December 14, 2021

NAGRA: Pirates Make More Than $1 Billion a Year in the US. PVOD Ups the Stakes.

In a recently published e-book, DEG Member NAGRA-Kudelski Group makes the case that that the economic damage of PVOD piracy is real, with billions of dollars of content value disappearing each year, through customer churn and the siphoning of customers by low-cost illegal services.

KEN GERSTEIN (ABOVE) EXPANDS ON COMPANY REPORT DETAILING THE EXTENT OF THE CRIME.

December 13, 2021 | In a recently published e-book, DEG Member NAGRA-Kudelski Group makes the case that that the economic damage of PVOD piracy is real, with billions of dollars of content value disappearing each year, through customer churn and the siphoning of customers by low-cost illegal services.

In an industry as competitive and dynamic as content distribution, NAGRA notes, the hybrid PVOD/theatrical release strategy adopted by multiple studios during the COVID-19 pandemic has had some success globally, and particularly in the U.S., sustaining movie revenues and growing SVOD subscriber numbers. Illicit services can often look legitimate to consumers, however, and pirates can make digital content available within hours of its legal release.

DEG recently spoke with Ken Gerstein, VP NAGRA Anti-Piracy and NexGuard, for more perspective.

DEG: In the e-book, you cover specific estimated piracy losses as a result of pandemic-era hybrid theatrical/digital releases. (Such as Black Widow‘s estimated $50M – $70M revenue shortfall and second weekend revenue drop.) What’s your assessment overall of the piracy toll on PVOD/hybrid releases this year?

KG: We’ve been tracking piracy trends closely over the past few years, especially since the start of COVID, and we’ve seen an accelerated shift in consumer behavior, where more and more people have been consuming their content via OTT distribution. Pirates’ behavior changed with that and it became easier for them to pirate content because they didn’t actually have to have a physical set-top box in their home. Today, with high value cinema releases brought online the same day as in theaters, pirates are using all possible techniques to steal content as early as possible and restream it for a huge profit.

DEG: Do you have specific numbers regarding lost revenue?

KG: We estimate that piracy usage for top movie content goes from 15 percent of the potential market in advanced markets to 50 percent or more in emerging markets. According to a study we conducted, pirates make over $1 billion a year in revenue just in the U.S., with a similar figure for the EU. With PVOD, the stakes increase significantly as movies are sometime sold for a fee on top of the subscription to the baseline SVOD service like HBO Max or Disney+ or Peacock, or used as a marketing subscriber acquisition engine to grow the service user base. Either way, lost revenue is real and growing, though the pain is mainly perceived at first as “slower than expected revenue growth”, resulting in several billions of dollars of lost value per SVOD service over time. Investors are starting to see the issue.

DEG: You mentioned the evolution of how pirates are getting content. How is that happening?

KG: Pirates need high quality content to attract consumers. There are now ways for them to get at least an HD, and in some cases a 4K HDR, copy of the content for redistribution. There are two main ways for pirates to capture the content. One is simply to get a subscription to get high quality content from the source – and if they want to be truly anonymous, they get a subscription with a prepaid credit card and then they restream content from a cheap mobile device so they’re not even in a fixed physical location.

The other way that is also becoming common is credential hijacking or bypassing of service security measures, including stealing content keys to access the content stored in the CDN.

If leaks still happen, there is a process of removing content as its discovered on illegal file sharing and streaming sites. There’s a whole ecosystem to take down content, every content owner does it but it’s a time-consuming cat-and-mouse process that often delivers results too late. Content owners need to try to counteract leaks faster and break the current pattern where consumers become too accustomed to getting content free of charge — that’s the issue.

At NAGRA, we have multiple solutions to tackle these security challenges, including industry-leading watermarking solutions to help SVOD platforms be more robust, make it as hard as possible for pirates to steal high resolution content.

DEG: What’s your perception of the way services are dealing with credential sharing?

KG: It’s a challenge for any consumer brand to strike the right balance with their subscribers. It is an awkward position to be in for an SVOD provider as you want to grow reach, have as many people as possible in a given family to discover the service, while also wanting to avoid large scale account abuse. But the area of subscriber growth is one that their shareholders are taking very seriously. So, if credentials are being shared and they’re facing competition from other services, the issue does need attention.

DEG: The e-book lays out multiple market challenges to PVOD, including that those illicit services often look genuine to consumers; that pirate services may be available in countries where major legal SVOD services are still not available; and that pirate services can be priced lower than legitimate services. How do you see these challenges manifest differently inside and outside the U.S.?

KG: Outside the U.S., because there is more price sensitivity, the impact is far greater if consumers can get access to a much lower cost option for titles or services that they want to use. Hollywood studios had issues in the past due to different timing of theater releases. For instance, if consumers couldn’t get access to a movie early enough in a territory, they would try to get the pirate version. Now the issue is more price, and not wanting to have multiple subscriptions in some territories. If people are not accustomed to getting content in a legitimate way, or they can’t afford to, they will seek out another way to get that title or that subscription.

In some cases, consumers may not even know they are using pirate services. Some services provide a very high-quality product masquerading as a legitimate service. The industry needs to educate consumers, in the U.S. and every territory, that they may be accessing a service that looks good but that may be a pirate service masquerading as legitimate.

DEG: When acquiring and using OTT services, some consumers do experience subscription fatigue, as well as challenges in search and discovery, and less than optimal user experience. How can improving things like discover and user experience help fight piracy?

KG: In the U.S., there is a demographic breakdown in how likely someone is to pirate. Usually in high school or college, or shortly after, is where people tend to seek access because they don’t want to spend money on a subscription. Other demographics are less likely, but there is some fatigue now that once you cut the cord there is often what’s referred to as “content stacking” or the stacking of multiple OTT subscriptions. This is starting to be a concern for the industry.

NAGRA has user experience expertise and solutions, and we engage with service providers to look at super aggregation and deep linking side of the business, in terms of how we can help make that connection to the content that “you want at the moment you want it, regardless of how you have to get there”. If we can remove some of that friction in accessing content for people who are willing to pay for it, that will relieve some of the pressure.

DEG: NAGRA advocates a clear, industry consensus on anti-piracy strategies to ensure that content creators protect their investments and generate expected revenue. How should the industry come together to do this? How can DEG help?

KG: An important piece in getting an industry consensus is measuring the problem and having consensus on how serious the impact is. However, in a fast-growing and highly competitive market like OTT streaming, everyone is keeping market data secret for obvious business reasons. Nevertheless, the industry as whole needs to come together to quantify the piracy risks and its impact to the business, with the goal to share insights and best practices to tackle the piracy challenge.

A major step would be getting all key partners within the ecosystem to actually “play ball” together, including the ISPs, cloud hosting providers and the CDNs, which can be inadvertently helping pirates get access to and deliver the pirated content. Looking at this across multiple providers is a big undertaking across the industry, yet this is truly a win-win business case. Great content needs legitimate funding, that then drives the whole ecosystem. Over time, piracy will hamper the investment in content if it continues to cripple the return on investment.

We have seen some of the SVOD services or providers start to do this on their own and experiment, but it would be more meaningful if it had more reach. Due to antitrust laws, collaboration usually needs to be done through an industry body, and we see that DEG, or some other organization like the SVA, could make it happen. One thing is sure, it is now time to ramp up the industry efforts for both scripted content, and sports as well.

Download a copy of the NAGRA ebook “Piracy Has No Boundaries Protecting Revenues in the Era of PVOD” here.