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How Hollywood Can Capitalize on Piracy

After spending millions of dollars on legal fees, film studios should stop suing downloaders and take better advantage of what they do.
October 17, 2013

Jack Valenti, the late president of the Motion Picture Association of America, once warned that a new form of distribution might kill his industry. It would empty theaters and drain studio coffers. Why would anyone venture out to multiplexes when films could be disseminated virtually free and viewed in the convenience of your own home?

Valenti was referring to videocassette recorders, the big boxes rolling out of Japanese factories circa 1980 that could make or play copies of movies at minimal cost. He called them a “parasitical instrument” and told Congress in 1982: “The VCR is to the American film producer and the American public as the Boston ­Strangler is to the woman home alone.” Filmmakers heeded him: Steven ­Spielberg refused to release E.T. to the home video market for six years. The debate was so fierce that it took a 1984 Supreme Court ruling to guarantee a consumer’s right to record someone else’s intellectual ­property.

Despite Hollywood’s nervousness, box office revenue jumped in the decade of the VCR. It rose from $2.7 billion in 1980 to over $5 billion in 1990, an increase of 16 percent even when adjusting for inflation. Years later, DVDs—the successors to videocassettes—would account for roughly 50 percent of studios’ overall profits. Paramount Pictures executive Barry London observed that the convenience of home video was “re-exposing people to movies who had stopped going.”

Time and again, Hollywood has met technological change with suspicion and attempted to suppress it. Yet in virtually all cases, once entertainment companies adapted to new technologies, the advances ended up expanding the markets for movies and television programs rather than destroying them. 

Things Reviewed

  • "Piracy and Movie Revenues: Evidence from Megaupload: A Tale of the Long Tail?"

    Christian Peukert, Jörg Claussen, and Tobias Kretschmer
    August 20, 2013

  • "Reel Piracy: The Effect of Online Film Piracy on International Box Office Sales"

    Brett Danaher and Joel Waldfogel January 16, 2012

Piracy is an amalgamation of lending library, viral-advertising hub, and market expansion tool.

Now another verdict is in: 10 years after studios began trying to bring down online file-sharing services, suing their users and arguing that the entertainment industry could collapse, it’s clear that their claims were overblown and their tactics counterproductive. Online piracy (which is not even the correct term, as it implies profiteering) hasn’t come to destroy consumer entertainment. It is more than likely its savior, an amalgamation of lending library, viral-advertising hub, and market expansion tool. 

Word of mouth
When the popular file-sharing site Megaupload was shuttered in 2012, consumption of digital video on legitimate sites increased, as you might have anticipated. But there was an unexpected side effect: worldwide box office receipts for modestly budgeted movies went down, according to a study conducted by the Munich School of Management and Copenhagen Business School. Only large blockbusters appeared to gain from the shutdown, which indicates that illicit file sharing might be the most economical method of advertising and market research available. The word-of-mouth effect that particularly helps a smaller-budget film can’t begin until someone sees it, and that often happens through an illegitimate download from a “torrent” site. But the torrents aren’t for everyone—not only is their content often illegal, they also generally require technological savvy—and a significant percentage of the people who subsequently hear about a film will pay to see it through legal channels.

Julie Bush, a screen and television writer who has written for FX’s popular biker drama Sons of Anarchy, believes the industry is beginning to recognize that this pattern of behavior amounts to a valuable form of promotion. “Many showrunners and executives I know not only pirate stuff all the time but also privately endorse the idea that piracy is good for the industry, a great way to advertise, and essential to building a healthy audience,” she says. (A showrunner is the person who supervises the day-to-day production of a television series.)

Last spring, HBO executive Michael Lombardo declared online piracy of the network’s Game of Thrones a “compliment of sorts.” As the blogosphere blew up, HBO quickly backtracked on that comment. But shortly thereafter, Jeff Bewkes, the CEO of HBO’s parent company, Time Warner, declared that seeing the show so widely pirated was “better than winning an Emmy.” 

“We’ve been dealing with this for 20, 30 years,” he told investors during a conference call. “People sharing [cable TV] subscriptions, running wires down the backs of apartment buildings. Our experience is that it leads to more paying ­subscribers.” 

