Amber Cazzell

PhD, Social Psychology. Visiting Scholar at Stanford, CSO at ERA.

Hollywood Crypto: Behavioral Economics of Piracy, Netflix, and the Future!

Dear (old-school) Hollywood, let’s chat frankly about pirates, Netflix (and other over-the-top video streaming services), and the battle for quality media. I’m going to be brutally honest with you about your failing monetization strategy. It’s going to hurt a little bit. But, if you hang in there with me, we’ll get to the good stuff: a strategic new way to eradicate revenue losses due to piracy and those pesky third-party subscription providers that scrape off the top.
So, let’s start with a history montage and some bad news.

A history montage and some bad news.

In 2001, BitTorrent was released and completely changed the face of piracy (and the internet as a whole). Now, rather than piracy largely involving physical VHS or DVD rips, anyone with an internet connection could access and host pirated content on demand from the comforts of home. And guess what? No amount of lobbying could stop it. At its peak, piracy accounted for 24% of global bandwidth traffic. Pirated content is now visited over 78.5B times per year, and it is estimated that piracy takes $2–6 billion from the TV, movie, and music industry, plus an additional $456 million dollars in lost would-be advertisement revenue.
What’s worse is the consumer adoption of and your (Hollywood’s) response to this catastrophe. 32% of consumers watch pirated content, and just shy of 40% of consumers don’t really care that movie studios lose profits to piracy. Thus far, avenues taken to stop piracy have included takedown notices, attempts to censor pirating websites from searches, and ads that tell consumers “piracy is not a victimless crime.” But problems with these tactics abound.
The internet is moving toward encryption and decentralization, which is a truly nasty combination for trying to enforce piracy laws via takedown notices or by filtering Google searches. Sending takedown notices to BitTorrenting websites is like trying to play the most epic game of whack-a-mole while blindfolded. Of course, you’ve tried to be a bit smarter by unplugging the whack-a-mole machine altogether — make Google cut off pirating supply lines by pre-filtering copyright infringement sites from search returns. Brilliant! But, now you know that failed, too. 85% of the revenue that keeps pirates afloat comes from advertisements, and the one and only Google is placing the greatest share of those ads. Asking Google to pre-filter their search results was like asking them to work toward losing revenue. No wonder they didn’t bite.
With regards to anti-piracy ads: First of all, most consumers see post-production movies as a sunk-cost and compare the additional cost to you of their streaming an illegal copy from a third party ($0) versus not watching at all (also $0). So, you might be a victim, but they feel no more responsible than the Kitty Genovese bystanders did. Second, these ads actually normalize piracy, and the actions of others speak louder than your explicit directives (what you’re saying is “we movie studios are the victims of piracy”, but what they’re hearing is “lots of people are doing this, so it’s actually normal behavior”). Indeed, your very own employees are betraying you by streaming pirated films from studio computers! Although these ads attempt to create cognitive dissonance (a guilt trip, if you will) in the pirate and the consumers of pirated content, most people reduce cognitive dissonance by changing their attitudes rather than changing their behavior. Effectively, these ads are fueling the “I don’t care about the lost profits” attitude. Oopsie.
Meanwhile, while you were distracted by the war waging on the high seas, a more formidable opponent was gearing up that would give you and pirates both a run for your money. In 2007, Netflix launched its online streaming service, the streaming service that would inspire the likes of Hulu, Amazon, etc., to take grabs at your money in new ways. At first, Netflix and other streaming services seemed like distribution complements. But contracts weren’t as lucrative as you’d like, and conventional wisdom advises avoiding third party revenue scrapes off the top. The aftermath of this odd and complicated partnership is the bizarre network of frenemies it has created.
Since the introduction of Netflix streaming, BitTorrent was dethroned as the internet traffic king, falling from the 24% mentioned earlier, to the 3.5% it currently stands at. Netflix grew into the new king of broadband, and now accounts for nearly 37% of internet traffic. Netflix’s massive bundling allowed it to drop large lump-sums of money to fund binge-friendly whole-season packets of content at a time. The new binge phenomenon did three important things: 1. It bolstered their subscriber base, 2. It provided the sort of security that lured your Hollywood talent to taste the forbidden fruit of Netflix, and 3. It let Netflix play scofflaw with Nielsen ratings — a luxury you certainly haven’t gotten to partake.
The inertia of traditional cable bundle subscriptions held for a while, but now there is a steady trend toward cord-cutting (cancelling cable subscriptions in favor of streaming services instead). This cord-cutting is projected to cost AT&T $1.2B and Comcast $1.6B in 2018 alone. It’s no surprise, then, that these telecom providers have been quick to snap up your big media companies, whether you like it or not. Now that Netflix (and their partner T-Mobile) is threatening AT&T, Comcast, Verizon and the like, they need you as a sort of content hostage to keep their subscriber count up. But here’s where the landscape of frenemies gets really complicated: telecom providers actually want people to use broadband — like massive amounts of it. And Netflix is actually doing a phenomenal job of ensuring that.
So, Hollywood, the brief history of your painful blunders is now up-to-date. The question then is, how do you compete with Netflix without shooting your parent companies in the foot? Toughie. This whole debacle reminds me a little bit of Hamlet…but I digress, because I promised that this would end in comedy. So, here’s my comedic proposition: perhaps piracy is your answer to Netflix.

