Peter S. Menell, Professor of Law and Director
Berkeley Center for Law and Technology
University of California at Berkeley School of Law
May 5, 2010

Mark Twain’s popularization of Benjamin Disraeli’s oft-quoted quip – “[t]here are three kinds of lies: lies, damned lies, and statistics” – has taken on new relevance in the latest round of rhetoric surrounding the effects of file-sharing on content industries.  A few weeks ago, the General Accounting Office (GAO) issued a report reviewing methodologies and studies for estimating the impacts of counterfeit and pirated goods: “INTELLECTUAL PROPERTY: Observations on Efforts to Quantify the Economic Effects of Counterfeit and Pirated Goods,” available at

This concise report (27 pages of background and discussion, plus brief appendices summarizing the methodology and listing contacts and literature references) offers an overview of a broad terrain: from fake Nike Air Jordans to counterfeit pharmaceuticals to file-sharing of popular music.  The first 15 pages of the study provide a broad framework for examining the economic effects of intellectual property infringement.  The remaining 12 pages review and discuss selected studies of these impacts.  Given the breadth of the markets (essentially all products) and intellectual property rights (patents, trademarks, and copyrights), the authors devote just a few pages to the challenges of measuring the effects of digital piracy.

The GAO Report briefly critiques five digital piracy studies: (1) the Business Software Alliance’s (BSA) study of software piracy levels – which assumed a one-to-one substitution rate between pirated copies and lost sales; (2) the Motion Picture Association of America’s (MPAA) 2005 study of film piracy – which did not disclose the assumed substitution rate and lacked transparency about how it extrapolated its results from surveyed countries to non-surveyed countries; (3) the Institute of Policy Innovation’s (IPI) 2005 study of entertainment industry piracy – which used multipliers that did not take into account substitution effects from increased disposable income (as a result of obtaining pirated goods) in determining the impact on lost output, jobs, and tax revenues; (4) Rafael Rob and Joel Waldfogel’s 2003/2004 survey of file-sharing by college students – which found that “one downloaded album reduces music purchases by roughly one-fifth of an album, and possibly by much more,” but used a static model (which ignores incentive effects of intellectual property protection) in evaluating consumer surplus; and (5) Felix Oberholzer-Gee and Koleman Strumpf’s empirical study indicating that illegal downloads of music have no effect on record sales – which used “a static model which does not reflect the effect of downloads apart from the week the download occurred” and does not make clear “if consumers who are illegally downloading music would have purchased the genuine album.”

Unfortunately, the GAO Report merely skims the surface and provides far too little exploration of the substantial and growing literature on the effects of file-sharing.  There are several valuable papers exploring the extent of unauthorized distribution and commenting on the two academic papers cited in the GAO Report that do not even make the bibliography.  Professor Stanley Liebowitz’s paper, “File Sharing: Creative Destruction or Just Plain Destruction?” comes to mind.  It is in the same symposium volume (“Piracy and File Sharing”) of the Journal of Law & Economics as the Rob and Waldfogel paper, yet apparently was not considered by the authors of the GAO Report.  But even multiplying the Rob and Waldfogel conservative substitution rate (one lost sale for each five illegally downloaded songs)1 by the relatively large number of unauthorized downloads (several times the number of record sales) produces a sizeable net drop in record sales.

This is consistent with the approximately 50 percent fall-off in record sales since file-sharing emerged a decade ago.  That is a dramatic effect, even if it cannot be measured with precision.  This is not to say that file-sharing has not hastened the roll-out of digital distribution services or that some other factors (e.g., the availability of other entertainment products) did not play some role in the decline in record sales.  But the GAO Report overlooked several well-documented studies directly evaluating the range of possible causal explanations.

The GAO Report cautiously concludes that “[w]hile 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.”  The report noted that “[a]lthough some literature and experts suggest that negative effects may be overstated, in general, literature and experts indicate the negative effects of counterfeiting and piracy on the U.S. economy outweigh the positive effects.”  But the GAO Report concludes that “[s]ince there is an absence of data concerning these potential effects, the net effect cannot be determined with any certainty.”

It was disconcerting, therefore, to see this limited and cautious report distorted by industry lobbyists to stand for more than it does.  Shortly after the GAO Report’s release, the Computer & Communications Industry Association (CCIA), Consumer Electronics Association (CEA), Electronic Frontier Foundation (EFF), and Public Knowledge placed a full-page article in Roll Call (a Capitol Hill newspaper covering the legislative and executive branches) and Politico proclaiming: “CONTENT INDUSTRY PIRACY CLAIMS ARE BOGUS.”  The advertisement asserts that the GAO Report shows that “claims of losses from digital piracy” by content industries to be “completely baseless.”  The next day, the CCIA released a study claiming that $4.7 trillion in revenue, about a third of U.S. GDP, is attributable to companies that rely on fair use.  That may well be true, but what does it mean?  That we should ignore digital piracy?

Exaggeration, sound bites, and rhetoric undermine thoughtful discourse on intellectual property policy.  The digital revolution has dramatically changed the marketplace for copyrighted works.  Intellectual property law and policy are fundamentally about balance and adapting to change.  But balance cannot be assessed without a framework and baseline.  The GAO Report provides a useful starting point toward that end.  It highlights the complexities of calculating economic losses from illicit activities.  Rather than polarize discussion, all players should work toward constructive discourse.