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In April, when a Swedish court sentenced the founders of Pirate Bay to one-year prison terms for promoting copyright infringement on the world’s largest file-sharing website, the music and film industries gave a standing ovation. But their triumph was short-lived.

The four men, who “tweeted” vigorously on Twitter during their trial, may not be able to communicate so freely from their prison cells. But their struggle for internet freedoms has developed into a political issue: Sweden’s Pirate party, dedicated to the legalisation of file-sharing, won a seat last month in the European parliament.

The war being waged by the entertainment industry against online piracy was further weakened when its powerful ally and champion of internet policing, France’s President Nicolas Sarkozy, had his anti-piracy bill watered down by his country’s highest court in April.

TECHNOLOGY

Illegal yet ever easier to do

Illegal file-sharing is almost as old as the internet itself. It began with friends exchanging files on private discussion boards but hit the mainstream with the arrival of Napster in 1999. Napster used peer-to-peer technology but its central index of songs made it vulnerable to legal action. Successors such as Kazaa and Gnutella obviated the need for a central site. The path to Pirate Bay – founded in 2003 – was paved by the 2001 release of BitTorrent, a more efficient form of peer-to-peer technology. Now, the fastest growing form of piracy is streaming video. Streaming – similarly to legal sites such as Hulu and BBC iPlayer – does not require a copy of the content to be downloaded. Viewers can click and watch shows or movies instantly.

Ten years after the launch of Napster, the first online file-sharing service, the music industry is no closer to solving the problems created by digital piracy. As advances in technology make television, film and video games companies more vulnerable to piracy, that decade-long failure to change consumer behaviour threatens to undermine business models across the media industry.

Piracy has helped to create momentum around legal and intellectual challenges to copyright law. “Piracy has gone from being a simple argument about infringement or using something without permission to questioning the very basis of copyright,” says Gregor Pryor, a digital media partner at Reed Smith, the international law firm.

For most music and film fans, its appeal is more simple. With a little technological know-how, they can find and download free copies of the latest releases. Many albums and films appear online before they reach the shops or cinemas.

In removing the cost of distribution, the internet has proved itself a perfect piracy incubator and has made it harder for those involved to be prosecuted successfully. The Pirate Bay case is due to go to appeal later this year. But the scale of the problem for content owners is worldwide.

Russia, China, Spain, Mexico and Canada were this year singled out by the US Congressional International Anti-Piracy Caucus as having the highest rates of copyright infringement, largely as “the result of a lack of political will to confront the problem”. Russia’s lack of progress in respecting intellectual property rights now threatens its accession to the World Trade Organisation.

“In Russia there is no concept of copyrighted recorded material. They get away with selling it and only paying publishing royalties, not recording ones,” says James Bates from Deloitte, the consultancy.

The statistics make uncomfortable reading: the music industry has been decimated by online piracy, which remains the default way of consumption for many. For every track bought online, 20 were downloaded illegally last year, according to IFPI, the international music industry lobby group.

The film industry is fearful of repeating the mistakes of the music business. Hollywood executives have waded into the debate, while large media companies such as NBC are joining forces with trades unions as rising unemployment levels focus their attention on the threat to members’ jobs and incomes from copyright breaches. IFPI has been working with the Motion Picture Association of America to share information on anti-piracy and enforcement.

The statistics are not encouraging, however. A total of 13.7m films were distributed on peer-to-peer networks in France in May 2008, for example, compared with 12.2m cinema tickets sold, according to Equancy and Tera, two Paris-based consultancies.

But the entertainment industry does not always endear itself to consumers by painting itself as the pained victim. A widely reported study in the UK this year said downloading cost the economy £120bn ($198bn, €139bn). Other industry associations scrambled to lament the losses. But the figure was later revealed to be an error – the estimate was really £12bn.

Such estimates commonly assume each downloaded album is a lost sale, ignoring other studies that show the most prolific downloaders also buy more music. One of the few people to be hired by the music industry who dared to suggest pirates were also labels’ best customers – ex-Googler Douglas Merrill – left EMI after less than a year.

An industry that portrays itself as the victim while suing single mothers and other ordinary consumers for big sums has only helped the cause of Pirate Bay and those downloaders who are trying to make an ideological point by stealing music and movies. An anarchic and nihilist foe – which is yet to make a coherent argument for how content production would be paid for in a copyright-free future – is a tough opponent.

But the majority of file-sharing sites are commercial, not political, in motivation. Few of the pirates want to build a business to take on Universal Music or EMI. Like a market stall selling pirated DVDs, they just want to make a small profit from a virtual commodity and do not mind whose business model they ruin to do so. What started out as a hobby for computer geeks such as Sean Fanning, who developed Napster, has become big business for website owners.

LEGISLATION

The battle is on to reshape copyright rules for the internet age

Internet piracy has become so difficult to control because it is now ingrained behaviour among consumers, analysts say.

“It’s a social norm,” says Eric Garland of Big Champagne, which tracks file-sharing. “Somewhere along the line in the last 10 years, it became in most places in the world socially acceptable to infringe copyright.”

A study by Entertainment Media Research found 71 per cent of those file-sharing gave “free music” as their main reason for doing so.

But the motivation of the individuals uploading copyrighted content to file-sharing networks – who make it possible for others to download – is more complex. “These guys operate a bit like the hacking community and are mostly doing it for kudos,” says Helen Saunders of the BPI, which represents the UK recorded music industry. “They compete with others to be the first to put the content out and are not looking to make a profit.”

