New Study: ‘Illegal File-Sharing Costs the US $8.7 Billion Annually’

Takes into account losses not only to the owners of intellectual property, but also to US consumers and taxpayers.

We regularly read stories about studies in which economic losses due to music piracy are quantified and then trumpeted before the press and elected representatives in order to paint a dark and gloomy picture of the effects that file-sharing is having on the US music industry.

Well, a new study just released again tries to emphasize the effects on music piracy, but this time it uses a different approach by taking into account losses to the entire US economy by incorporating among other things, the number of jobs lost and thereby the amount of lost tax revenue that would have otherwise been gen federal and state governments.

You gotta love it.

It even uses the model of an “interlocking economy” in which record labels would be able to use increased profits if there were no music piracy to in turn cause increased sound recording employment and earnings, and also an increase in the purchases of goods and services from other industries. The latter is then expected to then cause increased employment and earnings in other industries as well as additional purchases of goods and services.

You get the picture. It’s a sort of new-fangled “trickle down economics” theory in which if the music industry were only allowed to earn more money then everybody else would benefit as a result via more jobs and available government revenue.

Now this sounds fine and dandy and all, I mean nobody likes unemployment or empty government coffers, but is digital music piracy really costing the US economy a reported $8.7 billion USD in total output annually as the study claims?

It first makes the distinction that there are some 20 billion illegal downloads worldwide, though how it calculates this is a matter of dispute, and that 66% of all illegal downloads represent downloads of U.S. recorded music. It is then assumed that only 20% (1 in 5) of these downloaded songs would have been purchased legitimately if piracy did not exist.

From these figures comes the following data:

  • 49,337 lost jobs, of which 18,649 for the sound recording industry and 30,688 for other US industries as a result.
  • $1.87 billion is lost by US workers in earnings annually. Of this, $771 million would have been earned by workers in the sound recording industry or in downstream retail industries while $1.11 billion would have been earned by workers in other U.S. industries.
  • As a consequence of illegal music downloads, US federal, state and local governments lose a minimum of $293 million in tax revenues annually. Of this amount, $202 million represents lost personal income taxes while $91 million is lost corporate income and production taxes.

But, is this really the case? The crux of the whole study’s argument seeking to define the total US economic losses as a result of a digital music piracy rests on the assumption that 20% of song illegally downloaded would have been purchased legitimately if piracy did not exist.

With previous studies showing that the effect of file-sharing on legal music sales is “not statistically distinguishable from zero” it makes one wonder if once again we have a study before us that is simply trying to prove predetermined conclusions as set forth by its sponsors.

“Using detailed records of transfers of digital music files, we find that file sharing has had no statistically significant effect on purchases of the average album in our sample,” the study reports. “Even our most negative point estimate implies that a one-standard-deviation increase in file sharing reduces an album’s weekly sales by a mere 368 copies, an effect that is too small to be statistically distinguishable from zero.”

So for all its fancy data correlation and derived conclusions, I daresay that this latest study is simply more of the same attempts by the RIAA and the IFPI to scare legislators into action to eliminate file-sharing piracy.

The study’s beginning statements even note that it’s purpose is to “…alert policy makers to the magnitude of these ripple effects(on the US economy),” and that if “policy makers” really care about the “…viability of the U.S. economy in the global marketplace, it seems obvious that the problem of music piracy should be afforded a high place on the policy agenda in coming years.”

So it seems fairly obvious what the study is trying to accomplish, that it’s merely a biased concoction of numbers meant to play upon the worries of declining employment and US economic output. By lumping physical piracy with digital piracy, it seemingly even tries to tie the two together so that necessary action will seem indistinguishable and any solution put forth, even if its only a college campus P2P crackdown, will then appear to be appropriate.

This is why study’s statement that “…the U.S. economy loses $12.5 billion in total output annually” is worrisome because its not based on all the facts, tells only half the story, and yet is what will stick most in the minds of policy makers when it comes time to vote for or against legislation affecting the internet.

Let’s just hope that some of those who read it actually take the time to take a look at the numbers and what they really mean.