We live in an age of piracy. Intellectual property can no longer be locked up in the corporate castle. Instead, it flows as freely as trade winds--and can be plundered in the form of illegal downloads or cheap knockoffs produced offshore. Businesses face a new dilemma: are pirates a threat to be battled or innovators to be emulated? Should you compete with pirates at their own game? In the book The Pirate's Dilemma, Matt Mason shows how piracy has become a new business model and argues that youth culture is pushing the world towards a more democratic model of capitalism. Mason, who is 29, tells us what we can learn from pirate radio, video game hackers, and why being pirated is a whole lot better than being ignored.

Why is piracy becoming such an economic force?

The human being is a copying machine. It's how we learn to talk and learn social norms. We organize ourselves as a society by imitating what the rest of society does. Piracy has been with us throughout history. The problem now is we have the ultimate copying machine--the Internet. Things can be copied so fast that no one can even determine the original anymore.

Is piracy ever healthy in spawning innovation or creating a market?

Absolutely. Sometimes it creates a more efficient market -- digital distribution is a much more efficient way to deliver music than CDs and that's why people switched to it without the music industry wanting them to. A lot of people think my argument is that all piracy is great, which isn't really the argument. The argument in the book is piracy can actually be a market signal. It really highlights market failures in many ways.

Microsoft, for example, is alarmed that Vista isn't being pirated very much.

This is an interesting thing with piracy -- it's become a new kind of rating system. It concerns people within Microsoft that people weren't pirating Vista; they're continuing to pirate XP. These are important metrics because it tells you something about your customers.

To rip off Stephen Covey, what are the habits of highly effective pirates?

An entrepreneur looks for a gap in the market; pirates look for a gap outside the market. They go to the taboo area, and that's where they set up shop. The second thing they do is create a vehicle or platform, and that medium is also a message. A $5 DVD highlights that gap outside the market and says to the consumer, "This is a good idea. Why can't you get this legally?" The third and most important thing pirates do is harness the power of their audience. If the audience decides that what they're offering is of value to society and is more efficient than the legal, established way of doing it, fighting in the courts no longer works. You won't be able to stop it. You'll be as likely to win that as the war on drugs or prohibition.

What do you when somebody starts ripping you off?

The pirate's dilemma is a dilemma because there's more than one answer to this question, and there are a lot of questions you have to ask. If you're Colgate-Palmolive and somebody starts copying your toothpaste at a factory in China and it's toxic, well, that's a no-brainer. You've got to fight that with everything you've got. It's an example of people producing inferior, illegal products that don't offer any value to anybody and that's when you fight piracy. The time when you need to look at piracy again is when it's adding value in some way. When Edison started recoding musicians on plastic disks, live musicians did not like this. They saw it as the death of their business. Obviously, that wasn't the case. Edison and the live musicians came to an agreement and the record industry was born.

What's an example of a company that responded effectively to piracy?

In the book, I talk about Nike and this very famous shoe, the Air Force One. It was launched in 1982, and it's been kept alive by the hip-hop generations' love for its simple iconic design. Well, this didn't stop a 22-year-old hip-hop DJ from Tokyo called Nigo from making his own version of the Air Force One. He had a fashion brand called Bathing Ape and took the Air Force One, ripped off the swoosh, and added a shooting star logo and released them in limited quantities for around $300 and these became really popular. Bathing Ape is now a multimillion dollar brand all over the world. Although there was a definite case for infringement, Nike didn't sue him. They competed with him in the marketplace. They saw the way he was using garish textures and colors they hadn't experimented with, and they decided to do the same. There's no point in trying to sue somebody if they help you sell more of the original. Bathing Ape is doing really well and Nike actually bought shares in Bathing Ape. They invested in them.

What's an example of a company that botched its response to piracy?

Can I use the music industry or is that too obvious? It's just crazy. The thing that frustrates me about the music business is it's been 10 years and these guys still don't get it.

You worked as a pirate DJ in the UK and saw how pirate stations took unknown artists and pushed them to get to the top of the charts. What's the lesson for business?

Pirate radio stations are some of the most effective pirates in the world. They're so effective that the commercial radio industry and the UK government let it happen. Commercial radio uses pirates to find new music, new deejays, and new artists. It's supposedly bad for the record industry because people aren't getting paid royalties for pirate radio. Well, the kind of music that gets played on pirate radio isn't the kind that's played on commercial radio. All the major labels sign the tracks that are hottest on the pirates and release them nationally and advertise on the pirates. The lesson here for other industries is, sometimes it's better not to follow the laws to the letter. Maybe you should let a few things slide.

So Pirates are almost like a shadow R&D force?

It's crowdsourcing at its absolute best. You're starting to see that happening in other industries, too. In the video game industry, in the community of first-person shooter games especially, it's just accepted now that you can hack into games and change the code.

You describe how youth culture has itself become a commodity. Has rebellion become just another marketing shtick?

I say in the book that terrorists are the only people we take seriously as rebels anymore. Piracy has become a form of youth culture and I think that's the next thing that's going to get corporatized. I think it's good that the mainstream is going to figure out fairer and more efficient ways to distribute information.

In the book, you talk about how intellectual property theft helped lay the foundation of the American economy and how the word "Yankee" derives from Janke, the Dutch word for pirate. What would U.S. economic history look like if there had been no piracy?

If the U.S. were still paying all these license fees to the Europeans, it wouldn't have industrialized as quickly. It would be a banana republic. You'd probably be paying some kind license fee to the queen for the internal combustion engine or something. It would have been a place where you couldn't get a lot of stuff done and there would have been a lot of artificial barriers to entry. Looking back, it's clearly a good thing those barriers to entry were taken down -- and they were taken down by pirates.

And now we complain about China doing same thing?

There's so much about Chinese piracy in the media these days. But you don't hear anybody say, "hang on, this is how America did it." But it is. It's the same thing.