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.

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  1. identicon
    John Wilson, 19 Jul 2008 @ 10:11am

    Re: Re: Re:

    "Open source is a nice idea and produces quite useful product. I, however, prefer proprietary product when matters such as configuration control, a predictable schedule of updates, etc. are an important concern."

    I will presume that a predictable schedule doesn't include the unpredictable years it took to upgrade XP to Vista. Nor are you clear about configuration control where I've faced more problems with proprietary software than I ever have with open source, even on Windows.

    The reality is that, like many others, you prefer what you "know". More to the point what you think you know.

    Your many comments on this and other posts here do appear to have a "shill" factor to them, none the less.

    Less, perhaps, shilling for any particular company or organization than for your rather peculiar view of "morality".

    What I mean by that is your defense of laws which change short term monopolies in exchange for creation of a product (patents) or "content" (copyright) and extending them beyond their original intention and economic value.

    I will point out that there is little or no "morality" involved in the extention of copyright for "publishers" purely to freeze something for commercial gain of the "publisher" which goes against the whole idea of copyright when it became a legal tool in England with "Queen Anne's Act" which was put in place expressly to protect content creators from "publishers" be it Disney or anyone else. An idea and rationale carried on in the US Constitution.

    Even less when you consider that all extentions to copyright have occured not because creators asked for them but because "publishers" did.

    The same dynamic has been at work over the creation of new patent classes, a lessening of patentablity requirements, the silly idea that by changing something neither important to nor central to the device/invention patented. For example changing an inert compound in a pharmaceutical that somehow makes it all patentable all over again.

    Morality? Please point out the morality in that.

    Nor is there a whiff of morality in trying to, and sometimes succeeding in, criminalizing what is, in the end, a commercial transaction between buyer and seller.

    Your narrow view of morality is that what is moral is to follow a law, no matter how asinine that law may be.

    Laws in a free society, like so many other things, can only exist within the consent of the governed no matter what a legislature may do or say. In fact, that's how civil law evolves. To a large extent it's how criminal law evolves. Though consent is a far more vital component of civil law.

    A populace that withdraws respect for concepts like copyright and patents is the final and only moral arbiter, particularly in civil law.

    That respect for those concepts is dependent on them being what they originally intended and not distorted beyond recognition for the sole use and abuse of large software publishers, music distributors (which is what record companies are), motion picture publishers, drug manufacturers and so on.

    Once the public value of these concepts and the monopolies they grant becomes less than zero due to distortion then I'd say the consent of the governed has been withdrawn.

    A final point on morality, there is nothing at all moral in economics or trade with a monopoly no matter how briefly is may exist. Monopolies are simply immoral.

    Your defence of them while playing the morality card over and over again either indicates a strange view of morality or a blind adherence to law, particularly civil law, as being somehow based on morality rather than what it really does which is regulate such things as trade and commerce.

    ttfn

    John

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