A Detailed Explanation Of How The BSA Misleads With Piracy Stats

from the and-on-and-on-it-goes dept

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.

Filed Under: bogus stats, bsa, misleading stats, piracy, ripple effects, taxes
Companies: bsa, idc

Reader Comments

Subscribe: RSS

View by: Time | Thread

  1. identicon
    cram, 21 Jul 2008 @ 2:21am


    Hi PaulT

    Thanks for your thoughts.

    "Yet, Microsoft products are the biggest targets of software piracy. How do you explain that?

    Easy. Most end users are idiots."

    But does that excuse them of such criminal behavior or lessen the magnitude of the problem?

    "They know only what they've been told to use and never look at alternatives unless they have to - for example, there's a lot of people who still associate Internet Explorer's blue 'e' with the internet and are unaware there's alternatives. So, when they get hold of a pirate copy (usually through a "friend who knows about these things"), it's of the program they're used to (Windows, MS Office, Photoshop, etc.)."

    That's because most software users are ordinary people who need to use a computer, not computer savvy geeks. This is where the proprietary model succeeds, and fails.
    Most people don't want the hassle of hunting for open source when the vast majority of the world uses a standard. But they don't want to pay a bomb either. Result: companies lose.

    "However, if you were to force them to buy the software, they'd still balk at the price tag. They'd be more willing to replace their MS Office with OpenOffice when one is $300 and one is $0, than they are when the software is pirated and both are effectively $0 to them."

    But they would be a lot more willing to pay $30 for Windows than take Linux for free. That's why I think it's a pricing problem and not a business model problem. The model is not obsolete just because open source works or because the Red Hat model is successful. Nor can the free model work for all software (SAP, Galileo come to mind immediately).

    "Where is the need for the survey to address business models that are not affected by piracy?"

    "Why a survey? The bottom line is there are numerous business models, and it's the proprietary, closed source model where people are complaining of losses due to piracy."

    Obviously they are complaining because they are the affected party. Why does that rile? Unauthorized copying of software is illegal. These companies are complaining about that. Why is that a problem with you guys?

    They haven't decided to give away their software free of cost. They firmly believe in their model as much as open source proponents do in theirs. To say their model is doomed is one thing; to say they shouldn't complain about a clear and real problem is quite another. And Mike even decries their seeking the government's help. Who else do you turn to if you have to counter what is clearly criminal behavior?

    "There are many companies who have built robust businesses that are immune to piracy, as the business does not depend on keeping the source code secret and the executable restricted."

    No one's disputing that. But there are also many robust businesses built around the proprietary model. You may decry their model, but how can you justify unauthorized usage of their software? Why is that so difficult to understand?

    "Why is it a problem to point this out and suggest that a different model might be more feasible?"

    They are complaining of a problem and all you can do is to ask them to stop complaining. And offer a solution that suits your ideology, not their business model.
    Hell, if giving away software solves the problem why even bother with piracy? Because these companies don't want to give away their software. And adopting the free model will not work for many of them. What will work, is better pricing.

    If the model is more feasible, why would they not accept it? Does it make business sense to give away a piece of software when people are willing to pay for it?

    "If only companies like Microsoft and Oracle shed their stupid notions of making money from software sales and gave them awaty free, they would be able to make a lot more money than ever before in the history of mankind.

    Your sarcasm is misplaced. Microsoft and Oracle have made their fortunes specifically because they locked people into their proprietary systems, then charged the Earth for the privilege of using them. That needs to change, and it slowly is, piracy or no piracy."

    Perhaps you realize that people will pay for software even if there's a free, open source option. Free and open source is here to stay, no doubt, but it's not about to take over all realms of the software space.

Add Your Comment

Have a Techdirt Account? Sign in now. Want one? Register here

Subscribe to the Techdirt Daily newsletter

Comment Options:

  • Use markdown for basic formatting. (HTML is not supported.)
  • Remember name/email/url (set a cookie)

Follow Techdirt
Techdirt Gear
Show Now: Takedown
Report this ad  |  Hide Techdirt ads
Essential Reading
Techdirt Deals
Report this ad  |  Hide Techdirt ads
Techdirt Insider Chat
Report this ad  |  Hide Techdirt ads
Recent Stories
Report this ad  |  Hide Techdirt ads


Email This

This feature is only available to registered users. Register or sign in to use it.