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Saving Hollywood

DVDs in a computer's disc drives.
Photo by: aussiegall
DVDs in a computer's disc drives.

Last month, four men who run the Pirate Bay, perhaps the largest movie-piracy Web site on the planet, were convicted in a Swedish court of promoting copyright infringement and sentenced to a year in prison apiece. These men were true believers, high-concept pranksters, and sworn enemies of the movie industry. Dubbing the proceedings a "spectrial," (an amalgam of trial and spectacle), they and their supporters drove a bus around Europe, rallying people to their side. Friends of the cause protested outside the courthouse, where the bus was parked and served as their public relations headquarters. The Pirate Bay operators reportedly tried to buy Sealand, a defunct oil rig in the North Sea, in order to escape national copyright laws. After the conviction, some 25,000 Swedes joined the Pirate Party, a political party affiliated with Pirate Bay and dedicated to the "reform" of copyright laws.

Some people, like Columbia law professor Tim Wu, are tempted to think that even though Pirate Bay is still functioning, the conviction proves that as a business model, movie piracy is dead in the water. Last year's box-office figures went through the roof, and when your biggest foe is a motley collection of coders and performance artists, it's hard to imagine that Hollywood is expiring anytime soon. "There's a difference between a life and death, existential threat and an irritation," Wu says. "An elephant might complain a lot about mosquitoes, but is that elephant in any danger of dying?"

Maybe not. But DVD sales and rentals—by far Hollywood's most important revenue source these days—peaked in 2006 and have dropped by $2.5 billion, or one-quarter of the total annual box-office take, ever since. According to Eric Garland, who monitors music and movie piracy at bigchampagne.com, more than 70 million movies were downloaded via those irritants at Pirate Bay every week—and Pirate Bay is just one of countless piracy sites on the Web. Almost one in five Internet-connected computers around the world has downloaded BitTorrent software. If anything, Pirate Bay proves that people who spend their lives ripping movies aren't in it for the money—and that even if you put them in jail, someone will always be right behind them.

Thanks to the bandwidth required to share movies and the rise of the DVD in the late 1990s, Hollywood was spared a few years before piracy reached its glitzy shores, and studio moguls were able to learn from the music industry's clumsy response to file-sharing technology. But that doesn't mean they've figured it out. Piracy grows bigger every day, and movie studios and television networks are scrambling to find a way to save their industry. Do you lace more and better encryption into your DVDs and Blu-Rays? Offer your own movies and TV shows online for a small subscription or a few commercials to sit through? Sue the bastards?

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Some studios, such as Fox and Universal, have opted for the hammer. Others, such as Warner and, improbably, Disney, have been moving toward making online entertainment as easy and convenient as possible. All of them have tried a mix of each, throwing everything at the wall and seeing what sticks. But with billions of dollars at stake, no one knows what will work. And according to Garland, they have only a few years before their window of opportunity closes and an entire generation grows up thinking free movies are simply their birthright.

"Young people are already being socialized to receive a hard drive full of first-run movies from the guy down the hall," Garland says. "In the very near future, most people will be watching what they want, when they want, on demand while they're sitting on the couch. The question for Hollywood is, do they want to be the people that offer that experience, or do they want to let someone else do it?"

Protecting exclusive content

Oddly, the two companies that initially put Hulu online have the distinction of being the most aggressive pursuers of anyone who pirates their work or develops technology that enables file-sharing and digital copying. When Hulu debuted last year, industry watchers were amazed at how quickly it began to overtake YouTube in advertising revenue, and some began to wonder if this was the future of online entertainment.

But even as NBC Universal helped set up Hulu, the company was working overtime to track and purge any unauthorized footage of last year's Olympic games, which it had the exclusive right to broadcast in the United States. NBC's software scanned the Web for illegal footage and sent take-down notices to Web sites within an hour; Business Week reports that some 25,000 notices were sent out during the games, spooking pirates into shutting down their operations. That attitude was nicely summed up by Richard Cotton, NBC's counsel and onetime chairman of the Coalition Against Counterfeiting and Piracy, who used a 2007 press conference to declare that piracy should be a higher law-enforcement priority than theft, fraud, burglary, and bank robbery combined.

