The Stop Online Piracy Act may have been defeated last week, but the legal war over control of digital copyrighted content and internet distribution rages on.

Megaupload was raided and shut down earlier this month — and its principals charged — with numerous counts of copyright infringement, racketeering, and money laundering.

Founder Kim Dotcom was arrested in New Zealand in possession of forged travel documents and illegal weapons. He has since been classified as a significant flight risk and denied bail. The indictment alleges that MegaUpload made approximately $175 million last year providing access to copyrighted materials, and was visited by up to 50 million users each day.

Megaupload did not provide copyrighted materials directly, but rather provided server space for users to upload files and then share a link with others, which would allow them to download the file.

The files were not hosted by users like torrents, which merely facilitate ports for getting in and out of the river of traffic. The site generated profit primarily from advertising and monthly fees for “premium” access, which allowed users space to store their files for sharing with others, as well as priority for downloading others’ files. Free users were given incentives to purchase a premium membership through various annoyances that accompanied every individual download.

Megaupload executives claim that they did their absolute best to regulate user uploads in conjunction with the provisions of the Digital Millennium Copyright Act, but many of the site’s features revolved around user incentives that were clearly designed to encourage distribution of copyrighted content. A good example of this would be their uploader reward program, which encourages users to distribute links to copyrighted material to as many people as possible in exchange for account credits, which can eventually be redeemed for cash or other rewards.

It’s difficult to believe that Dotcom was unaware what the site was being used for and that its operations were likely illegal. He is no stranger to legal trouble. He has been arrested previously in the ‘90s for stealing calling card numbers and in 2002 for insider trading and embezzlement. Dotcom is a notoriously flamboyant character in the Internet security industry. He owns the most expensive home in New Zealand, as well more than 20 vehicles — including a Rolls Royce Phantom with the vanity plate reading “God.”

He has also occasionally participated in Europe’s Gumball 3000 rally. Dotcom knew exactly what the site was being used for, and he maintained the site because it was quite profitable. The music and film industries want US authorities to make an example out of Kim Dotcom.

A high profile arrest could “change the calculus,” according to MPAA production executive Kevin Suh. But the film and music industries are trying to change the wrong variable. Rather than cracking down on pirating, they should make mainstream purchase less objectionable — iTunes music service has been profitable and popular offering downloads for lower price than the physical disc, as has Amazon’s service.

Providing a cheap, legal alternative to piracy won’t eliminate it entirely, but it will bring over the consumers on the margin. Eventually the loss of those consumers will cause fewer entrepreneurs like Kim Dotcom to enter the market.

A positive incentive, like fixing the problems that led to the growth of piracy will be far more effective than cracking down on file-sharers.

Originally published in The Daily Cougar, via MCT.