The Big Business of Pirate Sites

Digital Citizens Alliance LogoA lot has been said about the advertisements that appears on sites that offer pirated content.

However, much of that focus has been about the types of ads that appear, noting that many major brands have their ads routinely appear on infringing sites. This was, and is, a big topic for Ellen Siedler of Vox Indie, who started talking about the topic on her site Pop Up Pirates.

But significantly less has been discussed about how much money these sites make (or have the potential to make) and just how profitable they are.

However, a new report from The Digital Citizens Alliance aims to shine a light on those questions and the results are both surprising and frightening.

According to that report, pirate sites are not only doing brisk business giving away free content, but are enjoying high profit margins and are operating in what can only be described as a growth market.

It’s a trend that’s unlikely to change without strong pushback from the advertisers and, to date, there’s been no sign that advertisers are willing to take the needed steps to reduce or eliminate the problem.

The Basics of the Report

DCA Study ImageThe report started out by looking at sites that had received more than 25 DMCA takedown requests with Google in the third quarter of 2013. The researchers then removed porn and hate sites from the list as well as those that appeared to be user-generated, personal, highly-localized or otherwise didn’t focus on movies and TV shows.

The sites that remained were segmented into by their types: Those types included:

  1. BitTorrent and Other P2P Portals: Sites that enabled users to download content via P2P networks.
  2. Linking Sites: Portals that provides links to where content can be downloaded on various third-party hosts.
  3. Video Streaming Host Sites: Sites that provided direct streams of videos, often using a Web-based player.
  4. Direct Download Host Files: Sites that provided storage and downloading for files directly, often linked to by linking sites. Also, since many direct download sites have dual business models, advertising and premiums subscriptions, only those who featured ads were included and only advertising was looked at.

From there, the categories were segmented again by size, with small sites having fewer than 1 million visitors per month, medium having between 1 and 5 million and large having more than 5 million.

From there, the report turned to MediaLink to try and determine the profit and loss that the sites faced. MediaLink, then looked at a variety of factors including the number of page views, the amount of ad space available and the amount likely paid for those slots. It then looked at the estimated hosting costs for the sites as well as any human resources or labor costs.

With all of that information, the report then tried to estimate the the total advertising revenue for the sites (other revenue was not counted) and the profit margins for the sites.

The results were, in a word, striking.

The Results

Presentation ImageWhen it was all said and done the report looked at some 596 sites and projected that they earned a total of $227 million in advertising revenue annually (extrapolated from the $56.7 million they were estimated to have earned in the test quarter).

However, the most jaw-dropping data from the study was the estimated profit margins for these sites, which ranged from 80% to 94%, depending upon the size and type of the site involved.

The largest sites typically earned both the highest revenues and had the highest profit margin. The 30 largest sites on the list had an average estimated revenue of $4.4 million per year and the largest BitTorrent sites did even better, netting an average of $6 million per year with an impressive 94.1% estimated profit margin.

The study also revealed that “premium brands”, defined as brands that are “Easily recognizable companies familiar to most consumers,” appeared on some 30% of the large pirate sites with other legitimate companies and some illicit services rounding out the list of advertisers.

All in all, the study paints the picture of content theft sites that aren’t just scraping by or part of a cottage industry, but rather, are possibly a nearly-quarter-billion dollars per year industry, one built entire on the backs of content creators and the companies that back them, all without returning any of that value to rightsholders.

My Analysis

The biggest complaint that many people are going to have about the study is that, for the most part, the numbers are estimates. The Pirate Bay and other sites are not opening up their traffic logs and accounting books to researchers. Therefore, all researchers can do is look at publicly-available data and, through the use of partners that specialize in this kind of analysis, make a best effort to guess what the actual numbers are.

But not only did the Digital Citizens Alliance do a great job in partnering with solid outside researchers, the data is so overwhelming that, even if it the estimated revenue is overrepresented two-fold, nearly all of these sites can and will still generate a tidy profit and the industry as a whole would still earn well over $100 million per year.

So even if the numbers do prove to be different, the key points of the study remains that piracy is big business and it is profitable. Considering that even smaller sites, which can be run by just one person, can easily earn an estimated $100,000 per year in revenue with almost no expenses, it is easy to see how many of the lower-tier sites are earning their owners a very comfortable living.

This also calls into question the claims that many pirate site owners make about running ads to “keep the lights on” or to “pay the bills”. According to this analysis, the potential revenue earned by these site far dwarfs the likely hosting bills.

In short, pirate site owners are not altruistic robin hoods stealing content from wealthy creators and giving to the masses. Rather, they are keeping a nice profit for themselves.

On top of those observations, here were a few other points I observed:

  1. Fierce Competition: Though lucrative the competition between pirate sites is fierce. The largest sites earned over 62.5% of the revenue despite making up just 7.6% of the sample. By contrast, smaller sites made up 69.3% of the sample size but earned only 11.8% of the total revenue.
  2. Lucrative BitTorrent: BitTorrent sites, looking at advertising alone, were the most lucrative with no segment having lower than an average profit margin of $84.5%. Other kinds of sites were hamstrung by larger costs.
  3. A Dual Economy: The study didn’t make many guesses on the actual revenue of direct download sites because they tend to have two revenue streams, advertising and paid subscriptions. The latter, in many cases, makes up the lion’s share of revenue.
  4. Large Sites, Bigger Brands: “Premium Brands” were more likely to appear on larger sites, with 29.9% of all larger sites having at least one. Medium and small sites were 17.4% and 13.1% respectively. This shows the problem with ads on pirate sites has little to do with unknown newcomers setting up new accounts.
  5. Advertisers As Victims: One point the Digital Citizens Alliance drives home is that, in their view, advertisers are victims. They find these kinds of sites undesirable to advertise on don’t want their brands lending credence to pirate sites yet, due to automation and bad actors, their ads still appear there.

All in all, it’s an interesting study that, despite some obvious limitations, goes a long way to dispelling many of the myths that persevere when it comes to pirate websites.

Bottom Line

When it comes to pirate sites, there’s this mythos that the people who set them up and run them are altruistic heroes, people who brave prosecution and litigation to, at their own expense, bring copyrighted content to the masses.

As this study shows, for these sites, that clearly is not the case. Online piracy is a business and a lucrative one. It’s that simple.

When you don’t have to pay anything for the production of new content, it’s easy to distribute it for free and earn a living. While many operators of such sites make arguments that they’re struggling to get by in the face of high bills, there is clearly at least the potential to earn a great deal of money by running a pirate site.

This may be a large part of why we rarely see such sites shut down due to a lack of business, Newzbin2 perhaps being the best-known exception.

Even if the numbers are off, the message is clear, piracy pays, just not the content creators.

Infographic

Digital Citizens Alliance Infographic

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