PIRACY AND THE MOVIE INDUSTRY: CHANGE YOUR BUSINESS MODEL NOW
OR END UP LIKE THE MUSIC INDUSTRY
Sean Jungels
I. Introduction
It has been over ten years since Napster hit the Internet creating the world-wide
phenomenon of peer-to-peer file sharing and online piracy. Since then piracy has thrived by
satisfying the public’s demands for fast, cheap, and easy-to-access entertainment. The strength
of piracy is seen through its immunity to the continuous campaigns against it. Despite the
Recording Industry Association of America’s (RIAA) efforts, desperate and ruthless at times, it
has only been able to watch piracy turn the music industry upside down.1 The momentum of
piracy has recently invaded the television industry, which has seen a shocking decline of
advertisement revenue, as ratings drop due to consumers downloading their favorite shows
illegally on the Internet instead of watching them on TV.2 This has forced network television to
change its distribution strategy by offering its content online.3 The Internet and online piracy
have forever changed consumer demand and will continue to affect new industries as technology
progresses. Today, technology has reached a point where piracy can take on another
entertainment giant, the movie industry.
The movie industry must take notice that piracy will continue to grow among its
consumers forcing it to change its business model because consumer demand shapes businesses,
1
Steve Knopper, Appetite for Self Destruction (2009); Henry H. Perritt, New Architectures for Music: Law Should
Get Out of the Way, 29 Hastings Comm. & Ent. L. J. 259 (2007).
2
Daisy Whitney, As Piracy Climbs, TV Takes Up Arms,
http://www.tvweek.com/news/2009/05/as_piracy_climbs_tv_takes_up_a.php (last visited Nov. 25, 2009).
3
Hulu, About Hulu, http://www.Hulu.com/about (last visited Nov. 25, 2009).
1
not CEOs. And the Internet has recently evolved consumers into the “on-demand” generation.4
The Internet can give consumers their entertainment when they want it, where they want it, and
how they want it. The piracy business model has given consumers a taste of this power by
taking advantage of the Internet’s ability to provide free, worldwide, instantaneous distribution
of content. The movie industry must focus on what consumers want and create a business model
that rivals what piracy currently provides consumers in order to defeat piracy.
This paper takes a look at the situation that a CEO of a major Hollywood movie studio
may currently be dealing with by analyzing the following: 1) the reasons that piracy will grow
into a problem for the movie industry; 2) the mistakes that the music industry made with piracy;
and 3) possible solutions to piracy, including a new potential business model.
II. The Current Situation for Movie Studios
Imagine being a 60 year old CEO of a major Hollywood movie studio. Your studio has
just bought the rights to a new trilogy, Pirates of the Movie Industry, which will undoubtedly
produce three huge blockbuster hits. The story rights have already cost you $20 million alone.5
Next, the going rate to have a decent screenplay written is $10 million.6 Thankfully you are
good friends with Jerry Bruckheimer and Steven Spielberg who offer to produce and direct your
movie at the cheap price of $15 million and $10 million, respectively.7 Now, in order to get your
star studded cast of Johnny Depp, Keira Knightly, and the rest of the bunch, runs you close to
$30 million.8 After figuring in production costs, visual effects, music, editing, and post
4
Economist, Listen to the Music (Nov. 28, 2008) available at http://
www.economist.com/people/displaystory.cfm?story_id=12633125.
5
Film Budgeting, http://en.wikipedia.org/wiki/Film_budget (last visited Nov. 25, 2009).
6
Id.
7
Id.
8
Id.
2
production costs, you are well over the $200 million mark.9 But being one of the biggest studios
in Hollywood and expecting huge returns at the box office and from DVD sales, the budget
seems standard and ready to be signed and put into action.
As you are about to sign the movie budget, you are interrupted by a familiar sound
coming from the laptop of a young member of the accounting team. You decide to ask the
accountant what could be so important that he is looking at his laptop during this important board
meeting. The accountant enthusiastically replies that he just finished downloading the full
version of the movie Wolverine: X-Men Origins, a movie that had not even been released in
movie theaters yet,10 and he just could not wait to be one of the first people in the world to see it.
You are good friends with the CEO of 20th Century Fox, the studio that produced Wolverine, and
demand to know how someone could illegally obtain a copy of such a huge blockbuster movie
before its theatrical premiere, something that could cost 20th Century Fox up to $20 million from
losses at the box office alone.11 The accountant quickly responds by telling you how easy it is by
searching on ThePirateBay.org or any of the other hundreds of file sharing websites on the
Internet. He continues to brag how he has a library of over 200 movies on his 1 terabyte (1000
gigabytes) hard drive12 at home that is set up to watch on his huge 72-inch Plasma TV with
surround sound. He also claims that he can transfer any movie onto his iPhone and watch it
during his commute to work.
9
Id.
10
Alan Duke, „X-Men Origins: Wolverine‟ leaked to Web,
http://www.cnn.com/2009/SHOWBIZ/Movies/04/02/xmen.piracy/index.html (last visited Nov. 25, 2009).
11
Peter Sciretta, Wolverine Still Tracking High Despite Early Internet Leak?,
http://www.slashfilm.com/2009/04/13/wolverine-still-tracking-high-despite-early-Internet-leak/ (last visited Nov.
25, 2009).
12
The average HD-quality movie file is 4.5GB. Screen Digest, Download speed for different types of content over
different broadband connection speeds, http://www.screendigest.com/reports/08willtheinternetbreak/RJAY-
7KEAWV/WillTheInternetBreak_sample.pdf (last visited Dec. 18, 2009).
3
As you sit there thinking that the accountant must be mistakenly telling you about his
music library, he mentions to you that he just remembered that he was supposed to tell you
something but the Wolverine movie had distracted him. He tells you that you are way over
budget because the revenues predicted from box office sales and DVD sales are too high because
by the time the Pirates of the Movie Industry movie is released in 2011, piracy will have
infiltrated the movie industry and have caused enormous drops in revenues for movies.13 Taking
this news seriously, you decide to clear out the boardroom and have an in-depth discussion with
your accountant.
