Feb. 13 (Bloomberg) -- The world’s biggest record companies sued college students, a 12-year-old girl and a dead woman and still failed to stamp out music piracy. Now they’re turning to Internet service providers.

Universal Music Group, Warner Music Group Corp., EMI Group and Sony Music Entertainment have gained leverage through court and government actions to pressure ISPs into warning customers not to steal music -- in some cases with a threat to cut service. Crowded networks are helping to soften U.S. and European access providers’ resistance to working with record companies.

Irish phone company Eircom, in a settlement with music labels, said last month it will unplug customers who ignore illegal-download warnings. A law being drafted in France would do the same, while Britain may require ISPs to pass information on offenders to rights holders. The four largest U.S. labels have struck preliminary accords to work more closely with ISPs.

“There has been an international push by the rights holders to pursue a similar strategy across the world,” said Danny O’Brien, international outreach coordinator for the San Francisco-based Electronic Frontier Foundation, which advocates expanded digital rights for consumers. “The end goal is the same: co-opt Internet service providers as copyright cops.”

Millions spent suing alleged pirates have earned the music industry negative press while failing to stop the practice. Despite the success of online music retailers like Apple Inc.’s iTunes, 95 percent of music downloads are illegal, according to London’s International Federation of the Phonographic Industry.

Piracy Costs

Piracy in the U.K. cost 180 million pounds ($265 million) last year, according to Jupiter Research. U.S. record companies’ 2007 losses were $5.3 billion, according to the Institute of Policy Innovation in Lewisville, Texas.

That’s fed a decline in the industry. New York-based Warner Music, the only publicly traded music company, has fallen 93 percent from a May 2006 high. Today, the shares fell 8 cents to $2.05 on the New York Stock Exchange. Universal Music, the largest record company, is owned by Paris-based Vivendi SA, EMI is privately held and Sony Music is owned by Japan’s Sony Corp.

“The network service provider is the logical place for us to go to protect our business,” Michael Nash, Warner Music’s executive vice president for digital, said in an interview.

Some artists have embraced the anarchy of the Web. Radiohead released the album “In Rainbows” on the Internet and allowed fans to pay what they wanted. Wilco, in a dispute with Warner’s Reprise Records, released “Yankee Hotel Foxtrot” for free, and Nine Inch Nails singer Trent Reznor, without a label, offered fans options to purchase his 36-track instrumental album, from giving some songs away to charging $300 for a limited edition.

In a three-month test, U.K. Internet providers agreed to send warning letters to users caught sharing files illegally. Denmark’s largest provider, TDC, blocked access last month to The Pirate Bay, a repository of free music, films and books.

Breakthrough

ISPs haven’t volunteered for the role of watchdog, because they could lose business, said John Kennedy, chairman of the Phonographic Federation.

“One of the biggest breakthroughs recently is that ISPs are concerned about usage of their bandwidth,” Kennedy said. “File- sharing is huge traffic.”

The Recording Industry Association of America, the Washington-based trade group, warned ISPs in May 2008 it may push for laws addressing piracy. That added urgency to “years of conversations,” RIAA Chairman Mitch Bainwol said in an interview.

AT&T Inc., the largest U.S. telephone company, and the biggest cable network, Comcast Corp., are among those cooperating, CNET.com reported on Jan. 28, citing unidentified people with knowledge of the matter.

AT&T, based in Dallas, and Philadelphia-based Comcast declined to comment. Verizon Communications Inc. isn’t participating, spokesman David Fish said.

Music Monitors

Eircom settled the February 2008 lawsuit to avoid the threat that record labels would monitor its network.

“We will not install monitoring equipment on our network and no customer information will be handed over to record companies,” spokesman Paul Bradley said.

Some ISPs argue they shouldn’t be watchdogs.

“Copyright infringement isn’t a criminal offense,” said Adam Liversage, spokesman for BT Group Plc, Britain’s biggest provider.

The threat of being disconnected would change the behavior of 72 percent of illegal downloaders in the U.K., a study by London-based Entertainment Media Research showed, while 74 percent would change their habits in France, an Ipsos poll found.

Unlimited Downloads

A letter isn’t enough, said Geoff Taylor, head of the British Phonographic Industry. “File-sharers are only likely to change their behavior if they know that letters are the first step in a process.

The Isle of Man, a self-governed island of 80,000 people in the Irish Sea, has proposed charging Internet subscribers for unlimited music downloads. Revenue would be distributed to copyright holders.

Warner Music, whose artists include Kid Rock and Metallica, is exploring ISP fees in the U.S. The company hired former Geffen Records executive Jim Griffin, who’ll initially focus on universities, Nash said.

ISPs have a responsibility to act because they’ve allowed illegal transfers, said Barry Bergman, president of the U.S. Music Manager’s Forum.

“The ISPs have a direct relationship with the pirates,” said Bergman, whose group pushed for stronger U.S. copyright laws. “It’s very important that they step up to the plate.”

To contact the reporters on this story: Kristen Schweizer in London at kschweizer1@bloomberg.netAdam Satariano in San Francisco at asatariano1@bloomberg.net

Last Updated: February 13, 2009 16:21 EST