"So we understand piracy now as a business model," said Sweeney in a recent analyst call. "It exists to serve a need in the marketplace specifically for consumers who want TV content on demand and it competes for consumers the same way we do, through high-quality, price and availability and we don't like the model. But we realize it's effective enough to make piracy a key competitor going forward. And we've created a strategy to address this threat with attractive, easy to use ways to for viewers to get the content they want from us legally; in other words, keeping honest people honest."

Sweeny implied that it might be more productive to try to understand companies that operate peer-to-peer networks or distribute file-sharing software rather than to sue them for copyright infringement. "So we understand piracy now as a business model," Sweeney said, calling it "a key competitor going forward."

In response, ABC last spring started offering free episodes of "Lost" and "Desperate Housewives" with ads viewers couldn't skip on its own media player. The trial was an instant hit, and the company decided to offer the service permanently. "We've created a strategy to address this threat with attractive, easy-to-use ways to for viewers to get the content they want from us legally," said Sweeney. It may be hard to compete with free, but ABC proves that it isn't impossible.

While it's hard to compete with free, it's not impossible—witness the success of iTunes in both music and TV shows. You just have to offer a compelling product at a reasonable price that is simpler to use than the alternatives. When ABC introduced its own shows into iTunes earlier this year at $1.99 a pop, it sold more than 8 million of them without damaging its TV ratings at all.