During the last year Netflix managed to outgrow BitTorrent in terms of the amount of US Internet traffic it generates. A promising finding for Hollywood as it shows that there's an overwhelming interest for the legal movie streaming service. At TorrentFreak we wondered what might happen if all US BitTorrent users made the switch to Netflix, and the results of this exploration are quite intriguing.

The movie industry claims that piracy is costing them billions of dollars a year.

Luckily for Hollywood, many Americans choose to consume their online media through legal services such as Netflix. In fact, there are now so many that the total Internet traffic generated by Netflix has outgrown that of BitTorrent.

This made us wonder – what would happen if all movie-downloading BitTorrent users made the switch to Netflix? What if movie piracy via BitTorrent disappeared?

Before we crunch some numbers we have to say that the model we use relies on a lot of assumptions. However, we try to keep these in favor of the movie industry to maximize their potential ‘profits’. We obviously chose Netflix as a BitTorrent replacement because it comes closest to what ‘pirates’ want.

What’s the ‘value’ of BitTorrent piracy?

What we’re going to do is determine the amount of Internet traffic movie and TV related BitTorrent downloads generate in the US. Since the file-sizes of Netflix and BitTorrent downloads are about the same, we then compare this traffic to what Netflix is generating now. Assuming a linear relation between revenue and traffic we can then “guess” how much extra money would come in if all BitTorrent users switched – and paid.

Step 1: How much BitTorrent traffic is movie/tv related?

The first assumption we’re going to make is that all BitTorrent traffic is unauthorized. This is of course not the case, but we’ll leave that debate for another time.

If we then take a look at one of the more recent reports on the BitTorrent ecosystem, often cited by the MPAA, we see that 35.2% of all torrents are movie related. Another 12.7% are TV-related. For the purpose of this thought experiment we are going to forget about Hulu and other free services and add TV to the ‘pirate traffic’ mix.

The total percentage of video torrents is then 47.9%.

Since we’re comparing traffic we have to adjust for the file-size of videos compared to all other content on BitTorrent and the actual popularity of the files. This is nearly impossible to estimate precisely , but several reports show that movie and video are downloaded the most by far. So we’re going to set the total amount of infringing BitTorrent video traffic at 85%, which is probably on the high end.

Step 2: How does BitTorrent traffic compare to Netflix traffic?

The next step is to see how much of total Internet traffic 85% of all BitTorrent traffic actually is.

A recent report from the Canadian company Sandvine shows that in the US 16.5% of total Internet traffic on an average day comes from BitTorrent. Since BitTorrent traffic goes both ways (upload and download), 8.75% of this is downstream traffic. This means that a little under 7.5% (85% of 8.75) of all Internet traffic in the US is video downloads over BitTorrent.

The same Sandvine report shows that 23.3% of total Internet traffic an average day comes from Netflix. More than 95% of this traffic is downstream, so we can set Netflix downloads at approximately 22.5% of all US Internet traffic, which is three times as much as BitTorrent’s video download traffic.

Step 3: How much revenue would these pirates generate on Netflix?

Here comes the interesting part. What would it mean in terms of revenue if ALL BitTorrent traffic moved to Netflix?

If we assume that BitTorrent and Netflix users consume roughly the same amount of content (again an assumption favoring the movie studios), then this is an easy calculation. Netflix would generate a third more revenue. Based on the shareholders report of the last quarter of 2010 (where most of the torrent stats in this article are based on) this translates into $198 million additional revenue for Netflix.

Based on more recent stats contained in Netflix’s third quarter filing of this year, the increase in revenue would be $266 million for that quarter.

Step 4: How rich would Hollywood become?

It’s clear that according to our (very unrealistic) calculations Netflix would greatly benefit from the sudden disappearance of BitTorrent piracy. The next step is to see how Hollywood would be impacted. Since most licensing deals are fixed and not based on usage, one could argue that the movie studios wouldn’t benefit at all. However, that’s not much fun.

So let’s look at the licensing deals that were in place already and determine Hollywood’s added profits based on that, assuming they would be more flexible.

In the whole of 2010, Netflix paid the movie studios $181 million in licensing fees according to the shareholder reports. If we add a third to that, Hollywood would have “made” roughly $60 million extra. Salient detail, the yearly budget of the MPAA is higher than that.

In recent months the movie studios have exponentially increased Netflix’s licensing costs, but still the added profits for the movie studios will be nowhere near a billion dollars. No, getting rid of ALL BitTorrent movie and TV piracy appears to have a ‘relatively’ small effect, even if all pirating BitTorrent users signed up for a Netflix account.

What does this mean?

Nothing. It’s a simplistic attempt to put a number on BitTorrent piracy in the US.

It shows that even when you assume that 90% of all US BitTorrent traffic is dedicated to video piracy, the added revenue for Hollywood in 2010 would have been less than the amount they paid to the MPAA. That is, if all BitTorrent users switched to Netflix.

The real added revenue if BitTorrent disappeared would of course be a fraction of this, as not everyone would start paying.

We don’t want to draw too many conclusions on this simple thought experiment, but it’s something to consider, especially when ISPs are expected to dedicate millions of dollars in resources to send BitTorrent users warning letters early next year. Not to mention the negative effect of the censorship bills that have been proposed recently.

Is it really worth all that?