Stories like this, about how much owners of intellectual property are losing to piracy, always bug me, because the industry press just accepts the figure without criticism or comment.

They claim that they lost almost thirty billion dollars last year to pirated software. They derive this number by estimating the number of pirated software installations, and multiplying by the price of the product. But it's almost certain that their losses aren't that high. The only amount of money that they're out is the amount that the people using the software would have been willing to pay if they hadn't been able to get it for free.

This kind of disingenuous story occurs because people don't understand the difference between price, cost, and value. For software, the marginal cost (resources required of the seller to produce it) for the software is almost zero, while the price (the amount asked by the seller) may be very high relative to its actual value, which varies from individual to individual. No rational person will pay more for a product than they value it, so if they can't get it for free, the only amount of money that the vendor is out is the sum of the value of it for all potential buyers. Clearly, it wasn't worth the full price to many of those individuals, or they would have paid it, and I think that the amount of loss is vastly overstated--many of them would have simply gone without, rather than pay full price, so the revenue in that case would still be zero.

Not only are all the points you gave correct, but there is an additional point. Piracy promotes sales. It does so by making the product available for review to potential buyers, some of which will by the product (WordStar is the classical example, but almost any s/w product follows the same pattern.

When I write something that people are willing to make the effort to pirate, then I know my s/w is a success.

Historically, s/w companies need to compete not only with other s/w companies, but with themselves too. At some point sales of a product will dry up (usually because the vendor is unwilling to lower the price to the new market reality.) This is why continued development is a required.

Autocad fell in the value crack for me this year.

I have to disagree. First, I've seen people pirate utter crap. Part of the problem of piracy is that it lower's consumers' standards and quantity replaces quality.

Second, since the advent of optical media and more recently widely available broadband internet access the ability of vendors to offer demo versions of products, which in many cases can be 'activated' to full functional status, has been extremely common. Those who pirate instead of seeking legit demos are just making excuses for their behavior.

The actual are pretty much impossible to measure but they are real. I've known too many game programmers who found themselves looking for a new job after their employer faile due to cash flow problems in turn due to poor sales. This was for product that had gotten very good critical reception and were almost universally copied by those inclined to pirate. Yet they sold only a small fraction of what they should have achieved.

The computer game field was a special case in that everybody who owned a machine had easy access to piracy tools and the know-how to use them. This level of ease is creeping into other sectors.

Just yesterday I cam across a small retailer openly selling illegally produced cartridges containing a dozen Game Boy Advance games on each ROM. I reported this to Nintendo's address for that purpose and hope to see some action taken.

I'm not defending piracy. I'm just saying that the estimates of lost revenue are overstated, and probably dramatically.

Wow, I made a lot of typos on that last post. Wake up!

The flip-side of piracy is that it makes dealing with legitmate products a PITA.

Dongles, soft keys, licensing servers. You name it, I'm dealing with it and it's all (licensing servers excepted) single point of failure stuff. The license servers aren't but only because we invested a signifigant amount of time bullet proofing a clustered set of license servers.

It's enough to make me a surly bastard at times.

Rand, did you realize some claim the Europeans are the biggest offenders.

http://www.iht.com/articles/528442.html

Another reason to boycott France?

Different types of software fare better than others in the face of piracy. Games are especially vulnerable because there is no lock-in due to network effects.

Someone priates a game, you the publisher lose.

Someone pirates your OS or wordprocessor, you win!

There is no "oh, I used blah to save that file, you should get it" effect at all in games, save multiplayer ones. This is part of why the big boys in gaming are so hot to trot on online gaming, it finally gives them a network effect to leverage.

Oh, and most of those pirates with large collections are just that, collectors. It's not like most of those people USE the SW they have tons of, they are into a 'mine is bigger than yours' contest, and would never have bought most of the things in their libraries.

The same cost/value/price fallacies are widely found in reportage of losses in the entertainment industry due to piracy. IMHO nearly all reporters need to be firmly beaten with an Econ. 101 text until they are at least conversant with the supply and demand curve, and how price effects the latter. Oh, and what a market-clearing price is. Sheesh, what the hell DID they all learn at those Ivy League journalism schools?

