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Playing to the Pirates: A Strategy for Streaming Differentiation

Maxwell Newfield

Northwestern University

MSLCE 464: Understanding the Creative Industries

Jacob Smith

December 7, 2020

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Abstract

As digitization increases in the creative industries, so too does piracy—the unauthorized access

or reproduction of copyrighted content. The film and television industries are in a time of great

convergence as each moves predominantly to streaming platforms. To guarantee long-term success, streaming video services will have to attract consumers away from the cheaper, more convenient pirate technologies. Other creative industries, specifically music, have dealt with piracy by building legitimate distribution methods based on pirate technologies. In other instances, music industry professionals have used piracy practices to understand market demands and offer products appealing to those communities. As streaming video companies compete for viewer times, a company like Netflix—which does not have the support of a legacy media library or infrastructure—should look to media pirates for market data and innovative formatting ideas.

Keywords: piracy, nobody knows, digitization, differentiation.

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Any Netflix customer who disabled the auto-play function might be stunned to learn of

the company’s newest offering. In November of 2020, Netflix launched a web browser channel

in France called Direct that mimics linear television programming. This feature plays a mix of

programming from Netflix’s library that the viewer cannot control. A company statement said

France was chosen for this experiment because often French television viewers, “just want a

‘lean back’ experience,” free from the stressful decision of choosing what to watch.

This type of content formatting is a form of localization, which media scholars Timothy

Havens and Amanda Lotz (2016) define as, “the process of unmooring media goods from their

immediate cultural surroundings and reproducing them in another locale” (p. 255). Netflix Co-

CEO and Chief Content Officer Ted Sarandos told Variety on its Strictly Business podcast that

localization became a critical business strategy after the company expanded to over 130

countries in 2016 (Littleton, 2020). The company observed what people watched and which

devices they watched on, and even how they preferred to pay for the service, then used that

information to generate new, original programing and features.

As Sarandos and company evaluate the Direct channel in France, evidence already exists that it could be popular elsewhere. In fact, literal demands for linear programming from streaming companies were made earlier this year. In March, viral marketing agency MSCHF launched a website and art project dubbed All the Streams that enabled users to view content from myriad streaming video services in a digital window meant to mimic an antique television

(Alexander, 2020). Like Netflix’s Direct, All the Streams ran constantly, and users could not select what played next. The format was a playful reminder of the intrinsic link between the film and television industries and digitization, or the broad technological change in the production and transmission of creative goods and services due to the world’s transition from analog to 4

digital technologies (Havens & Lotz, 2016, p. 250). The site was also a brazen act of piracy, the

unauthorized access or distribution of copyrighted media goods (Havens & Lotz, 2020, p. 258).

An accompanying manifesto expressed longing for the analog days of television saying, “At a time where ‘up next’ tends to be hot algorithmic garbage, pirate radio offers up the idiosyncrasy of human decision across an unrestricted breadth of choice” (MSCHF, 2020).

All creative industries, from film and television to music and beyond, are subjected to the

“nobody knows” principle of production, meaning consumer demand is much harder to predict for media products than in other industries (Havens & Lotz, 2016, p. 30). When covering All the

Streams for The Verge, Julia Alexander argued when streaming companies focus only intellectual property, consumer demands are easily missed. When Netflix responded to French viewer’s demand for an analog TV experience, the company was beaten to the innovation by a

10-person creative agency in Brooklyn over six months earlier. As Netflix fights for customers, the company should look to piracy projects like All the Streams to better understand what media products consumers want and how they want to experience them. Piracy practices and statistics are a critical data set that companies like Netflix must use to understand consumer demands,

augment content or format offerings, and, ultimately, create a product that cannot be pirated.

On the Strictly Business podcast, Sarandos said Netflix sees sleep as a competitor

(Littleton, 2020). The comment was presented as a joke, but it also indicated how seriously

Netflix fights for customer watch time. Netflix released its third quarter 2020 earnings report on

October 20 (Netflix). In the “Competition” section, the first entities mentioned are not industry peers but, “linear television and other big categories of entertainment, like video games and user 5

generated content from YouTube and TikTok.” This highlights how success for Netflix is not

just adding customers but also drawing consumer’s attention away from other activities1.

