Home > Copyright, Digital Policy, Economics, P2P, Teksavvy, Voltage > Expendables 3 Leak and Fall Out Example of Industry Use Of P2P?

Expendables 3 Leak and Fall Out Example of Industry Use Of P2P?

Over the past several weeks, I’ve been following the Expendables 3 leak with interest. The music industry has become masters at manipulating industry sales figures through their use of P2P. The shift in income as a result of P2P use (which more than makes up any lost sales) comes in the form of live events for the music industry.

The film industry is impacted in a similar way regarding pre-releases of films and the impact it has on theater attendance which is doing quite well overall. There has been a lot of discussion centered around the impact the Expendables 3 leak has had on the film performance, in fact I believe that it’s very possible the film was intentionally leaked by the producers of the film to generate interest at the box office while facing a release date that would see this film pitted up against 2 other films (The Teenage Mutant Ninja Turtles, and Guardians of the Galaxy) which have a solid cult following, more so than the Expendables franchise. In in fact this promotional and intentional release of Expendables 3 becomes quite obvious after one has a solid understanding on how the entertainment industries are using illegal file sharing to their advantage all while taking a heavy handed approach to torrent site operators, and internet users for using these promotional materials.

To fully understand how the entertainment industry is using “illegal” file sharing to its benefit, one has to look at the economics of the situation and several economic studies that have occurred over the years. I dove deep into the trenches of this research, because a few years ago I was trying to understand what was taking place on an economic front, and how to use P2P as an avenue to promote musical talent in the industry. I was seriously thinking about opening up my own record label at the time. I witnessed a lot of industry use of P2P over my time in the music industry that couldn’t be actively proved until now. Researchers are starting to catch on, and with each day that passes, there are more and more examples of heavy industry presence in the file sharing culture to promote their works. Even though a lot of what I’m about to reveal in this post has to do with the music industry, the media industry on whole has been affected by the same shift in the digital paradigm in very similar ways. I’m going to outline all of this in this post with quoted research.

Back around 2007, there was an Industry Canada study down by two researchers, one of which was Bridget Anderson that showed the potential positive effects on music sales regarding a P2P download. Anderson was attacked by industry on that research, and she took to her blog to defend herself. What became more interesting to me, was not the response Anderson had made, but a comment by a senior researcher at the United Nations Conference on Trade and Development Zeljka Kozul-Wright, back in 2007:

The recorded music industry is rapidly undergoing a process of Schumpeterian creative destruction (Kozul-Wright, Z. and Jenner, P., “Creative Destruction in the Music Industry and the Copyright”, forthcoming). It is facetious to believe in perfect substitutability between downloaded (authorized or unauthorized) musical content and record sales. There is little empirical basis for such an assumption (see Oberholzer-Gee and Strump, 2004). Music consumers are rapidly switching from purchasing records (CDs and other more traditional formats) to a variety of alternative digital formats, such as mobile music devices and other digital formats (such as single track downloads, album downloads, music video online downloads, streams, master recording ring tones, full track audio download to mobile, ringback tunes, music video downloads to mobile and subscription income.).

 

Indeed, overall earnings of the industry are on the increase, not on the decrease (PWC, 2007). The broader music sector, is now worth more than $US 130 billion globally. Its economic importance extends far further than the recorded music sector, ranging from radio advertising revenue, record company revenues, musical instrument sale, live music sector, music retail sectors, portable digital payers, to music publishing (IFPI, 2007). The so called “demise of the music industry” is highly contentious; indeed and completely disingenuous, for example, Price Waterhouse Cooper argues that the media industry, including music, is in a strongest position since 2000; and predicts a 7.3 per cent growth annually up to $ 1.8 trillion in 2009 (PWC, 2005).
 
PWCooper (PWC) estimates that the broad entertainment and information sector already accounts for over one trillion us dollars globally and is likely to rise to $ 1.8 trillion by 2009 (PWC, 2006). While sales of recorded music (physical retail) have been on a declining trend since 2002, the sales of digital content have been on a notable increase (by 60 per cent since 2006, IFPI, 2007).
 
To hold file sharing uniquely responsible for the decline in record sales i.e., largely unauthorized downloading, is basically erroneous and far too simplistic. Moreover, such an assertion indicates a lack of understanding of the dynamics of the current process of creative destruction and transformation to the digital paradigm in the “recorded” music industry. The word “recorded” itself denotes a kind of backward looking perspective, as it may no longer be the primary technological format for the rapidly converging music-ICTs-entertainment-telecommunications industry in the third millennium.
 