As for News Corp.'s Fox, the other co-founder of Hulu, the company has been at the forefront of just about every effort to install encryption in everything from DVDs to the public airwaves. When HDTV and Sony's Blu-Ray were competing to establish the dominant format in next-generation DVDs, Fox agreed to release all of its movies exclusively on Blu-Ray after Sony agreed to install tough new encryption and security techniques. Fox's decision was instrumental in establishing Blu-Ray as the main format for high-definition DVDs.

And as the country moves toward switching to digital televisions, Fox created the "broadcast flag," a digital signal embedded in movies and TV shows, which signals that copying the broadcast is illegal. Under pressure from Fox and other studios, the Federal Communications Commission in 2003 ruled that all digital TV tuners must watch for the signal and shut down all digital recording capacity when they detect it. The Electronic Frontier Foundation sued, and the FCC's ruling was thrown out by the courts. But Hollywood's lobbyists have repeatedly tried to get Congress to resurrect the broadcast flag.

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"Fox has been the chief drum beater on digital-rights management," says Fred Von Lohmann, a lawyer with the Electronic Frontier Foundation. "They've put a lot of their eggs in the basket of using technology to lock down consumers so they can't use digital recording devices. ... I think of Fox as a real partisan in the fight over technical restrictions."

The rest of Hollywood is considerably less hard-line, experimenting with both the carrot and the stick. Take Sony Pictures, for example. Last year, the company's chief technology officer, Mitch Singer, created the Digital Entertainment Content Ecosystem, a consortium of movie studios and electronics manufacturers dedicated to making legally acquired digital movies run on any device built by a company that has joined the coalition. As long as each studio encodes movies with its own unique encryption, it's next to impossible to transfer downloaded movies from one media device to another. But if the DECE project takes off, consumers would buy a movie once and be able to play it on a laptop, digital TV, Microsoft Zune—you name it.

Who's taking the lead?

At first glance, DECE appears to be a serious stab at making digital movies so easy to watch that consumers will buy them instead of downloading pirated copies. But there's a catch, of course. For one thing, Apple is not part of the coalition, and that's no accident. Sony and most of the other studios don't want Apple to assemble the same dominance in movies and TV shows that it has in music. So if this project takes off, you can likely say goodbye to watching most movies on an iPhone or buying them from iTunes. And the DECE group won't eliminate copyright-protection codes, just standardize them so viewers can watch movies in a variety of formats but still be prohibited from making duplicates.

According to Lohmann, who spends his days trying to end digital restrictions on electronic media, the consortium is merely an effort to lull consumers into accepting anti-piracy encryptions with a little more convenience. "They're trying to create a digital-rights management that will restrict what you can do but will be so invisible that people won't mind," he says. "It's all premised on this idea that consumers should be restricted in what they can do. And that's suicide because consumers will always go to a Pirate Bay."

Viacom , which owns MTV, Comedy Central, and Paramount Pictures, is similarly ambivalent. On the one hand, Comedy Central offers a vast array of old shows and comedy clips on its Web site, available for free if you just watch this little piece about the Men's Wearhouse first. On the other hand, Viacom's $1 billion copyright lawsuit against YouTube is easily the most aggressive move the industry has made to date.* (See correction below.)

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Interestingly, it's Disney, once the most retrograde and backward-looking studio in the business, that has made the most significant steps to accommodate the reality of Internet piracy. Disney's future is closely tied to Apple; it was the first to cut a distribution deal with iTunes, it's the one company that refused to join Sony's anti-Apple DECE, and Steve Jobs sits on its board of directors. The company just bought an equity stake in Hulu, has been negotiating to put movies and ABC and ESPN shows on YouTube, and is even considering setting up a Netflix-style subscription to its catalog. At an investment conference in March, CEO Robert Iger declared that the industry's old business model was rapidly dying, and the sooner the studios realize this, the better off they'll be. "When it comes to piracy, are we better off moving content faster and cheaper than if they steal it and we get nothing?" he asked.

