Warner Bros. announced yesterday that it will sell movies and TV shows online, and distribute them using BitTorrent. In the same vein as my editorial Pirates are customers too, Warner Bros. realises “If we can convert, 5, 10 or 15 percent of the illegal downloaders into consumers of our product, that is significant.”

A New York Times article states “…in the week ended May 2, an average of 47,069 people were in the process of downloading the movie ‘The Chronicles of Narnia’ using BitTorrent”. This likely means that hundreds of thousands of users will download that single movie. Assume similar numbers to other WB content, like “Harry Potter and the Goblet of Fire”, and WB is addressing millions of potential customers.

Warner Bros. will make 200 titles available beginning Summer 2006, becoming “first major studio to provide legal video content via the BitTorrent publishing platform” (see press release). To prevent unlicensed use, viewers will need to enter a password before opening a file, and the file will somehow be keyed to the user’s computer. Further details on the underlying mechanisms are not yet available, and it is not clear whether BitTorrent will provide this service.

Some express concern with ease-of-use and restrictiveness – I agree that restriction to a single computer is a hassle, but I suspect that the interface will be navigable to the neophyte.

If successful, WB’s move could lend credibility to BitTorrent, whose protocol has a reputation for distributing content illegally. While iTunes has attracted the likes of ABC and Disney, BitTorrent predominantly features free content. Since each BitTorrent downloader also uploads chunks of each file, BitTorrent likely has less infrastructure overhead than iTunes. Apple could be looking at a real competitor in the arenas of movies and television.

Media companies are reluctant to embrace electronic distribution of music, movies, and television. The entertainment industry tends to view the Internet as a threat to traditional sales rather than as a new way to reach customers. The RIAA and MPAA have been addressing the “problem” by suing P2P users into submission, and these efforts have left a wake of diminished privacy, innocent victims, and reduced freedoms.

The industry refuses to recognize that each pirate is a potential customer. Sure, the P2P user base has it’s share of freeloaders, but there are numerous users who would likely pay for a similarly convenient legitimate service. Three announcements made today illustrate three potential models to turn pirates into customers.

1. Apple renews $0.99 contracts — Click-and-mortar
2. ABC offers streaming television — Embedded advertising
3. Napster offers free music — Voluntary Collective Licensing (sort of)

Click-and-Mortar

This basic online store model — paying individually for each media downloaded — is the natural evolution of driving to the store and doing the same. iTunes popularized this model with $0.99 songs and $1.99 television programs, and it now accounts for 80% of the US digital music market. So why don’t the big labels offer their own downloads? points out that such a middle man may be a necessary, because “‘the consumer buys based on the artists, not the labels…. Each label will have a severely limited catalog of its own artists…’” -redherring.com

The dependence on such a middle-man reduces labels’ abilities to set their own prices. The flat $0.99 contracts were renewed today, despite the fact that Warner Music, EMI, and Sony BMG have all expressed interest in a more flexible price scheme. I fear that these big labels will eventually force the issue, in which case downloaded music might actually cost more than a CD. The same public who buys $2.99 ringtones will probably be happy to pay more than $0.99 for an entire song. I am also skeptical of the long-term viability of $1.99 television shows at a time when viewers can legitimately watch the same shows in HD for free.

Bottom line: The simple and familiar Click-and-Mortar model is here to stay, despite minor setbacks.

Embedded Advertising

Mandatory ads are well-suited for television, because this has long been the accepted paradigm. AOL’s In2TV offers classic TV shows for free. This is an all-out win: content owners can make money with old properties, advertisers have more ad space, and consumers have convenient access to the content.

For a two-month period beginning today, ABC is offering free streaming of Desperate Housewives, Lost, Alias, and Commander in Chief. The episodes are available after a show airs, and are funded by sponsors’ mandatory ads. This may actually encourage viewership of these serial programs because users can more easily catch missed episodes. In a time where DVR’s make easy to skip commercials, this could be a potential benefit for consumers and advertisers alike.

Bottom line: Embedded Advertising funds the web, and has funded television for even longer. It will continue to be applicable for online television.

Voluntary Collective Licensing

The EFF supports collective licensing, wherein the music industry provides licensed use via collecting society. Users would pay a nominal monthly fee ($5) directly, or as part of an ISP price, for unlimited access to the works owned by that society. The collecting society would then distribute funds to copyright owners based on metered popularity. While this may sound impractical, the EFF counters that this exact model is still in use by broadcast radio, and was adopted after the industry was unable to “sue radio out of existence”. ASCAP and SoundExchange are the preeminant collecting societies in the radio world.

In this model, labels and artists pay absolutely nothing to distribute their works, relying instead on the existing P2P infrastructures. This presents logistical problems for enforcing licensed use, but those problems are not insurmountable. The restructure announced by Napster.com today comes resembles VCL from the user perspective — five free previews, $9.95 for unlimited play, and $14.95 for Napster to Go, which allows transfer to portable players (see gizmodo.com, napster.com).

To further endorse VCL, the EFF has a petition in support of collective licensing, and for itself to act in the public interest in any copyright hearings. Their petition summarizes their position:

We oppose the recording industry’s decision to attack the public, bankrupt its customers and offer false amnesty to those who would impugn themselves. We call instead for a real amnesty: the development of a legal alternative that preserves file-sharing technology while ensuring that artists are fairly compensated.

Bottom line: VCF, the most radical approach of the three, offers a huge untapped market. Assume that 10 million users are willing to shell out $5/month, and that’s $600 million/year.

Conclusion

Some distribution methods are better suited to certain media, and the above strategies will likely coexist. Hopefully the industry will realize that embracing potential customers rather than suing the public will yield greater profits.