Pirates' Booty

Lately, I have been doing a lot of research into online film piracy. I have learned a fair amount, some of which will be covered in future ReelThoughts, but there are two key points I want to touch upon here: (1) The movie studios and the MPAA have vastly overstated the amount of revenue lost due to piracy, and (2) When it comes to lost revenue, the studios may be their own worst enemies. A lot of what I'm going to write here is common sense, so don't expect any shocking revelations.

Here's how the studios figure "lost revenue" via on-line piracy: every movie illegally downloaded, regardless of the intent of the downloader or the quality of the film, represents one lost full-price ticket sale. Therefore, total lost revenue is determined by taking the number of illegal movie downloads worldwide and multiplying it by about $7. Anyone with half a brain can see that this is a gross overinflation of losses. It's to the studios' advantage, however, to get the biggest number possible because it makes the problem appear worse than it may actually be.

When it comes to theatrical releases, indications are that the majority of downloaders fall into one of two categories: those who have already seen the title theatrically and want a copy for their private collection, and those who wouldn't pay to see it but are willing to "try it out" if they can get it for free. Few downloaders fall into the "lost ticket sale" category: those who would have seen it in a theater if it wasn't available gratis on their computer. I'm not saying there's no one who fits that description, but it's a minority case. Considering the quality of most theatrical release downloads, it's understandable why. They are, in many cases, unwatchable. It's nonsensical to get upset about an on-line copy of The Bourne Ultimatum that was made using a camera phone from the last row of a multiplex.

The reality is that, for 99.9% of the population, if an individual wants to see a movie, he/she will go to a theater to see it. Downloading as an alternative to theatrical viewing isn't a serious issue. That might change if there were pristine, HD copies available but those don't exist (at least for pre-DVD releases). I have previously suggested that there's an upside to piracy that the studios have thus far failed to exploit (surprising, considering how good most of them are at exploitation). Consider someone who has no intention of going to a theater to see Movie X. He downloads a copy out of curiosity. He watches a few minutes of the crappy download and is intrigued. But the quality is awful. So he goes to a theater and plunks down $7 to see the real version. That's a gained ticket sale, not a lost one. Are those cases rare? Probably, but I bet consideration of even a small number of them didn't make it into the MPAA's loss calculation.

When it comes to illegally downloaded DVD titles, the problem is more serious. That's because the quality is no longer unacceptable. However, downloading is not the method of choice for most DVD pirates. Instead, they use their Netflix membership (or borrow DVDs for free from a library) and make a first-generation copy. No downloading necessary. But what about the DVD copy protection? If you know how, it's easy to break. I spoke to someone who has a collection of more than 1000 DVD titles - all copied from DVDs he rented or borrowed. None downloaded. The fact is that most people with the knowledge to illegally download a movie can acquire and implement the knowledge to break the copy protection.

There is a lot of DVD piracy going on, but the on-line component is small. The illegal copying of DVDs is understandable, however, because of the gouging that goes on. The average undiscounted DVD costs between $15 and $30. For someone who makes a good salary, that may not seem like much but for someone who's relying on a part-time, low-paying job, it can be a day's wages. There's a huge amount of profit built into the DVD model. Although the actual break-even point varies from film to film (royalties and production costs vary), estimates indicate that it's somewhere between $1.50 and $3.00.

It's easy to envision a model in which a movie-only DVD would sell for $3 to $5. This allows a 50 cent profit per DVD for the studio and a 50 cent to $1 profit per title for the seller. (For a title that sells 2 million copies, that's a nice chunk of change all around.) A low price point like that would not eradicate piracy but it would decrease it. Or at least it would have if the approach had been used a few years ago. Now, piracy is becoming ingrained into parts of our culture. Many people see piracy as a "victimless crime" or something that's not really a crime at all. That's a surprisingly prevalent attitude among some people. Why bother, they reason, to pay anything for something they can get for free. For them, $4 is still too expensive. Yet, had DVDs been priced that way in 2000, the piracy movement would have found it more difficult to gain traction. It's the old "genie out of the bottle" truism. If greed hadn't caused DVDs to be overpriced, people wouldn't have been as eager to find an alternative. The studios have the right to price DVDs at whatever level the market will sustain, but it's disingenuous for them to deny that the fat in that price has no connection to piracy.

The bottom line is that there's no way piracy will ever be eliminated. In fact, it's likely to become an increasingly more important factor. The more proactive the movie industry becomes in addressing the issue, the more likely a balance will be struck to relegate pirates to a niche market rather than allowing them to enter the mainstream. The inability of the music industry to recognize this paradigm shift early has resulted in tangible losses. If the studios follow this ill-advised lead of short-sighted vision and petty, punitive lawsuits (which appears to be happening), then the grossly inflated deficit estimates being made today may be tomorrow's real losses.

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