If You Think The Cost Of 'Piracy' Is High, What About The Cost Of Enforcement?

from the why-is-that-always-missing-from-the-equation? dept

We've all seen the crazy high claims by the legacy entertainment industry about the "costs" of infringement. Most of these reports have absolutely no basis in reality and have been widely debunked -- even by the US government itself. But, even if we grant that there are some "costs" to infringement, why is it that we rarely -- if ever -- hear about the costs of enforcement? Julian Sanchez has a great post riffing off of the news that Hulu is thinking of requiring proof of pay TV subscriptions to get any free content, and does a neat little thought exercise on how distorting the "cost of piracy" discussions are if you don't also look at the cost of enforcement. He puts forth a hypothetical:

To illustrate, let’s imagine television show that initially streams online for free with advertising, garnering a million viewers per episode and earning $1 per viewer in ad revenues, for a total of $1 million. A small number who really dislike ads, or have connections too slow for streaming, let’s say 5,000, download pirate copies anyway—but the vast majority watch legally. After building an audience and generating some good word of mouth, the accountants suggest that it might be more profitable to stop the free streaming and instead sell ad-free episodes for $4, in hopes that enough dedicated fans will pony up to compensate for the predictable drop in viewership once the program is no longer free to watch. The paying audience does indeed drop to 255,000, which still leaves the company slightly better off for the switch, but 100,000 viewers decide to keep up with the show (at least initially) by downloading pirated copies. A subsequent price hike to $10, however, turns out to be a money loser. Now the show has only 80,000 paying viewers, while 150,000 are engaged in piracy.

Undoubtedly that piracy is costing the show’s producers something: If piracy were impossible, some unknown fraction of those who download illegally would be willing to pay the asking price. But just crudely using the actual market price at each stage—even if modified by some constant “displacement rate” to acknowledge that not every illicit download represents a lost sale at that price—yields some perverse results. As the pricing strategy for the show changes, the “cost” of piracy rises from $5,000 to $400,000 (even as revenue rises) to $1.5 million (while revenues drop by $20,000). Obviously, something is wrong here.

It’s no great mystery what: The problem is that the rate of piracy, the price of a digital good, and the “displacement rate” (the percentage of the pirates who’d buy at that price in a world of perfect copyright enforcement) are not independent variables. And, of course, the interdependency runs both ways: Pricing decisions are influenced by the knowledge that we don’t live in a world of perfect enforcement, and you can tell plausible stories according to which this might keep prices higher or lower than they’d be under perfect enforcement, depending on your assumptions about the conditions under which a particular audience will substitute the pirate for the legal good.

But it goes further than that, which is that when you factor in the cost of enforcement, the equation changes somewhat:

Returning to our imaginary program, suppose that under perfect enforcement—a zero piracy world—there would be 110,000 paying viewers at $10 per episode, netting the creators an additional $80,000 over what they’d make with their revenue maximizing strategy ($4 per episode) in the world of imperfect enforcement. That’s great for them, if not for consumers, but we haven’t factored in the costs of enforcement. Some of these are likely to be borne by the creators themselves—hiring lawyers to hunt down pirate copies circulating online and the like—but in practice they’re often shifted to taxpayers, in the form of direct enforcement expenditures, or to other parts of the economy, in the form of DMCA compliance costs or innovative services that are deterred entirely. It’s possible that, in this hypothetical scenario, the revenue maximizing strategy for the producers is to charge $10 while externalizing the costs of perfect enforcement, but the socially efficient outcome is to accept imperfect enforcement and let the producers revenue maximize against that background at a $4 price point.

As Sanchez admits, many of these numbers are theoretical, just for the sake of the thought exercise. But what we know in reality is that the cost of enforcement -- whether direct or through externalities -- almost never enters into the discussion in any meaningful way, even though it's absolutely there.

