YouTube, are you listening? Copyright violation issues dogging the networks that let people trade and download music and video files could soon become a thing of the past, giving consumers the ability to legally access more of their entertainment online on-demand.

According to a paper published Monday by industry trade organization Digital Watermarking Alliance, film and TV studios, music labels, and other copyright holders can use a process called digital watermarking to keep track of content and prevent it from being illegally traded via the Internet.

In 2005, movie studios lost $2.3 billion worldwide to Internet piracy alone, according to the Motion Picture Association of America. But it’s the music industry that is taking the hardest hit. In 2000, global spending on CDs and licensed digital downloads totaled close to $40 billion. In 2006, that number has fallen to slightly over $32 billion, according to PriceWaterhouse Coopers.

A digital watermark is a digital data element—from a unique serial number to copyright information—that is embedded into the actual content so it survives the copying process. Digital watermarks can be included in video, audio, and still images.

The technology could help content owners collect royalties and charge consumers who trade or download content on P2P or other networks.

“[Digital watermarking] is already in use in many industries for many applications, and it can be used to address this critical need now,” said Digital Watermarking Alliance chairman Reed Stager.

Hollywood studios have used watermarks in the past to keep track of copies sent to members of the Academy of Motion Picture Arts and Sciences. In 2004, actor Carmine Caridi was booted from the Academy and fined $600,000 after a watermark helped studios nab him for allowing a friend to upload his copies to the Internet.

Meanwhile, the situation has gotten even worse thanks to the proliferation of P2P networks and content-sharing sites that let people easily upload and trade copyrighted content online. Last week, YouTube removed 30,000 illegally uploaded videos from its site at the request of a Japanese artists’ group. (see Another 29,549 Bite It).

Why watermark?

Because digital watermarks survive format conversions, media like copyrighted songs, movies, TV or radio programs, and images can be identified on P2P networks and online communities such as MySpace, YouTube, and Google.

Watermark readers, which can be integrated into P2P network software, detect this information in a fraction of a second. The copyright digital watermark with the content ID can be used by the P2P or online provider to determine rights information via a remote database. The watermark also allows users to access any other features attached to that content, including song lyrics, upcoming concert information, or even alternate endings.

The digital data can include copyright information, content classification flags for filtering, content identification, and digital media serial numbers, which would enable content owners to trace illegal content back to the person who uploaded it to the Internet.

While watermarking has helped some media companies trace piracy—it may not be foolproof, said Joe Fleischer, CEO of Big Champagne, a Los Angeles-based company that tracks illegal file sharing activity online.

“Content protection has a history of failure,” said Mr. Fleischer. “If anyone had been truly successful in protecting content, we’d all know him.” Past protection strategies have been beaten by tech geeks, who would likely find a way around this, too, he said.

“The issue is the Internet, which was designed to transfer information between peers,” said Mr. Fleischer. “Stopping that is an incredibly ambitious task.”

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