Piracy and the Future of the Film Industry

I recently came across this tweet from Duncan Jones, the director of the little film that could, ‘Moon’:

“Dear BitTorrenters… so pleased Moon is popular with u; 40,000 active seeds cant be wrong! One thing. Will you please buy the DVD as well?”

Film piracy is no longer a hot topic; it has been around long enough to cool down a little. That has not, however, prevented it from continuing to cause a lot of problems for the film industry. Dodgy DVDs and increasingly, illegal downloads, cost the film industry massive amounts of revenue every year. A report in 2005 for the Motion Picture Association (all the big studios) estimated that the studios lost $6.1 billion a year and that the industry as a whole (theatres, cable tv etc included) lost $18.2 billion. At the time it was estimated that of that $18.2 billion, $7.1 was due to internet piracy. There are few people, I feel, who would disagree with the suggestion that that figure has risen. This loss of revenue will obviously cause serious financial problems for the studios and is certainly contributing to their current downfall.

The movie industry is not without clout however and it is responding to this threat with both with hard legal measures and also by raising awareness of the consequences of piracy. Recently the founders of the hugely popular illegal download website Pirate Bay were found guilty of copyright infringement and are looking forward to a year in goal. In Australia the film industry has accused one of the country’s largest internet service providers of encouraging pirates, its largest users, to upgrade their packages and turning a blind eye to their download content.

On the other, friendlier, side of the equation, the Trust for Internet Piracy Awareness in the UK has changed its campaign from the aggressive and accusatory ‘Piracy is Theft’ adverts to a kindlier thank you note for supporting the British film industry by not turning to illegal downloading.

Piracy, in particular, internet piracy can be assumed to be growing. Even if it is not, it is a significantly large enough problem at the moment for something to need to be done about it. Piracy needs to stop, or at least be controlled to prevent it from completely undermining the film industry (something that some people may be all for but that the studios (i.e. those with the money and power to effect change) most emphatically do not). The question is, why has internet film piracy become so popular?

Obviously the prospect of getting a product for free is plenty enough enticement for some. Others see it as the beginning of the end of capitalist materialism and a shining new future for the arts. These reasons do not account, I think, for the huge numbers of otherwise ‘respectable’ people who engage in this practice. The anonymity of sitting behind a computer and large number of other people doing it are certainly factors that encourage piracy. More significantly I think is the increase in technology that has allowed it to become so simple. Obviously hugely increased internet speeds facilitate film piracy but so too does the freely available and easy to use peer2peer software such as BitTorrent.

Behind all this, I feel is an increasing disengagement with the cinema as more entertainment is to be found in front of the computer (YouTube games, networking sites etc). Fewer people need to leave their computer to be entertained or to do the shopping or pay bills, why should they leave their computer to see a new film? Disgruntlement with Hollywood; poor films and the ever-increasing cost of seeing them, both at the cinema (up to £15, when it was £5 in my youth) and on DVD (and the yet more expensive BluRay) may also encourage people to illegally download films. Dominic Wells argues that people are using downloaded films as a test of brand value; i.e. that people will go to the cinema to see another film by same director or will a DVD of a film they have downloaded. This is certainly a much more economically efficient way for the consumer to find the film they want to own or pay to experience in the cinema. A look at the summer’s hit films show that it was not the star driven heavily marketed films that did well and created a buzz, it was smaller films such as ‘The Hangover’ and ‘District 9’. Some studies on the music industry (which has also been massively affected by online piracy) argue that pirated tracks encourage people to buy the song legally. However, some will see this as mere wishful thinking, arguing that people will never go back to paying when they don’t need to.

One final major factor that encourages piracy everywhere except in America is the delayed release dates that the rest of the world experience both in cinemas and for DVDs. Films are often available online before they are released in America but once they show in a cinema they are definitely online. A lot of internet buzz surrounding a film released in the US that will not reach Britain for another two months will encourage people to download it and be able to take part in that discussion. Most experts, such as Julien McArdle, who directed a documentary on the issue of piracy, agree that this is one of the most significant changes that could happen. McArdle made his film on a budget of about C$700 and is distributing it for free on the internet. Slyck.com has done an excellent interview with him.

