What do we know about Romney’s views on intellectual property? Really just two things.

We know that he joined the roster of anti-SOPA Republicans last year when that seemed like the thing to do (“I’m standing for freedom”). And we know that he worries about China stealing our IP. And that’s about it. But it’s more than it seems.

One of the striking things about the SOPA debate was that, when the bill failed, it failed along bipartisan lines. The usual overwhelming bipartisan support for stronger IP enforcement crumbled. For comparison, 2007′s Pro-IP Act – a major expansion of federal responsibility for IP enforcement – passed the House 411-10. In the Senate, approval was unanimous. Similarly, 1998′s Digital Millennium Copyright Act, which established the current take down procedures for infringing content, passed the House by a voice vote (used when not close). Again, in the Senate, approval was unanimous.

So something is going on when such a powerful alignment begins to break apart. We know part of the story is a shift in the balance of lobbying power, as Internet companies begin to throw their weight into policy debates. And part of it is the emergence of an Internet grassroots ready to mobilize against perceived threats. No such counterweight existed in 2007 or 1998, when concerns were raised about those bills.

It’s clear that both developments reflect, in part, a generational shift in attitudes and practices, built around the emergence of the Internet as a primary platform for cultural expression and community. There is clearly a generational politics of the Internet, of which the SOPA fight was arguably the first real test. But is there a partisan politics of intellectual property?

Broadly speaking, at the moment, in the US, the answer is no. Republicans, Democrats, and independents have very similar views on copyright and enforcement – almost always within the margin of error in our survey. With respect to our set of questions about attitudes toward sharing music files, only ‘share with friends’ produced a significant difference, with Democrats leading Republicans 65% to 52%, with Independents at 60%. This is basically the youth effect: young voters tilt Democratic, and 76% of 18-29 year olds view sharing with friends as “reasonable” (compared to around 50% of all other groups).* Romney trails Obama in this group by 19%.

What about the two major policy issues of the past year? ISPs, the RIAA, and the MPAA are set to implement a six-strikes model for online copyright infringement, in which customers accused of sharing unauthorized materials via P2P services will receive, first, warnings from their ISPs, then degraded service, and then possibly disconnection and/or a civil suit. The last steps are vaguely defined at present but clearly implied in conversations about the measure.

Let’s step back and ask a more basic question: should people face punishment for “downloading an unauthorized copy of a song or movie?” Among all US adults, the question just barely gets majority support: 51% said yes. Another 7% said it depends on the circumstances–which would be a useful quibble if the law recognized such circumstances. Partisan differences on this question are modest:

• Republicans: 57% said yes; 30% no
• Democrats: 53% yes; 36% no
• Independents: 51% yes; 35% no

This is not strong support for penalties, much less for the powerful criminalization of infringement over the past 15 years. Still, it can claim a majority. But for what?

We asked about the big five penalties at stake in most current and proposed law: warnings, fines, ‘bandwidth throttling,’ disconnection, and jail. Differences in attitudes among the party-identified are small. Warnings and fines are favored by around half of Americans. Limits on Internet speed or functionality attract under 30% support. Disconnection from the Internet is very unpopular at 16%–and falls to 9% if the question specifies household disconnection. Jail time attracts around 10% support.

What about proposals for stronger enforcement by intermediaries, of the kind at the center of the SOPA debate? Because we thought public opinion might be volatile on this issue, we asked a wide variety of questions to tease out differences in language (blocking, filtering, censoring) and differences in the points of application of enforcement (relatively narrow services like Facebook and Dropbox, wider services like Google and ISPs, and the government)

Broadly speaking, Republicans show very slightly more enthusiasm for enforcement than Democrats and very slightly more concern for privacy–with only ISP blocking of pirate sites generating any significant divergence. Again, this is an issue that tracks with age: younger adults are somewhat more tolerant of blocking via services that they can opt out of, and less tolerant of blocking that occurs via major points of access to the Internet in general.

But on the whole, partisan differences are minor. We’d argue that IP policy is still pre-partisan in the US, in the sense that the breakdown of unanimity has not yet been channeled into oppositional stances organized around the two parties. This absence of a partisan politics of the net is often seen as a plus – a virtuous neutrality for those in the netroots – but it also means that the major parties don’t take it seriously enough yet to dispute.

Tensions within the parties on these issues will certainly rise, but by how much? The pressure points for Democrats seem clear, with cultural affinities with (and financial dependence on) the major content industries on the one side, and the divergent attitudes of their young (and, we shall see, minority) base on the other.

For Republicans, there is a tempting politics of youth and modernity here, pushing uphill against a rhetoric of property, law and order, and a wider set of demands by big business that have traditionally commanded support. What would partisan uptake of these issues look like? It might look something like the polarization of opinion on abortion in the 1990s, as evangelicals came to power in the Republican party.

Or it might look like what we’re seeing now in Germany and other parts of Europe, with the emergence of small ‘Pirate’ parties as representatives of a nascent environmentalism of the Internet. Our German survey took place before the 9% showing of the Pirate Party in Berlin state elections in late 2011 and the subsequent battles over ACTA.

