It's not just about free content...

Videohybrid has a copy of Spiderman 3 that you can watch right now.

I tried to sit down and watch it the other day, and about 3 minutes into it, I stopped.  I was bored.

It wasn't the movie.  It was the experience.  I really like going to the movies.  I like going with my friends.  I like the huge screen and the Snow Caps and previews, man do I love the previews.  I could seriously just watch two hours of nothing but previews... all the best parts of upcoming movies.  Fantastic.   All in all, despite increases in price, I still think paying the twelve bucks or whatever it is to go to the movies is totally worth it and one of the best values you can get for your money.  Bowling (at least in NYC) is more expensive, and so is pool.  You can't really drink for that kinda money for two hours...   not much you can do for six bucks an hour, really.

And that's really what it comes down to.  Provide a great experience, and people will pay for it.  If content owners spent nearly as much time trying to create a great user experience at a fair price as they did trying to police content, they wouldn't see declining revenues.   

I might watch Casino Royale on the web, b/c I've seen it already, but that doesn't mean I'm not still going to buy the DVD.  (Tried to once already... sold out at Best Buy.)