Fee-Based Networks Making a Connection

Before it ran afoul of the courts, Napster Inc. taught more than 70 million consumers that “peer to peer” meant copying whatever they wanted from other people’s computers without paying for it.

Ever since, a small but growing band of upstarts has been trying to teach a new lesson: that peer-to-peer networking is a better way for businesses to send music, videos and other digital goods through the Internet. And no one has to receive anything free.

The new players range from consumer-oriented systems--including CenterSpan Communications Corp.’s Scour and those from Wippit Ltd., Yaga Inc. and Blue Falcon Networks Inc.--to distribution systems aimed at corporate customers, including Kontiki Inc. and Uprizer Inc. In addition, Altnet Inc. is building a fee-based network on the back of Kazaa, a free network that the record and movie companies are suing for copyright infringement.

Like Kazaa and other free networks, the upstarts slash the cost of sending digital goods by transforming consumers into distributors. Songs, movies and other files flow from user to user, with the costs absorbed by the users’ Internet providers.

The difference is that users of the new networks don’t control what gets traded on them. The only files available through these systems are the ones approved by copyright owners.

The ventures have attracted some blue-chip investors, but as a group they’re low on customers. That’s partly because of concerns about Napster-style piracy and partly because the record labels and Hollywood studios have been slow to adapt their business models to the Internet.

“I think they’re all willing to do deals now, but they’re wary. Too wary,” Paul Myers, chief executive of London-based Wippit, said of the major record companies. “I think they’re missing huge opportunities. They’re playing into the arms of the illegal services.”

Peer-to-peer networks are designed to solve one of the thorniest problems in transmitting bulky audio and video files on the Internet: The larger the audience, the higher the cost.

Unlike with conventional broadcasting, which uses the same airwaves no matter how many people tune in, transmitting a file over the Internet takes up more network capacity as the audience grows. Everyone who watches a concert online or downloads a movie connects separately to the supplier’s Web site, so each user drives up the amount of capacity, or bandwidth, the supplier has to pay for.

Peer-to-peer networks, by contrast, spread files the way a case of chicken pox spreads through a grade-school classroom. A popular song might start on one user’s computer, but each user who copies it becomes a new source for other users.

The network points users to the closest available source, so the first user ultimately supports only a small portion of the total copies. More advanced networks enable users to copy a file from multiple sources at the same time, taking small pieces from each.

“This is the greatest distribution mechanism for content ever invented,” said Chris Kitze, chief executive of San Francisco-based Yaga. “You have the ability to reproduce infinitely, at almost no cost, unlimited amounts of content, which means you never run out of inventory.”

Though Kazaa and other free networks let users decide which files to share with other users, the copyright-friendly upstarts don’t. Instead, network administrators decide which files can flow from user to user. And electronic locks let copyright owners dictate how much, if anything, people must pay for a file.

In Blue Falcon’s approach, for example, central computers ensure that only authorized users supply and copy files. Those computers also would provide the keys to locked files and bill users for what they download.

“It’s not about file sharing, it’s file distribution,” said Ian Clarke, co-founder of Santa Monica-based Uprizer.

That’s an important distinction because corporate officials are skittish about the whole concept of peer-to-peer networking. Mountain View, Calif.-based Kontiki bills its services as “peer assisted,” not peer to peer, and pitches to corporate customers by saying, “Here’s a more effective way to communicate,” said Mark Szelenyi, director of enterprise marketing.

Kontiki has about 20 customers in various stages of testing or deployment, and they typically use the network to distribute sales and training material and software updates, Szelenyi said. Similarly, Uprizer focuses on helping corporations cut the cost of internal communications, using peer-to-peer technology to distribute material to employees and branch offices.

Blue Falcon specializes in using peer-to-peer technology for Webcasts, helping customers such as Radio Free Virgin, a leading online radio network tied to Virgin Group Ltd., cut bandwidth costs by as much as 50%. Zack Zalon, general manager of Radio Free Virgin, said peer-to-peer techniques, better compression software and other improvements over the next few years could enable his company to reach up to 30 times more listeners for the same amount of money.

There are signs that the studios and record companies are ready to start experimenting with peer-to-peer systems. Amid pressure from the Justice Department and burgeoning online piracy, negotiations with tech companies have intensified, several executives at peer-to-peer companies said.

Wippit, a network that offers unlimited MP3 files for a flat monthly fee, has signed up one of the five major record companies, Myers said, although it has yet to announce which one. Hillsboro, Ore.-based CenterSpan has acquired the rights to songs from Sony Music’s catalog, and a subsidiary of Vivendi Universal has agreed to launch a CenterSpan-powered entertainment service, said Michael Kassan, co-president of CenterSpan digital media and entertainment group.

“We’re in the midst of some very advanced discussions on the video-on-demand side,” Kassan said, adding that entertainment companies’ attitudes about peer-to-peer technologies have changed dramatically.

The music labels and film studios have been very good at promising online initiatives, but not at delivering them. Although many have tried, none of the companies has been able to obtain all the licenses needed to compete with the unauthorized online networks. Nor have the studios’ video-on-demand ventures gotten off the ground--in fact, one of the two major initiatives already has collapsed.

Still, Jay Haynes, chief executive of Blue Falcon in Los Angeles, said he expects the labels and studios to embrace peer-to-peer distribution soon. “In the next 12 months, I expect to see explosive growth in on-demand [services].”

Napster and its successors did the entertainment industry a favor, Kitze of Yaga said, by inducing consumers to want to get music online. “The next change in the behavior is to get from ‘free’ to ‘paid for,’” he said.