Jason Freidenfelds

General Education 156: The Information Age

Prof. Anthony G. Oettinger

Harvard University

January 6, 2000

 

All material copyright Jason Freidenfelds 2000

http://freidenfelds.com/

 

Online Movie Piracy, 2000-2010

 

Introduction

Ten years ago, piracy of CD-quality music over modem networks was unthinkable.  MIDI music, which encoded note names, duration, and volumes with a detail comparable to music score notation, was the only feasible way to transmit music over public computer networks.  MIDI decoders played canned sampled notes following the coded notation, but all the nuance and individuality of the music was lost, so it hardly threatened the music artists or the music industry.  Today, piracy of CD-quality music is not only possible, it is common, due to vast increases in network bandwidth and processing capabilities.  Piracy of DVD-quality movies over the internet today is almost as unthinkable as comparable music piracy was 10 years ago.  But will further increases in bandwidth and processing power make DVD-quality movie piracy over the networks possible in the next 10 years?  Or perhaps sooner?

In this report, I draw a scenario of the movie industry’s imminent struggle with internet movie piracy.  Full-length movie piracy via the internet has a strong precedent in MP3, the highly popular compressed digital music format that has been the subject of news reports and court battles for the past couple years.  Compressed feature-length movie formats have begun to emerge as the next major object of digital piracy on the web.  One major difference between MP3s and movies is the sheer amount of data involved – a standard music track on a CD takes up about 60 MB (before MP3 compression), whereas a standard DVD movie takes up 4700 MB.  As of the end of 1999, downloadable movies are compressed to less-than-VHS quality levels (~500 MB).  But the rise of widespread broadband internet access, the decrease in the cost of hard drive storage and computational power, and the increasing publicity of pirated movies and movie-pirating software over the next few years will make VHS-quality, and eventually DVD-quality, movies available for download.  What might the impact of this new movie-download process be?  Who will benefit, and who will lose out?

The major stakeholders in this arena are the following:

 

1.   The movie industry, i.e., the Motion Picture Association of America (MPAA).^[1]

2.   Film directors, actors, and others involved more directly in making movies.

3.   Consumers.

4.   Pirates and hackers.

5.   Broadband service providers (cable, DSL, satellite, etc.).

6.   Cable companies (delivering movie services such as HBO and broadband internet access).

7.   Home movie rental and sales providers (VHS and DVD).

8.   FBI and other enforcement agents.

9.   Legislatures (Department of Commerce and the Commerce Committee) and courts.

 

The stakeholders most threatened by the availability of downloadable movies are the home movie rental and sales providers, the middlemen whose entire trade centers on the physical storage formats (VHS tapes and DVDs) that are in direct competition with digital downloadable formats.  These physical-media middlemen risk, at worse, being phased out with the rise of downloadable formats.  A “download center” service provider may still be able to make a business out of storing, organizing, and delivering movies over the web, but the resource demands will be far less intensive than that required of physical tape or DVD storage, so this service may well be handled by the studios themselves.  The broadband service providers and cable companies will have the motivation to compete tremendously to be the access portals for these huge new files.

Film directors and actors – the artists – stand to benefit substantially from the decreased dependence on big studios for marketing and distribution.  Many will enjoy increased popularity of their theater releases when their movies leak into the pirate networks at the right time.  The Blair Witch Project enjoyed greater popularity due to the spread of a bootleg copy on the internet one week before it was released in theaters.^[2]  But, on the other hand, piracy has the ability to reduce film revenues and hurt filmmakers’ chances at making more films.  Piracy can hit small film producers especially hard, since they lack big-studio legal and financial protection.^[3]

Consumers may have the most to gain as movies become available for download.  They have a chance to enjoy an increase in the selection and quality of movies, since smaller independent filmmakers may be able to jump the production and marketing hurdles that confine them today, and larger films will be able to provide ultra-high-definition formats and extra content for download, such as director and actor interviews and behind-the-scenes specials.  The increasing efficiency of storage and delivery, and the competition among studios if they serve up their own content, should drive down movie “rental” prices.  Obviously, many consumers relish the possibility of downloading free pirated movies.  And while piracy hurts movie production capability, in the long run it can also force legitimate movie providers to keep their prices and service schemes extremely competitive so as to lure consumers away from pirate services with superior offerings.  It is important, however, to keep in mind that the average computer and internet user is technically inexperienced and does not want to invest the time to become a technical wizard, so many of the currently available piracy networks do not provide them a feasible means of obtaining movies.  In general, end users do not appreciate steep learning curves; they prefer easy-to-use, reliable technologies.

