Music piracy using sites like Napster won’t be stopped, either by digital rights management (DRM) or by lawsuits, according to a new Report from Forrester Research, Inc. (Nasdaq: FORR). As piracy increases and artists and authors break away from publishers to go independent, record labels and book publishers will lose $3.1 billion and $1.5 billion, respectively, by 2005. But movie studios and game publishers have less to fear and more time to plan a profitable digital media strategy.

“Consumers have spoken — they demand access to content by any means necessary,” said Eric Scheirer, Ph.D., analyst at Forrester. “Neither digital security nor lawsuits will stop Internet theft of content. Regardless of whether they consider Napster right or wrong, traditional publishers must focus on beating Napster at its own game. They must create compelling services with the content consumers want, in the formats they want, using the business models they want.”

For the September Report “Content Out Of Control,” Forrester interviewed 50 entertainment companies that produce five different kinds of content — music, movies, books, videogames, and television. Executives interviewed say that they will use DRM technology to stop file-sharing, the technology that Napster depends on, and sue Internet companies and consumers that don’t respect their copyrights. But after speaking with several dozen DRM vendors, Forrester predicts that this two-pronged strategy will fail.

“DRM can’t prevent filesharing, nor will business models that depend on the control of content ever reap sustainable revenues,” continued Scheirer. “Consumers don’t want business rules or restrictive technology — and it only takes one person to break down the security barriers and share content on the Net. Lawsuits will only succeed in driving consumers to underground Internet services like Gnutella and Freenet.”

Forrester uses the term “collapse of control” to refer to the chaos that ensues in a content industry when viral filesharing satisfies consumer demand for content and transforms distribution-based businesses. Collapse of control won’t destroy the music and publishing industries, but it will cause a major shift in their power structures.

“There will always be a market for content. But as control over distribution slips away from major publishers, a lot of the money they’re making today will instead be earned by artists and service vendors,” Scheirer added. According to the Report, musicians will gain $1 billion, authors $1.3 billion, and third-party service companies $2.8 billion by 2005 in a historic transfer of revenues.

Forrester predicts that surprisingly, the danger of collapse is much less acute for companies in the movie and videogame industries. According to the Report, consumer demand for movies, television, and videogame content is different in important ways from the demand for music and books.

“The urge to collect and flexibly organize music, make custom playlists and CDs, and play my favorite songs thousands of times is a large part of the appeal of Napster. But this urge doesn’t hold for films. Movie companies will be able to avoid losing control over their content, even without DRM, as long as they make video-on-demand services available in the next few years.”

To compete with viral distribution technologies, entertainment companies that face collapse must aggressively reposition themselves as service organizations, in order to develop compelling service offerings for consumers and artists. These companies must aggregate production and promotion skills to discover, develop, and market independent artists while selling their expertise in production, editorial services, and cross-channel brand building.