The counterintuitive truth about piracy and profits

The most pirated films of all times were also blockbusters

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One of my favourite writers is Terence Corcoran, who as editor of the Financial Post is an old colleague of mine. I enjoy reading his columns because whenever he ventures into technology and telecom issues, the result is usually a car wreck. And who doesn’t enjoy watching a car wreck?

Such is the case with a recent column on copyright, which he promoted on Twitter as being penned by the “anti-Geist.” One of Corcoran’s favourite whipping boys is, of course, Michael Geist, the University of Ottawa law professor and Canada Research Chair in Internet and E-Commerce Law who is one of the country’s most-cited experts on copyright law. If you follow both gentlemen, you probably know they, well, don’t like each other, to put it mildly.

In his column, Corcoran accuses Geist of using the recently failed U.S. Stop Online Piracy Act to fuel fears about C-11, Canada’s upcoming copyright reform legislation. “Smelling SOPA blood” in the air, he writes, Geist has spent the past few days re-hashing all the various groups that are opposed to certain parts of C-11, as well suggesting that entertainment companies are trying to add SOPA-like elements to the bill.

I’m not about to stick my nose into a feud between individuals, especially one that seems to be increasingly personal on at least one end, so I won’t. The part I enjoyed in this latest column, however, was Corcoran’s explanation of how file-sharing works and how it apparently deprives Hollywood of much-needed revenue.

He explains how The Grey, Liam Neeson’s latest movie in which the actor battles wolves, is turning out to be a surprise hit in theatres–but also on file-sharing directories such as Canada’s own isoHunt. In parroting industry talking points that “millions of dollars will be lost to the makers and distributors of the movie” because of the file sharing, Corcoran completely misses his own point: success on file-sharing sites usually correlates with commercial success, meaning that one does not happen to the detriment of the other.

There’s quite a bit of evidence to back this up. The Hollywood Reporter in December compiled a list of the most pirated films of all time and the results are completely unsurprising. Leading the list were AvatarThe Dark Knight and Transformers, all of which were mega-hits in theatres. All of the other films also “did quite well at the box office,” the magazine reported, although it noted that theatrical release was only part of the story. “Some studio executives believe that online piracy does its most damage on ancillary income like DVDs and TV sales,” the story said.

Those same films also did very well on DVD. Avatar, for its part, was “the fastest-selling home video release in history, with sales totaling $130 million” when it was released in 2010, according to the Christian Science MonitorThe Dark Knight broke DVD sales records when it was released, as did TransformersThe Hangoverand so on and so on.

Those correlations seem to disprove the conventional wisdom that a freely downloaded movie equals a lost sale. Many pundits have in fact speculated the opposite holds true–that a freely downloaded movie (or song, or e-book, etc.) raises its profile, with the downloader perhaps recommending it to friends, who then go and purchase it. A growing number of creators, including my truly favourite writer Neil Gaiman–who I like for completely different reasons than Corcoran–are coming around to this view.

An increasing amount of literature is also emerging to support this counter-wisdom. Mike Masnick over on TechDirt recently released a report titled “The Sky is Rising” that shows the entertainment industries–video games, music, movies and books – are actually growing, despite the supposed heavy toll file sharing is having and despite one of the worst financial crises in modern times.

Observers who regurgitate industry spin will simply dismiss such reports because they are funded by open-internet advocacy groups, or “populist wolves,” but the results aren’t hard to independently verify. Entertainment One, the distributor of The Grey in Canada, reported full-year profit for 2011 of 42.5 million pounds on revenue of 469.7 million pounds, up from 18.6 million pounds on 264 million pounds in 2008. That’s a 128 per cent increase in profit and a 77 per cent jump in revenue. Hits like The Grey are likely to continue fueling that heady growth into 2013, despite or perhaps thanks to file sharing.

Screeeeeech, bang! Hear that? That’s the sound of a car wreck.




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The counterintuitive truth about piracy and profits

  1. The entertainment industries are actually growing – but are the pay scales of the artists who are providing such entertainment?  Or are they being told that because of piracy, they’ll have to take a pay cut.  Because I can’t help but think that the entertainment industry doesn’t need to wait for the statistics to figure out their bank balance is rising.

    • If the career trajectory of my son (and many of his colleagues) is at all typical of the industry, legions of talented and highly trained animators and CG specialists are little more than itinerant serfs, moving from project to project in 6-12 month intervals, with no prospect of continuity or security.

