Competing With Free
Competing With Free
Competing With Free

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    “We cannot compete with free.”  That is one of the justifications the movie
    and music industry uses to lobby for the controversial PROTECT IP Act (S. 968)
    and the Stopping Online Piracy Act (HR 3261). 
    In a recent hearing before the House Judiciary Committee, the Motion Picture
    Association of America’s Michael O’Leary argued:

    companies that want to invest in and develop new and innovative business models centered around high-quality online content and greater consumer choice have a
    limited potential for growth when they are forced to compete with entities that
    are distributing the exact same content through illicit means. “

    Unfortunately for the MPAA, this is simply incorrect.  Companies like Netflix, Hulu, and Spotify have
    shown that it is completely possible to “compete with free,” either through an
    advertising-based business model, a fee-based model or a hybrid model. These
    companies demonstrate that millions of consumers will pay for content that is otherwise
    available illegally (and easily) for free.

    Though it
    has been around since the late 1990s, Netflix began to offer unlimited
    streaming in the mid-2000s, and currently offers a streaming-only plan for
    $7.99, as well as DVD plus streaming options. Although the company has had some
    public relations hiccups recently, it is still incredibly profitable: in the
    quarter ending on September 30th, it made $62.46 million dollars profit,
    from a total revenue of $821.84 million. In 2010, Netflix took in over $2
    billion and made $160 million in profit (guess which industry made out with the
    rest of that money?).
    Going forward, Neflix predicts
    that it will make between $19 and $37 million in the fourth quarter of 2011.  Today, it announced
    that it may lose money next year, but that can be attributed to a plan to
    expand into the United Kingdom and Ireland. The company also faces increased
    future competition from services like Amazon Prime and Blockbuster (who are
    also chomping at the bit to compete with free) but clearly, contrary to what
    Mr. O’Leary believes, consumers will pay reasonable prices for content they can
    get for free, particularly when it is provided reliably and in high quality. 

    Netflix is the leader in the fee-based online video content distribution
    landscape, other firms have been successful by selling premium features to
    compliment ad-supported offerings. In this model, all users hear and see advertisements,
    but those who choose to do so can pay a premium for additional features and
    content. Like Netflix, Hulu and Spotify have had success offering content that Internet
    users could access “through illicit means,” and their success confirms that,
    with an “innovative business model,” it is possible to find paying customers
    online.Hulu, owned by NBCUniversal, Fox, Disney, and
    Providence Equity Partners, offers viewers access to hundreds of different
    television shows from a wide variety of networks, a vast selection of movies,
    and original content. Content is made available after it airs, on a schedule
    determined by the studios responsible for its production. All viewers see
    advertisements, but those that subscribe to the $7.99 per month Hulu Plus
    service can view content earlier than free users, and have exclusive access to
    Hulu’s content on mobile platforms. This service has proven itself to be
    popular: the company recently announced
    that Hulu Plus has crossed the one million-subscriber mark. The growth to one million has been
    both rapid and consistent, and, if maintained, the current Hulu Plus
    subscribership will net the company $95.88 million over the next 12 months. Hulu
    has also been successful in bringing in advertising revenue, earning
    $263 million in 2010, up 143% from $108 million in 2009. Company CEO Jason
    Kilar predicts that Hulu will pull in more that $500 million this year, which
    would be a 90% increase over last year.

    content delivery services other than video providers have shown clear paths to
    profitability as well. Spotify, a popular Swedish ad and subscription-supported
    online streaming service, has just entered the American market. In June, just
    before its American launch, the company raised
    $100 million from three venture capital firms, which valued it at $1 billion. In
    Europe, it has 1 million paid and 6 million free subscribers, numbers certain to
    increase. Spotify has yet to turn a profit, but its revenues reveal that the
    moment it does is not far off: its revenues grew 458% between 2009 and 2010,
    and losses as a percentage of revenue fell from 147% to 42%. The company pulled
    in $99 million in total revenues in 2010, and will almost certainly make more
    this year. Like Netflix and Hulu, Spotify’s rapid growth clearly shows that
    consumers will, when given, the option, pay for legal content. 

    While these
    are only three of the content distribution companies operating online (I haven’t
    even mentioned iTunes, which controls
    over 30% of the U.S. music market, or three times more than Wal-Mart), their
    success clearly invalidates the claim made by SOPA’s advocates that it is
    impossible to compete with piracy. Clearly, consumers will pay for, or watch
    ads to support, their favorite music, TV shows, and movies. Mr. O’Leary and the
    MPAA would like Congress to believe that Internet piracy has totally eliminated
    their ability to make a profit online, and that the disastrous Stop Online
    Piracy Act is the only remedy. Internet users will and do pay for the right to
    watch and listen to what they want, and firms with business models that allow
    them to provide high-quality streaming content at a reasonable price can become
    very successful. Congress should reject the MPAA’s claims along with SOPA and