Do Pirate Sites Really Make That Much Money? Um… No

Studies

from the and-again dept

One of the key refrains from the supporters of PIPA and SOPA in pushing for those bills was about how “foreign pirates” were profiting off of American industry. However, as we’ve suggested plenty of times in the past, there’s little evidence that there’s really that much money to be made running such sites. Even more amusing, of course, is that the MPAA/RIAA folks have to both argue that “people just want stuff for free,” and that these sites are raking in money from subscription fees at the same time — an internal contradiction they never explain. I’ve asked MPAA officials directly (including on stage at the Filmmaker’s Forum event last year) that if these lockers are really making so much money, why doesn’t Hollywood just set up their own and rake in all that cash. The only answer they give, which doesn’t actually answer the question, is that it’s cheaper for cyberlockers since they don’t pay royalties. But that’s got nothing to do with why the Hollywood studios don’t get this money for themselves. Of course, the real reason — somewhat implicit from the MPAA’s comments — is that it knows these sites don’t make that much money.

Researcher Joe Karaganis, who did the famed SSRC Media Piracy report, has just come out with a new report talking about just how little these so-called “rogue sites” actually make.

Now, some will immediately claim that this is ridiculous given the videos and photos we’ve all seen in the last week of police confiscating dozens of expensive luxury cars from the $30 million mansion owned by Megaupload founder Kim Dotcom (er… Schmitz). However, as Karaganis points out, it really doesn’t look like Megaupload made that much money from infringement, and even if it was, it seemed that widespread competition and the growing commodity of online storage would make the company less and less profitable. Even so, the actual details of the indictment show numbers much, much lower than what the industry has been claiming, and simply gives much more credence to the fact that Hollywood’s estimates of “losses” are complete bunk:

It’s easy to see how Kim Dotcom got rich by being an early entrant in the cloud storage market, in the only part of the business that required a lot of large file transfers. (Much the same is true of broadband adoption, for which piracy has always been the early killer app—especially outside the US where legal web services are still underdeveloped.) As a subscription business selling a scarce commodity, Megaupload’s revenues were many times larger than the largest torrent or link sites. In 2010, execs at Paramount Pictures estimated (in testimony to Congress) its profits at between $41 million and $300 million per year, with the range reflecting different assumptions about its subscription rate. The Justice Department’s recent indictment put the number below the low end of the range—committing to only $175 million in total revenues since 2005–under $30 million/year–and reflecting a roughly 7-1 split between subscriptions and advertising. There are no estimates of how much of this came from legal sources.

In contrast, it’s hard to see how this model remains lucrative. Storage costs are falling rapidly, and there are no barriers to entry or significant network effects. For a comparable market, look to the highly competitive web hosting business rather than search engines or operating systems, which have more characteristics of natural monopolies. Many companies–including Megaupload–already give large amounts of storage away. Many compete for “premium” users, either with inducements or bundling with other services.

$30 million a year is still decent — but for one of the largest sites on the internet, it’s actually pretty dismal, compared to what other sites of that size can earn. The fact that Dotcom was an egotistical show-off who loved throwing around money doesn’t really mean that much. Hell, it’s pretty easy to find any number of entertainment industry folks who are just as bad, if not worse, in just how ostentatious they are with their wealth. But people don’t automatically assume that Jay-Z is a criminal because he spends $1.5 million to close off an entire floor of a hospital for the birth of his daughter. Megaupload may have broken the law, but to automatically jump from saying that because it made some money, to it’s all because of infringement, is a leap in logic without facts. But, more to the point, if Megaupload was such a huge portion of the problem — as the US Chamber of Commerce has insisted — the fact that we’re talking about just $30 million in revenue (some of which is from legit sources) really suggests that very few are making much money in the “piracy” business (despite the horror stories about pirates rolling in cash and funding terrorists and organized crime).

Karaganis went looking for more detailed numbers, and in almost every case, it looked like being involved with such a service was not a particularly profitable endeavor:

• The Swedish trial of The Pirate Bay trial in 2009 became an occasion for all sorts of competing estimates of revenues. Record industry group IFPI estimated the site’s revenues at $3 million per year. The MPAA described $5 million in revenues. But prosecutors endorsed a much lower number: $170,000 from advertising (against what the defense characterized as $112,000/year in server/bandwidth costs and $100,000 per year in revenue). This is for a site that appears consistently among the top 100 visited sites in the world.
• NinjaVideo, a Brooklyn-based movie indexing site whose owners were arrested in 2011, was alleged by prosecutors to have made $500,000 in 2? years. After the site began to make money, the four administrators split the revenue, netting around $33,000/year each after expenses. http://prospect.org/article/ninja-our-sites . Hana Beshara, the site’s primary owner, was sentenced to 22 months in prison under the US No Electronic Theft (NET) Act.
• Brian McCarthy, the owner of Channelsurfing.net, a Texas-based sports streaming site, was alleged by prosecutors to have made $90,000 over five years. http://prospect.org/article/ninja-our-sites He also faces jail time and fines under the NET Act.
• Immigrations and Customs Enforcement (ICE) made some partial revenue estimates for targets of its 2010 domain name seizure program, Operation In Our Sites, based on information from advertising network Valueclick. According to ICE investigators, Torrentfinder, a BitTorrent site, made about $15,000 in ad revenue from Valueclick over a year in 2008-2009. Onsmash, a music link site, made around $2,500 in 2009-2010.

From there, Karaganis reached out to a number of torrent sites, to see if they’d share some data on how much money can really be made. And the results, again, showed very little money to be made. The sites all had decent hosting costs that they had to pay… and the revenue really isn’t that impressive:

The picture that emerges from the survey is one of financially fragile but low cost operations, dependent on volunteer labor, subsidized by users and founders, and characterized by a strong sense of mission to make work more widely available within fan communities. Few such sites make or seek to make money. Many are specialized communities exchanging media of particular types, genres, or languages. A site like NinjaVideo began this way, but grew into a larger, revenue-making operation.

The key point here is that all of these efforts to “follow the money” or cut off the money flow probably doesn’t matter all that much to many of the people running these sites. They’re not in it for the money, but for other reasons. All in all, it seems pretty clear that there just isn’t that much money in running a “rogue site” — contrary to what the supporters of these bills will tell you.

Filed Under: cyberlockers, infringement, money, studies, torrent sites