Online Piracy: A Cyber Gangplank Sought

When Mexican police raided some suspicious warehouses in Mexico City in May, they were not going after cocaine laboratories or marijuana farms. Instead they uncovered an enormous media counterfeiting operation, seizing 1,000 DVD burners, 12 tonnes of blank discs and thousands of copies of Hollywood movies and computer programs.

The raid was a victory for local law enforcement in a nation that is one of the largest producers and consumers of pirated goods. But it also highlights the evolving nature of the threat to media and software groups: while police may have seized thousands of discs, piracy in emerging economies is shifting to the web, where an ever-faster internet has made it increasingly simple to download movies, music and software illegally.

For more than a decade, big media and technology groups have been grappling with global piracy. What be­gan in the 1990s as a trickle of copied films captured with camcorders be­came a torrent of counterfeit discs as cheap DVD players and copiers flooded the market in the 2000s. With high-speed internet becoming accessible around the world, it is increasingly simple for anyone with a computer to download illicit, high-quality versions of virtually any music, film or software.

"Ninety per cent of our stuff is being viewed without compensation to us in most developing countries," says Jeff Bewkes, chief executive of Time Warner, which makes movies including the Harry Potter films.

Today, emerging markets-based "rogue sites" that facilitate piracy are the targets of proposed US laws aimed at reducing counterfeiting. However, the bills are pitting content creators, led by record labels and movie studios, against technology companies such as Google and Facebook that host content and link to other sites. The technology sector fears the laws – which would push advertisers and payment processors to stop doing business with rogue sites, and prevent internet service providers from linking to them – would land it with unfair liabilities and disrupt the basic workings of the web. In addition, some argue such laws are un­likely to prove effective when so many originators and consumers of counterfeit material operate beyond their reach.

Yet media companies say drastic problems require drastic solutions. According to a report by the Social Science Research Council, a US-based think-tank, in Russia 81 per cent of movies not watched in cinemas are pirated. More than half the software installed on Brazilian computers is illegal. And in India, 55 per cent of music is obtained by consumers who have not paid for it. The result is billions in lost revenues each year for big content creators, including software groups. The software industry estimates annual losses at more than $50bn; the movie business estimates $6.1bn in annual losses in its most recent report. And the record industry puts losses to piracy at $5bn a year.

While the methodology of such accounting is often disputed – not every illegal copy should be counted as a lost sale, and a relatively small number of people account for a large share of illegal downloads "the growing spectre of piracy, especially in emerging markets, has put media and software groups on the defensive. "You can't compete with free," says Rick Cotton, general counsel for NBC Universal, which makes movies such as the Bourne series. "If the current trends continue, it will undermine our ability to invest in new content."

The idea that piracy might become so pervasive it could disrupt an entire industry's business model is not far-fetched. The revenues of the record business have halved in the past 10 years, since swapping MP3s became commonplace. Software and movie groups are seeking to avoid the same fate. "When broadband penetration and quality increases, piracy inc­reases," says Kevin Suh of the Motion Picture Association of America.

Be it The Pirate Bay from Sweden, Russia's Rutracker or Demonoid from Ukraine, such sites have become infamous sources of unauthorised music, film and software downloads, serving users in their home nations and round the globe who take advantage of an internet with few national borders.

The US has only one law designed to address copyright infringement on the web. The 1998 Digital Millennium Copyright Act criminalises wilful copy­right breaches but gives safe harbour to technology companies that remove offending content once notified. However, it has failed to prevent large-scale piracy, a growing amount of which is originated and consumed in areas outside US authorities' reach.

In its most prominent test case, Viacom, owner of Paramount Pictures and MTV, sued Google's YouTube for $1bn in 2007, alleging the video-sharing site was facilitating illegal viewing of its content, even though it had taken some offending clips down. The courts sided with Google, citing the DMCA's safe harbour protections. Viacom is appealing, but the case prompted YouTube to put in place much more effective measures to prevent users from uploading copyrighted material. But as counterfeiting evolves, the law looks increasingly ineffective. "The DMCA was designed for an internet where there were only isolated cases of piracy, and they were stateside," says Frederick Huntsberry, chief operating officer of Paramount Pictures. "Right now the guys you're fighting are overseas. The volume is so large that you can't file enough lawsuits." For example, piracy is moving rapidly online as access to high-speed internet spreads in countries such as Mexico, Brazil and India.

