Piracy: If you can’t beat them, Join them

This post evolved from a conversation i had with Steve Masiclat, brilliant mind, and New Media Management program director at Syracuse University.

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Piracy is a big issue in the media industry, especially the movie industry. Research conducted by the MPAA funded LEK study shows that the movie industry worldwide lost $1.3 billion dollars in the US and $6.1 worldwide. This has led to the following figures from the IPI: Movie pirates (online and offline are responsible for:

·  $5.5 billion in lost annual earnings among U.S workers

·  141,030 jobs lost

·  $837 million in lost annual tax revenue

·  $20.5 billion in lost annual output to all U.S. industries

 

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This increase in piracy however is not just an attack by individuals looking to bypass the paywalls put up, but has undertones of unmet consumer demand and a failure on the part of the movie industry to meet this demand.

The movie industry is taking a wrong approach to this trend of growing piracy. The more they take away rights from the consumer, the more consumers adopt piracy. Why not instead add value to your product to entice them to buy it? Instead, it seems to think that the only way to run a business is to take away, or disable rights and features from users, and then charge them to re-enable them. Then they wonder why people turn to piracy when they block them from getting what seems perfecty reasonable to expect and what technology allows.

Take this scenario:

I walk into my local video store and purchase a movie.  Now with this purchase, I have what I believe to be a reasonable expectation to be able to watch this movie on any platform, be it a DVD player, a PC, my Iphone, Ipod, Apple TV, PS3, Xbox, etc. However, if I buy a digital copy of a movie, I am unable to burn it to a DVD to watch it on my DVD player because that violates the DRM and Terms of Service. If I buy a DVD and rip it to a digital file, so I can upload it to my Apple TV, that also violates the DRM and Terms of Service.

Now why would I want to buy a different copy of the same movie just so I can watch it on the various platforms I have. What is the logic behind trying to milk me, just so I can watch a movie I already own whenever and wherever I am?

The end of result of this injustice, is that we turn to piracy, because guess what, we can take that one file and convert it to different formats and watch it wherever and whenever we want, for FREE.

Another study by Cachelogic shows that P2P traffic is increasing at a rapid rate, especially in places where broadband speeds are fast and downloads are almost instantaneous.

The international markets are huge in terms of piracy and have sophisticated systems in play. 

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According to the MPAA, 24% of US internet users have stolen a movie, and an incredible 58% of Korean users reported stealing a movie. Here’s the chart provided by the MPAA:

Take China. China has one of the most sophisticated and developed piracy infrastructures in the world. They have a great distribution efficiency as well as initiative, great promotion and product exposure.

They have every movie you could possibly ever want and set up shop in cafes, pubs, restaurants, subways, buses, basically anywhere and everywhere you can imagine.

 

DVD peddlers can be found everywhere, lugging tote bags full of DVDs and dropping stacks of the shiny disks on restaurant and coffee shop tables for patrons to peruse while they dine. All the latest hit movies are available; catalog titles abound; and even American television shows are popular, with programs like Sex and the City and 24 eagerly anticipated each week. 

With incredible speed to market, after a movie is released, within a few days and sometimes even before a film opens in the U.S. China’s pirate manufacturers secure a master copy of the movie, throw on Chinese subtitles and distribute hundreds of thousands of these DVDs to ever corner of China.

These discs come in three formats. You can get a quality movie for one dollar and a complete disk with all bonus features for three dollars. There is even the option for a “double features” disc which has different movies on each side of the discs for two dollars.

At the MBA MEC conference in New York Phillipe Dauman of Viacom addressing a large crowd of MBA’s made the statement:

“In the China market, they pick only 20 western films that get shown in theatres every year, so if you are not one of the 20, you lose big.” 

If the quote above rings true, then moviemakers whose films don’t get picked lose big, as statistics (http://www.worldwideboxoffice.com/) show that most movies make over 50 percent of their revenue from overseas. This also means that pirates make a killing on those movies that do not get picked, because the only way to see those movies is to buy a pirated version from a street vendor, or to download it illegally online.

Now the problem for content creaters is that virtually all of these transactions involve pirated disks, meaning that not a single cent, or yuan, make it back to them.
Content Creators and Chinese officials are trying to reduce the level of illegal DVD sales, however, this lucrative trade is unlikely to be slowed. It goes back to the unmet demand by Hollywood producers.

