Since it was entrusted to the EUIPO in 2012, the EU Observatory on Infringements of Intellectual Property Rights has published studies on everything from the contribution of IP rights to the economy to perceptions of IP among young people. One part of the research undertaken by the Observatory has focused on the cost of counterfeiting and piracy in numerous specific industries: 11 studies have been published so far (see table) with more being planned.
Calculating counterfeit losses
Each study typically run to a few dozen pages and includes a wealth of sometimes bewildering data, formulas and economic analysis. But each one also offers a memorable headline: the figure, in euros, showing how much money that industry is estimated to lose to counterfeiting each year.
That headline is not arrived at based on a "substitution rate", as the Observatory's chief economist Nathan Wajsman is keen to explain. In other words, it is not about estimating how many counterfeits are in the market, and using that figure to calculate the industry's losses. As Wajsman says: "It's more the other way round. Based on the modelling we have done, we see that this sector would be expected to sell this much. We then compare that with actual sales, and we see a difference." This methodology derives from work done by the RAND Corporation for the European Commission in 2012.
Having obtained figures for actual and expected sales, the team of six or seven economists working at the Observatory then work out what proportion of the gap between them is due to counterfeits. "We try to tease this out using variables … We do not make any assumptions about the substitution rate. The methodology does not work in that way," says Wajsman.
For example, take the most recently published study, which is on smartphones. This is slightly different to the other studies as it was conducted with the International Telecommunications Union (ITU) and its scope is worldwide, but otherwise it follows the same methodology as all the others. The first step in the process is to obtain sales figures for smartphones by units and value for each country. The second is an estimate of expected sales, which is based on a methodology developed by Telecoms Advisory Services. This methodology estimates the number of smartphones sold based on the new connections and new smartphones resulting from replacing obsolete devices. A coefficient is employed for each country based on the share of smartphones replaced each year (2015, in this case).
These calculations produce a set of "relative forecast errors" – the gap between forecast and actual sales. For example, the figure for Cambodia was 1.4425 while that for North America was -0.2237.
The next stage in the process is to determine to what extent these errors can be explained by economic variables and by variables related to counterfeiting. Socio-economic variables unrelated to counterfeiting include: GDP per capita and GDP growth; exchange rate versus the US dollar; and mobile broadband services prices. Variables related to counterfeiting include indexes related to corruption, IP protection, governance and development indicators. In total 24 variables were tested to select a model with robust econometric results and a clear interpretation.
Based on this estimate of units lost to counterfeiting, smartphones prices by country are applied to obtain lost sales by region. For example the figure for smartphone sales lost to counterfeiting in Europe in 2015 is €4.2 billion, while that for Asia-Pacific is €7.2 billion and China €16.3 billion. The worldwide total is €45.3 billion.
|Quantification of infringement studies published so far|
|Industry||Annual estimated losses|
|Cosmetics and personal care||€4.7 billion|
|Clothing, footwear and accessories||€26.3 billion|
|Sport goods||€500 million|
|Toys and games||€1.4 billion|
|Handbags and luggage||€1.6 billion|
|Recorded music||€170 million*|
|Jewellery and watches||1.9 billion|
|Spirits and wine||€1.3 billion|
|*Figure does not include downloads|
*Joint study with ITU; worldwide estimated losses of €45.3 billion
The sector studies complement work done by the OECD, which has estimated that about 5% of imports consist of counterfeit goods. But studying each sector separately means more accurate figures can be arrived at taking into account the characteristics of each industry: for example, the counterfeiting rate in those studied so far varies from 2.3% in wine to 13.8% in pesticides.
When choosing which industries to study, says Wajsman, the Observatory chose "sectors we thought likely to be subject to counterfeiting" such as watches, leather articles, footwear and cosmetics. This selection was based partly on intuition and partly on earlier industry reports. "Certain categories of goods are more likely to be counterfeited than others," he says.
Having said that, though, he adds: "The basic takeaway I have is that counterfeiting is not confined to the luxury sector; everything that involves a brand can be and is counterfeited … even everyday products, like laundry detergent." Of the 11 industry studies published so far, the one showing the biggest impact is clothing – and that is not just about luxury labels but all kinds of clothes including €50 football shirts. It shows, says Wajsman: "Even if the price of genuine product is not very high, but you can make the fake for 10% of the cost, the profit margin is still huge."
The reaction from industry to those studies published so far has been "positive", says Wajsman, who joined EUIPO about 10 years ago: "The methodology is transparent and in some cases we have worked with sectors by tapping into their knowledge of the business." Two sectors that the Observatory is keen to study, but which present special problems, are tobacco and car parts. The former faces a particular challenge around smuggling, as well as counterfeits, while the latter is such a large industry that research is likely to focus on one area, namely tyres, to begin with.
Economists and IP
The industry studies are just one part of the research undertaken by the Observatory. Other work looks at the contribution of IP to the economy: two studies published in 2013 and 2016, both conducted with the EPO, attempted to quantify this, and show how it has changed over time; a third edition is likely in the next couple of years. Related to this, in 2015 the Observatory published a study on IP rights contribution at firm level.
It has also published reports on IP perceptions, by EU citizens, young people and SMEs. It is these that are likely to provide more insight into why people buy counterfeits, and to what extent such a purchase represents a lost sale of a genuine product. "You have to distinguish between where somebody knowingly buys a fake and where they are tricked," says Wajsman. Where somebody believes they are buying a genuine item from an authorised store, then there is likely to be a direct loss, but where for example they are buying a €5 t-shirt from a hawker on a beach, then that is not the case. In between these extremes, there is a spectrum of possibilities. "The grey area is the most difficult to estimate," says Wajsman.
He relishes that kind of challenge though. As he says, the particular difficulty for an economist working in IP is "to get good data" that is trustworthy and independent. On the other hand, he says he finds it "gratifying" that the results of the work done feeds into the political process and may have an impact on policy making, and stresses that the Observatory does not have any agenda other than seeking to build up reliable information: "We do our studies and publish the results, whether or not industry likes them."
This article is part of the Europe IP Focus 2017, which includes articles on various topical IP issues in Europe written by our sponsors
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