Hollywood: Organized Crime Goes to the Movies

The Jan. 10 murder of Gabriel Ayala Romero in a jail in northern Mexico could have been a scene out of Scarface, the 1983 Al Pacino film that details the life of a modern-day drug lord. Ayala Romero, known as Don Gabi, was stabbed more than 20 times in Topo Chico prison, where authorities say he was continuing to run a cell of the Los Zetas drug cartel. It wasn't drugs that landed him behind bars, though. Ayala Romero's role as head of Los Zetas's DVD and music piracy business had earned him a second nickname: the Czar of Piracy. Centered in northern and southeastern Mexico, the operation generated about $1.8 million a month, according to the Motion Picture Association of America. "He was murdered from within jail due to rival gang members, who were trying to gain control of his piracy organization," says Mike Robinson, the MPAA's chief of operations for content protection.

Lax enforcement and high profit margins have made trafficking in counterfeit DVDs a flourishing side business for drug smugglers and crime rings worldwide. Russian gangsters and Mexican drug cartels such as Los Zetas and La Familia Michoacana, Chinese gangs, and even former members of Northern Ireland's Irish Republican Army have all piled in to the lucrative business in the past decade, according to Robinson. "The scope of organized crime in home-video piracy is enormous," he says.

Hollywood studios lose an estimated $6.1 billion annually to movie piracy, according to a report by the Institute for Policy Innovation. While the industry has used that loss estimate since 2005, faster Internet speeds have made it easier to transmit pirated movies online, further cutting into legitimate DVD sales. Consumers make 53 billion visits a year to websites selling pirated movies, TV shows, games, music, and software, according to a study by MarkMonitor, a company that ferrets out piracy websites for clients including Time Warner (TWX).

To combat its multinational adversaries, the MPAA is hiring former law enforcement officers outside the U.S., including in Russia, Singapore, Britain, and Malaysia, to improve cooperation with local police. In South Korea, piracy has cut so deeply into legal home-video sales that major studios have closed their regional home-entertainment offices because sales aren't high enough to support the operations, says Jeff Blake, head of film distribution for Sony (SNE). "There are titles we can't exploit beyond theatrical [release] because of piracy," Blake explains.

That hurts, since home video is Hollywood's most profitable business. By the time a movie is released in home-video formats—including DVD, Blu-ray, and video-on-demand—most of the production costs have been covered and the added cost of manufacturing disks and digital versions is negligible. Piracy is eroding these most lucrative sales at the same time the theatrical business is slumping. Box-office revenue is down 20 percent in the U.S. and Canada so far this year, according to Hollywood.com Box-Office. Sales of traditional DVDs in the U.S. are in long-term decline, falling 11 percent, to $14 billion, last year, according to the industry association Digital Entertainment Group.

Creating a counterfeit DVD is often a multi-step affair involving illicit recordings collected from multiple countries with audio and video pieced together to produce DVDs in various languages. Piracy rings typically either steal a digital copy of a film or secretly bring a camcorder into a theater in a country with lax enforcement such as Russia, Mexico, or Pakistan, according to Robinson.

In developed countries where theater operators aggressively search for cameras in auditoriums, audio is recorded by people working with foreign gangs. The audio is later synced with video recorded elsewhere to make copies that can be burned onto DVDs or distributed over the Internet, according to industry officials. The MPAA says some pirates have created rogue websites that look legitimate enough that they are able to sell advertising on them. Stolen movies are streamed from the sites for free; the pirates make money from the ads. The Justice Dept. last June seized the domain name and content of NinjaVideo.net, which the agency said had links to more than 200 movies and 300 TV shows, and sold ads and took donations from users.

The MPAA is lobbying for passage of legislation in the U.S. that would speed up the process for Justice to seize domain names of such sites and warn advertisers. For sites that charge a fee to watch pirated movies, the legislation would block credit-card payment. "The Internet has regrettably become a cash cow for the criminals and organized crime cartels who profit from digital piracy and counterfeit products," says Representative John Conyers Jr. (D-Mich.), ranking member of the House Judiciary Committee. "Millions of American jobs are at stake because of these crimes."

Gangs like the DVD trade because it's a high-margin business that also provides a means of laundering cash from other illegal enterprises, according to a 2009 RAND Corp. study. Drug cartels, with international distribution networks already in place, have found pirated movies an easy way to branch out. "If they've got the capacity and the networks to move stuff, then this is a natural," says RAND study co-author Gregory F. Treverton. "This is relatively lucrative and not highly prosecuted."

In Mexico, groups including Los Zetas burn copies of films onto DVDs and even stamp them with gang logos before they are sold in public markets, says Richard Halverson, an investigator with the National Intellectual Property Rights Coordination Center in Arlington, Va., a federal task force. The Center coordinates investigations and distributes information among agencies including U.S. Immigration and Customs Enforcement, the FBI, and Interpol.

In addition to stepping up law enforcement, film and television studios are urging Washington to negotiate tougher trade agreements and are forging direct ties with foreign law enforcement agencies. The RAND study says China, one of the world's largest consumers of pirated DVDs, will likely crack down on movie counterfeiting as its own movie industry expands. In recent years the Chinese government has conducted large-scale raids on plants in Macau and on the mainland to shut down pirate DVD manufacturers. In one 2007 raid, authorities seized 1.79 million discs and 30 machines used to erase source-identification codes that would show where the DVDs were made, according to the MPAA.

In the operation that led to Ayala Romero's arrest, the Mexican army seized 1,180 disc burners and 3.14 million copies of movies and TV shows from 23 warehouses. Movie piracy in Mexico costs Hollywood about $590 million a year, figures Federico De La Garza, head of the MPAA's Mexico affiliate. His office is urging Mexican authorities to organize more raids like the one that netted Ayala Romero. "Our objective is to motivate the authorities to go after the large groups," De La Garza says.

The bottom line: Hollywood studios are losing billions annually to DVD piracy. International organized crime rings are the latest culprits.

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