Will the Government Sabotage the Cloud?

Jan. 19 was a glorious day. The whole Internet was united in celebration as it saved the LOLcats from SOPA-PIPA. But they could not has cheezburger for long. A day later, the swift hammer of American justice fell hard on Megaupload.com, a New Zealand-based and Hong-Kong-registered cloud hosting site. Its crime: piracy -- $500 million worth. The kingpin-style takedown confiscated Megaupload's hardware while swarming its founder's mansion with police.

This is exactly the wrong message to send to a growing cloud user base that largely views the government as technologically incompetent and highly untrustworthy.

In a world where piracy rules…
Megaupload's management got hit with the dreaded RICO statute, so you know the feds mean business. The charges are bazookas aimed at a purported piracy haven, whose management repeatedly thumbed its nose at takedown requests. Yet, no civil suits were ever filed against Megaupload.

Napster and Grokster are similar cases, but neither was prosecuted with such heavy-handedness. Both shut down voluntarily to comply with government injunctions from civil suits. If suspected copyright infringers are now subject to arrest and extradition before copyright holders bother to file a civil suit, the cloud computing industry, its users -- and, indeed, the entire Internet -- should all be worried.

One government takes a stand…
If Megaupload wins in court, the process is far from over. Reinstalling confiscated servers won't restore its users' trust. If the government wins, it sends a message that any company's leadership may be prosecuted and its assets seized if they don't get rid of copyrighted material immediately. No sensible CEO would tolerate such personal risk, and few sensible users would host personal files they know might be compromised without warning.

Stringent anti-piracy laws are ultimately meaningless when the U.S. government can launch copyright-defending criminal raids almost anywhere in the world. Piracy won't be stopped at any rate, with or without this new tactic. The war against piracy has gone about as well as prior "idea" wars, with success falling somewhere between nonexistent and laughable. For every protection, there's an equally effective hack.

An explosive revelation…
It's not just entertainment that gets pirated, although those industries seem to take it more personally. Globally, about 40% of all software is presumed pirated. Yet, Microsoft (Nasdaq: MSFT  ) , which has typically supported stricter copyright protection, decided SOPA went too far and convinced the Business Software Alliance to withdraw its support.

The film industry claimed that it lost $6.1 billion in 2005, a year in which its combined American box office and DVD sales were $30.5 billion -- 20% of the total take, not counting revenue from domestic television or international sources. Has the scourge of piracy brought the industry to its knees?

Can they save themselves?
News Corp, Viacom (NYSE: VIA  ) , CBS, Disney, and Time Warner all managed to boost the take from their diversified media empires over the last few years. While $6.1 billion may seem like a catastrophic loss, other high-end estimates I've found veer more toward the $3 billion to $4 billion range. How much would that affect film industry revenues?

Year

Box Office

Home Video

Cable TV Advertising

Total Revenue

2005 $8.8 billion $21.7 billion $20.7 billion $51.2 billion
2006 $9.2 billion $21.6 billion $22.7 billion $53.5 billion
2007 $9.7 billion $21.4 billion $24.2 billion $55.3 billion
2008 $9.6 billion $21 billion $25.6 billion $56.2 billion
2009 $10.6 billion $19.4 billion $24.6 billion $54.6 billion
2010 $10.6 billion $18.8 billion $27.2 billion $56.6 billion
2011 $10.2 billion $18 billion $31 billion* $59.2 billion

Sources: Boxofficemojo.com, Digital Entertainment Group, and SNL Kagan. All figures are U.S. totals. Network TV advertising not included. *Estimated based on SNL Kagan projections from late 2011.

Last year, a $4 billion loss would have been worth 7% of industry revenue. If the film industry were to suffer piracy at Microsoft's level, it would have lost out on close to $24 billion. Think about that for a moment. The film industry has been remarkably successful at transitioning from an economy of relatively tight control to one of much easier availability without losing its earning power. In spite of what appears to be far larger losses, even Microsoft recognized how dangerous SOPA was.

If box office and video revenue seems anemic, perhaps the industry might blame its own overreliance on gimmickry and repetition instead of pirates. There was not one original movie among last year's top 10 highest-grossing films, unless you count predictable comic book port Thor, soon to be regurgitated on theatergoers with an explosion- and brawl-packed 3-D sequel.

"The Infringing," coming this summer to theaters everywhere
The entertainment industry is so afraid of technology that it seems more willing to hinder future growth than innovate its way out. Megaupload's takedown could be a crippling blow to the cloud, if for no other reason than the precedent it sets. Any given online host is likely to have copyrighted material on its servers at any given time. It's virtually impossible to avoid having copyrighted material show up on someone else's site unless the material is so uninteresting that no one ever wants to see it.

Google (Nasdaq: GOOG  ) has battled Viacom for years over YouTube's supposed copyright violations, despite protections granted the search giant by the Digital Millennium Copyright Act. What if YouTube's CEO were arrested for piracy and Google's servers shut down? There are enough similarities between incriminating internal emails in each case to imagine the possibility, and both cases turn primarily on what employees said to each other.

Carbonite (Nasdaq: CARB  ) tries to scare consumers into buying its cloud storage. You wouldn't want to lose your valuable files, so get some cloud storage and be safe! Now that Megaupload's users have likely lost access to their files forever, that advertising rings hollow. It's a slippery slope from here, and in many ways, the cloud's at a disadvantage. How do you convince the government they're wrong when many politicians have no idea how the Internet works?

Cloud computing's changing the world in lots of interesting ways, and investors would do well to cash in on this exploding trend. The Fool recently compiled a research report detailing this big-time trend. Better yet, we also made it free for our readers, so click here to access your copy today.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter for more news and insights. The Motley Fool owns shares of Microsoft, Google, and Activision Blizzard; and has written calls on Activision Blizzard. Motley Fool newsletter services have recommended buying shares of Microsoft, Activision Blizzard, Walt Disney, and Google; creating a synthetic long position in Activision Blizzard; and creating a bull call spread position in Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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