This paper discusses why the movie industry is finally ripe to be infected by online piracy
resulting in the same devastating effects piracy has had on the music industry, and what the
movie industry must do in order to combat piracy and ensure its survival.
III. The Progress of Digital Technology in the Music and Movie Industries Results in
Similar Consumer Behavior
In order for you, as the CEO, to understand the possible effects piracy may have on your
industry, the accountant first decides to show you the similarities between the music and movie
industries.
A. The Copyright Act and the Free Rider Problem
A comparison between the music and movie industry is helpful because they are both
entertainment industries that greatly depend on copyright protection in order to make a profit.14
13
Liz Gannes, Will Digital Revenue Ever Replace What It's Displacing? (NewTeeVee, July 8, 2008),
http://newteevee.com/2008/07/08/will-digital-revenue-ever-replace-what-its-displacing/.
14
Greg Hernandez, TV Ads to Hit Movie Piracy Series of Prime-Time Spots Will Air Tonight (July 24, 2003),
http://www.thefreelibrary.com/TV+ADS+TO+HIT+MOVIE+PIRACY+SERIES+OF+PRIME-
TIME+SPOTS+WILL+AIR+TONIGHT-a0105815577.
4
The Copyright Act grants a copyright owner the exclusive right to reproduce the copyrighted
work, to prepare derivative works based upon the work, to distribute copies of the work to the
public, and to perform and display the copyrighted work publicly.15 Therefore, in the music
industry, copyright holders of a song make money only based on the enforceable rights they have
over deciding who can play their songs and preventing exploitation of their work, whether at the
cost of a royalty for a radio or jukebox play, a CD to a consumer, or the use of a song in a movie
or commercial. The movie industry similarly relies on copyright protection by making the
majority of their profit from the enforceable rights they have over who can see their movies and
when, initially at the cost of a box office ticket and then later at the cost of a DVD sale or rental.
Piracy, in both cases, results in what is known as the free rider problem.16 A free rider is
someone who receives a good or a benefit without paying anything towards its cost.17 Free
riding can increase to a level that leads to the non-production or under-production of a public
good.18 The average cost of making a movie is around $106 million.19 The music industry has
already been struggling to make back its production costs of CDs, a much lower cost than
movies, because of free riders. As the number of free riders of movies increase, it will become
harder to recoup massive movie production costs and still turn a profit.20
15
17 U.S.C. § 106.
16
Mark A. Lemley, Property, Intellectual Property, and Free Riding, 83 Tex. Law Review 1031 (2005).
17
Id at 1034.
18
Id.
19
Joshua Rich, MPAA study finds movies cost more than ever: Ticket buyers beware (Mar. 6, 2008),
http://hollywoodinsider.ew.com/2008/03/06/mpaa-study-find/.
20
Ben Bland, Social sites grow as do illegal downloads (July 31, 2007),
http://www.telegraph.co.uk/finance/2813230/Social-sites-grow-as-do-illegal-downloads.html.
5
B. The Progress of Technology Allows for More Free Riders
The number of free riders of music and movies has steadily increased mainly because
technology has made it easier and cheaper to participate in free riding. The progress of
technology in the music and movie industries has been very similar throughout the years:
cassettes and VHSs, CDs and DVDs, MP3s and AVIs.21 The similarity between the technologies
used in the two industries has lead to similar consumer behavior. It is important to note, though,
that CDs came out about 10 years before DVDs.22 The main cause of this delay was digital
storage capacity. Movies require a significant greater amount of storage space than a song or
even a full CD of songs; up to 100 times greater.23 This storage space obstacle, coupled with the
obstacle of Internet bandwidth speed, has accounted for the similar 10-year delay in the piracy of
movies.
In 1999, Napster allowed Internet users using a dial-up connection to download a song at
the maximum rate of 56 Kbits/second, taking under an hour per song.24 In order to have
downloaded a 700MB movie at that rate it would have taken days to finish, which was not
enough incentive for people to start sharing their movies online. Current bandwidth speeds,
however, have reached a point where movies can be downloaded in less than an hour by the
average PC owner,25 a time that will continue to drop and cause consumers to be more tempted
to free ride. Further, most hard drives in 1999 only had a storage capacity of less than 1GB,
21
Video, http://en.wikipedia.org/wiki/Video_recording (last visited Nov. 25, 2009); Music Technology,
http://en.wikipedia.org/wiki/Music_technology (last visited Nov. 25, 2009).
22
Compact Disc, http://en.wikipedia.org/wiki/Compact_disc (last visited Nov. 25, 2009); DVD,
http://en.wikipedia.org/wiki/Dvd (last visited Nov. 25, 2009).
23
Id.
24
Dial-up Internet connections have a maximum theoretical transfer speed of 56 kbit/s. Dial-up Internet Access,
http://en.wikipedia.org/wiki/Dial-up_Internet_access (last visited Nov. 25, 2009).
25
The average U.S. Internet connection shows that the median real-time download speed in the U.S. is 2.3 megabits
per second (mbps). National Study of Real-Time Internet Connection Speeds Shows U.S. Falling Further Behind
Other Advanced Nations, http://www.cwa-union.org/news/national-study-of-real-time-internet-connection-speeds-
shows-u-s-falling-further-behind-other-advanced-nations.html (last visited Nov. 25, 2009).
6
barely enough to fit one full movie.26 Presently, consumers have cheap access to large hard
drives, up to 2TB (2000GB), that give them the space needed to create large digital movie
libraries.27 The progress in these two technologies has opened up the world of movie piracy to
the everyday PC user.
