Digi-drama: Internet movie piracy

The film world tackles Internet movie piracy.

Hollywood chalked up some high-profile wins in its fight against Internet movie piracy last year. The film industry's tough-talking trade organization, the Motion Picture Association of America, slapped hundreds of people with lawsuits for illegally downloading and trading films online. The U.S. departments of Justice and Homeland Security shut down Elite Torrents, a popular website that spread copies of Star Wars: Episode III–Revenge of the Sith before the flick officially opened. Even Bram Cohen, creator of BitTorrent (a peer-to-peer file-sharing program responsible for an estimated 65% of illegal movie downloads in 2005), agreed to cut links to MPAA-pirated content off his website.

Yet the problem seems to be getting worse. According to London-based research firm Informa, illegal movie downloads cost the industry US$985 million in 2005, up from US$860 million in 2004. Growing access to broadband likely played a role, as higher Internet speeds made downloading large movie files faster.

Studio execs know enforcement is only part of the solution. As in the music industry, many believe the best way to prevent illegal downloads is to offer legal alternatives. Yet the interrelated nature of the players makes digital distribution an opportunity for some, a threat to others.

Warner Bros. plans to turn a technology used by Internet movie pirates to its advantage. Next month, in Germany, Austria and parts of Switzerland, the company launches In2Movies, a peer-to-peer file-sharing network that lets users download movies for the price of a DVD–or less. Kevin Tsujihara, the president of the Warner Bros. home entertainment group, says Germany has all the right ingredients for such a service: high rates of piracy due to high levels of broadband penetration, a tech-savvy population and consumers willing to pay for downloaded movies.

Warner Bros.' In2Movies service will offer titles like Batman Begins and Harry Potter and the Goblet of Fire at the same time their DVDs hit store shelves in Germany. So the service seems to pit the studio against retailers. But Tsujihara says Warner Bros. is in discussions to offer In2Movies through retailer websites.

Why not cut out the middleman and enjoy higher margins? Tsujihara says his studio operates a multibillion-dollar-a-year business in packaged-goods entertainment, and thinks switching to a strictly digital distribution model would hurt sales. As support, Tsujihara holds up the music industry. Despite explosive growth in services like iTunes, most of the industry's product is sold in physical form.

Still, Tsujihara believes digital distribution offers plenty of opportunities. Going digital, he points out, means Warner Bros. will save on manufacturing, shipping and return costs of physical DVDs. Plus, Tsujihara adds, offering legal digital distribution turns film pirates into customers.

Tsujihara isn't sure yet if In2Movies will come to Canada. But his studio is looking at options to legitimize peer-to-peer file-sharing networks in North America, including partnering with BitTorrent.

That could pose a serious threat to movie rental businesses. You might expect David Stewart, the president of Blockbuster Canada, to think so; he says he sees anyone who sells home entertainment as a competitor. Yet, for now, the only major form of digital movie distribution Blockbuster Canada faces is video-on-demand. Stewart acknowledges the service is growing–in a Decima Research study, the number of digital cable subscribers who ordered VOD programs over a three-month period increased to 28% in 2005 from 12% in 2003–but surprisingly, he doesn't consider it a threat, as movies appear on VOD roughly 45 days after they become available for rental or sale. “There's room for both of us,” he says.

Blockbuster Canada, however, may soon face a greater threat–one Stewart admits he's never heard about. CinemaNow, based in Marina del Rey, Calif., lets people access movies online a number of ways, depending on the title and where the customer lives. Americans can rent titles like The 40 Year-Old Virgin and The Brothers Grimm on a pay-per-view basis. The In2Movies' Canadian offering, however, consists mainly of B-grade fare such as F.A.R.T:. The Movie. CinemaNow CEO Curt Marvis claims the company is enjoying double-digit revenue growth rates in the U.S., and expects the Canadian lineup will soon reflect the U.S. one.

Accessing pay-per-view online gives movie lovers one more reason not to go to the cinema. Plus, this year sees the rollout of high-definition DVDs. Combine those with the increasing sophistication and declining costs of a home entertainment system, and theatre owners might have a tough time ahead of them, especially given dwindling ticket sales. (Canadian box-office revenues were down 8.1% in 2005.) But Ellis Jacob, the president and CEO of Cineplex Entertainment, isn't sweating. “Fifty feet [of screen] is better than 50 inches,” he says. Plus, he argues, a trip to the theatre is a social occasion; watching DVDs isn't necessarily. He points out theatre technology has kept pace with consumer electronics, and says he is committed to improving theatre-going by investigating services like babysitting.

Jacobs and Stewart seem unconcerned about the threat digital distribution may pose to their businesses. But the shift to legal downloading is on the horizon. As Warner Bros.' Tsujihara puts it, when that happens, much like in the music industry, the landscape will change. Some of the current players will be strong–and others will no longer exist.