My Colleague Chris Gilbey, yesterday, mentioned the real value of movies as Digital Content on P2P networks. I thought about his article this morning and decided that "you all" probably haven’t been discussing this, as Chris and I have, for five years, so - I thought I would fill in the gaps with some mathematics.

 

File sharing on the Internet started approximately in July 1973 at an IEEE conference where image scanning and digitization was being presented by researchers from the University of Southern California.

The “file” was a scan of  the 1972 Miss November Playboy Centrefold – Lena Sjooblom.

Post conference follow-ups involved handing out several digital copies of the image to researchers globally.

Over the years, the Lena image has been used so much that she is now dubbed the First Lady of the Internet! The Lena image is now considered the benchmark for testing and demonstration of image compression and transmission algorithms. And interestingly, Playboy, never sued for copyright infringement.

For several years thereafter, files of various types traversed the Usenet and could be found usually archived via Gopher and Veronica servers. However it wasn’t until 1998, that Napster was born and the publicity about file sharing commenced..

Since 1998, P2P file sharing has grown from an almost insignificant 2.5% of volume to over 75% of all internet traffic.

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As bandwidth has grown in availability and decreased in retail value, ongoing internet growth and adoption has been strongly promoted by user developed digital content delivery methods; Napster, Grokster, WIN-FM, Limewire, Edonkey, Emule, Bit Torrent.

 

In the beginning (1998) the modem was the dominant connection method, the available bandwidth 33.6 kbps, was adequate for the distribution of personal music collections.

By 2001, Cable had started to proliferate (read – grown affordable) and we started see movie files on Kazaa. Since the widespread adoption of DSL in 2003, bandwidth has grown to allow encoded lossy[1] movie files to be distributed by at least 20% of Internet users worldwide and this activity accounts for almost 76% of the Internets total file transfer content. By 2005, a report from Internet consulting Company Viant Technologies claimed that over 500,000 movies were being traded on P2P networks daily.

Hollywood and the Music Industry claim that their revenues and profits have almost disappeared because of the P2P file downloader’s.

But P2P file downloader’s are paying for the movies and in Australia at least it equals the same value that the copyright industries are placing on their content.

The other day I purchased a DVD at Woolworths that had three movies on it for $5.95.

Two of the movies were Deep Catalogue (library) (over ten years old), but the lead movie was a recent (within 18 months) Blockbuster.

Movie Aggregation appears to be the latest method for Hollywood to increase perceived consumer value. However, even Deep Catalogue has some value.

Therefore our Calculation with some assumptions

 

Price Comparison Methodology #1 – The Real DVD

	Woolworths DVD
Retail	$                5.95
Deep Catalogue 1	$                0.50
Deep Catalogue 2	$                0.50
Current Movie	$                3.50
Packaging & Distribution	$                1.45

 

So Hollywood expects to receive $3.50 per movie. (This is backed up by the iTunes USA rental price.)

Price Comparison Method #2 – The P2P Model

In Australia, our Broadband connections for an industrialized western nation, are a lot slower and are capped at ridiculously low monthly download allowances in comparison to Korea, Japan and the United States.

Australia	Connection Speed	Mnthly Cost	Price per MB	Mnthly MB Limit
Connection Type
Modem	56	$    9.95		Unlimited
ISDN	64	$   15.95	$   0.053	300
ISDN/DSL	128	$   19.95	$   0.040	500
DSL	256	$   29.95	$   0.015	2000
DSL/CABLE	512	$   49.95	$   0.005	10000
CABLE/DSL	1024	$   59.95	$   0.003	20000
ADSL2/CABLE	2048	$   79.95	$   0.002	50000
ADSL2+	3072	$ 120.00	$   0.002	80000
ADSL2+	6144	$ 180.00	$   0.002	120000

 

P2P file sharing utilizes mainly Emule and Bit-torrent clients. The clients operate on the principle of giving to get, in other words, the more you upload, the faster you can download.  For this reason, most P2P’ers in Australia leave their computers connected 24 hours per day to build up their “peer credits”. The prevalence of this is indicated by Australian ISP’s introducing upload limits on monthly Broadband plans over the last twelve months.

ADSL2 and ADSL2+ is only available in selected exchanges (constantly being expanded) and then only if you are within a 1-5 km range of the closest (ADSL2/ADSL2+ equipped) telephone exchange.

Therefore, the dominant connection speed in Australia is still 512 Kb, so in that respect, the Australian population is equal in technological Internet connectivity capability to the peoples of India and China.

 

Australia	Connection Speed	Mnthly Cost	Price per MB	Mnthly MB Limit	# of 700 MB movies p/mth	Price per Movie
Connection Type
Modem	56	$    9.95		Unlimited
ISDN	64	$   15.95	$   0.053	300	0.43	$   37.22
ISDN/DSL	128	$   19.95	$   0.040	500	0.71	$   27.93
DSL	256	$   29.95	$   0.015	2000	2.86	$   10.48
DSL/CABLE	512	$   49.95	$   0.005	10000	14.29	$    3.50
CABLE/DSL	1024	$   59.95	$   0.003	20000	28.57	$    2.10
ADSL2/CABLE	2048	$   79.95	$   0.002	50000	71.43	$    1.12
ADSL2+	3072	$ 120.00	$   0.002	80000	114.29	$    1.05
ADSL2+	6144	$ 180.00	$   0.002	120000	171.43	$    1.05

 

Unfortunately, the news is not quite so good for the Movie industry in the USA. With very high monthly download Caps (or quite often, no caps) the value of a movie in the USA is at the high bandwidth end of the above graph – i.e.: $1.05.

