On Piracy

The terribly dry yet fascinating Harper’s Magazine recently featured in its ‘Readings’ section an excerpted essay taken from a book, out this month, entitled Stealth of Nations: The Global Rise of the Informal Economy. The following is a summary and rebuttal of some of the key points made.

The excerpt begins in China, where intellectual property theft is, as most of us know, already rampant, and has been for several years. There are contributing factors for this. One is a market that allows around only 20 Hollywood films to be released every year. Another is the premium placed on legitimate DVDs sold in emerging economies like China. As The Economist reported in August, DVDs of The Dark Knight sell for $663 a copy in India. In China, the LA Times reports, counterfeit DVDs may have more special features than the genuine article. This last point taps into what most advocates of piracy usually tubthump; piracy gives people what they want. Not necessarily just regarding price – Zeitgeist would be hard pushed to fork out $663 for The Dark Knight – but also with regard to access and to functionality of the product. At The Future Laboratory‘s Spring/Summer trends briefing earlier this year, the emphasis was on loosening control over proprietary technology, collaborating with others in order to enhance innovation and ultimately help make the product better.

The product in question in this bazaar, however, is not DVDs; “There’s essentially just one product sold here: mobile phones.” The handsets are all knock-off, counterfeit items, playing on and abusing the brand equity of established companies with names like “Sansung”, “Motorloa” and “Sany Erickson”. It brings to mind the episode of the The Simpsons when Homer is duped by brands like “Panaphonics” and “Sorny”.

The competitive advantage for these products over their authentic brethren is the price. With no need for an R&D budget, the price of a “pirated Nokia N73 [is] $85, a fifth the cost of a real N73”. The author predicts sellers get an “extraordinary” 100% return on the initial investment. This, then, is big business. Big in the terms of holistic number of customers, returning multiple times, and big in the sense of the amount of profit it turns, and the number of people employed in such activities.

“The International AntiCounterfeiting Coalition… predicts that, with hundreds of thousands of industrial workers still facing unemployment and dislocation from the global recession, China will allow more piracy in order to prop up employment and avoid potential civil unrest.”

The author contends that this kind of behaviour is entrenched in society, and owes its debt to Bernard Mandeville, who argued for liberalising the market to the extent that things like tax-dodging, piracy and overcharging were “good for society”. The pamphlet in which he extolled his virtues became extremely well-known because pirates quickly got a hold of his six penny publication and distributed it in half penny sheets. This obviously made Mandeville no profit, but it raised his profile no end and, according to the author, “gave him the opportunity to publish a new edition”. Keeping as many people employed as possible, no matter the scrupulousness of their work, he argued, would lead to a better society than one dominated with excessive rules and regulations. And it seems, prima facie, that selling pirated goods allows access to consumers who can’t afford to pay full price. The difficulty, however, lies in whether the consumer can’t afford to or whether they just don’t want to. Whether someone whom a company would initially attempt to covet and convert to a prominent customer at a later age is instead lost to a world of pirated goods, which, not being subject to the same standards as the genuine article, ultimately disappoints the buyer and pushes them away from the brand entirely.

In a tale similar to that of Mandeville, the author Neuwirth suggests similarly that were it not for piracy, Shakespeare himself would also be confined to the realms of anonymity. During production of his plays, piracy allowed for other productions to run different versions – “King Lear was remade with a happy ending”, for example. In 1709, publisher Jacob Tonson bought the rights to the complete works, publishing them at a premium every fourteen years,  “enough to secure his perpetual copyright”. When one upstart pamphleteer threatened to sell the plays in sets for a fraction of the price, the argument that ensued resulted finally in Tonson flooding the market with plays sold at a penny.

“Shakespeare’s plays were suddenly available all over London at rock-bottom prices – something that had never been true even in the playwright’s lifetime. A century after his death, piracy helped make William Shakespeare a household name across social classes.”

Without deep research it is hard to dispute this intriguing interpretation, except to say that some of the adaptations of the plays may well have fallen under today’s terms of ‘fair use’, and that perhaps what this example really demonstrates is the need for a regulatory environment, one that stipulates that culture be accessible to all, rather than leaving it to excessive price gouging. Similar stories occur in the present-day as Neuwirth moves on to illustrate the situation in Peru, where “more books are sold in pirated editions than official versions”. The price for a legitimate copy of a book is too steep for most people to afford; thus the piraters are the ones that undertake market research, attend book fairs, etc. This is a dramatic fault with the publishing industry in Peru, which clearly has missed business opportunities here by not aliging prices sufficiently with customer demand. This again, then, is an example where regulators should be stepping in to correct market deficiencies. It is not necessarily an excuse for piracy to be celebrated. An absence of morality is not an imprimatur for immorality.

The Business Software Alliance affirms that in 2008, piracy cost software companies $53bn. The author rightly challenges this, writing that the BSA “assumes that every pirated program represents a lost sale at full retail price”. With relatively high prices for products like Adobe InDesign and Photoshop, this thinking by the BSA is indeed questionable. In some cases, initial access to a pirated copy, much in the same way a legitimate trial version works, might well help incentivise the consumer to purchase the full, legal product. Interestingly, the author quotes a note, hidden away in the BSA’s results,

“‘Business, schools and government entities tend to use more pirated software on new computers than ordinary consumers do’. The government – the same entity that the industry calls upon to police piracy – is actually one of piracy’s largest patrons.”

This revelation is startling as it turns the notion that it is consumers who are the wrongdoers, consumers who need the educating, on its head.

The notion of piracy contributing positively to business turnover is a tough one though. The author contends that in the world of fashion, going from a world of ‘planned obsolescence’ (a term used for things like when BMW will decide to release their new version of the 7 series), to “induced obsolscence”, where piracy “spurs demand for new styles”. This may be so in some sort of roundabout way, but the presence of piracy can surely be said to do little for the customer trying to differentiate between the legal and the illegal product, and little for the brand. Louis Vuitton et al. have surely suffered considerable losses over recent years, and invested significant amounts of time and money on combatting piracy. Though an anonymous executive of a “major sneaker manufacturer” might concede piracy doesn’t really impact the bottom line, it is debatable as to whether this is the case for those in the high-fashion world.

Ultimately, while the rise of pirated goods allows consumers more options, it also requires them to be increasingly savvy about the products they are purchasing. An over-regulated environment may stifle innovation; collaboration among multiple entities has been proven to sometimes enhance the development of a product. Quality of craftsmanship is necessarily going to be harder to discern when purchasing a pirated good, though. The trick is to create a legal framework that allows businesses to thrive, to provide their customers with a product at the right price, and to employ people who are protected under laws that they would otherwise not be granted under illegal outfits.