Sheesh, what the hell DID they all learn at those Ivy League journalism schools?

That it's Bush's fault.

The sad thing is, this is an old issue. We had the same software piracy issues on the Apple II back in early 1980s, and everyone was making the same arguments. EXACTLY the same arguments. There were the hard-core pirates, who used BBSs, the copy protection that made it harder to use software, and the companies overstating their losses. There was a constant escalating arms race between the protectors and the pirates. One difference: The primary storage device at the time was the floppy drive. The typical user had a stack of floppy disks, and while the floppies were fairly robust (low storage density helped) if your software floppy died, the official method for replacement was to send money and the disk to the company. If they were still in business, you would hopefully get a replacement in a month or so.

When Lotus and others tried to repeat the process with business software on the IBM PC, big purchasers cried foul and demanded the nonsense be stopped. I thought copy protection was gone for good, but after a few years the balance of power shifted and it started up again.

There is no perfect solution, and I don't like piracy. On the other hand, just about everything digital is software now, and many of the makers want to restrict our use to a ridiculous degree. My position is: Turn in pirates that pirate uncopy-protected software. But, while I won't steal it, if a company has put usurious limits on their software, I have no problem with someone breaking those limits.

There is no "oh, I used blah to save that file, you should get it" effect at all in games, save multiplayer ones. This is part of why the big boys in gaming are so hot to trot on online gaming, it finally gives them a network effect to leverage.

Very good point. It also means that there's no real reason not to distribute the program for free far and wide since one hopes to milk the $20 a month subscription crowd rather than trying to make money directly on a piratable program.

(Watch me violate copyright as I report on stealing intellectual property...)

http://www.washingtonpost.com/ac2/wp-dyn/A7319-2004Jun26?language=printer

License to Steal?
By Richard Morin
Sunday, June 27, 2004; Page B05

"There's no minimizing the impact of illegal file-sharing. It robs songwriters and recording artists of their livelihoods, and ultimately undermines the future of music itself."
-- Cary Sherman, president of the Recording Industry Association of America, in an op-ed piece last year in USA Today

"It's called stealing."
-- Lars Ulrich, drummer for Metallica, testifying before Congress in 2000 about music file-swapping on the Internet

Your Unconventional Wiz stands second to no one in the belief that Metallica Rules! But it's my duty to report the findings of a new study that suggest that Ulrich, who led the fight to close down the Napster file-sharing service, music association exec Sherman and a small army of music millionaires are probably wrong when they predict dire consequences from the ubiquitous practice of downloading music for free from the Internet.

Downloading music has no appreciable impact on CD sales, assert economists Felix Oberholzer-Gee of the Harvard Business School and Koleman S. Strumpf of the University of North Carolina in a paper presented last month at a conference in Cambridge, Mass., sponsored by the National Bureau of Economic Research. (It may be the only scholarly paper that formally acknowledges "aural support" from the music groups Massive Attack, Sigur Ros and the Mountain Goats. "Of course, we bought the CDs" and didn't swipe them off the Net, Oberholzer assured us.)

If anything, the two scholars claim, downloading tunes may actually increase sales of popular CDs and more broadly benefit the music industry by introducing listeners to music they would not otherwise hear or buy.

They reached those conclusions after doing a meticulous study of the relationship between downloads and CD sales. They obtained information on 1.75 million file downloads completed over the OpenNap file-sharing network during a 17-week period in late 2002. Their data included information on the artist and song being swiped -- er, downloaded. Then they analyzed album sales during the same period from data gathered by the music division of Nielsen Entertainment (the ratings folks), and compared how downloads affected sales of rock, rap, rhythm and blues, country, jazz and Latin music. In particular, they wanted to see if an increase in downloading was followed by a decline in CD sales.