With so many reasons to pirate films (the first and foremost of which will always be that it is free) it is no wonder that so many people are doing it. The internet is become such a powerful tool and platform and because it is open and free everyone the pirating community has been able to steal a lead on the film industry. The studios and distribution companies are, however, developing new models to allow them entry into this marketplace. So far companies like Apple have lead the way, selling downloadable films through their existing iTunes store. Other companies are providing similar services and being embraced by the studios; Universal Pictures UK chairman Eddie Cunningham when UK website Wippit started offering permanent downloads in 2006 said “I think what you’re seeing here is the beginning of a revolution in terms of how we can distribute digitally and I would expect you’ll see a lot more news of this type over the next few months.” The internet has also been embraced as a distribution tool by the independent filmmaking community. Downloading a film is cheap and simple and obviates the need for DVD burning and postage. It allows easy access to a global audience makes marketing and interaction with audiences a very fluid networked affair that can be very effective for the independent film.

There is general agreement however, that not enough has yet been done for the model of legitimate film downloading. Many different people have as many different ideas about it’s future. The basic split between them is whether you try and provide movies for free or not. Some promote the Spotify model of where you can stream but not download songs for free and accept adverts every five songs or so. Quite how this would translate into films is not yet known – it works for short films on sites where the advert is played before the film but one advert might not generate enough revenue for a feature and no-one wants their film interrupted. Dominic Wells argues that internet streamed but legally bought films will revolutionise the industry. The hypothetical case study he gives is that of the Bollywood gem trying to find an audience in the states. There are very few places he argues, where the audience population (primarily Indian) is dense enough for it to make financial sense for a cinema to show the film. Spread out across the country, however, are enough audience members to generate a significant profit. By being able to search a database of online films and find this Bollywood gem and then download it to their house for a small fee, this niche audience finds the film it is looking for and the film finds it US audience.

This sort of model will rely on superior technology and online infrastructure to that which we have at the moment however. Sky and other cable service providers are beginning to develop the household hub computer/T.V. complete with internet, standard television channels and demandable programming, but it is not quite yet a reality. Once this is in place and download speeds have increased yet further, DVDs will become outmoded and everyone will simply download what they want to watch. Simultaneous release, both internationally and between cinema and home-viewing (i.e. DVD or legal download) is a necessity for this to start happening and, according to Matt Mason, author of ‘The Pirates Dilemma’ says that can’t happen “until DVDs/Blu Ray are well and truly dead and buried” He goes on to say that “we’ll see the studios using file sharing sites more to promote films, and content deals between the studios and torrent sites are already happening.”

This model, for my money, is the most likely to prevail. What will be interesting to see is how content is managed on the internet. Which content providers (such as iTunes) gain ascendancy and how will they select films to make available to their subscribers? Studio films will of course have no problem being found but independent films will probably remain somewhat slightly more hidden. I imagine that there will be content providers dedicated to smaller and independent films and internet word of mouth will be used to promote them. Theatrical release will be less common for independent films but people will still be willing to go and pay for the cinematic experience of the bigger, more effects driven studio productions. Film will become a much more home-based experience. Piracy will fade away because it will become simpler and easier, as well as less guilt inducing, to watch the latest releases through the legitimate system.

Difficulties Implementing Technology Threatens Industry

It’s no secret that new types of technology can create problems, but apparently HDTV has created some unforeseen problems with consequences that could be surprisingly far reaching. The problem that HDTV has created is namely the fact that many local TV stations are refusing to let satellite TV companies and cable TV companies use their HDTV signals without paying for them.

According to federal law TV providers can’t use the content from local TV stations without permission. And historically, that permission has been granted to sat casters and cable TV companies in exchange for some pretty nominal fees or for promotional consideration.

HDTV has changed that. Instead of providing HDTV signals in the same way that standard def signals have been provided in the past local TV stations- and in many cases that large companies that own a bunch of TV stations- are now demanding significantly more money in exchange for their content. Some figures estimate that TV stations want up to fifty cents for every household that their content is provided to. While this may not sound like much money, when you multiply it by all of the households that the content is supplied to and figure that several stations in any given market are requesting similar amounts of money, that adds up to a pretty significant sum.