If only 20 movies make it into China, this means that there is a huge imbalance between China’s insatiable demand for filmed entertainment and its constrained “legitimate” supply. The Chinese population is starved of entertainment, and to fill that void, the black market has emerged to meet a need that would otherwise go largely unfilled. 

For one the pirates are making too much money in producing and selling these DVDs. Even at low prices, the high volumes they make in sales, provides a substancial revenue stream for pirates and makes piracy a highly profitable business. It also provides lots of jobs that can make the Chinese government hesitant to take anti-piracy measures.

Looking at the financials. A movie ticket, in China, costs six times as much as a DVD. If you had a choice to pay one dollar versus six, to consume the same thing, which would you pick? 

So far all attempts to solve this problem of piracy have been through legal and legislative means, however, the pirates are not going away, and neither is their business. Piracy is and forever will be the scorn of content creators, but why not turn the enemy into a friend. Why not realize the lost revenue, and also protect the representation of your content being reproduced and distributed in poorer quality. Yes support piracy!

Set up a warehouse, that allows pirates to come in and download movies at DVD quality and the movie artwork. This creates an incentive for them to come to your center. Once they download the movies, they can make as many copies as they like, and but on their own dollar.  Charge them 2 dollars per download, and collect a 25 or 50 cent fee on each pirated DVD they sell.

So hypothetically speaking, you just created Avatar and for some reason it wasn’t one of the 20 movies selected to play in China. You have this crazy idea and open up a warehouse in China. You get 10 pirators who come in and download Avatar and pay you $2. That’s $10. You charge them 25cents for each sale. They each make 100 sales, or to be more realistic, 24 sales. That’s $6.00 from each of the 10 giving you a total of $70.00. Now that’s $70.00 worth of revenue that you did no work for and cost you nothing. All you did was give people access to the content that you already had digitized and stored online. There are no distribution costs and no transaction costs. Bringing these operations in-house creates a cost center, but being the first to do it, creates a payment management system, which can then be sold to other media companies making it a profit center.

Will this cannibalize your DVD sales? Not if done right. If you focus on areas where piracy is high, your DVD sales are already low in that area, you might as well take your share of the pie. It’s all about looking at the industry and trying to figure out how you can turn people in the industry into partners.

The counter argument to this is that while it is a great method to get some revenue from piracy, it does not and will not cut down on pirate downloads, and that it could possibly cannibalize DVD sales. My argument is that while it may not and does not allow you to affect illegal digital downloads, it is an additional revenue source, with mininmum costs. The cost to create and implement such an infrastructure, for digital copies is extremely high, to the point of not being beneficial to the company attempting to perform this. Focusing on pirated DVD’s gives cuts costs as discussed above. Not only do some markets like China have extensive distribution systems and infrastructures in place to support this model, but there is also a higher demand for DVD’s, as most people can afford DVD’s and DVD players but not necessarily computers.

In terms of cannibalizing DVD sales, the DVD piracy market is already cannibalizing sales, so why not take a slice of the pie. Instead of having your sales cut into and not seeing any of that revenue, you get a slice of the pie, and do less work. 

 

What do you think guys? Could this work?

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2 comments

  1. There’s another thing that happens when you give content pirates the means to capitalize on their efficiencies; they very quickly realize they have vested interests. The inevitable next step is to become market players bound by laws because that’s the only way to ensconce power.

    I first developed these ideas during my year with IBM, and the man who helped me test and refine them was Sudhir Chadha, with IBMs London office.

    Sudhir likened the pirate distributors in this proposal to the Dubba Walla network in India, the men who deliver hot lunches to thousands of workers throughout India every day. The Dubba Walla have developed robust governance systems to fairly manage territories and customer relationships. It turns out when people have a vested interest in market conditions they quickly establish regulatory environments and governance structures.

    You’ve done a wonderful job of examining the market conditions on the customer side, and what the content producers have to realize is that they have the power to legitimate the pirates and turn them into business partners. That would do more to create advantageous market conditions than all the trade delegation negotiators in China.

  2. […] visual representation of Reggie Addae’s “Piracy: If you can’t beat them, join them” post from 10/15/2012. Enjoy and let us know what you think down in the […]

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