Tipping Hollywood the black spot

AS HOLLYWOOD bosses know all too well, digital piracy could plunder their industry. The music business, where piracy has long been active, has lost a quarter of its sales already. Watching its plight, the movie moguls say, has taught them a lesson: listen to what the customer wants and keep the business model flexible. But investors are not convinced that Hollywood's leaders are on top of the piracy threat. Like Scarlett O'Hara in “Gone with the Wind”, says Gordon Crawford, an investor at Capital Research and Management in Los Angeles, many have decided to do something about it tomorrow.

It is true that movies are not yet as vulnerable as music. Hollywood starts from a better position. Its products are priced more reasonably than CDs. People want to watch all of a film, so there is no incentive to download a single track. It can take days to download a movie from the internet, unlike a song, which takes minutes.

But rampant DVD piracy may be coming soon, both in the form of traditional counterfeiting and downloading from the internet. Hard pirated copies are widespread, and will proliferate further with the spread of DVD recorders and burners. Already as many as 600,000 movie files are shared each day on peer-to-peer file-sharing networks such as Morpheus and Grokster, according to the Motion Picture Association of America (MPAA). That number is likely to soar as more households get broadband internet and compression technology cuts download time.

Movie industry bosses say that they are doing plenty to combat the threat. As well as helping local police with raids on counterfeiters, they are devising “digital rights management” (DRM) techniques, such as deleting content after the user has “consumed” it. They are also offering movies cheaply online and seeking new laws. This week they won a battle against pirates when California's Supreme Court ruled that the First Amendment right to free speech cannot be used as a defence by someone publishing trade secrets on the internet—in this case, software to break DVD copy protection.

American Pie-in-the-sky

Next will come an Orwellian project to “re-educate” the young. With Junior Achievement, a volunteer teaching organisation, the MPAA has developed a curriculum for use in 36,000 American classrooms which teaches that swapping content is wrong. Older file sharers will be hard to persuade, however, and hackers can usually get around any copy protection the industry devises. According to the Pew Internet & American Life Project, 65% of people who share music and video files online say they do not care if material is copyrighted. Last month, the MPAA tried an emotional approach, with a series of adverts in which a set painter, a stuntman, a make-up artist, a grip and an animator explain how piracy hurts them, not just the big bosses. The campaign is unlikely to have much effect, industry-watchers say, as everyone knows how many millions the latest blockbuster grossed and how much the star got.

To frighten people, the big music firms are going after individuals in court. Movie firms reckon that this will help them too, though for now they are leaning on universities to stop their students file-sharing. One studio suggests that parents could be presented with a bill for their child's downloading activities at college, and degrees could be withheld until someone pays. Universities may stand by their students, however. For the Massachusetts Institute of Technology (MIT) to withhold degrees, says a spokesman, the student would have to be a “serious recidivist”. This month a federal judge ruled that MIT, along with Boston College, need not obey subpoenas from the music industry seeking the names of students it suspects of being heavy file sharers, if only because they were filed from the wrong jurisdiction. Legal attacks may scare people, but risk alienating customers and making them try harder to rip off the industry, which cannot, even in America, sue everyone.

Although Hollywood executives say they want to listen to customers, most of their efforts have been to stop and punish downloaders, not to make their products more attractive—with one exception. Five studios have launched Movielink, an online site charging $3-5 to download a movie. But the service is still “clunky”, admits a studio spokesperson. It cannot beat a good video store either for range of titles or for having the latest releases. Customers do not end up owning the film.

Assuming it is not resigned to milking all it can from its customers while awaiting inevitable demise at the hands of the pirates, the movie industry should rethink its business model. Movielink might be improved. Prices might be cut to reduce the appeal of piracy. Hollywood should lower the price of DVDs from today's $15-20 to $7-10, says Tom Wolzien, an analyst at Sanford Bernstein, and go for volume. The studios have packed their DVDs full of extra content—director's cuts, and so on—supposedly offering more value. Why not sell a no-frills, cheaper version? asks James Roberts, a consultant at Mercer.

Studios might also change how they release movies. Opening a blockbuster in America but not in Britain, for instance, increases demand for pirate copies, as does holding back a movie from release on DVD and video. The studios need to shorten their release windows, says Michael Wolf, director of McKinsey's global media and entertainment practice. They have done this a bit already, he says—with simultaneous global “day-and-date” releases of, say, X-Men 2—but not enough.

In the 1980s, software companies used to fight online pirates with DRM technology. But they found that copy protection annoyed users, and got rid of it. The makers of Lotus 1-2-3, a spreadsheet program, abandoned it after finding that they had merely created a new market for software that could defeat copy protections. Now the music industry is realising that often some of the downloaders it labels as thieves are actually trying out music before they buy it, and that controlled, legal file-sharing could be a marketing tool. Viral marketing of that kind, says John Rose, head of the anti-piracy effort at EMI, a music company, could be powerful. Hollywood should take note.

The outlook would be much less grim if the entertainment business could do a deal with the firms that make electronic gadgets. For copy protection to work, hardware needs to spot it. So far, says an investor, Hollywood has not had the top-level discussions that it needs with consumer electronics and PC manufacturers. Part of the reason, he says, is that piracy is not being tackled by the bosses of media companies. The task gets delegated. But even if Sumner Redstone, chairman of Viacom, were sitting down with Sony's chief, Nobuyuki Idei, the discussion might not go far. The consumer-electronics industry has little to gain by making products that seriously hinder piracy, as these would be unattractive to customers and hurt sales.

If the movie industry does not work out its position quickly, says Mr Wolzien, it could go the same way as music. This might even mean that actors would be paid a lot less. Some are well aware of this. Several movie stars, says a studio executive, even offered to appear for nothing (nothing!) in the MPAA's anti-piracy adverts, but were turned down. This time, understandably, the industry pointed the cameras at its humbler members.