  2. Yes yes, thank-you Peter. Calling those who see theft as theft “observers who regurgitate industry spin” is a sure way to elevate the debate. 

    Kudos to you for avoiding that “feud between individuals” and instead showing us the high road! 

    Oh-oh. Here’s one of those regurgitators now, making a lot more sense: http://www.slate.com/articles/business/moneybox/2012/01/caleb_crain_why_matt_yglesias_is_wrong_about_copyright.html

    • You seem obsessed with a concept that doesn’t really apply.

      Theft definition:

      Noun: ”The dishonest taking of property belonging to another person with the intention of depriving the owner permanently of its possession.”

      Given that an unlimited number of copies can be made for zero cost, ie no one is permanently or even temporarily deprived of their possessions, and given that it appears to act as advertising rather than replacement, I don’t really understand what your point really is.

      • Obsessed? How so? I posted only one comment.

        As for the definition of “theft”, I invite you to read the Slate article that I linked to above. 

        • The article points out that it is very unlikely that any revenue is being lost and in fact more likely that it is being gained as a form of advertising.

          Added to the fact that billions of copies can be made for zero cost with no loss of the original, it directly contradicts the notion that file copying is theft.

          I used “obssesed with the concept” because I found it odd that you seem so tied to the notion and insistent on the label of “theft”, that you are willing to ignore the facts of situation to maintain the fiction and somehow end up self identifying as one of the “observers who regurgitate industry spin”.

          But wait… Terence, is that you? LOL

          • The point is that piracy is wrong ethically, and legally. 

            I wish it weren’t, because I am an avid consumer of books, movies and music. I’m not tied to the word “theft”, but what pirates do is philosophically akin to theft, and Crane explains. The owner of the copyright is losing the opportunity to sell you the copy of movie/song/book because you have pirated it (and some percentage of downloaders would have paid for it, though not all would).
             
            Ultimately though, I am not so concerned with that concept of “theft” as I am the ethics of piracy. 

            Here is Crane’s follow-up article:

            http://www.slate.com/articles/business/moneybox/2012/02/caleb_crain_matt_yglesias_is_still_wrong_about_copyright_.html

          • I would posit that the underpinnings of intellectual property regimes are valid but ultimately different from theft.  Which is why we need a copyright act in addition to the criminal code, but both contain penal provisions. 

          • So why is it not theft if I lend a book, DVD or music CD to a friend, but it is theft if either of those things are in a digital format? 

          • I appreciate your views on piracy, or more correctly copyright infringement.  My problem has to do with using a sledgehammer when a screwdriver is needed.  Or, why when I buy a movie or song can’t I copy it onto a different medium?  Or change the ebook format, for that matter.

            And my question if Peter’s post has the right of it is, does it matter whether the pirate is a bunch of individuals, or the movie studio/record company/publisher?

          • The opportunity to sell something is not property, so the deprivation of same is not theft. Also, piracy does not preclude purchase.

          • Since when has Copyrights has become so tangible? What would prevent someone of copyrighting ‘lol’ so that everyone using that abbreviation would become, philosophically, thieves?

          • Look, I can agree that piracy is not the ideal by any means. And we’re certainly on the same page in terms of the concern for the integrity of one’s intellectual property. It’s not that I fail to see where the harm potentially surfaces.

            I’m not trying to say it’s “right”, but at the same time I think it differs from the traditional notion of “theft” in certain important ways.

            Most blackmarkets make money. This one doesn’t. Added to the weirdness is the fact that the “theft” actually increases the amount of product rather than creating any scarcity.

            So we’re not well served by traditional notions of theft even while recognizing that it can’t stand as it is.

            The answer however is not to shutdown the internet, which many of these recent laws seem aimed at doing.

            The industry is capable of attacking this problem from a far more productive perspective. It could make use of the infrastructure in ways the pirates can’t, and could limit the impact considerably.

            So we can prattle on and on about “theft” and pretend we’re saying something meaningful, but in reality this is all just a distraction. I don’t agree with piracy as some kind of ideal, but only a fool thinks it has proliferated as it has on its own and isn’t a sign or indication of a bigger paradigm shift that isn’t being appropriately managed.

      • Oh goodness. Don’t you start getting all legal pedantic too.

        Somebody sells you a car for 10 grand.
        They provide you a hot-wheels version.

        When you exclaim “He robbed me!” and someone responds, “No he didn’t. That’s not robbery. Robbery is the act of using violence to coerce money or goods to be transferred to yourself,” do you then go “Oh. Right. Of course.”
        No. You say, “Piss off, you know what I meant.”

