Consumers will pay more in piracy crackdown: Economists

Henry Ergas, recently appointed to Communications Minister Malcolm Turnbull's broadband cost-benefit analysis panel, and Allan Fels, former Australian Competition and Consumer Commission chairman, have jointly warned the government that the cost-benefit analysis of its proposed crackdown on online copyright infringement doesn't stack up, and the scheme will likely result in Australian consumers paying more for TV, films, and music.

In a joint submission (PDF) to the government's discussion paper proposing website blocking and graduated alert schemes to deter customers from downloading infringing TV shows, films, and music through peer-to-peer services, the pair of economists conducted their own cost-benefit analysis for the digital industry lobby group AIMIA — which represents companies including Facebook, Google, eBay, and Yahoo7 — and found that the costs would far outweigh the benefits.

"Their costs are significant, while the community-wide benefits are dubious — it is not clear whether the proposals will do much to reduce piracy and significantly increase the incentives for creators. Certainly, the government presents no evidence that the proposed polices are likely to produce net benefits," the economists stated.

ISPs would be forced to "police their customers' copyright infringement" with a much higher regulatory burden placed on them to comply, including instituting policies to terminate the accounts of repeat infringers in order to comply with safe harbour rule changes, something that the government has insisted won't be sought under the proposals.

Fels and Ergas estimate that the cost for ISPs per notice to warn customers against infringing would be between AU$20 and AU$30, based on the New Zealand model, and would cost, on the whole, between AU$4.5 million up to AU$148.8 million per year to run.

Any change would likely benefit companies rather than individual content creators, and consumers would end up paying the price, the economists argued. The competitive pressure that rights holders currently face through infringing content would also be reduced, meaning that Australian consumers would be forced to pay more.

"Stricter enforcement increases copyright holders' profit, but reduces consumer surplus by more — so the overall effect is a social loss through reduced consumption efficiency," Fels and Ergas said.

"The increase in non-infringing demand is likely to increase the price the copyright holder can charge, making legitimate consumers worse off, which in turn increases the incentive for piracy, offsetting the effects of stricter enforcement."

They argued that the key to reducing infringement is to make legitimate channels for accessing content more affordable and accessible to Australian consumers.

A downloader, they added, would not necessarily have otherwise purchased the film, song, or TV show, the economists said, but money spent on products related to the content might be lost if copyright infringement is stopped.

"Illegal downloading means more people see the creative output, and this can stimulate demand for associated legal products, for example, for licensed electronic games and memorabilia featuring the stars from a TV show. The creators capture some of these associated benefits. If stricter enforcement reduces illegal downloading, these complementary benefits fall, at least partially offsetting any gain in revenue from legal sales," Ergas and Fels said.

"If a higher share of the complementary income flows to creators than to rights-controlling intermediaries such as the studios, then the parties controlling the rights will ignore these effects and seek greater enforcement even when that reduces the incentives to create."

The economists called for the government to conduct its own cost-benefit analysis of the piracy proposal.

Australian Privacy Commissioner Timothy Pilgrim also warned in his submission (PDF) that any graduated response scheme would require internet service providers to retain data on the IP addresses associated with customer accounts at a certain time. The holding and disclosing of the personal information could potentially be in breach of the Australian Privacy Principles, which state that companies must only keep personal data that is "reasonably necessary" or that is for one of the organisation's functions. Personal information must also only be disclosed when required by law.