Ouya, a game console startup recently raised $4m on Kickstarter. The product design has three selling points; a) it will cost $99, b) it will enable you to run android apps on a television, and c) it is 100% hackable. According to the blog Kotaku, one of the consequences of these features is that you will be able to watch free streaming live sports events on your television. You will also be able to stream movies via BitTorrent. As it gets easier and easier to steal content with no meaningful deterents, revenues in multiple industries are cratering. The number of cable subscribers on Comcast (CMCSA) has dropped 7% from 24.1 million in 2007 to 22.3 million in 2011 (source: Comcast Annual Reports). That was in the old days when you actually had to know some techie stuff to connect your PC to your TV or burn a DVD to watch pirated movies. With Ouya, you will just connect your Android phone or tablet running BitTorrent to your TV and you will never have to pay a content creator again. If this drop in revenues was occurring due to innovation that was creating value in the marketplace, we would applaud that, but it is not. What happened in the marketplace between 2006 and 2011? The volume of illegal movie downloads in the US grew by a factor of eight. Unless something changes, these new piracy technologies will just continue to fuel the collapse of the creative industries.
Between 2007 and 2011 the amount of traffic used for P2P BitTorrent “filesharing” in North America grew from approximately 3000 petabytes to more than 13,000 Petabytes in 2011. In our opinion, the reduction in paying cable subscribers is directly correlated to the increased volume in media being consumed illegally. In the same period of time, revenues from Home Video, which includes BluRay, iTunes, Netflix, Amazon, Hulu and all legal streaming services dropped 26% from $26B to $18B.
The mantra from the anti-copyright pundits is; a) there is no need for law enforcement, iTunes proves people will pay for content even when its available for free, and b) piracy is about lack of compelling options, if compelling options are provided, people will pay. Between Xfinity, Hulu, Amazon, iTunes, HBO Go and Netflix, the offering in 2012 is pretty compelling, so why are Home Video revenues cratering? Because no industry can compete long-term with their equivalent product available instantly for free.
First, while digital music sales on iTunes have grown from zero to $6B worldwide in 2011, it is still a tragically reduced industry compared to what it was and what would be possible if there were some measures in place to mitigate illegal free distribution. The facts are that in the US in 2011, total digital music sales were $2.6B and subscriptions (Spotify, et. al) were $241m. This industry as recently as 2000, generated $12B in the US and $27B worldwide. Did music become less popular? No, music consumption soared to 132 billion mp3s downloaded illegally in the US in 2011. The great majority of music consumers do not pay. People don’t pay because nothing happens when they take the product illegally.
If we are judging the future of digital media by iTunes, then its “hasta la vista” baby to movie, television and sports revenue when everyone can have a “game console” for $99 that makes watching pirate media on your television incredibly easy.
The bottom line is that the law in the United States says that the ISPs only have safe harbor from their third-party liability if they are terminating repeat infringers. If ISPs were following the law, 18.8% of all US internet traffic would not be used to illegally distribute music, movies, software, games and books for free. If ISPs were following the law, there would be some consequences when a customer buys the $99 Ouya and then downloads every game, TV show and movie on it for free. Today, there are no consequences. That is why wages to musicians and musical groups are down 45% since Napster appeared. The same thing is coming for all other media industries.
How many of America’s 8.2% unemployed were people who worked in recording studios, wrote songs, played bass, wrote screenplays, worked at a software company (Adobe laid off 750 people in 2011, 3 million Photoshop downloads on BitTorrent to date), designed video games (revenues down 25% from 2010 to 2011) or worked behind a camera? Enjoy unlimited free movies, games and TV on your Ouya while you put thousands of Americans out of work!