Streaming, Torrents, and Market Fragmentation: Will p2p Filesharing, Unlike The South, Rise Again?

A high-definition video capture of the smash hit musical Hamilton, released last week on Disney’s Disney+ streaming service, has been spreading around Al Gore’s internet like COVID, propagating at a rate of a few thousand torrent downloads per hour. Part of this demand is pent up from years of unaffordable theatre tickets for the 2015 smash hit show. Another part is because, well, the theatre isn’t really a thing these days. Earlier this year, observers noted a similar trend with the popularity of the film Contagion, which was hard to find– but easy to download via torrent. We’ve seen a strange trend in the market for digital services in recent months as companies seek to stretch long quarterly earnings winning streaks by drilling in the deep blue ocean of content production, hungry for new subscribers. While original content production is exorbitant, these companies are flush– for now, at least. And everyone’s trying to cash in. Accordingly, as content accessibility becomes more fragmented and paid streaming services proliferate, illegal content distribution has also spiked. This leads to questions of how sustainable the quest for a fragmented– or more competitive- streaming market really is.

DROPPING HAMILTONS– ON STREAMING SERVICE

Demand to see Hamilton, Lin-Manuel Miranda’s rap musical that casts the Founding Fathers as people of color, drove ticket prices up to as much as $1,000 or more. The show was lauded as visionary. Game-changing. Wrote Ben Brantley in the NYT: “I am loath to tell people to mortgage their houses and lease their children to acquire tickets to a hit Broadway show, but Hamilton might just about be worth it.” (I’ll skip the critiques, of which there are plenty).

No surprise that people are illegally distributing copies, right?

Wait, though.

Wasn’t the whole purpose of putting it on Disney+ to make it accessible to the unwashed masses? After all, it’s only $6.99 a month for unlimited streaming! So cheap! Well, kind of. It’s cheap, that is, on top of Hulu ($6.99, also owned by Disney), Netflix ($12.99 a month), Amazon Prime (and video, $10 per month), and many more. Peacock, by NBC, a.k.a. Comcast, offers a tiered subscription. HBO offers HBO Go and HBO Now. HBO is also owned by the same parent company that owns Warner Brothers, which offers its own subscription streaming service. It is impossible to keep these services straight because they change. Business units bounce around the digital global economy like those little number balls in the PowerBall drawing.

In short, the market is becoming saturated with new streaming services. But even though the market is getting bigger, there isn’t much of a compelling reason to subscribe to one service versus another. At the same time, new companies are trying to curate content and deliver specific perquisites to attract former cable TV subscribers, paying way more than $6.99 for Hulu, more like $40 or $50 a month, which might well be less than Comcast digital cable.

THE FALL AND RISE OF TORRENTS

Given that digital streaming was supposed to save us from the evil Comcast bill, it’s not terribly surprising that consumers are starting to stray from the, ahem, righteous path of paying too much for things they don’t need. Forbes observed the reawakened phenomenon of digital piracy in 2018 after a long lull in torrent downloads:

In short, there’s a limit to how many subscriptions people will take out, and has been shown, preventing unlicensed downloading is very difficult. It’s true that the shows produced by the likes of HBO and Netflix regularly sweep the board at the Emmys, and are generally better than the content produced by traditional channels, but there’s only so much disposable income people are prepared to spend on subscriptions.

Torrent traffic dropped as much as 50% over a few years as cheap, good quality, plentiful digital content became available. To anyone who remembers when Netflix first came out with digital streaming, it was a game-changer. (Netflix via DVD was also pretty amazing, though I admit that I always enjoyed a trip to my local Family Video).

But content started to become more exclusive. And companies realized that without disincentives against driving up prices, they would do just that. Why charge $7.99 per month when you could charge $11.99 if people would pay it? The optimism of the decade-long bull market helped fuel the rocket ship of consumer spending, too, which didn’t hurt.

Lin-Manuel Miranda’s “Hamilton” (2015) has been propagating on the internet via torrent downloads at a rate of a few thousand per hour since it was released on Disney+ last week, raising questions about the goals and sustainability of the increasingly crowded streaming economy (Stage photo by Joan Marcus).

BEYOND THE STREAM: THE DIGITAL PIRACY OF SMALL THINGS

Meanwhile, my morning news digest included mention of some litigation Amazon is waging against a European eBook store that has been selling pirated eBooks. The complaint, filed in Seattle, alleges that the bookstore sold books it didn’t have rights to, sometimes even charging money for books that the authors themselves had released for free. It seems to be a fairly clear-cut case. But it also raises questions about how we should be distributing and monetizing digital content. As evidenced in the poor fragmentation of the digital streaming space and, similarly, the proliferation of “free” eBooks alongside relatively exorbitant Kindle downloads, no one has really figured it out.

