It works for Coelho because reading long-form content sucks on the devices available to most users today, so people are forced to buy a paper book if they want a good experience. In other words, the free digital copy serves as a kind of crippled demo of the real thing -- like trial versions of software.
However, in 5-10 years, tablets and ebook readers will become more popular and many more people will be able to read those free digital copies on devices which provide a reading experience that rivals that of printed books. (This is already possible on iPads and Kindles, but these devices are not widespread yet.) We'll see how many people want to buy Mr Coelho's printed books when they are able to get almost the same experience for free on TPB.
With a free digital alternative, the only people who buy something from Coelho will be those who do it out of sheer gratitude. If you are a Paulo Coelho, you can survive on that. Extremely popular writers will do fine regardless of piracy -- kind of like Facebook is doing fine despite the lack of a serious business model due to the sheer number of users. For less popular authors, the "free digital giveaway" strategy won't work. Coelho doesn't see that, maybe because he is assuming that every writer can become a Coelho if only they give their stuff away for free.
As a case in point, we already know Coelho's strategy (give away digital version, charge for physical version) does not work for short-form content. Just look at the newspapers. They're doing the exact same thing: giving away their stuff for free online and asking people to subscribe to the physical version for a fee. Not many takers, unfortunately, as the free online version is "good enough".
Needless to say, I don't see this approach working for movies, music and software, either. In these cases, physical versions just don't offer enough value over digital versions for most people.