Millions of potential customers in such markets look likely to gain access to the web in the next decade – and the prospect of many growing used to downloading content for free has led media companies to scramble for new ways to stem piracy. The most sweeping, and controversial, new pieces of legislation are the bills making their way through US Congress. The Stop Online Piracy Act, and the related Protect Intellectual Property Act, would allow copyright owners to seek court orders to block advertising and payment companies from working with infringing sites. They would also push technology companies to block links to illegal content. "To say that there should be free access to sites dedicated to breaking the law is wrong," says Mr Cotton.

But when the House of Representatives heard arguments for the bill last month, technology companies protested, saying it would roll back the DMCA's safe harbour protections. "We are concerned that these measures pose a serious risk to our industry's continued record of innovation and job creation," said a coalition including Google, Facebook and AOL. One clause in the Senate bill is drawing particular scrutiny. It would require ISPs to block access to infringing sites, which could include the likes of Google, Facebook and any site that links to offending content. So-called "domain name system blocking" is used to censor the internet in China, and its implementation in the US would make it easy for companies – or governments – to block sites of which they do not approve.

Rebecca MacKinnon of the New America Foundation, a US-based think-tank, who specialises in free expression on the web, said the legislation "would strengthen China's Great Firewall and even bring major features of it to America". But just as web-savvy Chinese are able to get around the Great Firewall, so too could American downloaders skirt new US laws. "It is not likely that DNS filtering would be effective in blocking US access to targeted foreign websites," says Leonard Napolitano of Sandia National Laboratories, a US government research facility.

A review of the impact of DNS blocking prompted the Business Software Alliance, a lobby group that initially supported the bills, to withdraw support. Vint Cerf, one of the internet's founders and now a Google executive, says: "Even our own government is beginning to go overboard in the protection of copy­right."

Media executives say they are sensitive to such views. However, says Mr Cotton: "There is a confusion between freedom of expression and lawlessness. There is simply no way you can have the broadband internet be a pillar of the 21st century and have it be a lawless Wild West environment." . . . It remains disconcertingly simple to illegally download music but the record industry seems to have turned a corner. US recorded music sales are up year-to-date for the first time in six years. This turnround is the result of a concerted effort to take down the most egregious file-sharing sites, such as LimeWire, which was closed last year, making it harder for casual users to pirate music. It is also a testament to the mainstream success of digital business models such as that of Apple's iTunes store.

While legislative efforts in France, the UK, the US and other countries re­main uncoordinated, pressure from media companies to hold ISPs and search engines liable for facilitating access to offending content – and looking to governments for stronger enforcement – is emerging as a common theme. Perhaps even more effective than legislation, say media companies, is co-operation by governments. They point to South Korea, where online piracy has plummeted in recent years after Seoul stepped up enforcement.

Partnerships with local media companies can prove effective, too. When NBC broadcast the Olympics in 2008 it worked closely with CCTV, the Chinese state broadcaster, to deter illegal online broadcasting of the Games. It worked. Beijing monitored sites and fined infringers, resulting in minimal unauthorised viewing.

For media companies, the Holy Grail is digital business models that let them sell their products for profit to new emerging market consumers. There are signs of progress. US video streaming website Netflix is moving into Latin America. Cable companies such as the Discovery and Time Warner channels have found limited success with free-to-air television supported by advertising in both Latin America and eastern Europe.

Legislation, co-operation and new business models will go only so far, however. The reality for media and software companies is that they are playing catch-up with a web that has outrun their ability to control it. consumers have come to expect movies, music and computer programs when they want them, where they want them and how they want them. And in emerging markets, where profitable online business models take time to develop, big companies are still exposed to lost revenues to the tune of billions each year.

"The main form of access to media goods in emerging economics remains the pirate market," says Joe Karaganis, who this year wrote a report on the subject for the SSRC. "Legal channels are all but unavailable, and those that are, are priced at US or European levels. New technology and no affordable alternatives leads to piracy."

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