Piracy Loss Estimates as a Managed Number

By Eric Goldman

I’ve long had doubts about the estimates of copyright owners’ losses due to piracy. Typically these studies use suspect methodologies, are based on privately-reported data that cannot be independently verified, and overcount losses by ignoring the demand curve (i.e., people who obtain copies for free may not be willing to pay the retail prices). But more than anything, these estimates are a product of self-interest–the industry can use the estimates as part of its PR and lobbying campaigns to garner support for the industry’s agenda. Therefore, the industry has incentives to make the numbers say what they want it to say.

The latest proof of this comes from the newest MPAA survey of movie piracy that produced a loss estimate that was surprisingly high. The WSJ reports:

For months, MPAA members debated whether and how to release the information. Some studios argued that making the figures public would help the industry win tougher laws and enforcement. Other studios said the figures were so bad that releasing them would hurt their stock prices and make a laughingstock of their enforcement efforts.

This situation reminds me a lot of how public companies “manage” their earnings. Most public companies provide an estimate of quarterly profits to the market. Then, the companies typically try to manage their earnings to come in close to the estimated number. If sales are going great, the company will try to roll sales over into the next quarter to keep from overshooting the estimate too much. If sales are going poorly, the company will try to accelerate sales through price breaks or other incentives that may not be good for long-term profits but help deliver on the short term promise.

The WSJ article seems to suggest the same game is being played by the copyright industries with their piracy numbers. They need to come in high enough to support the PR/lobbying efforts; but they can’t come in too high or they will spook the market. Now that we understand how the game is played, I hope we’ll evaluate industry claims about piracy losses more critically.

(Hat tip: EFF Deep Links)