When Online Pirates Win, Creators And Consumers Lose

Matthew Kandrach President, CASE
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Over the weekend news broke that a hacker group calling themselves “thedarkoverlord” leaked ten episodes of Netflix’s hit series Orange is the New Black online weeks before they were slated to go live on the streaming service.

After Netflix refused to pay their ransom demands, the hackers released a statement saying:

It didn’t have to be this way, Netflix. You’re going to lose a lot more money in all of this than what our modest offer was … We’re quite ashamed to breathe the same air as you. We figured a pragmatic business such as yourselves would see and understand the benefits of cooperating with a reasonable and merciful entity like ourselves.

The hubris of these characters is eye-opening, as is the fact these characters are watching way too many heist movies. Arrogance aside, consumers should harbor no sympathy for these digital bandits, nor think of this as some petty crime. Netflix, like all content producers, invests billions to create compelling and original programs, which in turn generates consumer excitement and anticipation for their service in the form of subscriptions. The success or failure of those investments should be determined by consumer demand in the legitimate marketplace, not by extortionist hackers.

However, the hackers are right about one thing: Netflix is likely to lose a lot of money. That piracy harms legitimate sales is beyond dispute. But what is less well known is the devastating impact caused by pre-release piracy—when a movie or show becomes available online before its scheduled debut—which is the case here. Indeed, Carnegie Mellon University researchers concluded that “on average, pre-release piracy causes a 19.1% decrease in revenue compared to piracy that occurs post- release.” While Netflix’s business model is different than that of other networks—they debut their shows online all at once as opposed to weekly episodes on cable or broadcast networks—it’s plausible to conclude many consumers who would have subscribed to Netflix may now choose to forego that subscription.

But I hope they don’t, not just because Netflix deserves to be paid when audiences view their content, but because consumers put themselves at great risk by visiting piracy sites. Make no mistake, piracy site operators are criminals, who dangle free movies and TV shows to lure viewers to their websites so they can infect their computers. To illustrate the scope of the problem, online safety group the Digital Citizens Alliance recently released a report titled “Digital Bait” that concluded “Internet users who visited content theft sites were 28 times more likely to get malware from [piracy] sites than from mainstream websites or licensed content providers”; and that “content thieves are making an estimated $70 million a year just from allowing malware distributors to place malicious code on their websites.”

This can have serious consequences for consumers. As DCA goes on to describe, piracy related malware can lead to identity theft, financial fraud, extortion demands and more. Stated simply, piracy isn’t just bad for content creators, it puts consumers in harm’s way.

Fortunately, government agencies and law enforcement are starting take notice. For instance, the Federal Trade Commission, which is the primary consumer protection agency of the US government, recently posted a blog warning consumers against visiting piracy sites and noting “[w]e recently downloaded movies from five sites that offered them for free. In all five cases, we ended up with malware on our computer.” Also, state consumer protection agencies are taking notice as well. Recently, many Attorneys General released Public Service Announcement videos, like this one by LA Attorney General Jeff Landry, warning their constituents about piracy related harms. What’s more, good faith actors in the online space have entered myriad voluntary agreements to diminish piracy. For instance, the advertising industry launched the Trustworthy Accountability Group to keep good ads off bad sites, thereby taking some of the profit out of content theft. And the Trusted Notifier Program helps ensure participating registries aren’t providing domains to sites engaged in large-scale piracy.

Educational initiatives by government agencies and officials coupled with private sector agreements to diminish piracy are important first steps, but more must be done. For too long, online theft has been viewed as a victimless crime. Sure, Hollywood studios don’t like it, the thinking goes, but nobody really gets hurt (and consumers get free stuff). That notion is no longer tenable—and as DCA’s research proves, is in fact dangerous. The FTC and state Attorneys General should be commended for lending their considerable voices to this issue, and we look forward to their continued attention to addressing online theft. As Netflix continues to deal with the fallout of this crime, let’s hope government, consumers, and industry can use this unfortunate event to help raise awareness about piracy related harms—because when online thieves succeed, we all lose.

Matthew Kandrach is President of CASE – Consumer Action for a Strong Economy, The Free Market Voice for America’s Consumers