C. Pirated Movies Will Become Perfect Substitutes for the Movie Theater Experience
Even though pirated movies are not perfect substitutes for the “movie theater” experience
yet, they are heading in that direction. One deficiency that hinders the demand for pirated
movies on the Internet is quality.28 Most pirated movies available online, prior to their DVD
release, are bootleg versions recorded in a theater from personal camcorders that have poor
sound and video quality.29 For big blockbuster action movies with elaborate special effects it
may take users multiple downloads before finding a version of acceptable quality. Also, the
selection of movies available online is not impressive.30 Even though many new blockbuster hits
become available quickly on pirate sites, lower budget films may be harder to find, if they can be
found at all.31 And the database of older movies is sparse at best.32 These current inefficiencies
of pirated movies are reminiscent of when pirated music first hit the Internet. The progress of
technology, however, helped improve the sound quality of downloaded music files. Also, as
more people participated in music piracy, the library of music online became enormous.
Technology, therefore, will inevitably progress to a point where both quality and quantity will
26
Hard drive capacity over time, http://en.wikipedia.org/wiki/File:Hard_drive_capacity_over_time.svg (last visited
Nov. 25, 2009).
27
Hard Drive, http://en.wikipedia.org/wiki/Hard_drive (last visited Nov. 25, 2009).
28
Davion Wong, Download Full Movies – Why Pay?, http://www.statssheet.com/articles/article69428.html (last
visited Nov. 25, 2009).
29
There is also the chance of copies of DVDs and digital tape being smuggled out of the production facilities that
can result in non-readable or incompatible movie formats. Id.
30
Id.
31
Id.
32
Id.
7
become less of an issue for movie downloaders. Additionally, once a DVD version of a movie is
released, the pirated version of the DVD can be of identical quality,33 leaving a user with an
identical DVD experience and a compelling reason to become a free rider.
D. The Movie Industry Must Stop Focusing on the Numbers
Piracy studies over the years have been quite inconsistent with each other in regards to
the actual amount of revenues lost, but they consistently show that the threat of digital piracy is
real and has resulted in a loss of profits.34 The first major study – by the Motion Picture
Association of America (MPAA) -- came out in 2005 and claimed that the movie industry lost
$18 billion in potential revenues due to global movie piracy.35 The MPAA study, however, has
come under great scrutiny since box office revenues have hit new highs every year and DVDs
continue to be profitable.36 Additionally, the MPAA and the movie industry had great incentive
to inflate the cost of piracy because it strengthened their case for the need to expand copyright
protection and it also avoided blame on their own management decisions. Even though the exact
effect of piracy is difficult and controversial to assess, most studies agree that piracy does hurt
the movie industry. Therefore, the MPAA and the movie industry must start focusing their
efforts on figuring out why people are being driven to piracy and how they can recapture those
consumers, instead of arguing over the exact dollar amount they lose to piracy each year.
33
Most commercial DVDs are copy-protected using DRM, but there are many software programs that can break the
encryption in DRM creating a great incentive to use these programs. Lucille M. Ponte, Coming Attractions:
Opportunities and Challenges in Thwarting Global Movie Piracy, 45 Am. Bus. L.J. 331, 366 (2008).
34
LEK, The Cost of Movie Piracy, http://www.perfspot.com/docs/doc.asp?id=1098 (last visited Nov. 25, 2009);
MPAA, 2005 U.S. Piracy Fact Sheet, http://www.mpaa.org/USPiracyFactSheet.pdf (last visited Nov. 25, 2009)
35
MPAA, 2005 U.S. Piracy Fact Sheet, supra note 34.
36
MPAA, Research and Statistics, http://www.mpaa.org/researchstatistics.asp (last visited Nov. 25, 2009).
8
There are three main types of movie piracy: (1) camcorder piracy, (2) optical disc piracy,
and (3) Internet piracy.37 Camcorder piracy involves theater customers or employees illegally
recording a movie at its release in theaters.38 Optical disc piracy involves illegal businesses
producing counterfeit discs from illegal or bootleg copies of movies.39 Internet piracy, the focus
of this paper, involves consumers downloading movies that are posted online for illegal file
sharing.40 Commentators have suggested possible solutions to camcorder and optical disc
piracy.41 The following analyzes potential solutions to recover the claimed $1.85 billion in
losses caused by Internet piracy in the movie industry.42
IV. The Movie Industry’s Non-Effective Responses to Piracy
After the accountant convinces you, the CEO, that piracy is inevitable in the movie
industry, you immediately begin to see that your potential revenues may decline so dramatically
that the costs of your elaborate sets, state of the art visual effects, and star-studded cast will cause
you to lose money on your investment. The accountant, however, attempts to console you by
telling you that his team has already analyzed how the music industry has fought piracy for the
past ten years and has determined which strategies will and will not work for the movie industry.
You just have to choose which plan to put into motion. The plans focus on how to stop piracy
from affecting the two most important areas of revenue for movies: 1) box office sales and 2)
DVD sales.
37
Ponte, Coming Attractions, supra note 33.
38
MPAA, Theatrical Camcorder Piracy, http://www.mpaa.org/piracy_theatrical_cam.asp (last visited Nov. 25,
2009).
39
MPAA, Fighting Optical Disc Piracy Around the World, http://www.mpaa.org/piracy_OptDisk.asp (last visited
Nov. 25, 2009).
40
MPAA, 2005 U.S. Piracy Fact Sheet, supra note 34.
41
See Ponte, Coming Attractions, supra note 33
42
MPAA, 2005 U.S. Piracy Fact Sheet, supra note 34.
9
Over the past ten years, the music industry has relied on its trade association, the RIAA,
to fix the piracy problem and the broader problem of the public’s conception of copyright law.
Therefore, it is first determined whether mimicking the following actions taken by the RIAA and
the music industry could solve the movie industry’s piracy problem: 1) public education
campaigns, 2) lawsuits against anyone and everyone, and 3) changing copyright law.