Yet the partisan lines around IP politics were already stronger in Europe than in the US, with more consistent defenses of freedom of expression and unimpeded access to the Internet on the left, finding common cause with traditional concerns with privacy on the right. Here is our German data on blocking and filtering by political identification.

Unlike in the US, strong “safe harbor” provisions for web Intermediaries like Google and ISPs have become part of the platforms of the German center-left parties – by all appearances moving ahead of public opinion on these issues. Strong Internet privacy positions have proved popular across the political spectrum, inconveniencing web companies that collect a lot of consumer data (like Google and Facebook) and also provoking conflict with the EU over data retention rules (an important component of strong enforcement).

In France, the left-right divide also incorporates IP enforcement issues, with most Socialists opposing the strong enforcement measures adopted by the conservatives – notably the creation of HADOPI, the Internet enforcement agency.

The UK, for its part, looks more like the US, with the Labour Party playing the lead role in pushing the major recent enforcement bill – the Digital Economy Act – through Parliament in 2009. The landscape is clearly in flux as voters and politicians adapt to a political environment in which Internet politics have begun to matter.

Could Pirate Romney win/have won? Not yet. But we can say with some certainty that the young aren’t getting any younger, and that their attitudes and practices are quite different from those of the policy making generation ahead of them. Among 18-29 year olds, only 37% support penalties for unauthorized downloading. 53% oppose. A better question is: could Pirate Tagg Romney win? Maybe we’ll find out.

Source: TorrentFreak, for the latest info on copyright, file-sharing and anonymous VPN services.

Even most opponents of SOPA/PIPA maintain a common front on this issue: the foreign thief must be stopped. Chris Dodd is right about this: the only public debate is about how.

For the past few years, Kim Dotcom (nee Schmitz) has been the MPAA’s go-to example of the foreign thief. Dotcom is a flamboyant hacker/entrepreneur with a fraud conviction, a penchant for fake names, and a fortune built, like many new media fortunes, in the grey areas of IP law. Megaupload was one of the first cloud storage or ‘cyberlocker’ services, and is routinely ranked in the global top 50 in traffic. There is little doubt that it hosted a lot of infringing media. There is doubt about the extent to which Megaupload encouraged this, and how that affects their liability for infringement.

The Megaupload case has important legal implications. Mike Masnick has a very good rundown, but let’s focus on two. The case will certainly challenge the scope of the “safe harbor” from liability afforded online storage providers—a very important issue in an era of cheap, ubiquitous cloud services. It will also be a front in the government’s (and, more particularly, MPAA’s) push to shift from an ex post model of enforcement, involving notification and takedown requests when infringing content is identified, to an ex ante model based on the surveillance and filtering of user activity.

If this sounds familiar, it’s because it is also fundamentally at stake in SOPA, and raises all the same censorship and free speech issues. Holding Megaupload liable for failing to monitor and filter user activity for infringement, for example, would compel monitoring across a wide range of web services, from search to social media. And that would mark a very fundamental shift in the freedoms associated with the Internet. SOPA and the Megaupload case are part of this long game.

The Megaupload indictment is also a public effort to cast a villain in the file sharing story: to prove that someone, other than consumers, benefits from piracy. Kim Dotcom’s arrest—with all of his luxury cars on prominent display—is about making the case not only for abstract losses to industry but also theft from industry. We’ve repeatedly taken issue with the industry calculation of losses, most of which are fictional. But let’s ask the narrower question. Who is the foreign thief, and how much is he stealing?

As usual when talking about piracy, there are lots of claims but very few hard numbers. The revenue estimates that do circulate in file sharing cases are notable, however, for their miniscule size compared to the 10s or, occasionally, 100s of billions in losses claimed by industry groups. Here are a few examples…

• The Swedish trial of The Pirate Bay trial in 2009 became an occasion for all sorts of competing estimates of revenues. Record industry group IFPI estimated the site’s revenues at $3 million per year. The MPAA described $5 million in revenues. But prosecutors endorsed a much lower number: $170,000 from advertising (against what the defense characterized as $112,000/year in server/bandwidth costs and $100,000 per year in revenue). This is for a site that appears consistently among the top 100 visited sites in the world.
• NinjaVideo, a Brooklyn-based movie indexing site whose owners were arrested in 2011, was alleged by prosecutors to have made $500,000 in 2½ years. After the site began to make money, the four administrators split the revenue, netting around $33,000/year each after expenses. Hana Beshara, the site’s primary owner, was sentenced to 22 months in prison under the US No Electronic Theft (NET) Act.
• Brian McCarthy, the owner of Channelsurfing.net, a Texas-based sports streaming site, was alleged by prosecutors to have made $90,000 over five years. He also faces jail time and fines under the NET Act.
• Immigrations and Customs Enforcement (ICE) made some partial revenue estimates for targets of its 2010 domain name seizure program, Operation In Our Sites, based on information from advertising network Valueclick. According to ICE investigators, Torrentfinder, a BitTorrent site, made about $15,000 in ad revenue from Valueclick over a year in 2008-2009. Onsmash, a music link site, made around $2,500 in 2009-2010.

