EU-Funded Study On The Cost Of Copyright Infringement Dismisses Key Real-World Factor As 'Outside Its Scope'

from the fantasy-economics dept

One of the less well-known outposts of the European Commission is the EUIPO Observatory. Here’s how it describes its objectives:

Provide evidence-based contributions and data to enable EU policymakers to shape effective IP enforcement policies and to support innovation and creativity

Provide data, tools and databases to support the fight against IP infringement

Provide knowledge and learning programmes for IP and enforcement authorities as well as for businesses and IP practitioners

Develop initiatives to help innovators, creators and businesses (especially SMEs) protect their IP rights

Design campaigns to raise awareness of the value of IP and the negative consequences of IP infringement
You may notice a certain one-sidedness there: this is all about infringement and enforcement, with nothing about whether the current copyright laws are part of the problem, or whether they are even fit for the digital age. Given that bias, the subject of the Observatory's latest report will come as no great surprise: "The economic cost of IPR infringement in the recorded music industry." Here are the main results:
In 2014, the recorded music industry lost approximately €170 million of sales revenue in the EU as a consequence of the consumption of recorded music from illegal sources. This total corresponds to 5.2% of the sector's revenues from physical and digital sales. These lost sales are estimated to result in direct employment losses of 829 jobs.

If the knock-on effects on other industries and on government revenue are added, when both direct and indirect effects are considered, infringement of IPR in this sector causes approximately €336 million of lost sales to the EU economy, which in turn leads to employment losses of 2,155 jobs and a loss of €63 million in government revenue.
I predict we'll be seeing these numbers a lot in the future, because the music industry will be quick to seize on them as "objective" figures that are above suspicion, unlike industry-sponsored analyses. But of course, things are not always what they seem, and it's worth reading the full report in order to find out what is really going on here. Nearly half of the 48-page is taken up with appendices outlining the forecasting model used to calculate those "lost sales." The mathematics there is pretty enough, but ultimately undermined by the following admission made earlier in the report:
It is important to note that the lost sales estimated in this report represent hypothetical additional revenue that the recorded music sector would have earned, had infringement not taken place. It is not an estimate of the value of the illegally acquired music recordings; nor is it an estimate of the substitution effect -- that is, the question of the extent to which the illegally consumed music would have been bought from legal sources had piracy not been possible, which is outside the scope of this study.
Thus it is taken as axiomatic that every lost sale would have converted to a real sale if a magic wand had been waved, and piracy had become impossible. No justification is offered for this huge assumption, and that's not surprising, since it doesn't exist: in the real world only a fraction of those "lost sales" would ever be converted to actual sales. So even if we accept the modelling in the appendices is correct, the figures that result must be reduced by some factor to take account of this. It's hard to say what that factor is, but it affects all the headline figures -- the 5.2%, the 2,155 jobs, and the €63 million in government revenue. Actually, things are even worse than they seem, because the study doesn't explore the possibility that online sharing boosts sales, rather than reduces them. It only mentions that crucial issue right at the end, where it says:
The question of whether piracy reduces sales of recorded music has been the subject of many studies, sometimes with contradictory results. Some authors have claimed that piracy actually increases sales by allowing consumers to sample music they would not otherwise have considered purchasing. However, a recent literature survey by Danaher et. al. (2016) shows that out of 25 studies reviewed, 22 found that piracy reduced the revenue of the legal industry. Thus, the results of the present study are in line with the prevailing consensus, albeit utilising a completely different methodology.
However, the methodology adopted by the report may be skewing the results by removing perhaps the most "advanced" digital market -- Sweden, the home of Spotify -- from the modelling because it is viewed as an outlier. And as for that 2016 study by Danaher et al., here are some of the 22 datasets showing that piracy "reduced the revenue of the legal industry":
1994-98 IFPI worldwide CD sales data and physical piracy rates

1998-2002 worldwide CD sales, IPSOS survey data for piracy downloads

1997-2002 country-level data on music sales and broadband usage.

1990-2004 consumer spending on cassette tapes, LPs, and CDs.
It seems unlikely that the analog world of cassette tapes and LPs tell us very much about what young people are doing online with digital files today. Of course, there's more recent data in the list, for example, this set:
2008-2011 iTunes music sales in France and other European countries
Which apparently showed the HADOPI anti-piracy law "caused iTunes music sales to increase by 22-25% [in France] relative to changes in the control group [countries]." Except that it didn't, as Techdirt noted at the time.

This quick run-through of the cited datasets is not meant to be a rigorous rebuttal, but it does indicate the superficial nature of the new report's analysis, which accepts uncritically the Danaher paper, instead of exploring properly the really important question of whether piracy drives or depresses sales. Coupled with a failure to consider substitution effects, that renders the EUIPO report's results of little value. What makes things worse is that the music industry will doubtless use them anyway to foist its copyright maximalist agenda on policymakers, who may mistakenly assume the Observatory's work can be relied upon.

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Filed Under: copyright, infringement, lost sales, studies

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    crade (profile), 3 Jun 2016 @ 7:48am

    There is a slight error in the statement:
    "It is important to note that the lost sales estimated in this report represent hypothetical additional revenue that the recorded music sector would have earned, had infringement not taken place"

    They mean the revenue they would have earned not just had the infringement not taken place, but had it been substituted with the purchase of a non-infringing copy. That's a massive difference.

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