From the fair use article posted earlier: "However, as with xerography, the copy was of lower quality than the original and thus was easily distinguishable from the original. This kept illegal copying (essentially, copying for a profit) below the threshold necessary to threaten the economic interests of the parties involved (authors, publishers, and users)."
This is a common argument, and not a particularly controversial one. Yet the more I think about it, the more convinced I am that it is wrong. Certainly, the copy was of lower quality than the original, but not significantly so. I watched Star Wars hundreds of times as a kid from a copy recorded off the air, still watch from that same VHS sometimes today, and the quality never bothers me. And I'm picky about video/photo quality. So why has this argument gone uncontested all these years? Certainly there were technical barriers to copying, but most of the barriers in the 'good old days' were those of cost: distributing a VHS is simply more expensive than handing them out. Nevertheless, the cost argument appeared nowhere in the fight over DVD copying, because the media in the early days cost upwards of $5 apiece. No, it was the 'perfect copy' argument that held fast. Never mind that only now do we have DVD media capable of storing a perfect copy of the original, and that such media remains so much more expensive that few bother to use it--witness the enduring popularity of programs such as DVD Shrink. The lack of challenge to this argument is particularly egregious in the music field, where, with the exception of a small niche of audiophiles trading FLACs, all of the filesharing that occurs is in MP3's, and largely 128Kbps files, at that. So the illegal copying may or may not have been below a certain threshold--we may never know, given the tenuous-at-best link between filesharing and declining profits--but it certainly wasn't imperfect copying that kept it that way.

--Ari