As befits a business devoted to the art of illusion, Hollywood likes to accentuate the positive. Each Monday brings news of the weekend’s box office grosses, which together accounted for a record $10.6 billion for 2009 in the United States and Canada.1 New 3-D technology kept ticket sales close to that level in 2010.2 Foreign revenue has grown as new theaters in China and other developing countries expand the market for American movies.3 With numbers like that, few observers realize just how much the Internet is hurting filmmakers of all sizes.
Although studios like to talk about box office revenue, it only accounts for between a fifth and a quarter of the money most movies take in. Per capita theater attendance has fallen steadily since the introduction of television, and films make most of their money from various television rights, Blu-ray discs, and especially DVDs. Hollywood relies on the business of selling plastic discs almost as much as the music industry. But U.S. revenue from sales and rentals of DVDs and Blu-ray discs has fallen by a quarter since its 2004 peak, and the decline accelerated in 2009 and 2010.4 And while there are several reasons for this decline—including the convenience of Netflix and consumer fatigue with the idea of film ownership—much of it is almost certainly due to piracy.
Since the 1980s, movie studios haven’t been in the business of selling tickets to see films so much as selling an array of different rights to show them. “Windowing” allows them to offer the same film at different times to pay-per-view television, premium cable, pay cable, and network television, as well as a similar array of foreign outlets. But the Internet is disrupting this business, and it could eventually destroy it entirely. Foreign audiences can now download movies that haven’t yet opened locally—sometimes even in their own language, since pirates often record audio tracks intended for hearing-impaired theatergoers, then sync them with video to create dubbed versions—and television stations don’t pay as much now that films are so easy to download.
In the long run, this matters far more than ticket sales. “The business model that formed the underpinning of the modern-day motion picture business is changing right before our eyes, in profound ways,” said Disney’s chief executive, Bob Iger, in an October 2009 speech at a University of Southern California business conference. “That means you’re going to have to change your business in profound ways, or you will no longer have a business.”5
Although the major studios operate as divisions of media conglomerates that can be cagey about the performance of their film divisions, analysts believe their earnings are down, an assumption reinforced by layoffs and division closings. When MGM’s assets went on sale in early 2010, the company drew bids for less than half of its 2004 price.6 In 2008 both Warner Independent and Paramount Vantage were folded into their respective parent companies; Disney sold Miramax two years later. Worried about the prospects for smaller films, studios are focusing more on blockbusters.
Studios are negotiating to build new businesses online, even as they try to limit piracy by suing commercial infringers. But the nature of the conflict is changing as online media consumption evolves beyond downloading tracks from iTunes to using services like Spotify, which lets consumers listen to music wherever they have an Internet connection. In technology terms, such services store media in the “cloud”—online servers that interact with PCs and other devices—and charge consumers a subscription fee to access it online. They’re selling access, not products—a business model that many believe represents the future, not just for music, but for all media. But there’s no reason the same services can’t be offered illegally—and Hollywood is already facing off against pirate sites that are free, popular, and growing fast.
RapidShare is one of the biggest companies in the cloud, but it keeps a low profile in the physical world. The company has its headquarters in picturesque Cham, Switzerland, a mountain village about a half-hour drive from Zurich. On the door of one of the offices is a cartoonish sketch of a seated figure and a logo that says, “RapidChair”—a way for the sixty or so mostly young employees to make fun of the idea that hardly anyone who delivers their mail has heard of the company.7 Not many people over forty have.
In 2009, RapidShare generated about 1 percent of the world’s Internet traffic from this modest setting—about as much as Facebook.8 It was the seventeenth most popular site in the world, with seventy-seven million users a month, mostly from outside the United States.9 The company stored about fifteen petabytes’ worth of data; that’s fifteen million gigabytes, or enough to fill the hard drives on sixty thousand average new computers.
