New Looks at Hollywood’s Piracy Problem (CDSA)

By Bryan Ellenburg

The assumption about piracy has long been that once a new theatrical release hits the file sharing sites, the box office take for that film will be significantly impacted.

But that just may not be the case, according to economist Koleman Strumpf, a professor with the University of Kansas School of Business, who conducted one of the most extensive piracy studies to date.

“Using movie-level tracking stocks in conjunction with the arrival date of illicit copies, I find that file sharing has only a modest impact on box office revenue,” Strumpf concludes in his study “Using Markets to Measure the Impact of File Sharing on Movie Revenues.” “The estimates indicate that the displacement effect is quite small, both on a movie level and in aggregate. … This is perhaps not surprising given the low quality of early file sharing releases and the lack of amenities such as theater sound and video systems.”

Strumpf examined the top 150 grossing movies in the U.S. each year from 2003-2009, and using data from both the Hollywood Stock Exchange (a mock entertainment stock market that has a track record for projecting box office performance), as well as insider data from No. 1 file sharing service BitTorrent, he estimates that pirated copies of those films cost the studios approximately $200 million in revenue.

That’s less than three tenths of a percent of what those movies pulled in, and less than half the $500 million the Motion Picture Association of America (MPAA) spent on anti-piracy efforts during the same time span, according to BitTorrent tracking site TorrentFreak.

“This small effect is perhaps the result of low quality initial file sharing copies and the superiority of the theater viewing experience,” Strumpf wrote.

Looking at those 1,500-odd films released during 2003-2009 (with the films averaging $61 million), it only took an average of 5.2 days after a film opened in theaters for a copy to show up on file sharing networks (it took nearly 69 days on average for a high-quality pirated copy to appear).

What makes Strumpf’s research unique is that while other piracy studies have had to guess as to when a title hit file sharing networks, he was able to convince BitTorrent sites to give him access to complete file sharing data, including both the time each file was originally uploaded and the time each user download began.

“The main result is that the effect (of piracy] is small, less than 1% of the average initial-run box office,” he wrote. In fact, movies that made it to file sharing networks prior to their theatrical release actually resulted in slightly larger gains at the box office, Strumpf concluded.

“One explanation is that such releases create greater awareness of the film,” he said. “This is also the period of heaviest advertising. … This suggests that free and potentially degraded goods, such as the lower quality movies available on file sharing networks, can have some beneficial effects on intellectual property.”

Strumpf’s study comes on the heels of a new intellectual property report from the American Bar Association (ABA), with the group both calling for greater government action regarding online piracy, and cautioning that individual consumers who pirate content are the wrong people to target.

“Enforcement for activities occurring in the U.S. or abroad is most effective when undertaken against the owners or operators of large-scale commercial enterprises running servers or services, meaning against the enterprises-themselves, not the thousands (or millions) of end-users,” the ABA report reads.

Sure, content owners can sue individual consumers who download and share content illegally. Both the Recording Industry of America (RIAA) and the MPAA have done just that in recent years, taking tens of thousands of individual consumers to court, usually settling for a few hundred dollars. Both industry groups have abandoned that tactic.

“… While it is technically possible for trademark and copyright owners to proceed with civil litigation against the consuming public who affirmatively seek out counterfeited products or pirated content or engage in illegal file sharing, campaigns like this have been expensive, do not yield significant financial returns, and can cause a public relations problem for the plaintiff in addressing its consuming public,” the ABA report reads. “Alternatively, a well-constructed and continuous public outreach campaign to educate the public about piracy and counterfeiting, the negative impacts these activities have on the U.S. economy and ways consumers can be proactive in trying to stop such conduct may have a longer lasting positive impact.”

Instead, content companies need to focus on where the piracy is originating: foreign nations beyond the sovereign jurisdiction of the U.S. The main sources for pirated content are hosted and operated outside the reach of American jurisdiction, ABA notes. But those sites rely on intermediaries (financial, advertising and logistical) that can be regulated.

“If U.S. legislation enabled litigants to identify and cut off such Web sites’ access to the services of these intermediaries, U.S. courts could help curtail foreign online counterfeiting and piracy via an indirect route,” ABA’s report reads. “But to avoid … unintended spillover effects, any such legislation much carefully define the types of foreign Web sites that would be subject to such court actions, and the types of intermediaries who would be asked to cut off services to such sites.”

One possible solution would require U.S. ISPs to block users’ access to pirate sites using DNS or IP blocking. Another would be requiring search engines to stop indexing and returning search results from piracy sites, ABA suggests.

“Over the last few years, many ISPs and app marketplace providers have created and implemented online complaint forms that provide both copyright and trademark owners with a streamlined procedure for reporting and affecting the takedown of infringing content online,” the report reads. “The availability of this process, however, does not shift the burden of policing marks and copyrighted content from the intellectual property owners to the ISPs or other online marketplace providers.”