Fall 2011

The Movie Business Fights Back

Based on his recent book, Free Ride, author Robert Levine explains why it may soon become easier for consumers to buy content on the Internet than steal it.


Internet Issues Levine

The movies are still big—it’s the screens that got small. Most of us still talk about the movie business as one that takes place in theaters, where films “open” on a certain day, take in money at a “box office,” and “play” for a number of weeks. If this were the movie business, it would be doing pretty well: U.S. box office revenue hit a record $10.65 billion in 2009, dipped slightly in 2010, and should stay at about that level in 2011. And international figures show the same thing. If you look at those numbers, it’s hard to understand why the studios and guilds are so worried about illegal downloading.

Like so much else in Hollywood, however, the relative health of the film business is just an alluring illusion. The media’s focus on who saw what last weekend is a relic of the movie business that existed before the rise of television, when a far larger portion of the American populace went to theaters regularly to see shows that included cartoons and newsreels, along with feature films. These days, most movies take in only around 30 percent of their total revenue in theaters. The rest of the money they make comes from a series of small screens—DVD sales and rentals, network television and pay cable rights, and, to a much lesser extent, various forms of downloads and streaming video. And if you look at these numbers, it’s much easier to see why the entertainment industry is scared.

Since 2004, revenue from sales and rentals of DVD and Blu-ray discs has fallen by a quarter, and the decline seems to be accelerating. Networks and cable channels are more reluctant to pay in advance for rights to films, especially independent ones. To some extent, this isn’t a surprise: New formats always replace old ones. But the online movie market seems to have stalled out, and illegal downloading is a major part of the problem. And although Hollywood has some promising plans to make online content more appealing—including the next-generation digital format called UltraViolet (more about that later)—it faces an uphill battle if movies can be downloaded illegally with no more effort than it takes to buy them legitimately.

Silicon Valley executives say Hollywood is afraid of progress—the industry has worried that new technologies would destroy the market for their products since the rise of television. It should be noted that they weren’t entirely wrong. In 2010, 1.3 billion movie tickets were sold in the U.S., compared with 4.7 billion sold in 1947, to a smaller population. But television also created a valuable new market for movies. By 1980, before cable and VCRs really took off, studios took in three-quarters as much from sales to network television as they did from theaters, according to Edward Jay Epstein’s seminal The Big Picture: The New Logic of Money and Power in Hollywood. It seems quaint now, but back in the ’70s the “network television premiere” of a hit like Star Wars was a big deal.

Over the last few decades, media history repeated itself. Universal Studios famously sued Sony, before the latter company acquired Columbia Pictures, for making a VCR that made it easy for consumers to infringe film copyrights. Gradually, this device also cut into the theatrical audience, as consumers began to record films on television, then buy and rent them. But the videocassette did create a massive new market. Suddenly, studios weren’t just in the business of making movies—they were in the business of making more money from those they had already made. By 1995, according to Epstein, studios brought in almost twice as much revenue from home video sales and rentals as they did from theaters.

Cable created similar opportunities. The hundred-channel world decisively doomed the old one, in which most consumers went to theaters regularly. But those hundred channels also required content, which often came in the form of films. Ted Turner’s cable empire needed movies so much that he bought MGM for its library. AMC, now a critics darling with shows such as Mad Men and Breaking Bad, began life as American Movie Classics—a market for old films.

The development of the DVD followed the same pattern. By the time DVD sales hit their peak in 2004, studio executives could be forgiven for seeing theatrical releases as incredibly expensive marketing campaigns for the more profitable home video business. By then, DVDs generated twice as much revenue as ticket sales. And studios kept more of that money, since they got a higher percentage from stores than they did from theaters. Theatrical showings, and the advertising campaigns that went with them, were still vital for creating audience demand, but the silver disc replaced the silver screen as Hollywood’s main source of income.

The Internet seems to have stopped this virtuous cycle: A decade and a half after the Internet became mainstream, it still has no functioning market for entertainment. This was not how it was supposed to be. Back in the ’90s, when Al Gore was talking up the “information superhighway,” he thought it would help the U.S. economy partly by creating a global market for American movies and music. The Internet has always been a valuable platform for movie marketing—it’s hard to imagine a time before studios posted trailers, let alone websites, for upcoming films. And to judge by online traffic, Internet users are certainly avid movie downloaders. The only problem is that few of these movies are paid for.

That doesn’t mean movies can’t be purchased, of course—most are sold on iTunes, while some are also available in streaming video as part of a Netflix subscription. But the number of films acquired legally pales in comparison to illegal downloads. Rampant illegal downloading puts pressure on studios to trade analog dollars for digital dimes—isn’t it better to sell a movie for $3 than to get nothing at all? An environment in which paying for products has essentially become optional is the very definition of a broken market.

Fixing that market means making legal commerce more convenient than stealing, both by limiting the second and encouraging the first. And, after some delay, it looks like that’s exactly what the industry is doing. The proposed PROTECT IP Act of 2011, which is meant to crack down on “rogue sites,” will not eliminate illegal downloading. But by giving the U.S. government power to seize domain names in certain situations, it will help force illegal sites to keep changing names and addresses—and thus become harder for consumers to find. Just as bootleg DVD sales are limited to shady street corners in the real world, stealing would be inconvenient online.

Before the end of 2011, studios will also introduce UltraViolet, a new digital format that uses cloud computing to allow consumers to download or stream movies almost anywhere. Consumers will be able to establish accounts for films they have purchased rights to, then watch them from any UltraViolet device connected to the Internet, including computers, video game consoles, and Blu-ray players that can go online. The organization behind the project, the Digital Entertainment Content Ecosystem— DECE for short—includes all the major studios but Disney and most major technology companies and retailers with the exception of Apple.

Like ATMs, UltraViolet devices would check in with a central database that tracks who can “withdraw” what content. (UltraViolet films will come with a limited number of downloads, as well as streaming rights.) Like ATMs, UltraViolet providers that stream movies to consumers will be able to charge their own service fees. (Hotels, for example, would be able to charge a few dollars to let consumers access the films they have rights to.) Also like ATMs, UltraViolet devices should be able to make all of this so easy for consumers that they barely notice the complexity of the underlying system.

If UltraViolet works, it will offer the flexibility and elegance of Apple’s iCloud system. It would have a level of convenience that rogue sites couldn’t match. Right now, if you wanted to start watching a movie at home one night and finish it at a hotel the next, you would have to make sure you had the DVD or the device you had downloaded the movie to. With UltraViolet, you would be able to sign into the system and pick up right where you left off—without having to carry anything.

How many consumers find this convenience worth paying for will depend partly on UltraViolet and partly on whether rogue sites can be made harder to find online. If that can be done—through some combination of the PROTECT IP Act, litigation against online locker services like Hotfile, and current enforcement strategies—buying movies and television shows online would become a far more appealing experience. It could become a story we’ve all heard before: The current market for movies is threatened by a new technology that ultimately delivers a new market of its own.

Internet Theft
As part of the Guild’s effort to keep members informed about the complex issues of Internet theft, the Quarterly has run an ongoing series of stories on the subject.
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