Of all these players, the movie industry occupies one of the most tenuous positions.  It is their story that will be the focus of my scenario.  As the producers and commercial advocates of the movie product, they stand to either gain the most or lose the most depending on how the future of digital downloading unfolds.  The issue at the heart of this report is not whether or not movies will eventually be primarily downloaded rather than transferred on physical media such as VHS tapes and DVDs; I take that as a given.  Rather, the issue is how soon and to what extent the transition to digital downloadable formats will occur, and what net effect this will have on the movie industry.  It is by no means a foregone conclusion that digital download is purely a threat to the movie industry.  It may, in fact, be a boon.  My scenario addresses the issue of the timescale and effect of digital download for movies with the interests of the movie industry uppermost.

Scenario

By September and October 2000, the Asian markets have bounced back almost fully from the economic crisis their endured in the late 1990s.  They are entering a boom era, bolstered surprisingly enough by China’s increasingly open trade policies.  The Chinese internet, restricted as it is, opens for certain bank and business transactions with select trade partners, including the U.S.  The necessity of e-mail exchanges between Chinese and foreign banks and businesses proves to be a crack in the dam, and their internet shows signs of opening at least partially to the public in a couple years.  This encourages e-commerce efforts in surrounding Asian economies, including outsourcing technical manpower to U.S. and European firms, especially by India.  Japan readjusts successfully, launching more broadband wireless services that provide a model for the embryonic U.S. broadband wireless network.  The Asian market successes bolster the flagging U.S. economy, which had been readjusting its overvalued technology stocks in the late spring and summer of 2000.

Al Gore is elected in November 2000, as the economy continues its unprecedented boom and U.S. voters endorse his promises to continue Clinton’s apparently successful economic policies.  In this time of prosperity, Gore presents himself as palatably moderate and not particularly activist; that is just what the voters are content to have.  Upon his appointment, Gore takes the opportunity to press his strong environmental stances, which he had put on the back burner as unpopularly liberal during the campaign.  He also asks for a commitment to build a stronger internet infrastructure.  In his State of the Union Address, he refers to Clinton having successfully “built a bridge to the 21^st century,” and he “challenge[s] the American people to commit now to building the roads and highways of the 21^st century – the Information Interstate System, if you will.”  His internet initiative proves much more popular than his environmental initiative, despite his rhetorical attempts to knit the two together.  As usual, the voters are as apathetic as the business lobbyists are frothing at the mouth.

Broadband internet access becomes more prevalent in American homes.  DSL (Digital Subscriber Line, which sends digital signals over conventional copper phone lines) expands its coverage to more than half of U.S. residential areas by spring of 2001, giving users a 384 Kb/s always-on internet connection for $35 per month, with phone line included (as opposed to $20 for a 56 Kb/s dial-up connection on a second phone line).  Many users buy the premium 7.1 Mb/s (already available in 1999) or 21 Mb/s connections, giving them faster connections that businesses or universities enjoyed at the beginning of 2000.  AT&T offers a new “ATT ZOOM” broadband cable service, rolling cable, phone, and broadband internet service (1.2 Mb/s) together into a $75 per month package.  Shares in AT&T skyrocket, and they are able to offer a limited-time free installation package.

The recording industry’s ongoing battle with MP3 music^[4] turns to an all-out legal war as more and more users find that downloading and exchanging pirated CD-quality music is actually quite easy once they get broadband connections at home.  An appeals court rules on RIAA (Recording Industry Association of America) vs. Napster^[5] that since Napster neither directly serves MP3s on its site nor allows passage of MP3s through its servers, it is not liable for the content of the music being exchanged by its users.  Meanwhile, the domain names www.musicexchange.com and www.mp3trade.com are bought out by a startup companies cloning Napster’s technique.  RIAA has its hands tied with litigating against the growing wave of MP3 exchange facilitators.

Its cries do not go unheard.  Gore steps in as a champion of intellectual property rights, realizing that the long-term health of the U.S. economy depends on the protection of intellectual property.  He is largely motivated by increasing concerns that a more open Chinese internet combined with a lack of Chinese controls on intellectual property^[6] might leave the U.S. digital economy vulnerable to large-scale foreign piracy.  China is, of course, not the only country with lax anti-piracy laws.  Gore tries to push tougher anti-piracy laws through Congress.^[7]

Unfortunately for RIAA and the artists, a still conservative-dominated Congress is not as sympathetic.  They deem the existing laws suitable for the new medium and advise better enforcement of those laws rather than creating new laws specifically for the new medium.  “A copyright is a copyright, whether it is on paper or digital,” says one senator.  The Gore administration, with corporate America on his side (in an odd twist of politics), continues to push against the “personal freedoms, personal responsibilities” advocates in Congress who are against heavy intellectual property legislation, but for anti-pornography legislation.  He manages to get more laws on the books restricting how industry concepts and intellectual content may be distributed on the internet.  The protective legislation is much appreciated by intellectual property-generating industries, including RIAA and the MPAA.  Much of it proves to be unpopular with the public.

