More on How the London School of Economics Got it Wrong

For those of you who haven’t heard about it, the London School of Economics allowed some lecturers to post a “study” on the LSE’s website that has some very questionable assumptions in it–not to mention overtly misquoting actual econometric studies.  It is striking that this paper was merely posted on the LSE’s website, a convenient launch pad for the Big Tech blogosphere from which it was quoted by a number of people whose names appear on the now-infamous Google Shill List produced by Google in the recent Oracle litigation.  Also unsurprising is the closeness with which it tracks a study that came to a comparable conclusion–yum, yum, piracy is good for you, let’s have some more please–financed by another Google Shill Lister, the Computer & Communications Industry Association.  You know–lobbyists.

And of course, the “study” was talked up uncritically by many who had taken the king’s shilling, so to speak.  But here’s a headscratcher–why wasn’t the “study” published in a peer reviewed journal?  Will it be?  The august London School of Economics surely cannot consider such a “study” a meaningful contribution to academia absent criticism.

Or is it the case that these lecturers at the LSE actually have been criticized already by actual economists–several economists–for the holes in their “paper” but decided to post it anyway?  For the propaganda value, perhaps?

When responding to criticism of their paper on a music industry blog, the authors gave this explanation for their paper:

“[W]e would argue that in this debate we only really hear the self-interested arguments and skewed figures of the lobby organisations calling for repression. We rarely hear the many counter-arguments to their positions. Hence, one of the main aims of our policy briefs is to rebalance this and list, document, outline the counter-arguments to this repressive logic and to the same old tune that the internet is killing the video stars.”

Now there’s a nice scholarly abstract of their paper:  “Outlining the counter-arguments to this repressive logic.”  Why?  Because “we only really hear the self-interested arguments and skewed figures of the lobby organisations calling for repression.”


So this is not about econometric analysis at all.  It would have been nice if they had actually included this explanation in their paper.  Because it sure is easy to get the wrong idea if you didn’t know that the authors were politically motivated.  And I suppose that the “repression” they are talking about is not the repression of a multinational US based corporation like Google selling advertising of other multinational corporations against sites that engage in the massive theft of an artist’s life’s work?  No, no, that’s “permissionless innovation” as they practice at the Berkman Center, the EFF and the ORG.  (Just ask Neil Gaiman.)

It’s fair to say that if this “study” proves anything at all, it is that people who like music a lot tend to pirate and also open the iTunes store more than people who like music less.  That’s about it.  That doesn’t prove anything about buying habits.  Wake me up when they say something meaningful.

But they won’t, because the real value of this paper as far as I can see is the exact purpose that the authors revealed in their comment about “repression.”  They reveal their motives to be political, not econometric.  Which may explain why the paper is merely posted on the LSE website and not published in a peer reviewed journal.  Just like the CCIA financed paper that makes about as much sense as “proving” the Sun rises in the West, it seems that these authors have dragged down the reputation of a well-respected academic institution for their own political motives.  It’s amazing what faculty can get away with these days.

If they are concerned about the reported dollar losses associated with piracy reported by trade associations, let’s try a different approach.  While losses from piracy have to be estimated, gains from selling advertising on pirate sites are known.  This is because there are no lost sales on ad supported pirate sites, and the big advertising exchanges (such as those run by Google and Yahoo!) are the paymasters of the vast majority of these monies.  Why not use those sums as a reference point?

Recall that in order to avoid the criminal prosecution of their senior management team, Google agreed to pay a $500,000,000 fine to the U.S. government (shared about 50% with the State of Rhode Island) to settle grotesque and admitted violations of the Controlled Substances Act by Google executives.  (Or more precisely, Google’s senior executives decided to take $500,000,000 of the stockholders money to pay a fine to keep themselves from going to prison.)

The rationale for this $500,000,000 number is that it was supposed to represent both the portion of the illegal drug advertising revenue retained by Google in its profit split as well as the portion of advertising revenue Google paid to the illegal drugs sellers.  (This is both prescription and counterfeit drugs.)

Google acknowledges in its recent “How Google Fights Piracy” report that it has voluntarily terminated Adsense and Doubleclick publisher accounts (at p. 24):

In 2012, Google disabled ad serving to 46,000 sites for violating our policies prohibiting the placement of ads on sites with infringing content, the vast majority being violations Google detected before we were notified.

What Google does not say is how long were these “sites” operational, how much money Google made from selling advertising on these sites, and what Google is going to do with the money that it made before the accounts were terminated.

If we assume that Google made a modest average of $10,000 on each of these terminated accounts—a very conservative estimate—then the 46,000 accounts that Google terminated brought $460,000,000 to Google.

So if Google made $460,000,000 from the accounts that it terminated and if Google retains approximately 40% of the gross revenues from ad sales, then the total amount generated–just by these terminated accounts–was around $1,150,000,000–over $1 billion.

If the LSE lecturers are interested in getting at the true cost of piracy, a fruitful area of research for them would be to investigate this advertising revenue.  These are known numbers.  Someone is paying the illegal sites and Google is one of those people by their own admission.

You don’t have to agree with my estimate–it may be high or, more likely, it may be low.  But it is impossible to argue that the number doesn’t exist or relies on an estimate.  This payment is taxable income–even in the UK Google does make some payment to Inland Revenue.  It’s taxable to Google when it is paid by the advertiser, Google takes a deduction for the share paid to the pirate, and Google has an obligation on some level to report the corresponding income paid to the pirate to justify the tax deduction.  (Unless they thought they were clever and paid it through China or something–but if they disguised the payments to pirates, they can explain that.)

But remember that Google told the BBC that it intended to keep the money from advertising for counterfeit Olympics tickets.  So Google’s demonstrated practice is to shut off the account, keep the money and promise not to do it again.  Novel jurisprudence, eh?  (Schmidt was born in the wrong century–can’t you just imagine him whispering in King John’s ear at Runnymede?)

So starting with these numbers–remembering that Google thought this method was just fine when it wanted to keep Eric Schmidt and Larry Page out of prison–it would be possible to determine how much money was actually paid for illegal exploitation of creative works, at least in the aggregate.

And if I were Google, I would far rather have a claim for copyright infringement that can be attacked and obfuscated by my lobbyists and by my allies in academia than a criminal prosecution for tax evasion.

Any day of the week.

But then Google isn’t in the habit of paying taxes in the UK now, are they?

What the lecturers at the LSE have reminded us is this:  Had you asked a room full of MBAs in 1985 whether they believed that in a few years time Michael Milken would be in prison and Drexel would be bankrupt, you would have been laughed out of the room.

And yet it happened.  And unlike the Google drugs prosecution, nobody died.

Perhaps we shall see a replay of that story with John Whittingdale in the role of Rudy Giuliani.

One thought on “More on How the London School of Economics Got it Wrong

  1. It seems like this study may have been more apropriate as an opinion piece, instead of trying to report this as genuine research.

    Their report also mentions concert revenue increasing, but they don’t go into any detail in regards to whom is earning most of the income from concerts, nor is there any real analysis showing that the musicians, themselves, are earning more from these multiple income streams they cite.

    Good work! Thanks for trying to keep people honest.


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