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


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  1. identicon
    MLS, 21 Jul 2008 @ 7:42pm

    Re: Re: Re: piracy

    "1. Your argument is ludicrious and always has been though it's often used by defenders of the current IP mess that those who complain the most have, directly, created. First off, if you can't afford a BMW, you can't afford to have it serviced and it's hard to lend something to a friend that you can't make run."

    You seem prone to making assumptions.

    "1a. A Beamer is something real and can be seen, touched, smelled and ridden in which is, at the end of the day, far more costly than a few cents for a CD or DVD. Not only that it is built on known and open standards, stuff in the public domain as well in a highly competitive industry where choice (remember that word) exits across all price and need points."

    A BMW is real, just like a CD/DVD. Based on your authority I am going over to eBay and buy myself a book on how to build a BMW given they are built with open standards and public domain stuff. Sure hope no trade secrets are involved...that would be a bummer.

    "2. Neither of the above apply to the software industry, the music industry (as opposed to the musicians who actually create the stuff) or the movie industry. In one case we have a virtual monopoly in the other two we have cartels."

    What is a virtual monopoly?

    "3. In the case of the industries noted in point 2 a free market doesn't, by definition of the term, exist whereas in points 1 and 1a a vibrant free market does exist."

    You are correct. Free markets (other than in situations such as open source) do not exist. Instead, the companies would appreciate being paid for their efforts. That does not strike me as being unreasonable.

    "4. Your ideas about simple economics, societies and history are really really horrible. I just hope your legal knowledge is marginally better. I suspect it is because you really have to work hard to be that bad at those three."

    Personal insults are always appreciated...they add so much to a discussion and engender a genuine camaraderie among participants.

    When the dust all settles I take it that you abhor patents, disapprove of copyrights, think people who deal in digital goods are out of touch with economic reality, dislike big business, especially those involved in the entertainment industry, and believe that everything ever conceived/created by man (and woman) should be unrestricted in any form so that everyone can light their tapers.

    Not that I subscribe to it, but a reality check is in order. No matter what economic theory may say (and, yes, MM makes very good points), our legal and legislative system is chugging along a path that is 180 out from what you proffer. Good, bad or indifferent, intangible rights are being further strengthened, made more criminal, being exported internationally, etc.

    If you want to pick a fight, do not do it with me because I am not one who is advocating any of the above. Pick it with Congress and the lobbying groups who are working in concert to make our laws even more draconian than they currently are.

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