An Upside to Piracy? The Government Says There Is

Counterfeit products -- such as fake watches and bootleg DVDs -- are illegal, but they may have some unintended economic benefits
Counterfeit products -- such as fake watches and bootleg DVDs -- are illegal, but they may have some unintended economic benefits

Counterfeit products -- such as fake watches and bootleg DVDs -- are illegal, but they may have some unintended economic benefits, according to a new report from the General Accounting Office.

Among the many ways legitimate businesses benefit from the availability of counterfeit goods: Consumers use bootleg copies of albums, movies and video games to sample goods, and if they like what they've tried, they purchase the real thing.

Also, while some media companies lose revenue on DVD or CD sales because of file sharing, they can potentially make it up in sales of merchandise related to the movie or album, according to the report.

Illegal file sharing doesn't necessarily mean the film studio or music label gets left out of the equation completely. This has repeatedly been proven with big blockbuster films that top the list of most pirated movies but still generate hundreds of millions of dollars at the box office. Alice in Wonderland, for example, was the second-most-often illegally downloaded movie for the week ending March 21, according to TorrentFreak, but still grossed $34.2 million at the box office that weekend. (So far the movie has grossed more than $320 million.)

Locked In to Software

Another possible sales upside of bootleg software: Buyers of pirated programs may get locked into a certain application. Because they invest so much time and energy in learning the program, when it comes time to upgrade, they may buy the legitimate version of the software to avoid so-called "switching costs."

Still, some media defenders argue that regardless of how much is lost in revenue to counterfeits, the more devastating impact piracy has had on the film and music industries is the loss of the relationship with the customer.

"There are known and obvious benefits to 'free,'" says Eric Garland, co-founder and CEO of BigChampagne Media Measurement. "That's why every brand and consumer product makes things available for free. But we're being disingenuous if we're saying that 'free' and 'authorized' are the same. When a music thief takes music, [the label] misses out on customer data and ad revenue; they don't get the opportunity to sell that person music in a different form or to sell them other music."

Potential Harm as Well

The GAO report acknowledges the potential harm caused by counterfeit goods, too. The makers of fake designer goods, for example, probably exert some pricing pressure on the makers of legitimate goods; it's great for consumers, but it could drag on innovation. Some software makers may also be so focused on developing anti-piracy features that they neglect to improve the overall product.

One of the most compelling points made in the GAO's report, though, is that the numbers used by various industries to quantify economic losses related to piracy are unreliable at best. The truth, according to the GAO, is that most numbers are "crude" and based on anecdotal evidence.

An oft-cited figure sourced to the FBI -- that the U.S. loses $200 billion to $250 billion to counterfeiting on an annual basis -- appears to be born out of thin air. The FBI used the figure in a 2002 press release, but nobody seems to know where the figure came from, according to the report. One of the biggest problems with data related to the counterfeit market is that there's no way of knowing how often the sale of a counterfeit item would replace the sale of a genuine product.

"It's fundamentally unknowable, " says Garland. "A lot of these statistics become endlessly repeated so they become part of the narrative, but nobody knows where they came from."