        Theft has a very well understood colloquial definition of “getting something that doesn’t belong to you without agreement or compensation”

        If you want to argue it’s not theft in a court of law, fine. This ain’t one.

        The truth of the matter is, the money doesn’t matter. Artists and creators have the right to control what they make. They have the right to sell those rights to others, and then those others have the right to establish those controls.

        And when pirates unilaterally decide those people no longer have those rights, that’s not right. It’s not fair. And it hurts developers.

        Incidentally, that last link there is a good counterpoint to Nowak’s entire thesis.  While larger diversified companies may be able to thrive despite piracy, there’s no way we can say it’s panacea for them.

        • Hey Thwim. Back to it are we? LOL

          Fair enough, I take your point to some degree: I’m engaging in semantics right? LOL

          You know me though, I’m simply less interested in the discussion of “theft” than what actions are an appropriate response, because I think we’re dealing with an odd situation where the “theft” is an artifact of a poorly understood infrastructure that the mainstream has eschewed.

          In a sense, the argument of “theft” on this topic is in its own way semantic, because it doesn’t really face the reality of what it will take to manage it.

          The laws the US and Canadian governments are trying to enact will be ineffectual in my opinion. They may even be a step backward. If we want to formalize the use of this 21st century infrastructure in a productive manner, it won’t be through laws of this nature.

          In order for the industry to protect its ability to profit from its work, it has to enter into the world that has arisen online and is so different from anything we’ve seen before.

          Until they do I find it hard to understand how it can effectively make use of the demand that exists there. A demand that isn’t going to shift back to the old model simply because they convince a government or two to pass some laws.

    • The examples mentioned in that article are inapt and far from sensible.  Violating intellectual property regimes is markedly different from theft, the main difference being the victim is left with his property intact.  Someone whose car has been actually stolen might very well wish the ne’er do well who exploited him merely closely examined his car, built another one, and drove away in that. 

      This is not to say the underlying principles of intellectual property are not sound, merely that they are not addressed in the article linked to.

  3. Digital piracy has been around for what, more than 15 years now? Bootlegging has been around for decades. I think the fact that these industries are able to continue to exist, expand, and scale-up salaries is indicative of the “harm” piracy does. 

    • Theft has been around for what, more than 150000 years now? Bootlegging has been around for decades. I think the fact that society is able to continue to exist, expand, and scale-up salaries is indicative of the “harm” theft does. *sarcasm off*

      •  But the Berne Convention just over 100.

      • The harm caused by piracy is much less clear, though. Theft involves depriving someone else the enjoyment of their property. The morality argument is much clearer. There is no very compelling evidence that the net effect of piracy is negative.

        • There is harm but it’s not direct and it only matters in the aggregate.  Combine that with being easy and not likely to be caught, it makes it really easy to justify to oneself.

    • And before bootlegging, the “Pirating” or books actually precedes formal copyright.

  4. In the past decade the internet has become the ultimate market for electronic media. The market reach, the capacity, the low-cost structure etc.

    Instead of taking advantage of this in a sensible way and adopting an appropriate response however, the industry has instead clung with all its might to the old model, throwing hundreds of millions at this to forestall the inevitable instead of using that same money to develop a sane response.

    And it seems even now they prefer to whine than do something about it.

    The industry has the ability to use the internet to reach the entire world. They can put up attractive well designed websites at per unit prices that would make piracy pointless for the majority. Sites that could benefit from the online networking world that is expanding all around us.

    Most people I know who download prefer legal means. The problem is there’s really very little simple and legal access to a whole load of stuff people WANT, i.e. there’s a demand for.

    Look at the success of ITunes. They haven’t even scratched the surface in terms of their offerings and interactive capabilities and they do pretty good business.

    And if this article is correct, instead of replacing movie theatres, they may actually be adding yet another revenue stream, one that would capture the whole world as a market, and access places where they don’t have theatres or DVD distribution.

    Clearly this industry is mired in 20th century thinking and missing the massive opportunity just waiting for them. If piracy pushes them there faster, then so be it, because at this point the foot dragging has reached epic proportions.

    • This is a great point. The industry should stop whining about piracy and make it not worth the effort. Offering content through streaming services cuts down on privacy substantially and allows the owner of the content to monetize it directly or indirectly through advertising.

