Monday, January 25, 2010

Is File Sharing Worth the Risk of a Hefty Lawsuit?

Joe Sibley, Thomas-Rasset’s attorney, said in a telephone interview that even the reduced amount of damages is unconstitutionally excessive. It’s a penalty of 2,250 times an assumed $1 cost of a music download.
With this hefty of a penalty, does it still make sense to download music illegally (ignoring ethical considerations for the moment)? In making such decisions, economists often look at expected values. If you buy a song legally, you have a 100% chance of being out a small amount of money (99 cents). If you download the song illegally, you have a very small chance of getting sued and having to pay a very large fine. In theory, assuming the consumer is risk neutral, she should only download if the expected cost is less than a dollar.

Hard numbers for this analysis are hard to come by, as with any illegal activity. According to one widely cited study by the Institute for Policy Innovation, about 4 billion songs are illegally download each year in the United States. A PC World article from 2005 reports that there were 17,000 Recording Industry Association of America (RIAA) lawsuits from 2003 to 2005, a 3-year span. Of course, not everyone who gets sued ends up going to court, but the Wired article notes that most "were settled out of court for a few thousand dollars," so the cost of being sued is still substantial.

These figures are far from perfect, but let's assume that the expected cost of downloading a song is:

(17,000/3)/4,000,000,000 (a rough proxy for the chance of getting sued for each song downloaded)
$2,250 (fee per song under the above lawsuit ruling)

Which comes out to about $0.0032 per song, or several degrees of magnitude below the purchase price. Under the original verdict of $1.92 million, the expected cost of an illegally downloaded song rises to 11 cents. However, this figure is not very realistic, as no ordinary defendant could pay such a sum and the appeals courts would almost certainly reduce it.

In either case, we shouldn't ignore the nonmonetary costs of threatened prosecution (getting sued is never fun) or the cost of lawyers. Many people will decide to avoid downloading because of fear or ethical considerations instead of taking the relative "deal" that is music piracy.