Internet Pirates on the Digital Seas

The major studios would have you believe they're about to go broke in the next few years because of Internet piracy. That's not exactly true.

Their concerns are certainly well-founded when you consider the success (and collapse) of Napster and like-minded file sharing services, and when you consider the proliferation of high speed Internet connections around the world.

Still, there are some major reasons that the studios don't have to worry just yet.

First, the studios are increasingly "front-loading" their films. This means that more and more the first weekend tallies are representing a greater percentage of the total box office of any given film.

This has resulted in the phenomenon of film revenues dropping 50% or more in the second and third weeks of release, but when you're opening weekend is in the $50 million plus category (or as in Spider-Man's case, $100 million plus) what does it matter?

Also, the studios get a greater portion of the box office revenue in those vital few first weekends. In exchange for getting the latest and greatest movies on their screens, theatre owners give up as much as 80% of the first dollar gross on big films. That's also the reason why you need a second mortgage to be able to afford that box of Junior Mints.

Because these films are so heavily geared toward opening weekend results, there isn't really time for them to proliferate on the Internet before the major core audience has seen them. Certainly Internet piracy could significantly hurt repeat business, but I'd suggest that the low quality of a lot of these films (see, for example, Hollow Man and The Mummy Returns - or better yet, don't!) has more to do with hurting those kinds of numbers than anything else.

The only risk to the "front loaded" box office revenue at this point seems to be on international returns, but the studios are getting around that by releasing films simultaneously in multiple markets (see, for example, Star Wars: Episode II).

Also, while there is the slight risk of cannibilization of some revenue streams, it seems new ones are popping up just as quickly.

For every person who doesn't go to see a movie at the theatre, there's another one who buys the movie on DVD or watches it on Pay-Per-View. Not to mention all the merchandising tie-ins attached to most big studio films.

Back in the "old days", the studios had to make their money from the box office, and they generally tried to turn a profit on the North American box office, with any ancillary revenues (T.V. rights, etc.) being considered gravy.

Shortly after Jaws came out, the studios figured out that they could market the hell out of their films, and turn a huge profit...even in previously unprofitable times (summer never used to be a time to see movies, in fact a lot of theatres used to close for the summer).

They also figured out that films could be paid for before their release if the rights to television networks and foreign markets were negotiated properly.

Now, of course, the foreign markets and the television stations (along with the video companies, etc.) are all owned by the same corporate conglomerates that own the studios.

What this essentially means is that instead of Disney making a film and selling the rights to ABC who then has to turn a profit on the advertising dollars, Disney can make a film and very cheaply license it to their ABC television unit (after an appropriate video, pay-per-view and premium cable period, of course) which then sells the advertising dollars. The odds of losing money on even the biggest flop of film are pretty much insignificant (Town & Country notwithstanding) because they can just keep rebroadcasting the thing on their various cable networks and speciality channels until it turns a profit.

But what does this have to do with Internet piracy?

Well, first off, things are not as dire as the studios and the MPAA would have us believe. In fact, the movie business has never been more lucrative.

What the studios are scared of is the ability for consumers to circumvent SOME of their revenue streams, and thus damage their bottom line in any way.

After all, the reward for a CEO who has a record year at AOL Time Warner is not only a big bonus, but he or she also has to create a new record the NEXT year.

The studios want some kind of nice, copy-protected way of distributing their films on the Internet. They want to be able to take your credit card information, let you watch a film ONCE, and once you've watched it, charge you to watch it again.

This is why when Sony launches their network adaptor and hard drive for the Playstation 2, eventually one of the features of the device will be the ability to "rent" movies online and download them to the drive. Sony owns Columbia-Tristar, and with tens of millions of PS2s out there this adds yet another revenue stream (not to mention another way to sell some PS2 hardware).

What they fear is a simple, popular (this is their biggest fear) Napster-like service that easily allows the distribution of films. While these services do exist right now, they're not the easiest things to use, and the movies themselves are not the best quality.

The music companies complained that Napster would cannibalize their business, so they did everything they could to make sure Napster wasn't a threat (and succeeded).

As a result, the music companies generated a lot of animosity among music listeners, and if you look at the figures it's only since the demise of Napster that music sales have started to decline.

The music companies felt the same way when radio first appeared. Why would people buy music when they could listen to it for free on the radio? Of course, the result turned out to be that radio play was great marketing for the music companies, and rather than adapting Napster to be used the same way, the decided simply to kill it, and in the process created numerous alternatives which are harder to destroy because of their non-centralized nature.

In other words, instead of adapting to the changing world, the music companies tried to adapt the world to their needs.

The movie studios feel that something like Napster would destroy their business, but in reality the opposite is probably true. While it may hurt their pay-per-view revenue models, if consumers can get a good quality, reasonably priced legitimate version of the same film, they will (which is why DVD has been such a huge success).

If the music companies had realize that the way to defeat Napster was to take advantage of it, they would have been able to come up with some kind of revenue generating scheme utilizing it. They could have insisted on advertising banners or marketing information in exchange for allowing users to trade files. Instead, they killed Napster and sent its millions of users to various competing services where it's quite literally the wild west, and nobody has any control.

Instead of viewing the Internet as a Pay-Per-View device, the studios should view it as a sell-through model. Let people download the movies, pay once, and do whatever they want with them. If they want to burn them to CD or DVD, fine. If they want to watch them a few times, then delete them, fine as well. If they want to use a frame from the film as their desktop background, let them.

Everyone knows HOW to shoplift. It's not rocket science. The reason most people don't shoplift is because the majority of people are honest. The studios have to learn that the solution to Internet "shoplifting" of their movies is NOT locking everyone in the store with the merchandise. It's allowing the honest consumers to get the product they want at a fair price.