Digital Piracy – FACT or Fiction?

From midnight tonight, the English version of Wikipidea, the world’s 6th most visited site, will go dark for 24 hours in protest at SOPA – the Stop Online Piracy Act.

Piracy, according to the MPAA (Motion Picture Association of America), is costing the US economy $21 billion per year (read: it’s costing them $21 billion). This figure is hotly contested, even by the US Government, and at the other end of the spectrum it is claimed that the true cost to the US could be as low as $446 million. To put this in perspective, the last Harry Potter movie grossed $1.8 billion (worldwide).

The entire language of the debate is wrong. People who illegally post copyrighted material online and those who consume it are called (digital) pirates. Pirates sailed the high seas looting valuable cargo remember. Those annoying adverts by FACT (Federation Against Copyright Theft) at the beginning of DVDs begin “You wouldn’t steal a car…” and end “Piracy it’s a crime. It’s a matter of FACT.”

But this is not theft or looting. The mens rea of theft requires the intent to permanently deprive the owner of the possession or use of their “property” e.g. like stealing a car. But posting and viewing a movie is not doing that. My consumption of this movie (legal or not) does not prevent anybody from consuming it (economists call this a non-rival good) The marginal cost is therefore close to zero and as my first year undergraduates learn, the efficient price is therefore zero.

Perhaps online pirates can rebrand themselves as liberators, the ultimate free marketers? While I’m being polemical there’s a serious point here; copyright is essentially bad, creating an intellectual monopoly. Monopolies are inefficient, creating what economists call a deadweight loss to society by pushing up prices by restricting output.

Therefore, despite the disputed claims that the piracy is costing the US economy millions or perhaps billions of dollars a year, it could be improving social wellbeing. While there is no doubt that this is a transfer from producers (the likes of Universal Pictures) to consumers (the likes of you and me), that doesn’t really bother me. Further, if consumers still spend the money they would have otherwise spent on movies, the economy may be significantly better off.

The argument for monopolistic copyright is to incentive authors to write, musicians to compose and film makers to shoot. Without it, why would studio invest $200 million in making a film? So there’s a trade-off between the ex-ante incentive to innovate or create and the ex-post efficiency of the market. In this context, Schumpeter called these short term monopolies a necessary evil of innovation and creation.

There are, of course, alternatives to copyright and indeed patents. But that’s for a future entry. But for the moment, the ultimate outcome of SOPA would be to make the US Government the pro bono lawyer for the incredibly wealthy motion picture and music industries. Now that seems quite silly.

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