Hollywood Should Beat Digital Pirates at Their Own Game: View

It seems cosmically appropriate that gambling house odds are on “The Artist” to win this year’s Academy Award for best picture. The Weinstein Co.’s paean to the end of the silent movie era is an apt metaphor for an industry upended by new technologies.

Whether or not “The Artist” gets an Oscar statuette, the film can teach Hollywood an important lesson: Once technical barriers are broken, they can never be rebuilt. The arrival of talkies required the industry to rethink an antiquated business model. This time the existential threat -- the one that should compel Hollywood to rethink its business model anew -- is the ability of digital pirates to bypass the industry’s distribution system.

Studio executives and their Washington lobbyists continue to hope that Congress will adopt a revamped version of the Stop Online Piracy Act, the legislation that was withdrawn in the face of opposition from the technology industry. The measure would have enabled studios to shut down pirate websites located overseas and out of reach of U.S. law enforcement. But SOPA’s provisions -- requiring law-abiding search engines and websites to deny copyright infringers access to credit-card payment systems and search listings -- would have darkened pirate sites only temporarily. They would have quickly popped up elsewhere in a game of digital whack-a-mole.

Megaupload Model

Perhaps perversely, one infamous pirate site, Megaupload, could provide a model for the film industry’s future. Though the site was shut down by authorities in January, the Megaupload cyberlocker (cloud-servers that store movies and other large data files too big to e-mail) was one of the 100 most popular websites in the world. Megaupload claimed 150 million registered users with an average of 50 million visitors a day. Over seven years, a U.S. Justice Department complaint says, it pulled in $175 million (with just 30 employees) distributing mostly stolen films. Clearly, there are millions of film buffs eager to watch movies when and where they desire, not when a studio dictates.

Kim Dotcom, the mastermind of Megaupload, awaits extradition to the U.S. We have no intention of glorifying his methods, regardless of whether the courts find Megaupload to be a criminal enterprise. Hollywood films are proprietary content and deserve to be treated as such. But the market is all but screaming at film industry executives to change their ways and honor consumer demand.

Studios should abandon their tightly controlled distribution system, in which a film is released serially to U.S. movie theaters, overseas theaters, pay-per-view television, DVDs and network TV. The industry now makes most of its money from overseas releases and DVD sales, and is fearful that simultaneous digital releases on all platforms in all markets will kill the golden goose that produces blockbuster hits -- and profits.

Why can’t the film industry compete on the basis of price and service, and beat the pirates at their own game? A fully monetized, legitimate version of Megaupload, paired with lower-cost digital filmmaking, could expand markets and revenue for the film industry. Hollywood could still produce its blockbusters and reap the rewards of the mass market. (If the VCR didn’t kill off cinemas, digital distribution won’t either.) The industry might also develop valuable niches that bypass the local multiplex. Older audiences, for example, might be willing to watch more films if they could pay less for each viewing and watch in the comfort of their own homes.

UltraViolet’s Proposition

Netflix, which streams movies to TVs and personal computers for a monthly subscription, has been a breakthrough, but it isn’t the only digital distribution model. Warner Bros. is testing a service with You On Demand Holdings that streams movies to consumers in China, where the studios complain that copyright violations are a way of life. Warner and other Hollywood studios have also quietly formed a consortium in the U.S., called UltraViolet, to distribute content digitally. It’s the right approach but the process is still clumsy, and the value proposition is undermined by fears that the studios aren’t fully behind it.

The industry should move beyond baby steps. Surveys show that iTunes, Spotify and other music websites have turned millions of music pirates into paying customers. The movie industry should give film buffs the same opportunity to go legit.

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.