 

USA	DSL Plans  NO CAP	$24.95/mo
	http://www.pon.net/service/dsl/
Tier 1	384Kbps -1.5Mbps Down 128kbps - 384kbps Up
	or $29.95/mo with year commitment
Tier 2	1.5Mbps-3.0Mbps Down	$34.95/mo
	384Kbps-512Kbps Up
Tier 3	1.5Mbps-6.0Mbps Down
	384Kbps-608Kbps Up	$54.95/mo

 

Price Comparison Method #3

For the purposes of this Blog, we shall assume that all P2P content downloaded is Video (the bulk of Australian P2P traffic – by file size volume) and that most Videos are 700 MB in size.

 

This particular example movie is encoded with the DIV-X[2] version 5 Codec

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 A commercial DVD title which takes 4.7 gigabytes of storage can be converted to DivX technology allowing broadband users to encode and distribute DVD-quality video at 500-700 Kbps.

Therefore, an important consideration in our valuation methodology must be made for the decreased level of quality. If the 700 MB P2P Movie file represents only 15% of the DVD quality, then we must discount the DVD price by the same amount.

 

	DVD Size (Bytes)	DVD Retail Price
	4,700,000,000	$   24.95
Less 75%	700,000,000	$    3.74

 

The minor disparity in accounting can be attributed to file size differentiation, i.e.: not all movies on DVD’s are 4.7 GB and not all movies on the P2P network are 700 MB.

The Movie industry is starting to listen to the concept of Digital Demand,

However their pricing policy seems a little out of whack.

 

Price Comparison Method #4 Rent - American, New Zealand and USA iTunes Movies.

In their August 2008 Press Release (http://www.apple.com/au/pr/library/2008/08/14itunes.html) Apple delineated their pricing policy for Australia and NZ digital movie rentals.

 

24 hour Rental	NZ	Aust	USA
New Releases	$  6.99	$  5.99	$  3.99
Catalogue	$  4.99	$  3.99	$  2.99
HD Option +$1	$  1.00	$  1.00	$  1.00

I

f however we add the invisible “Broadband cost” of downloading the 24 hour rentals, we get a slightly different perspective.

 

24 hour Rental	NZ	Aust	USA
New Releases	$    6.99	$    5.99	$    3.99
512 Kb DSL	$    8.60	$    8.25	$    1.05
Total	$   15.59	$   14.24	$    5.04

 

In our costings above, we calculated the downloads based on the P2P “de facto” standard of 700 MB per movie. Unfortunately, standard definition is a little larger and using MPEG2-TS (Transport Stream, the ITunes movies are three to four times the size.

And should a user want the HD version (an extra $1.00) of the movie then his figures will be even higher.

 

24 hour Rental	NZ	Aust	USA
New Releases	$    6.99	$    5.99	$    3.99
HD Version	$    1.00	$    1.00	$    1.00
512 Kb DSL	$   26.54	$   23.48	$    1.05
Total	$   34.53	$   30.47	$    6.04

 

Remember, this is a rental Digital movie that will disappear after 24 hrs.

Obviously – iTunes movie pricing policy will force Australian users to source alternative sized and priced movies for economic reasons. Subsequently the company will fail in its Video Digital distribution plans in Australia unless agreements are made with all ISP’s which seems highly unlikely in the face of the AFACTS legal action against iinet.

 

Price Comparison Method #5 Buy iTunes Movies.

If you want to BUY the iTunes movies, they are available at around $29.95 for new releases.

Which obviously, if you consider that each DVD has at least seven-nine versions available via Bit torrent or ED2K  obviously tells us that some economist in Hollywood has done the numbers and values the digital version of a movie at (after 10% reseller commissions) $3.50.

 

 

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We have demonstrated the value of  an overnight movie rental 90 minute, 7600 MB movie in Germany, Korea, Japan, Taiwan and the USA is $6.05,  and in the technologically, financially or legislatively (read Telstra monopoly) restricted countries like Australia, the value is considerably higher, around $30.50.

Let’s be real Hollywood – NO ONE IS GOING TO PAY $30.00 to view a movie once. !!!!!

The more realistic pricing model for the Antipodes and other bandwidth challenged countries appears to be the P2P model where in the USA the value of 700 MB DIVX movie is $1.05 and in Australia, India, China et al, $3.50.

This appears to be the same value as placed on the iTunes (buy movie) content by Hollywood. In economics, we call this the McDonalds Principle.[3]

Now we just need to ask one more question, are the shareholders of Hollywood studios also the shareholders of the RBOC carriers?

 

If that was the case, then P2P is no longer illegal, merely an alternative supply chain solution.

 

Authors Note.

All currency references in this article refer to the currency of the nominated country.

Please note: Statistics in this Blog have been drawn from several sources located in Denmark, Canada, France and Germany. Unfortunately there is no-one in Australia currently capable of providing accurate industry metrics due to legislative barriers.

 

 

[1] Movies on the Net are usually 700 MB in size – not 3.5-4.7 GB as on a DVD. See note 2 for lossy.

[2] DivX® is a popular MPEG-4 compatible (lossy) video compression technology due to its very high compression ratio which enables DVD-quality video and audio at typically 7-10 times smaller storage requirements than standard DVD/Mpeg2 compression technology.

[3] The burgers appear identical, only the currency and the associated currency hedge are different.