Impact of motion picture piracy | Japan Report

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Economic consequencesof movie piracy
JAPAN

Report: January 2011 | On behalf of JIMCA

2Impact of motion picture piracy | Japan Report

Contents

Key findings ...................................................................................................................3

How we arrived at these figures...................................................................................4

Steps in measuring the impact of movie piracy .........................................................4

The direct consumer spending loss to movie industry (step 1) ..................................5

Total economic impacts of piracy losses (step 2)..............................................6

Considerations in estimating direct consumer spending loss..................................7

Considerations in measuring the wider economic impacts.............................................8

Annex 1: The input-output approach adopted by this study............................................9Annex 2: The survey method used to estimate direct spending loss ............................10

References ...................................................................................................................10

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Key findings
A joint study undertaken by Ipsos and Oxford Economics on behalf of JIMCA: Japan and International Motion
Picture Copyright Association (JIMCA) has indicated the scale of harm caused by movie piracy to theJapanese economy in the 12 months up to Q3 2010, amongst online adults aged 15-64 years.
The approach taken in building up these estimates offers a conservative view of piracy and does not treat
every pirate view as a lost sale. As such, readers should consider these as indicators that piracy is at thevery least causing this level of harm.
Economic impact of movie piracy on Japan:

Level of piracy and impact on movie industry: 2,600 Full Time Equivalent (FTE) jobs were
forgone across the entire economy including
nearly 800 forgone directly by the movie industry
and retailers. These impacts of piracy on
employment persist as long as piracy persists.

 Direct consumer spending losses to the movie
industry, i.e. cinema owners, local distributors,
producers and retailers, were ¥23.5b equivalent to more than the average annual
operating revenues of seven J. League footballclubs combined.

 Allowing for effects on other industries, some¥56.4b in Gross Output (Sales) was lost acrossthe entire Japanese economy.
 This was equivalent to a loss of GDP of ¥28.9b
across the Japanese economy – reducing
national economic growth and Japan’s ability toinvest in its future.
 Tax losses are ¥6.2b, representing money thatgovernment could employ for other social uses
in areas such as education and health care.

¥56.4b 1 in 6 of the online Japanese adult population(aged 15-64) is active in some form of movie
piracy (downloading, streaming, buying
counterfeit, borrowing unofficial, burning), withan estimated 95m pirated movies obtained orwatched in the 12 months up to Q3 2010.
 In volume terms, digital piracy is the most prolificmethod of piracy with high levels of movie
streaming and burning movies on to disc athome. Overall digital piracy accounts for two
thirds of pirated volume in Japan.
 Just over a third (35%) of all people consuming
pirated movies claim they would have paid toview the movie via an official channel had theunofficial channel not been available.

¥28.9bGross Output (Sales) loss GDP loss
to Japanese economy

¥6.2b

2,600

Tax loss

Jobs (FTE) forgone

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Impact of motion picture piracy | Japan Report

How we arrived at these figures
Ipsos (a market research organisation) and Oxford Economics (an economics consultancy) werecommissioned to conduct a study on behalf of JIMCA to measure the economic impact ofmovie piracy in Japan.
This study defines and measures movie piracy asanyone viewing a full length movie via ‘unauthorised’means, including: digital (downloading,streaming, digital transfer of pirated copies),
physical (buying counterfeit/copied
DVDs), and secondary (borrowing
or viewing pirated copies).
In order to encourage survey
respondents to be honest
about their pirate activity,
we avoided using emotive
words such as ‘illegal’
within our survey question
wordings. The term
‘unauthorised’ covers all
formats of pirated movies
obtained/viewed.

Steps in measuring the impact of movie piracy
The approach used for this study can be divided into two steps:

Step 1:

Step 2:

Measuring the direct consumer spending loss
to the movie industry and retailers from movie
piracy based on survey work undertaken
specifically for this study

Measuring the “ripple effects” (also known as“multiplier effects” or “flow on effects”) of theconsumer spending loss to determine thetotal economic losses from movie piracy
across the entire Japanese economy

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The direct consumer spending loss to movie industry (step 1)

Direct consumer spending losses
were ¥23.5b - equivalent to morethan the average annual operating
revenues of seven J. League
football clubs combined.
Approach
The approach for measuring direct consumer
spending losses to the movie industry is based on
the analysis of results from an online survey of 3,000
adults aged 15-64 years conducted by Ipsos in Julyto August 2010. Further details are provided in
Annex 2.
The survey results show that 1 in 6 of the adult
population of Japan has participated in movie piracy
in the 12 months up to Q3 2010 – with an estimatedvolume of pirated movies viewed or obtained at 95min this period.

across a range of formats including: cinema
revenue, DVD/Blu-ray sales and rentals, TV Videoon Demand (TV VOD), downloads and streaming
video.
The size of this loss is significant, equivalent to morethan the average annual operating revenues ofseven J. League football clubs combined, or over¥184 for every man, woman and child in the country.
Direct losses to the movie industry are divided
across the three main forms of piracy, with thehighest losses from digital piracy at ¥16,742m,¥3,539m from borrowing or viewing pirated copiesand ¥3,238m from physical piracy.

