Fall 2009

Internet Theft:
How It Happens and Why It Matters

As digital piracy siphons money from the revenue stream of film and television, the DGA and its international colleagues are working to combat this growing threat. In this primer, we explain the dollars and sense of it all—and what's at stake.


Piracy Part 2

Internet theft, more commonly known as digital piracy, is instantaneous, worldwide, difficult to track and accessible to anyone with a broadband connection. Its breeding ground is an Internet culture that believes all content-regardless of whether one person took an hour to create it or hundreds of people spent years-should be free to all who want to "consume" it.

And the problem is only getting worse. As technology continues to improve through faster connections and cheaper memory, more and more pirated content will be made available-threatening the future of the business and the livelihood of all DGA members.

Does the complexity of the problem mean that nothing can be done to counter this fast-moving train? The DGA doesn't think so and has been actively working toward finding ways to fight back. "The Guild recognizes that if digital piracy is left unchecked and the Internet is allowed to operate without any restrictions or management of copyrighted content, that the end result could lead to an economic meltdown for our business and our members," says DGA President Taylor Hackford. "Our work must be multi-pronged and effective in all the arenas in which the battle will be fought-legislatively, administratively, internationally and in the court of public opinion. We cannot sit back and hope that the companies can solve this problem by themselves."

Considering the international scope of digital piracy, it is not surprising that in the past year the most active and public battleground has been in France. After months of lengthy and heated debate, the French government, with great support from French directors, composers and other film artists, recently passed a law called "Creation and Internet" that provides for sanctions against those who steal copyrighted work. The law applies what is called a graduated-response approach in which individuals who are illegally downloading materials are given a series of warnings about their behavior. If the warnings are completely ignored, a court can lay down a series of escalating sanctions against the offender from fines to cutting them off from the Internet for a year, to jail time. The measure still has one more hurdle to overcome before it becomes law.

This was a hard-fought campaign with great opposition from the Internet industry and consumer groups who claimed that any effort to sanction those who steal is an invasion of their personal rights. But directors and the organizations that represent them did not back down. "It's not a perfect bill and it won't stop everything," says the Romanian-born French director Radu Mihaileanu, the president of ARP (Société civile des Auteurs-Réalisateurs-Producteurs). "But it has great educational value to teach people that content is not free."

In April, at the request of French colleagues, the DGA National Board issued a resolution in support for the bill. It was an important step and received widespread press attention in France right before the legislature voted.

When the DGA received the French request, the Guild was already fully engaged in its fight against Internet theft. In preparation for the 2007 contract negotiations, the DGA had conducted extensive research in new media and was well aware of the link between the growth of digital media and Internet piracy. "There's no question that the economic impact of digital piracy on directors and all members of directorial teams is significant," says DGA National Executive Director Jay Roth. "A substantial percentage of what people make comes from downstream revenue. It keeps them alive between projects. It also supports our pension plan-60 to 70 percent of money coming into our pension fund comes from downstream revenue, over $250 million a year added to our incomes. And in its own unprecedented way, downstream revenue is precisely what Internet piracy destroys."

What is Internet Piracy?

Broadly defined, piracy is simply a genre of theft-the taking of someone else's property or goods without securing permission or paying a fee. As it relates to movies and television shows-forms of intellectual property (IP)-piracy is the unauthorized use, copying or distribution of copyrighted content. For instance, someone who uses a DVD burner to make multiple unauthorized copies of copyrighted movies or TV shows risks being charged with IP piracy.

Bootlegging DVDs and CDs is referred to as "physical" or "hard-goods" piracy. The major players in physical piracy tend to be international organized crime operations, which typically set up numerous optical disc burners in warehouse-like facilities for virtually unlimited illegal reproductions that eventually reach black markets around the world.

