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Counterfeiting and Piracy: At What Cost?

A NEW EUROPEAN study attempts to assess the impact of counterfeiting and piracy on the EU’s creative industries. Another report, however, says that it is difficult, if not impossible, to quantify the economic effects of counterfeiting and piracy.

The EU study, which was conducted by Paris-based TERA Consultants and commissioned by the International Chamber of Commerce’s Business Action to Stop Counterfeiting and Piracy (BASCAP) initiative, defines Europe’s creative industries as “core” and “noncore.” Core creative industries include the music, film, television, software, publishing and advertising industries. Noncore creative industries are suppliers to and customers of the core creative industries. Noncore industries include those that manufacture or sell hardware, such as televisions or music-playing devices, as well as ancillary industries such as transportation.

The study illustrates the impact of the noncore industries by noting that the core creative industries in all EU countries generated €560 billion ($760 billion) in value added to gross domestic product (GDP) in 2008, approximately 4.5 percent of Europe’s GDP that year. The study found that the value added by the total creative industries (core plus noncore) was approximately €860 billion ($1.2 trillion) in the same year, or approximately 6.9 percent of GDP. In addition, in 2008 approximately 8.5 million people were employed in the core industries and 14 million in the noncore.

The study analyzed piracy and counterfeiting data from Europe’s five largest markets—the United Kingdom, France, Germany, Italy, and Spain—to estimate the economic impact of these illicit activities in all 27 member states. The researchers used data on the number of copyright infringements resulting from illegally downloaded and streamed files as well as the number of physical counterfeit products sold annually in each of the five EU countries.

TERA applied a variable substitution rate, or the number of units that would be sold if products were not being pirated. This rate changed depending on the type of product being pirated. For example, for recorded music, the substitution rate used was a conservative 10 percent, the study says. For movies and television shows, the substitution rate took into account different moments of the release timeline. For instance, the likelihood of piracy will vary depending on whether a film is in the cinema, is on TV, or is widely available on DVD. Researchers then multiplied the substitution rates by unit retail prices.

The study estimates that €10 billion ($13.6 billion) and more than 185,000 jobs were lost to counterfeiting and piracy in the music, movie, TV, and software industries in the EU in 2008.

A new report on the same issue from the U.S. Government Accountability Office (GAO) says that while research suggests the problem is sizable, accurate assessments of economic impacts may be impossible because of the illicit nature of counterfeiting and piracy and the difficulty of making accurate calculations when so much is based on assumptions rather than hard facts.

For example, notes the GAO, the substitution rate, “is a key assumption that can skew the results of an economic loss estimate.”

While the EU study used a conservative substitution rate based on research, estimates often employ a one-to-one substitution. This rate requires three conditions: the fake must be almost identical in quality to the original, the consumer must be paying full retail price for the fake product, and the consumer must not be aware of buying a counterfeit product. When some of these conditions are not met, it is unclear whether the consumer would have purchased the genuine product at full price.

The value of the fake goods also raises questions. “Officials from the International Trade Commission stated that counterfeits are very difficult to price, and estimates of economic impact would benefit from including a range of prices from the spot price of the fake on the street corner at the bottom to the manufacturer’s suggested retail price at the top,” the report says. Many experts told GAO investigators that a one-to-one substitution rate is not likely to be accurate in most circumstances (unless the consumer does not know that he or she is buying a counterfeit) where counterfeits are much cheaper than the legitimate product.

The GAO looked at some benefits of piracy, though many companies would probably not agree with some of the characterizations. For example, the report notes instances where those holding the rights to the intellectual property may benefit from a consumer using a pirated good, such as when consumers use pirated goods to sample a product like music or movies before buying the legitimate version, which may ultimately lead to an increase in sales of the legitimate product.

Companies may also lose revenues in one business line and increase in another due to increased brand awareness. One example is that movie piracy may result in increased sales of merchandise that is based on the movie characters.

Another expert interviewed by the GAO said some industries may benefit from piracy in another industry. A company that makes routers, for example, may benefit from digital piracy because of the bandwidth demands related to the transfer of pirated digital content. The EU study, by contrast, assumes noncore industries will be harmed by piracy or counterfeiting in core industries.

But the GAO report acknowledges that there are potentially more negative effects than positive, including reduced incentives to innovate, health and safety risks for consumers, and lost revenue from declining U.S. trade in countries that have weak intellectual property protection regimes.