The ICE numbers aren’t complete accounts, but they met the traditional definition of “commercial” copyright infringement that justified the criminal charge (US District Court Case # 10-2822). What they don’t do is describe a very lucrative or, in any other respects, criminal business.

This is a point we’ve made repeatedly regarding the incentives for criminal involvement in piracy. We see little evidence that there’s much money to be made from it—especially as the costs of setting up and running such sites decline. It’s very likely that the larger sites generate significant revenues from advertising—indeed even in the torrent admin community (see below) it’s assumed that the handful of top sites generate six and even seven-figure revenues annually. But at any given time there are only a few such sites. And even accepting the IFPI estimates, it’s chickenfeed. The top 5 pirated films, for comparison made $2 billion last year. The (non-overlapping) top 5 grossing movies made nearly $5 billion. Piracy generates an overwhelmingly consumer, not criminal, surplus.

It’s easy to see how Kim Dotcom got rich by being an early entrant in the cloud storage market, in the only part of the business that required a lot of large file transfers. (Much the same is true of broadband adoption, for which piracy has always been the early killer app—especially outside the US where legal web services are still underdeveloped.)

As a subscription business selling a scarce commodity, Megaupload’s revenues were many times larger than the largest torrent or link sites. In 2010, execs at Paramount Pictures estimated (in testimony to Congress) its profits at between $41 million and $300 million per year, with the range reflecting different assumptions about its subscription rate. The Justice Department’s recent indictment put the number below the low end of the range—committing to only $175 million in total revenues since 2005–under $30 million/year–and reflecting a roughly 7-1 split between subscriptions and advertising. There are no estimates of how much of this came from legal sources.

In contrast, it’s hard to see how this model remains lucrative. Storage costs are falling rapidly, and there are no barriers to entry or significant network effects. For a comparable market, look to the highly competitive web hosting business rather than search engines or operating systems, which have more characteristics of natural monopolies. Many companies–including Megaupload–already give large amounts of storage away. Many compete for “premium” users, either with inducements or bundling with other services.

The sum of Megaupload’s activities may well satisfy a court that it encouraged large-scale copyright infringement, and therefore should be held liable. But Megaupload’s survival is not the main concern: it’s what happens when all storage is mirrored in the cloud. It’s whether we’ll monitor and police the core features of the web: storage, linking, and search.

The Torrent Admins Survey

Now that the nerds have (provisionally) won the argument that DNS blocking could break the Internet, attention will turn to “follow the money” enforcement strategies—especially those targeting advertising and payment systems. We might ask, in this context, what “follow the money” looks like in a sector where there are few barriers to entry and costs are falling toward zero?

To find out more, we prepared a short survey of torrent site administrators, which was circulated through torrent admin lists and IRC channels by some trusted intermediaries. We received 11 responses to our survey—most of them anonymous; most of them ‘vouched for’ by our partners; and most of them anonymized through various services. We neither asked for nor received identifying information. This is, in other words, a small sample with some big caveats (such as selection bias). Nonetheless, the responses tell an interesting story.

Responses came from a pretty wide spectrum of sites, including:

• 2 that receive over 10 million visits per month
• 2 that receive 2-10 million visits per month
• 2 that receive 500,000 – 2 million visits per month
• 2 that receive 25,000-100,000 visits per month
• 2 that receive less than 25,000 visits per month.
• 1 that did not specify traffic

To provide some reference points, the two current largest torrent sites—the Pirate Bay and Torrentz—receive roughly 88 million visits/month and 46 million visits/month respectively (according to Google Adwords. There are claims that this significantly undershoots traffic on those sites.) Although cyberlocker sites like Megaupload and Mediafire now outdraw torrent sites by a wide margin, the latter remain a good indicator of the cost structure—and costs of entry—of large scale file sharing. BitTorrent is now a thoroughly commoditized technology, running on low cost hardware with freely available software. Cyberlockers are slightly further behind.

How much does running a torrent site cost? The largest site in our survey, with over 10 million visits per month, was also the most expensive. It reported server and bandwidth costs of $25,000-$30,000 per year. Most of the sites operate on less than $10,000 per year. A couple of the smaller ones were under $3,000.

How much money do these sites make, and how? Of the eleven responses, only the largest site used advertising. It reported a roughly break-even operation, with costs covered in most months by advertising. The other ten do not use advertising. These are typically the smaller, private trackers that require invitations to join—a category that nonetheless reaches into the millions of visits per month.

Eight indicated that they meet the majority of their expenses through member donations. Only one indicated that it fully met expenses this way. Only one earned additional income through affiliate links. The balance typically comes out of the pockets of the site administrators.

Although we received less information on staffing, several indicated that they operated entirely with volunteer labor—in a couple cases involving communities of a dozen or more administrators. This is the norm among smaller, private sites.

