Market Overview

Why Most Investors Should Support SOPA

To date, the Internet has been nearly unanimous in its disapproval of the proposed Stop Online Piracy Act, or SOPA, which is currently snaking its way through the US House of Representatives. The bill, coupled with the PROTECT IP Act, has been touted at as an effective way to protect digital intellectual property.

Most users of Facebook and Twitter have seen at least a few comments against SOPA. Wikipedia, Reddit, and other Internet sites have carried out “blackouts” in protest of the bill. Go Daddy, a domain name registrar, lost tens of thousands of domains from a boycott organized in response to the company's public endorsement of it.

What has so many up in arms against SOPA are provisions within the bill that would allow the US Attorney General to force Internet service providers (ISPs), payment network providers, search engines, and advertising services to stop conducting business with sites identified by the US Department of Defense as violating intellectual property rights. This includes sites based in foreign countries.

Effectively, this means that government would have the power to block American Internet users from accessing or purchasing from sites it determines have broken US intellectual property laws, regardless of what country the site is located in. SOPA is a broad bill that proposes some interesting precedents.

Despite the controversy surrounding SOPA, dozens of companies and trade associations have officially endorsed it, as they view online piracy as a major threat to their industries.

The exact cost of online piracy is impossible to measure. The Recording Industry Association of America, or RIAA, claims piracy costs the music industry alone billions of dollars a year globally. The Motion Picture Association of America, or MPAA, cites similar figures for the film industry.

The Business Software Alliance, or BSA, said that the total commercial value of software pirated in 2009 was over $50 billion globally.

Finally, the US Chamber of Commerce estimates that the domestic cost of online piracy is $135 billion annually.

Of course, the RIAA, MPAA, BSA, and the Chamber of Commerce have clear motives for possibly inflating, to an extent, the costs of piracy. Still, few would argue that online piracy has not done real harm to the media industry.

For example, from 1999 to 2009, the RIAA claims US music sales dropped 47%. From 2006 to 2011, the music industry saw DVD sales decline by 25%. Software sales have also been down or flat in recent years. While not all of this can be attributed to online piracy, it has certainly been a factor.

With almost 20 million people depending on "IP-intensive industries" for jobs according the Chamber of Commerce, a lot is at stake. SOPA, or a similar bill, would finally give the US government the power it needs to tackle online piracy.

The White House recently distanced itself somewhat from the bill in a public statement, stating that it would not support legislation that "reduces freedom of expression". However, the fact that SOPA has managed to gain as much political traction as it has is a sign that the laws surrounding online piracy will probably undergo major changes sometime soon.

Even if the White House is against certain provisions in SOPA, it still maintained in that same statement that "online piracy by foreign websites is a serious problem that requires a serious legislative response."

A "serious legislative response" would likely be a blessing for the media industry, which has seen sales decline steadily in numerous markets since the advent of online piracy.

Below are some interesting stocks that could benefit from stronger anti-piracy laws:

1. Netflix (NASDAQ: NFLX), Pandora (NYSE: P), Hulu, and Spotify: Internet content streaming companies could be poised to benefit the most from bills like SOPA. Many of these companies provide free, ad-supported versions of their products. The harder it gets to steal digital content, the more attractive the services these companies offer will become to Internet users.

Netflix, which saw its stock price decrease by over 70% in the second half of 2011, might suddenly become a steal. It is currently trading at under $100, and has a 52 week high of $304.79. Pandora, which has been stuck under $15 since the end of November, could test new highs.

Hulu and Spotify, given more favorable market conditions, may decide to finally have an IPO. Hulu was rumored to have already strongly considered going public back in 2010, but then reconsidered.

2. Vivendi (EPA: VIV) and Sony (NYSE: SNE): Vivendi owns Universal Music Group, Canal+ Group, and holds a controlling stake in Activision Blizzard (NASDAQ: ATVI), one of the world's top video game companies. Vivendi Entertainment, also owned by Vivendi, is a significant digital distribution company involved in DVDs.

Sony is the parent company of Sony Group, which includes Sony Computer Entertainment, Sony Pictures Entertainment, and Sony Music Entertainment, among others.

The bottom lines of both Vivendi and Sony are clearly tied to the success of their digital intellectual properties. Effective efforts against online piracy could result in sizable earnings increases for many of their holdings.

Vivendi, a French company, managed to increase profits in 2011 despite the extreme economic uncertainty in Europe. Yet, investors were hesitant to jump on board, precisely because of the aforementioned economic uncertainty. As a result, the company's stock has lost about 25% of its value over the last year. News of stronger anti-piracy laws could ease the fears of investors.

Sony, on the other hand, has seen its revenues decline, and has struggled to post profits in recent years. With a 52 week high of $36.97 – more than double its current price – the stock could shape up to be an intriguing play thanks to SOPA.

3. Empire Film Group (PINK: EFGU) and Lux Digital Pictures (OTC: LUXD): The major film companies, most of which are now subsidiaries of giant corporations like News Corporation (NASDAQ: NWS) or General Electric (NYSE: GE), have managed to paper over losses in sale volume by upping prices through the promotion of costlier Blu-ray discs and 3D films.

While more stringent anti-piracy laws would help those companies earn more, nearly all of them have managed to change their business models enough to emerge not much worse for the wear from falling DVD sales.

However, small film companies like Empire Film Group tend to find it more difficult to deal with losses in volume in DVD sales.

Empire Film Group, which trades as a pink sheet, has noted in past earning reports that DVD and Blu-ray sales are a major component of the company's revenue streams. A bill like SOPA could be critical in keeping the company afloat.

Empire Film Group's stock currently trades for about two cents. In 2008, it was as high as $5.30. If SOPA causes DVD sales to recover closer to 2005 levels, the stock would have real upside potential.

Lux Digital Pictures is an over-the-counter stock, or OTC, that would benefit from SOPA, and it currently trades for only a fraction of a penny.


ACTION ITEMS:

Bullish:
Traders that think SOPA or a similar bill will be passed in the near future, and that this will eventually lead to increased revenue for media companies, may consider the following:

  • Going long on Netflix and Pandora - these companies are positioned well in the changing media landscape even if SOPA does not pass.
  • Going long on Sony and Vivendi .
  • Investing in pink sheet and OTC film industry stocks like Empire Film Group or Lux Digital Pictures – a much riskier, but possibly very rewarding, investment.
Bearish:
Traders that think popular sentiment will prevent bills like SOPA from passing may consider the following:

  • Going long Netflix and Pandora – yes, still, although the upside will be lower.
  • Shorting companies like Vivendi or Sony later in the year as economic uncertainty in 2012 may drag share prices lower.
  • Avoiding pink sheet and OTC film industry stocks like the plague.
Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

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