Napster All Over Again?

Hollywood feels threatened by Internet file-sharing services.
Economist StaffMarch 22, 2002

The file-swapping of recorded music on the Internet has already sent the music industry into a spin. Now it is Hollywood’s turn to take fright. At its peak in February 2001, 2.8 billion music files were downloaded each month through Napster alone. The sharing of files containing pirated movies may still be in its infancy, but 300,000-500,000 feature films are already being downloaded daily, according to Viant, a consultancy.

This activity is set to grow thanks to three factors: the spread of broadband connections; the use of new compression formats that have made it easier to squeeze a digital film into a computer file; and the increased trading of movies over file-sharing networks, such as LimeWire and Morpheus, and through Internet chat-rooms. It is now possible, as Michael Eisner, Disney’s boss, demonstrated at a Senate hearing last month, to capture from the Internet a brand-new film, such as “Monsters Inc”, or a current TV show.

Naturally, Hollywood is in a panic. In 2000, the average film cost the big studios $55m to produce and $27m to promote. And four-fifths of a film’s revenue typically comes from sales after the release at the movie theatre: from home video, pay-TV and so on. The industry relies on this controlled-release pattern to ensure that it pockets a slice of revenues at each stage. So the idea that a new film can simply be zapped out on the Internet, with no compensation to the industry that created it, causes consternation. Richard Parsons, the new boss of AOL Time Warner, has described it as “worse than shoplifting”.

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The movie industry is now trying to combat this with both legal and commercial means. The greatest concern is protecting copyright. The fear is that, once a studio releases its films online in digital format, it will relinquish all control over their subsequent use and distribution. The industry’s response, however, has been an increasingly heavy-handed effort to fight piracy with technology.

This approach will always have limits because no form of encryption is impenetrable. Just look at the $1 billion lawsuit filed last week by Canal Plus, alleging that NDS, a subsidiary of NewsCorp, cracked and distributed on the Internet the codes to the French company’s pay-TV encryption system. But the movie industry is behaving with particular severity. It has already tried to ban the sale of digital TV-recording devices that allow users to share movies via an Internet connection. Now it is backing a bill, put forward by Fritz Hollings, a Democratic senator, to require the computer industry to build copy-protection technology into its hard drives. “The content industry cannot solve the piracy issue alone,” argues Peter Chernin, president of NewsCorp.

The other approach is to try to thwart piracy by supplying a legal alternative. This is what the record companies did, by setting up their own subscription download services. Even Napster, now backed by Germany’s Bertelsmann, is hoping shortly to relaunch as an official business, its underground version having been closed last year. Later this year, five big studios—Sony Pictures, Paramount Pictures, Universal Studios, Warner Brothers and MGM—plan to launch Movie fans will be able to download recent and archive films from this site, for a fee. One day, online distribution might even become profitable. “Every time consumers have a new medium for watching movies, this has increased the overall revenue stream,” says Yair Landau, head of Sony Pictures Digital Entertainment.

Because of their concerns about copyright, though, the studios’ plans are half-hearted. will, in effect, rent its films. Users will not be allowed to “burn” them on to a DVD, transfer them to another device, such as a television set, or share or swap them in any way. This makes downloaded movies less useful than old-fashioned video cassettes—which undermines the argument for setting up such a service in the first place.

Yet offering a legal download service is a necessary defensive move in the face of relentless technological improvement. Napster thrived because it offered music fans convenience and flexibility that they could not find elsewhere. Filmed entertainment, by contrast, takes up lots of bandwidth and is tediously slow to transfer. At the moment, most people are unlikely to wait several hours to download a pirated film—a trip to the video store is simpler. But better compression technology and faster Internet links will make downloading movies more practical.

When downloading does take off, the trick for the movie studios will be to find a reasonable balance between protecting their revenues and keeping consumers happy. The meaner the industry is over what people can do with the movies they pay to download, the more the studios’ own services will be a second-rate alternative to piracy.