Moving forward.

The inverse relationship between broadband being used on BitTorrent piracy pre-2007 versus on Netflix post-2007 strongly implies that the two are substitutes, and I would go so far as to say competitors. And this sort of makes some sense. Some Netflix subscribers are cord-cutters, joining Netflix because it’s cheaper than cable and has increasingly high-quality content to select from. Some Netflix users (and I mean uusserrs), are actually just the subscriber’s friend’s mom’s boss’ third cousin tagging along onto the account because they are too cheap to pay for anything besides their internet bill. Bottom line — Netflix users are nearly as stingy as pirates but pay (or tag along) to avoid UX hassles. The enemy of your frenemy is your friend. And thanks to some recent advancements in the infrastructure of the internet, I think that you can actually all just be friends.
Some prophets have been demanding a decentralized internet since it’s birth. Still, it’s only in the wake of the Cambridge Analytica scandal and the repeal of Net Neutrality that it’s even been brought to the layperson’s peripheral view. People are angry that their data has been mined, and yet also scared that your parent companies are going to throttle their ability to binge-watch Game of Thrones and post selfies. More privacy-conscious technical folks are starting to turn toward more user-ethic driven dApps, such as Metamask and decentralized versions of social networks like YouTube and Reddit.
It’s this sort of crowd that is also building out new decentralized storage, bandwidth, and computation infrastructure, and incentivizing trustless cooperation between all parties with “cryptocurrencies”. These are sometimes called utility tokens. Filecoin, for instance, is creating a utility token which is exchanged for the storage of files on a decentralized network of devices. AXE is doing the same, except for bandwidth and telecommunications.
Now, before your eyes glaze over, keep in mind that this is extraordinarily relevant to you, Hollywood. You’re going to have to learn to sink or swim in this new environment, as pirates are already gearing up to incentivize copyright infringement via anonymous payments. Think Silk Roadeconomy centered entirely around the illegal distribution of your IPYou must evolve and adapt faster than them, or you’ll be left for extinction.