Let’s remember that there was a massive antitrust lawsuit about eBook pricing in 2013. The court held that Apple conspired to fix eBook pricing in violation of the Sherman Act. Apple lost and was required to pay hundreds of millions of dollars in restitution. In spite of this, pricing of eBooks remains, well, super weird. As a product, they’re to some degree restricted by many of the same layers of profit margins that govern real books. Licensing! Royalties! And, of course, a failure to disintermediate— a rarity in the global digital age. Apart from the lazy excuse of “corporate greed,” this is why companies have failed to drive down prices to where they’re affordable given their virtually infinite, instantaneous profit margin. Over time, we see that markets for new products usually end up normalizing prices. The problem of piracy, though, is prevalent where prices are grossly distorted. While things like theft or fare evasion will always exist to some degree, there is a lot of evidence that driving up prices increases the incidence of these activities.

Need more examples? See the music industry– way before digital video streaming was even a pipe dream.

“He is refining his methods! He is evolving!” said Anthony Hopkins of the serial killer in the film Red Dragon, although this description is apt for the beast of corporate digital media distribution. Screencap ©2002 NBCUniversal / Universal Pictures.

THE DEATH OF DIALUP-ERA P2P FILESHARING, SORT OF

Lest you forget, I’m not a Zoomer. I am old enough to remember Napster. I am old enough to remember Limewire. I am old enough to remember downloading files from desktop FTP clients, where you had to type in strings of numbers, passwords, and usernames, and pray to the TCP/IP gods that your 56k modem could handle downloading a twenty megabyte file (that’s roughly three or four mp3s, and yes, it took hours). Kids today do not know. When Napster busted onto the scene, record sales evaporated almost overnight. The industry was, of course, apopletic. No one wanted to buy CDs from physical stores if they could download that same CD for free. At the same time, record companies doled out lavish compensation on executives while demanding $17.99 for a new CD that cost pennies to make ($26.79 in 2020 dollars from 2000 dollars, which shocks me as I type this with my own ten fingers). So, too, was the internet a good venue for disseminating information about music, if not the music itself. My rhymes be blowing up chatrooms all over the internet, Talib Kweli rapped in 2000.

The problem got so bad that the industry funded a series of PSA’s intended to shame people out of stealing music. “You wouldn’t steal a car,” the ads admonished in bold lettering. Predictably, this spawned what has become a generation-long tradition of parody. Of course, it is a bit of a stretch to liken a digital transfer, representing a few dollars in lost profit, to the grander crimes of automobile theft, or breaking and entering. (My favorite spoof on illegal downloading here).

“You wouldn’t download a pizza” followed the likes of “you wouldn’t download a chair,” spoofing the PSA produced by the Federation Against Copyright Theft and the Motion Picture Association of America in 2004. This slogan appeared as “unskippable” preludes on many a DVD and also in theaters, likening grand theft auto to digital content piracy.

The problem is that while piracy remained quite popular throughout the 2000’s, it also spawned innovation by the industry. I’m also old enough to remember that the death of Napster wasn’t the death of music sharing, nor of the music industry. What really did in illicit p2p filesharing during this first go-round in the early days was the iTunes Music Store, which Steve Jobs launched in 2003. iTunes changed the game. It was user-friendly, dynamic, and clean. It is one of the few pieces of software I’ve ever had that started out nearly perfect and has mostly gotten worse over the years. (The search feature is damn near unusable in the newest version on OS 10.15 Catalina). At 99 cents for a song, it was much easier to just click, download, and be done with it. No hassle from unreliable download speeds, no risk of downloading corrupted files or the wrong version. 

Only 2000’s kids will remember. The iTunes music store as it appeared in 2004, when Britney Spears, Dido, Kelis, and the Black-Eyed Peas topped charts. The glory days of the iPod. Courtesy of the Wayback Machine. Remember iPods?

Takeaway from music? 99 cents is a lot of money for something that is distributed at virtually no cost to the seller. In managerial accounting, we talk about variable and fixed costs of production. Fixed costs would be the costs of the server farm. They are sunk, a.k.a. you’ve spent them already by the time you’re selling your product and you can’t easily recoup them. But in an hour on what was in 2003 a broadband connection, you could download perhaps 700MB in an hour. That’s the equivalent to a CD (of uncompressed music or data).

Or, it was maybe about 120 mp3s. An hour of electric usage and equipment depreciation to do that for you cost two or three pennies. It might have cost Apple a penny to distribute 120 mp3s that they’d sell for $120. Of course, artists have to get paid. And we can’t forget the record executive. But it’s worth noting that the convenience factor is quite valuable here. Even ten years ago, let alone fifteen, it would have been hard to envision a way to open your phone, have your phone tell you what music was playing at that moment, and then click a button to purchase and automatically download that song to your collection.

Apple’s shift to DRM-free music was a watershed moment because it was sort of meant to signal the death knell of what had become a pretty obsessive crusade by major publishers, media conglomerates, and even video game developers to attach super stringent DRM to products. The Criterion Collection, for example, developed DVD’s with a unique encoding that would effectively crash your computer if you tried to rip them. Video games began requiring that desktop versions be tied to the publisher’s DRM via internet. Access keys became much longer and much harder to fake.

