Hollywood wants Congress to pass laws protecting intellectual property against theft on the Internet. But Hollywood lobbying has gone too far with the introduction of a new bill that authorizes copyright holders to hack into peer-to-peer networks.

The Peer to Peer Piracy Prevention Act, sponsored by Hollywood-area Representative Howard Berman (D-Calif.) and House subcommittee on intellectual property chair Rep. Howard Coble (R-N.C.), would allow copyright owners, such as the film and recording industries, to secretly hack into users' computers and unleash new technologies to thwart unauthorized trading of movies or music on peer-to-peer (P2P) networks.

Security experts worry about how authorized hacking could spread viruses, destroy data, and invade privacy. Providers of P2P technologies, like Steve Griffin, CEO of StreamCast Networks, say the bill is tantamount to "cyber warfare" against consumers. Indeed, Rep. Berman indicated that the entertainment industry wants to target consumers because litigation against providers of P2P networks has become futile.

"While the 9th Circuit could shut Napster down because it utilized a central directory and centralized servers, the new P2P networks have increasingly engineered around that decision by incorporating varying levels of decentralization," Rep. Berman said.

Since it is next to impossible to shut down decentralized networks, Rep. Berman and Hollywood hope to intercept and catch the actual people who illegally download music and films. This strategy is flawed not least because there are numerous people to catch and many hackers will probably see this as a reason to counter-attack Hollywood. But there's a larger problem.

Many of Hollywood's Internet pirates are also paying customers in real space, putting Hollywood in the strange position of wanting to attack its own customers. Intellectual property is, of course, important both in principle and to the U.S. economy. But new technologies force intellectual property holders to re-examine their beliefs and business models -- something that the entertainment industry tried and failed to avoid in the past with the introduction of audio and video cassettes. A similar situation is occurring now.

Downloads of pirated music have not visibly impacted purchases of compact disks (CDs), notes University of Texas economist Stan Liebowitz, author of a forthcoming book about the digital economy. Liebowitz points out that downloads of music files are close to five times greater than the total number of CDs sold in the U.S. in a year (and one-and-a-half times the worldwide sales), but CD sales have only declined by five percent, which is what might be expected in a recession.

Liebowitz speculates whether consumers are simply downloading music that they used to copy on audiotape. It could also be that many consumers download songs that they wouldn't buy at the price of a CD anyway, especially if they don't value the other nine songs they are forced to buy on a single album. If this is the case, music companies could actually make more money by recognizing the opportunity to offer their products in different forms.

Consumers will still buy CDs when they are interested in all the songs, but for those songs in which consumers are less interested, music companies might be able to increase sales by lowering prices and offering online singles sales using a micropayment system. The film industry could change its model too.

Videos could be embedded with digital rights management technology (DRM) created by Hollywood, not legislated. This would make unauthorized copying difficult, if not impossible. If consumers could easily order films online at a market price, which may mean greater price differentials than we see now, it's not a stretch to think that the market would expand and everyone will win.

Instead of making consumers the enemy, as Hollywood is doing with support of the P2P Piracy Prevention Act, it would be smarter and more profitable to respond to new technologies with a change in thinking. Consumers will always be willing to pay market prices to be entertained. The challenge is for entertainers to meet the demand with a better model.