JOHANNESBURG — Long before the Bitcoin hype began to bite in recent months, a Stellenbosch outfit called Custos was already looking at how to tap the so-called ‘Blockchain’ to catch out content pirates. Custos essentially quietly deposits Bitcoin into digital files of new film or ebook releases. The deposited Bitcoin then gives ‘bounty hunters’ a unique way of anonymously earning the cryptocurrency by unlocking the coins if a movie or ebook finds its way onto a content piracy platform or website. It’s an interesting business model that highlights how the underlying Blockchain technologies of cryptocurrencies could actually have the potential to disrupt an entire set of industries across the globe. What’s more interesting is that it is South Africans who are starting to lead the way in this regard as well. – Gareth van Zyl
With me on the line from Stellenbosch is G-J van Rooyen, the CEO of a Bitcoin Blockchain company called Custos. G-J, it’s great to catch up with you, it’s been some time since you and I last chatted.
Yes, it’s been a couple of years. Last time we spoke, we were just kicking off the business.
Let’s just get into what your business does. Obviously before the Bitcoin hype, you guys were already getting into Bitcoin, Blockchain technologies to help clamp down on content piracy. Can you tell us a bit more.
That’s right — we were a spinoff from Stellenbosch University. We became interested in alternative uses of Blockchain tech. A couple of years back in 2013 we started experimenting with ways that we could use the Blockchain that’s not directly related to Fintech because at that stage everyone was looking at ways to reinvent banking and reinvent finance using Bitcoin and its derivatives. But at that stage we were doing quite a lot of work in media tech, we did a lot of work with Naspers in the Naspers-sponsored MIH Media Lab around things like content protection, video broadcasting, next generation network and that kind of thing. We stumbled upon this concept that we could use Bitcoin and Blockchain as an anti-piracy mechanism; and in a nutshell, what we do is; we pay pirates to rat on each other.
How we do that is a bit more sophisticated. We use a few tricks that really are only possible with Bitcoin and cryptocurrency; it’s where we literally embed a little bit of cash, a tiny deposit inside the media that is issued to recipients. Say, for example, you’re a movie reviewer: you get a pre-release copy of a movie to review, it’s only playing in the cinemas in two weeks’ time. Our clients then want to make sure that that company of the movie screening stays firmly inside the control of the intended recipient, of the reviewer. If it leaks out prior to box office release, it costs them a lot of money.
Piracy is an extremely damaging phenomenon in the media world and what we then do is we put a tiny bit of a (Bitcoin) deposit inside that copy that the reviewer receives. It’s tied to his or her identity and it’s really a sort of a fidelity guarantee that that copy of the movie is still inside the control of the recipient because if the movie should leak, we make it very easy for anyone else there, anyone inside the file sharing community to anonymously pocket the reward, to claim it as a bounty and the moment that happens we can see (on the blockchain) that a particular copy has leaked and we use that to inform our clients. Now I use movies as an example, but it’s pretty much applicable to any type of media and more recently, we’ve had some good business developments on ebook protection as well.
This makes it quite an interesting venture for bounty hunters to earn Bitcoin essentially.
That’s why in the bigger scheme of things, in sort of the cryptocurrency ecosystem, we think that’s important. Because if you look at Bitcoin and the hype around other cryptocurrencies, it’s usually around trading and investing. There are a number of other ways in which people can apply cryptocurrency and for many of our bounty hunters; it’s the first Bitcoin that they receive when they claim the bounty. However, they earn cryptocurrency directly for performing a useful service. Essentially, we’re outsourcing the search for pirated content, which is a difficult thing to do directly into the piracy communities, and rewarding the participants for doing that directly in cryptocurrency.
What has the take up been like, can you give us an idea of what content studios have used your services, and perhaps even the number of bounty hunters out there?
