Piracy cannibalises the main money makers for studios – the rental and sale of DVDs and home videos. Hard copy piracy costs an estimated $3-3.5bn per year; digital theft may cost $3-4bn per year.
DVDs and videos are where film companies now generate their principal revenues: 46% of global revenue comes from video/DVD rental and sales. Because film production costs are amortised in the theatrical window and video/DVD production costs are minimal, every incremental unit has a high contribution for the business. Piracy cuts into this and has a direct impact on the bottom line.
It is estimated that hard copy piracy costs the film industry around $3-3.5bn per year. This cost represents what the film industry would have gained in revenues had these films been purchased legitimately rather than through pirates.
Though there are few estimates for the costs to the film industry of soft copy piracy, we believe the impact could equal the cost of hard copy piracy, possibly running to $3-4bn per year. This represents the cost to the industry of films being downloaded for free had they been bought legitimately. Although precise estimates of these illegal activities are difficult, some sources believe this estimate is conservative. However, it must be noted that many users who download pirated material from the internet do so because it is free and may not necessarily buy the films otherwise.
Marketing, overhead and distribution costs typically account for 60% of total DVD costs. Hard copy piracy costs for these activities are negligible.
"There is a strong irony that traditional hard copy pirates are unlikely to see much money from digital theft," says Ed Shedd, partner in Deloitte’s UK Media Consulting team.
Though the internet provides a convenient distribution mechanism for black marketeers, it will be very difficult for pirates to cash in with online models. This is because the digital thieves, your average ‘Joe Bloggs’, download for their own enjoyment and to share films with others. Unfortunately for the film industry, the cost is the same whether the pirates cash in or not.
We would expect to see substitution from hard to soft copy piracy as digital thieves download films for free and copy them onto CD themselves rather than pay for pirated hard copies. The total combined cost is therefore difficult to predict but we believe it will be significant and could potentially have a devastating impact on the film industry if action is not taken.
The fact that films are currently enjoying a growth phase masks the effects of this lost revenue. From 1998-2002, European video sales (VHS and DVD) experienced an 11% compound annual growth rate. DVD sales have driven this growth, making DVDs the most successful consumer product format of all time. 26%
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