A. Public Education Campaigns
One of the RIAA’s biggest concerns when online piracy began was that the public was
not aware that its actions involving copyrighted music, such as peer-to-peer transfers, were
illegal. Therefore, the RIAA believed that a public education campaign would knock some sense
into Americans and cause them to stop pirating music. The campaign failed, however, for two
reasons. First, the advertisements for the campaign were produced in a way that made the public
resent the RIAA, along with copyright law. Second, the public’s awareness of copyright law was
not the problem.
The advertisements produced for the RIAA’s public education campaigns attempted to
create the image that the RIAA and the music industry were victims under attack by the public’s
criminal actions.43 The ads compared online peer-to-peer file sharing to criminal acts such as
stealing a DVD from a store. Even though the RIAA tried to portray a caring message for artists,
the actual message received by the public was an attack on working class citizens.44
43
Brett and Shane Lunceford, The Irrelevance of Copyright in the Public Mind, 7 Nw. J. Tech. & Intell. Prop. 33,
*11 (2008).
44
Id at *10.
10
Furthermore, the public was not sympathetic to musicians and music labels that were making
millions of dollars a year.45
The actual problem is not that the public is unaware of their illegal actions, but it is that
they do not care because they do not believe that society benefits from copyright law any
longer.46 “The habit of music-sharing among peers is culturally embedded, and predates the
technology that now facilitates its expansion. In the 1950s, American teenagers with reel-to-reel
tape recorders distributed home-made tapes of singles and albums among their friends.”47
Music-sharing has grown to the point where it has become a normal part of peoples’ everyday
lives. Therefore, most of the problems of enforcing copyright law are rhetorical issues.48
In its campaign, the RIAA was viewed as representing not only the music industry, but
the entire entertainment industry. Therefore, the RIAA left the public feeling bullied, mislead,
and unable to trust the motives of the entertainment industry, diminishing the MPAA’s power to
affect the public’s perception of infringement. Further, society has redefined what it is willing to
protect under copyright law.49 Therefore, the MPAA has lost any chance of successfully
stopping piracy with public education campaigns.
B. Lawsuits Against Anyone and Everyone
Feeling that its back was pushed against the wall, the RIAA decided to take a zero
tolerance approach to enforcing music copyrights and, thus, began suing anyone and everyone
45
Id at *11.
46
“If we do have intellectual property law for the cyberspace of the future, it will – or, at least, should – be quite
different from the general system that currently governs owners and users of communicative works in the analog
world.” Id at *33.
47
Jim D'Entremont, Napster and the Dogs of War, Index of Censorship, Oct. 2003, at 9.
48
Id.
49
A study found that 51.3% of their respondents “do not regard piracy as improper or intrinsically wrong.” Sameer
Hinduja, Trends and Patterns Among Online Software Pirates, 5 Ethics and Info. Tech. 49, 54 (2003).
11
who was suspected of infringing its members’ copyrights.50 This included not only file sharing
websites such as Napster, Grokster, and ThePirateBay, but also children, mothers, and next door
neighbors.51 Even though the RIAA had success in many of the lawsuits it filed, the overall
effect of its lawsuits did not stop piracy.52
The lawsuit victories against Napster, Grokster, ThePirateBay, and other file-sharing
websites have always been short lived.53 Once courts shape copyright law to prohibit a certain
type of file-sharing on the Internet, another better way to share files has already been invented
and put into use in a way that the law does not cover yet.54 The creators of these sites are
intelligent people that are using state-of-the-art digital technology and also know the state of
copyright law on the Internet. They are a force not to be underestimated, especially when they
are driven not by financial gain, but by furthering their own ideals of living in a world that shares
all ideas freely.55
Further, even though US courts would most likely keep holding that new file-sharing
websites that come into existence in the future are infringing copyrights, US courts’ limited
jurisdiction presents a significant problem, such as with ThePirateBay.56 A website can be run
50
Jon Healey et al., Song Swappers Face the Music; The Record Industry Sues 261 Internet Users. Thousands More
Cases Are Expected in the Labels' Latest Attempt to Dissuade File Sharers, L.A. Times, Sept. 9, 2003, at A1.
51
RIAA's Lawsuits Meet Surprised Targets; Single Mother in California, 12-Year-Old Girl in N.Y. Among
Defendants (The Washington Post, Sept. 10, 2003), at E01; Jon Healey et al., supra note 50, at A1.
52
Tara Touloumis, Buccaneers and Bucks from the Internet: Pirate Bay and the Entertainment Industry, 19 Seton
Hall J. Sports & Ent. L. 253, 262 (2009).
53
See Electronic Frontier Foundation, RIAA v. The People: Four Years Later (2007) (“Napster was replaced by
Aimster and AudioGalaxy, which were then in turn supplanted by Morpheus and Kazaa, which were in turn eclipsed
by eDonkey and Bit Torrent. The number of filesharers, as well as the number of P2P software applications, has
kept growing, despite the recording industry's early courtroom victories.”).
54
“The same 9th Circuit that shut down Napster ruled Grokster was street-legal.” Rod Smolla, You Say Napster, I
Say Grokster (Dec. 13, 2004), http://www.slate.com/id/2110982/.
55
David Sarno, The Internet Sure Loves Its Outlaws (L.A. Times, Apr. 29, 2007) available at
http://www.latimes.com/technology/la-ca-webscout29apr29,0,5609754.story.
56
ThePirateBay would most likely be held liable for infringement under the secondary liability doctrine as
articulated in MGM Studios Inc. v. Grokster, Ltd., 545 U.S. 913, 937 (2005); ThePirateBay is based in Sweden, and
under the TRIPs international copyright protection regime, Swedish law governs the dispute. Touloumis,
12
out of any country in the world, including countries where laws on file-sharing are very relaxed
or unenforced. Therefore, if any website gets shut down in a certain jurisdiction, it can move on
to another country that has less strict laws. It is a war that will result in endless litigation costing
the entertainment industries money that could be spent more efficiently elsewhere in preventing
piracy.