The picture that emerges from the survey is one of financially fragile but low cost operations, dependent on volunteer labor, subsidized by users and founders, and characterized by a strong sense of mission to make work more widely available within fan communities. Few such sites make or seek to make money. Many are specialized communities exchanging media of particular types, genres, or languages. A site like NinjaVideo began this way, but grew into a larger, revenue-making operation.

Rights holder pressure on payment systems is not new, but it has been ad hoc. Credit card companies were enlisted in the mid 2000s, when the record industry group IFPI waged war against the (nominally legal) Russian pay-download site AllofMP3. Industry threats against safe harbor provisions for payment providers played an important role in this process. No payment provider wants to tangle with industry lawyers on behalf of an accused infringing site, even if there is no legal basis for cutting off service. Few accused sites are able to lawyer up to respond. Strict legality doesn’t make much difference in such contexts. One site administrator showed us a letter from a payment provider terminating service based on a DMCA complaint—a law that makes no such provisions.

SOPA and PIPA legalize these strategies and make them much easier to use. Under SOPA, rights holders gain a strong right of “private action” that allows them to issue cut off letters directly to advertising services and payment systems. The latter must cut off service or face secondary liability for infringement. Under SOPA, moreover, neither the payment system nor the rights holder is liable for damages from any mistaken or overly broad actions. The “safe harbor,” under these circumstances, is repurposed to empower the complainant rather than the user.

Independent of the potential for collateral damage, SOPA and PIPA are best understood as collections of harassment measures for pirate sites, rather than any sort of “solution” to piracy. A loss of advertising revenue would harm some file sharing sites—especially the larger, more public sites that have grown into advertising-dependent commercial operations. The loss of primary payment systems such as PayPal would complicate life for the smaller torrent sites, but wouldn’t cut off revenues: there are many ways to manage the modest donation systems that keep these sites in business.

Some parts of the file sharing ecology, consequently would be vulnerable to payment system attacks. But the overall impact is likely to be low. Much of the file sharing ecology already operates at very low cost, on minimal revenue. Much of the labor is volunteer—with advertising and the “professionalization” of staff a matter of choice rather than necessity. And infrastructure costs are falling.

We talk about the efficacy of enforcement at some length in our Media Piracy report. Many readers have concluded that enforcement doesn’t work. But that isn’t what we say. We say, rather, that we’ve found no evidence that it has worked. The main factors shaping piracy are price, income, and the declining cost of technology–and that will remain the case. But it seems entirely possible that some impact can be bought at a high enough price. The numerous critiques of SOPA and PIPA provide a good idea of that price—a broken, arbitrary, copyright surveillance regime and an Internet culture reorganized around the established content providers.

The Commercial Scale Standard

In most national copyright laws, criminal law applies only to copyright infringement on a “commercial” scale. Traditionally, commercial scale referred not to the number of copies made, but to financial benefit derived from it. (Infringement that doesn’t meet the criminal standard can still be addressed through civil law, as tens of thousands of file sharers in the US and Europe have learned.) In the past 15 years, digital technologies made a mess of this distinction. When copying was capital intensive and required a factory, scale and profit went together. But in an era of ever cheaper copies and storage, the two are delinked. What to do, then, with the commercial standard?

The US response in the 1997 NET Act was to expand the definition of commercial infringement to include the unauthorized digital receipt of anything of value, subject to an exemption up to $1000. Without the for-profit requirement, the door opened—in theory—to criminal prosecution of a much wider array of participants in file sharing. The exchange of a bunch of albums or a few copies of software can easily qualify. In practice, the NET Act has been applied not to consumer-level sharing, but to intermediaries—initially members of mostly non-commercial “warez” groups engaged in cracking software, and more recently to marginally commercial intermediaries like Hana Beshara and Brian McCarthy. (The expanded criminal model is also being exported abroad without the de minimis exceptions, through trade agreements and new enforcement treaties like ACTA).

In our view, this is a bad way to resolve the confusion around the commercial standard. It dramatically expands criminal liability without any corresponding intention of enforcing it. Law enforcement, under such circumstances, becomes arbitrary and easily captured by private parties. Industry lobbying secures funding for enforcement agencies and enforcement agencies return the favor, turning to stakeholders for staffing, planning, and cost sharing. Personnel flows between the two, anchored in the understanding that government service is rewarded later in the private sector.

The US Attorney leading the Megaupload case, for example, is Neil MacBride, former head of enforcement for the Business Software Alliance. The Obama transition brought at least five RIAA lawyers to the Department of Justice. The Megaupload indictment, both in its tone and its kitchen sink approach to infringement, could have been written by the MPAA. The distinction has become a formality.

So what to do? As long as we have a culture organized around copyright, there should be ways to define and police violations of it. But our current definitions needs a rethink. There is ample reason to see unauthorized copying and file-sharing as inevitable in the digital era and more–as inextricable from the core features of general computing and the Internet. The law should recognize this because doing so protects the wider set of freedoms to express and innovate that build on those features. Both individuals and companies should be accorded wide latitude in their use. That said, there is no reason to defend piracy as a profit-making activity.