RapidShare is an online locker service, the best known of a dozen or so large sites—there are also scores of small ones—that offer Internet users cheap digital storage as well as the ability to share anything they’ve uploaded with anyone they want. (They’re also called file-hosting services, or one-click hosting services.) It offers limited access for free and sells RapidPro accounts that provide faster service and more storage space for €4.95 (about $7) a month. When users upload a file, they receive a Web address that allows anyone to download it, which they can keep to themselves, share with friends over e-mail, or link to from blogs or other sites. Every day the company takes in 400,000 files of all types—text, music, videos, software—from users who are either short on hard drive space or looking for a way to distribute files that are too big for e-mail. Many of those files, probably most of them, are pirated. Which is why RapidShare and other online locker services—Hotfile, Megaupload, and MediaFire, among others—are starting to do to Hollywood what file sharing did to the music business.
For a company that generates so much data traffic, not much is known about RapidShare. The company was founded in 2005 by Christian Schmid, a teenager in Freiburg, Germany, who later moved near Cham to live with his girlfriend. Schmid is so private that it’s difficult to find a photograph of him online, and he has never given an interview. The only thing anyone knows about him for sure is that he’s very, very rich: a movie business estimate places RapidShare’s annual profit at a minimum of $45 million.10
Online locker services are growing at the expense of file sharing, which has fallen as a percentage of global Internet traffic since 2007, as lawsuits drove away companies and scared users.11 “Peer-to-peer [file sharing] is declining, and when you look at RapidShare and Megaupload, that’s where the traffic is going,” says Craig Labovitz, chief scientist at Arbor Networks, which makes software used by Internet service providers. “We believe that online lockers are growing faster than the Internet, which is growing at 45 percent a year.” According to one study, online locker services account for about 7 percent of all online traffic, and more than 90 percent of the nonpornographic material stored on them is copyrighted.12
Online locker services don’t index their own files—you can’t go to Hotfile.com and search the site—but a Google search will return links posted on other sites. Functionally, these services are the online equivalent of a self-storage business, except that anyone with the right Web address can download the file there with a single click. Given the site’s location, a better analogy might be a Swiss bank. Like Swiss accounts, online locker services have plenty of legitimate uses—backing up files, making content available to multiple divisions of a company—but they make it a point not to ask questions and, intentionally or not, attract unsavory activity on a massive scale. Do a Google search for “RapidShare” or “Hotfile” and any popular movie—even one that’s still in theaters—and you’ll find pages of links to illegal downloads.
Online locker services have essentially crowdsourced copyright infringement: they store files but leave the linking to others. Some sites, like the ones Ellen Seidler found her independent film on, consist of nothing but links to movies, plus ads to bring in money. Although these “link farms” don’t have formal ties with online locker services, they depend on one another. Lockers pay for storage and bandwidth, so link farms don’t have to. And link farms bring users to online locker services, where downloading large files may convince them to buy memberships so they can do so faster.
Any piracy on RapidShare is the result of consumers finding an illegal use for a legitimate service, says Daniel Raimer, RapidShare’s main outside lawyer and de facto spokesman. Although several major German publications have covered the company, our January 2010 conversation at his Düsseldorf law office marked the first substantial interview the company has done with the English-language media. “It’s not RapidShare’s business to violate copyrights,” Raimer says. “RapidShare’s business is to offer Web space. That’s pretty much it.” Raimer says RapidShare is covered in Germany by the 2007 Telemediengesetz, or Telemedia Act, which offers online intermediaries the same kind of safe harbor as the Digital Millennium Copyright Act. When studio or label executives point out a pirated version of a movie or album, the company takes it down. “If you do illegal things, that’s a serious problem,” Raimer says, “but it’s not our main business to deal with that.”
Some online locker services, such as Dropbox and Microsoft’s Windows Live SkyDrive, seem designed to help users who want to back up the contents of their own computers. But Schmid seems to have realized early on that the most effective way to market RapidPro accounts was to make sure his service was filled with files people wanted to download. So until the spring of 2010, RapidShare encouraged users to upload files they thought would be popular by awarding them RapidPoints based on how many times these files were downloaded. The strategy seems to have worked: a study by the networking company Sandvine says the site has more download than upload traffic;13 Raimer says the average file is downloaded five to ten times, although he cautions the range is so wide that this doesn’t mean much.