Additionally, the RIAA’s lawsuits against the average music consumer have not resulted
in the effect the music industry desired. “If industry honchos think they’re going to terrorize
people into buying more CDs, they’re crazy.”57 First, suing an insignificant percentage of the
tens of millions of people that download illegal music has not induced fear into the general
public or deterred the public from piracy.58 Second, trying to sue more people will most likely
turn the public against copyright enforcement efforts more and encourage more piracy. 59 People
need other reasons to follow a law than only fear of punishment.60 Harsh and sometimes unfair
lawsuits against the average citizen reflected poorly on the RIAA and the music industry and
painted them in a bad light in the eyes of the public. Therefore, the MPAA should stop wasting
its time and money on lawsuits against both file-sharing websites and consumer infringers.
C. Changing Copyright Law
Changing copyright law runs into two of the same problems already explored above.
First, if the public’s conception of copyright law is not in line with the law, the public will not
Buccaneers and Bucks from the Internet, supra note 52, at 262; see Paul Edward Geller, International Copyright
Law and Practice § 3 [1][a][i] (Matthew Bender & Company, Inc. 2007).
57
D'Entremont, supra note 47, at 9.
58
Eric P. Chiang & Djeto Assane, Music Piracy Among Students on the University Campus: Do Males and Females
React Differently?, 37 J. SOCIO-ECON. 1371 (2008).
59
See Senator Takes Aim at Illegal Downloads (USA Today, June 19, 2003),
http://www.usatoday.com/tech/news/techpolicy/2003-06-18-hatch-wants-computers-dead_x.htm.
60
Lunceford, supra note 43, at *13.
13
obey the law.61 Second, since piracy is a worldwide epidemic, the substantive reach of the law
would have to be enforced at an international level.
Additionally, as seen with the enactment of the Digital Millennium Copyright Act
(“DCMA”), passing a law does not guarantee that it is going to be followed or be able to be
enforced.62 The DMCA criminalizes the production and dissemination of technology, devices,
or services intended to circumvent measures (digital rights management, DRM) that control
access to copyrighted works. DRM on entertainment content, however, has only frustrated
consumers.63 Software programs have also been developed that can break the encryption in
DRM, giving people great incentive not to follow the DCMA. Continuing to grant more power
to the copyright holder is further against what the public conceives as fair and will result in less
cooperation by the public with copyright law.64 Therefore, it would not be worthwhile for the
MPAA to spend a great amount of money and time attempting to solve piracy by international
copyright law reform.
So far, as the CEO, you are not enjoying your conversation with the accountant. He
seems to keep showing how piracy wins no matter what. The accountant tries to calm you down
by explaining that you have to take things in perspective. First, the movie industry does not have
it as bad as the music industry did. People are not going to stop going to the movie theaters. The
movie theater experience is analogous to a music concert, and there are no studies showing that
piracy has affected the revenue stream from concerts. In fact, industry analysts have shown that
61
Lunceford, supra note 43, at *14.
62
Id at *15.
63
Bryan Gardiner, MPAA: Frustrated Consumers Will Pirate (PCMAG.COM, Oct. 16, 2006),
http://www.pcmag.com/print_article2/0,1217,a=191502,00.asp.
64
Alessandro Balestrino, It Is a Theft but Not a Crime, 24 Eur. J. Pol. Econ. 455, 455 (2008).
14
downloading movies has little effect on a person’s movie theater activities.65 And DVD sales,
which are more at risk of being affected by piracy, considering their similarity to music CD
sales, account for less than half the revenue of a movie, unlike how CD sales were usually the
main revenue for an artist. Therefore, the piracy problem for the movie industry, although
serious and increasing, must be taken into perspective. You, as the CEO, do not have to worry
about your box office sales and DVD sales dropping to a point where your margin is approaching
zero in the near future. You have time to experiment with different business models and
recapture the new generation of consumers led to piracy and their lost revenue by offering a
better alternative to pirated movies.
IV. Changing the Movie Industry’s Business Model in Order to Satisfy the “On-Demand”
Generation
The movie industry’s business model has to keep up with the constant changes of
consumer demand. And the change in consumer demand has recently been lead by the Internet.
The Internet has evolved consumers into the “on-demand” generation.66 The Internet has given
consumers their entertainment when they want it, where they want it, and how they want it.
Being given a taste of the power to dictate the distribution of entertainment at the click of a
mouse, consumers are no longer willing to settle for anything less.67 The piracy business model
has satisfied consumers by taking advantage of the Internet’s ability to provide free worldwide,
instantaneous distribution of content. The movie industry must focus on what consumers want
65
Jay Lyman, Analysts Question MPAA's Findings on Film Piracy (Crmbuyer, July 9, 2004),
http://www.technewsworld.com/story/35036.html.
66
Lisa Lapan, Network Television and the Digital Threat, 16 UCLA Ent. L. Rev. 343, 346 (2009) quoting
Economist, Listen to the Music, supra note 4.
67
Lapan, supra note 66, at 346
15
and create a business model that rivals what piracy currently provides consumers in order to
recover and retain the lost revenue from the “on-demand” generation.
A. Consumers Want Cheap, Easy, and Fast Un-Restricted Access to High-Quality
Digital Products
Many experts in the entertainment industry have come to the conclusion that in order to
deter illegal file sharing consumers must be provided cheap, easy, and fast access to digital
products.68 The music industry has finally embraced using the Internet to facilitate legal digital
downloading as seen through iTunes and amazon.com. The movie industry would benefit from
following in the music industry’s footsteps, but has not.69 The movie industry continues to be
reluctant in changing its business model and, instead, chooses to attempt, hopelessly, to regain its
lost revenue by blocking consumers from what they want, a fatal mistake which the RIAA made
for years and paid for severely.