  5. Obviously trends can be observed but scientifically valid tests are impossible.  It seems very unlikely that every download is a lost sale, but it seems equally implausible that everyone goes out and buys stuff because of limited people taking it for free.  

  6. IMO, the entertainment industry’s argument on this issue echoes the claim by old-school owners of pro sports franchises that radio (later TV) broadcasting of games would detract from gate revenues, when all empirical evidence proved the opposite.

    • So your argument is: “I don’t like your business model, so that justifies my taking your product without paying for it.”?

      • Thanks for exposing my password, disqus! Sheesh

      • No, that is not be my argument because I never posited it. Try reading.

  7. The analysis here is off. Avatar was probably the most pirated movie because it was also one of the most popular (and heavily advertised) movies out there. It isn’t like people were saying, “hey, I downloaded this obscure flick called Avatar, it’s pretty good” (and not just because Avatar sucked) – it had the biggest opening day ever (also, as a 3-d movie, there is more value-added to seeing it on the big screen). A better metric would be to look at the level of piracy relative to legitimate ticket sales, or DVD sales. 
    Obviously a movie that was 100% pirated would make no money, while a movie that was 0% pirated might lose out on publicity. There is probably a number in-between those two that is profit maximizing, however, I suspect it is much closer to 0% than it is to 100%. I also suspect that the folks bankrolling PIPA have far fancier bean-counters, who have done the math on this one. Certainly, ticket sales are down (US ticket sales have never exceeded the 2002 peak), as is revenue (accounting for inflation). I think the stronger argument against SOPA/PIPA involves pointing at innovation in media that has been spurred on by piracy. That also puts a different spin on the MPAA and its fellow travelers – they aren’t just fighting to preserve their own profits against pirates, but also to stifle competing business models. 

  8. So Peter, I assume that since your editor approved of this article, I can go ahead and pirate the Maclean’s ipad app, and read the magazine there for free?

  9. Peter I fail to see why the profit a company or individual makes (or doesn’t) with their product is in any way shape or form a valid reason to discount the need for a Copyright Modernization Act?
    Further to that, Google made $37 Billion in 2011, that was more than all other Bill supporting industries combined.
    Would that matter?

  10. The problem for the industry would be that their numbers about piracy are entirely fictional… if it wasn’t for the reality that politicians like to take them as fact

    In actuality, the US GAO has determined that it’s near impossible to determine any legitimate costs to online piracy because it’s not possible to come up with all the data required to produce a mathematical model to do so: especially for the entertainment industry where people who don’t purchase the product can’t be guaranteed to put all the money they “stole” in “value” back into it if they were otherwise forced to anyways because it’s a product folks purchase for leisure and not a staple.

  11. The problem that the movie industry has with piracy and online distribution comes down to a couple things.
    1. It doesn’t sync well with the current pay model. $10-15 at the theatre for one viewing, $15-20 for a DVD/Blu-ray. With the theatre it’s even better because each individual is paying to see the film, and if they want to see it again they have to pay again. So whole families end up raking in almost $100.  As well it doesn’t really cost companies much to produce a DVD or Blu-ray so $15 is pure revenue.
    But with online distribution, there are a lot of factors that the movie industry can’t control, they can’t charge that same $15 for a digital copy because people won’t pay that much. So they’re stuck selling it for $5-8 which doesn’t make them the same profit per person, plus they have to pay for a digital distribution company to provide the hosting where as Disk distribution is already well in place and very cost effective. 
    2. The movie industry doesn’t like it because they’re used to a certain influx of money to pay their salaries and the salaries of their actors. It’s viewed as lost income, money slipping through the cracks. They would have to modify their entire pay structure. And who wants to make LESS money really.
    3. They can’t control it. Downloads are beyond their control, once a file is on your computer who knows where it goes, how do they track it? You’ll notice that on Blu-ray players there is a lot of tech built in that makes sure you’re connected to a registered TV and not to a recording device.
    4. That’s why 3D is such a huge deal for the movie industry, it’s a format that can’t be copied and displayed easily. So people go to the theatres because of the 3D and they buy Blu-ray players and new TVs because of it. (Hence 3D is bad and you should do your best to avoid it unless genuinely used http://www.imdb.com/title/tt1664894/)
    Eventually the industry will have to adapt as long as we keep them from completely destroying and controlling what the internet has achieved. Just give it some time.

  12. I think one of the key things they’re missing is that even a greatly reduced per unit cost online would still rake in more money than a higher one in which the distribution costs are higher and have less reach. For the sake of argument consider the principle:

    1) 10 million units at $20 equals $200 Million in revenue.
    2) 500 million units online at $2 equals $1 Billion in revenue.

