the developers make money by selling in-game items, advertisement, and other things.
To further the comparison between a game developer and a musician, you can call the in-game ad service a live concert. After all, playing a pirated copy online is pretty much like sneaking past the guards at the front gate of a concert.
Games, too, are headed to an end of simple digital distribution. In the Asian games market, this has already happened - most games are cheap or free, and the developers make money by selling in-game items, advertisement, and other things.
Perhaps the biggest example of this in the West is Second Life and World of Warcraft, where the games are free but you pay for service.
So... no contradiction there. It's impossible to keep people from copying and distributing games, so game developers are realizing that they can make money with other business models.