"Once the technology catches up with them, the film industry is going to have a real problem," said Bruce Eisen, executive vice president of CinemaNow, the online wing of Trimark Pictures. "Once the genie's out of the bottle, it's hard to put back in."

According to some in the software and entertainment industries, the official uncorking occurred when Microsoft released its so-called MPEG 4 video compression last year, which some have called the movie industry's version of MP3. With little loss of data, the compression software makes video files much smaller than those possible with earlier technologies--1/450 of the size, to be exact--allowing them to be transferred at far faster speeds.

Such multimedia developments have coincided with a proliferation of new search and file-sharing programs that have lowered the bar significantly for would-be copyright violators. These products allow mass piracy by putting sophisticated copying tools into the hands of even the most technically pedestrian consumers.

Appropriately enough, the origin of the best known of these file-swapping programs is itself the stuff of which movies are made. "Napster" was the childhood nickname of 19-year-old founder Shawn Fanning, who created the program while in school and then dropped out to continue developing it as a business. The company has declined to comment on many of the issues raised by its technology, citing pending legal action.

Since its humble beginnings, Napster has become the subject of a copyright lawsuits by the recording industry and some major artists, and a related tool dubbed Wrapster now allows the trading of movies and any other kind of digital files. But many similar programs with names such as Gnutella, Scour Exchange and Hotline also permit easy search and copying of everything from music and video to desktop PC software.

In fact, Gnutella has gained notoriety as the most dangerous threat. Using what are known as "distributed networks," the program links individual PCs directly without requiring a central controlling computer, as Napster does--making it infinitely more difficult to police.

"Gnutella is peer-to-peer. That's the worst," said Jonathan Taplin, co-chairman of Intertainer, which develops digital technology for the entertainment industry.

Created secretly by software engineers at America Online subsidiary Nullsoft, the Gnutella project was officially terminated when it came to the attention of senior managers, who sources say were particularly embarrassed in light of AOL's newly approved merger with media conglomerate Time Warner, long a target of piracy.

But before the action was taken, Gnutella was copied and posted on other sites around the Internet. The program has since become an "open source" project, owned by no one and therefore beyond the immediate reach of the courts.

"Instead of one bad-quality videotape for sale on the street, we could soon be talking about unlimited numbers of high-quality copies available on the Internet," Disney's Eisner said recently in an industry speech. "And new technology is making it faster and easier for users to download this kind of material."

Eisner outlined the industry's counterattack strategy, which includes such standard tactics as lobbying Congress for stronger copyright laws and developing more potent encryption safeguards. But others in the movie business and other industries wonder why it has taken the studios so long to address online piracy despite full knowledge of its devastating potential.

These critics say the industry has been obsessed with "old media" copyright violations through illegal videotapes and more recently digital video discs, not even attempting to gauge abuse on the Internet that could eventually prove far more damaging. "The entertainment industry is playing catch-up. Internet time is moving faster than they thought," a source in the software business said.

Until now, Hollywood had been operating on borrowed time because Internet movie piracy was limited by slow Internet connections and poor viewing technologies. But those barriers are starting to fall quickly with progress in video compression, fast Internet connections and powerful file-swapping technologies such as Napster that allow people to find and anonymously trade copyrighted works online.

"The main reason you haven't seen movie piracy alongside MP3 piracy is that feature films are a massive bandwidth hog," says Mika Salmi, co-founder and CEO of AtomFilms, which distributes short video and animation clips over the Internet. "The movie studios have taken some comfort assuming it'll be some time before movies can be swapped online. But no one in Hollywood should assume they're immune."

Many film executives say their industry has learned from their music counterparts and are better prepared for the coming onslaught. As a result, established studios and online start-ups have begun offering films on the Internet, they say, and thousands of movies are available online at dozens of legitimate sites. iFilm.com, for one, claims an Internet library of some 4,000 clips.

