Online Video-Game Pirates Are Outgunning the Publishers

The fastest-selling video game of all time centers on a foot soldier conducting covert operations behind enemy lines. Perhaps not surprisingly, a gaming population two-thirds the size of New York City has followed suit by illegally downloading the title on the Internet.

At least 5.2 million copies of Activision Blizzard's (ATVI)Call of Duty: Black Ops were illegally downloaded between its Nov. 9 release and the end of 2010. That's about 100,000 copies a day, according to TorrentFreak, a blog about file-sharing platform BitTorrent, which has more than 160 million users globally. All told, more than 19 million people illegally downloaded five of the top-selling games of 2010, which also include Electronic Arts' (ERTS)Battlefield Bad Company 2: Vietnam, and Mass Effect 2, Take-Two Interactive's (TTWO)Mafia II and Activision Blizzard's Starcraft II.

"The trend is toward increased levels of piracy, and thus increased costs to the publishers, due to the growth of broadband access to the Internet, particularly in countries where there is no legal and enforcement deterrence against online piracy and little appreciation of, and respect for, intellectual property," says Ric Hirsch, senior vice president for intellectual property enforcement at the Washington D.C.-based trade group Entertainment Software Association (ESA). "Online downloading activity continues to be a problem as more households gain broadband access to the Internet, particularly overseas."

U.S. Game Developers Hit Especially Hard

How much illegal downloads cost video-game publishers is anyone's guess because of the challenges of reliably measuring pirated downloads, especially from overseas. As far back as 2007, the ESA pegged piracy costs to publishers at $3 billion a year, and that number included only illegally produced game disks and not illegal downloads.

Today, the ESA pegs piracy costs to publishers at "several billion dollars" a year. While much of the piracy is from overseas, most of the costs are borne domestically because the most popular titles are largely made and distributed by U.S. publishers such as Activision Blizzard and Electronic Arts. Activision declined a request for comment from DailyFinance.

Still, the ESA's estimate may be overstated because it's impossible to measure how many of the thieves would have purchased the game otherwise, says Wedbush Morgan analyst Michael Pachter. "I would bet that three-quarters of the illegal downloads were by people who would never have purchased the game anyway," says Pachter. "The total cost is probably $300 million to $500 million annually, but I can't say it's much more."

Regardless, game pirates appear to be one step ahead of publishers when it comes to outsmarting safeguards against online theft. Many publishers now avoid distributing personal-computer versions of their games and stick with either disks or downloads solely through consoles such as Microsoft's (MSFT) Xbox or Sony's (SNE) PlayStation.

That means antipiracy efforts aren't likely to keep up with the growth rate in global broadband access. Such efforts include so-called technological protection measures (TPMs) that publishers are embedding to better disable titles that are illegally acquired, as well as stricter laws against illegally downloading titles through Craigslist and other online marketplace sites.

A Reminder of the Hidden Risks

All told, the likely rise in piracy puts a further damper on a video-game industry hampered last year by falling sales, as many cash-strapped gamers opted for either used games or free titles online. U.S. game software sales through the first 11 months of 2010 fell 5% from a year earlier to $7 billion, according to research firm NPD Group.

Sponsored Links

With the Activision Blizzard release of Call of Duty, though, the industry showed signs of life heading into the holiday season as software sales in November alone rose 4% to $1.46 billion. Call of Duty had grossed more than $1 billion in sales by late December.

"These numbers should serve as a reminder of the hidden risks associated with digital sales, especially as the piracy on the top-pirated PC title -- typically downloaded -- was almost 200% greater than that of any console game (largely sold as packaged media) despite the vastly smaller installed base," wrote Janney Capital Markets analyst Tony Wible in a Jan. 3 note to clients. "We believe higher levels of piracy should encourage more support of packaged media."

"I'm not sure that there is much to be done to stop tech-savvy thieves who have their minds set on stealing intellectual property," adds Pachter. "The only real solution is cloud-gaming, where no consumer possesses a copy of the game. That's the direction the industry will ultimately take."

Get info on stocks mentioned in this article: