NEW YORK (Fortune) -- In 1999, best-selling author Paulo Coelho, who wrote "The Alchemist," was failing in Russia. That year he sold only about 1,000 books, and his Russian publisher dropped him. But after he found another, Coelho took a radical step. On his own Web site, launched in 1996, he posted a digital Russian copy of "The Alchemist."

With no additional promotion, print sales picked up immediately. Within a year he sold 10,000 copies; the next year around 100,000. By 2002 he was selling a total of a million copies of multiple titles. Today, Coelho's sales in Russian are over 10 million and growing. "I'm convinced it was putting it up for free on the Internet that made the difference," he said in an interview at this year's World Economic Forum in Davos.

Coelho, whose fiction explores universal themes of spiritual aspiration and brotherhood in unpretentious language, has been a star of the Forum for 11 years. (For an account of Davos 2008 see this column.) Before this year's Davos, both Coelho and I attended a wonderful conference in Munich called Digital, Life, Design. Onstage there he told the surprising story of his embrace of free Internet distribution. In Davos I sat down with him to learn more.

Coelho explained why he thinks giving books away online leads to selling more copies in print: "It's very difficult to read a book on your computer. People start printing out their own copies. But if they like the book, after reading 30-40 pages they just go out and buy it."

Intrigued by his growing sales in Russia, Coelho used the Bittorrent site - a favorite for illicit distribution of media - to seek out and download online translations of his books as well as audio versions. By 2006 he was hosting an entire sub-site he called The Pirate Coelho, with links to books in many languages. While he did not play up his own role, he did quietly include a link on his official site.

"So you gather together all the stolen digital versions?" I asked him. "You say steal?" he replied. "No. I think it's a way of sharing." His agent, Monica Antunes, who joined in the interview, chimed in unashamedly, "We don't own the translation rights to all those editions."

By last year Coelho's total print sales worldwide surpassed 100 million books. "Once we did the Pirate Coelho there was a significant boost," he says.

For all this, he kept quiet with his many publishers in countries around the world. "Sharing" is typically not the word they use to describe such activities. Coelho says the publishers have periodically taken action to remove books from the Pirate Coelho. "They think it is against me. They don't know it is in my favor. They will know it after your article," he says.

"Publishing is in a kind of Jurassic age," Coelho continues. "Publishers see free downloads as threatening the sales of the book. But this should make them rethink their entire business model."

Now Coelho is a convert to the Internet way of doing things. His online e-mail newsletter, published since 2000, has 200,000 subscribers. In 2006 he started blogging. Last year he joined MySpace and Facebook to interact more actively with readers. "MySpace is an addiction," he says ruefully. He also makes available an extensive archive of rights-free photos on the Flickr photo-sharing site.

None of Coelho's books has ever been made into a movie. But now he is using the Internet to let his readers make one for him, based on his latest book, The "Witch of Portobello." It tells the story of its protagonist from the point of view of multiple people who knew her at various times in her peripatetic life. Now Coelho and Hewlett-Packard (HPQ, Fortune 500) have created a competition, inviting anyone worldwide to submit a segment as they envision it. Coelho plans to knit together 15 winners and release the film.

He spends about three hours online every day, interacting with readers who send him over 1,000 e-mails and messages daily. A fulltime staff of six helps manage his manifold Net activities, and the entire operation costs him $15,000 each month, which he pays out of his own pocket.

"I don't understand why publishers don't understand that this new medium is not killing books," Coelho says. "I'm doing it mostly because the joy of a writer is to be read. But at the end of the day, you will sell more books."