Casual purchase of counterfeit DVD shines light on piracy

About a week before Christmas, I took a stroll around the Los Angeles Toy District and bought a pirated DVD.

As I wrote on Dec. 21, curious about the quality of the merchandise for sale on the street, I shelled out five bucks for a copy of the movie “District 9,” which was still days away from being available in your local retail store.

As I’ve been informed, quite properly, by readers in and around the movie industry, that casual act made me part of a global problem that is killing jobs and eliminating opportunities for creative people everywhere.

Consider this the other side of that column.

What I expected to find in the case I bought from a street vendor was a traditional crummy camcorder copy, providing the view and sound of a screen somewhere far on the horizon but of the audience too, chattering, coughing, and getting up to go to the bathroom. Such low-quality copies are among the largest single categories in the international film piracy trade, especially overseas, though digital copies and online files made from stolen prints or discs are posing an increasingly serious threat.

Indeed, but what I got was a high-quality digital copy with up-to-date trailers, a navigable menu that (mostly) worked and even some special features. Plainly the source was a DVD diverted from the retail stream -- stolen from a warehouse, perhaps, or slipped to a gang of copiers by a confederate at a DVD factory.

In other words, the pirates have really got their act together. Product like this has a real, and frightening, capacity to take a bite out of the legitimate retail market.

The retail stream is porous, and it only takes one lost disc to start the counterfeiting process, says Michael Robinson, chief of content protection at the Motion Picture Assn. of America, or MPAA. Sometime before the release date, “one will leak,” he says, “usually after you’ve produced millions and they’re in process of being shipped to distribution centers.”

The direct costs of movie piracy are impossible to measure accurately. In 2005, the MPAA estimated the direct loss to its member companies at $6 billion and the total loss to the global industry at $18 billon, or about 5% of all revenue. Around the same time, a Washington think tank placed the cost in lost or forgone U.S. jobs and tax revenue at nearly $27 billion.

One problem in estimating the cost is that the industry isn’t above blaming piracy for losses that may have more mundane causes. In 2003, Universal blamed illegal Internet viewing of a work print for killing the buzz for its would-be blockbuster “The Hulk.” Yet the movie scored a very healthy gross of $62 million on its opening weekend. Universal’s claim that piracy accounted for its sharp drop-off thereafter glossed over the possibility that the real reason for the bust was the putrid word of mouth from theatrical audiences.

Rand Corp., in a study this year of piracy’s links to organized crime, warned that all estimates “should be taken with caution.” Still, it concluded that, whatever the real figure, it’s rising dramatically.

Piracy’s effect goes beyond the direct loss of revenue from customers downloading an illegal copy or buying a pirated disc on the street. The movie industry’s distribution infrastructure is eroding worldwide because selling legitimate DVDs in some countries no longer pays. In 2006, Blockbuster cited piracy as one reason it was closing its 86 stores in Spain: Of DVDs viewed in Spanish households, the company contended, 60% were pirated. Illicit downloading of content from the Internet is even beginning to cut into the audience for pirated hard copies.

For independent producers, these indirect costs can be much more devastating than direct losses. That’s because to get capital, indies depend on deals with foreign distributors, who pay upfront or offer revenue guarantees to get the cameras rolling. In some countries piracy has cut distributors’ expected income so sharply that they’re offering guarantees of a fraction of what they used to.

“DVDs used to be a huge revenue source for independent distributors,” says Richard S. Guardian, co-president of Lightning Entertainment, a Santa Monica distribution agent for independent productions. “But when the DVD business is worth a fraction of what it used to, distributors are going to be much more selective, and they’re going to pay much less money upfront for our films.”

The movie industry complains that consumers, lawmakers and law-enforcement agencies all take too casual an approach to intellectual piracy.

“People must have the attitude that this is stealing,” says Avi Lerner, chairman of indie production company Nu Image and producer of the recent release “Bad Lieutenant: Port of Call New Orleans.” “If you steal a car, you’ll go to jail. If you steal the work of thousands of people, no one cares.”

Busting DVD counterfeiting rings remains a low priority for police in most countries, adding to piracy’s appeal. The penalties are slight compared with those for, say, drug trafficking. The product is easier to sell, and the profit margin can be better than for heroin or cocaine, Rand determined.

People in Hollywood are haunted by the lesson of an industry destroyed by piracy: recorded music. When digital piracy emerged in the late 1990s, it hit the record labels like a shock-and-awe attack. By the time Napster arrived in 1999, provoking an aggressive legal attack from the industry, the game was already lost. U.S. sales of recorded music fell 60% from 1999 through 2008, according to the Recording Industry Assn. of America. Piracy was surely a leading factor.

One industry misstep was its failure to give buyers a suitable legal option for downloading digital music. Legal MP3s were exorbitantly priced and released in incompatible formats. Not until Apple introduced its iTunes Music Store in 2003 did legal downloading become user-friendly. But a generation accustomed to getting its music for free still resists paying 99 cents per song, even for files certified to be of high sonic quality and virus-free.

Hollywood is determined not to make the same mistake. Industry representatives testify frequently in Washington about the need for strict enforcement of anti-piracy laws and try, if spottily, to use publicity to make the purchase

of counterfeit goods seem socially unacceptable. As an employee of a newspaper whose product is offered for free by websites everywhere (including latimes.com) and a writer of books I hope people will pay good money for, I endorse the effort. Studios and networks, meanwhile, are also starting online downloading services such as Hulu, hoping to get viewers accustomed at least to obtaining content from authorized sources, if not to paying for it.

“At the end of the day, this is going to be much more about offering people legal alternatives than about a PR campaign,” said Jean Prewitt, president of the Independent Film & Television Alliance, a trade association of 160 independent production and distribution companies.

Not all anti-piracy approaches suit everyone in the industry equally, however. Prewitt fears that the big studios and television networks will use piracy as a pretext to try to eradicate large-scale peer-to-peer Internet services such as BitTorrent, which is a major source of illicit content but a promising distribution option for independent companies -- and a potential competitor to major distributors. Comcast, which owns cable channels as well as a cable service and is in the process of acquiring NBC Universal, was caught blocking subscribers’ access to BitTorrent and other file-sharing services in 2007. (Last month it settled a lawsuit over that action for $16 million.)

Still, the independents and the studios agree that the threat of piracy is real. “We have to stop it today,” says Lerner. “We can’t wait until tomorrow, or it’s the end of the film business.”

Michael Hiltzik’s column appears Mondays and Thursdays. Reach him at michael.hiltzik@latimes.com, read previous columns at www.latimes.com/hiltzik, and follow @latimeshiltzik on Twitter.