With some justification, media companies think online locker services depend on piracy, and several have sued RapidShare in Germany. Lower courts have granted preliminary injunctions to several book publishers, three German film companies, and the music collection society GEMA; two of those decisions were later overturned by the appellate court in Düsseldorf. The injunctions require RapidShare to block only specific works, which the company says it can’t do. It uses a very basic filter to screen out copyrighted material, but it has refused to use a stronger content-identification system, as YouTube now does. It has also declined to block uploads based on file names, since that might flag legitimate content that uses the same words, such as home movies named “Avatar” or “Inception.”
The legality of online locker services is now being tested in the United States, in a case that could set an important precedent. In February 2011, the MPAA sued Hotfile.com for copyright infringement.14 Although the technology behind the site is almost certainly legal—it operates under the same principles as SkyDrive or Google Docs—the way Hotfile runs its business could make it liable for infringement under the “inducement” doctrine outlined by the Supreme Court in its Grokster decision. Hotfile pays individuals who upload files between $2 and $15 for every thousand downloads of their material. Although one could upload anything, the fact that potential downloaders can’t preview files makes it a tough way to distribute works they’re not familiar with. The easiest way to generate enough downloads to make money is to put up popular movies or albums.
The other big online locker service is Megaupload, owned by a Hong Kong–based company that also runs the streaming service Megavideo and the self-explanatory Megaporn. Megaupload is even more secretive than RapidShare, but both Raimer and several Hollywood antipiracy executives say it’s owned by Kim Schmitz, an obese German hacker who is both literally and figuratively larger than life. (Megaupload, which has never said anything about its ownership structure, did not respond to requests for comment.) Schmitz served twenty months in jail for insider trading starting in 2002, and his habit of appearing in photographs with expensive cars and beautiful women made him a tabloid figure in his home country. One antipiracy executive, who says Schmitz lives in a top-floor suite in the Hong Kong Hyatt, compares his colorful life to that of “a James Bond villain.” In early 2010, according to the New Zealand Herald, Schmitz purchased the most expensive private house in New Zealand for $NZ30 million ($22 million).15 Apparently, the movie distribution business can be quite lucrative if you don’t have to cover the expense of making films in the first place.
Online locker services have worried labels and studios for years. But over the course of 2010, as gadgets like Boxee and Google TV made it easier to connect TVs to the Internet, the problem threatened to become a crisis. Until recently, most movie piracy has taken place on computer screens, which don’t offer the same viewing experience as big-screen TVs. As consumers connect their TVs to the Internet, however, they could be able to download movies from Hotfile or stream them from Megavideo as easily as they can buy or rent them from legitimate outlets like iTunes and Netflix. And that means Hollywood might never develop an online movie business to replace the DVD sales it’s losing.
To understand why movie piracy seems harmless, as well as why it’s not, consider X-Men Origins: Wolverine, the kind of comic-book action flick studios depend on. In the spring of 2009, a month before the 20th Century Fox film opened, a work print of the film leaked online. It was downloaded more than four million times,16 an issue the studio took so seriously that the FoxNews.com gossip writer Roger Friedman was reportedly fired for reviewing the unfinished version and describing how easy it was to get. The movie still grossed $85 million on its opening weekend—less than the last X-Men movie, but certainly respectable—and made $179.9 million over the course of its run in U.S. theaters.17 It took in a total of $373 million worldwide.18 How much damage could the online leak have possibly done?
Enough to matter. Wolverine had a $140 million budget.19 Studios don’t reveal what they spend on marketing, but they usually allot an amount equal to half the production budget. So Fox probably spent about $210 million before Wolverine even popped out his claws. As for the $373 million, a box office gross is just that—a gross. Studios usually end up with about 50 percent of U.S. theatrical revenue, in this case $90 million. For a variety of reasons, including taxes and local distribution expenses, studios usually end up with only around 30 percent of foreign box office receipts—another $46 million. (Fox declined to comment on the movie’s financial performance, so all of these figures are based on industry rules of thumb.) In other words, out of that $373 million in box office income, Fox probably took in about $136 million—for a movie on which it had spent $210 million.
Now let’s look at the effect of piracy. It’s foolish to argue that each of the four million people who downloaded the movie illegally represented a lost ticket sale, as some industry-funded studies of piracy do.20 But it seems even more absurd to suggest that none of them did. Let’s say one in twenty downloaders represents a lost ticket sale—a fairly conservative estimate.21 That’s 200,000 unsold tickets—around $2 million in lost box office revenue. That’s real money.
