The internet has been in overdrive for the last few days since it was announced that the United States Government had shutdown Megaupload leading to the arrest of four employees in Auckland, New Zealand who will be extradited to the US for trial.

A grand jury indictment has accused Megaupload.com of costing copyright holders more than $US500 million in lost revenue from pirated films, music, and other copyrighted content. Internet hacked network Anonymous immediately whipped into action taking down the websites of the Justice Department, the Motion Picture Association of America, and the Recording Industry Association of America.

Those websites continue to have intermittent issues thanks to Anonymous but the death of the internet media giant is already having a major impact on the rest of the web. The debate over new internet piracy laws in the US has shifted gear from assured passage to political wilderness, and many of Megaupload’s contemporaries are shutting down or rapidly changing the way they do business.

File-sharing site FileSonic have shut off sharing services for all users effectively turning themselves into a digital personal locker. A number of other file-sharing sites have also started to delete accounts that have uploaded large volumes of pirated content.

But the major labels remain unrepentant about the action. Joshua P. Friedlander, Vice President at the Recording Industry Association Of America (RIAA), has written a lengthy blog post about their official position on Megaupload and similar services. Their website is still having uptime issues so we’ve copied it below for you to have a read:

While much of last week was spent debating the language and suitability of anti-piracy legislation, on Thursday January 19th the US Justice department charged the operators of Megaupload with a host of crimes, and the site was shut down ( see here and here).

Megaupload had been one of the most popular and notorious file sharing services in the United States, and used predominantly for trading unauthorized content including music, movies, and other copyrighted works.

If you need any evidence about its shady business model, read the federal government’s news release on the indictment or consider the fact that the Obama Administration’s trade representative listed Megaupload as a “notorious market” rife with theft last month.

Merely days later, we’ve seen other popular file sharing lockers like Filesonic and Fileserve curtail their own services, likely fearing similar charges as they functioned similar to Megaupload. These shutdowns beg the question – what happens next?

Fortunately, shutdowns of these types of hubs for illegal activity are not unprecedented. In October of 2010, Limewire (the most popular P2P service at the time) was shut down, and just like this week, millions of users were forced to find new sources for their content.

Although some contingent of users remain fixated on stealing music rather than using any of the myriad legal – and often free – services available, we have seen strong evidence that many users quickly switch to legal sources.

According to the NPD Group, Limewire users left by the millions in the months after the shutdown. And just like this week with Megaupload and its ilk, the shutdown of one major source led to decreases across other similar services as well.

So where did those users go? There’s good data that shows many turned to legal services. In 2010, digital album sales grew 13% while digital tracks only grew 1% according to The Nielsen Company, and many suggested that rapid growth in download sales was finished.

But in 2011, digital sales rebounded, with digital album sales up 19% and digital tracks up 8% versus the prior year.

But this chart from Nielsen shows what happened more explicitly. Digital music sales that had been flagging jumped in the month immediately after the Limewire shutdown, and have remained stronger ever since (note that while the Beatles did go on iTunes in November of 2010, they only account for a small portion of that sales increase, and current music sales went up even more than catalog).

When Billboard looked at the data after the Limewire shutdown it said “The spike in sales was immediate, noticeable and lasting”. Collectively, this evidence strongly suggests that the shutdown of illegal sites helps create a thriving and diverse digital marketplace.

It encourages users to go to legitimate sites, and enables great new services to be launched – like Spotify, which launched in the US last year and quickly signed up millions of new users. It’s always reassuring when the data we see in the market reflects what we thought was just common sense.