Internet or online piracy is different, and enormously more damaging. The biggest difference with Internet piracy is that there's a viral quality to it. One film can be streamed (as is increasingly the case) or downloaded by millions of individuals with such speed that prevention is increasingly complex. Ultimately, no one involved in the creation of the film or TV program is paid, even though the economic rights of copyright holders are protected by copyright laws. The DGA's collective bargaining agreements specifically lay out the ground rules for compensation from copyright holders to ensure that directors and other creators are paid for reuse of their work. But in this brave new world, the theft of copyrighted works is not seen as illegal or a crime, but rather a "right."

What makes the effort to combat Internet theft all the more difficult is that it is not easily reduced to simplistic positions. And at first glance, based on public statements, it appears that everyone equally supports copyright protection and the need to keep illegal content off the Internet.

However, the real question is not whether everyone believes in copyright protection, but whether they also believe that there must be an effective and meaningful way to keep pirated films and TV programs off the Internet. Those who claim to be in favor of copyright protection while they argue for an Internet in which films and TV programs flow freely and openly to the public, say that the remedy to protect copyrighted works on the Internet already exists. They say that copyright holders (and through them, filmmakers) have the right to due process which allows them to bring lawsuits against perpetrators. But the difficulty is that lawsuits have already proven to be an ineffective solution for a crime that takes place in a matter of minutes and can be done by anyone, anywhere in the world.

True copyright protection must permit the kind of sanctions and the ability to enforce the law that applies to crimes on any highway-Internet or otherwise. In other words, the fundamental issue at stake is how Internet theft is dealt with, not whether one just says they believe in copyright protection. If "open and free" is to apply only to lawful content, then there must be a means to deter illegal content.

Consider the thousands of movies and TV shows that are illegally available on the Internet every day-and the millions of people with computers that can stream and/or download that content-and you get an idea of the exponentially widening maw of a massive revenue siphon. "No one can put an exact figure on losses, but no serious person doesn't believe we're losing billions a year to piracy," says Roth.

"Broadband has been spreading in virtually every country in the world and the speed of broadband has increased, too," says Rick Cotton, general counsel for NBC Universal and one of the entertainment industry's leading executives in the fight against piracy. "As those two trends continue, the ability to download big files becomes more and more accessible in a world where there's already a tidal wave of online piracy."

Its impact on the whole industry is clear. When piracy eats into revenues, it becomes more difficult for a film or TV show to make a profit, which in turn makes it harder to find new investors. The ultimate result is that fewer films and TV shows get made. Not only does compensation from residuals dry up, so do employment opportunities for Guild members.

"Directors are well aware that to be able to pursue the work they love, it requires that they be able to make a living," says Hackford. "So, if they're not going to be compensated for what they do, they won't be able to do it. And it isn't just current members, but future generations, who may never get a chance if piracy takes away their ability to earn a living."

How Does Piracy Work?

The MPAA, which closely monitors worldwide piracy, has noted that the camcorders movie bootleggers sneak into first-run feature screenings are the principal source for pirated movies online. After surreptitiously recording the film, the bootleggers sell the illegal copy to "replicators," who burn it onto DVDs, which they in turn sell to "release groups." These groups then put the pirated movie on high-speed computers called "top sites," which serve as online distributors.

TV show pirates have it much easier: All they need to do is turn their computer into a digital video recorder, a process which simply requires attachment of a readily and legally available TV tuner card to, say, a laptop. As the show airs, the computer's hard drive can record it as a digital file, which can then be uploaded and offered at will to pretty much anyone with an Internet connection anywhere in the world.

Whether the source of origin is an insider hawking a screener or a regularly camcording bootlegger, pirated content fenced on a top site quickly finds its way onto millions of personal computers, usually through peer-to-peer services. P2P, as it's commonly known, is essentially a networking protocol, and is intended for people who want to share digital content. When combined with software applications such as Kazaa, LimeWire or Morpheus, a P2P allows computers to connect with each other on the Internet. Once connected, a computer can access the hard drives of all other computers also on the network.