What's amazing is that even when the costs are explicit, they barely enter the conversation. Take, for example, the predecessor to SOPA/PIPA: the ProIP Act, which passed in 2008. A report by the Congressional Budget Office showed that the cost of this bill, which is almost entirely focused on increased enforcement was $435 million. Yes, you read that right. Taxpayers have been on the hook for nearly half a billion dollars for the increased enforcement initiatives -- like the spectacular flop known as Operation In Our Sites. Is this really a wise use of taxpayer resources?

Add to that, of course, the negative externalities created by such enforcement -- such as the chilling effects of increased censorship, expensive court cases and other such efforts, and it's kind of amazing that these costs never seem to even enter the public debate, even though many of them are a lot more real than the "costs" presented by the industry for "piracy."

Filed Under: pay tv, pipa, piracy, proip, sopa
Companies: hulu

Website Censored By Feds Takes Up Lamar Smith's Challenge: Here's Your 'Hypothetical'

from the take-that dept

So, remember Lamar Smith's claim that all of the problems of SOPA are "hypothetical" and no one has shown any language as to what's wrong with the bill? Yeah, it seems that one such "hypothetical" has decided to take Smith up on his challenge. Enter Dajaz1, the American music blog that was censored for over a year and denied due process... under SOPA's predecessor, the Pro-IP Act (which many of us tried to warn about at the time it was being debated). Yes, it appears that Dajaz1 (finally relaunched) has a thing or two to say to Lamar Smith about his "hypotheticals."

Before I get into SOPA and PIPA, let’s go backwards and discuss the language of Pro-IP. Since Mr. Smith is so concerned about the language I’m hoping he can point me to the language in the Pro-IP Act covering criminal forfeiture where it states or even insinuates that it can be used to seize DOMAIN NAMES. That language doesn’t exist, what does exist is broad confusing open ended wording that apparently covers a wide spectrum of things the legislators who passed this bill never considered it could be used for. With all the assurances the bill he co-sponsored back in 2008 wouldn’t be misused coupled with the fact I’m writing this post on a factual representation of its misuse, it seems pretty rich that he’d have the guts to come out talking “show me the language.” Who cares about “language” when it’s written specifically to be vague enough to allow for a free for all?

Lets be honest here: What the worlds population hasn’t caught onto yet (and all the (‘Big Content’ owned versions of Self Serving State TV are not going to tell them) is much of the things in SOPA/PIPA that people are against, the authors and many of the co-sponsors of SOPA/PIPA already snuck into Pro-IP. The internet is already being censored, it’s already being misused, abused, free speech has already been stifled and there has already been collateral damage. All with the same open ended broad definition type language that exists in SOPA/PIPA that they absolutely refuse to narrow down as evidenced by not approving even the most common sense amendments. Many of which would have likely taken away or reduced their ability to misuse Pro-IP.

If Mr. Smith and his colleagues are genuine and sincere, why don’t they show US the language where it specifically states you cannot do all the things everyone is concerned about, make the language clear and concise, and then correct the language in Pro-IP so it can no longer function as the free for all that is already doing everything opponents of SOPA/PIPA are afraid of. Then, perhaps, I can take you somewhat seriously in your position that you believe you are doing the right thing and not just doing the bidding of corporations that bought you lock stock and barrel even at the detriment to your own reputation. One scenario makes you easy to manipulate, but genuine and willing to correct mistakes; the other just makes you corrupt. Pro-IP must be repealed and corrected immediately

But the folks at Dajaz1 are just getting warmed up. After discussing Pro-IP, they discuss how the industry has a ridiculously broad definition of "rogue website" by pointing to the infamous GroupM "rogue website" blacklist put together by Universal Music and others -- which included a bunch of hip hop blogs (including Dajaz1 itself and another of the seized blogs, OnSmash, which is still in purgatory somewhere). They also note that hip hop superstar Drake not only used the internet and free music to turn himself into a superstar... but that he did so via the exact same blogs listed on the GroupM "rogue website list.". From a press report at the time:

"You’ve gotta credit Drake, especially with NahRight and other sites, He was well-connected to those guys."

