ECONOMICS AND JOB IMPACTS OF SOFTWARE PIRACY ON …...In 2007, Global Information Technology/Software piracy cost California IT firms an estimated $1.36 billion in revenue losses,

ECONOMICS AND JOB IMPACTS OF SOFTWARE PIRACY ON CALIFORNIA

ORANGE COUNTYbusiness council

ECONOMIC CONSEQUENCES OF SOFTWARE PIRACY ON CALIFORNIA

Authored by: Dr. Wallace Walrod Chief Economic AdvisorOrange County Business Council

EXECUTIVE SUMMARY

TheITandComputerSoftwareclusterisalargeandgrowingdriveroftheCaliforniaeconomy,and healthofthissectorisessentialtomeaningfuleconomicrecoveryintheState.

NationalandglobalsoftwarepiracydisproportionatelyhurtsCaliforniabecauseSoftware/IT employmentandeconomicbenefitsareconcentratedinthestate.

Californiaworkerslosebillionsinwagesduetopiracy.Lossinbusinessrevenuestranslatestothe inabilityforbusinessestoexpandandhiremoreworkersandincreasecompensationfortheircurrent workforce. SoftwarePiracynegativelyimpactseconomicactivity,jobcreation,jobretention,andtaxrevenues.

Inadditiontodirectimpactsontheeconomyandjobs,thepotentialforadditionaldamagetothe Californiaeconomyisenormous.

-SoftwarePiracyisacompetitivenessissueforCalifornia,includingmanufacturingand constructionemploymentretentionandattractionefforts.

-ChillingeffectthatalaxsoftwarepiracypolicyframeworkhasonCalifornia’sR&D,knowledge, investment,innovation,andeconomicdrivers.

ECONOMICS AND JOB IMPACTS OF SOFTWARE PIRACY ON CALIFORNIA

ECONOMICS AND JOBS IMPACTS OF SOFTWARE PRIVACY ON CALIFORNIA

Software piracy in California cost software vendors an estimated $1.36 billion, the highest of any state and higher than the national figure for ninety-eight other countries. Lost revenues to a wider group of software distributors and service providers cost an additional $3.88 billion, enough to hire nearly 16,000 tech workers. The lost state and local tax revenues in California would have been enough to hire more than 7,500 experienced police officers. 1

California’sSoftware/ITindustrycontributiontotheregionaleconomyisessentialtoCalifornia’s economicrecovery.IToccupationshavehigherwagesandmultipliereffectsthanmostother occupationsandthereforegrowthinCalifornia’sSoftware/ITindustrytranslatestoincreased economicactivityacrossavarietyofsupportindustriesandthroughouttheCaliforniaeconomy.

A2010reportbytheBusinessSoftwareAlliancehighlightsthatreducingtheglobalsoftware piracyrateby10percentagepointsoverfouryearswouldcreate$142billioninneweconomic activitywhileaddingnearly500,000newhigh-techjobsandgeneratingaround$32billion innewtaxrevenueby2013.IntheUnitedStates,reducingpiracyby10%overfouryearswould generatenearly$38billionintheneweconomicactivity,create25,000newITjobsandcreate morethan$6billioninadditionaltaxrevenuesby2013.EstimatesforCaliforniawouldtranslate intoover$4billioninneweconomicactivityand$660millioninadditionaltaxrevenueinthe state.

Reducingsoftwarepiracyby10percentagepointsinhalfthetime(twoyears),wouldincrease economicbenefitsby36%,returning$193billioninneweconomicactivityandgenerating$43 billioninnewtaxrevenuesand680,000newjobs.IntheU.S.alonethiswouldtranslateto morethan$52billioninneweconomicactivity,morethan$8billioninnewtaxrevenues,and 34,000newjobs.California’ssharewouldbeover$5.7billioninneweconomicactivityand $880millioninadditionaltaxrevenue.

Californiawouldbenefitsubstantiallyfromeffectivelyaddressingsoftwarepiracy,astheIT andsoftwaresectorishighlyconcentratedinthestate.Software/ITfirmswouldbenefitfrom higherlevelsofrevenueandthereforebeabletocirculatetheseadditionalgainsintoemploying alargerworkforce,increasingwages,andincreasedfundingforR&D;allofwhichpresent additionalincomeintheformoftaxrevenuesforlocalandstategovernments.Inessence, theincreasedeconomicactivityduetoreductionsinpiracywouldincreaserevenuestofirms allowingforadditionalinvestmentinavarietyofbusinesssectorstranslatingtoadditionaltax revenuestolocalandstategovernments,speedinguptherateofeconomicrecoveryfor California.