In September of 2009, the MPAA proposed to withhold releasing new DVDs to RedBox,
a new successful business that rents DVDs to consumers for $1 through Kiosks placed in stores
such as Jewel, until 30 days after the DVDs were released in stores. This business strategy was
in hopes that it would increase newly released DVD sales.70 Blockbuster also supported this
arrangement since it would give its brick-and-mortar stores, now on their deathbeds, a leg-up on
RedBox and other distributors.71
68
Kristina Groennings, Costs and Benefits of the Recording Industry's Litigation Against Individuals, 20 Berkeley
Tech. L.J. 571, 584-85 (2005).
69
Steven Daly, Pirates of the Multiplex, Vanity Fair, Mar. 2007, at 287.
70
MG Siegler, The Movie Studios Have A Great Idea To Ramp Up Piracy (Aug. 14, 2009),
http://www.techcrunch.com/2009/08/14/the-movie-studios-have-a-great-idea-to-ramp-up-piracy-and-blockbuster-
wants-to-help/.
71
Id.
16
The MPAA has to stop trying to use its members’ rights in order to force consumers back
into their old business model. RedBox is popular and successful because it provides a service
that consumers want. And since consumers know that a business can be profitable by offering
$1 movie rentals, consumers are not going to be forced by the MPAA to go to Blockbuster or
Wal-Mart instead and buy a $20 DVD.72 Consumers are going to go find an alternative and see
the DVD they want to see for $1 or less, legally or illegally. Taking away products and
privileges that consumers believe should be available to them is only going to drive them to
piracy faster. More importantly, the MPAA has to realize that brick-and-mortar rental stores like
Blockbuster, and even Redbox Kiosks, are not the future of the DVD industry; the Internet is,
and that is where the MPAA has to start focusing its efforts.
B. A Successful Business Model Must Utilize the Internet and Digital Technology
The Internet is the only way that the movie industry can fully match what piracy offers
consumers. Instead of trying to destroy successful businesses like RedBox, the movie industry
should be taking notes and figuring out how it can take what is good about certain business
models and apply it in a way beneficial to the industry. For example, if people are willing to rent
a DVD for $1 a night from a Kiosk, maybe consumers would rent a DVD online for $1.
The MPAA and the movie industry must first realize that switching their business model
to the Internet will not necessarily cause them losses in box office or DVD sales.73 Industry
analysts have shown that downloading movies has little effect on a person’s movie theater
72
It should be noted that if the price difference is attributable to higher retailer costs or profits, then the RedBox
business model is sustainable. If the price difference is attributable to lower revenue to the rights holders, however,
it may not be.
73
Alternative distribution channels have not affected ratings for ABC shows. Nate Anderson, Disney-ABC: “We
understand piracy now as a business model” (Ars Technica, Oct. 10, 2006),
http://arstechnica.com/business/news/2006/10/7946.ars.
17
activities.74 Further, downloaders are the industry’s core customers and enjoy watching movies
many times in the theater, at home, and on mobile devices.75 Second, box office sales keep
hitting new record highs every year. And third, box office sales only account for 15.7% of the
movie industry’s revenue.76 Therefore, the excuse that changing their business model would kill
box office sales must be put to rest.
DVD sales, however, will decline the same as music CDs have, whether or not the movie
industry adopts an Internet business model. This may not happen as fast or dramatically as CDs
because of the lingering inconveniences of storage and bandwidth limitations, but with the
progress of digital technology it is certain that one day, most video entertainment will come from
digital files and not physical formats. So, instead of going into denial about declining DVD sales
and forcing the public to buy as many DVDs as possible, the quicker the movie industry starts
making up for declining DVD revenue sales on the Internet, the better their future outlook will
be.
Moving onto the Internet is only the first step though. To be successful, the movie
industry must offer consumers a perfect, or better, substitute to piracy. Figuring out what
alternative to piracy consumers will embrace is going to be a trial and error process. The
following describes one possible business model that could satisfy consumer demand and,
therefore, solve the movie industry’s piracy problem.
74
Lyman, Analysts Question, supra note 65.
75
Id.
76
Eric Bangeman, MPAA Sues Over DVD-to-iPod Service (ARS TECHNICA, Nov. 17, 2006),
http://arstechnica.com/news.ars/post/20061117-8241.html.
18
C. The Hulu.com Business Model
To help understand how the movie industry may be able to change its business model and
utilize the increased use of the Internet is to analyze how the television industry recently
accomplished that feat with Hulu.com (“Hulu”).77 Hulu is a video media website owned by
three of the four major television networks; NBC, Fox, and CBS. The site allows consumers to
watch streaming video of television shows and movies for free in HD.78 Most of the site’s
content is available 24 hours after the episode has aired on live television. The small movie
database contains mostly old releases. Overall, in regards to television content, consumers are
getting what they want.
The Hulu website launched only a year and a half ago and has already experienced great
success. This quick rise to fame can be attributed to the quality of the product offered and the
satisfaction that consumers are receiving. Despite its great success, the question that still
remains for the television industry is, does Hulu make enough money to be a successful
substitute/complimentary business model for network television?
D. The Potential in Online Advertising Revenue
The difference between television advertising and online advertising revenue was $46.6
billion to $471 million in 2007.79 Hulu’s revenues in 2009 are expected to be $120 million,
doubling 2008 numbers.80 The television industry should be impressed that Hulu is expected to
match YouTube’s revenue in only its second year of existence and has a couple of reasons to
77
Hulu, About Hulu, http://www.Hulu.com/about (last visited Nov. 25, 2009).
78
Id.
79
Lapan, supra note 66, at 358 citing Gannes, Will Digital Revenue, supra note 13.
80
Lapan, supra note 66, at 358 citing Liz Gannes, Analyst Hulu to Bring in $120 Million in „09 (NewTeeVee, Mar.
