Hat tip to IP Dragon for linking to a blog that comments on recent statistics put out by the US and China on a recent anti-counterfeiting operation. News accounts cited that the CDs that were seized were worth USD 500 million.

I bet if you could go back to the earlier incarnation of my Chinablawg, back in 2003 I think, you could find posts in which I complained that lobbying groups were playing fast and loose with valuation numbers to make their losses look bigger. This is how it works: when a lobbying group, such as the Motion Picture Association of America, goes to the U.S. Congress to testify on China’s enforcement of IP rights, they want to make things sound as scary as possible so that perhaps the US government might actually do something to help them. Makes sense.

What that often means is that they start with a number of, let’s say, estimated illegal sales of DVDs. Now comes the fun part. You then have to deem a per unit value on each DVD. What do you use? Well, one way is to go with the sales price of a legal DVD sold by a valid distributor in the same market. Sounds reasonable, particularly to some staffer in the U.S. Congress who reviews the testimony of the lobbyist.

However, let’s say that the price used is RMB 130. Quite possible for buying a relatively new title legally from a U.S. studio, yes? Now we multiply that number by the amount of estimated illegal DVD sales, perhaps also an estimate of illegal downloads as well, and we have our final number for loss of sales in China. Is this persuasive?

Not really. If you do it this way, you are assuming that for each illegal DVD purchase, that customer would be willing (if the illegal version was not available) to purchase the legal version at full retail price. To put in another way, you would be assuming that there is very little price elasticity when it comes to such purchases. Correct me if I’m wrong, but I can’t think of too many products that would be more price elastic than a DVD, and when you factor in the price differential, all I can say is “wow”. So these numbers are pretty much crap, yes? I think we can all agree that for most purchasers of illegal DVDs, if the supply were cut off, they would not be running out and buying Spiderman 3 for RMB 130.

In this case, a joint operation called Operation Summer Solstice was run by the US FBI and the Chinese government. It sounds like the Pentagon got the rights to name it, with predictable results. The CDs seized contained software, specifically Symantec and Microsoft software, maybe anti-virus programs and Windows stuff, maybe something else. Felix Salmon, whose blog was linked to by IP Dragon, does something obvious. He takes the total number cited, USD 500 million, and divides by the cited number of CDs seized, 290,000. Why didn’t I think of that?

And the answer is — a unit price of USD 1,724. Ha! Gotcha! That is some killer anti-virus software they got there, huh? The blogger further estimates, using a normal US retail figure, that the seizure should be correctly valued at USD 7 million, and remember, this is for legal retail software. Once we take into account the price elasticity issue, or the preference of these customers to perhaps not buy this stuff at all when faced with retail prices, how much is that seized software really worth? Yeah . . .

One caveat is that each CD might have contained several different software packages, and therefore the US retail figure that was used may not have reflected what was really on each CD. But 1,700 bucks? I don’t think so.

Disclaimer: I am an IP lawyer, and I also do a lot of IT work. I have represented movie studios in China, I have represented software companies in China, I have helped to lobby the government on IP enforcement issues. I am solidly on the side of the angels on this issue. However, I hate lying, and I do not think that puffing up these statistics helps matters. I dislike the practice and have been complaining about it for years. Software piracy is so prevalent here that there is enough to complain about without having to embellish.