Reducingpiracywouldresultinsignificantincreasesintaxrevenuestostateandlocal governmentsinCaliforniawhichinturnwouldincreasetheiroverallbudgetandallowfor increasedspendingonnewconstructionandinfrastructureprojectssuchasadditionalhousing projects,roadwaymaintenance,low-carbongreenefficiencyimprovementstoexisting buildings,improvingeducationalfacilities,improvingtradeinfrastructure,etc.

1 Business Software Alliance

1

CALIFORNIA HAS ALMOST 20% OF NATION’S IT/SOFTWARE EMPLOYMENT

National and global software piracy disproportionately hurts California because the Information Technology/Software industry is highly concentrated here and has become a major California job generator. Retaining and growing this sector is key to California’s employment growth and economic recovery.

ThehealthandcompetitivenessofSoftwareandInformationTechnology(IT)sectorinCaliforniaisa significantissueforthestate’seconomicandfiscalhealth.Software/ITisoneofthefewareasof growthsincetheeconomicdownturn.TheannualaveragegrowthrateofemploymentofSoftware/IT employmentPublisherswas4.89%between1990-2010,comparedtooverallCaliforniaemployment growthofonly0.50%annuallyduringthesametimeperiod(EmploymentDevelopmentDepartment, StateofCalifornia).

Software/ITaresignificantdriversofthestate’sprojectedfuturejobgrowth.TheCaliforniaCommunity CollegesCentersofExcellenceprojectsthattheInformationandCommunicationTechnologies(ICT) sectorwillgrow8.5%overthenext2years,comparedtoadeclineof0.4%inCalifornianon-ICT employment.TheInformationandCommunicationTechnologies(ICT)sectorisdefinedbytheCOECCC as“…allrapidlyemerging,evolving,andconvergingcomputer,software,networking, telecommunications,Internet,programming,andinformationsystemtechnologies.”

Job Growth in California

All Firms

Non-ICT Firms

ICT Firms

3.8%

- 0.4%

8.5%

6.0%- 2.0% 2.0% 10.0%

2 - y e a r p r o j e c t e d g r o w t h r a t e

Therearecurrently46,000CaliforniaICT firms,mostlysmall,family-owned businesses.2

EmploymentinPrimaryICToccupations inCaliforniatotaled632,500in2010and over1,680,500ICTsupportoccupations.2

Software,IT,andotherIntellectualProperty (IP)sectorsdriveCaliforniaandnational economicgrowth,especiallyinthe retentionandgrowthofCalifornia’s manufacturingsector.U.S.Intellectual Property(IP)companiesinmanufacturing

2 Estimates by California Employment Development Department and Centers of Excellence, An Initiative of Economic and Workforce Development by California Community Colleges 2010 Environmental Scan, ICT, Information and Communications Technologies in California.

3 Employment and Gross Output of Intellectual Property Companies in the United States, NDP Consulting, January 2011.

andnonmanufacturingsectorsgeneratedalmost$7.7trillioningrossoutput,or33.1%oftotalU.S.GDP in2008andaccountedforaround60%oftotalU.S.exports. (Softwarepiracy>lossofinnovation>lossofabilitytofirmtostaycompetitiveinevolvingmarket).

ManystudiesconductedbytheBusinessSoftwareAllianceandothersfindthatthemainreason softwarepiracyeffectsmanufacturingcompetitivenessisbecausepiracyreducesinnovation(ordriveof firmstoinnovate);therefore,companieswholoseinnovationlosetheirabilitytocompetewithother firms.

WithCaliforniamanufacturingemploymentjuststartingtorecover,andthestatebenefittingfromtwo ofthelargestportsintheworld,theeconomicimpacttoCaliforniaofSoftware/ITissubstantialto exportsandCaliforniamanufacturingemployment.3

2

Software/IToccupationspaywellandtheassociatedbenefitsripplethroughouttheCaliforniaeconomy.AccordingtotheCentersofExcellenceCaliforniaCommunityColleges,primaryICToccupationshadwagesof$116,090inCaliforniain2010,withsecondary(support)ICToccupationsearning$86,224creatinganaverageof$109,617forbothprimaryandsecondaryICToccupations.LookingspecificallyattheInformationsectorashighlightedbytheCaliforniaEmploymentDevelopmentDepartmenttheaveragewagesfor2009were$92,872,muchhigherthanthecurrentaverageCaliforniawageof$51,334asreportedbyEDD.WithhighwagesandhighmultipliereffectsthebenefitsoftheSoftwareITsectorsignificantlypositivelyripplethroughouttherestoftheCaliforniaeconomy.

