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On November 19, 2006, someone at a computer in Wharton, New Jersey, put a high-quality copy of a newly released holiday family film, recorded directly from the film reels, onto eDonkey, a person-to-person file-sharing network. Within weeks, that one file had been downloaded by 30,408 people on six continents (you can see the download locations on the map). Dozens of other illegal versions of the movie, posted to other file-sharing networks, likely found their way onto the hard drives of many thousands more.

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The burst of illegal file-sharing that follows the release of nearly every popular film is perceived as a potent threat to Hollywood. File-sharing of all sorts has grown from less than 10 percent of total Internet traffic in 1999 to nearly 60 percent today, as broadband has spread along with new technologies enabling the rapid sharing of huge files. For now, demand is limited by the fact that most Internet users still need an hour or more to download a full-length movie. Nonetheless, the U.S. movie industry lost $2.3 billion in revenue to Internet piracy in 2005, and $3.8 billion to bootlegged DVDs and other “hard goods” piracy that same year. (Hollywood’s total annual revenue for 2004 was estimated to be just under $45 billion.)

China is consistently portrayed as the Wild East of movie piracy, and rightly so in terms of the sheer number of counterfeit DVDs available there. About 90 percent of DVDs sold in China are bootlegs, according to Dan Glickman, the head of the Motion Picture Association of America, and they are everywhere. But Hollywood actually loses more money because of piracy in North America and Western Europe (Europe leads the world in Internet piracy), and downloads are a major reason why.

Yet is online piracy really a mortal danger to Hollywood? Often, piracy fills a gap where legitimate markets have failed. Downloaders in the United States don’t want to wait months for a DVD. Those in Iran want to skirt morals police, in China to flout quotas on foreign films, and in Britain to watch TV shows that aren’t immediately available through legitimate channels. Many casual illegal downloaders have said that they would be happy to pay if a cheap and easy alternative existed.

So while piracy markets unquestionably harm the film industry, they can also signal untapped opportunities. The development of VHS and DVD markets—which was initially feared and resisted by movie studios concerned about both piracy and shrinking box-office receipts—has in fact expanded the movie market. (Hollywood’s revenues are now dominated by DVD sales and continue to march smartly upward.) Piracy, by encouraging lower prices and faster DVD releases, may have helped prompt movie studios to respond more quickly to viewers’ demands.

Studios continue to adapt to changing technology and the piracy that accompanies it. Warner Bros. and NBC Universal have begun selling DVDs in China at a price competitive with bootlegs, rather than at Western prices prohibitive to most Chinese. Several studios have worked out a deal with Bit-Torrent, a file-sharing site, to allow moderately priced movie downloads that self-destruct after viewing. As watching movies at home becomes ever easier, couch potatoes may end up spending more time (and more money) on that pastime, and less time watching TV (or reading magazines like this one). If the studios play their cards right, the digital age may hold more promise than peril for Hollywood.

China, Malaysia, Indonesia, and the Philippines are home to some of the world’s largest DVD-counterfeiting industries. One factory near Manila, busted in 2005, was capable of producing 14 million discs a year. Chinese bootleg discs have been found in more than 25 countries, including the U.S. In 2005, 39 members of the Yi Ging syndicate, a Chinese gang in New York, were indicted for operating a massive bootleg-DVD-distribution business alongside their extortion and gambling rackets.

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At the top of the piracy pyramid, carefully guarded “topsites” host vast numbers of stolen movies, songs, and software programs. Topsite operators steal high-quality copies and format them into small digital packages that can be easily distributed on the Web. Often motivated by anti‑ corporate ideology and geek pride, many of these operators anonymously seed file-sharing networks, free of charge.

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Thepiratebay.com, a Sweden-based site, is an Aladdin’s cave of free media. The site works like Google to index files available, throughout the Web, for free download. A recent trip to the site found more than 5 million users online, swapping recent Oscar-winning films, new movies, new music, and Microsoft’s new Windows Vista—its elaborate copy-protection system disabled just one week after its corporate launch.