A paper from New York University researchers analyzes the methods used by the content industry to annoy and stop file-sharing on BitTorrent networks.  They found the practices of MediaDefender and other organizations presented no more than a nuisance to downloaders despite costing the content industry millions of dollars.

Prithula Dhungel, Di Wub and Keith Ross reviewed two specific methods use to slow down BitTorrent downloads. The first called “piece attack” involves trying to upload as many failed connections or hash fails as possible. Second, there is the “connection attack” where TCP connections are blocked preventing downloaders from accessing the actual content.  The researchers found these methods did slow download speeds, but not enough to deter downloading. Additionally, blocklists which can be easily found online increased speeds by 30-35 percent.  BitTorrent client uTorrent only encountered hostile connections 2 percent of the time while Azureus had only 18 percent.

Emails from a few years ago estimate that music companies pay up to $4,000 for each month of MediaDefender protecting one album.  As many already suspected, this money is likely being flushed down the digital drain.  Downloaders are not being deterred and certainly not being encouraged to buy content in another way.  The content industry is spending massive sums of money to fight against consumers preferred method of distribution. The ethics of file-sharing are not the point – basic economics, as always, is. Consumers by the millions are using file-sharing networks to find the content they want and share that content with other people. This is a good thing that should be embraced, not fought.  As we’ve seen, embracing new technology increases the size of your market and the money you can make, not decreases.

I love having all my media in one place: on my iPod, media center, or gaming console. Disc switching is so 2004. And slowly entertainment companies are getting it – we want digital downloads of our movies, games, and music. But they don’t understand how we want them priced.

I’m going to skip, for this article, the true economics of digital goods (they’re infinite in supply, they should be free). Instead, let’s start with making them cheaper than their tangible alternatives. Why? There’s a win-win situation here.

First, digital goods save the creator money. The is no packaging, processing, stocking, or shipping. A little hard drive and some bandwidth are all you need. This should all cut substantial costs out of the creator’s bottom line, and that’s savings worth passing along to the customer.

Consumers, while adding the convenience of fewer discs and more content, lack the ability to resell their digital goods, which research shows increases the initial value of tangible goods (you spend more on a car knowing you can resell it for some money, and the same applies to video games and DVDs).

So why are digital goods still priced so high (and by high, I mean, the same price as their tangible counterparts)?

Part of the reason is retail chains are eager to keep customers coming into stores and want DVDs and video games as weekly incentives. Creators might want this traffic for impulse (or non-technical savvy) purchases, but in truth, they are the losers in this arrangement. Creators fight for shelf space often paying premium dollars for ideal placement when digital stores allow for better navigation and unlimited shelf space.

Yes I believe digital goods will eventually all be free (it’s inevitable) and new business models will support their creation. For now, let’s just make the prices fair. Remember, BitTorrent has all this content available for free anyway.

Prison Break attracted more than six million TV viewers for its season premiere. Another two million downloaded the episode over the next week even though the episode was available for free on Fox.com.

Fox believes most of those downloads came from Europe where Prison Break isn’t available on TV or online.  TorrentFreak found only 4 percent of downloads came from the U.S.

TorrentFreak concludes availability is a key factor when people download from BitTorrent.  Price is not the only consideration.  Joss Whedon’s recent Dr. Horrible web series was streamed free on the web but became a top seller on iTunes for a price because people wanted a convenient, downloadable version to watch when and where they wanted.

This is why media companies should view file-sharing networks as competitors feeding a market need.  Other countries want to watch popular TV shows, but networks delay them for weeks if not months. Even websites Fox.com and Hulu only allow North American viewers, sending millions of international users to file-sharing networks.

The market wants easily available, convenient TV shows, movies, and music.  They keep showing this with their time and dollars. Media companies should pay attention to what the market wants.

EA released the long-in-development Spore this weekend, packed with repressive DRM.  Gamers have responded by flooding Spore’s Amazon with one star reviews (more than 650).  EA limits Spore to only three installations.  Uninstalling the game does not increase that number, leaving paying customers to prove they legally purchased the game to EA for permission to play the game.

All this happens in the name of preventing piracy. But Spore has been available on Bittorrent sites for almost a week sans DRM. This leaves paying customers to deal with restrictive DRM.

EA knew a public relations nightmare was brewing when it announced the DRM back in the spring.  After public outcry, EA removed part of the DRM requiring a validation check every 10 days, but EA kept the three installs limit that is frustrating gamers.

So piracy is running free and paying customers are pissed off.  How is DRM supposed to work again?

