Notes on cable – Part 6 – Piracy

Piracy is going to get a lot better in the future.

  1. Internet speeds will get faster due to Moore’s Law.
  2. Open source software will get better as contributors keep adding code.

My belief is that many of the dynamics that played out for the music industry will play out for piracy.  Piracy itself is a form of competition.  Content companies will be forced to compete with their own content.  The companies that will fare best against piracy are the ones who can put together an offering that is more compelling than piracy (e.g. Netflix).

In the long run, I think that most of the industry will be dominated by a small handful of Internet TV services with big content libraries and excellent software.  Content companies will increasingly need to become good at software.  Usually software markets are dominated by a small handful of companies.  If that’s the case for Internet TV, then many of the traditional players will be losers.

Issues with piracy

Piracy has some issues that will go away over time:

  1. With BitTorrent, you have to wait at least a few minutes before the video finishes downloading.  The open source Popcorn Time software allows BitTorrent to be used to stream video as it downloads.  It can take several seconds for a video to start streaming.  As Internet speeds get faster, the delays will come down.
  2. Many cable companies implement data caps that penalize users heavily for downloading a lot of data.  The idea behind these caps may be to discourage consumers from cord-cutting (ditching traditional cable subscriptions for legal and illegal online video).  As data caps continue to trend higher, I believe that these barriers will go away.

Piracy has many aspects that make the process annoying or user-unfriendly:

  1. Malware or malicious software.  Some such programs will hijack a computer and prevent the consumer from using it.  It will try to trick the user into paying money to be able to use the computer again.  Many piracy sites support themselves with advertisements for malware.
  2. Many BitTorrent clients (and sites that distribute them) try to generate revenues from toolbars, malware, and advertising.  The (formerly?) popular uTorrent client for example updated itself and started showing annoying banner ads from within the user interface.
  3. Because piracy sites and services are constantly being shut down, having to find new avenues of piracy can be annoying.
  4. It takes some work to get pirated video to play back on a big-screen TV.  Users may not be tech-savvy enough to figure out how to do this.
  5. The video quality of pirated content may be noticeably lower than the same content acquired legally.  Some files are bogus.
  6. For movies currently playing in theatres, physics will place limitations on the quality of “cams” (illegal camera recordings).  Ambient lighting in the theatre (necessary for moviegoers to find their way to the washroom) will always limit the quality that can be achieved in a cam.
  7. For anime and foreign-language films, the quality of subtitles may be low.  Sometimes fan-made subtitles for anime do not include translations for some Japanese words because the fansubbers have a fetish for Japanese culture.  In many causes subtitles are non-existent.

Better software can deal with some of these problems.  Popcorn Time does not require the user to visit Torrent tracking sites (and Torrent search engines like Kickass Torrents, The Pirate Bay, Isohunt, etc.).  This reduces the problems with malware and advertisements on Torrent sites.  Here is an example of the problem with BitTorrent sites:

bittorrent-traps

The ads on the webpage actively try to trick the user into downloading malware.  This is not user friendly at all.  It may not be obvious to everyday people that this webpage is full of malware ads.  This process may be too complicated for many consumers.

However, Popcorn Time avoids many of these problems.  It takes only 3 minutes to go to a website that hosts the Popcorn Time software and to start watching a movie.  For those of you who want to legally research Popcorn Time, I suggest watching videos on Youtube:

The software itself curates pirated content.  It tries to choose only pirated content from sources that always release torrents of high quality.  The hobbyists working on the software are also trying to make refinements such as ensuring that subtitles are available in multiple languages.  With traditional BitTorrent, subtitles can be annoying if the user has to track down .srt files from other sources.

Popcorn Time has some downsides:

  • From what I can tell, Popcorn Time cannot be used to conveniently access the all of content available via BitTorrent.
  • Some ISPs intentionally throttle (slow down) BitTorrent traffic, though this practice is less popular nowadays because many BitTorrent clients implement encryption.  Because of encryption, the throttling systems cannot reliably differentiate between BitTorrent traffic and other traffic such as World of Warcraft.  The false positives can cause unhappy customers and unnecessary customer service expenses for Internet service providers.
  • In some countries like Germany, consumers have been sued for illegally distributing content via BitTorrent.  Pirates can technically get around this if they pay for a VPN service (though setting up a VPN may be too complicated for some consumers).
  • There are other forks of Popcorn Time that will trick the user into install malware.
  • In the future, there is a chance that the popcorntime.io domain will be taken down.  The constantly shifting landscape will make piracy complicated for users.