31, 2009), http://newteevee.com/2009/03/31/analyst-hulu-to-bring-in-120-million-in-09/.
19
expect revenues to continue to increase from online advertising and become a profitable business
model. 81
Online video advertising is growing quickly. Even with overall ad spending expected to
decline in 2009,82 online video advertising is expected to grow by 45%.83 $734 million was
spent in 2008 on online video advertising, and in 2009 it is expected to surpass $1 billion.84
Even though some entertainment CEOs believe that they are trading “analog dollars for digital
pennies,” Lisa Lapan describes that there may just be “a lag between consumers and advertisers
in the move online.”85
Ad space online currently sells for less than ad space on television. Once its potential is
utilized, however, online advertisement revenue and profitability should begin to rise and
eventually surpass television ads. First, online ads give advertisers the unique ability to target
consumers based on their Internet activities. Second, online ads give consumers the ability to
connect instantaneously to a product’s website to learn more about it or to purchase it.86 This
also gives advertisers instant feedback on how well their ads are working. Third, online ads give
advertisers the freedom to explore new and better techniques that will improve the effectiveness
of advertisements. To list a few new ides; ads could be placed in the borders of a video player to
be shown continuously throughout a show or movie; users could be given a choice on what type
81
Lapan, supra note 66, at 358.
82
Lapan, supra note 66, at 357 citing Toni Fitzgerald, Latest Ad Forecast: From Bad to Worse (Media Life Mag.,
Mar. 31, 2009), available at
http://www.medialifemagazine.com/artman2/publish/Media_economy_57/Latest_ad_forecast_From_bad_to_worse.
asp.
83
Lapan, supra note 66, at 357 citing Press Release, eMarketer, Numbers Show Decline in TV Ad Spending (Jan. 27,
2009), http://www.emarketer.com/Article.aspx?id=1006900.
84
Lapan, supra note 66, at 357 citing Brian Stetler, Hulu Questions Count of its Audience (N.Y. Times, May 15,
2009), available at
http://www.nytimes.com/2009/05/15/business/media/15nielsen.html?scp=1&sq=Hulu%20Questions%20Count%20
of%20its%20Audience%20&st=cse.
85
Lapan, supra note 66, at 385.
86
Id.
20
of product their ad would involve (cars, jeans, video games, etc.); ads could be made interactive
so that a user must participate before the movie begins playing; ads could be linked to product
placement so that a consumer viewing a movie star using a certain brand named product could
pause the movie and place an order with a click of the mouse. The possibilities and results far
exceed what is possible with television ads.
There are already studies that show commercials online are more likely to be
remembered than on television.87 Studies on Hulu’s interactive ad-viewing experience have
already shown their superiority to television ads.88 Once enough data becomes available
showing the greater effectiveness of online ads compared to television ads, online ad space
should become a worthwhile business model to invest in.89
Also, the number of users on Hulu will continue to increase. More and more of the
public is becoming technology savvy and will be demanding the effectiveness of digital
technology when receiving their entertainment content. New desktop and portable computers
and PDA’s all facilitate online access. Also, viewers that watch a show first on network
television may re-watch the show on Hulu, doubling the advertising revenue gained from that
viewer. Most importantly, though, Hulu is reclaiming viewers that would have otherwise
downloaded pirated television episodes illegally.
87
Lapan, supra note 66, at 385 citing Brian Stetler, Web Site's Formula for Success: TV Content With Fewer Ads
(N.Y. Times, Oct. 29, 2008), available at
http://www.nytimes.com/2008/10/29/business/media/29adco.html?scp=1&sq=Web%20Site's%20Formula%20for%
20Success:%20TV%20Content%20With%20Fewer%20Ads%20&st=cse.
88
Lapan, supra note 66, at 385 citing Joshua Cohen, Hulu is Cooler Than You Think (Tilzy.TV, Nov. 14, 2008),
http://www.tilzy.tv/hulu-is-cooler-than-you-think.htm.
89
Lapan, supra note 66, at 385.
21
E. Reconfiguring the Hulu.com Business Model for the Movie Industry
NBC, Fox, and CBS did not have to make an extreme change to their business model
when creating Hulu. Their primary source of revenue stayed the same from the transition from
television to the Internet: advertisements.90 In contrast, the movie industry relies on box office
and DVD sales as their main sources of revenue. Hulu, however, has been a success story for the
television industry that may prevent the previous quoted gloomy future from occurring.
Similarly, the movie industry must now develop a new business model that utilizes the Internet
to satisfy their consumers and prevent piracy from destroying their industry.
Hulu is a great business model for the movie industry, but it will need to be re-configured
in order to fit the movie industry’s needs. Hulu changed considerably during its first two years
in existence and is still not a complete solution to piracy for the television industry, but it is a
great beginning business model that has helped immensely and will continue to be molded as
digital technology and consumer demand changes. Hulu satisfies the on-demand consumers’
desire for cheap, easy, and fast un-restricted access to high-quality digital products. A movie site
that offers a large selection of movies, viewable instantaneously on a high quality HD video
player will have the qualities necessary to replace any need for consumers to pirate movies.
As discussed above, the expanding market for online advertising offers the movie
industry great potential for revenue with a site that would undoubtedly attract a lot of users.
Even though advertisements are usually not shown during a movie at a theater or on a DVD, the
Internet offers a unique opportunity to not change that familiar experience with consumers, but
still to make revenue from advertisements. Since consumers are used to watching 15 minutes of
90
Lapan, supra note 66, at 367.
22
previews before a movie, the site could play advertisements before playing a movie. This would
also be a great opportunity for the movie industry to cash in on the exploding branded
entertainment market. $22.3 billion was spent on branded entertainment in ad spending in 2007
and is expected to keep rising.91 Television networks with falling ratings, such as NBC, have
actually been able to increase its profitability due largely to their use of branded entertainment.92
The possibilities of using online advertisements are immense and create the potential for a
substantial new revenue stream for the movie industry.
