Supporters of stronger intellectual property enforcement — such as those behind the proposed new Stop Online Piracy Act (SOPA) and Protect IP Act (PIPA) bills in Congress — argue that online piracy is a huge problem, one which costs the U.S. economy between $200 and $250 billion per year, and is responsible for the loss of 750,000 American jobs.

These numbers seem truly dire: a $250 billion per year loss would be almost $800 for every man, woman, and child in America. And 750,000 jobs – that’s twice the number of those employed in the entire motion picture industry in 2010.

The good news is that the numbers are wrong — as this post by the Cato Institute’s Julian Sanchez explains. In 2010, the Government Accountability Office released a report noting that these figures “cannot be substantiated or traced back to an underlying data source or methodology,” which is polite government-speak for “these figures were made up out of thin air.”

Of course, the main problem with the above “analysis” is that it assumes labor roles are static (i.e. people can’t find a new job). In a sense, it presents a false dichotomy between having a job that’s properly protected by IP or being unemployed. Since one can generally find or make a new job in the event of losing one, it stands to reason that the prior dichotomy is simply false.

Beyond that, though, there seems to be no accounting for the role technology plays in cutting down IP-related jobs. For example, iTunes and other digital file services have largely negated the need for the manufacture of compact discs, cassette tapes, and other forms of physical music media. Netflix, Hulu, and other video services have undermined the need for the production and distribution of DVDs and other forms of physical video media. IP rights are properly integrated into these business models, so any decline in media manufacturing jobs is due not to piracy, but to technology.

This, incidentally, is a good thing, since the decline in media manufacturing jobs now frees up some labor segments to do something more productive. Lowering the cost of production and distribution (while maintaining or increasing consumption volume) by cutting labor is how wealth is created. Freeing up labor to do something more productive is how wealth is created.

Finally, one other thing ignored by this analysis is the positive role that so-called “piracy” might have on the various IP-protected industries, particularly music. The costs and risks associated with purchasing entertainment (over time, the cumulative costs can be quite substantial, and there is no guarantee that you will like what you buy) discourages purchases. By offering entertainment for free, as is done in broadcast television, people don’t have to invest much to see if some type of entertainment will be valuable to them. If it is, they can support it more; generally by buying DVDs and tie-in merchandise.

This is also true of music. If people can acquire music for free, they can see if they like it. If they do, they might be inclined to purchase tie-in merchandise or go to live shows (where the bulk of bands make the bulk of their money anyways).

Thus, it can be said that protecting IP by enforcing monopolistic policies actually hurts media producers because it discourages people from ever sampling new media, which in turn kills the sales of tie-in merchandise and other forms of related sales. This is just a theory (based on personal experience); there is no data supporting this view.

Anyhow, the point in all this is that there is absolutely no evidence that IP piracy hurts the economy in general, or even fields that enjoy the most IP protection. In fact, it may be that IP piracy is beneficial. At any rate, the idea that the united states’ economy needs stricter IP laws is simply ludicrous.

I was “in the ceiling” for a lunch conversation at Berkman this past Friday about the future of the Nigerian film industry. This means that, while I know the conversation included luminaries like Ronaldo Lemos of the Center for Technology and Society at FGV Law School in Rio, business strategist Dayo Ogunyemi, filmmaker Robb Moss, film critic Shaibu Husseini, World Bank economic expert Chioma Nwagboso and Berkman’s own Yochai Benkler, I basically have no idea who said what. So rather than giving my usual blow by blow, I’ll offer my takeaways from the conversation.

Colin Maclay (who hosted this conversation), Mike Best and I met with a number of Nollywood luminaries in Lagos a few months back and got an introduction to the concerns and anxieties of the world’s second largest film industry (in terms of films produced annually, not in revenue terms.) On that trip, we learned that Nollywood’s financial structure is utterly different from that of India’s film industry. Nigerian films make virtually all their money from single-copy sales, rather than from licensing, foreign rights or theatrical screening. As a result, piracy can have a much sharper impact than in other markets. In India, some scholars refer to piracy as “a marketing expense”, as the sale of pirated films may encourage other viewers to go see the films in theatres. It’s harder to make this case in Nigeria, where over 90% of revenue comes from the actual sale of DVDs and VCDs and there’s virtually no revenue from screenings.

In our discussions at Berkman, a core idea emerged – piracy is a response to poor distribution networks. One of our participants explained that capital is so scarce within the Nigerian film industry that distributors usually produce 50,000 copies of a film in a first run – all they can afford – and hope to issue a second run using revenues from the first run. But the audience for Nollywood films is massive: one participant tells us that the least successful films sell 30,000 copies. So when a film is a hit, it’s quickly pirated. The pirate copies aren’t necessarily cheaper than the legitimate copies – often, they sell at a similar price and they’re chosen simply because they are the only copies available.