Other piracy options

Some for-profit companies will create software whose main purpose is to make piracy easy.  Kazaa and Napster are examples from the past.  The problem with these services is that they get shut down or are forced to move away from facilitating piracy.

Youtube hosts a lot of pirated content.  Google does a fairly reasonable job at protecting the rights of content owners by taking down infringing material.  A lot of illegal material available elsewhere is unavailable on Youtube.

Some people use Usenet/Newsgroups to pirate files.  However, many ISPs wisely no longer offer free Usenet access to its users.  Users who like this method must pay for a Usenet service provider.  Usenet has zero ads.

Streaming websites

Through a web browser, anybody can access live streams of pay-per-view events and channels currently being broadcast.  While the video quality is often mediocre today, Moore’s Law will inevitably increase the video quality.  Many of the illegal streaming websites run ads to make money.  In general, those ads are a little less obtrusive than the ones in legal services.

How do legitimate services stack up against piracy?

So far, the best solution seems to give consumers:

  • The content that they want.
  • In a convenient form (e.g. the DRM should not get in the way, content is available online, etc.).
  • No ads.
  • No waiting several months after the content’s initial release.
  • At a reasonable price.

In general, many legitimate services face the problem of getting multiple parties to row in the same direction.  If some content providers are adamant about making consumers watch ads, it will be difficult to create a good service because consumers do not like paying subscription fees for ads.  Personally, I think it’s crazy that some companies think that advertising is a sensible business model for an online video service such as the paid version of Hulu.

Another big problem with many legitimate services is that the content library is small.  Liberty Global’s MyPrime service for example has received poor reviews due to its small content library.  I believe that scale will be a huge competitive advantage going forward for Internet TV services and the cable channels that they compete against.

Netflix

Netflix’s CEO Reed Hastings clearly thinks about what consumers want.  For example, his latest shareholder letter mentions the sobering popularity of Popcorn Time.

To me, it seems that most consumers prefer Netflix over piracy over ads.  Netflix is an example of a company that does things right.  Here are some things it does well:

  1. No ads.
  2. The software is available on a wide range of devices.  (Unfortunately, many cable providers do not want Netflix on their customers’ set-top boxes.)
  3. The software saves the point in time when the user stopped watching.
  4. The recommendation engine helps users discover content.
  5. The software is easy to use and intuitive.
  6. The software allows users to switch between languages and toggle subtitles.  This is especially useful for foreign-language content where some users prefer dubs while others prefer subs.

There are some areas where Netflix can make improvements:

  1. Make its content library even better.  Going forward, I think that Netflix will raise its prices so that it can give users access to a bigger, better pool of content.  It doesn’t make that much sense for users to have to flip between several different apps/devices/software to access all of the content that they like.
  2. Offering Season 2 of a TV series without offering Season 1.
  3. Opening credits on Netflix shows.  I’m guessing Neflix’s analytics team has already figured out what percentage of its users skip these.  By comparison, some pirated videos have chapter markers that make it really easy to skip opening credits and recaps of previous episodes.  I suppose Piracy really does drive innovation.
  4. The few seconds of the Netflix logo at the beginning of Netflix exclusive shows.  These strike me as superfluous because Netflix users are well aware that they are on Netflix.

TV everywhere

One problem with TV everywhere is that the software and technology behind it lacks scale.  The MVPDs never banded together to collectively fund better user interfaces for TV everywhere.

As well, there is a lack of co-operation with certain content companies like Fox and ABC (owned by Disney) insisting on making viewers watch commercials.  It makes no sense.

In general, I do not see how TV everywhere comes close to Netflix in competing against piracy.

Innovation in anti-piracy

There have been some fairly sophisticated attempts at combating piracy.  Technicolor developed watermarking technology that allows movie studios to pinpoint the exact movie theatre where its material was pirated.  Unfortunately for movie theatres, piracy continued despite prosecuting the people recording cams in theatres.  Technology generally has not reduced piracy in a meaningful way.

