Online Piracy's Great Comeback

The 2010s were the golden age of piracy.

BitTorrent accounted for a third of all internet traffic, LimeWire had more monthly users than Facebook, and the Pirate Bay was the only video store in town where you were sure to find what you were looking for .

The world was slowly switching from physical to digital media, and even people who weren't particularly tech-savvy realized that digital goods could be replaced endlessly with practically zero marginal cost.

At its peak, 95% of all music downloads were pirated because it had become cheaper, and above all else, an easier way to fill up large digital libraries that were being made possible by cheap digital storage.

But then, it just stopped.

Since 2012, the internet has gotten faster, storage has gotten cheaper, and people have become more comfortable with computers, which should have just accelerated a growth trend.

But it didn't.

Since 2015, peer-to-peer file sharing has collapsed in popularity, and you might think you already know why.

Streaming services like Spotify and Netflix were just a better, easier, and safer way to access content.

Now, as these services have become markedly worse and simultaneously more expensive, piracy is making a comeback.

It seems pretty simple, right?

The only problem is that's not the whole story.

Realistically, these companies knew this day would come.

It was just really important that they could pretend it wouldn't.

For a lot of people, they've decided it's time to cut back.

But legitimately, it might be time to cancel some subscriptions, and I'm probably going to have to cancel some.

Some of them I'm not using, and it's just wasting money.

There's so many of these, it's hard to keep track of.

At that point, that's an adversarial relationship.

I don't want to pay people to enter adversarial relationships.

We aim, as I said, for this business to be a growth business for the company with margins that our shareholders will feel good about.

So what really made piracy go away and what's really bringing it back might sound simple, but there's actually a bit more going on.

First and foremost, the majority of people actually would like to acquire their media legally as long as it was easy and not ridiculously expensive.

Most reasonable people understand that it costs time and money to produce a song, film a movie, or develop a video game, and the people involved in these projects do need to be compensated or else they are just not going to make them.

Even people who frequent the high seas, so to speak, know this better than anybody else.

A survey coming out of Australia at the peak of online piracy found that people who pirated content were actually more likely to pay for it if it was available.

In a finding that really ages this study, online pirates were far more likely to pay for movies and music through iTunes or QuickFix.

This was because people who pirated content were just more likely to consume content overall, and most of them would only make the trip to the Bay if they couldn't find what they were looking for more legitimately.

So there were two things that changed after 2013.

Sure, there were a few high-profile crackdowns on some of these sites, but even the regulators themselves knew they were just playing a game of whack-a-mole.

One of the most downloaded files on the Pirate Bay was the Pirate Bay, a complete copy of

copy of the site with all of the addresses that could be set up by basically anybody with some basic server hardware in the event that the authorities took down the original site.

But then came along the streaming sites that, thanks to faster internet speeds, could let users watch content on demand without granting them direct access to digital files which could then be copied and shared illegally.

The big thing was that these options were just so easy compared to piracy, and so cheap compared to buying songs or movies one by one, that it just didn't really make sense to bother with anything else.

nowadays that's clearly changed there are dozens of streaming services that are each getting more and more expensive every year the movies and shows that you watch are being split up over different providers the services themselves are getting worse by introducing ads and pushing less relevant content and on top of all of that it's just not that easy anymore

Even individual TV shows have certain seasons split up over different streaming services, and the first step in sitting down to watch a movie these days is to Google what streaming service has the 1984 release of Gremlins, and if you're unlucky, what streaming service plus what VPN combo will get you the movie you want to watch.

If you're already going through all that effort, it gets really tempting to just replace streaming services with your port of choice, because in most cases, it will just be easier.

So yeah, streaming services were cheap and easy, which killed the need for piracy.

But then they slowly became expensive and terrible, which brought it back.

Pretty straightforward, right?

Wrong.

It's easy to write this whole thing off as just dumb companies being needlessly greedy to their own peril.

And while that's definitely part of the problem, there is a lot more to it than that.

Music streaming by comparison is decent.

There are multiple services, but almost all of them have almost all of the music that you would possibly be looking for.

As a result, nobody really bothers to pirate songs anymore, which is particularly impressive when you remember that just 15 years ago, 95% of music was being downloaded illegally.

Artists have not been thrilled about the lower revenue they have got from streaming versus physical album sales, but most of them still go along with it because even a small share of something is better than most of their music being accessed for free.

This raises the potentially unpopular idea that it might not be streaming that's broken, it might be the movie industry that's broken.

The golden age of streaming was never going to last because it was never meant to last.

So it's time to learn how money works to find out why piracy is really making a comeback.

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netflix is the most dominant movie and tv streaming service in the world it has over 300 million paying subscribers and unlike a lot of its competitors it's actually profitable but from its very first days of online streaming they knew they would eventually lose people back to piracy they just really didn't care and to see why i'm sorry but you are going to have to look at some financials

Last year, it made $8.7 billion in net income after taxes, which is extremely impressive.

But it still makes it hard to justify the valuation of more than half a trillion dollars.

At that rate, shareholders would need 57 years for their investment to pay off, which is not a reasonable bet for a company in an industry that has only been dominant for a decade.

57 years ago, watching a movie looked like this.

And in another 57 years from now, it's highly unlikely that we will still be watching movies through the current selection of streaming services.

Now, most investors in this company aren't dumb.

They know that Netflix can't make their money back with its current structure.

What they are banking on is being able to offer a cheaper service that they can charge more for in order to fatten up those margins.

Let's not talk about my margins, by the way.

Being nice and fat, that's a nice shirt.

Do they make it for men?

Anyway, cutting content, raising prices, and pushing strange features like mobile games within the app are not some surprise new rollout.

