Piracy isn’t the problem. Movie studios are just bad at business
Sky TV, New Zealand’s primary pay TV provider (an alleged monopoly), is currently throwing their toys out of the cot because their business is finally coming to the end of the road.
Following in the footsteps of Australia and the UK, they insist that the only option left is to force internet providers to block access to websites that are used for pirating movies. But is piracy really to blame here?
“There’s nothing we can do in New Zealand apart from site blocking” — Matthew Cheetham, Managing Director NZSA
You can already be fined for pirating movies
In 2010, New Zealand passed the Copyright (Infringing File Sharing) Amendment Bill, that gave copyright holders a process for deterring pirates that could lead to fines of up to $15,000. You would expect that this might deter people from downloading movies… except the movie industry has not issued a single infringement notice under the new law. It’s hardly fair to complain that the law doesn’t help you if you don’t even attempt to make use of it.
Netflix has shaken up the Pay TV industry
In the USA, there are now more Netflix subscribers than cable TV subscribers. Last year, Sky TV in New Zealand lost 5% of its satellite subscriber base, but despite Netflix’s obvious impact, they insist that piracy is their main competitor.
But if we’re such egregious pirating freeloaders, why are so many of us paying for multiple streaming video services? Netflix subscribers overtook Sky TV subscribers back in mid 2016, and when the 2017 numbers come through, one would expect there to be more people paying for multiple streaming services than there are paying for Sky TV.
337,000 Kiwis […]have already demonstrated their love of [streaming video] by subscribing to both Netflix and Lightbox.
If we look outside New Zealand and at the international market, we can see that Netflix is starting to make a sizable chunk of money every year, and that number keeps growing.
We’re happy to spend our money. And it’s not just movies fighting for a share of our wallet:
People prefer to spend money on video games
Nobody goes to the movie theatre anymore. Heck, people are spending more money on Angry Birds than they are on movie tickets:
This is some Economics 101 here: people only have a certain amount of money to spend each year. If I spend a dollar on a movie ticket, that’s a dollar I can’t spend somewhere else. The opposite is true: if I spend $100 a month on video games, then that’s $100 that I’m no longer able to spend on movies. What’s more, the video games I buy are probably going to be entertaining enough that I don’t feel the need to go to the movies — and that’s good, because I’ve already spent all my money on loot crates and power ups.
All the movies are the same these days anyway. Whatever happened to the days of Mel Brooks and Quentin Tarantino? When are we going to get another Bill and Ted or Wayne’s World?
The “blockbuster” phenomenon is making awful movies
In the 1970’s, movie studios realised that they could water down their films into simpler formulas, throw a bunch of money at production, sink even more money into advertising, and make crazy amounts of money. This was the start of the blockbuster phenomenon:
If you look at this graph you can see there’s a stark difference between movies made before 1970, and movies made after 1970. Let’s split up the graph into two separate ones so we can take a closer look:
From 1915 to 1969, there’s a steady but small growth in movie budgets, from $15 million up to $40 million, or around two and a half times growth. But then something happens in the 70's:
Average movie budget grows from $40 million to $280 million, or 7 times growth in slightly less time. Meanwhile, as movie budgets are going through the roof, average box office return has stayed fairly steady at around the $1.5 billion mark (in 2018 dollars).
Just to drive the point home, let’s look at the whole graph again, but we’ll use a logarithmic scale — it shows a steady rate of growth as a straight line, as opposed to a growing curve that’s hard to reason about:
You can see growth is slow (although quite variable) through to 1970, and from 1970 it starts climbing dramatically. Box office returns on the other hand, have followed the opposite curve:
Box office returns grew from $100 million to $1 billion from 1915 to 1970, and all but stopped growing after that.
What this means is that movie studios are paying more and more for every movie in the hope that it’ll be a blockbuster, but box office revenues have barely kept up with inflation for the last 40 years, let alone shown any sign of real growth.
The long tail changes everything
While Hollywood has been betting the farm on getting into the top 10 and collecting a cool billion dollars for every successful hit, better access to a massively wider range of movies is meaning that the blockbusters are fighting for a much smaller piece of the pie.
This is where we push the boat out a little and get into some more recent market theory.
Chris Anderson, in his book “The Long Tail”, looks at a range of examples of how the economics of the internet has meant that the 10 most popular movies, albums, or books no longer make the lion’s share of the profit. In the 21st century, it’s the 999,000 least popular items that only sell a few dozen copies each, but when multiply 10 sales by 999,000 items, we end up with a sizable amount of money; money that people are spending on the niche products that they really like, instead of having to buy a product from the top 10 that they only kind of like.
The idea is simple — if you have limited space for your products, then you only stock the most popular ones. As a customer, you can only choose from the products that are available, so the most popular products get bought even more than they otherwise would have been. In the case of a pay TV company, you only have a limited number of channels, and only 24 hours in the day. To their credit, Sky TV has brought out a new appliance to let you record and live-pause, but it’s small beans when you realise there are hundreds of thousands of hours of film and TV that would take decades to stream down to a satellite dish. Movie theaters have the same problem — even a large cinema only has a dozen screens, so moviegoers in the western hemisphere never get the chance to catch a quirky Sundance or Bollywood film; only blockbusters for you!
Netflix on the other hand (and Spotify with music, and Amazon with books), have infinite shelf space. Not only that, they have infinite channels — in theory, every Netflix user could watch a different movie or TV show at the same time. This is what Chris Anderson refers to as “broadcast versus broadband” — when there’s no longer a cost to making a product available, you make all your products available all the time.
Why would you pay $50 a month to be told what to watch and when to watch it, when you can pay $10 a month and watch whatever you like?
Takeaways
- Movie studios are paying way more per film than they should be
- Box office returns have been flat since the 70's
- People are happy to pay for what they want; but what they want has changed
- The internet gives us infinite shelf space — why would you accept any less?
- Piracy isn’t killing Hollywood; they’re doing a fine job of that by themselves
