(Reuters) - A small number of U.S.-based startups are harvesting data about the hundreds of millions people who illegally stream movies, TV shows and music in a bid to create a new advertising market.
Whether major brands are willing to pay for the opportunity to market to consumers who steal content -- an industry taboo to date -- will determine the fate of this cottage industry.
The new businesses measure and track the digital footprints of illegal downloaders. While the concept is still in its infancy and has been greeted with skepticism among some media insiders, a handful of firms are making early inroads.
The biggest of these startups, Tru Optik, signed a deal earlier this year to share its data with New York media agency Mindshare, a division of GroupM, which is owned by WPP, the global advertising and public-relations company.
Three-year-old Tru Optik has assembled a database of the 500 million people who illegally view or share shows and movies via BitTorrent and other file-sharing platforms. That data is combined with other user data, including the websites they visit, zip codes and purchasing history.
Mindshare uses this information to better identify new genres of movies and shows to help its media clients advertise to fans of these genres, said Sameer Modha, who oversees customer data strategy at Mindshare Worldwide.
For example, Mindshare recently noticed from the data that there is a fan base for shows and movies from several different genres, including Westerns and science fiction, that all featured "protagonists who are isolated in some dystopian alternate reality."
Mindshare can use this customer segmentation to help media clients market relevant shows and movies. But Modha stressed that Mindshare does not advertise directly to illegal viewers, and said that understanding their behavior is not the same as promoting it.
"If I go interview people who steal cars, am I condoning car theft or am I just understanding the phenomenon?" he asked.
That question gets to the heart of an ethical debate around these startups and piracy.
Some major industry players, including the National Association of Broadcasters (NAB), told Reuters they find the enterprise distasteful but have yet to take any legal action against this new approach.
"Our members will continue to resist business partnerships with companies who condone content theft and piracy," said Dennis Wharton, spokesman for the NAB, which represents TV and radio broadcasters.
Tru Optik's CEO, Andre Swanston, says the company does not endorse or condone piracy. Its database allows brand advertisers to reach these downloaders - identified by IP address and other anonymous data points, but not by name, according to the company - with targeted ads on the websites they frequent. No ads are placed on sites where pirated content is shared or on pirated content itself, according to the company.
"I don't think it's legitimizing these people because these are already legitimate consumers," he said, noting that the illegal downloaders also are heavy buyers of media. "By providing media companies with better audience data and the ability to market to these viewers, Tru Optik believes it is helping clients mitigate piracy and better monetize its content," Swanston said.
The U.S. Copyright Act prohibits unauthorized use of intellectual property, and anyone who illegally downloads content could face fines or even prison. The law does not address the activity that Tru Optik and the others are pursuing, namely providing information about these consumers.
The NAB and other industry groups are not lobbying for regulatory or legislative changes to curtail this fledgling business. The Federal Trade Commission, which oversees advertising, has not addressed the issue and did not return a request for comment for this story.
So for now, one of the biggest obstacles for the startups may be the comfort level of would-be customers.
Their pitch is based on compelling statistics.
About 70 percent of consumers under 30 in the U.S. and Germany, for example, have copied, shared or downloaded files illegally, according to a 2013 study by Columbia University and research institute American Assembly.
Plus there is evidence these viewers spend more on media than their peers. A 2014 survey of 2,500 users of BitTorrent, a protocol that allows people to share files, are 170 percent more likely than others to pay for digital music.
Tru Optik has signed up about 20 customers, Swanston said. The Stamford, Connecticut, company has 20 employees and works out of a former YWCA that has been retrofitted into a loft-style office, complete with games and a ping-pong table. It's backed by two venture firms -- Cambridge, Massachusetts-based Progress Ventures and Connecticut Innovations of Rocky Hill, Connecticut.
Besides its work on peer-to-peer file sharers, Tru Optik provides clients with analytics on viewership of streaming platforms, including Roku and Apple TV.
Another Tru Optik client, streaming service YipTV, discovered from the database that 25 percent of illegal viewers of the "El Classico" soccer matches between FC Barcelona and Real Madrid were women who also like novella-type movies, said YipTV CEO Michael Tribolet.
So the West Palm Beach, Florida, company launched a campaign marketing its sports offerings to these viewers. It saw a 35 percent increase in subscriptions, including a 10 percent increase in female customers, Tribolet said.
Santa Monica, California-based Muzit, which has six employees, is working with recording artists who want to reach consumers who have illegally downloaded their songs, said CEO Tommy Funderburk, who is also a rock singer. The company would not disclose how many clients it has.
U.S. rock band The Mavericks last year ran banner ads on several websites, inviting fans to provide an email address for the chance of winning a guitar signed by the band.
"Many of these people are fans and potential customers," Funderburk said.
New York City-based PeerLogix, which has six clients so far, according to the company, is pursuing a similar model. It works with brands and music, TV and movie producers who want to advertise their content or products to the people who are illegally viewing the content.
Some media and advertising industry executives said they doubt these businesses will take off. Because entertainment companies have long called for tougher anti-piracy laws, they said, lining up with companies seeking to profit from illegal downloads could undermine their credibility.
Ashwin Navin, CEO of Samba TV, was the co-founder of BitTorrent, a pioneering platform for illegal viewing and sharing of content. He called the effort to create an advertising market aimed at pirates "a tough nut to crack."
"Either treat them as nefarious actors or not," he said.
David Morgan, chief executive of Simulmedia, a New York-based ad tech firm, notes it is against the ethos of the way media companies think.
"The entertainment industry is fundamentally built on the creation and monetization of unique intellectual property," said Morgan.
But to Tru Optik's Swanston, it's only a matter of time until the industry embraces this big market.
"Anyone not tapping into this immense source of audience data is at a huge disadvantage to their competitors," he said.
Editing by Eric Effron and Edward Tobin