Video Pirates: The Bane of Hollywood

Where do you think organized crime is making its money these days? With drugs, gambling, and prostitution? Yes, but also - and this may surprise you - the movies.

Mobsters have moved into the movie piracy business and it is bleeding Hollywood to the tune of billions of dollars a year.

Movie pirates used to be small-time operators, selling VHS copies of films on the sidewalk for $5 or less.

But now, with the Internet and DVDs, the movie piracy business has exploded, and police departments across the country are struggling to keep up.

Every month, a special unit of the Los Angeles Police Department mounts two or three raids looking for pirates. Just last Thursday at a raid on a warehouse in downtown Los Angeles, they arrested two men who they say have been filling orders for counterfeit DVDs for years.

Detective Rick Ishitani found one of their order books. "These are movies titles that just came out. 'Angels and Demons,' they ordered 100 movies. And 'Terminator,'" the detective explained.

Police say the suspects were wholesalers who acted like mobsters. They would pick up customers in a van and drive them around blindfolded, before bringing them to the warehouse to fill their large orders.

In the last four years, the LAPD has confiscated nearly a million counterfeit DVDs.

The DVDs are made by pirates who often sit in the back row of theaters and record movies with tiny cameras.

Illinois police say Gerardo Arellano did just that. He was arrested at a multiplex outside Chicago and showed up at court with his family. They were also with him when he was recording in the theater, according to investigator Gary Kissinger.

"He was actually observed with the camera sitting on his right leg, along with his wife and small child," Kissinger told 60 Minutes correspondent Lesley Stahl.

"He brought a child with him to do this?" Stahl asked.

"Yes," Kissinger said. "We're finding that to be more commonplace because not only their child, but other family members or friends, because they act as lookouts and also they're less conspicuous. They blend in with the rest of the audience."

Kissinger works for the MPAA, the Motion Picture Association of America.

Stahl interviewed him at the AMC multiplex where Arellano was arrested.

"I actually heard once that one of these people brought a camera in in a baby carriage," Stahl remarked.

"Sometimes even in the diaper bag," Kissinger said. "Actually, we've seen it where they cut out the cup holder and they'll set the, cut out the bottom of the cup holder and actually set the camera in here."

"And then they control the camera with a remote control device and monitor it," he added.

Police say Arellano worked out of his home, where they found more than 13,000 DVDs he had made from his recordings, along with the computers he used to upload the movies onto the Internet.

"Rarely do you see an individual that's involved in all three major components of the piracy activities: in other words, camcording, Internet piracy activities and also selling the movies on the street as well," Kissinger said.

John Malcolm, a former Justice Department official specializing in intellectual property, says pirates like Arellano are linked to organized crime rings that are making a barrel of money selling DVDs.

In Mexico, the drug cartels are brazenly stamping their DVDs with their logos.

"Here, for instance, are pirated DVDs by the Zetas," Malcolm said, showing Stahl a DVD stamped with a gang logo.

"Here's a Leonardo DiCaprio film with the drug cartel. And they're advertising. It's just breathtaking," Stahl remarked. "Are they getting out of drugs and into movies?"

"No. They want to diversify," Malcolm explained. "They might be doing gambling on Monday, human trafficking on Tuesday, child prostitution on Wednesday, drug dealing on Thursday, and counterfeiting on Friday."

But even more than organized crime, it's the Internet that has Hollywood's hair on fire.

John Malcolm says pirated movies are being uploaded onto the Internet in a matter of hours and then downloaded very quickly using computer technology called "BitTorrent."

"And what it does is it takes a movie file, which is a very large file, and it breaks it up into very small pieces so that it is easier to trade back and forth via a swarm," Malcolm explained.

He showed Stahl what a BitTorrent program looks like on his computer. The programs are perfectly legal. But, every day, we're told, up to 50 million people around the world are using programs like this to illegally download pirated movies.

Malcolm showed Stahl how it works. Tiny "bits" moving toward a blue column in the middle of Malcolm's screen are pieces of the movie we were getting from people all around the world. The bits moving away from the column are pieces we have and are sharing with someone else.

"And when we get that complete movie, the technology will rearrange all those little pieces into one complete film that is watchable," he explained.

"There's a technology that automatically puts it in the right order?" Stahl asked.

"Sure does," Malcolm said.

The piracy has movie director Steven Soderbergh in despair. "Well, Lesley, I'll tell ya, there are days when I really wish Al Gore hadn't invented the Internet," he joked.

Soderbergh, one of Hollywood's A-listers, is vice president of the Directors Guild of America and the director of "Traffic," "Ocean's Eleven" and "Erin Brockovich."