Various Wage Estimates (Q1, 2010)4

Occupation/Source: Wages:PrimaryICT $116,090SecondaryICT $86,224AggregateICT $109,617SoftwarePublishers $134,374ComputerSoftwareEngineers,Applications $103,730ComputerSoftwareEngineers,SystemSoftware $111,446InformationIndustry $92,872

InformationTechnology/Softwareoccupationshaveconsiderablyhighermultipliereffectsthan traditionalindustriesand,meaningjobscreated,retained,and/orsavedintheSoftware/ITsectorhave significantpositiveimpactsandbenefitsthatmultiplymanytimesoverthroughouttherestofthe Californiaeconomy,includingsignificantpositiveimpactstotheCaliforniamanufacturingandservice sectors:

RIMS II- Final Demand MultipliersSector Output Earnings Employment Value-AddedSoftwarePublishers 2.1882 .7143 12.6920 1.3726InformationSector 2.5629 .9932 21.6924 1.5149

Thesemultiplierswerecreatedusingthefederalgovernment’sRegionalInput-OutputModelingSystem(RIMSII),U.S.BureauofEconomicAnalysis.ForSoftwarePublishers,everydollarinspendingcreates$2.1882inoutputand$.7143inadditionalwages/earnings.Foreveryadditional$1milliondollarscreatedinthissector,anadditional12.6920jobsarecreated.LookingattheInformationsectoroverall,everydollarcreatesanadditional$2.5629inoutputand$.9932inearningsandforevery$1milliondollars21.6924jobsarecreated.5

4California Employment Development Department and Centers of Excellence An Initiative of Economic and Workforce Development by California Community Colleges 2010 Environmental Scan, ICT, Information and Communications Technologies in California 5U.S. Bureau of Economic Analysis, U.S. Department of Commerce

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Measuring the full current and potential economic impacts of software piracy, while complicated, is by any measure extremely substantial and negatively effects every California worker, business, and the California economy in meaningful ways. These effects take shape in the form of significant job losses, lost economic activity, loss of state and regional tax revenues, and perhaps most importantly, potential threats to California’s culture of innovation that has been the state’s post-World War 2 economic engine for the state.

In2007,GlobalInformationTechnology/SoftwarepiracycostCaliforniaITfirmsanestimated$1.36 billioninrevenuelosses,anadditional$3.88billiontoitssupportanddistributionindustries,andcost stategovernments$556millioninstateandlocaltaxrevenue.

SoftwarepiracycostCaliforniamorethan16,000lostjobsin2007.6 Updatingtheseresultsto2011,Californialost$1.66billionineconomicactivity,almost20,000jobs,and$697.6millioninstateandlocaltaxrevenuein2011duetoSoftwarePiracy.

OthersectorsinCaliforniaarenegativelyimpactedbySoftwarePiracyaswell.Forexample, California’smanufacturingsectorisalsonegativelyimpactedbypiracyintermsofjobsandsaleslost andoverallcompetitivenesswithforeignnations.Piracyandcounterfeitingfloodthemarketwithmuch cheaperproductsandthereforedivertrevenuefromlegitimatecompanies,effectivelylowering potentialprofitsandthroughatrickledownprocess,inhibitscompaniesfromexpandingandhiring additionalproductionworkerstranslatingtohigherunemploymentandlowertaxrevenuesforlocal andstategovernments.

ManufacturingemploymentinCaliforniahasdecreased31%between2000and2010duealess competitiveCaliforniabusinessenvironmentcomparedtoneighboringstatesandabroad.California’s manufacturingsectorisconcentratedinthehigh-techmanufacturingsectorandtherefore piracyandIPisofparticularimportancetoCaliforniamanufacturers.Manufacturingemploymentis Californiaisestimatedaround1,242,300asof2010bytheNationalAssociationofManufacturersand high-techmanufacturingisestimatedat485,900or19.7%ofU.S.high-techmanufacturing(Milken Institute).California’shigh-techmanufacturingisparticularlysensitivetoissuessurroundIPprotection andpiracy.7