    To get at the same number of customers in scenario two through traditional channels would be infinitely more expensive too, so the profit percentage from scenario two is much higher as well.

    Online doesn’t really affect the movie theatre take either in my opinion. It would only effect DVD sales, but given that each additional copy online has $0 overhead versus a DVD through traditional means being say $5 per copy, I should think the logic is obvious.

    For some reason the industry doesn’t want to make more money, likely because their scared about the risk.

    • That’s all basically true, but anyone with a computer will generally have the choice to acquire as many units as they wish at $0. No matter how thin you can slice your profit margin, the “competition” is still free. 

      • Agreed in principle, but there are plenty of reasons to believe that the legitimate product would be more popular than the pirated versions for people with any spending power worth considering.

        The legitimate industry can spend more on appearance, ease of download, quality of download, links to social networking, proprietary OS etc. than the pirates who make essentially nothing. (which is weird for a blackmarket of this size really)

        The legitimate industry can use its access to concerts, theatres, artists, authentic merchandising and the like to reward and encourage participation.

        Then there’s the social/pyschological aspect. If prices are seen as minor or reasonable, most people generally prefer to do things legally if the popularity of ITunes and Netflix is any indication.

        Because of numerous factors, the pirates generally can’t offer the ease, quality and reliability the industry could, if they bothered. Until they get in the game, they’re just handing excuses to millions upon millions of potential customers.

        It’s the general nature of things that social acceptance of certain behaviours is dependent on the apparent reasonableness. If there’s a legitimate option that is reasonably priced, piracy will naturally become less acceptable on the whole. Clearly it’s quite acceptable to those who do it right now, and since we’re talking millions upon millions of people, it’s hard to impact that with a wagging finger but no sensible alternatives.

        For people who don’t want to waste time (ie money) searching around, downloading and converting, the industry can make quick headway. For others they can use the additional lures I’ve mentioned, and I’m sure many I haven’t thought of.

        I know that I for one prefer a well tailored website with a no muss or fuss download procedure such as ITunes, to chasing around looking for crap. My time is worth too much.

        I don’t know, I think the industry is just making excuses. They could easily be making money already on this if they wanted. And the above example is an indication of the potential.

        Piracy will probably always exist to some degree, as it always has, but they could seriously curtail it if they really wanted to, without all the legal mumbo jumbo.

        • Personally, I’d argue that the number of people using Netflix or iTunes is less a testament to the idea that people inherently prefer legal options than a testament to the service problems that piracy currently has. But these problems will decrease over time as pirates develop trust and social based systems to automatically rank pirated copies for their quality, and as hobbiest hackers become fed up with those problems and program systems to deal with them.

          Does the industry suck? Yes.  Does it help when we take the pressure off the pirates by saying, “Well, if only the industry got its act together, they wouldn’t pirate in the first place.”  Hell no.  People who want crap for free will always exist. Why make their job any easier by providing any sort of moral rationalization for them to exist at all?

          I understand you don’t like the industry practices. I’m no fan either. However, I would argue that the place to complain about such is not in any discussion about piracy. After all, the typical response, the *moral* response to when a company is not providing the products or services in the manner we like is simply to *not access* those services.  Not to access them but simply not pay for it.  There’s a fundamental difference there, and when we start explaining away piracy, we’re blurring that difference – which helps nobody.

          And until society in general is vocally against piracy, there’s little moral high ground for us to stand on and criticize the companies when they blame piracy for lowered profits.. even if those profits are merely potentials.

  13. If you go to get a pack of CD’s at your local computer store, you’ll quickly understand that the “entertainment industry” is already making a ton of money off the sale of CDs, even though they’re not actually producing anything.  They’re also not giving those “tax profits” collected by the Canadian government to the artists that they “say” they instituted the CD taxes to protect.

    You can get a 100 pack of CDs in the states for as low as $22.00 retail, but the same 100 pack of CDs in Canada?  Expect to pay at least $69.00 or higher for the exact same product, from the exact same manufacturer.  That is called “oppressive taxation”, where you pay 3 times the actual price of a given product to the government in the form of taxes.

    In this case, it’s time that we did away with the CD tax in Canada.  If the “entertainment” corporations want to make money, perhaps they should at least try considering doing a better job, instead of gouging EVERYONE for their failure to provide quality product at reasonable enough prices.

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