Internet Regulation and the Economics of Piracy

Ever since Tim O’Reilly said that “piracy is not a problem,” I’ve been looking for evidence to support (or refute) his claim. In his latest article, Julian Sanchez (a former reporter for Ars Technica) savages the belief that piracy impacts jobs or the bottom line:

the data we do have doesn’t remotely seem to justify the […] rhetoric that now appears to be obligatory on the Hill.

Sanchez makes several important points. To focus the discussion, Sanchez first notes that even if piracy were a huge economic problem, SOPA and PIPA would do nothing to fix it. He then moves on to the meat of the matter, which is threefold.

First, the MPAA and RIAA have claimed that piracy costs America 750,000 jobs and between $200 and $250 billion per year. This is simply wrong. As Sanchez examined in detail several years ago, these numbers appear to have originated in an ancient Forbes article about physical piracy and have since then cropped up in a number of discussions about internet piracy where they do not apply. The MPAA recently downsized their figures to $58 billion in annual damage; Sanchez investigated those claims and found them wanting, too.

Second, Sanchez targets an assumption that underlies most estimates of damage: namely, that piracy always leads to lost revenue. This is almost certainly false — many pirates will never pay for their ill-gotten gains — but for the sake of argument, Sanchez assumes that it’s true. Yet, revenue in the music and movie industries has actually outpaced the economy as a whole during the recession. In a world without piracy, would these industries truly have done $58 billion better still?

Finally, Sanchez reminds us that the constitution enshrines copyright as a means to promote the useful arts, not to increase corporate revenues. A better way to measure piracy’s impact is to look at whether it has reduced artistic output. At first blush, it seems the answer is no: accounting for the recession, there are more new movies and albums released today than ever before. (That said, more independent studies should be done on this point.)

Sanchez makes many other important and subtle points. I highly recommend reading all of his recent articles on the issue.