Filmmakers know they’re going to need to recover costs by selling the first 50,000 copies. As a result, some are releasing their films in two, three or four parts, hoping to sell an initial 50,000 copies of each. A few days after the film has been released, the film is likely to start appearing either as a pirated copy, or as part of a compilation. Compilations, one of our participants told us, are generally produced in China and can include up to 100 low-quality films on a DVD.

For whatever underlying reasons, the Yoruba-language film world – where the average film sells 50-100,000 copies – seems to have better distribution systems. Original films are produced in larger runs and often meet market demand before unauthorized copies enter the market. This may be a function of the fact that the Yoruba-language film industry preceded the English/pidgin market and has had more time to work through financing and distribution issues.

Filmmakers continue to look for a technical fix to their problems – there’s some enthusiasm for a copy protection solution from an Indian company (possibly Aft-India), though skepticism that any scheme can remain unbroken for long. (“The Figurine“, an extremely high-quality and much discussed film, hasn’t yet been released on DVD – one of our participants tells us the film will be copy protected before release.)

The real answer may be improving film financing, so that filmmakers are able to raise money by selling equity in their films, enabling them to invest in larger distribution runs. Financing might also help filmmakers pay the fees to the censorship board, which reviews all films before release. (Ghana, by contrast, has had very little film censorship. Perhaps in response to this, Ghanaian films have been pushing the boundaries, showing nudity, sexual situations and producing some films that are probably best characterized as soft porn. Ghana’s ministry of information has announced a new censorship board – it will be interesting to see whether this board quashes this new trend in Gollywood cinema.)

While people in our group expressed concern about distribution, no one seems especially worried about Nigeria’s ability to churn out appealing and crowd-pleasing films, and for those films to compete with Hollywood. One of our discussants noted that the James Bond film Quantum of Solace grossed $280,000 in theatrical release in Nigeria, and that many top Nigerian films gross above $200,000. Those numbers sound small, but they reflect the fact that there are five official cinemas in a country of over 130 million people. If Nigeria had the cinema infrastructure of a country like India, some speculate, we’d see a shift in the economics of Nollywood. We might see the emergence of a model like that used for music in Jamaica, where musicians are shifting from trying to sell records to trying to sell concert tickets. Films like The Figurine launch with “yellow carpet” premieres and expensive ticket prices – those who attend on opening night are paying a premium for the experience and the exclusivity.

Not all these big-budget films are artistic successes. “Kajola” was billed as Nollywood’s first great sci-fi flick. It had a production budget nearing a million dollars – huge by Nollywood standards, where “big films” are usually made for less than $100,000. Set in a totalitarian future Nigeria of 2059, the film uses a combination of live action and computer graphics… and turns out something that looks a lot like a bad video game. (The reviews I’ve read inevitably conclude with the reviewer walking out of the film.)

On the other hand, films that are predictable and fairly low-tech are sometimes going viral. Yoruba comedy Jenifa tells the story of a country girl come to Lagos to go to college… and laughed at for her backwards ways. So she recreates herself as a new woman, “Jenifa”, and shows up her mates up. One of our panelists suggested that this film was the first in Nigeria to be promoted successfully online, where stills, quotes and reviews circulated widely amongst the ~ 2 million Nigerian Facebook users. (You can watch Jenifa on YouTube, though it’s an unauthorized copy. It’s subtitled, which is good for us non-Yoruba speakers out there. This points to a long-term challenge for the industry – filmmakers would like to make money from audiences in the diaspora, which is hard to do, as many movies get chopped into ten minute chunks and posted on YouTube. This tends not to affect the domestic market, because connectivity in Nigeria is so expensive, it would be insane to try to watch this film online in West Africa rather than buying a legit or pirated copy.)

The best market for Nigerian culture may be outside Nigeria, the problems of YouTube distribution aside. One discussant tells us about Nigerian hiphop group P-Square recently sold several million copies of their latest album. A distributor purchased and sent six million copies to the East African market. Not only has the record succeeded, it has allowed the group to demand $100,000 – $150,000 for live performances. Perhaps, some of our group speculated, this is the future for Nigerian cinema – live screenings of new films across the continent and film stars demanding appearance fees similar to those of hiphop stars.

Join the forum discussion on this post - (1) Posts

To start of with, let us define theft. The commonly accepted definition is “the taking of someone else’s property without their consent“. The two keywords that need to be looked at here are “taking” and “consent”. I am going to demonstrate in various different ways why software piracy does not come into the same category as theft. My first argument is with the word “take”.

First of all, the word “taken,” as it was originally used, was meant to imply that what you take is no longer there with the owner. In fact, the root of the word piracy itself betrays what it is supposed to mean. Pirates stormed ships forcibly, looted the occupants (not to mention murdered and God knows what else), and took away things that left the original owners without them.