The survey also shows that over a third of all pirate
consumers would have paid for an official version of
the movie had they not been
Direct consumer spending losses to the movie industry from piracy (¥m)
able to pirate.

Internet VOD / stream
Download
TV VOD
Disc rental (DVD / BD)
Disc sales (DVD / BD)
CinemaValue of direct losses
Translating this pirate activity
into financial loss indicatesthat the direct consumer
spending loss attributable tomovie piracy in Japan was¥23.5b in the 12 months up to
Q3 2010. This represents the
direct retail value (including
Value Added Tax) of losses¥23,519m¥267m¥890m¥1,007m¥5,554m=¥3,238m + ¥16,742m + ¥3,539m
¥236m
¥928m

¥700m
¥3,452m¥10,651m¥5,149m
Total
Source : Oxford Economics/Ipsos

¥31m
¥80m
¥131m
¥991m

¥7,997m¥1,037m¥968m¥3,430m

Physical Piracy

Digital Piracy
Sources of Piracy*Chart Note: Totals may differ from the sum of the individual figures due to rounding.

¥0m
¥0m
¥60m

¥1,111m¥1,617m¥750m
Secondary Piracy(digital & physical)

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Impact of motion picture piracy | Japan Report

Total economic impacts of piracy losses (step 2)2,600 (FTE) jobs were
foregone across the
economy as a resultof piracy.
As indicated, it is estimated that the direct consumer
spending losses to the motion picture industry andretailers due to movie piracy totalled ¥23.5b in the
12 months up to Q3 2010.

¥6.2b and forgone employment of 2,600 Full Time
Equivalent (FTE) jobs. These losses occur acrossthe entire Japanese economy and incorporate
losses to the movie industry and retailers.

However, these losses will also flow through fromthe movie industry to other industries, as the movie
industry reduces its own demands for Japanese
goods and services. This can be modelled as a“demand shock” to the rest of the economy throughan input-output model.

Putting some of these figures into context:

The input-output analysis indicates that movie piracy
in the 12 months up to Q3 2010 produces a total (i.e.
direct, indirect and induced) loss in Japanesenational Gross Output (Sales) of ¥56.4b, a loss in
GDP of ¥28.9b, a reduction in taxation revenue of The total Gross Output (Sales) loss is ¥56.4b equal to over ¥441 for every man, women andchild in Japan.
 The loss in GDP of ¥28.9b is a direct blow tonational economic growth and reduces Japan’sability to invest in its own future.

 2,600 (FTE) jobs were foregone across theentire economy. Moreover, unlike the impact of
the recession, the impact of piracy will not pass
but will persist, impacting
Total economic losses to all industries due to movie piracy*
on employment as long as
piracy persists.
¥56,358m
Induced impacts¥17,920m

2,640 jobs

Indirect impacts
Direct impact(movie industry and retailers)

1,092¥16,096m¥28,913m¥10,263m¥7,847m¥6,246m¥10,802m¥1,461m ¥1,965m¥2,819m

GDP lossTaxes¥22,342m

Gross Output (Sales)

796 The tax loss of ¥6,246m
represents money whichgovernment could employ
for other social uses inareas such as education or
health.

751
Jobs (FTE) forgone

Source : Oxford Economics/Ipsos*Chart Note: While the direct consumer spending loss of ¥23.5b is inclusive of Value Added Tax, this was adjusted to exclude
VAT for modelling purposes to produce the direct consumer spending loss figure of ¥22.3b indicated in the chart. Annex 1
provides further details. The tax impacts are inclusive of Value Added Tax (as well as of direct and corporation taxes).
**Chart Note: Totals may differ from the sum of the individual figures due to rounding.