The use of the Drake example becomes pretty important, because back during the House Judiciary Committee's SOPA hearings, Rep. Ted Deutch of Florida, rather stunningly, used Drake as an example such sites. See the video here, which highlights how insane that is: In fact, that's the topic of Dajaz1's third post in the series: just how out of touch Ted Duetch is that he thinks that, for there to be the next Drake, he needs to shut down the very sites that Drake directly used to promote his work.

REALITY CHECK: On February 12, 2009, Drake released a Mixtape called “So Far Gone” for free on the internet. This mixtape garnered so much buzz for him that he ended up touring (making a reportedly 5 figures per night), and getting several singles on the radio in the top 10 on Billboard. Drake accomplished all of this as an independent artist. A bidding war ensued by the major labels and Drake signed to a major a few months later. Despite the fact that he’d given away “So Far Gone” for free 7 months prior on the internet and it had well over a million downloads, the tape was re-released as an EP by his label in Sept. 2009 and still managed to go Gold. He was nominated for 2 Grammy Awards.

Drake came from the internet, making relationships with and utilizing the blogs, most of which are listed as so called “ROGUE WEBSITES” that have been targeted by “Private Rights of Action” in the form of a blacklist by advertising giant, Group M. Two of those “rogue sites” had their domain names seized with banners calling the operators criminals by The Dept. Of Homeland Security. (While this domain was returned last month, OnSmash is still in purgatory). No hypothetical here,this is the reality of the misuse that is happening now and will only get worse with the passage of SOPA and PIPA.

Dajaz1 also points out that the other example Deutch uses -- Adele -- also came up through the internet, and was discovered on MySpace -- just the type of site that would be significantly burdened under SOPA/PIPA. Furthermore, the post highlights numerous other top music acts directly thanking the various sites listed as "rogue sites," including some of those seized and censored by the US government under ProIP.

In the final installment, Dajaz1 points out that SOPA and PIPA are not about "saving the artists," they're about saving the big, slow legacy players who fear innovation that allows artists to succeed without them.

When Congress and the RIAA says “Rogue Websites” do they mean the tools the artists are using to connect directly with their fans and distribute their own music? I mean I’m just wondering because I could make this post 20+ pages of screen shots showing examples of artists utilizing these “ROGUE WEBSITES” the RIAA is trying to get Congress to pass legislation and scrub from the internet.

And, in fact, Dajaz1 then shows a ton of tweets from famous artists to the very same blogs that were targeted as "rogue sites" (some of which were taken down). So just as clueless Congressional Reps. like Lamar Smith, Bob Goodlatte, John Conyers, Mel Watt and Ted Deutch insist they're "protecting the artists," it appears those very same artists are using those darn "rogue websites" to not just promote themselves and their careers, but to make a ton of money doing so.

So who exactly is Congress trying to protect? The content creators or trade groups with deep pockets who become obsolete if the majors fully embrace technology and innovate? Truth be told there are some incredibly smart people in the urban internet world who’d be amazing assets to the legacy industry in adapting to the marketplace. If only they’d utilize them.

One of the most disturbing things to come out of the SOPA hearings is how gullible many members of Congress appear to be and how technically inept many are in Washington. If you don’t understand the technology it is not OK to say you don’t get it while turning around and saying you don’t believe the people who do. (I’m looking right at you Mr. Watts) Generation Gaps are no excuse, you’re in what amounts to a management position and you should be qualified to hold that position when you are dealing with my generation and our children’s generation economic future. Your lack of knowledge is not an excuse for the loss of any American’s Constitutional Rights. To essentially shoulder shrug like you’re cute when something that important is at stake is reprehensible. If anyone in Congress, The White House, DOJ, ICE, Homeland Security, or any other branch of Government’s knowledge in technology stops somewhere around 1997 then it is time to retire as you are no longer qualified to hold your position in 2012.