The earnings report also highlighted streaming investment from two legacy media companies, NBCUniversal and Disney2. Most importantly though, the earnings report announced

a precipitous drop-off in new member signups compared to the third quarter of 2019. These

challenges come at a time when pandemic lockdowns have sent digital piracy skyrocketing

(Roxboro, 2020). Now more than ever, the creative industry concept of differentiation, the process of making a product new or distinct from previous offerings, is critical for Netflix

(Smith, 2020). Production has slowed significantly during the COVID-19 pandemic, which means content differentiation will be difficult for some time (Richwine, 2020). Now might be the perfect opportunity to learn lessons from video pirates.

For Netflix, piracy is more than a digital copy of Hubie Halloween saved to an external

hard drive. In the video streaming world, piracy constitutes any form of unauthorized content

access including using a virtual private network tool to view content exclusive to specific

territories or even sharing passwords among multiple people. Shared passwords can be

purchased on dark net markets for less than the cost of one month’s subscription to Netflix

(Spangler, 2018). Unauthorized stream aggregators are so prolific that some like TeaTV can sell

legitimate advertising around their illicit offering (Graham, 2019).

The anti-piracy firm MUSO studies these sites and all other forms of digital piracy. A

representative from MUSO told me it is hard to quantify lost revenue for individual companies

due to piracy (P. Clothier, personal communication, December 1, 2020). But a 2017 study by

1 In case Sarandos was not joking about competing with sleep for human attention, studies show people are sleeping slightly longer during the COVID-19 pandemic (National Heart, Lung, and Blood Institute, 2020). 2 Legacy media companies are those that were founded before digitization (cite Havens and Lotz). For Netflix, this constitutes competition with serious content and infrastructure resources. 6

Digital TV Research predicted that global digital piracy could cost Netflix and its competitors

over $50 billion between 2016 and 2022 (Clarke, 2017).

Netflix is a member of industry groups like the Alliance for Creativity and Entertainment

that organize against piracy, and the company issues takedown requests under the Digital

Millennium Copyright Act of 19983. But as recently as 2019, the company acknowledge

password sharing is not a black and white issue of infringement (Netflix Investor Relations,

30:43). Executives have even cited piracy data as a tool for localizing content and setting prices

during international expansion (Van der Sar, 2013, 2015). Some critics argue that if Netflix took

a closer look at that piracy data, it could identify new, ardent supporters.

Writing for Vice in 2018, technology reporter Karl Bode argued for a reformation of

media pirates’ public image. Bode cited studies by UK and French piracy regulators Ofcom and

HDOPI, respectively, as well as private organizations like Jupiter Research and the BI

Norwegian School of Management, that show those who pirate media often spend more money

on legitimate content than their peers. Pirates should be viewed not as thieves, Bode argued but,

“as potential customers that simply aren’t satisfied by the options currently being made available

to them.” Bode’s thesis was confirmed by a review of academic studies done for the United

States Patent and Trademark office. Those researchers cited multiple studies demonstrating that

increased access to legal content slowed piracy rates of said content (Danaher, et al., 2020).

Another study by those researchers showed piracy rates of ABC shows decreasing by 25 percent

after those shows were added to Hulu, even though the Hulu service contained advertisements

3 The Digital Millennium Copyright Act of 1998 was an act of the United States Congress to address the changing nature of copyright in the internet era. It allows copyright holders to inform online service providers that the providers are hosting pirated materials. 7

(Danaher, et al., 2014). In case any of those studies were not convincing enough for Netflix, the

piracy inspiration approach was proven to work for an entire industry.

Steve Knopper covers the music business for Rolling Stone magazine. Knopper spoke

with record industry executives recalling the pitch meetings with Apple co-founder Steve Jobs

during an era of industry lawsuits against Napster (2013). In the early 2000s, record companies

were focused on stopping Napster through legal battles. Jobs was interested in the functionality

of Napster rather than the economic threat it presented. Warner Music vice president Paul Vidich

said Jobs’ focus on converting customers was a revelation for the industry. “What Steve was

doing with iTunes was to replicate that type of experience–a vast catalog, available on a singles

basis, with a convenient interface. It had to be easier than Napster,” said Vidich.