Impact of motion picture piracy | Japan Report

Considerations in estimating direct consumer spending loss
The design of the survey used for stage 1 (and the final direct consumer spending loss figure) addresses
three points often used to challenge the lost revenue estimates produced in piracy studies. It allows for thefact that not every pirate viewing is a lost sale; it allows for respondents viewing an official version after
viewing pirated material (sampling); and it applies a downweight to claimed cannibalisation behaviour.
Further explanation is provided below:
1. Allowance for "sampling" effects – some potential moviegoers may go on to watch official versions offilms after previewing pirated copies. Therefore, some allowance was also made for these potential“sampling effects” (i.e. viewing a film officially after initially viewing a pirated copy) in the survey work.
Respondents were asked if they had also viewed an official version of the film they had pirated and, if so,their responses were not included as a part of “lost revenue”. Some 27% of respondents said that they
viewed an official version of a movie
Allowances made in estimating direct losses
after watching a pirated version.
2. Not every pirate view is a lostsale - those viewing pirated movies
were asked what they would havedone if they could not access suchmaterial, indicating whether they would
have viewed the movie at a cinema,
through disc rental or sale, paid-for or
free TV broadcasts, digitally andthrough various other forms of media.
This allowed for estimates of therevenue losses for each of these
media types. Based on these
responses (including samplingallowance) 35% of all viewings ofpirated films are cannibalising paidmovie consumption, counting as lost
revenue.
3. Downweights - these estimates, inturn, are further reduced to allow for
the fact that many of those who saythat they would have paid to watch inresponse to survey questions would
not, in fact, do so in reality. This is astandard approach used in market
research to adjust for likely overclaim.

All pirate views (100%)

1

Pirated andsubsequently saw
official version

Pirated and notseen official
version

27% of all piracy(removed from lost revenue)

2

Would not have
paid for movie if
no piracy

Would have paid
for movie if nopiracy38% of all piracy

35% of all piracy(removed from lost revenue)

3

Downweight
applied to claimed
cannibalisation=
Final lost revenue
estimate

7

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Impact of motion picture piracy | Japan Report

Considerations in measuring the wider economic impacts
Direct revenue losses to the movie industry and retailers (identified in Step 1) only account for part of thetotal economic impact of movie piracy on the Japanese economy as a whole. Employment and taxes will
also fall, as industry revenues decline. These revenue losses form the starting point for measuring the
economic impact of piracy.
The wider losses must also be considered as when major industries, such as, the film industry and retailers
face a consumer spending loss, such as those resulting from movie piracy, the effects ”ripple" across theentire economy. The estimation of such total economic impacts is known as economic impact analysis. The
chart indicates how direct impacts (such as an increase in movie piracy) can flow through to industries
across the economy in the form of indirect and induced impacts.
Indirect impacts - reduced revenues to the
motion picture industry also result in reduced
revenues to other parts of the economy which
supply services to the movie industry – such as
materials and equipment suppliers, accountants,
tradespeople, marketers and lawyers. They, inturn, demand less from their own suppliers andso on. Piracy therefore also reduces output,
profits and employment along the supply chain.
Induced impacts - Further, because of this falloff in demand, employment in all of theseindustries is reduced and workers have less tospend on other goods and services for their own
consumption – be it travel, computers or cars,
etc. This leads to further rounds of reduced
output, employment and taxes.
Economic impact modelling allows for theestimation of the combined direct, indirect andinduced impacts – i.e. the total economic
impacts. The total economic impacts measure
the losses to the Japanese economy as a wholein terms of the losses in total Gross Output(Sales), GDP losses, forgone jobs andgovernment taxes.

Flow of direct losses across wider economy
Indirect impacts
For example:• Accountancy

Direct revenue
losses to themovie industry
and retailers• Legal services• Marketing• Banking• Rent• Transport

Including:• Cinema exhibitors• Wholesaling• Office overheads• Film and video
distributors• DVD/Blu-ray rental
and sales• Legal streaming
video

Induced impacts(spending of
direct & indirect)• Film producers

For example:• TV VOD• Food & Beverage• Recreation• Clothing• Housing

Further details on the estimates used to derive
the economic impact results are in Annex 1.

