Let's look at the diagram again, but remove the black which represents viable activities.
You'll note that the law no longer covers the complete domain of activities anymore. This presents some major problems, as people such as MP3.com have found out. As a way of branching out, MP3.com attempted to create a business where they would create high-quality MP3 files of thousands of CDs (at the time, it was technically challenging to create a good MP3 from a CD, as evidenced by the notoriously spotty quality of files downloaded from the original Napster), and when people proved to MP3.com that they owned the CD, MP3.com would give them access to the prepared MP3 files. MP3.com figured this would not be an issue because they made the customer prove that they already possessed a legal copy of the song or album they could obtain. The courts found that MP3.com was distributing music files, which requires a license that MP3.com didn't have. Subsequently, that service has been shut down.
This is a perfect example of what the modus operandi of the legal system has been up to this point: To try to extend all of these little circles outward until they cover all the scenarios that are important at the moment. In this case, the courts decided that distribution of music in this manner was the same as distributing new CDs to the customers. Unfortunately, because each of these sets of laws have been designed with any number of hidden assumptions based on the domain that they were created for, there are unresolvable conflicts everywhere these laws overlap.
For instance, consider "sending digital video over the Internet". In early 2000 in Australia, the part of the government charged with licensing television broadcasters briefly considered trying to require anybody in Australia who wants to transmit streaming video over the Internet to acquire a broadcasters license.
Notice that if one only considers the point of view of those familiar with television, this requirement not only makes perfect sense, it shows a good understanding of how the growth of the Internet could affect television. It is probable that an Internet site in a few more years could broadcast streaming video twenty-four hours a day, seven days a week, at television qualities to television-station sized audiences, effectively gaining all the capabilities of a television station. In only a few more years, this capability will exist for everyone. Obviously, if a country wants to regulate what can appear on television, the country will not want to allow such "stations" to bypass the decency laws of that country just because it isn't a "television station". Thus, it was proposed that the bureau should consider requiring streaming video websites to meet the licensing requirements of a television station. Do not think I am mocking this idea; from the point of view of television regulation, this was an unusually forward-thinking idea, especially for the year 2000.
Fortunately, it was rapidly struck down... because when look at this with anything other then a television-centric viewpoint, it quickly degenerates into absolute absurdity. Does Grandma need a full-fledged broadcasting license just to post streaming video of her grandchildren's birthday party for the father who's on a business trip on the other side of Australia?
And flipping it around, can we completely duck the issue of requiring a broadcasting license by not "streaming" video? In places where two classes of law overlap, like in this example where television law is overlapping with personal law, people will attempt to "dance" from one legal domain to another. So, if the law specifically requires streaming video providers to obtain licenses, a provider may decide to delay the video by an hour, create several files containing an hour of content each, and allow the visitor to view those on the web in a non "streaming" fashion, which violates the spirit of the law, but not the letter. In every way that matters, they are still broadcasting and deriving all the benefits thereof (especially if they also just "happen" to schedule all of their content in advance by an hour so this delay gets cancelled), but they've either ducked the law or forced the creation of unwieldy special-case clauses in law or the policies of some entity like the FCC.
And this is only one small case involving two domains! Imagine all the wonderful conflicts you could create with a bit of creativity, many of which have already occurred, somewhere. I could go on for another twenty or thirty pages proving this point with examples, but that would exhaust us both. If there was only a limited number of these intersections, we could cover them all with special cases as we have in the past, but the combinations and conflicts are nearly limitless, with every year's new technology adding a few more.
Here, you can make your own conflicts. Pick one or two from this list: Video, music, spoken word, deriving works from (such as making custom cuts of movies), text, images, software. Pick one from this list: over the Internet, on demand, traded via peer-to-peer, with some unusual monetization system (such as micropayments). Pick one from this list: to one person, to a select group of persons, to a small number of people in general, to the general public. Odds are very good that unless you deliberately select something that already exists ("Video monetized through advertising to the general public" a.k.a. "Television"), you can find cracks in the law. If you select two from the first list ("Music and spoken word over the Internet to a small number of people in general", which is personal radio station DJ'ing, which is a popular hobby in some subcultures), you're certain to find conflicts. And this isn't even an exhaustive list of possibilities, just what I came up with in a few minutes.
I think it is clear that the current approach cannot succeed. We can not address each problem that arises with a stop-gap solution; each such stop-gap adds two more conflicts to the system. Even if we stuck with it long enough to nail down each problem the hard way, and in this era of multi-year lawsuits that would take a very long time, it would still be messy and inefficient, and would still be subject to radical upheaval by a new technology. We are far better off laying a completely new foundation.