The ‘cost’ of piracy

A claim that the annual costs of piracy to the software industry has topped $50 billion for the first time highlights a major flaw in the way such ‘costs’ are estimated.

According to the Business Software Alliance, 41 per cent of software worldwide is pirated. It argues that this represents losses to the industry of approximately $53 billion.

However, there are two major problems with this analysis. First, the calculation of the piracy rate itself is questionable. The Economist has previously accused the BSA of relying on “sample data that may not be representative, assumptions about the average amount of software on PCs and, for some countries, guesses rather than hard data.”

It appears the BSA’s method involves estimating how much software is installed around the world, subtracting the known legal sales, and taking the remainder as piracy. Clearly any calculation which involves the relationship between solid numbers and an estimate is prone to inaccuracy.

But it’s the lost revenue figure which is the more dubious. The formula here is simple: the losses are the number of pirated copies multiplied by the retail price.

That’s a virtually meaningless figure as there is no way to know how many people who use pirated software would have otherwise paid for it. Many people who use copied programs do so because they literally can’t afford the retail price. Many others do so because they only need to use a program occasionally or for a few features and thus don’t consider it worth the price. And others have no interest whatsoever in paying even a cent for the program and have only acquired an illegal copy because doing so is free of charge.

This is not to say there is any legal or moral justification for software piracy. And the losses are probably (proportionally) higher than with movies and music where some people download more ‘free’ content than they could ever listen to, let alone consider paying for.

But groups like the BSA have legitimate points to make about the genuine costs of piracy: not just whatever lost revenue exists, but in increased security risks, lost business for third-party retailers, and even lost tax revenues from legal sales. Trotting out a figure which is clearly a ludicrous overstatement based on a fallacy simply undermines this message.