On the business side, on the media science side, we’ve focused very heavily on the movie market originally. Back when we spoke in 2013, early 2014 our market analysis indicated that piracy in the film industry was on a very strong upswing, that there’s a very definite need for more sophisticated ways of cracking the sources of piracy. So we’ve focused quite heavily there. Our core product is a web service or API (application programming interface) software as a service where a client can connect directly to our system and mark and crack media copies using our technology. On top of that, we built a platform for independent movie studios, for the small movie studios where they can very easily send out screener copies of movies to recipients and that’s been quite popular among our early users.
We piloted that with a couple of local South African producers and distributors of movies and quite a large proportion of the local productions go through our system now during the pre-release distribution of screeners. Then about a year and a half ago we were approached by a company in the UK that does ebook distribution or serves ebook solutions for the large publishers, Erudition Digital, and they were interested in adding our tech as a value add to their ebook platforms. Therefore, we integrated directly with their distribution system, so when Erudition puts an ebook for retail, we serve that watermarked copy of the ebook. At the moment our biggest movie-producing client is in Japan, so we’re working with a company there that distributes about 300 new movies per month directly to DVD shops. We’re helping them to secure their distribution network there.
Regarding your question about the number of bounty hunters out there, the easy answer is, we don’t exactly know because they can be completely anonymous. But we’ve been doing a very controlled release of our extraction tool that the bounty hunters have used so far. As a kind of double-sided business with media clients on the one side and bounty hunters on the other side, we need to be very careful that we don’t over-scale on a number of bounty hunters before we have enough media out there in the wild to keep the bounty hunters interested and to have marked and pirated media for them to find. We try to keep our number of bounty hunters fairly small and very focused on the content that our clients release. We know that we have bounty hunters across four continents at the moment, but these are tiny numbers. There are dozens of bounty hunters, strategically placed within the file sharing communities where we know our clients’ content leaks or is likely to leak.
Getting back to the types of content that you’re protecting: is content piracy a bigger problem for the film industry or the ebook industry. Because you’re now playing in both fields essentially?
That’s actually a very interesting question because the harm around piracy relates directly to the type of media. I often hear people say something like, “The film industry should just relax about piracy, look, do what the music industry did, just evolve your business models around that”. But it’s very difficult to do for the type of media that’s intended to be consumed once by a recipient. For a music track, for example, you have multiple opportunities to sell that music track to the consumer. They might hear it the first time on a piracy streaming site, but music is something that, if you like it, you want to listen to it again and again. You’re likely to have another opportunity to sell that track and to recoup costs in producing the content from the recipient at some stage. Music is significantly cheaper to produce than a feature film for example, so there are lower costs that need to be recouped.
— Custos Media Tech (@CustosTech) September 18, 2017
For a movie, you’re dealing with something that could cost tens of millions of dollars to produce. You have one opportunity to sell a movie to a recipient. If they watch it on the piracy site first, if you have a pre-release leak of the movie due to a screener copy being leaked, you’ve lost that sale and Hollywood is landing in a situation where there’s tremendous risk around not being able to recoup the costs for producing a large blockbuster. For ebooks, you have something similar. You usually purchase a book because you want to read it once, particularly ebooks that aren’t items that you’re going to display on your shelves and become part of the furniture. An ebook is something that people purchase to read once and if they are paying that first to a piracy site or by Googling for the ebook and getting a copy for free you’ve lost that opportunity to make a sale. So, ebooks turned out to be a particularly attractive market for new anti-piracy technology.
Is content piracy still a big thing, especially with the emergence of legal streaming services like Netflix, Showmax etc? I know that in the ebook department, there could still be a huge problem, but specifically when it comes to video, it seems like customers today have more options on the table. That is, they don’t have to go out and illegally download something anymore.
Yes, the CEO of Netflix used to say that when Netflix moved into a new territory, piracy rates dropped by 50% and I think you touched on something very important there: that the piracy isn’t simply a criminal phenomenon, that people don’t want to pay for content, therefore they steal it. It’s quite often an access problem where people want to have access to the content they want to watch, the books they want to read, or the music they want to listen to, but they’re unable to find it at all or at a price point that makes sense for the local market or the specific demographic in which that consumer would be. It’s certainly still a big problem for the film industry. I think Netflix has found some piracy has changed quite a bit since those early days where they were just redistributing other content owners’ content on an easier-to-use distribution channel.