They are part of a development plan that the company knew it would have to implement since it started offering online streaming.

It would just be a lot better if they could do it without competition.

Now on the expenses side, there is some good news.

As technology improves, network infrastructure has become cheaper for the same capacity, which means the actual cost to stream videos to users is getting better every year.

Netflix's cost of revenue adjusted for inflation has actually been stable since 2022, despite adding almost 100 million new users in that time.

Included in those costs are the aforementioned servers and network infrastructure, but it also includes the cost to license and produce their own movies, TV shows, and games.

Another big reason their costs have been improving is because they just aren't licensing as much content as they used to, and that's for two reasons.

The first was a business decision to cut down on a cost, especially for content that wasn't drawing in new users.

The second reason is simply because they can't get their hands on as many titles anymore because independent studios have made their own streaming services and want to keep their biggest IPs exclusive so they can force users to either switch to their platform or shell out for two or more streaming services.

Netflix is slowly producing its own titles, but that hasn't caught up to the content they are losing from licensing.

So then why does this mean that Netflix doesn't care about piracy?

Well, publicly they say they do, of course, but piracy is going to hurt their competition a lot more than it's going to hurt them.

If people can't find a movie or show on Netflix and then give up and pirate it, that didn't really cost Netflix any money, because the vast majority of content out there wasn't theirs to lose, and they most likely didn't spend the money producing it.

A 2023 paper in the Journal of Economic Behavior and Organization titled Pirate and Chill found that when movies moved off Netflix to another platform, piracy of that content increased by more than 20%.

Now, first and foremost, that's an amazing name for a professional journal article.

But apart from that, it showed why Netflix hasn't been too concerned with online piracy.

In a now infamous quote from the company's chief content officer, they said that in order for Netflix to be successful, we need to become movie studios faster than movie studios can become us.

Piracy that disproportionately hurt legacy movie studios and their libraries of content was not something that Netflix would encourage.

But behind closed doors, they certainly weren't too sad it was happening.

Another way to think about this is that obviously Amazon isn't encouraging shoplifting.

but it's a problem that hurts their competition far more than it hurts them.

Piracy has also been a handy little tool throughout the company's history.

Back in 2013, it admitted to using data from online piracy sites to find out what was popular and therefore what was worth licensing.

Okay, so Netflix doesn't care about the rise of piracy, but what about the actual Hollywood studios?

Well, they obviously do, and they crack down on IP theft with furious anger, but they are in a difficult situation.

They could send piracy back to the dark ages by re-concentrating their content onto a single easy platform, but at the moment that would probably be Netflix, which a company like Disney would obviously not be willing to go along with after investing so much in their own service.

If they keep competing though, they are just going to make the experience worse for everybody and probably lose more ground to the high seas.

Now, for these companies, this whole fight could not be happening at a worse time.

There is a reason why music studios were able to play nice and make their content available just about anywhere while movie studios were fighting to the death.

Music is simply much cheaper to produce, and there are far more sources of alternative revenue beyond just directly selling a song or an album.

artists don't make as much from streaming as they would from a physical album sale but they can make it up in tours merchandising and other licensing deals on the flip side movies have largely been getting more expensive to produce while cinema attendance has never fully recovered from its dip during covid ironically one of the biggest theater releases of the past five years was actually for a music studio with the cinema release of taylor swift's era's tour

In the past, poor box offices wouldn't matter as much, because mid-budget movies could make a lot of their money back through DVD sales, but obviously that's not really a thing anymore, so studios have put even more effort into pushing their streaming services to eventually make back the difference.

It's a bold strategy, and there are hundreds of billions of dollars in market cap at stake, so executives really wanna pretend that eventually it'll work out.

But if it doesn't, there are some lessons to be learned from the music industry which didn't beat piracy.

It just made it unnecessary.

The first is that movies have simply become too expensive for the current market.

Studios have recognized that people are only going to the movies for special occasion releases these days because it's expensive, the theater experience isn't that good anymore, and people can just wait a month and watch it for free on one of the streaming services that they were already paying for.

instead of making the whole thing cheaper and putting less of their eggs in a single basket they have doubled down on producing mega blockbusters of the 20 most expensive movies ever made 19 of them came out in the last 10 years after streaming was already mainstream these figures also only count the production budget not the marketing budget and on the revenue side the box office doesn't include the share paid out to movie theaters

With even extremely generous estimates of those arrangements, only about half of these releases made their money back, and some in particular like the Marvels, Snow White, Dial of Destiny, and the latest Mission Impossible movie are shaping up to be catastrophic losses.

So far, studios have been able to justify these flagship productions to their investors by talking about their IP value, which can later be extracted by bringing in customers to their streaming platforms, but that isn't really happening.

Customers who join because they want to watch a single movie didn't tend to stay subscribed for very long compared to those who enjoy a deeper library of mid-budget movies or TV shows.

I don't know about you, but I tend to take my subscription to whatever streaming service is hosting The Office this month.

These huge productions also put more strain on the business as these losses have to be made up somewhere, and that is more often than not increased prices, more ads, and worse overall service.

Now, I would forgive you for not feeling too sorry for Hollywood studio executives, but they are really in a no-win situation here.

The harder they push back against the changing media landscape, the harder they push people towards the high seas.

So anyway, now might be a good time to shamelessly plug that these videos are being made available ad-free on Spotify, so if you would prefer to listen in or watch it over there, I have left a link in the description.

And if you think it's just streaming services that have been getting so bad, go and watch this video next to find out why making junk makes so much money.

And don't forget to like and subscribe to keep on learning how money works.