Opinion post for VillainLabs about Hollywood's ongoing war against piracy. Written by Rogue Saint.
Advancement of technology is changing our world in virtually every possible way. We shop online more than in stores. Communication has moved to the virtual space of social networks. Our viewing habits are slowly shifting from TV to online streaming. In entertainment, Hollywood mostly uses digital format to record instead of film. While technology has eased many of our daily tasks, it has also brought new challenges for individuals and businesses.
The dot-com era of the early 2000s proved a large threat to the entertainment industry. The era introduced piracy – file-sharing technologies that move digital properties across the net without anyone paying for them. Despite big initial wins and putting the entire entertainment industry in a state of profound alert, and though it is still very active, piracy has been suffering heavy defeats. I don't mean defeats in court, I mean defeats in the trenches where it matters the most – with the consumers. While the war is not over, and it won't be for a long time, the victorious side is already known. It is Hollywood. To present my arguments and prove my point, I want to take you back some forty years. Don't worry, we'll come back to the future with Marty.
In the 1970s, Sony invented the video cassette recorder. The VCR could record a program from the TV, and with a tape in possession, a person could do anything with it he wished. In theory, he could sell it. No wonder major Hollywood studios considered the VCR a threat to their business. Yes, Hollywood was afraid that the VCR would tear the business down. So they sued Sony for manufacturing a product that would infringe copyrighted material. Can you believe that Sony was once a pirate ship trying to loot the studios of sacks of gold? Well, not only did the studios lose in court, but they were dead wrong about the VCR. Not slightly wrong. Not generally wrong. But dead wrong.
Per Wikipedia, by 1995, more than half of Hollywood's revenue in America came from the VCR and only a quarter from theaters. Forbes argued that the VCR, once seen as the destroyer of the movie industry, turned out to be its savior. This example from Hollywood history is more important to our argument than you might think. However, let us now help Marty. We definitely want to move into the twenty-first century. And the storm is coming… Three...two...one... BAAM...
Year 2016 – Battlefield China
To establish the trenches and the front line of this war, China is by far the best example. There's something very interesting happening in the Middle Kingdom. On one side, it is the hotbed of piracy, with an estimated nine out of ten DVDs being fake. Per the BBC, the pirate ships loot the entertainment industry for $6 billion in sales annually. An astonishing number without a doubt, but not unexpected. China has been hotly pirated waters for quite some time. So how do I dare claim that piracy is losing?
Well, that $6 billion is all the pirates have to show for their efforts, and the numbers are declining. The people of China want to enrich their lives in a different way. Which people specifically? The same ones who are turning the tide against the buccaneers. The middle class.
There are currently over 100 million Chinese with wealth between $50,000 and $500,000. Online shopping is on the rise. The Chinese middle class spends over $200 billion a year on travel already. What’s important for us is that the country is now the world’s second-biggest box office territory. According to Goldman Sachs, the area of life seeing the biggest investment in time and money from this group is entertainment. In addition, the growth of the middle class is projected to spread away from urban areas – a rather important detail when you know that pirate ships generate most interest in rural, poorer areas.
China isn't an isolated example. We've learned from Europe and the US that the middle class is willing to spend to improve quality of life, particularly for fun and entertainment. The Chinese middle class will impede the maneuvers of the pirate ships on its territory. More damage will come when the Chinese actually begin to spend not only on DVDs but on SVOD, in addition to movie theater experiences.
All this won't happen because the Chinese all of a sudden come to love America and its movies. It will happen because those $6 billion hurt Chinese businesses, too. Remember, Hollywood studios take only about a quarter of Chinese theatrical revenue. When a rich and powerful man smells money and more power, he wants to get them. The enticing smell of $6 billion is hard not to notice.
Those in charge of distributing movies worldwide should recognize the current trend in China and prepare for similar movement in other countries with emerging middle classes. Some of these are the Philippines, Indonesia, India (which, granted, already has a formidable movie industry), Nigeria...
Now, when we have a strong argument that the tide is turning against the buccaneers in their biggest stronghold, let's look at one aspect of piracy we can remember from the VCR suit. An aspect many don't even think about.
Piracy will unintentionally benefit Hollywood
Wait – what? You're cursing at me and calling me names. Take your time. I'll wait until you run out of expletives. Are you ready? Let me refresh you on an important lesson from business class. The purchase of a product lies at the end of the buying funnel. It is the end goal, not the first step. If you have $5 in your total purchasing power, can you buy a $15 DVD? If you have $100, can you buy a $15 DVD that you are unaware exists? If you can afford a $15 movie ticket but the nearest theater is 500 miles away, are you going to see that movie? Are you going to buy a plane ticket to watch a movie?
No country except the US has a theater for every 8,000 people. SVOD is in its infancy even in Europe, let alone in other territories. Ask Netflix how much they make in Europe compared to North America if you don't believe me. Do you know who fills the void? Do you know who steps in for poverty-stricken communities without strong Internet and with no movie theatre in a 500-mile radius?
I know, you're still mad because you didn't get your $15 today, and you didn't get your share of $6 billion this year. You didn't get it because the people we discussed were never your customers in the first place. They stayed away due to lack of funds, awareness, or logistics. Therefore, you lacked those customers. We can argue about who’s at fault for lack of funds, logistics or awareness, but the fact remains – you did not have those customers. The $6 billion we talked about? Not a real number, but a projected number if those people had the ability to consume your product. That's a big difference.
So, you didn't get your money – what exactly did you get? Instead of money, the pirate ship unintentionally delivered you the most important thing you can have: two to three hours of time and undivided attention from people who were never your buyers but might become so in the future. And if the movie is good, you have built strong product awareness.
The VCR did a lot for product awareness for Hollywood in the US. It did even more legwork outside of the US. Do you really think Hollywood received payments for millions of millions of video cassettes that had been multiplied in some dark basement thousands of miles away in Central Europe? Do you think Superman is the most recognizable brand in the world because of sales of the comic book? I’d like you to be honest, not emotional. What Hollywood got from then non-buyers was awareness that in later years, with growth of funds and improved logistics, turned into profit. One of the side effects of global awareness of a product is increase in budgets.
Both production and marketing budgets are on the rise. Out of the one hundred most expensive movies to make, only a few preceded the dot-com era. Yes, I know about the thing called inflation, but only a fool would put in $400 million to produce a blockbuster (production plus marketing) if there weren’t a good chance to return money on that investment. Marketing budgets for blockbusters are skyrocketing. Very often they equal or even surpass production budgets. If piracy were actually winning against Hollywood, this would never have happened.
I could go on, but the fact is that the biggest threat to theater profits is the changing habits of the younger generations. Those changing habits will shape the future of the business models pertaining to showing movies in theaters. Outlining and predicting further changes in the behavior of younger consumers is another topic.
Hollywood is winning the war because piracy without entertainment cannot exist. Piracy only bridges failures of society to elevate quality of life for the common man hanging at the bottom of the social ladder. For the middle and upper-middle classes, piracy fails to offer a meaningful upgrade on life, regardless of its free price tag.
Your neighborhood villain.