However, it may not be possible to fully “test” this hypothesis econometrically, as we are really comparing apples and oranges. There is no reason to assume that the downloaders would have necessarily bought the equivalent volumes of products in records, CDs or other physical music formats. This assumption can be highly misleading and steers the whole debate in the wrong direction. The implication of such reasoning would be to hinder or even halt the process of technical change and innovation in the music industry, which is not only unadvisable but impossible.
 
Our own research would support the arguments made in the Andersen and Frenz Study , 2007, that indeed there may be a significant positive relationship between file sharing and purchase or greater use of various other formats containing music content (although not necessarily record sales per se). According to IFPI, legal downloads have risen significantly over the last 5 years and IPR-related earnings have also been on a significant increase at this time (IFPI, 2007; HFA, 2007). While record sales have declined, that does not imply that the entire industry in the decline. Indeed, other segments have risen in volume and in earnings, more than offsetting the decline in record /CD sales (IFPI, 2007; PWC, 2006; Kozul-Wright and Jenner, forthcoming).
 
The more recent, healthy overall industry earnings indicate the opposite of Liebowitz’ assertion that …”file-sharing appears to have caused the entire decline in record sales and appears to have vitiated what otherwise would have been a growth in the industry” (Liebowitz, 2007). There is no empirical basis for such a facetious assertion. Additionally, there may be many other reasons for decline in record sales (the white elephant in the room), other than increase in file sharing (e.g., transformation to the digital technological paradigm, excessively high prices of CDs, i.e., excessive mark up, standardized quality, decline in purchasing power for luxury goods, lower degrees of choice and diversity, etc).

File sharing and downloading not only increases market exposure but significantly reduces marketing and advertising costs. File sharing, as the imminent dominant mode of music consumption, is proving to be more “efficient” than simply purchasing pre-recorded music. Owing to diffusion of technical change, it is far cheaper, as it reduces the costs of intermediation and allows consumers greater choice over listening patterns; facilitating the growth of demand-driven patterns of consumption thereby enabling greater consumer participation, and more interactive modes of consumption. Global consumers as well as new producers can benefit greatly from the new P2P file sharing technologies that should be facilitated and legalised, rather than hindered.
 
Improved new technologies cannot be suppressed simply because they threaten vested industry interests. That would be against the logic of the market and the well known dynamics of technical change and innovation, as analysed by Schumpeter over 40 years ago. It is precisely this feature of innovation-led creative destruction that characterizes capitalist markets; explain their resilience, dynamism and ultimate superiority over other forms of production and consumption.
 
Zeljka Kozul-Wright,
UNCTAD
Geneva, November, 20, 2007.

 
About a year ago, I wrote a 3 part series on how the Electronic Dance Music sector has used piracy to its advantage throughout its history including in present day. Essentially these posts detail how the music industry uses pre-releases and pirated works to generate interest in the artist and try and bolster industry sales. I came to the conclusion that P2P is quickly becoming the test market for works, and labels are using P2P to generate interest in legal sales, and also generate interest in live events. A snippet of Part 2 of the series:

In 2012 a working paper was released by Robert G. Hammond of North Carolina State University on the impact of album pre-releases in file-sharing networks on physical and digital album sales. What they are essentially studying is industry’s test market, evolved from the white label days to the P2P file sharing networks, and it’s now industry wide. The report summarized:

The paper comes to the conclusion that album sales benefit from album leaks. “[A]n album that became available in file-sharing networks one month earlier would sell 60 additional units”. In addition the results also suggest that popular artists benefit more from file-sharing than newcomers and less establised artists.

That paper concluded (emphasis added):

Considering all model specifications, file sharing has a positive effect on physical and digital album sales. “[A]n album that leaked one month earlier will receive 59.6 additional sales” (p. 15). However, more established artists – with two previous albums, both of which sold at least 100,000 units – benefit more from file sharing than less established ones. The author speculates “(…) that artists with established fan bases are positively predisposed toward the [new] album” than younger and less established artists (p.19).

In respect of music genres the file sharing effect on more popular genres such as pop, country and hiphop/rap is larger on less popular or niche genres such as folk, metal, jazz. In addition, major labels benefit more from pre-releases on file sharing networks than major-distributed indie labels, which outperform pure independent labels. Among the major companies Sony Music Entertainment benefits most from file sharing, followed by Universal Music Group, EMI and Warner Music Group.

 

In 2013 a similar conclusion was reached by the researchers at the London School of Economics:

Entertainment industries are beginning to realize that the sharing of films and music online generates marketing benefits and sales boosts that often offset the losses in revenue from illegal sharing of content, the authors say.