But that’s just the beginning of the damage. To understand how illegal downloading really hurts Hollywood, let’s look at what happens once Wolverine claws its way to the home video market. To make up the $60 million gap between the movie’s cost and its revenue, Fox counted on DVD sales, especially important for a movie that appeals to teenagers and young men. Wolverine sold 4.4 million DVDs in the United States, with a gross of $73.5 million.22 (No reliable figures on international DVD sales are available.) Studios have much higher margins on DVDs—about two-thirds, even allowing for additional marketing expenses—so those sales probably brought Fox another $50 million.
Those DVD sales also suffered from piracy, however. Since its theatrical release Wolverine has been downloaded more than four million times from file-sharing services alone23—let’s assume five million, counting other sources of piracy. Assuming that one in ten of those downloaders decides not to buy a $15 DVD—a moderate estimate—that adds up to another $7.5 million in losses.24 That means Fox lost almost $10 million to piracy, and that’s not counting lost DVD rentals or the lowered price of pay-per-view or television deals. In the end, Wolverine almost certainly made a profit. But Fox needs some of that money to run its business and offset losses on other films.
The United States also needs the resulting economic activity. Hollywood is more American than the rest of the entertainment business. Five of the six major studios are owned by U.S. corporations, and film business jobs are still mostly located in the United States. (Even when movies are shot elsewhere, they tend to be conceived, financed, and marketed in California.) Perhaps most important, at a time when the U.S. trade deficit is becoming a bigger problem, Hollywood still generates a significant trade surplus. The demand for U.S. movies isn’t likely to change soon; countries with homegrown film businesses rarely produce effects-driven popcorn fare like Wolverine. But exporting them relies on international recognition of copyright, which the Internet is eroding.
Movies also shape the world’s idea of what the United States stands for, as a cable written by an American diplomat in Saudi Arabia released on WikiLeaks showed. “It’s still all about the War of Ideas here, and the American programming on [the television channels] MBC and Rotana is winning over ordinary Saudis in a way that [the U.S.-funded satellite channel] ‘Al Hurra’ and other U.S. propaganda never could,” read the May 2009 message.25 Titled “David Letterman: Agent of Influence,” it mentioned Friends and Desperate Housewives as being particularly popular. “We should say that copyright theft and copyright abuse is more than just an economic disaster,” says Simon Renshaw, who manages the Dixie Chicks. “You could argue that it’s a national security issue since content exports—American culture in the form of films, television, and music—is American soft power at its finest.”
International trade has always shaped copyright policy, since countries that produce music and film need them protected while those that don’t would prefer to use them for free. For much of the nineteenth century, the United States did not recognize British copyrights, which left American publishers free to print unauthorized editions of books by Charles Dickens and other authors. (This also hurt American authors, since it had the effect of making homegrown works expensive by comparison.) More recently, the United States has campaigned for stronger copyright protection in Asia.
Most academics tend to see copyright as yet another set of regulations that let the West take advantage of developing countries, while others point out that the Indian and Nigerian film businesses thrive without much enforcement of copyright laws. But few filmmakers in those countries have the budget to make movies with production values that are up to international standards, and that means they’re rarely exported in a way that generates money for the countries that make them. A detailed 2010 study by the Organisation for Economic Co-operation and Development found that improved protection of intellectual property rights generally helps developing economies.26
From an international perspective, it’s hard to make a case that copyright laws don’t play an important role in developing a strong culture business. The vast majority of the popular culture we consume comes from countries with strong copyright laws: the United States, the U.K., France, northern Europe, and Japan. Nations without them, like Russia and China, don’t export much music and film, considering their size and influence. Countries with copyright may be more developed for other reasons. But consider East and West Germany, which were fairly similar when they were divided after World War II. Over the next four decades, West Germany exported movies by Wim Wenders, Werner Herzog, and Rainer Werner Fassbinder, plus music by influential recording artists like Kraftwerk and Neu! East Germany, where artists essentially worked for the state, didn’t produce a single figure of comparable influence. Whatever the future of the film business looks like, it will be shaped by law as well as technology.
