"Of course I can do a better job distributing hot dogs than the hot dog guy if I just put out a massive table of hot dogs I got for free and let people run up and grab one without paying for it. But that model doesn't work if I have to pay for my hot dogs."

I'm not arguing for the Pirate Bay, but there is an error in your logic - to make that analogy fit into an online distribution situation, you would have to postulate that you only have to pay for one hotdog, and the rest can be duplicated and distributed for close to zero cost.