• Household goods

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Annex 1: The input-output approach adopted by this study
Input-output table: A Japanese input-output table for 2005
sourced from MIC (2009) was used for the purposes of this study.
This table is the latest one available for this purpose.
Allocation of impacts to industries: Modelling of input-output
shocks (such as direct losses due to film piracy) requires the
allocation of these shocks to different industries. No specificsector which quite captures all of the activities of the motion
picture industry exists within I-O tables, as these are split among
several industries and the I-O tables aggregate many industries
together.
However, most activities covered by the motion picture sector
would fall under the “Image information, character information
production and distribution” industry category, which covers
services including: the production and distribution of content suchas films and DVDs. Based on a review of relevant industry
category descriptors, internet VOD and downloads were also
allocated to this category while cinema consumer spending was
allocated to the “Amusement and recreational services category”(which includes cinema projection). TV VOD was allocated to the“Broadcasting” category. DVD and Blu-ray rentals were allocatedto the “Goods rental and leasing services” category.
In addition, based on Japanese market data, 13% of total
consumer spending (excluding VAT) on DVD and Blu-ray sales,internet VOD and downloads was allocated as a margin toretailers through the “Commerce” category.
In order to obtain higher levels of accuracy for forgone
employment estimates, supplementary estimates of labour
productivity in the broadcasting, video picture and soundinformation, amusement services, and goods rental industries
were derived from MIC (2010).
Basic price adjustment and tax estimates: The tax estimates
cited in this report incorporate: VAT, direct taxes; and corporationtax.
As I-O tables use data expressed in basic prices (exclusive of tax)
to model the effects of demand impacts such as piracy losses, theoriginal retail prices derived from the survey work were adjusted
to exclude the 5% Value Added Tax (VAT) applicable to mostgoods and services in Japan. That is why the direct consumer
spending loss figure of ¥ 22,342 million differs from the retailvalue loss of ¥ 23,519 million recorded by Ipsos.
An allowance for VAT on direct purchases (only) was, however,included in the final indirect tax estimates. This amounted to¥1,176 million (i.e. the VAT on the retail loss figure of ¥23,519
million).
OECD (2010b) data for Japan indicate that the income tax
payable by workers accounted for some 25.7% of employeecompensation in Japan in 2009. An average Japanese full timegross income of ¥4.16 million per annum was estimated based on
Full Time Equivalent (FTE) employee estimates for 2009 andaverage wage data sourced from the Haver database. Thesefigures allowed for the estimated change in income due to lost
wages and the determination of direct tax impacts.
Corporation tax was determined by using the GDP loss estimateof ¥28,913 million, using the Gross Operating Surplus/GDP ratio
and applying this to the rate of corporation tax in Japan (39.5%).
An allowance was also made for a depreciation-related tax write
off of 49.3%, based on input-output table data on the ratio ofconsumption of fixed capital to Gross Operating Surplus. This had
the effect of reducing estimated tax losses.
The table below indicates the split of tax losses.
VAT impacts¥1.176m
Income and other employee tax impacts¥2,819m
Corporation tax impacts¥2,251m
Total¥6,246m
Multipliers: Broadly speaking, input-output multipliers measure
the relationship between the initial shock (in this case the direct
consumer spending loss) and final outcomes across the whole ofthe economy in terms of Gross Output (sales) or GDP.
This study uses “Type II” multipliers. “Type II” multipliers is thetechnical term for those that incorporate induced effects due tochanges in household income (along with the direct and indirect(supply chain) effects accounted for by what are known as Type I
multipliers). Type II multipliers allow for the fact that employees
who lose work due to the flow-on effects of film piracy would also
reduce their spending on goods and services.
However, the Type II multipliers used in this study were adjusted
to reflect the fact that employees who lose their jobs (or are never
employed) due to an economic shock (such as film piracy) will notgenerally receive a zero wage – i.e. they will receive some levelof government benefit and will use this to spend on goods andservices.
Accordingly, employee wages reported in the I-O tables were
adjusted by 0.92 in deriving the induced impacts. This factor was
based on OECD estimates of gross replacement rates for Japan– i.e. the relative rate of benefits payments to the average grosswage (OECD 2010a).This has the effect of reducing the Type II
multipliers (and therefore reducing the total economic losses
arising from film piracy).
Type II multipliers of 2.5 (Gross Output) and 1.3 (GDP) were
estimated. This covers activity in the Japanese motion picture
exhibition, production and distribution industries as well as TV
VOD, internet VOD, downloads of motion pictures and theretailing of these motion pictures
Treatment of motion picture earnings by foreign countries(“foreign earnings”): This study accounts for the fact that some
portion of consumer spending on films will ultimately flow out toforeign countries, based on the popularity of foreign films in themarket. The outflow of these earnings to foreign countries(“foreign earnings”) is often referred to as “leakage” byeconomists.
The I-O tables themselves already allow for some leakage,
however the motion picture industry is likely to have higher
leakage than the broad industries listed in I-O tables, given theimportance of foreign films.
The initial “demand shock” to Japan was therefore modified toallow for this higher motion picture leakage. First, the foreign film
share of forgone consumer spending on both foreign anddomestic films was estimated. This was done by taking into
account the market share of pirated domestic (Japanese) films,
using Ipsos data on the proportion of Japanese films (relative toall films) which pirates claimed to have viewed.
Second, the portion of consumer spending on foreign films which
actually flows out of the country was estimated. (Only a portion of
consumer spending on foreign films in Japan will flow out toforeign countries, as Japanese exhibitors and distributors will
obviously take a share of such spending.) Specific data on thisportion was not available for Japan. However, analysis by Oxford
Economics, based on UK and Australian film data (UKFC 2010,
Screen Australia 2010) indicates that, on average, this portion is20% (excluding local VAT/GST).
Foreign earnings lost due to piracy were then estimated byapplying this 20% figure to the foreign film share of lost consumer
spending. Forgone foreign earnings in excess of those which
would be accounted for by the I-O tables were deducted from theinitial demand shock.
Note on use of terms Gross Value Added (GVA) and GDP:
This report refers to “GDP losses” for convenience and ease ofunderstanding, though technically, the values reported relate to
Gross Value Added (GVA) losses. GDP per se is (modestly)
different to GVA. Technically, GDP at market prices = GVA atbasic prices plus taxes on products (such as VAT) less subsidies
on products.