Out Game the Game Theorists

I have predicted before the rise of an additive-only economy, one where everybody wins. My parent company, ERA, is a team of psychologists, programmers, physicists, and philosophers who have built the technologies and incentives to change markets, and already have changed markets.
Your beloved content can be served up to power or be the next crypto-currency. One, if you’re bold enough, that will automatically track every (wo)man-hour of viewership of your content into a decentralized digital ledger, or “blockchain”, regardless of how or when they accessed it — offline, online, pirated, through partners, or otherwise. And cherry-on-top: you’re not going to have to pay one penny to tech bros to develop it, host it, maintain, or distribute it.
Media is one of the first things in human history that became a post-scarce resource, you should celebrate and embrace that (after all, Google and Facebook did, and they’re much more profitable than you), not fight it with the DMCA. You hold the grail to the fountain of youth, digital goods — once produced — can be resold an infinite number of times for the mere costs of sending bits of light through fiber optic cables. AXE quantifies the “burnt” electricity cost on this bandwidth transfer, much like Bitcoin (whose second ever developer is on our team) does for solving mathematical puzzles in a lottery game. Except you, Hollywood, mine points for every time your movie is transferred.
Let’s be honest, ContentID did work after $60M and years of development, but Google scrapes so much off the top it wasn’t even worth your time. And it profits the best on the content that YouTube loves — short viral media that keeps users suckered into a never ending dark UX clickbait hole. Not the quality content you (and billions of people) love, of long-form story telling.
Believe it or not, this isn’t even a pipe dream. Steem has already paid out $40M in fiat to reward content on its blockchain. While that may hardly be budget of even 2 TV shows, it is at least proof that a blockchain variant of ContentID is possible. More importantly, it is already a more popular website than HBO, globally ranked in the top 2K in just a couple years from launch, while HBO is globally ranked at 5K+ and beyond.
Here’s how AXE could make a Hollywood Cryptocurrency (“CC”, I affectionately call “Pirate Booty”) possible:
Step 1: Cryptographic signatures ensure you are credited your viewership ratings on the blockchain, much like ContentID, but as you’ll see, this will work across any platform (yes, even in the real dark web). Result: You’ve digitally marked your territory on your IP. At the end of the day, people want the authoritative high-quality source material, not the bootlegged ripoffs. Even pirates have pride in their bounty hunting achievements.
Step 2: Control the experience around the consumption — the UI, the UX, the branding, etc., if you want, time tier it through partnered theaters where you charge royalty on the scarce resource of the seat, but once the hype is over and you’ve won your Oscar, release the original to the web for free (“What?! I thought I was going to make money,” you might say. Yes, sit tight.) Result: This makes it so the inevitable “Pirate Booty Coin” (and Netflix) cannot compete by offering a lower price or a different (legal or illegal) incentive.
Step 3: The enemy of your frenemy is your friend, do the unthinkable and let pirates become your CDN. They are good at tech, and let’s face it, you’re not, or else you would have built and owned the entire platform — but the tech bros baited you into Netflix, Prime, etc., instead. (Even Silicon Valley can’t rival pirates, P2P decentralized networks were pushing 40% of the world traffic by 2009 yet it took Google until almost 2014 to scale up to 40%.)
Result: Viewers will flock to your content on legitimate sites that run your experience and branding yet are able to efficiently torrent from pirate and peer CDNs (pirates will basically become the Uber drivers of bandwidth for you), as opposed to sketchy virus-infested streaming sites. They wont bother scrubbing your digital signature, because they will gain AXE tokens for verifying the cryptographic integrity of your content as it is sent through the network (the proof-of-propagation, as it is called). Meanwhile, you’ve lowered your infrastructure maintenance costs to $0, and reduced latency for your consumers.
Step 4: The only thing that needs to be running Pirate Booty CC is the UX. That’s it, and the beauty of decentralized protocols, it doesn’t matter whether pirates or partners do, the ledger is enforced by the end peers themselves regardless of platform! As files are transmitted peer-to-peer, the Pirate Booty CC algorithms scans the network for your digital signature, then adds points to the studio’s wallet as it is streamed or rewatched offline. Result: An unprecedented magnitude of accuracy, security, precision, and scale compared to Nielsen ratings or even platform specific metrics on YouTube, Hulu, or others.

Step 5: Cash Out.

Hollywood CC points reflect the real world viewership value of your content. There are many different ways this could be used to make a quick buccaneer — Arrrgh — buck — durn auto-complete! And you’ll be feelin matey fine about d’em pile of digital gold.
  1. The boring way outAdvertisements, and yes, this will bite you in the long run. The wealth of viewership stats, even demographic (if forced, but we also don’t recommend that) data that ERA’s system could hash could then use ERA’s realtime graph database, GUN, to inject personalized and contextually relevant ads directly into the stream. Which btdubs, since these ads are also delivered via decentralized routes, most ad-blockers would have to be rewritten from scratch to not depend upon techniques like crowd-sourced blacklisting of advertiser’s centralized domains. We do not condone this cash-out method, and will build anti-ad technology if needed, as it is short sighted on human psychology, ethics, and economics.
  2. The subsidy. Quite honestly, the predictable result of Net Neutrality’s loss (which AXE can bring back, without needing government enforcement or regulation — a nod to our crypto-libertarian fans) and the telecom trend of swallowing up studios for a subscriber-centric content play, is the cash out that is already happening. Create good IP, distribute it for free to drum up popularity, then sell the IP. Your consumers will be stoked about this arrangement because it means that they are getting free access to your content without having to risk virus-ridden streaming sites with sketchy ads, and all at low latency speeds. All they will need to pay for is the bandwidth they use — which they are already doing.
  3. Stakeholder Credit. As one of our Hollywood industry friends is experimenting with, the Pirate Booty CC could be a security token, one that represents stock in content as it appreciates (or tanks) over time. How do you get shares? Through Hollywood blockbuster ticket pre-sale financing. Fans of a film franchise or TV series could outright invest alongside 21 Century Fox (maybe they do 1:1 matching funds) before movie production even begins. If the series does well as a whole, stakeholders’ (both customer, investor, distributor, or otherwise) value appreciates.
  4. Resource Capitalization. For the closet capitalists out there, the worth of a thing is at least equal to the cost spent in extracting (oil, gold, etc.) or producing (bananas, etc.) it, plus whatever value-add a speculative “stock market”-like consensus believes it has. The fiat cost of electricity “burnt” mining a Bitcoin is the necessary pre-requisite capital put into the thing. Thus a Bitcoin represents a “store of value” (much like how a battery can store electricity) that can be an asset later liquidated. The unique thing about Pirate Booty CC is that it represents the demandaround the “burnt” AXE bandwidth (specifically, value over and above the cost of sending any random bytes through radio towers or pipes). It is easy to then convert the Pirate Booty CC viewership ratings into its calculated AXE value (the actual bandwidth cost), and then liquidate that in exchange for any stable resource that is a store of value (such as fiat, or Bitcoin).
Here is a concrete example, your parent company AT&T will stream your movie once to a local peer (let’s say neighbor Joe on the block) and charge them full price. Then, when all the other neighbors request that episode it’s served to them from the local peer, but AT&T gets to charge the full price even though there is a near $0 actual bandwidth cost for them. Local propagators = low latency = happy customers and more bandwidth exchanged! Plus it reduces a whole lot of traffic off of AT&T’s main internet backhaul.