This is the crux of the matter here. The complaints that Lamar Smith so wants to dismiss are not "hypothetical" to sites like Dajaz1. And, they're not hypothetical to artists like Drake. The idea that these artists need such laws to protect their interests is simply laughable when you see how these artists rely on those sites to market their works, make a name for themselves, and leverage that publicity into huge piles of money from live shows or later recording deals. These aren't hypotheticals. These are all very, very real... and Congress, in its ultimate cluelessness, is trying to break the internet to "stop" these sites. And not because it will protect artists, but because it will protect the major record labels and movie studios from up-and-coming competition. The major labels don't want Drake to come up through the internet. They don't want people like Mac Miller creating best selling albums, without a major label, by using those same sites to get publicity.

So they start this huge campaign to label these new forms of distribution as "rogue sites," get the US government -- in its admitted cluelessness -- to support them, and then (to make the insult even worse) pretend that it's all about protecting the very artists who rely on these new forms of distribution.

Sorry, Lamar Smith: the threat isn't "hypothetical." It's very, very real, and Dajaz1 is living proof.

Filed Under: adele, censorship, drake, hypothetical, john conyers, lamar smith, mac miller, mel watt, pipa, proip, protect ip, sopa, ted deutch
Companies: dajaz1

Senate Oversight Of IP Czar... Only Involves Entertainment Industry Execs

from the that's-oversight? dept

The ProIP Act added the role of the IP Enforcement Coordinator, a role that was filled by Victoria Espinel. We have been quite concerned that Espinel has viewed her role as protecting jobs in one particular industry (often at the expense of jobs and progress elsewhere) -- a concern that was not alleviated by Espinel's request for input on what she should focus on. That request made all sorts of assumptions about the impact of intellectual property infringement that were not actually supported by fact. Mike Arrington also reported recently on a meeting with Espinel where she made it clear that her role was to help the entertainment industry.

So, it's unfortunate, but hardly a surprise that the Senate's hearing on "oversight" of Espinel's work involves only people on the entertainment industry's side. The panel who will discuss Espinel's performance includes the CEO of Warner Bros., the CEO of the "Global IP Center" of the Chamber of Commerce (whose views on IP are positively neanderthal, complete with some of the most ridiculous studies), the CEO of Carlin America (a music publisher) and the president of the AFL-CIO, who has already done some horse trading to be an official representative of the RIAA's position.

Talk about regulatory capture. It's as if the Senate is admitting that the role of the IP Enforcement Coordinator is to be the entertainment industry's top cop, and her performance will be reviewed by the industry itself. The Constitution says that copyright and patents are for the purpose of "promoting the progress of science and the useful arts." But that's not what Espinel is doing. She's protecting a particular industry, often at the expense of progress. To then have her review be done by such a one-sided panel of folks -- folks who are receiving extreme benefits from her role -- is just ridiculous.

Filed Under: congress, ip enforcement, ipec, oversight, proip, victoria espinel

GAO Concludes Piracy Stats Are Usually Junk, File Sharing Can Help Sales

from the completely,-painfully-unsurprising dept

For many years we've explored how entertainment and software industry piracy statistics are very reliable -- at least in terms of being consistently and notoriously wrong on an annual basis. Each year companies (especially the BSA) like to throw out marginally-coherent data "proving" the supposedly-huge impact piracy has on the economy, national security or employment. The claims are quickly debunked as nonsense -- yet the same claims return year after year, and often get cited by U.S. politicians as gospel.

Carl was the first amongst many to direct our attention to a new study by the GAO on the effects of piracy (covering all sectors, even toys, clothing, automobile parts, and medicine). The GAO's study unsurprisingly found that U.S. government and industry claims that piracy damages the economy to the tune of billions of dollars "cannot be substantiated due to the absence of underlying studies." The full GAO report is worth a read, and not only argues that claims of economic impact have not been based on substantive science -- but that file sharing can actually have a positive impact on sales:

"Some experts we interviewed and literature we reviewed identified potential positive economic effects of counterfeiting and piracy," The GAO wrote. "Some consumers may knowingly purchase a counterfeit or pirated product because it is less expensive than the genuine good or because the genuine good is unavailable, and they may experience positive effects from such purchases. Consumers may use pirated goods to 'sample' music, movies, software, or electronic games before purchasing legitimate copies," the GAO continued. "(This) may lead to increased sales of legitimate goods."

