I believe nlawalker's point was that if a paid service is identical in functionality to a free "pirate" alternative, there's still an incentive to use the free one. Even if the paid service is better than the free one, many people would opt to stream illegally over, say, purchasing region-free non-drm DVDs.
A stream is not identical in functionality to a DVD.
Aside from that, this is a difficult to prove assertion. I'm not sure there's actually been a paid legitimate service that's actually better than the free pirate one overall, when you take out the morality equation.
Netflix, rdio, etc. do seem to be doing quite well at proving that people are still willing to pay for a good service with legitimate content, though. Imagine if they were actually as good as the alternative.
Google play almost solves this problem for me with music. I have a hopeless addiction to fairly off-the-beaten-track hip-hop, and used to have to use private trackers and forums to find good stuff. I got Google play music recently, uploaded stuff I already had, and now I get really good suggestions for new, rare stuff every day. It's still not as comprehensive as what's available on the rest of the internet, but it's better than any other paid music thing I've tried.
I think the closest I know of is vodo.net -- but it has the usual problem of free/indy media -- a lot of it is simply crap. But it has some low-budget gems, like Pioneer One:
(Note that one person's gem is often another person's crap...)
Yet, vodo.net, even being free -- still has higher friction than The Pirate Bay, less choice in [encoding] quality -- but at least supports offline usage (unlike Netflix).
Piracy will always have an inherent risk of getting caught. As a result piracy isn't free at all. It is potentially very very expensive. To do piracy properly you have to pay for a proxy so it isn't really free at all.
I don't pirate stuff very often now. Spotify and Netflix usually ensure I have something to watch and listen to. There are a few exceptions. Once every 6 months or so I subscribe to a proxy to catch up on a bunch of TV shows which aren't on Netflix, LoveFilm etc. Realistically I would pay for the things I download if there was a reasonably priced option. I rarely want to own a film or TV show, I just want to watch it once. $30 for a season of something is too expensive..
