A Music Lesson on Piracy for Hollywood

By PATRICK GOLDSTEIN

March 12, 2002 12 AM PT

Tom Bonadeo noticed something funny last summer. The traffic patterns began to change on the broadband service he oversees as chief technology officer for NTC Communications, a firm that wires hundreds of apartment complexes near college campuses on the East Coast. Even though his company had enlarged its broadband capacity, its network was being clogged up every night with downloads from Morpheus, the popular file-sharing program that allows music fans to download a vast array of free songs.

It didn’t take long for Bonadeo to discover that students weren’t just downloading songs anymore. They were downloading movies. Lots and lots of them. I naively asked Bonadeo if these were old movies or DVDs. “Heaven’s no,” he says. “They’re current ones. And they’re not ones someone’s recorded on a video camera in a theater. This is all top-notch quality digital stuff.”

For the last several years, the record business has been embroiled in a nightmarish struggle to protect its music from being illegally downloaded on the Internet. The Recording Industry Assn. of America, or RIAA, estimates that 3.6 billion songs are illegally downloaded every month. Things have gotten so bad that Michael Greene, the head of the industry group that puts on the Grammy Awards, devoted most of his recent Grammy telecast speech to lambasting music fans for “stealing artists’ livelihood,” calling file sharing “the most insidious virus in our midst.”

Now the movie business is feeling the heat. Surveys say an astounding 350,000 films are being downloaded illegally every day, many of them while still playing in theaters. The Motion Picture Assn. of America filed suit March 5 against a number of popular file-sharing services, including Morpheus, Grokster and Kazaa. At a recent entertainment law gathering, MPAA chief Jack Valenti said file-sharing “is file-stealing--it’s an outrageous despoilment of precious assets.”

Disney czar Michael Eisner was just as blunt at a recent Senate Commerce Committee hearing. “There are people in the tech industry who believe that piracy is the killer app for their business,” Eisner said, complaining that high-tech firms’ earnings are propelled by “people getting things for free.”

Is there any way for Hollywood to avoid the fate that has befallen the music industry, which has waged wrenching battles against Napster and other free file-sharing outlets while record sales plummeted? Are there lessons Hollywood can learn from the music business’ mistakes and missed opportunities? I asked a number of music industry insiders what advice they could offer Valenti and their movie-biz peers. When I couldn’t get Valenti on the phone, I figured I’d try a more direct form of communication.

Dear Jack:

Sorry we missed each other. I did get your messages from the road, but you never left me your cell number. But no matter--maybe someone will e-mail you the column. (It’s free, you know, we don’t get paid for most of our content on the Net, either). I know the studios are making you carry the ball on this, since they’re too busy dealing with short-term problems (like bad-mouthing their rivals’ Oscar movies) to worry about a looming technology crisis.

So here’s some free advice: Don’t waste too much energy on getting help from Congress. You did a great job of lobbying the Commerce Committee, which made all the right noises about threatening the tech firms with draconian legislation if they don’t figure out how to prevent computer users from downloading pirated movies off the Internet. It probably sounded reassuring to show-biz stockholders, but you and I know that theft-proof technology is a pipe dream. Just ask the music-biz guys: They’ve tried every kind of protection device imaginable and any two kids from Stanford could figure out a way around it over the weekend.

Don’t let the lawyers do all the talking. The record business allowed their legal eagles to lead the charge and they alienated everyone in sight, starting with the news media and teen downloaders, their most active record buyers.

“Too many people looked at this as a legal issue instead of a cultural issue,” explains Danny Goldberg, who has run several record labels in the past decade. “The only people at record companies who dealt with this were the Internet department and legal affairs, but unfortunately the lawyers, who see everything in terms of precedent and worst-case scenarios, were closer to the top hierarchy of the company, so they dominated the debate.”

Don’t tell consumers you’re protecting artists’ rights without enlisting the artists’ support. The record industry has darkly warned that music will disappear if musicians don’t get paid for their efforts, but with rare exceptions, no pop artists ever came forward to support this contention, persuading fans that the people really benefiting from copyright protection were profit-hungry record labels.

“If you’re ever going to get any big movie stars to support the movie equivalent of [pay-to-use subscription services] Pressplay and MusicNet, you need to give actors an economic incentive to be a part of your subscription service,” says attorney Peter Paterno, who represents Metallica, Dr. Dre and other top artists. “If you gave Tom Cruise or Tom Hanks a 50-50 split of the profits, they’d be out there

Here’s an idea, Jack: the next time you go to Congress, bring Cruise along. If he can open “Vanilla Sky,” maybe he can convince kids not to steal movies off the Internet.

Don’t preach “The Customer Is Always Wrong” gospel. The biggest mistake the record business made was shutting down Napster without providing a decent alternative pay service. As Alex Salkever pointed out in BusinessWeek recently, all it did was foster a new generation of “free-floating trading systems built on an ever-changing networks of PCS swapping encrypted files, a system that’s everywhere and nowhere at the same time.”

You can’t simply protect the status quo. A whole generation of consumers has come of age who experience entertainment through computers, MP3 players, I Pods and other convenience-oriented devices. Soon they’ll demand similar portability for their film collections. Modern-day technological innovation, from the Walkman to the cell phone, is all about convenience. If you put your entertainment in a lock box, you’re swimming against the tide.

As RIAA chief Hilary Rosen put it: “You need a business strategy to go with a legal strategy. You can’t wait to put movies on line until you have absolute security. There’s no silver bullet. It’s a circular problem that you’ll never solve or get ahead of.”

Don’t forget to promote the value of your entertainment. The news media has repeatedly portrayed the music industry as the personification of soulless corporate greed. This happens when you price CDs higher than LPs, even when they’re cheaper to produce. Miraculously no one seems to have noticed that DVDs routinely cost $5 more than video tapes, even though they cost no more to manufacture, perhaps because they do offer value-added extras.

Don’t lose sight of the fact that for all its ills, downloading is a fantastic delivery system. Getting entertainment free isn’t always piracy; it’s also a proven marketing tool. At the same time that record labels were demonizing kids for downloading music without paying, Lost Highway Records was giving away thousands of “Oh Brother, Where Art Thou?” CDs to promote the soundtrack, which is one reason it ended up being such a hit. One man’s bootlegging is another man’s word-of-mouth. If “Matrix Reloaded” is as good as the original and some hacker put half the movie on the Net, it would only make fans that much more excited about seeing it in a theater. In theaters or DVDS or the Internet, content still counts.

Most important, don’t be afraid of the future. Remember when you said VCRs were the “Boston Strangler” of the film biz? Now home video is the industry’s biggest profit center. New technology has a funny way of appearing scary at first glance, but it often opens the door for unforeseen business opportunities. I bet a lot of people thought Fed Ex would be wiped out when fax machines and e-mail came along, but the company is doing just fine.

“You can’t fight disruptive technology--you have to learn to adapt to it,” says Jim Guerinot, who manages No Doubt, Beck and Offspring. “It’s wrenching for big companies to have to change their business model and rethink their notions of profit margins. But there’s a gigantic collection of entertainment fans out there. The industry can’t treat them like the enemy. You have to follow where the market is going.”

It’s sound advice, Jack. If Hollywood is good at anything, it’s giving people what they want. The trick is finding a way to get them to pay for it.

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