While some traffic on P2P networks is legitimate-such as a group of users sharing and accessing each other's vacation photos-the entertainment industry has long seen that the majority of P2P traffic is pirated product being illegally swapped and shared. No hard data exists on the exact amount, but some things can be inferred. For example, Sandvine, an online network management company, issued a study last year showing that P2P traffic accounts for just under half of all traffic on the Internet at any given time. And researchers at Delft University of Technology in Holland put the number at about two-thirds. Moreover, MPAA research suggests that 90 percent of pirated movies (titles still in the theaters or not yet available on DVD) on the Internet come from camcorded piracy. Since illegally camcorded content ends up on top sites, and top sites' largest group of visitors is P2P members, the amount of pirated content moving along P2P networks is at the very least substantial.

A unanimous U.S. Supreme Court decision in 2005 ruled that P2P networks or software makers could be held liable for the illegal actions of their users if the networks or makers were "inducing" users to commit copyright infringement. The justices agreed that evidence showed the defendant-Grokster, a software company that owned and operated a P2P file-sharing service-had marketed its service as a way for users to swap copyrighted content, mainly music, without paying for it. Grokster went out of business as a result.

But the P2P industry in general has survived by carefully promoting its products and services only for legit use, though the entertainment industry continues to question how much use is legit. The proportion of P2P traffic has decreased somewhat, but it still generates the most online traffic in the Western and Southern hemispheres as well as in the Middle East, according to a recent study by the Internet management and analysis firm ipoque.

P2P piracy is "one of the two areas where we see the greatest activity," says NBC Universal's Cotton. "Streaming sites is the other. Many are based offshore, and they're increasing."

Streaming sites are a relatively new phenomenon which is likely to soon displace downloading and P2P and have the potential to be even more disastrous. In effect, they are websites that let you watch, among other things, Hollywood movies and TV shows for free or by subscription-without the time and inconvenience of downloading. You can't save a copy, but you can watch it any time you want. No copyright permissions have been granted, and no residuals paid. The sites make money by selling subscriptions payable by credit card, and by selling ads, often with the actual advertiser not knowing where the ads will appear as they are sold by third-party agencies. Some sites are estimated to be making many millions of dollars a year. No surprise, since their overhead is minimal and they aren't paying for their product.

Another newcomer is "cyber lockers," sometimes called digital lockers, which have been around for about five years but only recently have emerged as a means to steal audiovisual work. Cyber lockers are essentially online storage sites where you can upload a file up to 200MB (movie-size) and let other people download copies whenever they want. One such site, RapidShare, makes money by charging downloaders for a quicker, enhanced downloading capability. According to V.i. Labs, a digital anti-piracy technology firm, RapidShare claimed last year to have 160 million files on tap.

While cyber lockers can serve a legitimate purpose, like streaming sites they are "typically offshore hosts serving as facilitators to access pirated content," says Darcy Antonellis, Warner Bros.' technical operations chief.

Combating Piracy

Simply closing or blocking illegal websites or networks would be nice, but doing so is anything but simple.

While still a challenge, physical or hard goods piracy is easier to combat. "You look for whoever is mass-producing the pirated discs," says James McQuivey, an analyst at Forrester Research, which tracks the state of piracy and consumer attitudes toward it. "But consumption of Internet piracy is spread across a much wider area. Some are real professionals, but others are casual pirates doing it only because it's easy or convenient. It's almost impossible to shut it down."

With the help of new digital technologies, like watermarking, industry investigators working with law enforcement officials have managed to identify and track down some original source providers of pirated content. For example, last February the Department of Justice announced indictments against three Southern California men for uploading movies to illegal websites. One of them had been an employee of a copying facility used by Paramount; he bootlegged a promotional copy of The Love Guru and later distributed it, according to the indictment.

But throwing a lasso over camcording remains elusive. "Camcording has largely resisted all efforts to police it," says Paul Sweeting, an analyst with the technology and digital media firm GigaOM Pro and author of The Media Wonk blog. Despite laws on the books in many states, "Camcording is still the number one source of pirated movies on the Net as well as for a lot of bootleg DVDs. Camcorders are getting smaller and better all the time, too, so in some sense the problem is getting worse."