Study after study have supported the conclusion that file sharers purchase more media -- though the idea never resonates the same way as claims of economic armageddon caused by file sharing. While the GAO's report does obviously highlight some of the negative impacts of counterfeiting, the GAO goes on to argue that any overarching conclusions of piracy's impact on the broader economy may not even be possible. The GAO was instructed to study piracy's impact as part of the Intellectual Property Act of 2008 (PRO-IP Act) -- which delivered plenty of handouts to the entertainment industry. ProIP was ironically pushed through using unreliable studies to justify its creation. Of course we'll soon be swimming in new dubious data "proving" the GAO wrong -- and around and around we go.

Filed Under: economics, gao, piracy, proip, studies

Investors Recognizing How ProIP Is Bad For The Entertainment Industry

from the it's-not-a-bad-thing dept

Kevin Stapp writes in to point out an interesting article over at the Motley Fool, where the author, Anders Bylund, points out why the new ProIP law is bad for the big entertainment companies from the perspective of an investor in those companies. Basically, he recognizes what some of us have been saying for years. If you rely on stronger copyright as a crutch to protect an old business model, you're much slower to adopt newer business models that can greatly increase the size of your market. In other words, by denying the growth potential of infinite goods, you shrink the potential size of your market, and that's bad for the company and bad for investors:

As much as I love my Walt Disney investment and the great entertainment the company has created over the years, it's also part of a boneheaded industry that can't deal with the digital revolution.... Disney, Warner Music, and their colleagues could handle rampant piracy in a much more delicate manner and turn today's massive problem into free distribution and dirt cheap marketing. Yes, there are ways to make money when others copy your dearly beloved content for free. The PRO-IP Act is a step in exactly the wrong direction, though.

Exactly. And this reinforces the point that it's a mistake to keep trying to find the right "balance" between content producers and content consumers. There's no need for a balance if the content producers adopt business models that both expand their market (by properly defining the market) and leave consumers free to share and promote the content in a way that actually helps the bottom line of the content producer. It's quite rare to see short-term investor-types recognize such strategies, so it's quite interesting to see a discussion like this on a mainstream site like the Motley Fool. Hopefully others will start recognizing this reality soon as well.

Filed Under: business models, economics, infinite goods, investors, long term thinking, proip
Companies: disney

Groups Urge Senate Not To Turn The Justice Department Into Hollywood's Private Police Force

from the bad,-bad,-bad-ideas dept

As we noted earlier this summer, Senator Patrick Leahy had introduced a companion bill to the House's dreadful Pro-IP bill, except that Leahy's bill went further. Beyond just adding a "Copyright Czar" position to the White House, it would authorize the Justice Department to start prosecuting civil copyright infringement lawsuits. In other words, it would have the government act as the private police for of the entertainment industry. This is scary stuff. Beyond already handing out unnecessary gov't granted monopolies, the gov't would now be using taxpayer money to settle business disputes from an industry that was only in trouble because it stubbornly refused to update its business model.

It's difficult to see why taxpayers should be paying FBI agents to protect one industry's obsolete business model.

A bunch of special interest groups made that argument to Senators this week, noting that it was a pure gift to Hollywood -- pointing out that all of the companies and groups in the industry already have their own enforcement arms, and it made little sense to have the FBI take part in private business disputes. Hopefully, there are still enough Senators who haven't been convinced by the propaganda provided by the entertainment industry on this issue to recognize what's actually at stake here.

Filed Under: business models, copyright czar, justice department, patrick leahy, politics, proip, senate