Mitch Singer, chief technology officer of Sony Pictures Entertainment, has the kind of office that Silicon Valley executives probably imagine when they make fun of Hollywood: larger than some New York apartments, with tasteful art and modern furniture. This is where Singer planned Hollywood’s strategy to introduce its own cloud-based movie format, with more features and flexibility than illegal downloads. Although it’s being marketed to consumers as UltraViolet, its official name is considerably geekier: the Digital Entertainment Content Ecosystem, or DECE.
Notice how there’s no reference to a physical object? What sets DECE apart from videocassettes and DVDs is that it’s a purely digital format, much like iTunes files. Unlike iTunes files, though, UltraViolet content is stored in the cloud, on Internet servers; it can be streamed and downloaded as needed. Consumers establish an account that tracks what films they have rights to, and they can watch them from any connected UltraViolet device, including computers, video game consoles, and Blu-ray players with Internet connections. If it succeeds, it will give the studios an online product that could replace the DVD—and perhaps much of the revenue it represents.
Singer, who is also president of DECE, is a Hollywood executive with a law degree, but he sees the conflict between technology and the content business with a coolly logical worldview more common among Silicon Valley engineers. He has longish hair and glasses and speaks quickly, in complete paragraphs that might include references to economics, encryption algorithms, or network design. And he started worrying about how downloading would hit Hollywood as soon as he saw what happened to record labels.
“I’d say, ‘There, but for the grace of bandwidth, go us,’ ” he says with a smile.
As Singer points out, there have always been two schools of thought on how movie and music companies should respond to online piracy. Most entertainment companies believe they need to litigate to prevent illegal downloading, which risks alienating fans. Technology executives say that media companies need to “compete with free” by drastically lowering prices, but that makes it hard to make money, and this didn’t work so well for the newspaper business. The answer may lie somewhere in the middle: lawsuits don’t work if content isn’t available from legal outlets, while lowering prices won’t help if a free alternative is just as convenient. “I think RapidShare is a major concern for the content industry,” Singer says.
Assuming consumers act rationally, entertainment companies need to compete with pirates on both price and convenience. Since pirates almost always offer content for free and studios and labels can cut costs only so much, the competition really comes down to convenience. That means coming up with a product that can be played on different devices with minimal hassle, just like downloads from Hotfile or streams from Megavideo. But it also means issuing takedown notices and pressuring Google to remove search results that link to illegal sites, in order to make piracy as much of a hassle as possible. “We believe in speed bumps,” Singer says. “You don’t want to get caught up in focusing solely on protecting content.”
Singer believes movie studios need to focus their antipiracy efforts on films that are still in theaters, then accept the fact that illegal downloading can’t be stopped and concentrate on making UltraViolet as appealing as possible. Although UltraViolet movies are copy protected and limited to compatible devices, users don’t have to worry about moving them between devices, because they’re stored remotely and accessible from anywhere. (All UltraViolet movies come with at least three downloads and unlimited streaming for a year, and buyers can play movies on up to twelve devices at once.) In addition to using copy protection to limit access, Singer wants to use it to let consumers watch their movies wherever they are.
Singer had the idea that evolved into UltraViolet in 2002, when he was messing around with his multimedia system, trying to transfer some movies to his PC so he could watch them on other screens in his house. This was hard to do with DVDs, which are encrypted to foil copying. So Singer started thinking about a format that would make it easy. “I said, ‘Okay, technology exists to enable some really cool functionality here,’ ” he remembers. “We’re going to take what’s limited today and give you more expansive rights.”
The idea behind UltraViolet is “Buy once, play anywhere.” Although UltraViolet movies can be downloaded to watch away from an Internet connection, the idea is to give consumers the right to enjoy the movies they bought with more flexibility. (The system could also be used for books, music, or other digital media.) Consumers will be able to buy UltraViolet movies in physical stores—where they’ll be included with DVDs or Blu-ray discs, and potentially other physical products as well—and from online retailers and cable companies. Once they own those movies, they’ll be able to watch them from services run by any of the partners, which will check what movies they have and offer to stream them, in some cases for a fee. Comcast’s cable service will stream UltraViolet movies on your TV from the same system Microsoft’s Xbox Live does.
