The BSA (Business Software Alliance) has released a study (prepared by IDC) along with a heavy PR blitz claiming all kinds of absolutely astronomical benefits from reducing software piracy.
There are immediate reasons to be suspicious. While the study is touted as an ‘economic’ analysis of the benefits of combatting piracy no self-respecting economist I know of would come out with an ‘estimate’ in the way the BSA does because we just don’t have the data to do that. At the same time there are no difficulties in pointing out multiple errors in the BSA’s estimates which indicated they are almost certainly wildly too high.
Of course we should remember as we get hot under the collar about this latest piece of misinformation that that for those of us opposed to software monopolies the best thing right now for the developing world would be a really massive crackdown on piracy with draconian enforcement. That way people would stop with the free candy (MS windows + office) and get into linux before it is too late :).
Below is a quick analysis of the paper pointing out some of the bigger howlers.
1. they claim with a section title: “Lower Software Piracy Produces Higher IT Benefits” (p.4) and then produce as their evidence the fact that:
“A countryâ€™s software piracy rate is a key dif- ferentiator among countries that enjoy vast IT eco- nomic benefits and those that have yet to unlock them …
In general, there is an inverse relationship between a countryâ€™s software piracy rate and the size of its IT sector as a percentage of GDP. Thus, the lower the software piracy rate, the higher the IT related bene- fits, including IT-generated taxes.’
[+ nice accompanying graph and repetition innumerable times in the section]
This is outrageous and is just the old analytical fallacy of equating correlation with causation: just because more piracy is associated with a smaller IT industry doest not mean piracy causes a smaller IT industry and that reducing piracy will increase the size of the IT industry. In fact it seems more likely causation goes the other way (smaller IT sector -> more piracy) or is simply the result of omitted variables: developing countries have both a smaller IT sector – e.g. due to education levels, etc, and more piracy – because commercial software prices are higher, enforcement is worse etc. Putting these two facts together but leaving out conditioning on development will give you the resulting correlation
2. p.13 Summary of IDC’s methodology:
‘the theoretical losses from piracy in terms of revenue to software vendors, software- related revenues to services firms, and software- related revenues to channel players. Employment losses are calculated from revenue losses, and only apply to employment in the IT industry, not IT pro- fessionals in end-user organizations (although IDC believes there is some impact.) Tax revenue losses are calculated from revenue losses (VAT and corpo- rate income tax) and employment losses (income and social taxes). The software losses are based on the piracy rate and equal the value of software installed and not paid for, adjusted by IDC’s soft- ware analysts to account for software in a country (such as enterprise and server software, not meas- ured in the annual BSA study).’
So there it is baldly stated, they calculate societal loss by:
a) assuming that every pirated copy would have been purchased if piracy were prevented (blatantly false) b) take no account of general equilibrium issues: i.e. that people have a fixed budget so that if you suddenly spend a load more on ‘commercial’ software (because you pay for everything) that means less to spend on other goods (such as bespoke software, fridges, apples etc)
They have never heard of a demand curve (i.e. that people buy different amounts depending on price!)
Sampling effect: ‘piracy’ is one way for people to sample a product before buying. Even in the developed world we often see people using a friend’s copy at home but the purchased version at work which is a similar situation (Let’s remember that the biggest shareware company in the world is microsoft)
That estimates of welfare/revenue losses (at least on this scale) have to be done on a society wide basis so that you include the displacement effects from spending more on non-pirated software
Finally and most importantly, the whole study gets its analysis wrong from the very start. For information goods, once the good is made it is optimal for societal welfare to distribute at marginal cost (i.e. at 0 for software).
Thus piracy of e.g. MS windows should be welfare improving for the world as a whole and definitely welfare improving for every developing country. Of course this may be bad for MS (though that depends on sampling effect).
Now the usual trade-off (and the reason we have IP) is that if it was known in advance that everything would be sold at marginal cost there would not be the money to pay for the original development. Thus we do grant a temporary monopoly to help rather than distributing at marginal cost.
What this means is that any ‘economic’ study of the effects of piracy is really about the trade-off of lower consumer prices (due to piracy) vs. less innovation.
Given that most piracy involves: a) developing countries (so that loss of sales is low since they wouldn’t be able to afford the stuff anyway) b) big name products (who are already deep within the black in relation to paying for the innovation)
It seems on the face of it likely that software piracy is actually welfare improving. (Backing this up with proper empirical evidence studies is a mammoth task because we don’t really know the demand function for software or the supply function of innovation).