That, of course, doesn't mean that they're happy with everything about the Internet. Like the music executives before them, movie moguls appear to be embracing a love-hate relationship with the new medium: On one hand, a full transition to digital moviemaking and distribution could mean huge cost savings; on the other, the same technology that creates this opportunity can be used against them in the form of piracy.

"There's an old saying that Hollywood is driven by fear and greed," Salmi said. "In this case, there is a fear of missing out, of staying on the sidelines."

It is here, however, where the studios could prove to be their own worst enemies. Steeped in a protectionist tradition that borders on paranoia, movie executives have long fought bitter and sometimes self-damaging battles against any attempts to copy and distribute their works without consent. Rather than adopt new business models that accept some piracy as a way of life, as have the PC software and gaming industries, many in Hollywood believe that the only way to address copyright violation is to hunt it down and kill it.

While entertainment companies are investing substantial resources to develop strong encryption and security features to thwart piracy, experts in this technology say such efforts will likely never rise above the level of limited deterrence. They say the movie studios will be forced to follow the music industry, which has begun experimenting with new business and distribution models as an antidote to rampant piracy of MP3 files.

"At the end of the day, any system can be hacked. It will be hacked--I guarantee it. The issue is less an issue of security procedures and more a question of business models," says Vincent Pluvinage, chief executive of Preview Systems, one of the leading online security services. "The end goal is not to have something so secure that hackers can't break through it. You want just enough to keep honest people honest."

That direction poses a deliciously ironic question for an industry not known for high-minded ethical behavior: What price honesty?

According to one rough economic analysis by entertainment attorney Schuyler Moore, Internet pay-per-view movies can't fall below $2.50 a pop to maintain viable revenues. Although that price is competitive with home video rentals, it may prove too high given the notorious frugality of online consumers--particularly in a market where free alternatives are only a few clicks away.

"If you make it easy to digitally download for a reasonable price, most people won't do something illegal," Intertainer's Taplin said. "Do you pay 25 cents for a newspaper and take all the copies out?"

But the obscene amounts of money unique to the production of today's movies allow for much less pricing flexibility in Hollywood than in other industries. For instance, an album can be produced for well under $1 million, while a blockbuster Hollywood film can approach $200 million.

Accurate figures measuring piracy in either business remain elusive at best, but the movie industry's stratospheric numbers are worthy of a George Lucas script. Even without wide distribution on the Internet, the Motion Picture Association of America estimates that global movie piracy cost $2.5 billion in lost revenue last year, of which $250 million took place in the United States. The recording industry says it loses about $4.5 billion a year, including $1 million a day in U.S. offline piracy.

Such numbers make it difficult to imagine a business model that could thrive alongside easily accessible, free-pirated versions of the same products. Though advertising and pay-per-view models have worked well on television, it is not certain they will translate as readily to the Internet.

"If you're going to distribute on the Net, it's instant distribution worldwide, and it's archived so you can watch it any time," explains Allen Weingartner, Internet contracts administrator at the Screen Actors Guild. "There is no afterlife for the product, no supplemental market to make up the cost. Where are the economies here?"

Rather than providing new muscle for Hollywood blockbusters, the Internet might more plausibly become a platform for promoting and distributing independent productions or even as a source of whole new categories of entertainment.

Craig Grossman, the head legal counsel for Scour.net, believes that fears over the new technologies have been overblown. His own company recently released its own file-swapping service, Scour Exchange, which allows audiences to find music, video, pictures and text on the Web, then trade them online.

"The movie industry came up with a model and a way of monetizing the VCR," he said. "The fact that the movie industry opposed that technology is, in retrospect, ridiculous. I'd put Scour in the same bucket."

But others believe that Gnutella-like programs will force deep changes on the industry well beyond the battle over copyright protection by forever shifting the balance of power among entertainment companies, artists and consumers.

"We're going from a linear medium, which is unidirectional and where only a few people control the pipes, to a networked medium, which is a many-to-many relationship," said Jim Banister, who recently left his job as president of Time Warner's Entertaindom site to create a new media company. "There's a whole different math to that. It's the reason AOL was able to buy Time Warner."