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January 16, 2015

Against Armchair Advocacy

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Recently, Eli Dourado at the Mercatus Center posted a blog in the wake of the Sony attack discussing stolen correspondence and privileged documents from the MPAA, which were leaked as collateral damage. I’m particularly disappointed to see Eli engaging in hyperbole that borders on dishonesty when he claims content owners are trying to “censor the Internet” and that MPAA is engaged in a “war against the Internet.” Preventing illegal activity on the Internet is not censorship, any more than preventing illegal activity on the streetcorner is censorship, and to use that language is sloppy, inaccurate, and even dishonest. This kind of hyperbole is often engaged in by activist groups, but is a surprise coming from some who claims to be a serious policy analyst at a serious policy organization. It’s also ridiculous for Eli to suggest that the whole episode surrounding Sony Pictures and the movie “The Interview” was a financial success for Sony. In truth, Sony has been devastated by the experience.

He suggests there are two lessons to be learned:  1) that the MPAA is trying to “censor the Internet” by reviving the Stop Online Piracy Act, the much maligned 2012 legislation aimed at combating online theft; and 2) that the extraordinary circumstances surrounding the release of “The Interview” are proof positive that movie studios should bypass theatrical exhibition altogether and release their films online as soon as the director yells, “cut!”

At the outset, it is troubling that when we have just witnessed an unprecedented attack by a rogue-state on an American company, people continue to focus on salacious details revealed in stolen material rather than the big picture. Here, Dourado chooses to exploit the attack to perpetuate stale narratives to support his disdain for copyright.

To justify his claims regarding SOPA and Internet censorship, Dourado points to press reports that MPAA encouraged state attorneys general to take enforcement action against movie and TV piracy. Dourado see this as an example of MPAA’s “war against the Internet.”

That movie studios and their trade association are exploring ways to educate law enforcement at all levels of government about what is widely recognized as rampant online theft should come as no surprise. It may “shock” Dourado, but content based industries that invest billions in developing and distributing their products have every incentive and right to see those works protected from theft, thereby encouraging more investment, innovation and consumer choice.

But setting aside exaggerated claims regarding SOPA, what is more surprising is Dourado’s apparent (or willful) ignorance of the marketplace, media industry economics and the circumstances surrounding the Sony attack.

For instance, Dourado suggests that studios must “begin now to learn how to make money through online distribution.” However, as the MPAA notes on their website, in the US there are currently more than 100 legitimate websites offering access to legal online movies and TV shows (more than 400 worldwide). And those sites appear to be populated with high quality content, not just titles once relegated to discount bins. Indeed, KPMG recently released a study concluding that 94 percent of the more than 800 titles studied were available on at least one of thirty-four online services surveyed. And recently, to help connect consumers with particular movies or shows of interest to them amongst so many options, the media industry has created a new search tool ( enabling consumers to find legal online sources for content. None of these actions seems consistent with an industry at “war against the Internet.”

Dourado also claims that “[The Interview’s”] online release was a success” demonstrating Hollywood’s need to eliminate the theatrical window (when movies are exhibited exclusively in theaters). This despite his own observation that the movie only made $31 million in online sales and $5 million at the box office. According to IMDB, the movie cost $44 million to make, not including marketing costs, which can easily double a movie’s production budget. And in this case, the film garnered more free publicity than perhaps any movie in history, which presumably gave sales a bump. Also keep in mind that theaters generally keep 50 percent of box office revenue and online distributors keep 30 percent of sales. So by my calculations, Sony made $21.7 million from online sales and $2.5 million from box office revenue for a grand total of $24.2 million, or 55 percent of what the film cost to produce (again, not including marketing). Call me crazy, but I’m not aware of too many investors eager to risk capital on ventures offering those returns. No one denies that the Internet is an exciting medium for content creation and distribution, but holding up “The Interview” as a justification for abandoning other distribution platforms is a stretch.  

Perhaps most disappointing is Dourado’s blithe dismissal of the “comically implausible threat of North Korean terrorism” levied against Sony and movie theaters. While I myself was at first skeptical of the North Korea link, the best information suggests that Sony was the victim of an unprecedented attack by a rogue state, not to steal social security numbers, but to destroy the company in retaliation for speech. These are not idle threats. That’s easy for him to say when he’s not the CEO of a studio or theater chain who has to think twice about terrorist threats which could put their customers in harm’s way. And cyberterrorists had just demonstrated their reach.  

The attack on Sony represents a possible turning point in how America views online crime of all kinds, including intellectual property theft. Invocation of SOPA is a distraction from the obvious lack of rule of law online demonstrated by this episode. Responsible stakeholders should focus on how to craft solutions to criminal activity on the Internet, not lazy armchair quarterbacking regarding Hollywood’s business model.

Let's say one more word on armchair quarterbacking: It’s clear that Eli thinks he knows better than the movie studios themselves how they ought to be distributing their content, but isn’t that kind of arrogant? Usually, it’s the Left that stumbles into the Knowledge Problem, asserting that they know better than capitalists how the capitalists ought to be deploying their capital. When net neutrality activists advocate that they know better than ISPs how broadband networks should be managed, I’m betting Eli thinks they are out-of-bounds. But isn’t Eli doing the same thing? Exactly how much time has Eli spent making risky, extremely expensive entertainment content and selling it through a variety of channels? Wasn't Eli's one venture into Hollywood distribution issues kindof an embarassment?

Yes, Hollywood is also subject to the knowledge problem, but it's reasonable to assume they have more knowledge of how their business works than do armchair advocates.

It’s not policy analysis to try to push an industry into operating the way you think it should operate. It’s advocacy, and arrogant advocacy at that. Inappropriate for policy groups, in my own humble opinion.

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