Verizon Fights To End Piracy With New Policies As Streaming Gains Steam

A recently leaked memo of Verizon’s (NYSE:VZ) “Six Strike Policy” by Torrentfreak, can be considered as the first salvo by ISPs (Internet Service Providers) to fight piracy and protect content providers. This is an interesting development because last year Verizon refused to provide information on torrent pirates when sued by a consortium of movie makers for adult films. We suspect other ISP providers such as Comcast (NASDAQ:CMCSA) and Time Warner Cable (NYSE:TWC) will adopt similar policies this year.

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The Six Strike Policy is split into three actions (According to the leaked memo):

First And Second Alerts

“Are delivered by email and automatic voicemail to the telephone number we have on file for you. Notify you that one or more copyright owners have reported that they believe your account has been involved in possible copyright infringement activity.”

“Provide a link to information on how to check to see if file sharing software is operating on your computer (and how to remove it) and tell you where to find information on obtaining content legally.”

Third And Fourth Alerts

“Redirect your browser to a special web page where you can review and acknowledge receiving the alerts. Provide a short video about copyright law and the consequences of copyright infringement.”

“Require you to click on an “acknowledgement” button before you will be able to freely browse the Internet. Clicking the acknowledgement button does not require you to admit that you or anyone else actually engaged in any infringing activity, only that you have received the alert.”

Fifth and Sixth Alerts

“Redirect your browser to a special web page where you will be given several options. You can: Agree to an immediate temporary (2 or 3 day) reduction in the speed of your Internet access service to 256kbps (a little faster than typical dial-up speed); Agree to the same temporary (2 or 3 day) speed reduction but delay it for a period of 14 days; or Ask for a review of the validity of your alerts by the American Arbitration Association.”

Verizon doesn’t mention what actions would be taken after the sixth strike, but we do believe such customers will be highly susceptible to lawsuits. Motion Picture Association of America (MPAA) and Recording Industry Association of America (RIAA) can obtain the list of users with repeated strikes against them through subpoenas, and Verizon may be compelled to handover this information to avoid being named as an accessory after the fact.

In the past, Verizon has fought hard to protect the privacy of its customers, including those accused of being torrent pirates. However, with this new policy wherein the customer has willingly acknowledged potentially illegal activities being carried out through his/her account, could set them up for lawsuits and serious penalties. Although the said policy applies to all users including business customers, we suspect the company might exclude business users as it would be hard to identify specific offenders on large networks along with the risk of Verizon losing business from this lucrative segment.

Help Drive Redbox Venture

Apart from fighting privacy, the timing of this new policy seems awfully coincidental with Verizon’s new online video streaming service Redbox (see: Verizon Salivates Over Juicy Data Growth With Redbox Streaming Service). We believe by increasing the risks of accessing pirated content through its service, Verizon will be able to drive users to access Redbox for online content, thus driving revenues for its FiOS Broadband segment.

Verizon Looks To Drive Wireless Data Consumption

The streaming market has seen tremendous growth, and entering this growth market will not only enable Verizon to make a profitable venture out of it, but also help it differentiate its mobile services from other telecom players in the market. The advent of high-speed 4G LTE technology has made streaming good quality videos at high speeds possible. As the growing number of users access Internet on the go, the demand for video streaming from mobile devices is also set to rise.

If Verizon starts offering streaming plans bundled with its existing wireless data plans, it will not only be able to monetize this growing need for video on demand, but also put its high-speed LTE network to greater use. Even otherwise, a standalone streaming service can help drive up the demand for videos and cause customers to consume more data on their mobile devices. Having recently debuted their shared data plans, Verizon will be looking to increase mobile data usage and cause users to move into the higher tiers of their plans. This new anti-piracy policy is specifically in line with this long term strategy of the company, to drive higher data consumption through its streaming service.

Verizon Has Bargaining Power

This new policy by Verizon can have a far reaching impact on its FiOS business as discouraging consumers to access pirated version would drive sales for Verizon On Demand platform.  We expect content providers such as TV shows and movie studios to be far more comfortable dealing with Verizon in future knowing their businesses is protected, and thus allowing Verizon a significant bargaining chip in negotiating exclusive content deals. One of the big concerns was how could Verizon woo content providers to tie up with it and we believe this new anti-piracy policy does exactly that. While protecting the brand and value of content providers, Verizon is sending a powerful message on the importance of doing business with it. As this policy rolls out and Verizon generates significant goodwill with content providers, we expect it will be in a position to grow its FiOS TV subscription pricing by significantly growing its content library.

Also, we believe content owners might be welcoming to a disruptive force that could challenge Netflix (NASDAQ:NFLX). All in all, this new policy is bad news for those who depend on torrents for entertainment while boosting Verizon’s reputation in the industry as the standard setter.

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