The report points to the results of a consumer tracking study by the U.K. communications regulator Ofcom that found that file sharers in the U.K. spent more on content than those who only consumed legal content.

The growing use of streaming, cloud computing, so-called digital lockers that facilitate the sharing of content and sites that offer a mix of free and paid methods of getting content will, the study predicts, spur the entertainment industries to shift their focus from pursuing illegal downloading to creating more legal avenues for getting content online.

The LSE researchers urge countries like the U.K. and the U.S. to reform their copyright enforcement regimes, which they say are out of step with such developments and with online culture generally and do not necessarily even serve the interests of the creators they claim to be protecting.

“Insisting that people will only produce creative works when they can claim exclusive ownership rights ignores the spread of practices that depend on sharing and co-creation and easy access to creative works; this insistence privileges copyright owners over these creators,” the report says.

In 2014, the Electronic Dance Music sector released its annual numbers. This sector of the music industry now surpasses all other genres, and is the top money maker for the industry as a whole with a overall worth of $6.2 billion. The vast majority of this is coming from fan attendance at major live events. To go back to what Kozul-Wright had said in her comment:

Our own research would support the arguments made in the Andersen and Frenz Study , 2007, that indeed there may be a significant positive relationship between file sharing and purchase or greater use of various other formats containing music content (although not necessarily record sales per se). According to IFPI, legal downloads have risen significantly over the last 5 years and IPR-related earnings have also been on a significant increase at this time (IFPI, 2007; HFA, 2007). While record sales have declined, that does not imply that the entire industry in the decline. Indeed, other segments have risen in volume and in earnings, more than offsetting the decline in record /CD sales (IFPI, 2007; PWC, 2006; Kozul-Wright and Jenner, forthcoming).

There has been a dramatic shift in income as a result of the use of P2P. Recorded music is largely now being used by the industry as a promotional tool to get people out to events. The offset in digital sales lost, more than makes up in the amount of attendance at live events as a result. What the music industry has essentially found is that the selling of the music experience at live events is a much more profitable venture. The same goes for the film industry. For the film industry, there has been a steady incline year over year. To go back to the London School of Economics study:

“Despite the Motion Picture Association of America’s claim that online piracy is devastating the movie industry, Hollywood achieved record-breaking global box office revenues of $35 billion US in 2012, a six per cent increase over 2011,”

In 2013, box office attendance was again showing growth with attendance up 6% over 2012. The film industry numbers are showing an increase and substantial growth if you look at where the money has shifted, which is to the experience of watching a film in the theater. You can’t get that from a downloaded copy, or purchased DVD.
Now back to Expendables 3. Following the research that’s been conducted on the manner, leaked media has been known to bump up sales. The producers of Expendables 3 know this. They have a tremendous amounts of competition right now from the cult following of Teenage Mutant Ninja Turtles, and Guardians of the Galaxy, they get this mysterious “leaker” to release the film on P2P to generate promo for the film, all while this leaker played up the part on how bad he would be for leaking this film, which is a promotional technique I covered in Part 1 of my Business End of Piracy to generate interest in the release.

To make matters even more clear, one of the actors of Expendables 3, Kellan Lutz openly slipped the following on the leak (which I’m sure given time will be retracted if he wants another job):

“So for the people who downloaded it, I actually think they’re gonna wanna watch it in the theaters because it’s a good movie,”

From a promotional stand point, I can see the promotional team at Lionsgate go; “Okay, we have no chance at becoming number one at the box office due to the cult following of the films we are up against. We’ll release of the film on the torrent sites, hoping to generate interest in the release and see if our box numbers go up. If we don’t end up at number one than we can just blame the whole thing on piracy, get the films name out there in the press and recover profits we would have made if Teenage Mutant Ninja Turtles and the Guardians of the Galaxy. That’s how we’ll cover our losses.”

Not only is the research quite clear on how P2P is being used by the entertainment industry, it’s also quite clear on what offsets the lost sales. New wealth has been created as a result of file sharing, which more than offsets the amount lost in physical and digital copies. If all the torrent sites in the world were to shut down tomorrow, I would strongly suspect the entertainment industry would be at a significant net loss.

Now in Canada we are facing the prospect of a movie producer Voltage Studios on suing about 2000 people for downloading their content. If the film industry is using file sharing to bolster promotion for their films, along with copyright related lawsuits; is it fair, actually let me rephrase this, is it constitutional for movie studios to be suing active participants of a legal market place in which there is heavy industry presence? How can one determine what is a legal download, and what isn’t in this environment? Is the release of user data justified under public interest in this circumstance? Food for thought, and a lot more on this forthcoming.

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