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House of Cards: Assessing the Impact of Software Infringement on Manufacturing Competitiveness

· January 31, 2014

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The second season of the gripping Washington drama House of Cards, starring Kevin Spacey and Robin Wright, will be available on Netflix in two weeks. But this post is about a different house of cards – the study released yesterday by the National Association of Manufacturers (NAM) on the Economic Impact of Global Software Theft on U.S. Manufacturing Competitiveness and Innovation. Although infringement of software obviously occurs throughout the world, the NAM report contains serious flaws.

The NAM report starts with the Business Software Alliance (BSA) piracy rates for different countries. It derives a global weighted piracy rate of 51% in 2011, which contrasts with a U.S. piracy rate of 19%. The NAM report then estimates software expenditures by U.S. manufacturers as a percentage of total costs at .75%. The report finds that the 51% of foreign manufacturers that use infringing software have a .75% cost advantage over the 81% of U.S. manufacturers that pay for their software. Using econometric models, the report concludes that this cost advantage has cost 42,200 U.S. manufacturing jobs and $240 billion in lost revenue between 2002 and 2012. It further estimates that the infringement-based cost advantage has allowed foreign firms to invest more in R&D, causing U.S. manufacturers to receive 1,927 fewer patents from 2002-2012. Finally, it finds that reducing global software infringement by 2.5 percentage points per year for four years would add 27,239 U.S. manufacturing jobs and $29 billion in revenue.

Beyond its use of the inaccurate and inflammatory term “theft” rather than “infringement,” the NAM report reflects substantive flaws that undermine its conclusions.

#1: The NAM report is constructed on the foundation of the BSA piracy rates, which themselves are highly problematic. These rates are based in large measure on small surveys concerning the kinds of software individual computer users install on their computers.

#2: Even if the BSA piracy rates are accurate to some degree, they measure the rate of infringement of software by PC users. They say nothing specifically about infringement by manufacturers. Unless we assume that BSA’s anti-piracy efforts directed at businesses around the world have absolutely no effect whatsoever, we should assume that the piracy rate of businesses is lower than that of the PC users who BSA actually surveyed. Moreover, it would stand to reason that the piracy rate of large manufacturers, which are more readily identifiable by BSA, is lower than that of most businesses or consumers. In other words, the piracy rate of foreign manufacturers may well be far below the global weighted piracy rate of 51%.

#3: The NAM report assumes that all the cost savings from infringement translate into lower prices or increased investment in R&D. This assumes the savings aren’t simply pocketed as profits. Moreover, it should be noted that the estimated 1,927 fewer patents issued to U.S. manufacturers represents only .1% of the U.S. patents issued in that period.

#4: The NAM report does not appreciate the reason infringement rates may be higher in emerging economies, and how other costs may change if infringement is reduced. The vast majority, if not all U.S. trading partners already prohibit infringing software copyright. If foreign manufacturers use infringing software, it is largely because they think they can get away with it. In other words, the problem is one of enforcement. The rule of law is weak in many emerging economies, with ineffective or corrupt legal systems. Reducing infringement by manufacturers would require the strengthening of the rule of law (unless one thinks copyright can be effectively enforced while every other aspect of the legal system remains corrupt – a doubtful proposition). Improving the legal system likely would increase manufacturers’ costs relating to software, because they would have to pay for it rather than infringe it. But the rule of law could very well decrease other costs incurred by foreign manufacturers. Corruption imposes significant costs on  firms in many aspects of their operations. These costs could far exceed the saving flowing from infringement. A widely cited World Bank figure suggests that corruption adds 10% to the cost of doing business globally. In other words, stronger legal institutions, while reducing infringement, could reduce foreign manufacturers’ overall costs and make them even more competitive with U.S. manufacturers. World Bank researchers contend that businesses grow “significantly faster where corruption is lower and property rights and rule of law is safeguarded” – about 3% a year, and the U.S. Government regularly tells emerging economies that a stronger rule of law will improve their competitiveness.

Thus, while the rule-of-law improvements that would bring about stronger IP may advance the global good, they won’t advance the competitive posture of U.S. manufacturers vis-à-vis their foreign competitors. If NAM gets what it wishes for, it may find that foreign firms are even more competitive than they are today.

Jonathan Band is a DC-based attorney whose clients include Internet companies, providers of information technology, universities, library associations, and CCIA.  He previously guest-posted on DisCo about the Oracle v. Google oral argument.

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