So one place to start might be to ditch the NET Act and SOPA and restore a narrower commercial scale standard for criminal infringement, along with a less draconian set of penalties for the times when it is invoked. Such a standard would make profit the trigger, and make that the basis for any follow-the-money actions against payment systems or advertisers. This bar could be set high enough to exempt the marginal member-subsidized torrent sites, since these are little more than group implementations of search, store, and link–the building blocks of the web. They cost little today and less tomorrow.

But the bar could also be low enough to encompass sites that start to generate a lot of money. Drawing such distinctions could help restore a useful middle ground—retaining a threshold for enforcement while rejecting both the universal liability envisioned in the Net Act and the universal surveillance implied in SOPA. It would better align the law with the actual capabilities of law enforcement to enforce, and thereby make enforcement less arbitrary. And it would help articulate a much wider zone of personal freedom to copy, based on a recognition of the wider importance of unhindered, unmonitored use the core capacities of the web.

A reinvigorated commercial standard won’t end piracy. Nothing short of a copyright surveillance state would, to any significant degree. But the commercial standard would help drive file sharing into the non-commercial economy, leaving more room for creative, legal, low-cost commercial alternatives. That’s not a sufficient definition of copyright reform, but it may be a necessary step if we’re to bring law into line with the basic economics of our digital culture. The law can’t eliminate piracy, but it can help make it irrelevant.

—

Addendum: Regarding the monetary harm of Megaupload’s activities, the Justice Department characterized it, without explanation, as “well in excess of $500,000,000” since 2006. And although that number is probably meant to impress, it’s somewhat baffling. Even without a per annum breakdown, it comes nowhere near the annual piracy losses claimed by the major industry groups—whether the BSA’s $58 billion loss claims for software losses in 2010 or the “conservative” $26 billion estimate for movie, music, and software piracy from 2007, which lazy journalists still allow to circulate. This for the site that MPAA called “By all estimates… the largest and most active criminally operated website targeting creative content in the world.”

Since we’re using made up numbers here, let’s make up some more–and for the sake of argument, some extremely favorable ones for the Justice Department’s effort to paint Megaupload as the big bad. Posit that all $500 million in losses came in 2011. Posit the $26 billion loss number. Megaupload’s contribution to the pirate economy tops out at 2%.

Source: TorrentFreak, for the latest info on copyright, file-sharing and anonymous VPN services.

The European Strategy: Send Money to the US

Most of the time, the international politics of intellectual property law are pretty easy to follow: countries that are large exporters of intellectual property usually favor stronger international IP agreements that help exploit international markets.  Countries that are large importers of IP, in contrast, generally favor lower levels of IP protection that minimize the outflow of royalties, licensing fees, and other payments for foreign-owned products and technologies–whether computers, drugs, movies, or books.  Whatever other rhetorics are in play, from the rights of authors to the right to development, political positions usually line up with those underlying incentives.

The turn toward the use of trade agreements to set IP obligations–from the early bilateral agreements of the 1980s to the WTO’s TRIPS agreement in the early 1990s–more or less formalized this instrumental approach to IP law.  Trade agreements, at the end of the day, are about economic deals–not morality or even fairness.  For anyone clinging to a moral interpretation of these arrangements, it’s worth revisiting at the US and EU positions in the South African AIDS drug controversy from the late 1990s or more recent opposition to the proposed WIPO treaty for the visually impaired.

I raise this not to attack trade agreements, but to ask some similarly instrumental questions about the European Commission’s position on IP rights and enforcement.  Over the past two decades, the EC has been a very active proponent of higher IP standards and stronger enforcement, from the ACTA agreement, to the upcoming revision to the Enforcement Directive, to the imminent extension of copyright on recordings (see here).  Let’s ask the obvious question: why?

Follow the Money

I’ll focus on audiovisual markets and piracy, since these are driving the EC and wider EU push on enforcement.  Media piracy–not counterfeits–are why we’re talking about major changes to the emerging digital architecture of public life, including Internet surveillance, ’3-strikes’ disconnection laws, public and private censorship of websites, and a host of other measures.

So where do the EU’s economic interests lie?  Let’s look at the numbers:

*** According to the World Bank, Europe’s audiovisual imports exceed its exports by a ratio of around 4-1.  In 2008, Europe (EU 27) imported roughly $14.7 billion in audiovisual and related services (basically, licenses for movies, TV, radio, and sound recording).  In contrast, it exported about $3.9 billion, for a net trade deficit of $10.8 billion  (International Trade Statistics 2010: 156).

*** About 56% of those imports ($8.35 billion) come from the US.  The EU, in turn, exports about $1.7 billion to the US, resulting in a net negative trade balance of around $6.65 billion.  This does not include software licenses, where US companies monopolize larger parts of the European consumer and business markets.

*** The US, in contrast, is a large net exporter of audiovisual goods, with roughly $13.6 billion in exports and $1.9 billion in imports.

For countries or regions that are net importers of copyrighted goods, higher IP standards and stronger enforcement will result in increased payments to foreign rights holders.  Because the US thoroughly dominates European audiovisual markets, stronger enforcement in these areas is, in practice, enforcement on behalf of Hollywood.

