In a federal courtroom on Friday, a judge ruled that much of the evidence the FBI had gathered in the hope of convicting MegaUpload founder Kim Dotcom for pirating billions of dollars worth of American intellectual property may have been obtained illegally. If you're not familiar with the saga of Dotcom, he is a German-born Internet entrepreneur who founded the file sharing site and its sister site, Megavideo. In January, he was arrested by an Interpol SWAT team in his New Zealand home on copyright infringement charges from the United States Department of Justice. Since then, he has become the poster child of the online piracy debate.

The Department of Justice has gutted MegaUpload—purging all of its user-uploaded content, putting its employees out of work, placing Dotcom in jail, and pulling the site offline. Friday's decision means that his case will most likely not reach trial and Dotcom can try to put the pieces of his company back together.

All the ado surrounding one man's website might seem a little extreme, but for the past few months, Hollywood has made a concerted effort to clamp down on online content sharing. The proposed Internet-regulating legislation SOPA, PIPA, and the new CISPA were all dreamed up by Hollywood lobbying groups and their continued pressure wheedled authorities to pursue other sites like The Pirate Bay, MediaFire, and UploadBox. Attacks on those sites have not been as severe, but their operations have been significantly cut back under federal regulation.

The movie and television industry are deathly afraid of the Internet. They saw what happened to the book publishers, newspapers, and record companies, so the movie men are doing everything in their power to fight the digital onslaught. Yet it is precisely this antagonism toward digital distribution that will cause them to fail. Instead of learning from the music business' Pyrrhic victory over Napster, Hollywood should be looking toward the video game industry and adapt to meet the demands of digital consumers.

In an interview with The Cambridge Student, Gabe Newell, one of the founders of Valve Software and its game-download service Steam, told the paper that the solution to online piracy is very simple.

"We think there is a fundamental misconception about piracy," he said. "Piracy is almost always a service problem and not a pricing problem. If a pirate offers a product anywhere in the world, 24-7, purchasable from the convenience of your personal computer, and the legal provider says the product is region-locked, will come to your country three months after the U.S. release, and can only be purchased at a brick and mortar store, then the pirate's service is more valuable."

To put it simply, your service has to be better than free to compete with the pirates. Newell created Steam to address just this issue for PC games. Steam hosts a library of several thousand titles, without regional or DRM locks, available to download instantly.

The real beauty of digital content delivery, though, is that it can directly connect producers and consumers, and thus drastically lower the price while making more profits. Traditional video games must first be created by a developer, then distributed by a publisher, and then sold at a retailer, with every party taking a cut along the way. Steam removes the need for a retailer or a publisher, so the developer can directly reap the benefits of their work. Capitalizing on efficiency, Steam often reduces game prices to a quarter or less of what they would cost at retail (remember, it costs nothing to copy a digital file) and makes even more money because an exponentially greater number of people buy the game at the lower price.

Comedian Louis C.K. experimented with a similar strategy with his latest stand-up special in December. He footed the cost of the entire production then charged a flat fee of $5 for a stream and direct download of the performance—eschewing networks, distributors, cable companies, and all other middlemen. The same service would typically cost about $20 for a DVD or pay-per-view. On his site, he made a personal plea to would-be pirates: "Please bear in mind that I am not a company or a corporation. I'm just some guy. I paid for the production and posting of this video with my own money. I would like to be able to post more material to the fans in this way, which makes it cheaper for the buyer and more pleasant for me. So, please help me keep this being a good idea." Reminding fans, "I can't stop you from torrenting; all I can do is politely ask you to pay your five little dollars, enjoy the video, and let other people find it in the same way." Within 12 days, C.K. reported over a million dollars of personal profit from the online sale. Other comedians like Aziz Ansari have followed C.K.'s example and posted their own specials exclusively for online purchase.

Film and television content is a different animal than other forms of media, so how can Hollywood adapt to curb piracy? Production costs are much greater than those of print publishing and music recording. Moreover, online streaming and downloading still has to catch up to the same level of quality as physical media like DVDs. And many—including this columnist—are loath to give up the movie theater experience.

Current efforts at online viewing simply aren't good enough; Hulu and Netflix have limited libraries, iTunes downloads are similarly sparse and can often cost more than a DVD. Meanwhile, anyone with Google and five minutes can find almost any movie or TV show for free on a pirate site, albeit the video may look like it was taken by a colonoscopy camera.

The days of charging 20 bucks for home viewing are over. What the networks and studios need to do to stay alive is form their own Steam-like conglomerate site. They need to make the pirates irrelevant. The entirety of Hollywood's catalogue should be available for instant streaming and downloading in full HD for a nominal fee—say two dollars a pop for movies, five bucks for a season of TV—you would own it forever and could play it on any screen with an Internet connection.

There would be no need for pirates with this kind of widespread availability. Hollywood might say that those prices are far too low to be sustainable, but Valve's price experiments with Steam show that the volume of low-cost digital more than makes up for the discount (discounting a product 75 percent means you must sell three times as much to maintain the same level of revenue, Valve found that a 75 percent price cuts actually increased sales 40-fold). And because the studio or network would release content directly, it would mean more money back to the people actually responsible for making it.

Changes to the workforce, however, would be drastic: the middlemen in the industry not directly associated with content creation (publishers, distributors, and cable companies) would need to find another job, and traditional viewing methods like theaters and live television would take a huge hit, not to mention the final nail in the coffin of video stores.

Whatever path Hollywood decides to take, Friday's decision makes it clear that forces like Mr. Dotcom and MegaUpload can't be beaten in the courtroom: movies are going to have to win the marketplace.