The implication was that whatever losses came from piracy were later offset by DVD sales and subscriptions to HBO. (The first season of Thrones was the best-selling television DVD of 2012 on Amazon; the third season got better ratings than any other show in HBO history besides one season of The Sopranos.) HBO Go, a streaming service available only to paying HBO subscribers, allows up to three people to sign on to the same account simultaneously. It’s ostensibly for people who share a household, but subscribers widely share passwords with friends. HBO could block that by restricting accounts to a single IP address, but it doesn’t. Clearly, the company has decided that widening exposure for its programming is better than sealing up all potential revenue leaks.

Remember this the next time you hear the entertainment industry’s claims of lost revenue. One figure often repeated by industry mouthpieces like the MPAA is that $250 billion has been lost since torrents became a viable source for content acquisition, around 2003. The problem, as journalist Julian Sanchez discovered, was that the number was based on a 1993 Forbes article citing the overall economic damage from worldwide distribution of all counterfeit goods, from bootleg copies of Disney movies to badly stitched Levi’s. 

In 2010, the Government Accountability Office said that such significant damage to the film industry could not be substantiated. Even a cursory examination of box office figures makes that clear: 2012 was Hollywood’s best year in history, with $10.8 billion in North American ticket sales and a 6 percent increase in attendance over 2011. Additionally, a study published in 2012 by researchers at Wellesley College and the University of Minnesota found no link between the emergence of BitTorrent and declining box office revenues in the U.S. 

So why perpetuate these thin-air numbers? They are often dredged up when the motion picture industry is either lobbying for federal intervention—most notably through the Stop Online Piracy Act (SOPA), which proposed that entire sites be taken down for linking to illegal file-sharing pages—or pursuing ugly litigation against the people who are supplying (“seeding”) content or downloading it. 

Studios still pursue these lawsuits because to do otherwise would be a tacit admission that they had spent a decade absurdly throwing punches at raindrops. In November, several of them will seek a judgment against isoHunt, a site that allows for movie trafficking. But some courts appear to be weary of the litigation. In March, an Ohio judge refused to allow studios to sue 197 people en masse for downloading Puncture, a drama starring a pre–Captain America Chris Evans. Calling the legal tactic “unseemly,” the judge said going after dozens of defendants at once in such suits amounted to a “new business model” that sought to “coerce settlement.” 

Coping mechanisms
There are better ways for the industry to respond to file sharing—like changing the way it releases films, especially in countries with rampant content theft. 

Traditionally, Hollywood would spread out its major releases, forcing international viewers to wait months or even years for legal availability. (Little wonder they opened a torrent client on their computers.) Those releases typically were staggered so the movie’s stars could appear at publicity-rich premieres in several countries. “The golden wisdom is, if they’re not there, the marketing is less effective,” says Brett Danaher, a Wellesley economist who participated in the study on the box office effects of piracy. In other words, it would have been costlier for studios to release a movie simultaneously in all countries.

But distributing movies has gotten less expensive now that digital prints have taken the place of film. And piracy-heavy countries such as China and Russia have been fed a steady diet of bombastic American action films, creating huge appetites for franchise spectacles. This year’s Iron Man 3 opened in China two days before its U.S. release and even spliced in Chinese-­centric scenes. The film took in over $100 million there en route to a $800 million international gross. 

Last year was Hollywood’s best year in history, with a 6 percent increase in theater attendance.

The expectation of immediacy created by file sharing has also opened up a new revenue source: video on demand. The 2012 movie Arbitrage, starring Richard Gere, grossed a tidy $11 million via digital distribution to home TVs. Kevin Spacey, who appeared in another video-on-demand success story, Margin Call, recently predicted that all movies will eventually be released “day and date”—meaning they will be available in theaters and for home viewing simultaneously. As multiple streaming services vie to deliver that content to homes, studios stand to profit handsomely. 

Beginning in 2016, Netflix will be the exclusive carrier of first-run movies distributed by the Weinstein Company. Subscribers will be able to stream high-quality films at their convenience. “The real work is to make paying for stuff—either directly or through a subscription—so easy and commonplace that no one bothers looking in the dark alleys,” says screenwriter John August, who wrote the 2005 remake of Charlie and the Chocolate Factory.

It’s a signal that Hollywood is coping in the same way it handled other perceived threats, from television to games to home video: with innovation and marketing. 

“I believe torrents are the libraries of the future,” Julie Bush says. “The more people who see and enjoy my work, the more opportunities I will have to be compensated.” 

Jake Rossen is a freelance writer who has contributed to the New York Times, the Village Voice, and ESPN the Magazine.

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