This compatibility is important, since it could make UltraViolet more convenient than piracy. The main challenge for most media formats is support: Few people purchased movies on Sony’s Universal Media Disc format, since they couldn’t watch them at a friend’s house. DVDs can be watched on any player—with a few geographic restrictions—but you have to carry them around. With UltraViolet, you could start watching a film with your Comcast cable service, then go to a friend’s house and, after signing in to your account, finish watching the same movie on his Xbox Live connection. (The relevant standards were set by the DECE organization.) Both companies, as well as many others, will draw information from the UltraViolet database.
If this sounds complicated, Singer says, think of it as an ATM system for movies. Much like ATMs, UltraViolet companies check in with a central database that tracks who can “withdraw” what content. Much as ATMs dispense their own cash, UltraViolet providers handle the resulting streams or downloads and charge their own access fees. “I was on a panel and some guy says, ‘Are you telling me I have to pay for my content again after I bought it?’ ” Singer says. “And my response to him was ‘You pay for money that you already have.’ It’s convenience.”
The trick will be making UltraViolet as easy to use as the ATM system. So far, efforts to come up with copy-protected files compatible with a variety of devices have failed—often embarrassingly. Intel’s Viiv platform never took off, and Microsoft’s PlaysForSure music format proved so unworthy of its name that the company itself abandoned it. And free culture activists have become so hostile to the idea of digital rights management that bloggers started insulting UltraViolet before it had even been introduced.
UltraViolet can count on widespread support within Hollywood; the venture includes five of the six major studios, as well as some independents, plus Best Buy, Comcast, Microsoft, Motorola, and Netflix. Essentially, it has the support of most companies that make and sell movies, as well as the makers and sellers of the equipment on which they play. But the four companies missing are big ones: Disney, Apple, Google, and Walmart. The last of those is more important than most consumers realize, because the retailer controls more than a third of DVD sales; in 2010 it bought the company Vudu to get into the online movie business itself. Apple isn’t expected to sell UltraViolet movies in its iTunes Store, but the iPad and the Apple TV could play UltraViolet movies in apps, the way they do Netflix films. Disney has introduced Keychest, a system similar to UltraViolet, but other studios kept their distance, and in November 2010 Disney’s chief executive, Bob Iger, said movies in that format could be compatible with UltraViolet.27
“People have wanted it to feel like a format war, and I don’t think it really is,” says Mark Teitell, DECE’s executive director. If anything, studios will promote UltraViolet by packaging it with DVDs and Blu-ray discs, in order to offer consumers the picture quality of a disc as well as the flexibility of a cloud-based format. “UltraViolet should really help us build value for people who buy Blu-ray discs,” Teitell says.
UltraViolet will still have to compete against online stores committed to other formats. In order to maximize sales, studios will continue to make movies available through Netflix, iTunes, and new high-definition pay-per-view services that offer films that are still in theaters. “UltraViolet certainly is a priority for our company, and we’d like it to have some success in the marketplace, because we genuinely believe that a digital locker is critical to the success of digital consumption,” says Peter Levinsohn, the executive in charge of digital distribution at Fox. “But UltraViolet will not be the only solution to this.”
It may be the best solution for Hollywood, however. Over the past decade, studios have grown accustomed to selling DVDs in stores for $10 to $15, and rental models like Netflix don’t generate nearly as much money. No one knows whether consumers will buy movies they can’t put on a shelf, but UltraViolet may offer enough convenience to convince them. “What consumers want is flexibility with the content they’ve purchased,” Levinsohn says. “The more valuable we make the products and services we offer the consumer, the more people will consume them.”
Over the course of 2010, as DECE finalized its technical specifications and prepared to introduce UltraViolet, RapidShare began cleaning up its act. During the spring, the company gradually dismantled its RapidPoints program and started having more productive conversations with music labels and movie studios. (Several movie business sources say the company was threatened with a lawsuit, but Raimer says negotiations improved when studios stopped insisting on content filtering.) “We listen to their concerns and try to find a solution,” Raimer says. “But we have very strong feelings about privacy. We don’t screen files.”