Now, one can make this story more complicated.  The vast majority of European audiovisual production is for domestic or intra-European consumption.  Exports from European countries to each other significantly outweigh exports outside the EU (by about 50%).  Won’t stronger IP laws and enforcement capture more benefits for European industry?  Probably, but these should not be confused with overall benefits to the European economy.

Here’s how we put it in our Media Piracy report:

Domestic piracy may well impose losses on specific industrial sectors, but these are not losses to the larger national economy. Within a given country [or in this case, region], the piracy of domestic goods is a transfer of income, not a loss. Money saved by consumers or businesses on CDs, DVDs, or software will not disappear but rather be spent on other things—housing, food, other entertainment, other business expenses, and so on. These expenditures, in turn, will generate tax revenue, new jobs, infrastructural investments, and the range of other goods that are typically cited in the loss column of industry analyses.

To make a case for national economic harms rather than narrower sectoral ones, the potential uses of lost revenue need to be compared: the foregone investment in the affected industries needs to represent a better potential economic outcome than the consumer surplus generated by piracy (Sanchez 2008). The net impact on the economy, properly understood, is the difference between the value of the two investments. Such comparisons lead into very complicated territory as marginal investments in different industries generate different contributions to growth and productivity. There has been no serious analysis of this issue, however, because the industry studies have ignored the consumer surplus, maintaining the fiction that domestic piracy represents an undiluted national economic loss.

For our part, we take seriously the possibility that the consumer surplus from piracy might be more productive, socially valuable, and/or job creating than additional investment in the software and media sectors. We think this likelihood increases in markets for entertainment goods, which contribute to growth but add little to productivity, and still further in countries that import most of their audiovisual goods and software—in short, virtually everywhere outside the United States.

The EC clearly speaks for the European audiovisual industries on these issues, who stand, in theory, to gain from stronger IP enforcement (or maybe not!).  But who speaks for the massive and very real consumer surplus?  No one.  I’m aware of only one study that makes any effort to model it: the Dutch government funded “Ups and Downs: Economic and Cultural Effects of File Sharing on Music, Film and Games,” which estimated the annual welfare benefit from music filesharing in the Netherlands at around 100 million euros.  Multiply by 30 for a very crude extrapolation of this benefit across the EU.

Whose Piracy is It?

But to what extent does piracy actually impact European movies?  For better and for worse, the answer appears to be: very little.  Ernesto at TorrentFreak  regularly compiles lists of the top ten films downloaded via BitTorrent, which generally track recent Hollywood hits.  He generously furnished me a ranking of the 99 top downloaded movies for the first half of July (99 because the top 100 included Thor under two different titles).  Although not a rigorous sample, I’d suggest that it is  a decent proxy for the global demand for film.  Among these 99 films:

*** 74 were solely US productions
*** 3 were solely European productions
*** 3 were Indian productions
*** 17 were jointly produced by the US and one or more other countries, including 14 with European companies.
*** UK production companies were solely responsible for 2 films, and partnered in 11 more.
*** German companies co-produced 4 films.
*** Canadian companies co-produced 3 films.
*** South African and New Zealand companies were sole producers of 1 film each. Japan and Romania co-produced 1 each.

French production is an interesting case given the leading French role in promoting both strong IP protection and Europeanist cultural politics–including the well known ‘cultural exception’ for trade in audiovisual goods and services.  French companies figure in only 4 films on the list—and in no cases for movies filmed in France, in French, or prominently involving French actors or filmmakers. The No.1 film on the list, Source Code, was co-produced by Vendome Pictures–a relatively new French production company dedicated to producing, by all appearances, American movies.  Source Code stars Jake Gyllenhaal and was filmed in Chicago.

Another feature of this list is that 97 of 99 of the films are in English (the two non-English films are Indian).  The list makes a strong case that, in the absence of licensing barriers, the international market is an English language market and more particularly a Hollywood market that occasionally involves foreign production partners.

Even the long tail (down to #99 at least) isn’t European.  For the most part, it’s composed of the Hollywood movies from the last year that you’ve never heard of: the Kevin Bacon filmElephant White; the girl surfer/shark attack/Dennis Quaid movie Soul Surfer; the Russel Crowe/Elizabeth Banks film, The Next Three Days; the Topher Grace/Anna Faris flick, Take Me Home Tonight, and many others. According to the MPAA, 677 film were produced by US production companies in 2009.  That’s a lot of movies that go straight to the back catalog! And even that number is well off the peak of 2006-2007.

Is this the sign of a European cinema in decline?   Not if we look at the number of feature films produced, which should certainly factor into any account of piracy’s effects on incentives to produce.  The number of feature films produced in Europe has increased every year in the last five.  Almost 1200 were produced in 2009.

