we will get you all to pay for enforcement regardless of whether you want it, in order to get you to pay for content regardless of whether you want it.

You are such an idiot, Masnick. Paywall paywall paywall. Oh, right, did I forget to mention paywall?

Anonymous Coward says:

this is paid for out of tax payers money. it isn’t regarded as money lost because the people are paying it out. the fact that the money could have been spent on something worthwhile is irrelevant. there is nothing more important than the entertainment industries, not just in the USA but in every other country, in fact in the whole world. you just go out and ask people where music and movies are on their list of priorities for life. i bet you get told good and proper!!

cosmicrat (profile) says:

About time enforcement costs took center stage

I remember when they were pushing SOPA and PIPA and downplaying the enforcement costs, although the government accounting office estimated some $10 million a year for PIPA.

Seems that was low.

Quite honestly I’m shocked. $435 mil over less than 5 years is huge. And what do we have to show for it? And this does not take into account the cost to the private sector, which is even higher.

This issue should be highlighted in the public debate, fiscal issues do have a lot of traction in our current economy. Mike: more articles like this please.

To be balanced, this money is not completely “lost” to the economy; just as “losses” from piracy represent money that the “pirates” turn around and pump back into other purchases, so this money goes to enrich an ever increasing class of lawyers, prosecutors, investigators and all the vendors and private businesses that service them. Personally, I’d wager that most of us would much rather have our tax dollars be spent on new infrastructure, renewable energy and a national health plan than supporting copyright lawyers, prosecutors and potentially the prison industrial complex.

ethical (profile) says:

Facts are stubborn things

Techdirt says there is no connection between 9,947 Petabytes of infringing data transfers in the US and declining revenue. The US movie industry home video and box office was approx. $28B in 2011, down from $37B in 2006. Music was $6B in 2011 down from $12B in 2000. According to Sandvine 18% of US Internet traffic is P2P filesharing and 5% is used for sites like Megaupload. Cisco states that North America used an average of 9,947 Petabytes (1 million Gigabytes) a month in 2011, which would mean that 7,899 Petabytes were used to illegally use movies, 3,141 Petabytes to illegally use television shows and 650 Petabytes were used by illegal music consumption in 2011.

ethical (profile) says:

There would be little cost if . . .

There would be little cost to piracy enforcement if the ISPs just followed the law. ISP’s only have safe harbor from their liability due to their subscribers distributing every piece of music, movies, book, software and video game ever made on the Internet for free if they terminate repeat infringers. They get millions of notices of infringement a month which clearly identify their repeat infringers and yet 19% of all internet traffic is used to steal content. So obviously most ISPs are not terminating repeat infringers. If they were, there would be none of the costs mentioned in this article. That is how the DMCA that they agreed to is supposed to work.

Anonymous Coward says:

New Anti-Piracy Message

I rented a DVD today which, before the movie starts, displayed the message, “Piracy is not a victimless crime. To learn more about how piracy harms the economy, visit [a website that ends in .gov]”. This was followed by the standard FBI warning, but next to the FBI symbol was a badge that read “Homeland Security Investigations”.

Anonymous Coward says:

So if company A really was out to maximize profits, you leave the free Ad version up. Use only text based ads to the left and right the video(average of no more than 1 every 400 pixels of embedded video quality per side ). Embedded video ads would follow the following format:
Instead of a standard ad over and over again, you give the user the ability to chose which ad to choose, with a short time(3-5s) that chooses a default. Then give the user the ability to rate the commercial, which they can optionally fill out a reason why after the show is done.

This way the site video is in encouraged to share TrueHD video when ever possible. Higher quality for the customer, greater ad placement for the company.

That would be a data plethora for both you AND the ad companies, who are then more willing to pay more for the ad space. You are talking about a very inexpensive and very large focus group, made up of people ACTUALLY likely to use your product.

Below the embedded video you have a link that says “Tired of embedded Ads? Register for a Premium membership”

Then membership prices would be based on a monthly rate, with breaks for buying up to 6 months at a time.

Premium Membership would then let you watch the video with no ads. Leave the text based advertisements, drop them by half, and make sure they are relevant to the customer.

So here you get very good ad placement, a lot views(who isn’t willing to try something that has no cost?), and when your customers are so addicted to the service that ads piss them off, they have the option to be ad free videos.

Wait did I just create the ultimate video plan?

The real point is to make the free version match the premium version minus the embedded ads in the videos. No restrictions on what Free can Watch and what premium can not. No playback restrictions, no hiding of the link in the link bar.

Make it easy to watch/share on the net.
Strive to generate only good will from your customers.
Listen to customer complaints. Take time to have a person write back to them. No auto responses.

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