10 Impact of motion picture piracy | Japan Report

Annex 2: The survey method used to estimate direct spending loss
Survey method: Interviews were conducted online amongst a
representative sample of online adults in Japan aged 15-64
years. A total of 3,000 interviews were completed in July toAugust 2010.
Piracy volume estimates: The volume of each form of movie
piracy was calculated as follows:
Population [the online population of Japan aged 15-64 years: 60m]
X
Penetration [the proportion admitting to being active in eachpiracy type in the preceding 12 months]
X
Activity rate [the mean number of movies obtained in thepreceding 12 months, amongst those active in each piracy type]
Cannibalisation of official paid movies: Movie pirates wereasked about the last movie they viewed via each piracy type. Thiswas used to calculate the cannibalisation rate:

If the pirate version were not available, the pirate may have paid
to see an official version. For each official option, we establish
what proportion of pirates claim they would have done this. A‘credibility down-weight’ is applied to this data – allowing for thefact that not everyone claiming they would have paid to see anofficial version would actually have gone on to do so.
Lost consumer spending estimate: The piracy volume
estimates and the cannibalisation rates are used to calculate alost revenue estimate. This indicates the value of lost sales toeach official movie channel – from cinema through to DVD
sales/rentals and official digital channels.
Key considerations in this approach:This approach addresses three points often used to challenge thelost consumer spending estimates produced in piracy studies:We do not assume that every pirate version equates to alost sale.



We do allow for ‘sampling’ - those who see an official
version subsequent to the pirate version are not treated ascontributing to lost revenue. In fact, we make the very
cautious assumption that no lost revenue results frompiracy if any official version is seen subsequently.



We do allow for ‘over-claim’ – we apply a ‘downweight’ tothose claiming they would have paid for an official version(had the pirate version not been available).

Those who saw an official version subsequent to the pirate
version are considered to be using piracy for ‘sampling’ – which is
not treated as lost revenue
If the pirate version were not available, the pirate may have
waited for a free option (e.g. waiting until it is broadcast on TV orborrowed someone else’s official DVD) – which is not treated as
lost revenue

References
Ministry of Internal Affairs and Communications (MIC) Statistics Bureau (2009) 2005 Input-Output Tables for Japan
http://www.stat.go.jp/english/data/io/io05.htm
Ministry of Internal Affairs and Communications (MIC) Statistics Bureau (2010): Results of Monthly Survey on Service Industries, 2009at http://www.stat.go.jp/english/data/mssi/kekka.htm
Organisation for Economic Co-operation and Development (OECD) (2010a) The OECD summary measure of benefit entitlements,
1961-2007 sourced from http://www.oecd.org/dataoecd/52/9/42625593.xls
OECD (2010b) Marginal personal income tax and social security contribution rates on gross labour income for 2009 at
http://www.oecd.org/dataoecd/44/2/1942506.xls
OECD (2010c) Corporate income tax rate, 2009 at http://www.oecd.org/dataoecd/26/56/33717459.xls
Screen Australia (2010) Get the Picture: Audiovisual Trade at http://www.screenaustralia.gov.au/gtp/pdfs/trade.pdf
UK Film Council (2010) Statistical Yearbook 2010 at http://sy10.ukfilmcouncil.ry.com
The Haver Database at http://www.haver.com/

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