Win + Win

So, let’s breakdown how this new monetization scenario plays out for all stakeholders:
Consumers: Win! Pay telecom for bandwidth, get subsidized Hollywood IP, become stakeholders in their favorite shows and its telecom parent, plus use their credit to exchange movies with their friends (possibly on different networks, with their own catalogue of content, or for roaming bandwidth), all using their Hollywood cryptocurrency credit card!
Pirates: Win! Telecoms or customers pay them AXE for providing hyper efficient decentralized content distribution, P2P. I bet they’ll be happy not having to broker deals with those sketchy ad companies anymore…
Telecom services: Win! Since you now own much of Hollywood IP, this means you’ll have to embrace the cord-cutting that’s headed your way as free content opens up. But if you’re savvy, it’s possible you’ll make more money by embracing free media access. Let those mechanics drive up bandwidth traffic to unprecedented levels. While bandwidth traffic is increasing, you can enjoy the de-congestion that a P2P network provides — and it’s perfect for locally hosting viral content — like the latest Game of Thrones episode. Meanwhile, you hold the bulk of servers, and you can jump into mining AXE on its decentralized network. You’ll also enjoy all the perks of the Hollywood results outlines below, since you own much of that IP.
Netflix: They will need to decide to what extent to adopt your new business model. If they largely adopt it, then many of the Hollywood outcomes outlined are relevant to them. In order to continue making revenue on the merits of their platform, however, they’ll probably want to do two things: 1. Build you a UX that will makes your brand shine. And 2. Start paying you for earlier tier access (to differentiate against pirates, who *scoff* just have “old” content), since lots of high-quality content is now free, easy, and safe to use. Regardless of the route they choose to go, these streaming platforms are likely to complement big movie studios, rather than compete with them.
Hollywood: Win! You get to tell the stories you believe are worth telling. Oh, and your customers, they’re gonna buy the ticket and disc for it, 2 years in advance — fully funding your wildest car chases and tuxedo casino spectacles. And all those customers are going to share your story with their friends, and their friends, until your story has touched every last soul.
So, Hollywood, you’ve got some thinking to do and some choices to make. It sounds like a risky plunge. But then, you also thought that television and VHS would be the end of your industry since they lowered the barriers to content access. Maybe it’s worth running a Pirate Booty CC experiment on some old content or on a pilot season?
Or, you can go about your safe, traditional way of doing things. You’ve just got to hope that pirates don’t actually get their own movie-bounty cryptocurrency off the ground and that Netflix is nice to you in your old age.
I am building out the egalitarian infrastructure of the decentralized web with ERAIf you enjoyed this article, it would mean a lot if you gave it a clap, shared it, and connected with me on Twitter! You can also subscribe to watchor listen to my podcast!
Dr. Amber Cazzell is an Applied Social Psychologist who has conducted research at Stanford, the University of Queensland, BYU, and Yale.


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