It wasn't. "We find that file-sharing has no statistically significant effect on purchases of the average album," they reported, noting that downloading, at worst, "can explain a tiny fraction" of the decline in album sales.

Even their most pessimistic estimate suggests that it took 5,000 downloads of a song to cut CD sales by a single copy. And for some CDs, downloading apparently created a buzz that promoted sales.

"High-selling albums actually benefit from file sharing," they wrote. For every 150 downloads of a song from those albums, sales increased by one copy, according ot their findings.

How do they know that downloads increased sales, and not the reverse? They used a sophisticated statistical technique that allowed them to determine which was the cause and which was the result.

The study comes at a time when complaints about the Internet's impact on the music biz have never been louder. The number of music CDs shipped between 2000 and 2003 fell from 940 million to 800 million -- a 15 percent drop.

And it's not just rockers who are swiping music. Last year, the sales of Christian music albums fell by 5.2 percent -- a direct result of downloading, asserted John Styll, president of the Gospel Music Association. "I'm surprised and disappointed that the behavior isn't that ardently d ifferent between Christians and non-Christians," Styll told a reporter for the Dallas Morning News in April.

So professors, if the Internet is so good for music, why are CD sales plummeting? These economists aren't sure, but they have some hunches -- including a sour economy, the standardization of radio play lists that limit airplay of new or unfamiliar performers, a reduction in the number of albums released, the skyrocketing cost of CDs "and possibly consumer backlash against record industry tactics."

Here's another possibility: The music is awful.

(my apologies for posting such a big chunk of the article, but the Post free archive disappears after two weeks, so this link will go dark soon)

"Here's another possibility: The music is awful."

Yup.

Your supposition on whether that much money was actually lost is completely correct, however there is nothing wrong with the story. If I walk into Barnes & Nobles and steal $1,000 in books, that number will be reported in the news media. However, B&N is probably out considerably less than that, because unsold books can have the cover ripped off and be given a refund by the publisher. Also, the second case is preferable to because the potential loss can be insured.

Your supposition on whether that much money was actually lost is completely correct, however there is nothing wrong with the story. If I walk into Barnes & Nobles and steal $1,000 in books, that number will be reported in the news media. However, B&N is probably out considerably less than that, because unsold books can have the cover ripped off and be given a refund by the publisher. Also, the second case is preferable to because the potential loss can be insured.

VR: well I at least was also remembering the last time we went around this very same merry go round in the 8 bit days! (can't speak for the other commenters above though :-)

Lord how I hated those ever-present boxes of 5 1/4" floppies, at a whole 100k each! 'Course that's way more than the 8 inchers on the stand-alone wordprocessor I had hooked up to the teletype I went online with (300 bps! 11 cps hardcopy output! oh the speed!), but I date myself.

And how did I forget the subscription revenue of online games??? Funny thing has been found with online games, players who got given the software in a promo were much less likely to stick with the game after the trial period than those who bought it (forget which company ran the trials on that one). Which of course makes sense, but I wonder how the retention rates are on pirated copies? That data'd be hard to come by, as the crack in such a case would be good enough to fool the registration system into thinking it was legit.

These days s/w phones home even if it doesn't have online registration. A friend of mine has a considerable amount of his s/w pirated, but he ends up collecting the revenue anyway (and at retail, rather than the wholesale price he usually sells it to his distributors for.)

As others have commented, the parameters vary when you talk about short shelf life products like games.

As for other types of s/w like music... it's the distributors that complain about pirates because they compete directly. However, artists are learning they can distribute directly which is much more lucrative for them, and again piracy serves to increase the artists visibility which in turn increases their revenues. People like to go to the source, unless the source is unreasonable.

Piracy is just an extension of the advertising budget. It's a net gain for the developer/artist.

Lets see.....I can spend $18 on a cd that may be crappy or $15 on a DVD I am fairly certain I will enjoy?

I know DVD's have been getting the lions share of my entertainment dollars these past three years.

The equation for me is DVD = Value and CD != Value.

If they would lower the cost , I would buy many more. I don't think record companies understand economics.