Californiainnovatorsarealsosubstantiallyimpactedbypiracyandcounterfeitingastheirproducts arebasedaroundIntellectualPropertyRights(IPR)andtheabilityofgovernmentstoprotectand/or enforceIPR.TheseinnovatorsorIP-intensivefirmsaremainlysmallbusinesseswhofocusthemajority oftheirtime,knowledge,expertise,andinvestmentcapitalonR&Deffortstocreatenewand innovativetechnologiesandproducts.Thesetechnologiesandproductsarethenlicensedoutto largermanufacturing-basedfirmsandIPRinfringementunderminesthesignificantR&Dcosts associatedwithcreatingnewinnovations.Ifthesesmallercompaniesareunabletoturnaprofit becauseoftheproliferationoftheirIPthentheyareunabletoappropriateadditionalfundingto continueR&Deffortsandeffectivelylosetheirabilitytoinnovatenewproducts.

NDPConsultingestimatesthatbetween2000and2007,IP-intensiveoccupationsandsubsequently portionsofIToccupationsgrewby114,500whilethesameoccupationswerecutby4,800innon-IP- intensiveindustries.Thedifferenceintermsofwages,economicbenefits,andexportsaresignificant whencomparing15IP-intensiveindustriesto12non-IP-intensiveindustriesintermsofeconomic performanceperemployee.

6Business Software Alliance, 2007 State Piracy Report and California Employment Development Department 7National Association of Manufacturers and Milken Institute 4

Wages Sales Value-Added Exports R&DSpending CapitalSpendingIP-Intensive $59,041 $485,678 $218,373 $91,607 $27,839 $15,078Non-IP-Intensive $37,202 $235,438 $115,239 $27,369 $2,164 $6,831Difference $21,839 $250,240 $103,134 $64,238 $25,676 $8,246

*Source: NDP Consulting, “The Impact of Innovation and the role of Intellectual Property Rights on U.S. Productivity, Competitiveness, Jobs, Wages, and Exports

ConsideringtheimportanceandvalueofIP-intensivejobstotheCaliforniaeconomy,orITfocusedoccupationsbringtotheeconomy,ifpotentialrevenuestosmall,innovativefirmswerereducednotonlywouldinnovationbedrasticallyreducedbutvaluablejobswhichhavehighmultipliereffectswouldbelostandsubsequentlytheState’seconomywouldsuffer.8

Frontier Economics estimates that the total global value of counterfeit and pirated products on California could be between 82,500-90,750 jobs lost with annual wages ranging from $103,730 (Computer Software Engineers, Applications) to $111,446 (Computer Software Engineers, System Software) to $134,374 (Software Publishers). By attributing the annual average wage of the Information sector at $92,872 to the number of lost employees the result is around $7,661,940,000 to $8,428,134,000 in lost California wages. Potential lost tax revenues to California are estimated to be between $1.,22 billion and $1.34 billion. 9

TheabovelikelyunderestimatesthepotentialeconomiclosstoCaliforniaduetopiracy.Thereismoreatriskthanjusttheeconomicimpacts,jobslostorgained,oradditionaltaxrevenuesasoutlinedthroughoutthisreport.NottakenintoaccountisthepotentialdamagetotheCaliforniaeconomyintermsofeconomicdevelopmentorattractionandretentionofbusinessandfirms;namelyInformationTechnology/SoftwarebasedfirmswhichhavelongbeenacknowledgedasCalifornia’sjobcreationengine.EnsuringtheStatedoeseverythingitcanretainthisindustryandkeepCaliforniaattractivetothesefirmswillprovideaplatformandresourcefordevelopmentofnewindustriesandjobcreators.

Software/ITandotherhigh-techbasedinnovationfirms,alongwithentrepreneursandinvestors,have deepconcernsregardingtheprotectionoftheintellectualpropertyandtradesecretsastheirlively hooddependsonit.Havingasetofstrictandenforceableintellectualpropertyrightsisalargefactorin thedecision-makingprocessfirmshavewhendecidingwheretolocateorexpand.Manyfirmshave pulledR&DoperationsinforeigncountriessuchasChinabecauseofthelackofIPprotectionthey provide.IfsoftwarepiracyisperceivedtobeanissueinCalifornia,firmsmaybecomeapprehensive aboutlocatinghere.AccordingtotheBSA,in2007Californiahadthesecondhighestsoftwarepiracy rateat25%ofeightstatesmeasuredinthereport.Thishigherrateofsoftwarepiracyinthestate actsasadeterrentforsoftwarecompaniestodevelopandlocateintheregionforfearoflostrevenues andcompetitivenesswithpiratedproducts.10