Media and software companies release reports that piracy costs them billions of dollars, destroying their business, funding terrorism, or hurting poor farmers. These companies lobby governments to pass laws, sue fans in court, or ask people to spy on others in order to prop up business models that are becoming obsolete. Companies should stop fighting piracy and treat it like any competitor - by competing and out innovating file-sharing services to provide a better value allowing everyone to make more money.

Matt Mason promotes this in his book, The Pirate’s Dilemma, calling piracy a sign of innovation as pirates experiment to make processes more efficient.

Some of America’s greatest innovators were thought of as pirates. When Thomas Edison invented the phonographic record player, musicians branded him a pirate out to steal their work and destroy the live music business, until a system was established so everyone could be paid royalties. Edison, in turn, went on to invent filmmaking, and demanded a licensing fee from those making movies with his technology. This caused a band of filmmaking pirates, including a man named William, to flee New York for the then still wild West, where they thrived, unlicensed, until Edison’s patents expired. These pirates continue to operate there, albeit legally now, in the town they founded: Hollywood. William’s last name? Fox.

New technology has repeatedly challenged media companies, from Edison’s phonograph to television to cassette tapes. After lawsuits attempted to quash the innovation, media companies embraced the new technology and found new revenue streams, making more money as a result. The home video market Hollywood so desperately defends now would never have existed had Universal and Disney’s lawsuit against Betamax succeeded. Instead of suing file-sharing networks, media companies need to embrace the new technology as a new way to make money.

The current state of media and software is quite good. Media companies are making more money every year. Even the music industry is making more music while more people are listening to music. The recording industry is plummeting at a rate so fast piracy cannot be the sole factor, as studies have shown.

But piracy has become an obsession for media and software companies, hurting themselves and their paying customers with DRM and restrictive policies that limit the value of their products. Microsoft, Google, and Major League Baseball have all discontinued DRM serviced, meaning people who legally paid for goods no longer get to use them while pirates continue to download DRM-free goods for nothing.

Piracy offers a compelling alternative. Piracy offers unlimited free downloads of an almost complete collection of every movie, song, TV show, book, or game ever made using a variety of easy to use programs. Pirated content has no DRM, meaning you can put your music and movies on every computer and portable device you own. On the down side, pirated content is has unreliable quality and inconsistent download speeds, but since its free, these are minor negatives.

Why should someone pay for a service with less services?

Media and software companies need to recognize piracy is not going away - it’s a competitor. No matter how many lawsuits the RIAA, MPAA, and BSA file, piracy grows. These lawsuits increase publicity for many sites and services, working against the lawsuit’s purpose - Pirate Bay, the leading BitTorrent tracker, is now one of the 100 most trafficked websites thanks to publicity from these lawsuits. And for every file-sharing service closed down, dozens more pop up. File-sharing is too useful and thus valuable.

To compete, media and software companies will need radical changes to their business models. Techdirt’s Mike Masnick constantly refers to leveraging infinite goods to sell scarce goods.

In a competitive market, the price of a good is always going to get pushed towards its marginal cost. That actually makes a lot of sense. As competition continues, it puts pressure on profits, but producers aren’t willing (or can’t for very long) keep selling goods at a direct loss. Sunk (or fixed) costs don’t matter, because they’ve already been paid — so everything gets pushed to marginal cost.

Movies, music, and software have high upfront costs but negligible reproduction costs - it’s as simple as copy and pasting a file.

This means leveraging infinite goods to sell scarce goods, like concert tickets, collectable merchandise, or advertising (people’s time and attention is very limited). $20 for DVDs and CDs worked under the old, obsolete business model. The new media economy requires new business models that offer more value to consumers. Plastic discs don’t offer $20 of value anymore, meaning new price models and revenue expectations need to be developed. Just because the recording industry used to be making $10 billion a year doesn’t mean is deserves to always $10 billion. As Masnick points out, should the automobile industry be blamed for putting horse-drawn carriages out of business? The industry has to innovate and adapt to market forces to continue making that money. That’s how capitalism works.

Several progressive artists and developers are experimenting with new business models. Radiohead’s pay-your-own price for their new album was a good start. Trent Reznor of Nine Inch Nails earned $1.6 million in one week selling special editions of his new CD, a CD that you could also download for free. Indie record label Fueled by Ramen used viral marketing to build valuable brands around its bands rather than relying on disc sales. The potential for rewarding business models exists, but will require risk and experimentation and an understanding of the evolving marketplace. Media and software companies need to recognize what their customers want and give it to them. Suing isn’t the answer. Embracing is. And that’s how both piracy and business can win.