The future may become increasingly difficult

Whereas in the past content companies could charge based on the value of their content, in the future they may be reduced to selling convenience.  If piracy reduces overall prices, the economics of the industry will be impaired.  This has happened to the music industry as musicians shift to other business models such as touring rather than selling music.  Legal subscription and advertising-supported services such as Pandora and Spotify are not very profitable at the moment.  The À la carte model of selling music via iTunes does not seem to be a major money maker for Apple.

To me, the future seems highly uncertain.  Maybe piracy will devastate the TV industry.  Maybe it won’t.  Maybe Netflix will take over the industry.  Maybe it won’t.  However, I see the value proposition of traditional television over the alternatives declining.  Traditional television may be able to defend itself by shifting to TV everywhere and presenting the same content in a non-linear on-demand fashion.  However, I do not have high hopes for TV everywhere.  Too many of the content providers and cable companies insist on making life difficult for consumers by trying to make them watch ads.  The paid version of Hulu suffers from having some of its content delayed 8 days from its original release.  Most of these platforms are not scaling their software R&D costs and/or content costs over tens of millions of customers or across a global footprint.

It could be that the future has a handful of winners and a long list of losers.  And perhaps the future is a disappointing one for shareholders where the entire industry slowly sees its earnings shrink.

*Disclosure:  No position in NFLX or DIS or Liberty Global.

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5 thoughts on “Notes on cable – Part 6 – Piracy

  1. It’s interesting that uTorrent also packaged a surreptitious Bitcoin miner with its latest update. Reminds me of Lenovo’s Superfish. Seems that this is what happens when there is not enough good money to be made in that part of the value chain – the squeezed players have to resort to dirty tricks.

    Another reason for piracy is that it evades government-ordered content restrictions. For example, in China, the government bans Western TV shows (including innocuous shows like Big Bang Theory that get too popular) on a whim from time to time, and also bans or censors domestic shows (like those about time travel) when they get too popular. So the only way to get things will be from piracy. There is no legitimate business that can compete, due to the government’s restriction of content.

  2. Is digital piracy any differently than other historical situations where there’s a big gray wedge between supply and demand? Maybe more difficult to police than a ship carrying rum across the Atlantic. If the content is profitable enough it may not even matter no matter how large the %. There was a running joke that China had one copy of Microsoft Windows and one billion users.

    Radiohead released “In Rainbows” for whatever the consumer wanted to pay, including zero. I believe the price paid settled around $5-6 an album. When you remove the middle-man costs they would have to pay through normal channels I imagine it worked out fine for the artist. I think Radiohead hypothesized that the majority of their fans did want to pay, and would be more likely to pay the artist than Sony. It worked for them.

    What if “Game of Thrones” was release in a similar manner by the author? Or Harry Potter movies? In a convenient, timely, reasonably priced manner. I think Netflix is stepping stone to that type of model. Middle man generally only exist when it’s not economic and efficient to go direct to consumer.

    • Ah, should add further research shows that Radiohead released it’s follow up album independently but for around $12.00.

      • Netflix is a middle man. Cable channels are middle men.

        Some companies like WWE are going straight to the consumer with WWE Network. Some of the big sports leagues will be able to do it one day… NHL, NFL, etc. All of the bundling companies will lose these revenues when the content creators can go straight to the consumer without being part of a content bundle like ESPN, etc. etc. Cable companies, satellite companies, MVPDs, etc. will see less revenue from taking their cut of pay-per-views.

  3. The majority of sports rights have been locked up for 5+ years and I doubt sports organizations will prove to be superior technologists compared to the big media companies. Pay-per-view is not a material contributor to cable network earnings (cable providers are the partners in this).

    Cable networks are how the big media companies monetize their film and production units. Content production has at best 15% margins due to flops and performers driving up costs to expected revenues. Cable networks are steadier because of contracted affiliate fees for every subscriber that increase nominally yearly. The cable ecosystem may buckle as advertising turns programmatic depressing the price per ad and fewer viewers tune in at the appointed hour. If the bundle breaks and everything goes online, we end up with a youtube world where content providers get paid per view from ad-supported content, nominal subscriptions or begging for money. This is a world of livestream gaming and makeup tutorials. Ultimately, the media companies do not want to exchange analog dollars for digital dimes.

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