Custos startup uses bitcoin bounties to make pirates rat on one another — Quartz https://t.co/FK0eRSCvU9
— CHSeaton (@COSseaton) July 23, 2017
Netflix has started focusing very heavily on producing their own content and they place themselves in a market position where the type of content they can produce is tailored directly to their distribution network and since their business model has evolved in that way, they’ve taken a much more prominent stance on piracy and they do have an internal team focusing on preventing that. But as we’ve seen with the recent leak of (Netflix produced) Orange Is the New Black: when you get a pre-release leak of a new series, it’s damaging to a company like Netflix. It’s more difficult to quantify because Netflix uses their original content as a way of acquiring new customers and retaining existing customers, so it’s very difficult to quantify the damage to the bottom-line that a leak like Orange Is the New Black does. But there’s no doubt that it’s harmful to them.
You run Custos out of Stellenbosch, what is your background and why is Custos being run from that part of the Cape? You guys also had a relationship previously with the University of Stellenbosch?
That’s right. I happen to be a rehabilitated academic. I used to be an associate professor at the Department of Electronic Engineering and my own research focused heavily on telecommunications and signal processing and particularly content protection and content distribution. And it’s in this environment that the idea of using Bitcoin for content protection spun out. It was one of those inventions that literally was made one morning around the coffee machine and in the Media Lab. My now two co-founders were chatting about ways of combining our research on digital rights management with Bitcoin and stumbled upon this idea that you could use a Bitcoin private key as a way of placing imposed vulnerability on the recipient of a media item to give them skin in the game to protect that.
We immediately wrote up our disclosure to patent it and in the Media Lab we worked very closely with the technology transfer office at Stellenbosch University. We then immediately went into the patenting process and started our market research, and we discovered that, a) it looks like a viable idea, and b) there seems to be a good market for this. We then incorporated the company and got some early investment. Our first year we ran off a seed grant from the Technology Innovation Agency and during that period we also raise our first seed grant/seed round of investment and as it emerged that the business concept seemed to be viable, I started spending more of my time with the company and eventually elected to move to the company full-time.
What do you make of the current Bitcoin hype because last time that I chatted to you, Bitcoin was still very much a fringe thing? It now looks like a bubble, doesn’t it?
Yes, it’s absolutely fascinating to see how the discourse around Blockchain and Bitcoin has developed. Back when we spoke last, it was this emerging phenomenon that was the kind of thing that tech geeks got very excited about. Back then, you could bore people within long conversations about it and the stuff that we were working on certainly looked like very blue sky tech. Yet now, it’s gone completely mainstream. We’ve had so many bull runs and proclaimed deaths of Bitcoin in the last couple of years, I’ve lost count. It’s certainly something that’s grabbed the public’s imagination now.
Blockchain technologies have been experimented with in an enormous variety of different application. It’s been applied to currencies like Bitcoin and Ether and several of the other new cryptocurrencies, such as Zcash which have also become popular. People have started to consider cryptocurrency more seriously as a potential investment, something to stick a little bit of money into and see what happens. But we’ve also seen phenomenons that definitely look like bubbles. The one that personally I’m sceptical about at the moment is the enormous hype around what’s called, “Initial Coin Offerings” or ICOs, which is a very novel way of doing fundraising for a business.
The idea is basically that you issue a cryptocurrency, issue your own type of Ether or Bitcoin that’s tied to your business operations and you sell off these coins or tokens to anyone in the world who’s willing to put down money to buy one in the hope that they’ll share in the profits of the company. We’ve seen companies raise millions and millions of dollars within 30 minutes using these ICOs. There has been an enormous rush for companies with often little more than a white paper on what they plan to do.