8 NDP Consulting The Impact of Innovation and the Role of Intellectual Property Rights on U.S. Productivity, Competitiveness, Jobs, Wages, and Exports, April 2010

9OCBC Calculations of Frontier Economics, Estimating the Global Economic and Social Impacts of Counterfeiting and Piracy, Frontier Economics, February 2011

10Business Software Alliance, 2007 State Piracy Study5

Highlevelsofpiracyandcounterfeitingworktoseriouslyharmaregion’sinnovationandabilityto continuallyproduceIPandsubsequentlyreducesoveralleconomicactivity.WithIPtiedto33.1%ofthe totalU.S.GDPin2008andaccountingfor60%oftotalU.S.exportsin2007,theimportancetoprotect IPandencourageinnovationissubstantial.Currently,Californiaisoneofthemostinnovativestatesin thenationwiththehighestpercentageofhigh-techoccupations,R&Dfocusedfirms,andIP-intensive sectorswhichhaveallcontributedtoCalifornia’seconomicprosperity;therefore,reducedinnovation duetosoftwarepiracywouldseverelyharmCalifornia’sabilitymaintainorcultivatehighlevelsof economicactivityandincreasedsoftwarepiracyprotectionwouldgeneratedsignificantpositive benefits.11

EnsuringthereisastrictandenforcedpolicyframeworkandinitiativeforprotectingIPisessentialto

maintainingandexpandingaregion’sITsector.A2009reportbytheInternationalChamberof Commerce’sBusinessActiontoStopCounterfeitingandPiracyinitiativetitledIntellectualProperty:A PowerhouseforInnovationandEconomicGrowthhighlightedhowintellectualpropertyprotection promotesinnovationbyincreasingfundingforresearchanddevelopment.FirmsthatdevelopIPare generallymoresuccessfulandhavehighermarketvaluethanthosewhodonot.Thisisespecially apparentinsmallandmediumbusinesseswhichdevelopIPreportmuchhighergrowth,income andemploymentthanthosethatdonot.Overall,thisreportfoundthat“sectorsthatrelyonIP representasignificantpartofdevelopedanddevelopingeconomies,intermsofGDP,employment taxrevenuesandstrategicimportance.IPalsopromotesforeigndirectinvestmentandtechnology transferindevelopedanddevelopingcounties”(BASCAP,2009).Therefore,byprotectingandenforcing IPprotections,notonlywillitbenefittheITsector,butalsowillpositivelyimpactothersectorssuchas manufacturingandtheoverallCaliforniaeconomy. RAND’srecentreport“IntellectualPropertyandDevelopingCountries”highlightedtherelationship betweenintellectualpropertyandtheeffectsnation’scompetitiveness.Theirconclusionsaboutthe impactonnationslikelyholdstrueforimpactsonstates.Insupportforstrongerintellectualproperty rights,RANDexplainsthatincreasedIPRcancreateownershipadvantages:

“Investment by firms can be more likely when host countries have strong IP protection, as this protection reduces the risks of limitation and leads to a relatively larger net demand for protected products…Therefore, IPRs positively affect the volume of foreign direct investment by enabling foreign firms to compete effectively with indigenous firms that possess ownership advantages.”

“Not only can IPRs positively affect the volume of FDI, but they can also influence where multinationals decide to locate that investment. IPRs are territorial in nature and hence differ across national boundaries… In this regard, stronger IPRs in some developing countries can be a location advantage that will positively affect multinationals’ decisions…On the contrary, developing countries characterized by weak IPRs can be less attractive locations for foreign firms.” 12

ThePropertyRightsAlliancereport“TheInternationalPropertyRightsIndex2011Report”highlightstheeffectsofintellectualandphysicalpropertyrightsonacountrieseconomy.ThePropertyRightsAllianceidentifiesthat,basedontheirfindings,“countrieswithhighpropertyrightsscorestendtobenationswithhigherpercapitaincomes…[while]…countrieswithlowpropertyrightsscorestendtohavelowerpercapitaincomes.Additionally,countrieswithstrongpropertyrightsregimesattractmoreforeigndirectinvestment…and…developingcountrieswithstrongpropertyrightsshowstrongerpercapitaGDPgrowththanthosethatfailtorespectpropertyrights.”ITSectorImportancetoJumpstartingSlowEconomicRecovery

11 Employment and Gross Output of Intellectual Property Companies in the United States, NDP Consulting, January 2011

12RAND Europe, Intellectual Property and Developing Nations 6