The extra money that the TV stations and the companies that own them want is supposedly justified by the fact that HDTV programming costs more to produce than standard def programming. That’s because of the fact that sets for HDTV need to be built bigger in order to accommodate the wider viewing area of the High Def camera, and HD programming requires new and expensive equipment for the filming and editing of HDTV programming. Even local stations have to make upgrades in order to broadcast their news programs and any other local programs in High Def. Of course the other angle of this request for more money could also be attributed to the growing corporate trend of trying to milk profit whenever and wherever possible.

Of course the cable TV and satellite TV companies are trying to resist this any way that they can. They say that they don’t have the obligation to pay in order to carry the channel for two reasons. First, they never have in the past, and second, that same program content is available over the air for free so why should they- and by extension their subscribers- pay for that same content.

Many industry insiders are crying foul about this whole problem though for several reason. (And these are the farther reaching consequences mentioned earlier.) For one thing, many people are claiming that because the subscription services aren’t providing these channels, the subscribers can’t get their local channels. (This seems like a weak argument because, as already pointed out, those channels are already available over the air for free. Apparently the subscribers in question are too lazy to set up an antenna. And if they can’t receive the signals with an antenna, then it’s debatable whether or not those channels are really local for them anyway!) The other major problem is that there’s a fear that if people can’t get their local channels, then they won’t be satisfied with their HDTV sets and then won’t recommend the sets to their friends. That in turn will slow down sales of the sets and jeopardize the planned conversion to digital TV in 2009.

The Appeal of Investing in Films

Are films a good investment opportunity? I think they are for the right kind of investor. Here’s why. I have written this in a Q&A style to answer the major questions that prospective investors ask about whether to invest or not.

1. Why is film investment an attractive investment opportunity? Is it because of the high return or because of the nature of business?

For many investors, the high return is a big draw, because films do have the potential for a very large return, though there is a very high risk with a lot of big “Ifs”. A film can do extremely well if it has a good script, good acting, good production value, has a budget that fits the type of film this is, and strikes a chord with distributors or buyers for the TV, DVD, foreign rights, or other markets. Then, if the film goes into theatrical release, it has the potential to have an even larger audience, though theatrical is not the primary source of income for most films, just the big blockbusters, since the theater owners take about 75% of the box office unless a film goes into a long-term release and there is a high costs for prints (though an increasing number of theaters are going digital). The value of a theatrical release is more for its promotional value for gaining other kinds of sales, except for the huge blockbusters.

Despite the potential for high returns for some films, investors in it for the money have to realize that any film investment is a big risk, because many problems can develop from when a film goes into production to when it is finally released and distributed. Theses risks include the film not being completed because it goes over budget and is unable to get additional financing or there are problems on the set. Another risk is that the film is not well-received by distributors and TV buyers, so it doesn’t get picked up. Or even if a film gets a distribution deal, the risk is that there is little or no money up front, so the film does not see any further returns. So yes – a film can have a high return, but an investor can lose it all.

As a result, for many investors, other key reasons for investing are more important. They believe in the message of the film. They like and support the film producers, cast, and crew. They like the glamour of being involved with a film, including meeting the stars and going to film festivals. They see their investment as an opportunity to travel to distant locations for filming and for promoting the film. And they see investing in the film as a tax write-off, much like giving to a charity.

2. What kind of investment returns can investors can expect, since many independent productions are not designed for big screens, where are the sales coming from?

If all the stars align, and there is a good film done with a reasonable budget and distributors, buyers, and an audience responds, the film could readily earn 4 to 10 times its cost, making everyone very happy. A low-budget indy scenario for this level of return might be a film shot for $50,000-200,000. It might get $500,000-750,000 for a TV sale and earn $1-2 million more through DVD, streaming, and foreign rights sales, even without a theatrical release.

For most films, the main value of a theatrical release is the PR value of getting the film known, so buyers will want to purchase or rent the DVD and TV buyers will want to show it on one of the premium cable movie channels. Also, most films don’t get a theatrical release, and the funds are earned through other channels.

3. What kind of movies can usually generate good profits, since the recent Oscar Awards show that a big investment does not necessary mean big returns?

