The global film industry is currently losing $3bn-$3.5bn per year to illegal piracy operations, according to a new report The Impact Of Piracy On The Film Industry, by UK based management consultancy firm Deloitte & Touche.

The new report attributes most of the current loss to "hard copy" video piracy, ie replication and distribution of physical video copies, either on VHS tape or VCD and DVD.

Deloitte estimates this is worth about $3bn a year, but is "unlikely to grow significantly". While it says that DVD sales have been growing at 11% per annum in Europe between 1998-2002 it estimates that "20% of sales were lost to pirates" in 1998-2000.

It warns that the real growth area is "soft" piracy, where films are viewed on the internet, swapped on-line or where the internet and broadband connections are used to transfer software from its source to a hard copy pirate producer.

It cites the example of The Matrix Reloaded, which was available to download only days after the much trumpeted theatrical release on May 17.

"It seems that Warner Bros' plan to release the film simultaneously in 63 countries around the world in an attempt to avoid illegal copying has backfired. The illegal copy is based on an original print of the film, indicating a key security weakness in theatrical distribution," says report author, Mark Endemano." Pirates used a file-sharing computer programme called BitTorrent, which enables 'digital thieves' with access to broadband to download large-scale files for free from different sources in three hours."

The report says that 400,000 - 600,000 films per day are now being downloaded in the US alone, helped by the spread of broadband connections, and that unchecked the problem will get worse. "Once the distribution pipe becomes wide enough and freely available to all at a low cost, a Pandora's box will be opened for the film industry in the same way that it has been for the music majors. And once the box has been opened it is very difficult to close."

The report suggests that pirates have a number of advantages when compared with legitimate suppliers, first that they do not incur the production and marketing costs of making a new film.

But it also points to areas where the pirates are able to better satisfy consumer demand; early access to films and value for money. "Pirated copies of Star Wars Episode 1 flooded the market in Asia, whilst the film was on release in the US in cinemas. As a result, when the film opened legitimately in Asian theatres attendance was far below expectations."

Stripped of production costs pirates are able to deliver cheaper copies. In the UK, it says the average cost of a recently released DVD is $33-$41 (£20-£25). "In China the cost of a legitimate DVD is eight times higher than a pirate copy. In Many Asian and East European countries purchasing pirated copies is the norm. It appears that few actually buy legitimate copies."

Although some consumers are more concerned by speed of access to new films and may be motivated by low purchase price, the biggest disadvantage - poor copy quality - is being eliminated by digital copying. Now a good original can lead to a DVD of studio quality.

Piracy is also affecting TV companies, the report warns, "free-to-air programmes are under threat form pirates and the industry will be forced to move its best programming to pay services such as cable and satellite."

Deloitte says that software solutions such as content scrambling (CSS), encryption technology and watermarking can only provide short term solutions.