Over the last decade or two there have been some extraordinary claims about the cost of copying and counterfeiting on businesses and economies. However there has been little information that hasn’t had some pretty major and almost certainly incorrect assumptions.
The US Government Accountability Office (GAO) has released a report (PDF) done on under the provisions of the PRO-IP law. It doesn’t sound too promising at being able to get any kind of even moderately accurate measures.
According to experts we spoke with and literature we reviewed, estimating the economic impact of IP infringements is extremely difficult, and assumptions must be used due to the absence of data. Assumptions, such as the rate at which consumers would substitute counterfeit goods for legitimate products, can have enormous impacts on the resulting estimates and heighten the importance of transparency
Commerce and FBI officials told us they rely on industry statistics on counterfeit and pirated goods and do not conduct any original data gathering to assess the economic impact of counterfeit and pirated goods on the U.S. economy or domestic industries. However, according to experts and government officials, industry associations do not always disclose their proprietary data sources and methods, making it difficult to verify their estimates.
The US government really doesn’t appear to have done much work on the issue. When the study looked for the sources.. Well you’d have to read this and weep…
Three commonly cited estimates of U.S. industry losses due to counterfeiting have been sourced to U.S. agencies, but cannot be substantiated or traced back to an underlying data source or methodology.
First, a number of industry, media, and government publications have cited an FBI estimate that U.S. businesses lose $200-$250 billion to counterfeiting on an annual basis. This estimate was contained in a 2002 FBI press release, but FBI officials told us that it has no record of source data or methodology for generating the estimate and that it cannot be corroborated.
Second, a 2002 CBP press release contained an estimate that U.S. businesses and industries lose $200 billion a year in revenue and 750,000 jobs due to counterfeits of merchandise. However, a CBP official stated that these figures are of uncertain origin, have been discredited, and are no longer used by CBP. A March 2009 CBP internal memo was circulated to inform staff not to use the figures. However, another entity within DHS continues to use them.
Third, the Motor and Equipment Manufacturers Association reported an estimate that the U.S. automotive parts industry has lost $3 billion in sales due to counterfeit goods and attributed the figure to the Federal Trade Commission (FTC). The OECD has also referenced this estimate in its report on counterfeiting and piracy, citing the association report that is sourced to the FTC. However, when we contacted FTC officials to substantiate the estimate, they were unable to locate any record or source of this estimate within its reports or archives, and officials could not recall the agency ever developing or using this estimate.
These estimates attributed to FBI, CBP, and FTC continue to be referenced by various industry and government sources as evidence of the significance of the counterfeiting and piracy problem to the U.S. economy.
The GAO looked at a rather large number of surveys and estimates by various bodies and people. They didn’t sound too happy with the methodology of any of them.
While experts and literature we reviewed provided different examples of effects on the U.S. economy, most observed that despite significant efforts, it is difficult, if not impossible, to quantify the net effect of counterfeiting and piracy on the economy as a whole. For example, as previously discussed, OECD attempted to develop an estimate of the economic impact of counterfeiting and concluded that an acceptable overall estimate of counterfeit goods could not be developed. OECD further stated that information that can be obtained, such as data on enforcement and information developed through surveys, ‘has significant limitations, however, and falls far short of what is needed to develop a robust overall estimate.’ One expert characterized the attempt to quantify the overall economic impact of counterfeiting as ‘fruitless,’ while another stated that any estimate is highly suspect since this is covert trade and the numbers are all ‘guesstimates.’
Reading the report was fascinating with a strongly discernible sense of frustration by the GAO. It is only 41 pages and quite legible for the layperson. It gives a better idea about the current state of the duplication debates than anything else I’ve seen.
ars technicia, one of my favorite technology sites reviewed the report with the appropriate title of “US government finally admits most piracy estimates are bogus“.
Why is the government even looking into this issue? It’s all due to the PRO-IP Act, which passed under President Bush and has led President Obama to appoint an Intellectual Property Enforcement Coordinator within the White House. Part of the IPEC’s duties include gathering data on piracy and counterfeiting, and current IPEC Victoria Espinel is now rounding up that data. The GAO report is part of this process, and it certainly doesn’t make industry estimates look compelling.
This is ironic for a bill that was backed by the big rightsholders; even its acronym, the PRO-IP Act, shows what it was supposed to do. But, by hauling the black art of “piracy surveys” into the light, the PRO-IP Act is forcing rightsholders to tone down some of their more specific and alarmist rhetoric.
None of this is to say that piracy and counterfeiting aren’t real problems. The GAO accepts that the problem is “sizeable,” but it also points out just how much bad data is used to produce these studies. Actual dollar figures and job loss numbers should be handled with extreme care and a good bit of skepticism; the GAO also noted that numerous experts told it that “there were positive effects [from piracy on the economy] and they should be assessed as well.”
This is a helpful, level-headed review from the GAO, one that (hopefully) brings some of the debates over digital infringement into saner territory.
Unfortunately these bogus studies and numbers have been framing the debate leading up to the current ACTA talks. Quite simply no-one appears to have even a remote handle on the scale and costs of various types of violations of copyright, trademark, and patent.
The only thing that you can be sure of is that if someone starts putting numbers to the costs, then they’re almost certainly wrong, and probably wrong by orders of magnitude. It is likely that they will quote from one of the studies looked at in this report or using a methodology derived from it. Quite simply, those studies are probably all pretty bogus. This means that treaties and law based on these false numbers are probably as likely to do economic harm as they are to do good.
Lawmakers should really be looking at overhauling the basis of intellectual property from the ground up based on the current and probable future technologies. They shouldn’t be swayed by the protestations of lobbyists waving their latest surveys full of questionable numbers and assumptions.
In the end result, in my opinion, most businesses affected by counterfeiting and copying need to look at their business models to find out how to satisfy the consumers of their product more effectively. The costs of duplication, distribution, and even marketing are reducing as the information age takes hold. Generally this is not being reflected in the prices of many products because of inadequate and increasingly obsolete business models. This leaves a significant differential that the counterfeiters exploit. That is the problem that needs to be addressed.