In 2002, the typical home computer has 60-80 GB (sometimes over 100 GB) of hard drive space, enough to hold thousands of music albums, and enough to hold full, uncompressed digital copies of DVD movies.  New processors run at 1.5 to 2.5 GHz, fast enough to support extremely sophisticated coding and decoding schemes.  Most of the country is wired to the internet, largely due to the popular free ad-banner supported modem dial-up ISPs (internet service providers).  Heavy competition among various DSL services and the competition between AT&T’s “ATT ZOOM” and its clones, combined with the competition between DSL and cable all-in-one services, drive broadband prices down even further, to lows of $25 per month for 384 Kb/s connections.

Users who don’t want to buy full home computer desktop systems with broadband internet access have a variety of attractive options, from the “Connector 2002” system (a stripped-down computer that supports web-browsing, e-mail, and word-processing, with a free modem connection and ad-supported service) to the “Palm Complete” system (a Palm Pilot that has a home “docking system” with a full keyboard and larger screen).  For many users, glorified cell-phones that have limited web-browsing and e-mail capabilities are sufficient; they prefer free digital voice-mail systems to e-mail anyway.

The digital download music industry continues to fight over standards.^[8]  It charges too much per song ($1.95) for music that is arguably lower-quality than CD music.  Software that cracks the first few standard encoding schemes is widely enough available to put a dent in downloaded music sales.  Digital downloading as a commercial music format founders until 2003, when Sony’s “MP4” incorporates a fingerprinting technology that puts a trace on the original downloader of a particular piece of music.  This fingerprint is spread throughout the data in a different configuration for every consumer, making it nearly impossible to extract with piracy software.  The FBI is now able to trace piracy of downloaded music back to the originator.  This effectively clamps off widespread piracy of digitally downloaded music.  However, CDs are still issued by most artists.  MP3s “ripped” from CDs continue to be traded at increasing volumes.

New political and economic forces are afoot by the end of Gore’s term.  The long U.S. economic boom is winding down.  The country, along with its highly linked economic partners overseas, begins to slide into a recession.  It is propelled by the “told ya so” economists and legislators who had been predicting such a slide since 2000.  John Steeling, a Republican candidate who promises to cash in on the decade of tremendous American growth by delivering deep tax cuts, is voted into office.  In response to civil libertarian lobbyists’ demands for greater intellectual freedom on the internet, and with the blessing of the anti-pornography advocates as long as “intellectual freedom” doesn’t include nudity, he reverses the Gore Administration’s final efforts at passing new intellectual property legislation for the internet.

As a result, RIAA mostly gives up trying to fight MP3 trade assistance services like Napster.com in court.  It instead battles them with a massive campaign to promote the slightly higher-fidelity MP4 music format.  The music industry lowers digital download prices and advocates a new wireless streaming “MP4 on the fly” download service.  Sony, in conjunction with Lucent, offers headphones with a wireless connection to download, play, and store MP4s from anywhere there is digital wireless service.  This service is wildly popular with teenagers despite the high price of the headgear.^[9]

The movie industry, meanwhile, is beginning to struggle with the same bootlegging problem that plagued the music industry in the early 2000s.  The standard for DVDs, settled in 1998, has long been cracked by half a dozen free downloadable software programs (although these programs are slowly, one by one, removed from the internet by court injunctions following lengthy procedures).  These readily available programs effectively negate the encryption barrier that was supposed to prevent easily copying DVDs to computer hard drives.  Movie trade begins among college students around 2000.  It spreads outward to the broadband private community to a significant degree by 2002.  Services similar to Napster.com specializing in movie trade emerge, including MovieTrader.com.^[10]  Since home digital video cameras have become more widespread, the services claim to simply facilitate home movie trades.^[11]

In 2003, cable services begin offering pay-per-download movies as an option in place of broadcast programming.  Local cable companies team up with Blockbuster.com’s marketing clout to offer downloaded movies.  The first download schemes involve encryption, but not fingerprinting; pirates rapidly break the encryption and distribute various cracks, which the more ambitious home users use to make pirated full digital copies of the encrypted movies on their digital VCRs.  Over 150 movie titles are being traded on the MovieTrader network by 2004.  This widespread trade, involving some 40 to 50% of the American broadband community (which is 30% of American homes at that point) serves as part of the impetus for Gore’s final push for intellectual property industry protections before he leaves office in 2005.  The subsequent application of fingerprinting technology to downloadable movies in 2005, borrowed from the music industry, stanches the flow of bootlegs made from digital downloads.  The new fingerprinting technology helps President Steeling relax his stance on intellectual property protections for the internet.

