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Where has all the good illegal peer-to-peer action gone? Underground. In some cases, waaaaay underground. Fearful of reprisals from the major entertainment companies and worried about virus-laden, corrupted, or spoofed files, many users are shying away from the big-name file-sharing networks like Kazaa and WinMX, and have gone straight, buying their music and video from legal sources. That's a win for Hollywood.

But it is also clear that large numbers of music and video pirates are simply looking elsewhere for their booty and have turned to lesser-known P-to-P networks, Usenet, and even invitation-only networks.

"Users are very much moving around...rather than moving out," says Eric Garland, the CEO of BigChampagne, a market research firm specializing in P-to-P activity.

To combat the new threats, Hollywood has turned to old standbys: new legislation, more lawsuits, and improved copy-control technology.

Once boasting over 30 million users, Kazaa is now down to about 16 million, according to research firm ComScore Media Metrix. WinMX users have dropped from a high of 6.8 million down to 6 million this May, the firm says. If you looked just at these results, it would appear that entertainment companies are winning the war. But these statistics show only a partial picture of the piracy problem.

Still Trading

Have users really reformed? Not really: Many are flocking to smaller P-to-P networks like BitTorrent, EDonkey, and EMule. According to ComScore, BitTorrent nearly doubled in users, from about 200,000 to more than 400,000 between November 2003 and May 2004; EMule grew from under 100,000 users in February 2003 to nearly 300,000 a year later. EDonkey, which ComScore did not track in its survey, has made even bigger gains, says Garland.

Their usage numbers may not be on the same scale as the old Napster's, but these services may pose a greater threat to content owners than previous P-to-P networks. All three use an advanced technique called swarming, in which portions of files are downloaded from multiple sources and immediately offered to the network. The result: potentially faster downloads and more rapid propagation of content.

And there are other options for pirated content.

Internet newsgroups, best known by the collective name Usenet, offer a vast reservoir of music, movies, and software, at connection speeds that can put the better-known P-to-P services to shame.

In the past, the difficulty of using newsgroups, combined with limits ISPs place on file transfers, has stunted the growth of piracy on them. That could change, particularly with the emergence of user-friendly software--such as the freely available Xnews reader--that makes accessing content in newsgroups easier than dealing with the more unpredictable P-to-P services.

But even if newsgroups become a more popular venue for illegal file trading, they are generally still public and therefore trackable. Private networks set up by file traders are harder to track or quantify.

"John," an IT manager for a financial services firm in the Midwest, says that he and his friends have traded files over an encrypted virtual private network they set up expressly for that purpose. And more and more music and video is being traded face-to-face.

"If it's music, it's almost always sneakernet," John says. "It's just so much easier to hand someone a USB drive and say, 'Bring it back to me next week.' It's easy to trade someone 20 gigs of music for 20 gigs of music."

Going Straight or Dropping Out?

The good news for Hollywood is that the piracy crackdown in the last two years has persuaded substantial numbers of people to go legit. A Pew Internet Project report reveals an increase in those who say they download music files, from 18 million in December 2003 to 23 million in February 2004--17 percent of whom use legal services like ITunes or Musicmatch. And ComScore data shows that the six largest online music shopping services drew more than 11 million visits from U.S. users in March alone.

That's as it should be, says Marc Morgenstern, vice president and general manager of Loudeye's Digital Media Asset Protection Business. The company sells online-content-protection services to the music, movie, game, and software industries. Its Overpeer service line is responsible for some of the decoy files masquerading as copyrighted content on P-to-P networks. The aim: to make file sharing so inconvenient that consumers will pay for a more predictable and satisfying experience.

"[The file-sharing community is] starting to notice. If you go on bulletin boards, you will see that people are getting frustrated by this activity," says Morgenstern.

But while file-sharing old-timers may be frustrated, Hollywood's aggressive antipiracy campaigns may also be scaring off potential customers for legal download services.

The Pew study shows that the Recording Industry Association of America's legal actions are discouraging potential first-time users of legit services. About 60 percent of those who have never tried downloading don't want to go to any source of downloaded music--legal or not--for fear of lawsuits, the study says.

The much-publicized antipiracy lawsuits aren't the only reason users might be confused as they consider buying digital tunes. It can be hard to tell the good guys from the bad. Some legitimate music services such as Great Britain's Wippit use the same basic peer-to-peer technology that powers pirate havens like Kazaa, while the Russia-based Allofmp3.com, for example, has a download music store with appealingly low prices--but its licenses are based on Russian copyright laws, so its content may be illegal for users outside of that country.