Universal Calculates $100 Million Lost to Online ‘Hulk’ Theft

By MICHAEL THURESSON

Staff Reporter

Smarting from the disappointing performance of its big-budget summer release “The Hulk,” Vivendi Universal SA is blaming Internet piracy and may sue to recover what it claims is as much as $100 million in lost revenues.

Vivendi’s Universal Studios unit, which moved aggressively to identify the source of the piracy when it became aware of it two weeks before the film’s June 20 opening, hired the L.A. office of accounting firm Deloitte & Touche LLP to calculate the losses.

While the studio’s efforts to stem the piracy led to federal copyright infringement charges against a 25-year-old New Jersey man, Universal may seek to recover the losses from an unnamed New York advertising agency suspected of being the source of the leaked copy of the film. A more detailed accounting of the alleged losses is expected to come out at the Sept. 26 sentencing of Kerry Gonzalez, who pleaded guilty to the copyright violation charge in June.

In moving to seek substantial money damages, the studio would be taking the most forceful step yet by the film industry to halt what is seen as a growing piracy problem. But critics, pointing to technological hurdles yet to be overcome in downloading massive movie files, as well as the film’s mixed to poor reviews, questioned the real extent of Universal’s lost revenues.

Christian Tregillis, Deloitte’s partner in the intellectual property services department handling the assessment for Universal, would not disclose the firm’s methodology. He did confirm that by using multiple formulae, including tracking how many copies of the film were distributed on the Internet and projected box office receipts, Deloitte & Touche has come up with a figure in the neighborhood of $100 million.

“The way it works is when you look, if there are so many copies you can see, you can make inferences about how many out there you can’t see,” he said. “They may go after the advertising firm itself.”

Analysts believe Deloitte compared “The Hulk” to previous movies with similar costs released on the same date. The box office performance of those films and revenue derived from ancillary licensing deals would be factored in, said David Joyce, an equity analyst covering cable and media industries at Guzman & Co., a Miami-based investment bank.

Whatever the methodology, Joyce doubted that the true tally was anywhere near $100 million or that Internet piracy was responsible for its weak financial performance.

“The reason Universal is doing it is because the box office take was less than the cost of producing the movie,” said Joyce.

Hulking disappointment

Universal was banking on the $150 million film as its summer blockbuster. But after the opening weekend, when it took in $62 million, a record for the month of June, “The Hulk” quickly tailed off. Its second weekend receipts declined 70 percent, with its total box office take coming in at a disappointing $132 million.

While the studio laid the blame for the falloff squarely on Internet piracy, there was tacit acknowledgement that the film’s poor performance was not entirely due to duplicate copies circulating for free. Early viewers may have warned potential paying customers off the film, which received mixed reviews from critics.

“As a result of the film being seen on the Internet and replicated into CDs, a dialogue began on the film which had a serious impact on our normal marketing activities and the expectations the public had for the film,” said Karen Randall, executive vice president and general counsel at Vivendi Universal Entertainment.

She would not address the calculation of lost revenues or any potential civil litigation.

The studio is not alone in having copies of its films pirated and posted on the Internet before opening theatrically.

Pirated copies of the Walt Disney Co./Pixar Animation Studios co-production “Finding Nemo” and Sony Picture Entertainment’s “Spider-Man” have also filtered around the world, although neither studio has been able to pinpoint the original leak.

According to the Motion Picture Association of America, the number of instances of online copyright infringement tripled between 2001 and 2002, with the numbers still rising. The group, Hollywood’s lobbying association, estimated that 400,000 illegal movie downloads occur each day.

Joyce, for one, was wary of the number. Estimates of how many movies are illegally downloaded are hard to come by, although the problem is seen as less severe than pirating of music files, which are much smaller and easier to download than movies.

“It’s in their interest to show there is a greater number downloading to get the attention of regulators,” Joyce said.

‘Landmark case’

Universal believes the early legal victory in “The Hulk” criminal case represents some amount of redemption, hailing the prosecution as a moral victory against piracy.

“It is a landmark case for us and any other studio,” said Randall. “There has never been an instance of a prerelease act of Internet piracy where the person was caught and held accountable.”

Universal’s motivation for pursuing the case in civil court is more complex. In addition to identifying the sort of piracy that the music industry says has cost it billions of dollars in lost revenues, the studio has more immediate concerns.

Though nominal in terms of its overall theatrical, home video and TV revenues of nearly $4 billion in 2002, missing out on $100 million could send a bad message to investors as its parent prepares to sell a majority interest to General Electric Co.’s NBC unit.

“They don’t want to put too big a number because investors get antsy, especially if they show they don’t have an answer to this,” said Tregillis.

There are likely to be several repercussions of the Universal case. One is tighter control over the internal distribution of releases in areas such as postproduction and awards film screening. Also, big budget features will likely be released in more theaters initially in an attempt to more quickly capture revenue in the face of Internet piracy.

Whether Universal can recover damages in a civil trial is a question. The basis of the studio’s claim is already coming under fire.

“They’re saying that anybody who shoplifts an item would have bought that item if they weren’t a criminal,” said Patrick Von Sychowski, digital cinema analyst for Screen Digest, a media research company based in London. “That’s an assumption not everybody would agree with.”