What exactly is hotlinking? And why do people say you shouldn't do it?
Hotlinking is when you directly use (e.g. embed/display/link) a file (such as an image, movie, audio file, flash animation, or any other digital asset) that is hosted on another site.
It is considered poor netiquette to hotlink for the following reasons:
You are consuming another site's resources for your own benefit.
Aside from costing the owner in bandwidth, by hotlinking their files you may be undermining their revenue source. Many websites may depend on revenue from advertisements, and the said advertisements are usually not placed in the files themselves, but in the html page where the files are linked to or displayed (e.g. a software developer may depend on revenue from ads on their download page, but not on ads in the actual software). By bypassing the html page, you could also bypass advertisements, and thus, deprive them of revenue.
It is considered especially rude to hotlink images or other embedded assets without crediting the author (which many people do). Not only are you plagiarizing their content, you are also doing so in a way that (may) use their resources and deprive them of revenue.
Additionally, hotlinking means you depend on the other webmaster not moving/removing or altering the hotlinked asset, all of which can have negative effects on your site or pose security risks.
However, it should be noted that hotlinking is not always bad. Many webmasters encourage it as the web was designed to allow this sort of cross-site linking of assets. The downsides of hotlinking are also its advantages:
If the author updates the asset, your hotlink is updated as well.
It reduces the amount of duplicate content on the web and allows for better proxy- and browser-side caching, which reduces network traffic.
It can prevent linkrot resulting from the use of cheap throwaway image hosting services. To avoid hotlinking, most forum users will save an image to their computer and then upload it to a free image host in order to post the image on a blog or forum. Unfortunately, after a year or two, these free image hosts will usually remove the file, change the URL format, forbid hotlinking themselves, or go out of business, resulting in a large amount of dead images and links on the web. (As alluded to, use of free image hosts is itself a form of hotlinking, but not from a netiquette standpoint, hence their prevalent use as an "alternative to hotlinking".)
If proper attribution is given, including a link to the original site, it can provide additional traffic and revenue to the hosting site. Not only that, but both the hotlink and the backlink will be good for SEO.
It allows you to link to an asset without copying it, avoiding copyright infringement. Additionally, hotlinking keeps the asset in the original owner's control. If they choose to change/remove the asset, they can.
Using a canonical URL for a file allows the original source to be easily identified and means users know the file is authentic. This is often used with software as well as trust seals (where only verified sites can display the hotlinked seal).
In general, you should ask for the owner of the file's permission before hotlinking. While hotlinking has many benefits, some webmasters object to hotlinking for the reasons listed above, and as such it's a good idea to check first. In addition, if the webmaster knows that you are hotlinking a certain file and is OK with that, they will be less likely to delete or modify that file.