This clearly doesn’t apply to piracy of music CD’s and software. If I download a song from a server, then the original copy is intact and nothing has been lost. To put a different spin on it, if I light a candle, and you (without my consent) light another candle from my flame and run away, can I charge you with having stolen my light? Is that piracy? I don’t think so.

Of course, all software companies and music companies have the right to make it as difficult as possible for people to copy and run their software. Which brings me to my second point as to why I don’t consider piracy as theft.

Image Credit: decoder72

I quite understand the meaning of the term opportunity cost. The primary gripe with piracy is that it causes lost sales. This assumption is dubious at best or remarkably overstated. For this argument to ring true, the assumption must be made that if a user illegaly downloads a song, he or she would have purchased it. If the user never intended to purchase the song, then downloading the song illegally has not caused any sort of lost sales.

In fact, this is much more often true than not. The overwhelming majority of people who illegally download software would never have bought it if they were unable to get if for free. So this argument falls flat.

My final argument is an extension of my earlier article on how to charge different prices for your products. Companies usually adopt pricing policies that confer an additional benefit to those who pay high prices. For example, business class passengers in airplanes have shorter lines. Conversely, they make it difficult for customers who are price sensitive and want to save money to ensure that only those who are willing to make some sort of a sacrifice can get the lower priced products. The example is that of discount coupons which force customers to go through all the hassle of cutting out and saving useless bits of paper in order to get a discount.

Piracy can be looked at in this light. It is never easy to download something illegally. You have to find a source, try and crack it, are in constant fear that updates will change something and render the software useless, etc. This is the reason why people pay money for software. They do it to avoid hassles. The very fact that people choose to buy software instead of trying to get it for free demonstrates this. The end result is this: People who would never have bought the software anyway are the ones who usually try and download music and software illegally. The others buy it to avoid the hassles of using non-genuine software.

The fact that people are still buying music and paying for software illustrates this principle. They pay for software even though they can get it for free. As long as companies make it as difficult as possible for their software to be copied illegally (it doesn’t have to be impossible), they will not lose sales since those to whom the software is worth the price will purchase it.

A lot of people of course, have different points of view on this, believe that you should go to an online store and purchase software, and they are most welcome to share with our readers why they feel that piracy is theft or provide further reasons as to why it is not.

Join the forum discussion on this post - (6) Posts

It’s easier than you might think. A company that has amazing technological and financial resources at its command should actually find it quite a trivial matter to simply enforce over the Internet the policy of a unique copy of Windows being installed on just one computer. I believe it can certainly be done. Why then has it not happened?

To answer this, we need to understand the facts about something called “network externalities.” In game theory, the term “network externalities” relates to the phenomenon of something becoming more valuable simply because more people use it. Since it’s more valuable, even more people use it, and it is, therefore, a self-propagating mechanism.

Image Credit: purprin

For example, the telephone is an amazingly useful piece of technology. But how would you like to be the only one having a telephone? I’m betting you wouldn’t. Who would you call? Who would call you? Without other people having a telephone, the instrument is worse than a paperweight! The more people who have a telephone, the more people you can call and who can call you back. The value of the telephone increases simply because more people use it.

This means that products that have network externalities associated with them and have a large user base might completely wipe out the competition even though their product is of a poor quality. Since the value of a product can increase due to the number of people using it and not because of its inherent quality, a dominant product can get away with having a worse product than the competition.

Let’s take the case of Windows. Most people install Windows on their PCs. Why? One major reason is that there is a lot more software that is written for Windows than for, say, Linux or the Mac OS. Why is there more software for Windows? Say I’m a developer and I’m just going to start writing code for my new software. Should I write it for the Windows platform or for another one? If I write it for, say, Linux, then no one using Windows can use my software. Since the overwhelming majority of people use Windows, I would get a better payoff if I wrote my software for Windows because there are more chances of people buying it.

So the more number of people who use Windows, the more software there is out there for it, and, therefore, when I purchase a new computer, I would choose one that has Windows running on it because of the larger amount of software available for it.

Windows has a dominant market leadership in the OS world simply because it has a dominant market leadership! Such is the self-propagating nature of network externalities. Now let’s assume that Microsoft stops piracy completely. Almost all of India, China, and other Asian countries would be forced to use another software simply because, in these countries, the price of Windows is too high for almost anyone to purchase. In India, people would maybe buy Windows if they could purchase a copy for Rs. 200. That means $5! You think Microsoft is ever going to sell Windows for $5? No way.

So now that half the world has stopped using Windows since there is no more piracy, Windows has lost the only advantage it ever had – a dominant market leadership. When half the world starts using Linux, for example, then more developers will write software for Linux, and so even more people would buy it. It might happen that Windows will never recover from this shock (since you cannot improve your position unless you improve your position – a catch-22 situation).

This is the real reason why Microsoft will never stop piracy. They know that if they do, then half the world will stop using Windows, and they figure that, if that happens, they’re doomed.