For advice, RapidShare turned to the lawyer Andrew Bridges, a partner at Winston & Strawn, who successfully represented Diamond Multimedia against the RIAA in the case that established that MP3 players don’t face the levy intended for digital recording media. Two months after RapidShare landed on the congressional International Piracy Watch List, it also hired the lobbyist firm Dutko Worldwide to convince politicians it had been lumped in with pirates unfairly. “We were really not happy about that,” Raimer says in December 2010, almost a year after we first spoke. “We’re trying to convince politicians and the guys from [the Congressional International] Anti-Piracy Caucus that RapidShare is a legitimate company.”
Judging by RapidShare’s traffic, its decision to focus on the legitimate market has been an expensive one. According to Quantcast, the service had 3.7 million U.S. users a month in January 2011, down from 5.3 million the year before.28 “It’s been a significant decrease in uploads, and honestly we’re not really sad about that, because a lot of the guys who were doing illegal things have left RapidShare and gone to other companies like Megaupload or Hotfile,” Raimer says. “Windows Live SkyDrive, Google Docs, these are the companies we want to compete with. If that means Megaupload is bigger than we are, that’s okay with us.”
Entertainment companies are still pressing RapidShare to do more, perhaps with a more sophisticated filter. Since dedicated pirates would get around it, perhaps by encrypting their files, Raimer says there’s no point. Unsurprisingly, studio executives disagree. “That’s silly and wrong,” says NBC’s general counsel, Rick Cotton. “There’s no reason why they can’t employ a similar kind of filtering technology to that used by YouTube, as an example.”
Until the MPAA sued Hotfile, online locker services had faced only one U.S. lawsuit, a case brought in November 2009 by Perfect 10, a soft-core pornography Web site that specializes in photographs of natural-looking women and has sued a number of Internet companies.29 The court denied Perfect 10 a preliminary injunction, RapidShare countersued, and the two sides settled in July 2010.30 RapidShare can make a solid argument that it’s covered under the safe harbor provision of the Digital Millennium Copyright Act, since it can reasonably say it doesn’t know what’s stored on its servers; unlike YouTube, it has no search function or “most popular” list. But several movie studio lawyers suggest that RapidShare may have “induced” copyright infringement by offering RapidPoints to users whose files proved to be popular downloads.
Raimer disputes this; he says RapidPoints could only be turned in for small prizes. “We had T-shirts and [key-chain] lanyards,” he says. Some users got so interested in accumulating points that they’d send RapidShare takedown notices for popular movies, then put the films back online themselves so they could collect points when they were downloaded. Partly for that reason, RapidShare cut the program.
Raimer believes that changing RapidShare’s policies leaves the service in the clear. “The technology Hotfile has is the same as what we have—it’s also the same as what Microsoft’s SkyDrive and Apple’s MobileMe have—so the issue might be what companies do with it,” Raimer says. “I think people will agree that the basic technology of file hosting is the kind of thing the [Digital Millennium Copyright Act] covers.”
Hotfile offered studios a better target for a lawsuit, since it pays uploaders cash. (The studios also may have been reluctant to face Bridges, who has a reputation as an effective litigator.) Hollywood wants to shut down Hotfile, but it also wants to set a precedent that would make other online locker services do more to filter content. This will be controversial, since any regulations could also affect Microsoft, Apple, and Google. But setting up some basic rules wouldn’t just help Hollywood in the present; it would protect its future. The harder it is to access and store pirated content, the more consumers will want to do so legally—perhaps with UltraViolet.
Mitch Singer has studied what happened to the music business in order to avoid making the same mistakes. In the late 1990s, when he did some work for Sony Music, he attended a few meetings of the Secure Digital Music Initiative, which the major labels set up to develop a copy-protected album format. Historically, electronics makers and entertainment companies had always cooperated to introduce new formats. But once MP3 files became common, electronics manufacturers realized their devices would sell better if they could play pirated music, so they had no financial incentive to incorporate copy protection. “The iPod developed around getting content from ripping CDs or getting MP3 files from Napster,” Singer says. “It wasn’t until eighteen months later that iTunes launched.” When it finally did, the major labels were under so much pressure that they agreed to sell music under Apple’s conditions.
