Despite success in suing people who download music illegally and in reaching deals with personal networking sites like YouTube, the music industry is still bleeding millions of dollars in sales to online piracy.
It is a major issue for an industry that is desperately trying to boost revenue from legal downloads to make up for falling sales of compact discs, which declined 23 percent globally between 2000 to 2006.
To get an idea of the size of the problem, Eric Garland of Web consultants Big Champagne estimates that more than 1 billion digital tracks are illegally traded for free each month.
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By comparison, Apple Inc.'s (AAPL) iTunes Music Store, which has more than 70 percent of legal digital music sales in the United States, has sold only a bit more than 2 billion songs since its launch in 2003.
The problem is so-called peer-to-peer (P2P) networks using Gnutella- and BitTorrent-based software that link millions of personal computers and allow anonymous users to exchange digital music files for free over the Internet.
Since the music industry started winning lawsuits against individuals in the last few years, the growth in the number of people using illegal file-sharing software has slowed significantly, but nonetheless it is still growing.
Russ Crupnick, an analyst at consumer research group NPD, said the number of U.S. households engaged in P2P over the last year rose 7 percent, while the number of illegal downloads were up by 24 percent.
"P2P remains an unacceptable problem," said Mitch Bainwol, president of the Recording Industry Association of America. "The folks engaged in the practice are doing more of it."
But shutting down the companies that marketed the applications doesn't kill the network.
"If you've got the software, you can still file-share. The rulings just means you can't distribute (the software) anymore," said Wayne Rosso, a former chief executive of Grokster.
PIRATES AS PARTNERS
In the last year, the music industry's focus has been on more high profile Web sites like News Corp.'s (NWS) social networking site MySpace and YouTube, Google Inc.'s (GOOG) online video sharing site.
French media group Vivendi's Universal Music Group, along with fellow record companies Warner Music Group (WMG) and Sony BMG, have signed revenue-sharing agreements with YouTube to let its users legally distribute their music on the site.
Universal Music Group also sued MySpace last year for letting users distribute its artists' works, a case that Universal has it expects to end in a settlement.
The record companies are now partners with "what they used to call pirates," Rosso said.
The reason is that a company like YouTube has tens of millions of young music fans that music companies want to sell to.
"The record labels are saying on the one hand it's piracy so we've got to provide protection," said Jon Diamond, chief executive of ArtistDirect. "But on the other hand, it's their audience and they want to figure out ways to monetize that audience."
ArtistDirect's MediaDefender targets users of P2P networks and redirects them to video commercials when they search for files to swap illegally.
Even if record companies could eradicate all illegal downloading, there is no guarantee that people who swap songs for free would actually switch to buying music legally.
But the industry's strategy is to slow down P2P sharing and hope that legal digital music sales will eventually make up the shortfall.
"Obviously it's been a huge impediment to the growth of the legal market," said Larry Kenswil, Universal Music's top digital executive.
"But the growth of the legal market has been spectacular," he said. "P2P is not going to go away, but the relative problem will drop for us."