Bit Rate

Can You Turn Pirates Into Purchasers?

1/25/2012 1:49 PM

You’re a manufacturer of high-end racing bicycles.

You make your newest bike models available to specialty retailers several weeks ahead of wider distribution, since they’re your most valuable sales partners.

But a crypto-anarchist cycling gang — with the nom de guerre Bikes Want to Be Free! — hates this policy because it inconveniences them. So, the day the newest products hit the street, they smash the windows of the cycle shops and steal the goods.

What’s the rational response?

Do you (a) work with the bike shops to hire security guards and install steel gates over the windows; or (b) say, You know what? Let’s turn those thieves into honest, paying customers by giving them what they want at a 50% discount, so they’ll stop stealing our stuff.

DOJ takedown notice on Megaupload.comIn the media world, there’s a school of thought that piracy is primarily the result of a “market failure” — that business-model decisions like windowing, pricing and content encryption are driving millions of Internet users to sites like The Pirate Bay or the recently shuttered Megaupload. The entertainment industry, according to this line of thinking, should focus not on policing efforts like SOPA and PIPA but on rethinking their retail strategies for a digital age.

Venture capitalist Fred Wilson, for example, lectures Hollywood that “scarcity is a shitty business model.”

“[D]enying customers the films they want, on the devices they want to watch them, when they want to watch them is not a great business model. It leads to piracy, as we have discussed here many times, but more importantly it also leads to the loss of a transaction to a competing form of entertainment,” he wrote in a blog last week.

BTIG analyst Rich Greenfield is of the same mind, arguing that if movie studios made new releases available on the Internet for a rental fee of $20-$25 the same day they premiere in the theater they’ll come out ahead and inhibit illegal downloads (see Greenfield: Shorter Windows Could Reduce Movie Piracy). Wilson, by the way, suggests a more realistic $5 per view.

The calculus involved in eliminating content windows is one thing. Can Hollywood afford to preemptively destroy or diminish the movie theater industry? (Does it need to?) By the same token, cable networks have shown that they won’t risk their billions in affiliates fees for new online distribution models; e.g., they’re licensing older content to Netflix instead of current-season material… or, like HBO, they don’t do business with Netflix at all.

For movies, the hue and cry from theater owners would be inevitable (look what happened when Universal tried a three-week-after-premiere VOD release at $60 — 60 bucks! — for the buzz-poor comedy Tower Heist). Greenfield is unsentimental about giving them the shaft: “No more tests or trials, studios simply need to shift their model and the exhibitor backlash will evaporate.” Simple? I doubt it.

A separate question is whether going direct-to-Internet will curtail piracy. If you’re a believer in the better angels of our nature, perhaps you think the dude who just stole Mission Impossible: Ghost Protocol via Pirate Bay is going to eagerly shell out $5 or even 25 bucks instead.

I think piracy is motivated primarily not by a “failure” of business practices but by greed: getting something for nothing.

Even with the rise of iTunes and other legitimate sources for digital music, illegal downloading remains rampant. The RIAA says the music business has increased its digital revenues by 1000% from 2004 to 2010 — but that “digital music theft has been a major factor behind the overall global market decline of around 31% in the same period.”

Greenfield tries to buttress his window-smashing argument by claiming that “virtually all of Netflix’s content is catalog movies and television series that are readily available illegally. Despite easy illegal access, 21 million consumers are paying Netflix $7.99/month for its streaming service.”

OK, but that means that a whole lot of people — who have instant access to a cheap, legal alternative — are still stealing movies and TV shows. Reducing the opportunities for people to steal content, as SOPA and PIPA were intended to do, is important to ensure the viability of legitimate services.

There’s no doubt: In the instant-clickable-broadband era, consumer expectations are changing rapidly. People want more content in more places. Some may even be willing to pay for that privilege, and earlier releases might indeed grow the entertainment-spending pie. But it’s terrifically wishful thinking to suggest that a shift in business models would somehow transform digital pirates en masse into paying customers.

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