[The blue part of the chart is the percentage of a film's total audience that it receives in its home country (vs. the rest of Europe). Source]

Some of this insularism reflects linguistic and cultural differences within Europe.  And some of it reflects the fragmentation of the European market.  The burden of rights clearance across 27 countries and innumerable production companies makes it very difficult to distribute European films widely within Europe–and far more difficult, in particular, than licensing large catalogs from the six US studios.  The EC has made reducing these market barriers a high priority, but has shown less certainty about how to move forward.  As EC reports have noted:

The practice of territorial licensing has a lot to do with commercial decisions based on the structure of a European market that is characterised by linguistic and cultural differences, as well as by high transaction costs in distributing local content across borders. (p.185)

In other words, it’s not clear where the market obstacles stop and the mismatch of product with demand begins.

Here, our list of downloaded films points to the future–and to the main dilemma facing European cultural policy.  The emergence of a more unified audiovisual market suits both the political project of European unity and the culturalist project of making more European productions available to more Europeans.  Given the current constraints, lower barriers to licensing will certainly increase the range of European offerings to European consumers.

But there’s a catch: so far, the European market and–beyond that–the global market, has had little to do with expressions of cultural specificity or auteur-driven visions.  It has to do, above all, with making films in English that minimize those particularities.  It means producing a Europe built around historical epics (Ironclad), sci-fi/fantasy (Inception, Harry Potter) or, often quite literally, the perspective of the universal (American) tourist, like last year’s The Tourist (Johnny Depp in Venice) or Unknown (Liam Neeson in Berlin).

All of the above were joint US/EU productions on our July download list.  And it means a European film industry reorganized further into an investment vehicle for Hollywood movies, like Vendome Pictures, the now defunct publicly-funded Medienfonds in Germany (Battlefield Earth,Terminator 3), or Luc Besson’s massive, soon-to-be opened Cite du Cinema north of Paris.

My goal is not to make an anti-Hollywood argument here.  There are pros and cons to this system of public subsides, and greater integration into the global market might be, on balance, a good thing in business and cinematic terms. But it is important to be clear about the future that the EC is promoting with its IP policies.  It is not a defense of European heritage or–primarily–a vision of the French auteur able to bring his or her distinctive vision to a global audience. It’s a vision of European production companies  as slightly better integrated junior partners in global Hollywood.

It’s this junior partnership that should be weighed against the wider sacrifices of privacy and freedom of speech built into so many recent national and EC-level IP enforcement policies, such as the French ’3-strikes’ plan, which will cut French citizens off of the Internet for the piracy of Hollywood productions.  Strong enforcement reinforces status quo positions in the market, but at an escalating public cost as consumer behavior becomes the real focus of enforcement activities.  There is nothing in these policies will alter the balance of cultural power or change the direction of payments.  That’s why I’ve characterized the EC enforcement plan as: “send money to the US.”

Moralizing IP rhetoric is also a handicap in this context.  Continuing to defend IP as a fundamental right long after it has been made an object of trade policy is to surrender any real leverage in making deals.  A trade negotiator would be very lucky have such a partner on the other side of the table.  Where could Hollywood find such a partner?

How the European Commission Took Up the Cause of Hollywood

I know and understand that our french conception of author’s rights isn’t the same as in the United States or other countries.  I simply want to say that we hold to the universal principles proclaimed in the American constitution as much as in the Declaration of the Rights of Man in 1789: that no one should have the product of their ideas, work, imagination–their intellectual property–expropriated with impunity.

Each of you understands what I say here because each of you is also a creator, and it is in virtue of these creator’s rights that you have founded businesses that today have become empires.  The algorithms that give you your strength; this constant innovation that is your force; this technology that changes the world is your property, and nobody contests it.  Each of you, each of us, can thus understand that the writer, the director, or the performer can have the same rights. – French President Sarkozy, opening the ‘e-G8? conference that he convened this past April.

With this fulsome praise of tech and media CEOs at the e-G8, Sarkozy expressed the basic European cognitive dissonance on IP:  the embrace of universal rights as a way of pretending equality with the real powers in the room.  More cynically, it is the embrace of the foreign agenda as a way of rewarding the local junior partners.  Indigenous elites used to play this game with the French back when they had the empire.

How did Europe get here?  Tellingly, there was initially little European enthusiasm for a broad trade agreement on IP in the 1980s.  By most accounts, lobbying by US tech and pharmaceutical industries made the difference, capitalizing on a wider overestimation of–and nostalgia for–Europe’s role as a cultural superpower, when it was the primary beneficiary of stronger international IP laws.  More narrowly, the European Commission’s IP activism can be traced to the actions of a handful of American CEOs, who convinced their European counterparts of the benefits of a global IP deal in the run-up to the WTO agreement in the 1980s.   Those counterparts, in turn, applied pressure on their national governments and, through them, the EC.

This gambit has been described in several histories of the WTO negotiations, including Peter Drahos and John Braithewaite’s excellent Information Feudalism.

EC bureaucrats were less keen on trying to harmonize intellectual property standards via the trade regime. They had had some experience of the difficulties of trying to harmonize intellectual property standards in Europe. Some states, such as Germany and the UK, were keen on higher standards while others, such as Spain and Italy, were not so inclined. The view coming out of the EC at this time was to press on with the initiative on counterfeiting in the GATT (a lot of luxury European trade marks were the subject of counterfeiting) and make a general IP code a much longer-term priority….