I personally crashed my parent’s computer using Napster in a failed attempt to download the song “Ms. Jackson” by OutKast in October of 2000. When the iTunes store debuted in 2003, it was an obvious workaround for the whole family. The program functioned better than Napster while still offering every song I wanted. From my parent’s perspective, the 99-cents-per-song price was cheaper than replacing an entire computer.

My experience with iTunes indicates that piracy has value outside of content but also in format and user experience. Both Napster and All the Streams presented content in a unique way that ultimately proved valuable to legitimate businesses. Notably, each piracy project was motivated by ideology just as much as a desire for free stuff. And while Napster has long since shutdown, thousands of people belong to the MSCHF subreddit and regularly discuss All the

Streams and other projects. That subreddit is an illustration of another value play that Netflix could find in piracy—pirates love to talk to other pirates. 8

A 2007 study by research David Y. Choi and Arturo Perez analyzed pirate behavior

across all creative industries and recommended ways for companies to build off the valuable

information presented by piracy practices (p. 8). The study found that use of an illicit technology

encouraged organic relationships among users and noted that content creators could use those

resources to, “provide a stimulating way for their users to participate in the creative process.”

When acquiring content based on piracy data, Netflix could have offered subscription incentives to piracy communities. Or if a show is popular among media pirates, it could offer an in-app comment functionality to draw the community onto their service. Hulu notably added a chat function for all users this month so it stands to reason that communications functions may soon become an industry norm4 (Welch, 2020). Netflix could even draw inspiration from one of the

competitors the company name checked in their earning letter last quarter, YouTube.

Advancements in digitization lead to convergence, or new connections between media

products or entire media industries (Havens & Lotz, 2106, p. 192). For digital pirates, this means

greater crossover between video and music piracy, which is thriving on YouTube. There, users

are generally free to upload unauthorized copies of hard-to-find albums, which are distributed to

new audiences thanks to YouTube’s recommendation algorithm as well as a laissez-faire

approach to policing copyright infringement on obscure media. Musician and writer Catherine

Sinow noted that these videos often have collegial comment sections where listeners describe

their experience with the album and even share fan art (2020).

These pirate communities drive real world economic success for once forgotten music

works. One such album, Mort Garson’s Plantasia, developed a cult-like following when a

pirated copy hit YouTube in 2015. The re-sale price of the album’s original pressings increased

4 The Hulu chat function currently only works amongst friends but, notably, it is an implementation of a third-party app developed outside of Hulu headquarters. 9

exponentially after Plantasia hit YouTube which led to a reissue of the album by record label

Sacred Bones (Discogs, 2019). Normally, reissuing a 40-year-old synthesizer record that was

created to encourage healthy growth in plants would be a risky creative business decision, but the

project was a safe bet for Sacred Bones thanks to the Plantasia community on YouTube.

That kind of passionate fan engagement that leads to safe business decisions is critical for

Netflix. A 2018 study found that, “perceived content quality is the main driver of SVOD5 satisfaction, and that satisfaction is positively related to intention to continue using SVOD services” (Riekkinen, 2018). Based on Netflix’s stated goals, their product must be more satisfying than every form of visual entertainment and, possibly, as enjoyable as a good night’s sleep. A 2017 economic study noted that streaming companies cannot possibly compete with the

breadth of content with media pirates (Godinho de Matos, et al.). Thus, the value Netflix offers

must be in the ease of use and user connectivity. User interaction data would not be available in

the localization studies Sarandos discussed with Variety because Netflix does not offer these

services yet. But the demand is present in pirate communities. That means every act of piracy is

a valuable piece of data for a company that wants to dominate all human viewing practices.

Mort Garson’s Plantasia indicates an extreme version of the “nobody knows” rule of creative production. But few would have known it was a hit record without piracy. Pirates operate in plain sight every day, indicating demand with clicks and comments. Each one of these pirates is a potential customer for Netflix or other streaming video companies. It is possible one

of these pirates has already made a suggestion or built a tool that will revolutionize the streaming

industry. All Netflix has to do is go and find it.

5 SVOD is an industry term for “streaming video on demand.” 10

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