Here's a scene that should warm the heart of any executive in the video-game industry. It's a muggy Manhattan morning late last June. Liam McLaughlin, 23, a full-time games bootlegger, opens the door of his Bleecker Street co-op to find three armed U.S. marshals dressed in swat gear, and four suits from the Interactive Digital Software Association, a sort of Pinkerton agency for games manufacturers. The marshals have a warrant. Can they come in and look at his game collection? McLaughlin, it transpires, has been making copies of more than 250 CD-ROM game titles for the Sony PlayStation. He's been selling them via his website, hundreds a week, at $20 a pop--around 60% off the cover price. Fast-forward to last month, and McLaughlin cuts a deal, pays a large fine and makes a very public apology. And the forces of law and order confiscate his PlayStation.

Now here's the bad news for video-game execs: there's a whole new piracy threat on the horizon that is set to make McLaughlin's scam look like a parking violation. It is now possible for you to go online and--for a price ranging from nothing to $50--download software known as emulators, which can transform your computer into just about any gaming platform that ever existed. These include today's top-line consoles, the Sony PlayStation and Nintendo 64, which retail for about $130. Once you've done that, it's a cinch to find literally hundreds of thousands of sites on the Internet that offer illegal copies of the latest shoot-'em-ups--for free. "With just a few keystrokes, you can have a game that's just as good as what you buy in the store," laments IDSA president Doug Lowenstein. "It's certainly damaging to the health of the industry."

Piracy of entertainment content on the Internet is a growing pain in the wallet for artists and executives in several huge industries. Just ask any music mogul who has fretted over the explosion of copyrighted songs that have been pirated and made available for free in the MP3 format on the Net. The rise of emulators could present an even more insidious problem. For one thing, annual sales of video and computer games, at $6.3 billion, have surpassed those of recorded music and even movies ($6 billion). And piracy hits the games industry harder, undercutting sales of both consoles and games, which at $50 to $60 for a top-rated title like Rogue Squadron or Tomb Raider 3 cost four times as much as a music CD. No wonder the games industry lost a staggering $3.2 billion to piracy in 1998--about $1 billion more than the music industry did.

"We're talking about an hour to download a game over a 56K modem, so it's no easy task," says Kevin Hause, a gaming analyst with tech experts IDT. "But these games are expensive. Compared with MP3, the desire to do this is greater." And the opportunity, despite the risk of felony prosecution, is growing. Illegally copied games sites are proliferating so fast that stamping them out is akin to "playing wack-a-mole at the county fair," says Kathlene Karg, one of the IDSA investigators who raided McLaughlin's operation. Case in point: the IDSA managed to shut down 400 sites in the past year--impressive but less than 1% of the estimated total.

Until very recently, emulators had a more innocent image. They were--and to many gamers still are--a way to connect with a simpler computer era and play legendary games for long-dead consoles like the Commodore 64 or Atari 2600. Like so much of late-'90s culture, the emulator scene became cool by being retro. Nick Vigier, 19, a computer-science major at Carleton College in Northfield, Minn., last summer found and downloaded a classic version of Frogger and an Atari emulator. Sounding like a member of a previous generation who collected Pez dispensers, he explains, "You can relive your childhood."

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