Some of the big blockbusters that pass the $100 million threshold can certainly make a profit from a successful theatrical release, both in the U.S. and abroad. But whether they make a profit depends on their budget. Because of the high salaries of stars that are typical in these films and other high cost items, such as special effects, many blockbusters still may not make a profit. Thus, dollar for dollar, many low-budget indy films may be a better investment, since the multiples are higher with a success; there is more likelihood that a low-budget indy, which is done well at a reasonable budget, will be sold and make back it’s money, and the potential for loss is much less.

4. Are documentaries a good investment opportunity?

Good documentaries are an especially good investment opportunity, since the costs of making documentaries are much lower than for feature films. They can be done with a much smaller crew – even two or three people in the field – one for the camera, one to handle sound and lighting, and another to coordinate arrangements and ask good questions in the field. Post-production can be easier too, with fewer takes and less film to edit for the final cut. Many documentaries are done with a budget of $10,000-50,000, which can easily be recouped 5 to 20 times over with DVD, TV, and foreign sales.

5. Are there any legal or regulatory restrictions preventing individual investors to participate in film investment opportunities?

Generally, if you’ve got the money to invest, the filmmakers will find a way for you to legally to give them the money. Various vehicles include nonprofit corporations, LLCs, private placement memorandums, and loans. A typical requirement is that the individual have the funds to invest funds that might be lost in a risky venture and is advised of the risk of the investment.

6. What are the key risks behind film investments and how do you prevent them?

The key risks behind film investments is the potential to lose it all if the film doesn’t get completed or doesn’t find distribution. The best way to protect yourself is to assess the potential of the feature film or documentary going in; assess whether the budget and expected return seems to be reasonable for the project; and assess whether the producer, director, and others on the film seem to have the experience to complete and market the film

7. How much will be the initial investment required to invest in a film production?

An initial investment can range from a few thousand to several hundred thousand, depending on the film and the way an investment is structured. For example, some indy filmmakers doing low budget films have found creative ways to get funds by inviting investments of $1000-2000 from those participating in the film, such as the actors and crew members. Others have divided up investment packages into $5000 each for 20 investors to raise $100,000. Still others have looked for a few big investors, who can contribute at least $20,000, $50,000, $100,000 or more.

Once there is some investment in place, there can be other sources of funds, such as GAP funding and incentives from states and cities in the form of rebates after filming is completed. VC funds are also a possibility, particularly after there is some initial investment in the film, if the film’s budget will be at least $1-2 million.

8. With modern technology advancements, what are the opportunities for independent and emerging film producers; or are these developments more of a threat due to piracy and competition?

There is a growing opportunity today for indy and emerging film producers to get distribution in alternate ways, such as through the Internet, self-distributed streaming downloads or DVD sales, play on mobile devices, and sales of DVDs or streaming rights to Netflix and Blockbuster. While piracy has always been a concern, new technological fixes can help to prevent this, such as locks to prevent duplication or more than one or two showings of the film. Other protections can come through licensing a film for distribution to platforms like iPhones, which have their own protections against copying.

Certainly, there is more and more competition, because more and more people can make films today, though the big studios and distributors still dominate in the theatrical arena and they have the money to make the big films with big stars and special effects. But the new technologies for production and distribution offer so many more avenues to create and market indy films at a much lower costs. So there are naturally many more films out there from many thousands of producers.

But with creative promotion, filmmakers can help their film stand out among the clutter. They can creatively use the social media, such as LinkedIn, Facebook, and Twitter to let people know about their film. They can gain recognition on the film festival circuit. They can get endorsements from well-known people. They can mount an e-mail PR campaign to the media. They can rent theaters to set up showings in different cities. They can put on events with their film as a centerpiece. And they can make themselves available to appear on radio and TV shows, as well as for interviews with reporters for the print media. In turn, all of these activities can help to sell their film to distributors and buyers for TV, DVD, foreign, and other sales, while attracting a growing audience for the film, making distributors and buyers even more eager to promote the film.

So, yes, indy films can be a great investment for certain films. And whether you make money or not, an investment can open u p many opportunities for more involvement in the film industry and for having fun.

Copyright © Gini Graham Scott 2010. This article can be shared with others personally if the whole article is included, along with the bio at the end of the article. Please contact the author directly for republication rights.