Digital pirates sell ads on page views generated by giving away music, movies, and television shows they don't own. These advertising impressions created by content theft are then being purchased by major advertisers including AT&T (NYSE:T), McDonald's (NYSE:MCD), and Wal-Mart (NYSE:WMT).
This occurs because those premium brands -- along with dozens of others -- buy ads through blind sales channels, according to Good Money Gone Bad, a report on the profitability of ad-supported content theft commissioned by the Digital Citizens Alliance.
The report examined ad-supported content theft and the growing threat it represents not only to the creators whose business it undermines, but also to the credibility of the digital advertising ecosystem.
The research project also analyzed advertising-supported websites that deal primarily in pirated music, movies, and television shows and found that ads yielded enormous profits for them. But the illicit ad dollars taken in from unsuspecting top-tier brands only tells part of the story.
[A]dvertising profits garnered by content thieves do not equate with the losses incurred by the owners of the content. These losses are unquestionably much greater, because content thieves are responsible for illicitly distributing millions of copies of highly valuable works that cost billions to create, depriving their owners and creators of billions of dollars in rightful income.
To explain it in pirate terms, these digital buccaneers aren't just stealing your ship then heading off to drink rum and argue with parrots. They're stealing your ship and tricking major advertisers into sponsoring it in the America's Cup.
How the study worked
Conducted for DCA by MediaLink LLC, the study examined 596 websites in the the third quarter of 2013. The sites included video streaming hosts, BitTorrent P2P portals (which facilitate content theft between individuals), links sites that lead visitors to pirated entertainment, and direct-download websites, which actually host and offer downloads of stolen material. The sample sites had an estimated $56.7 million for Q3 of 2013, projecting out to $226.7 million annually with average profit margins of 83%.
BitTorrent portals generated more ad revenue than any of the other segments, and the largest sites have the highest average operating margins, about 94%. The portals represented 23.5% of the sample sites but accounted for 50.3% of advertising revenue.
These P2P sites have been a huge problem for content creators. The sites dance around the edges of the law since they do not directly host any pirated material. P2P sites match people looking for content with others who have it on their hard drives for download. In theory the shared material could be legal and non-copyrighted, but in practice that is almost never the case. According to NetNames, 96.2% of unique visitors to such sites accessed infringing content at least once in January 2013.
How does this happen?
In the olden days -- back before the Internet -- advertisers actually had to purchase ads in specific places. If you wanted your advertisement to appear in, say, Wednesday's sports section of The Boston Globe, you could specify that. That type of buying exists online, but it is fast becoming a marginalized method as more ads are bought through networks than in any other fashion.
An estimated 53% of U.S. online display ad placement was automated in 2013, according to Magna Global, which projects that volume to increase to 83% by 2017.
Advertisers are not intentionally supporting websites using pirated content. Ad networks at least say they are trying to screen out illicit sites, but the pirates have found ways to remain part of the system.
"Cross-ownership and affiliations between sites help some operators evade enforcement and maximize profits, establishing networks of sites distributing the same stolen content," the report read. "If one site is shut down by authorities, others may keep running."
How can it be stopped?
Major brands don't want their ads on sites featuring stolen content. This is partly because it does not look good for credible companies to be supporting illegal activities and partly because those advertisements are likely to be ineffective.
The online advertising industry knows this is a problem but has struggled to come up with ways to solve it.
"Even one premium brand ad on one of these sites is too many," an ad industry insider told MediaLink. Another said that having one's brand appear on content theft sites alongside the kinds of ads that are common there "is a bad day at the office for a brand marketer."
If there is any hope of solving the problem, ad networks must step up their policing efforts. While the names and URLs of the pirated sites change, many of the largest have been in existence for a long time. A good place to start would be removing the 596 sites studied in the DCA survey.
It does seem that if a group of researchers can identify pirate sites doing $226.7 million in ad sales, the ad industry could do the same. The question, of course, is how much it actually wants to.
Ad networks sell page views and the more of those a network has to sell the more money it can make. Screening out sites that generate traffic -- even if that traffic is from pirated content -- is in the short-term bad for business. This may explain why although efforts have been made to solve the problem of ads being placed on sites featuring pirated content, those efforts have been less than successful.
Doing anything that supports pirated content ultimately steals money from the people spending billions collectively to create the music, movies, and television shows that entertain us all. Advertisers should track where their ads are being placed more carefully, and ad networks need to screen their partners better. If they don't, they are essentially pirates by association.
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Daniel Kline has no position in any stocks mentioned. He does not care for parrots. The Motley Fool recommends McDonald's. 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.