Cotton reports some headway against what has until recently been a huge headache—people posting video clips of TV shows without authorization, usually on popular sites like YouTube. "What's happened in the last two and a half years on these video-sharing sites is an example of what's possible," says Cotton. "They now have embraced content recognition or filtering technology that can block over 90 percent of individuals who are uploading copyrighted content."

And, as in the case against Grokster, the industry has had some success through legal action. But with many illegal sites moving offshore and others proliferating in foreign countries, the legal route can be tortuous. Laws and priorities vary from country to country, making it frustratingly difficult to land a blow against large-scale online bootlegging.

Case in point: The Pirate Bay, a Swedish website that the Los Angeles Times once described as "one of the world's largest facilitators of illegal downloading." Almost from its inception in 2003, The Pirate Bay, which helped users find bootlegged content, was the target of infringement lawsuits by American and British copyright holders, who got little traction with Swedish courts. In 2006 the Swedish police did locate and seize Pirate Bay servers-succeeding in only shutting the operation for a mere three days, as the site had other servers.

Not until last April were the operators of The Pirate Bay convicted in Sweden for abetting massive copyright infringement. The site remained online, however, until August, when a Swedish court ordered all traffic to the site blocked. The operators are appealing the verdict, which, per Swedish law, is not final or binding until the country's high court rules on it. Meanwhile, other similar sites have popped up.

Closer to home, otherwise friendly Canada has become so much of a concern regarding piracy that the U.S. government has put our neighbor to the north on its watch list of countries where IP is not getting adequate protection. A congressional report released earlier this year said that Canada has become known as a "safe haven" for Internet bootleggers because the country's laws fail to include any provision that "clearly provides an effective means for copyright holders to protect their works from online piracy."

"In some countries, the lack of adequate laws protecting IP rights can be a problem, while in others, the lack of will to enforce existing laws is the issue," says a staff member for Rep. Howard L. Berman, chairman of the House Foreign Affairs Committee and a staunch IP rights supporter. Even when copyright holders seek to defend their rights in court, legal recourse is costly, time-consuming and ineffective for both sides.

Domestically, the federal government has helped in recent years by passing legislation meant to protect U.S. copyright owners and increasing law enforcement's anti-piracy efforts. In 2005, Congress passed the Family Entertainment and Copyright Act, which upped penalties for infringement and also made camcording a movie a felony. Three years later, lawmakers approved the Prioritizing Resources and Organization for Intellectual Property Act (PRO-IP Act), which increased federal funding for anti-piracy operations and also created a special high-level administration position responsible for IP issues. In September, President Obama announced the nomination of Victoria Espinel, who has a long career in various intellectual property work, to be the U.S. Intellectual Property Enforcement Coordinator.

The Federal Communications Commission, under Chairman Julius Genachowski, is responsible for shaping the administration's broadband plan, including rules applying to Internet access. In his first major policy speech in September, Genachowski proposed the FCC's plan to codify a set of rules that ensure open access to the Internet. In his speech, Genachowski made it clear that he intended to create a free and open Internet by putting teeth into current guidelines and that broadband providers cannot discriminate against content or applications. However, in his remarks he also notes, "It is vital that illegal content be curtailed on the Internet... open Internet principles only apply to lawful content..." At issue for the entertainment community will be how the FCC chooses to make sure that illegal content-i.e. pirated works-is truly kept off the Internet.

"We love that people can have immediate and open access to our members' work," Roth says. "But there's also the issue of how to make sure that artists and authors are protected."

The studios and the Internet Service Providers (ISPs) are in ongoing discussions about the trafficking of illegal content on the Internet, a problem the ISPs are already addressing with child pornography and viruses. While there is at present no single ISP position on this issue, it is clear to them that as broadband penetration grows, making it easier and easier for filesharers and bootleggers to stream larger files, network traffic jams will increasingly become a common occurrence as illegal films and TV programs clog the Internet. The ISPs understand that customer dissatisfaction-when people begin to find their own Internet service slowing down-will become an issue for them.