He says piracy is costing Hollywood $6 billion a year at the box office. "As the margins of profit shrink, fewer projects get made, which means fewer people go to work," Soderbergh told Stahl.

"There is a feeling out there that, 'Boy, I got this and I'm not hurting anybody but some fancy, overpaid movie star who can well afford it,'" Stahl remarked.

"Well, in fact, you know, the wealthy movie star isn't hurt by it. It's just everyone else. Most of the people in this industry are not the A-list talent that you see in a magazine or interviewed on 60 Minutes," Soderbergh said.

"You're talking about all the people behind the camera," Stahl said.

"Supporting cast and all the crew," the director replied.

To a perfectionist like Soderbergh, it is shocking that what is causing all the havoc is often a product of inferior quality where the camcorded recordings are shaky, crooked and can include seats in the movie theatre.

"I've seen some of these pirated movies. And you can hear the guy snoring in the movie theatre. I wonder why people even wanna watch these things," Stahl said.

"It's clearly a situation where the people that are buying these are not that quality conscious. That's not the experience they're looking for," he said. "They want to be first, and they want to pay less or close to nothing."

In France, the parliament just passed a tough anti-piracy law: if you download pirated movies frequently you not only lose Internet service, you could be sent to prison or fined nearly half a million dollars.

But in the United States, there has been resistance to punish the downloaders.

"I'm hearing from the industry that there's this great reluctance to really clamp down in a way that brings people into court or prosecutes people," Stahl said.

"On the Internet you're talking about millions and millions of people who are for all intents and purposes invisible to us," Soderbergh said. "Trading, you know, copyrighted material. That's just like an avalanche. You can't drag those people into court."

That's why Hollywood and law enforcement have concentrated on the pirates. Before some movie previews, audience members have to pass through airport-like security. Their bags are searched for cameras and they have to check their cell phones. Inside a theater in California recently a security officer used night vision goggles, looking for pirates.

In the search for counterfeit movies, dogs have been trained to sniff for DVDs; they helped police in the Philippines and Malaysia confiscate nearly two million DVDs.

Investigators searching for movie pirates also use a secret method they don't like to talk about: every print of every movie is encoded with a watermark.

"So if you run a movie here, there's a specific watermark just for this theater?" Stahl asked investigator Gary Kissinger. "And it says basically it ran here?"

"That's correct," Kissinger said.

From watermarks, investigators knew movies were being pirated at an AMC multiplex. So projectionists and other employees there began looking for pirates and that led to the arrest of Gerardo Arellano.

In the past four years, AMC employees have helped police make 55 arrests, including some pirates with international connections.

But movie piracy is such big business now, that frequent raids and arrests have barely made a dent. Richard Cotton, an executive vice president at NBC Universal, says the numbers just keep growing.

Asked how many movies are released every year in the U.S., Cotton told Stahl, "Ballpark, 400 to 500 movies are released in the United States."

He told Stahl "virtually every movie" that is released winds up pirated on the Internet.

When "Dark Knight" came out in 2008, it was pirated, but not until after it had been seen in theaters for a day and a half. Hard to believe, but that was seen as a major victory.

And then there's "Wolverine." When it premiered at a party in Arizona earlier this year, it had already premiered a full month earlier to millions on the Internet.

In this case, a copy of the film was stolen while it was being edited. But "Wolverine" still made a ton of money, $160 million worldwide the weekend it was released.

"This is part of the problem with discussing the issue and talking about Hollywood. Because it feels like a lot of people who are making enough money complaining that they aren't making more money," Soderbergh said. "Nobody's crying for us."

And yet the movie business is suffering, Soderbergh says, and the studios are less likely to take risks.

"The chances of a movie, for instance, like 'The Matrix' being made shrinks. Here's a guy, here's a movie, two guys, they've made a small independent film. Warner Brothers gives them $75 million to make this script that nobody can understand, right?" Soderbergh said. "Wouldn't happen today."

And things could get even worse unless something is done in cyberspace to stop people from downloading.

"What we have done for 15 years is not to put any speed bumps, any technological blocks in the way of individuals. So, that the conclusion that the younger generation in particular draws is, 'If it's so easy, it can't be wrong.' And that's really what we have to bring to an end," Richard Cotton said.

"Can you do anything?" Stahl asked Soderbergh.

"I think the best you can do is slow them down a little bit. Part of the problem.... Look if we could freeze...," he replied.

Asked if that's the best the industry can do, the director replied, "I think so."

"It's a game," Stahl said. "It's like sport."

"It is a sport and there are people that are very, very good at it," Soderbergh said.

Produced by Tom Anderson