NEW YORK (CNN/Money) -
Who should pay for movie and music piracy on the Internet?
That question has hounded Hollywood and Silicon Valley ever since an upstart Internet company called Napster rocked the music business some years back with a nifty technology that allowed Internet users to get Beethoven and Beck for free.
Now the issue goes before the Supreme Court in a case that could reshape the future of the Internet, and how Hollywood markets its products.
In MGM v. Grokster, the major Hollywood studios and record labels have asked the nation's highest court to hold the developers of popular software for Internet downloading, known as "peer-to-peer" file sharing, accountable when users of their software download copyrighted movies and music. Lower courts so far have refused.
Oral arguments in Grokster -- one of two important Internet cases to be argued before the high court Tuesday -- come just a week after a new study found that piracy appears to be thriving in the virtual world.
The Pew Internet & American Life Project, a non-profit research group focusing on the Internet, said last week that some 17 million Americans are using not just the Internet but e-mail or other technology -- like their friend's iPods -- to get bootlegged music.
The study doesn't say how much Internet piracy is taking place overall. But to some analysts, it offers further proof that piracy will continue no matter what steps the entertainment industry takes.
"Apple Computer has spent a couple of years working its way to 300 million songs sold" for its iPod portable music player, said Eric Garland, CEO of file-sharing tracker BigChampagne. "We think, very conservatively, that 750 million unauthorized or free songs are swapped online every month."
"Peer-to-peer" file-sharing allows computer users to exchange files without having to go through a central Internet server. The software first gained national attention in 2000 as hordes of music lovers flocked to Napster, which provided a directory of songs that users could then download.
The record labels won a federal appeals court order shutting down Napster in 2001. They then went after other distributors, including the developers of two programs called Grokster and Morpheus.
Last summer the same San Francisco court that shut down the old Napster refused to do the same to the developers and distributors of Grokster and Morpheus software. The court found that since Grokster and Morpheus allow users to trade music and movie files without going to a central site like Napster, they should not be accountable for bootlegged material swapped using their software.
The decision was a huge blow to the entertainment industry since software programs such as Grokster and Morpheus are much harder to police when there isn't a central site to monitor.
The music labels -- joined this time by Hollywood -- appealed to the Supreme Court, which agreed last December to hear the case. A decision is expected sometime this summer. Also Tuesday, the court is hearing another big case over whether cable operators have to open up their broadband lines to competing Internet service providers, much as Baby Bells have to do in the phone industry.
In the music case, the pro-Grokster crowd insists that innovation will be irreparably harmed should Hollywood and the record labels win.
"This case is not about bad actors," Michael Weiss, CEO of Morpheus developer StreamCast Networks, said at a news conference early this month. "It's about technology and who gets to control it, plain and simple."
But entertainment executives say their companies have already lost billions in sales to downloaders and stand to lose billions more.
Music industry critics, however, say those claims are overblown. Meanwhile, movie piracy by home users is much less rampant since it's harder to download films and most people don't seem all that interested in watching movies on their home PCs, at least not yet.
Grokster has drawn extraordinary interest, not just from the technology industry but from groups like the Christian Coalition of America, the American Civil Liberties Union, the National Taxpayers Union and the commissioner of major league baseball.
One pair of strange bedfellows: religious and "pro-family" groups -- typically at odds with the entertainment industry over on-air nudity and profanity -- are backing Hollywood and the music labels in the case because they think peer-to-peer is widely used by pornographers and other miscreants.
No matter who wins, both sides acknowledge the battle over piracy will continue in the courts and on Capitol Hill. Congress so far has resisted entertainment industry pressure for a new law that would hold software and hardware makers liable when people download copyrighted material for free.
Hollywood and the recording industry have already sued thousands of individuals for alleged illegal downloads using Grokster and newer, faster programs like BitTorrent and eDonkey.
BigChampagne' Garland predicted more litigation no matter what happens in Grokster. In past piracy cases, the best the entertainment industry could hope for was a court order blocking a product from being manufactured. In the Internet age, lines of computer code are unstoppable.
"All you can do (in Grokster) is remove a company from the equation," Garland said. "At a certain point, it will always come back to lawsuits against individual users."
For more on technology, click here.
For more news on Fortune 500 companies, click here.