Pirate Bay, the most notorious file-sharing site, sets the ideological bar somewhat higher. Its founders in Sweden sent out a clear challenge when they announced that any proceeds from its sale would go to fund projects on freedom of speech, freedom of information and the openness of the internet.

That cause will be taken to the European parliament after Sweden elected Christian Engström, the first MEP from the Pirate party. The party’s stated intent is to reduce the term for commercial copyright protection to five years. It also believes that “non-commercial copying and use” – including file-sharing – should be legalised. Content owners argue that few other MEPs share Mr Engström’s views.

Just as businesses that used to deliver ice to households were unable to make refrigerators illegal, content owners should not be able to use the law to protect an obsolete business model, he says. Instead they should build profitable services around “non-commercial file-sharing”, such as search engines.

A key plank of the Pirate party’s logic is that copyright was not designed for the internet age. To that end, Lawrence Lessig, a professor at Stanford Law School, has devised a system of “copyleft” – a new content licence that encourages the kind of sharing, remixing and non-commercial reuse that is common on the web.

While some artists have experimented with Prof Lessig’s “creative commons” licence, few content owners see the merits of a debate about copyright. Its protection is still seen by labels and studios as the best incentive to create and invest in content.

Most piracy sites rely on advertising for their income. Global Gaming Factory X, a group that is planning to buy Pirate Bay, told industry blog PaidContent it could make $40m (€28m, £24m) a month from advertising. But while that figure has been met with scepticism, many sites make substantial sums from advertising placed around other people’s content.

“These kinds of sites often generate significant profit through advertising and advertisers will pay a lot of money,” says Helen Saunders, head of internet investigations at the BPI, which represents the UK recorded music industry. “Just think about how many people are going on to them. They can be very attractive to companies whose target audience is 16-24 year-olds.”

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Questionable legality means most mainstream advertisers try to avoid media-sharing sites such as Pirate Bay and Mininova, even though they attract millions of visitors. Most ads are for gambling, “adult” chatrooms or dubious offers of free iPods. But some big brands – such William Hill and even Microsoft – have found their ads appearing alongside pirated content, even if that was not the advertiser’s intent.

The ads may not always be genuine – the appearance of such brands boosts sites’ appearance of legitimacy. But more often it is simply a factor of advertising space being sold across “blind” networks of so-called remnant inventory, typically yielding very low revenues for site owners.

“It’s very much like a spam e-mail business,” says Eric Garland of Big Champagne, a research firm. Low costs and high volumes mean it only takes a few gullible victims to click on an ad – and perhaps be tricked into downloading computer viruses – to turn a profit.

Pirate Bay, which has about 10m users in more than 30 countries, carries ads for online games, dating, lottery, mobile ringtone and computer screensaver sites. It was alleged by the Swedish government and IFPI to have generated more than $3m in annual revenue from advertising. That would be low for a mainstream media site with such substantial visitor numbers, yet one of Pirate Bay’s founders argued that these figures were an overestimate.

Recent surveys suggest peer-to-peer piracy is no longer increasing and that legal downloads of digital music at Apple’s iTunes are also starting to plateau. “Music piracy has almost found its high watermark,” says Mr Garland. “Clearly there is a saturation point for digital media.”

But if peer-to-peer is peaking, new technologies are rising up to replace it. Teenagers are experimenting with techniques – such as swapping computer hard drives or trading songs on mobile phones via Bluetooth – that are near-impossible to detect.

A more severe new threat to content owners does not rely on swapping songs or movies at all. Streaming video sites – using similar technology to the BBC iPlayer, Hulu or YouTube – allow media to be viewed or heard with just one click. That makes streaming video much less complex to use than Pirate Bay-style sites. Streaming “is a problem emerging so fast that it makes my head spin”, says Mr Garland, who expects it to be the industry’s main concern within a year. Specialised search engines, which aggregate links to these video sites, also operate in a legal grey area but attract substantial traffic by improving the usability of pirating sites yet further.

As technology speeds ahead of legal precedent, some experts argue that chasing new sites will remain a futile effort. So content owners have turned to broadband operators as their last hope to control internet piracy. By monitoring traffic on their networks, content owners argue, internet service providers could spot breaches of copyright and throw persistent offenders off their networks.

But the European Commission has now suggested that cutting off an individual’s internet access is an infringement of human rights. That has stymied Mr Sarkozy’s “three strikes and you’re out” proposals. The UK’s Digital Britain report this month stopped short of proposing anything so drastic, instead leaving it to record labels to take legal action individually against frequent file sharers who ignore warning letters from their broadband providers.

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Content owners seeking ways to limit the damage are also using their commercial clout to bring broadband operators to the table. In a pioneering deal, Universal Music has agreed to let Virgin Media, the UK cable company, offer an unlimited downloading service to its broadband customers – as long as Virgin also helps Universal clamp down on piracy.

But even if this “all you can eat” model offers a user as much content as piracy does, it will struggle to compete on price. Whether it is films, TV shows or music, consumers are becoming accustomed to getting what they want for free.

Before too long, another pirate is likely to face court accused of copyright infringement. The content industry may well celebrate another Pyrrhic victory. Whether motivated by ideology or profit, the media-sharing movement seems set to reinvent itself again and again.

Copyright The Financial Times Limited 2009