The problem facing Pratt and Opel [Edmund Pratt, CEO of Pfizer and John Opel, Chairman of IBM] was clear enough. They had to convince business organizations in Quad countries [the US, the EU countries, Japan, and Canada] to pressure their governments to include intellectual property in the next round of trade negotiations. That meant first convincing European and Japanese business that it was in their interests for intellectual property to become a priority issue in the next trade round…..

Pratt and Opel’ s response was swift. In March 1986 they created the Intellectual Property Committee (IPC).24  The IPC was an ad hoc coalition of 13 major US corporations: Bristol-Myers, DuPont, FMC Corporation, General Electric, General Motors, Hewlett-Packard, IBM, Johnson & Johnson, Merck, Monsanto, Pfizer, Rockwell International and Warner Communications. It described itself as ‘dedicated to the negotiation of a comprehensive agreement on intellectual property in the current GATT round of multilateral trade negotiations’ (pp.117- 118) ….

Enrolling European business in the network was the essential first step for the IPC… The IPC had established a line of dialogue with the Union of Industrial and Employers’ Confederations of Europe (UNICE) in November 1986. It proved vital. In Europe’ s more hierarchically ordered world of business lobbying, UNICE was the key portal of European business influence on the EC. During 1986 and 1987 close cooperation developed between UNICE representatives and EC officials; UNICE was given the opportunity to comment on the EC’ s negotiating position and drafts. In May 1987 UNICE produced its own position paper on GATT and intellectual property arguing that the EC’ s approach was ‘deemed too narrow by European industry’ and that the ‘scope of the negotiations must be broadened’ to include other areas of intellectual property where European industry was making heavy R&D investments.  In the following months this became the position of European Community negotiators (p.128)….

Perhaps what US CEOs were able to sell to their European and Japanese counterparts was a vision of a globally secure business future. Ultimately, US corporations might do best out of the globalization of intellectual property standards. A world in which US corporations were dominant but European and Japanese corporations still remained powerful players and strategic partners was preferable to a world in which corporations from all these countries faced competition from increasingly efficient developing country manufacturers. It made sense for the most powerful corporations from the world’ s three strongest economies to collaborate on a project that would enable them to lock up the intangible assets of business in the new millennium and allow them to use those assets to set up production facilities wherever it suited them best. The international character of their production along with their need to capture new markets became the basis of the mutual interest needed for an alliance between them. (p.119) ….

Although they never quite grasped the fact, European trade negotiators had more in common on intellectual property standards with their developing country counterparts than they realized. The US initiative on intellectual property was aimed at European and Japanese markets as much as it was at the tiger economies of Asia. (p.83)

So what would a disenchanted, liberated EC do?  As an American citizen, it is perhaps presumptuous to make suggestions.  But as a French citizen, hey, it’s my EC too!

It could start by distinguishing more clearly between the broader welfare interests of EU citizens and the commercial interests of junior production partners in global Hollywood.  In an earlier era,  it was plausible to think of these commercial and public interests as substantially the same.  Movies were cheap and played a much larger role in public culture.  French or German or Swedish cinemas made stronger claims to being globally-relevant, distinctive national cultural champions.  Copyright infringement was harder, less frequent, and generally industrially organized, which made enforcement a relatively painless proposition.

Today is different.  As IP enforcement targets individual behavior and comes into conflict with other basic values (privacy, freedom of expression), commercial and public interests have begun to diverge.

The EC could also think differently about Europe’s opportunities in the larger digital media transition.  Where some parts of the EU audiovisual industries lose from piracy, the larger impact is chronically exaggerated in EC statements and mitigated (if not completely overshadowed) by the EU system of public subsidies for production.  This may be an inefficient system that produces a lot of movies that relatively few people want to see, but it’s arguably a pretty good model for managing the transition to a more fully realized digital media economy, in which piracy drives the development of cheap, legal, digital access (see Netflix, Hulu, Spotify), and public subsidies ensure that there’s a lot of relatively rich European content to distribute. That, it seems to me, is a plausible vision of a digital media economy that leverages Europe’s strengths, rather than reinforces its weaknesses through a costly war on internet users.

Creating a more unified European audio-visual market is an important goal in this context, but also an achievement that is likely be built on the homogenization of EU production.  The public subsidy model is probably the only counterweight–at a continued cost to wider commercial prospects.  Struggling to adopt the fragile economics of Hollywood blockbusters, in contrast, is a risky bet that should probably be left entirely to the commercial sector.  Leading the way in strengthening digital enforcement seems like an especially bad choice in this context since its short term effect is just to send money the US.  Europe has little to lose from a wait-and-see approach.

De-moralizing the IP debate is also an important step.  At the Americans’ insistence, it’s a trade policy debate now, and nothing should be freely conceded by the lesser partner in those trades.  What, in other words, do the French get in return for enforcing Hollywood’s copyrights?  The answer should not be limited to: the dignity of the French auteur.  Don’t bring a knife to a gun fight.

Source: TorrentFreak, for the latest info on copyright, file-sharing and anonymous VPN services.