Singer likes to contrast the development of iTunes with the introduction of the DVD. When the movie studios and electronics companies established the DVD Consortium, neither side could go ahead without the other: movies weren’t on the market in a compatible format the way MP3 files were available on the Internet before Apple started selling the iPod. So electronics companies had to give the studios the copy protection they wanted. The actual protection they came up with wasn’t all that strong: it was broken a few years later by a teenager.31 But by that time the studios had some legal protection in the form of the Digital Millennium Copyright Act.
Technology executives like to mock the law’s anticircumvention provision, since any digital rights management system eventually gets cracked. But that’s not really the point. The law also made it illegal to sell a DVD copying device at Walmart, and it gives some consumers pause. “Every time people want to use [the DVD copying program] DeCSS, they have to download it, they have to worry about viruses, and perhaps a twinge of guilt goes through their brain,” says Fox’s senior vice president of content protection, Ron Wheeler. “None of that has ever been true for CDs. That’s the difference, and it’s all because of the DMCA.”
Unlike Apple’s copy-protection system for the iPod, the DVD Consortium created technology that could be licensed by any electronics company willing to pay the necessary fee. The DVD player became a commodity, which encouraged price competition. “The manufacturers were completely independent, and that put downward pressure on prices,” Singer said. Within a decade after the format’s 1996 introduction, the price of a DVD player went from more than $1,000 to less than $50. This created a giant market for movies and gave studios the power to set their price. “DVDs are now thirteen years old, and we’re still selling them for roughly the same price we sold them for at launch,” Singer says. In some cases, there’s more profit in selling a single DVD than the machine that plays it.
“Maybe,” Singer says, “the heading of this white paper would be ‘Who’s Commoditizing Whom?’ ” Just as cheap digital music helped Apple market its iPod, so inexpensive DVD players helped Hollywood sell more DVDs. The advantage can go either way, but piracy tends to cost entertainment companies their negotiating leverage.
Singer knew he needed to offer technology companies an incentive to respect copyright rather than turn a blind eye to infringement, and two things changed in the last half decade that made this easier. First, many technology companies have become more interested in selling services than gadgets; Microsoft makes money selling Xbox Live subscriptions and games, not the video game console itself. Second, the Internet service providers that benefited from the widespread availability of pirated content had started to worry that the use of file-sharing services was clogging their networks. UltraViolet gives both groups of companies a service to sell.
For Internet service providers, selling UltraViolet movies will be much easier if potential buyers aren’t illegally downloading the same films from file-sharing networks. So it could also give Internet providers an incentive to cut piracy on their networks. It’s hard to know how effective they could be, especially without a government mandate. But giving them a reason to try would be a significant step in the direction of legitimate commerce.
Theoretically, at least, UltraViolet should also encourage competition among retailers, much as the DVD player did. While DECE sets technical specifications, it doesn’t mandate how retailers sell movies. That means Best Buy could package UltraViolet movies with physical DVDs, Comcast could use them to buttress its video-on-demand options, and Netflix could use them to “upsell” subscribers into buying films instead of just renting them. It also means that all of those companies will compete to offer hit movies for the cheapest price. Since studios set wholesale prices, the resulting competition should benefit them.
This assumes that UltraViolet works. Although DECE hoped to introduce UltraViolet products in time for the 2010 Christmas season, it took too long to agree on all the necessary standards. “People have been really skeptical that a group of sixty companies—many of which are large, powerful companies with different business models—could get anything done,” Teitell says. “But they were partly right: it’s challenging.”
DECE also faces a more complex world than the Blu-ray or DVD format. “Home entertainment is moving from something that involved two companies—the content company that owned something and the retailer that sold it—into something that involves multiple parties,” Teitell says. “UltraViolet will be a combination of something you buy now and an ongoing service that comes with it.”
At least for now, pirate sites won’t be able to offer a similar service. “What we hope will happen with DECE is that consumers will want the extra functionality we can offer them,” Singer says. “And if we create an environment that’s better than free, I think we can bring back digital sell-through.”