"He's come a long way from where the CEOs of these companies used to be," Sweeting says of Iger. "He really seems to get it that they need a new way of doing business. I think it's no accident that Disney bought Pixar and Steve Jobs sits on the board of directors. Clearly, Jobs has influenced thinking at the highest levels."

But the reality is that no one studio has settled on a coherent approach to Internet piracy. Each studio is part of a vast entertainment conglomerate with separate divisions chasing their own agendas and headed by strong, distinctive personalities. Sony Pictures, for example, is determined to hold onto its content as tightly as possible. But Sony's electronics division is just as intent upon developing technology that spreads content far and wide. The organizational structure lends itself to a certain schizophrenia; one studio executive is hunting anyone who runs off with his content, while his colleague down the hall is finding new ways to share it with the world.

Pulled in two directions

Take Hulu, for example. Late last year, Internet entrepreneur Avner Ronen unveiled Boxee, a Web site that allows people to watch Hulu (and other) programs on their TV screens. The service dramatically enhanced the viewing experience, and seemed like a bold new strategy to keep viewers and ad revenue rolling into the studios. But in February, Hulu's overlords at Fox and NBC ordered Hulu to pull all of its programs from Boxee. Why? Watching Hulu shows on a TV screen could draw viewers away from the cable channels that syndicate the studios' programs, and even though the number of cable subscribers has been steadily dropping since 2001, the studios still can't afford to alienate their partners.

Or take RealNetworks, which was on the verge of releasing RealDVD, a groundbreaking new DVD-ripping program, when the studios sued to stop it. According to RealNetworks spokesman Bill Hankes, studio executives know this technology is inevitable and were trying to hammer out a partnership with RealNetworks right up until the moment they filed the lawsuit. But in the end, they just couldn't bring themselves to commit to it. "There were folks at the studios who clearly saw the opportunity that this type of technology could provide," Hankes says. The studios have begun marketing their own DVD-copying software, but it may be too late. "The market is rife with DVD rippers today that people can get on the Internet for free," Hankes says. "They are not subject to any legal action that I'm aware of. They're trafficking in this as we speak."

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But it's easy to scoff at Hollywood's reluctance to embrace the future—after all, it's not your money on the line. Try telling an investment fund that's put millions in a movie that you're going to try digitally distributing it for a fraction of what DVD sales will net and see how far you get. "It's going to be very difficult for the studios to come up with workable business models because the deal structures for movies are so complicated," says Sweeting. "You have a lot of people with fingers in the pie, with claims on the revenue streams, from the stars to the directors to the hedge funds that finance them. That's a lot of people who can say no."

In the end, the real reason the studios haven't been able to figure out what to do may simply be this: Nothing will work. You can hound all the pirates you want, encrypt every disc, set up all the cheap movie Web sites in the world, and millions of people will still want something for nothing. Like the music and newspaper industries before it, Hollywood may well be stuck in a process in which they trade physical dollars for virtual pennies. Eric Garland, who tracked music piracy for years before getting into the movie business, says that he watched music industry moguls war-game every scenario, and not one would have preserved his profits. Even in Hollywood, the money is simply drying up.

"The people in the industry have not been able to model video-on-demand or the Internet as anything but something that will shrink the market," says Garland. "How do you wake up in the morning and contemplate implementing a strategy that will shrink your business? ... People say to me, 'Are you saying that I should deliberately accelerate the shrinking of my business in order to usher in a smaller, less profitable business?' And I always say, ‘Well, when you put it like that ...' But the answer is yes. It has to be."

Correction: The original version of this paragraph contained assertions about Viacom's view of fair use that, upon further examination, do not accurately reflect the company's position.