The VHS sales and rental industry mostly dries up by 2006.  DVDs are actually cheaper to produce in the long run, so the industry promotes DVD sales and rentals as the standard over VHS tapes.  When the last VCRs bought in 2002 or 2003 have broken by 2005 or 2006, those late adopters get around to buying their DVD players.  Unfortunately for the MPAA and digital movie download services such as Blockbuster.com, the well-established DVD format is just coming into its prime (unlike the music CD format, which is on its last legs by 2008, to be replaced by music DVDs and digital music downloads).  Because the software “cracks” for DVD encryption are widely available, creating digital copies of movies using DVD drives on home computers continues to be easy.  The people who have fast enough connections to download legitimate movies can download pirated DVD copies almost as easily using MovieTrader.com’s software.

By 2009, the movie industry begins to recover from its long bout with piracy.  At that point, 60% of America has broadband connections fast enough for compressed digital movie download (which would be higher if not for the end of the economic boom in 2005 and the subsequent recession).  The other 40% prefers DVDs, and only in 2008 does the movie industry finally adopt a more heavily encrypted DVD standard that includes fingerprinting.

Commentary

RIAA’s long and frustrating legal bouts in my scenario are based on its current struggles against various music downloading services^[12], some for profit^[13], some for more indirect profit through advertising.^[14]  I cite these indexing and trading sites as the working model for pirated digital movie trade rather than the current preferred digital trading network for pirated movies, the IRC (Internet Relay Chat) channels^[15], because the IRC channels require tremendous patience and negotiating skill, far beyond the movies’ worth in dollars for most consumers.  Right now, people mostly trade on IRC for the thrill of the hunt.  A Napster-like movie trading service will give less computer-savvy users a chance to download bootleg digital movies.

China, representing any foreign country that threatens U.S. intellectual property industries due to a lack of piracy protection standards, drops out of my scenario around 2004 because I think it is extremely unlikely that they will have any significant level of broadband connectivity before 2010.  They do threaten the industry with hard copy bootlegs, but not with digital download piracy.

Alternate economic trends would likely not reshape the key aspects my scenario significantly.  A continued boom of the sort we are experiencing today, driven perhaps by the blossoming information technologies, past 2005 would increase the likelihood that more of the U.S. would get broadband connections.  An earlier or deeper recession would likely slow the spread of broadband service.  But because both the pirates and the legitimate industry depend upon a broadband infrastructure for their success, a broader or narrower playing field would not particularly increase one’s chances over the other.  Wider broadband internet access gives more people a chance to download pirated material, but it also facilitates more rapid development of standards and greater marketing opportunities.  A slimmer broadband community means both less piracy and more sluggish establishment of digital download standards and marketing strategies.

The movie industry has a tremendous opportunity to appropriate the digital download process.  If they act now, they can begin setting encryption and licensing standards so that when consumers shift to sufficiently broadband connections, legitimate and efficient means of downloading movies will be available.  If they do not, they may suffer the same fate as the music industry, which is now scrambling to make up for lost ground in the war against pirated music.^[16]  Considering the MP3 precedent, the current lack of active concern among movie industry leaders about the threat of pirated downloaded movies is astonishing.  My roommate who has worked in a research and consulting branch of Universal for the past three summers describes his bosses’ amazement that full-length movies could be downloaded in public IRC channels.  The MPAA’s public anti-piracy policy does not even mention digital piracy; it discusses VHS tapes only, praising efforts in the mid-1990s to crack down on video tape piracy operations.^[17]   The recording industry, by contrast, has an extensive anti-piracy campaign against digital download piracy.^[18]

Recent MPAA press releases reveal a sharply increased awareness of the dangers of digital piracy, including a report on Jack Valenti’s (President and CEO of MPAA) appearance before the House Subcommittee on Telecommunications, Trade and Consumer Protection on October 29^th, 1999 in which he lucidly outlined the threat of downloadable digital copies of movies.^[19]  But this is extremely late notice by the industry’s highest leader, considering that downloadable digital pirated movies have been available on public IRC channels since early 1997.  The MPAA will need to press hard on legislatures and enforcement agencies to help them combat piracy, and, like the music industry, they will need to do most of the investigative work and initiate most prosecution, spoon-feeding evidence to the FBI and district attorneys.  Most importantly, they can counteract the growth of an underground movie trading network by developing a feasible method, involving some form of encryption and credit card number exchange, for consumers to pay to download movies.  For most consumers, piracy is not worth the hassle, if there is a reasonably low-priced and convenient legitimate alternative.