I personally don’t think that’s something that’s sustainable and several governments across the world have started talking or issuing regulation around the management of these ICOs. This is because ICOs could provide a way of issuing securities and bypassing the existing securities legislation, which is a dangerous thing for small investors out there. So, that’s certainly something that I think is in a bit of a bubble at the moment. As for the Bitcoin price and whether it’s a good investment, I must say, I’m quite bullish about Bitcoin as a cryptocurrency. I think it’s proven itself as a security over the past eight years and there’s an increasing demand for something that is fundamentally a scarce digital asset.
JPMorgan’s Chief Executive Officer recently hit out at Bitcoin, he basically called it a stupid fad without substance. What’s your take on his comments?
His words, if I recall correctly was that it’s a fraud. My comment on that is that I think it’s very difficult for something to be fraudulent if it’s completely open so that anyone can see how it is built and what the principles behind the concept is. And in terms of the security behind how it works and how it interacts and how it’s traded, we’ve had eight years of Bitcoin being actively traded and actively attacked by outsiders or people trying to get access to other people’s money through the system and the system has withstood that. So I think calling it fraudulent is inaccurate. I think what people sometimes misunderstand is that there’s nobody building Bitcoin and selling it to other people or where you have something like a Ponzi scheme where somebody is issuing tokens, shares, or participation in something that doesn’t have an underlying business supporting it.
In the case of Bitcoin, you simply have a scarce digital asset scarce digital commodity that people trade with each other paying Dollars or Rands to do it and in that sense; it’s a bit like gold. It’s artificially scarce on its own; it’s not necessarily something that has utility. Due to its scarceness and the fact that it would present a tradeable thing that you can sell for a local currency anywhere in the world, it’s become like gold in terms of investment: something that you can buy a little bit of and if you need to change it into Dollars, Pounds, or Euros. You can do so wherever you are.
Things that matter for bitcoin:
Things that don't matter:
Jamie Dimon's opinion
— Jeremy Gardner (@Disruptepreneur) September 13, 2017
Do you think that the Blockchain and Bitcoin are here to stay then?
I certainly think so. I think it’s already moved out of the domain of the tech geeks who initially were dazzled by the cleverness of the technology. It’s been used to do crazy things. There are companies using it to crack the prominence of diamonds, there are companies using Blockchain to crack the ownership of security and make sure that there’s a more technically sound way of managing complex databases of ownership. It’s been used for music rights management tracking which artists are owed how much royalties due to a rework of a specific track of music.
These are all use-cases that were difficult or impossible or prior to the invention of Blockchain. I think we’re only starting to scratch the surface round what we can do with this technology. Bitcoin is the granddaddy of Blockchain applications; it’s the “Hello World” application of the Blockchain, which is simply building a digital currency that runs in a completely distributed way where nobody controls how it is issued or how the ownership of the money is tracked.
G-J, you’ve given us some of your views on the ICOs out there, but would the Custos ever consider launching an ICO, considering that you could probably create your own token and use it to trade on your own platform?
I’d be lying if I said we hadn’t toyed with the idea before, but it’s not something we’re seriously considering right now. It’s technically possible. At the moment we’re paying our bounty hunters in Bitcoin. But it’s completely feasible issuing a token or currency that’s called the ‘Gold Baboons’ or whatever and issue those as rewards to bounty hunters participating in the system. The idea behind an ICO would then be that you create this currency to be part of the ecosystem, the currency in which rewards are received and you allow people to repurchase some of these to participate in the growth in the value of this alternative currency. But it’s not something that we’re considering as a fundraising mechanism at the moment. We’re building our business in the more traditional way, raising funding rounds by pitching to investors and by getting feedback from business, from clients, from investors on what seems viable and what seems the right direction for us as a business. That’s most likely the route we will continue on.
G-J, it’s been an absolute pleasure talking to you today, thanks very much for taking the time to chat to me.