You Wouldn’t Stream a Car – What Netflix’s Refusal to Bow to Pirates Means for Digital Piracy

Orange is the New Black, by Netflix, from Wikipedia

On April 28, 2017, a hacker/s called ‘thedarkoverlord’ managed to exploit a weak point in Netflix’s security, and hijacked a copy of the first 10 episodes of its hugely popular original series Orange Is the New Black, threatening to release these episodes to the public unless Netflix agreed to pay an unspecified ransom amount. Given that each episode costs an estimated 4 Million USD to produce, one would assume that they would be anxious, to say the least, to protect their intellectual property from the rampant digital piracy that would surely follow such a massive leak.

To everyone’s evident surprise (particularly thedarkoverlord), Netflix refused to heed the hacker’s demands, seemingly nonchalantly dismissing the possibility that such piracy would significantly dent their revenues from the show. Netflix’s actions are remarkable because of how piracy has been projected as the bane of innovation and cultural creation in the digital age and the sole focus of the efforts of copyright law in the digital age. Some media houses have trumpeted this nonchalance to indicate the decreasing relevance of piracy in the age of cultural abundance. To analyse the implications of this, it’s useful to delve into how piracy has affected digital culture and the laws that regulate it.

The Economic Inefficiencies of Copyright

From the very advent of recognising copyright as a measure for protecting creative output, the major goal of copyright law has been to incentivise the creation of cultural products. As the ease of reproduction of these works increased, copyright law began focusing more on providing means to prevent unauthorised access to works to safeguard the revenues of artists. This development relies upon viewing intellectual property in a similar vein to physical property – if you wouldn’t steal a car, you shouldn’t ‘steal’ a movie. However, this argument is disingenuous and ignores fundamental distinctions between physical and intellectual property. For example, the theft of a car prevents its legitimate use by another person, and so the value of a car is in effect zero-sum – either the thief or the legitimate owner can enjoy the car. Cultural products embodying intellectual property, on the other hand, are what are called ‘nonrival goods’, where the consumption by one person does not make it any less available for consumption by another. This characteristic of intellectual property means that the most efficient technical economic model is one where the cost of obtaining information should equal the marginal cost of production of each unit of that information. The digital age has meant that the actual cost of production of additional units of creative products is close to zero, and for an efficient market, therefore, the units must be priced at zero. The goal of copyright law has therefore been to incentive the production of cultural products by introducing deliberate inefficiencies in the pricing of cultural products, by allowing creators to protect and price their products above their marginal cost, as it is argued that in the absence of incentives to produce (i.e. the ability to monetise these goods), no such goods would be produced at all.

The extent to which piracy affects incentives to create, and consequently innovation and cultural consumption, is a question which has been sought to be answered by many different parties, utilising different methodologies to come to very different conclusions about the actual impact of piracy. For example, figures by industry associations such as the MPAA and MUSO are used as evidence of how digital piracy is gutting the creative industry, while other studies, such as those by the Swiss and Dutch governments, find little to no correlation between piracy and innovation or consequent losses in revenue for artists.

Piracy, Cultural Consumption and the New Media

Within this deeply contested discourse on piracy and copyright, the proprietary view has largely dominated both internationally (such as through TRIPS or more recently, the TPP), and consequently in domestic laws, leading the adoption of harsh and often overzealous laws to protect potential violations of copyrights in digital media. In India, as well as other countries, violation of copyrights brings with it criminal sanctions. Elsewhere, online piracy, simply as the act of viewing a pirated movie, is liable to have your internet connection disabled. These harsh penal actions did little to curb actual piracy, and in the process, wrecked crucial tools which enable access to knowledge. This perspective has particularly come into critical focus when pitted against emerging technologies which utilise cultural goods, mostly based on the internet, and which usually operate in a legally grey area, due to the proprietary view of copyright. From the Sony – Betamax and Grokster decisions of the US Supreme Court to the recent Myspace decision by the Delhi High Court, the leeway that various laws and court decisions have given these emerging business models has paved the way for exploring a better balance between incentives to artists and access to cultural goods.

Even before digital piracy through torrents or on the web was the norm, movies were pirated through unlicensed CD’s and DVD’s. This provided an impetus for Moserbaer to come up with a business model premised on providing access to cheaper, legitimate movies, which was widely successful. This has paved the way for technologies such as on-demand video and streaming services, such as Netflix, to emerge. Recent studies have shown that an increase in the availability of businesses like Netflix or Hotstar has coincided with a consequent decrease in the use of torrents for unauthorised downloads of movies and TV shows. These studies indicate that the problem of piracy has mostly been a service problem, causing inefficient pricing and service models to dominate the industry, while disabling easier access to copyrighted works, which disability turns people towards less safe, and less optimal choices such as piracy, which provide easier, unimpeded access. This could establish that when cultural products are appropriately priced and easily available, as these new models provide, the problem of piracy could diminish to a large extent.

Netflix clearly weighed the costs of not acceding to the demands of its hackers, and seems to have concluded that digital piracy is not a major threat to the sustainability of their own business model, acknowledging that piracy is an access problem. Hopefully, this indicates a paradigm shift in the perspective of an industry which has always viewed piracy as a major existential threat to be protected through penal laws and protective strategies, to cultural an industry which recognises that the true way to solve the problem of piracy is to increase access to legitimate content.

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