How Hollywood drives people to piracy

Big media companies have been pushing SOPA and PIPA as a way to limit piracy, by removing consumers’ ability to find pirated content. But it’s not Google’s (s GOOG) fault people are seeking out films online and watching pirated streams or downloads — it’s the studios’ fault for not making it easier for consumers to find and pay for that content instead.

Windows? More like walls

In a blog post Wednesday, BTIG analyst Richard Greenfield argued that Hollywood’s windowing system is the what’s really driving people to seek out content without paying for it. The whole post is worth a read, but the key argument is here:

“In a world of IP-connected devices (smartphones, tablets and IP-enabled TVs) fueled by improving bandwidth wired/wirelessly and consumers that increasingly expect access to content anywhere/anytime (think WatchESPN or HBOGO), the movie industry’s sequential release pattern a.k.a. “windowing” appears to be the underlying problem fueling piracy. Hollywood’s distribution strategy needs to evolve to meet consumers needs. In a world driven by physical product (VHS/DVD), content was always available (except between theatrical and home video albeit there was no other way to get the movie), it never disappeared, whereas in a digital world, studios have created more discreet release windows that are impossible for consumers to understand.”

Hollywood’s windowing system is essentially keeping consumers from being able to access the content that they want to watch. Without a reasonable option to pay, many are left to pirate a film that they wouldn’t go to the theater for anyway.

Consumers will pay, if the content is there

Fred Wilson had a fascinating blog post over the weekend in which he gave a personal take on this very issue. Stuck at home while his wife was under the weather, the couple decided to watch a movie from the comfort of their own home instead of heading out to the theater. But the couple couldn’t find anything good through Netflix, (s NFLX) Amazon Video on Demand (s AMZN) or through their cable VOD service.
“We would have paid good money to watch Sherlock Holmes or Tinker Tailor Soldier Spy,” Wilson wrote. “But it simply was not an option. So we went with a TV show that was free and then went to bed.”
Were Wilson less scrupulous, he might have pirated one of those movies, and there are certainly many who do. But the important point here is that the studios are leaving money on the table by not giving viewers access to the movies that want to see and are willing to pay for. For the movie studios, whether the film was pirated or not shouldn’t matter — the end result is a lost sale.
In a discussion about the future of digital content in the cloud organized by PricewaterhouseCoopers Wednesday, CBS research chief David Poltrack said his company has found that most consumers — like Fred Wilson above — aren’t against paying for the TV or movies they watch. But more often than not, those titles aren’t available in an affordable, convenient fashion.
“Consumers feel that copyright owners have the right to get paid for what they produce,” Poltrack said. What gets pirated most of the time, according to him, are the things that consumers can’t find in a legitimate way. His advice to other media companies is to make it so that there’s no reason to pirate — by making content more readily available in a clean, well-lit place.

The Hulu example

Hulu is a perfect example of how content owners can fight piracy — by making their content available in a way that’s “better than free.” When Hulu was first launched, it was positioned not necessarily as a way to drive incremental ad dollars to the TV networks, but in response to a rampant piracy problem.
In the three years since launch, Hulu has grown pretty dramatically, both in mind share and market share. The site, which offers a way for consumers to catch up on their favorite network shows without having to pirate them, is routinely in the top ten online video properties, according to comScore. (s SCOR) More importantly, Hulu has has emerged as the top destination for advertisers in the online video market, which was a big part of the company’s ability to bring in $420 million in revenue last year.
While CBS isn’t part of Hulu, Poltrack said that its own efforts to monetize the network’s shows online have been largely successful. Online video ads have higher CPMs than what the network gets for broadcast viewing, and the company now generates more ad dollars online than it’s able to get from DVR’d content. As a result, he argued that giving viewers access to what they want online can actually be more lucrative than being stuck in the traditional cable model.

Going digital isn’t a zero-sum game

The big lesson that the big Hollywood studios have yet to learn is that a digital purchase or rental isn’t necessarily made at the expense of a trip to the movie theater. There are plenty of consumers who won’t go to the local megaplex to see a romantic comedy or drama, but are happy to pay for the convenience of watching it at on the TV at home or on another device.
It took the broadcast networks a bit of time to learn this lesson as well. When Hulu was first launched, there was some serious consternation around whether or not it and other network sites would eat into primetime viewing, which is the bread and butter of broadcast. But what ended up happening was that the networks enjoyed an aggregate increase in viewership — and they were able to monetize shows online better than they would have otherwise.
I personally experienced this a week ago, thanks to Ed Burns’ indie flick Newlyweds, which was released on iTunes (s AAPL) and cable VOD at the same time that it hit theaters. I would have never paid to see it on the big screen, but for $5.99, it made for a good film for me to watch on my iPad during a flight to Las Vegas.
There will always be huge tentpole films like Avatar or The Dark Knight, which consumers will go out to see and enjoy the big screen experience. But just as TV viewers might tune in to the weekend’s football games live, but watch Modern Family on Hulu, there are plenty of theatrical releases that will play just as well on someone’s 60-inch flatscreen TV. By not making Tinker Tailor available to that audience at the same time, some studios might be missing out on incremental revenue.

What does Hollywood have to lose?

Of course, in the background of all this discussion, Hollywood is freaking out over its future: The studios are faced with declining box office revenues, as well as massive falloff in DVD sales. That’s created a perfect storm for Hollywood, which is soul searching and trying to find new ways to drum up revenues.
For the most part, studio reaction has been to protect the current distribution and windowing regime. There have been some efforts to shorten windows or create new windows, but most have been purely experimental and limited to titles that no one wanted to watch anyway (e.g. the premium VOD experiment around Tower Heist).
Hollywood’s UltraViolet initiative goes along way to improving the consumer value proposition by extending content ownership to multiple devices and storefronts. And it combats another big problem that Poltrack highlighted in his talk, which is that consumers don’t want to keep having to buy the same content over and over again. But until those movies are available in a timely fashion — i.e., not months after they’ve already left theaters — there will remain a huge audience that the studios will never capture, whether it’s because they’ve pirated the film or because they’ve chosen to watch something else.
Photos courtesy of Flickr users Hello Turkey Toe, sushi?ina and Benjamin Thompson.