As Keith Bolcar, special agent in charge of the FBI's cyber crimes unit in Los Angeles notes, ISPs have never been-and still aren't-required by law to do anything to help stop piracy. But as networks have become more and more overburdened as a direct result of it, "We've seen a sea change in ISP cooperation," notes Cotton. "When a network is slowed down by traffic, it becomes more expensive to operate."


Still, attacking the sources of piracy and the means of its transmission doesn't address what experts agree is the biggest obstacle-the fact that the millions of people who stream, swap files or download illegally don't consider it a crime, or at least not a serious one. According to a survey this year of consumer behavior and attitudes in Brazil, Russia, India, China and the U.S., only Brazilians considered acting ethically as "somewhat important" when it came to obtaining movies online.

"Consumers simply do not see bootlegged movies as illegal or morally wrong, perhaps because of the ease and anonymity of Internet downloads and the widespread consumer acceptance of obtaining fake movies," the survey conductors wrote in the Wall Street Journal. "Fifty percent of 1,910 consumers readily admitted to obtaining a bootleged movie."

"It's tricky to survey people on whether they see this as crime," says Forrester Research's McQuivey. "If they do, they think it's like highway speeding, not speeding in a neighborhood with kids. We can't get a good sense of how many people think it's illegal because no one likes to admit it."

The MPAA has mounted outreach campaigns for educating people, mostly students, that illegal downloading or file-sharing is both morally and legally wrong. The recording industry has done the same, while also pursuing illegal downloaders through lawsuits (far more than the film industry has filed). Both efforts have netted mixed results. "Education programs have very little effect," says McQuivey. "On the flip side, the music industry has succeeded in putting the fear of litigation in people, but it hasn't stopped piracy. It's just made people hate the music industry and feel justified about file-sharing."

But one relatively new form of education seems to be working, says Antonellis of Warner Bros. It is the graduated response similar to what the French have been trying to implement in its "Creation and Internet" law. Essentially, working with ISPs to identify users who are downloading pirated content, the copyright holder simply informs them that their actions are illegal-and most people stop.

"When we notify a user that he's engaging in infringing activity, we see a very high level of effectiveness," says Antonellis. "The graduated response has gotten lots of results just through first and second notices, and where we've been able to get a graduated response in place, here or abroad, we see similar results."

But no one expects the problem will ever go away. "There will always be some kind of piracy, theft or breakage when you put goods into commerce," says Roth. "You don't encourage it, but you basically manage it. That's why stores have cameras and tags on clothing. They want enough of a deterrent to make it so difficult that it can be managed."

Outside of France, other European directors have been struggling with the same challenges. Directors UK in Great Britain has specifically cited revenues lost to Internet piracy as a threat to new productions and, by extension, their membership's future employment opportunities. The British government has made P2P piracy a priority and is considering a bill similar to the French one that would allow authorities to suspend or terminate Internet access. And, as in France, this provision is extremely controversial.

Throughout Europe, advocates for digital privacy rights have fought against any interference with Internet accounts. The European Union has been poised to vote on anti-piracy proposals as part of an overall legislative package on telecommunications issues, but opponents of the proposals-huge telecommunications giants who also have the support of the Green and Socialist party members-have delayed the vote by raising concerns about consumer privacy and civil liberties. Contributing to the delay has been the ongoing debate over the French bill.

"There is a belief in a universal right for access to the Internet that is more important than the rights of copyright owners," says Johannes Studinger, head of UNI-MEI, an international umbrella group of entertainment unions. "The French bill has already had an impact at the EU level in that a commission of content providers, ISPs and others has been formed to talk about how to find a balance between Internet users' rights and the rights of copyright owners."

Hackford emphasizes that the DGA supports that balance because the future depends on it. "Even if you could put a cap on piracy levels right now, which you can't, it's debatable how effective it would be. Because technology is not static," he says. "Just look at digital piracy now and 10 years ago-the difference is exponential. What will it be like in another 10 years, especially when there will be more interconnectivity between people's TVs and their computers, with faster broadband speeds and greater memory? For us, the primary issue is about protecting our digital future, and the time for that action is now."

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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