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FRONTSIDE
 e Price of Piracy
A new report says music thievery costs our economy billions. Are such numbers reliable?
Calculating a business’s losses from theft
typically involves some sleight of hand.
Estimates are often based on the assump-
tion that most items stolen would have been
sold. But can such a formula be applied to
music?
A new study by the Institute for Policy
Innovation (IPI) finds that global music
piracy costs the U.S. economy $12.5 bil-
lion in losses and 71,060 jobs annually. The
report, titled, “The True Cost of Sound
Recording Piracy to the U.S. Economy,”
breaks down losses by physical piracy
(bootleg CDs) and illegal downloads on
peer-to-peer networks. Mitch Bainwol,
CEO of the Recording Industry Association
of America (RIAA), released a statement
saying, “This new report vividly illustrates
the serious economic harm caused by the
widespread availability of illegal music
either via the Internet or on the streets.”
To derive these numbers, the study esti-
mated “substitution” rates, which assumes
that without counterfeit channels, many
pirates would purchase legitimate prod-
ucts. The report uses an average substitu-
tion rate of 65.7 percent for physical piracy
and 20 percent for Internet piracy. In turn,
the U.S. Bureau of Economic Analysis used
industry-specific numbers to derive the
cascading effects of those direct losses
throughout the rest of the U.S. economy.
But Koleman Strumpf, a professor of
economics at the University of Kansas,
is skeptical. He is the coauthor, with Felix
Oberholzer-Gee of Harvard Business
School, of a study that found that fi le shar-
ing has no signifi cant effect on CD sales in
the U.S. “If they [IPI] want to parade a large
number, they have to defend it,” Strumpf
says. “I don’t see it in this study.”
Stephen E. Siwek, however, the author
of the IPI study, says that Strumpf’s fi ndings
are fl awed. “I would be very hard pressed to
accept their results based on the dramatic
decline in CD sales that we have seen in the
last few years.”—Isabelle Groc
PIRATE’S BOOTY According to the music
industry, billions are lost from bootlegs.