Against iTunes, companies like eMusic (founded in 1998) competed by provide inferior, though far cheaper service. Offering music-purchasing-as-a-service, essentially, eMusic worked on a subscription basis. “X-as-a-service” has become popular because it normalizes revenues over time and can increase revenues. Just so long as you don’t piss off your consumers too much (I’m looking at you, Adobe). Finance people and investors love smooth curves because they are unimaginative and like consistency.

But Apple took the market by storm in spite of its relatively high price of 99 cents per song, because the interface was that good and the offering that comprehensive. Nearly 20 years later, Amazon’s digital music interface still sucks in comparison. You have to find the song, put it into a cart, and download it separately in a .zip file. iTunes, on the other hand (now called just “Music”), is seamless. Seamlessness and “turnkey” solutions for consumers are always a sell.

Since the smash hit of Apple music and competitors, though, streaming– a true music-as-a-service platform, has largely displaced music sales. Never mind that the unprofitable Spotify is “worth” $50 billion on its own now, and Sirius XM, which owns Pandora, is “worth” another $25 billion. Neither company makes much money, and duopolies don’t tend to remain stable for very long. (For comparison, Jay Z’s TIDAL was “worth” well under a billion when it was recently acquired by Sprint). In other words: no one really knows how to value these things. The same is true with companies producing original content.

Comcast has a review of 1.2 stars out of 5.0 on Trust Pilot, from 600 reviews, and 1.1 out of 5 from Consumer Affairs from 184 reviews. The peacock logo, first introduced in 1956 to promote the network’s advances in color television, is a holdover from NBC. NBC and Comcast both have an on-again, off-again relationship with the General Electric corporation that dates back to the dawn of modern corporate history. © 2020 Comcast Corporation.

OF LONG TAILS AND SHORT TAILS

One interesting part of the streaming model is that it’s expensive to develop and maintain the technological backbone of a system in which the vast majority of content is viewed in the largest numbers when it’s brand new. You will have fewer viewers hankering for an obscure 1956 French film than you will for Brooklyn Nine Nine. But you’ll definitely have a nonzero number of subscribers who subscribe because of the 1956 film. A report from McAfee confirmed that while this is generally the case, there are oddities– like the 2019 Lion King remake sparking renewed interest in the quarter-centenarian animated film. This was far more true when Netflix sent DVD’s in the mail. In 2020, it’s unclear why they cut out so much content so frequently, given the explosive growth of server capacity worldwide.

Licensing of third-party content is a huge cost, certainly. But the streaming giants are spending most of their money on original, exclusive content production. Because these aren’t sold per-view, though, it’s hard to figure out how well they’re being monetized. The “tail” question is one of whether people join Netflix solely to watch the exclusive, original series Ozark or whether they join it to watch, say, eighty-five different, obscure foreign films that are hard to find somewhere else. The underlying data to understand consumer behavior in this regard is obviously a pretty closely-kept secret. But we’ve seen some analysts cast doubt on the sustainability of the original content model.

For music, it has taken years, but we’ve seen the emergence of alternatives to things like the iTunes store. The indie-friendly Bandcamp, for example, which has provided unprecedented access to independent artists, often tied in with social media platforms. Soundcloud, which emphasizes streaming, enjoys similar connectivity with social media. Because cinema production is comparatively far more expensive, it isn’t as though we’re going to see a Bandcamp for indie filmmakers any time soon.

CONCLUSIONS

Markets are going to change, and the ways people consume media will change. Netflix successfully pivoted from mailing DVDs to people’s doors to digital streaming, and is a smash hit globally. Other media companies are dipping their toes into the water, or diving right in. Whether the services will be popular is not as relevant as the question of whether they can be sustained based on their current revenue models for a long time.

In the meanwhiles, though, the streaming giants have failed to sufficiently differentiate their products from one another. A market that is insufficiently fragmented (by specific specialization of streaming services offered) will confuse consumers. But a market that is too fragmented will just piss off consumers and drive them to alternatives. No one likes having to type in seventeen different login passwords if they want to watch seventeen shows over a given period. Or keep track of seventeen recurring bills, God forbid. Alternatives might include piracy. They might include seeking out platforms that embrace what we in the business realm call “regulatory arbitrage,” that is, gaming the system to legally circumvent the law. (Is it illegal to watch streamed content of copyrighted material if ) In the long run, we will invariably see some of these platforms fail while other ones succeed.

COVID is already disastrously restricting production and delivery of cinema. A quarantined or locked down populace hungry for new content is going to consume a lot, certainly. But there will be a lot of reorganization in the market in the coming years, and it’s not clear who will come out with the most enduring product. Nor is it clear whether the reëmergence of piracy will pose a threat to the industry, or possibly facilitate a push toward the maintenance of more free content, which could certainly be a draw for hypothetical freemium streaming platforms featuring, say, free older content and paid new content. But in the mean time, hold onto your hats.

Netflix did not immediately respond to a request for comment. But we’ll give them a break because we had a nice chat with one of their media relations people several months ago, and it’s a rarity for giant corporations to be nice to small-time journalists and bloggers.

Nat M. Zorach

Nat M. Zorach, AICP is a city planner, community development professional, and MBA candidate at American University's Kogod School of Business, based in Detroit.

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