The movie industry, however, may not have to start off by relying solely on
advertisements as its only revenue stream like the television industry does. Where “subscription
or pay-per-view services are unlikely to work in [the television industry]”93, the same is not true
for the movie industry. People are still willing to pay to watch movies; whether purchasing a
movie ticket, subscribing to NetFlix or Blockbuster Online, or renting a DVD from RedBox.
People do not expect their movie watching experience to be free, unlike their expectations with
their music and television experiences. Therefore, a movie site, through trial and error, could
determine the maximum price consumers are willing to pay to rent or purchase a digital movie
file, and whether subscription or pay-per-view services result in sensible additional revenue.
Many movie websites have failed, however, because they contained unappealing
technical restrictions in the form of DRM, offered limited selections, or charged nearly the same
for movie downloads as for physical media.94 Also, legitimate movie sites cannot post movies as
quickly as pirated sites, since legitimate sites are subjected to the industry’s standard release
91
Jack Loechner, Elusive Consumers Create Marketers' Needs For Branded Entertainment (Media Post, Mar. 7,
2008), http://www.mediapost.com/publications/?fa=Articles.showArticle&art_aid=77639.
92
Wayne Friedman, TV's New Metrics - Ben Silverman Knows the Score (Media Post, Nov. 17, 2008),
http://www.mediapost.com/publications/? fa=Articles.showArticle&art_aid=94887.
93
Lapan, supra note 66, at 359.
94
Daly, supra note 69, at 287.
23
policies.95 The time period between box office and DVD release has usually been around four
and a half months.96 During that time, people who wish to watch the movie after watching it in
the theaters and do not want to wait four and a half months, will download an illegal copy and
lessen the chance of that person every buying the DVD when it comes out. Also, in four and a
half months, a consumer’s desire to buy a DVD may fade. The movie industry should
experiment with making the DVD release date closer to the box office release date, and even try
releasing them on the same date since this will match what piracy offers.97
F. Offer Consumers What Pirates Cannot Give Them
The movie industry cannot stop at offering consumers a substitute to piracy. They must
offer consumers something better, something new, something that pirates cannot offer them. In
this aspect, following in the footsteps of the television industry and offering social media
websites for movies could increase interest in movies and also increase advertisement revenue.
Social media is “media designed to be disseminated through social interaction . . . us[ing the]
Internet and web-based technologies.” Most TV shows now have social media websites that
include Internet forums, weblogs, social blogs, podcasts, pictures, video and rating. This is a
great chance to offer consumers something that pirates cannot.
V. Conclusion
The challenge facing the movie industry is not going to be solved by this paper or any
other paper written on this subject. Copyright law, the foundation on which the movie industry
95
MPAA, 2005 U.S. Piracy Fact Sheet, supra note 34.
96
Anne Thompson, Distributors Hold Firm Against Day-and-Date (Hollywood Rep., Mar. 17, 2006),
http://www.hollywoodreporter.com/hr/search/article_display.jsp?vnu_content_id=1002198452.
97
Gary Gentile, “Bubble” Hits Theaters, TV, DVD on Same Day (USA Today, Jan. 18, 2006),
http://www.usatoday.com/tech/news/2006-01-18-bubble-theater-threat_x.htm; Anders Bylund, IFC,Comcast Starts
Day-and-Date Distribution Service (Ars Technica, Mar. 1, 2006),
http://arstechnica.com/old/content/2006/03/6294.ars.
24
was built, is not going to save the day either. Piracy is only going to be solved by the movie
industry adapting to present digital technologies and consumer demand; not one that holds on to
a business model that is out-dated and has fallen second to piracy. The industry itself has even
recognized that frustrated consumers will pirate movies.98
It will not be an easy task for the movie industry to make a radical change, however,
especially with big players like Wal-Mart strongly opposing efforts in online distribution.99 The
fact is, though, that the movie industry must follow its consumers, and its consumers are going
online, fast. It is predicted that all televisions will be internet-enabled by 2015.100 Accenture has
even advised the entertainment industry “not [to] be prissy about where people consume your
content.”101
This paper is a wake-up call to the leaders of the movie industry who are still reluctant to
change their business model to incorporate the Internet. The president of Disney-ABC has
admitted that “[p]iracy is a business model…[i]t exists to serve a need in the market…[a]nd
piracy competes for consumers, the same way we do: through quality, price, and availability.”102
She further stated that even though the industry does not “like the model…we realize it’s
competitive enough to make it a major competitor going forward.”103 It is going to take a lot of
time, experiment, and creativity to recapture all of their consumers they lost to piracy, but the
98
Gardiner, MPAA: Frustrated Consumers Will Pirate, supra note 63.
99
Economist, Coming Soon - Hollywood and the Internet, Feb. 21, 2008.
100
Duncan Riley, By 2015, Every New Television Will Be Internet Enabled (The Inquisitr, Sep. 1, 2008),
http://www.inquisitr.com/2799/by-2015-every-new-television-will-be-Internet-enabled/.
101
Lapan, supra note 66, at 371 quoting Accenture, Beyond the Hype: How New Content and Technology are
Redefining the Future of Media, available at http://www.accenture.com/global/research_and_insights/by_industry/
media_and_entertainment/entertainment/2007contentstudy.htm (last visited Dec. 18, 2009).
102
Jemima Kiss, @ MIPCOM:Piracy is a Business Model, says Disney Co-Chair Anne Sweeney (Paidcontent.org,
Oct. 9, 2006), http://www.paidcontent.org/entry/mipcom-piracy-is-a-business-model-says-disney-co-chair-anne-
sweeney.
103
Id.
25
movie industry has not been one of the biggest industries in the world without being able to
defeat their competition. And piracy is just another word for competition.
26