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Can file sharing thrive?
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February 8, 2002: 2:33 p.m. ET
With the future of music trading unclear, the technology may not stand on its own.
By Staff Writer Meghan Collins
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NEW YORK (CNN/Money) - Imagine one teacher assisting another with a live in-class project - from 800 miles away - or a sales account team member on vacation in Barcelona helping another in New York develop a corporate presentation, in real time.
File-sharing companies that swooped in to take over where Napster left off say they can survive by selling software for tasks such as these - without depending on people who want free music - but Wall Street analysts argue it's an uphill battle.
"Most peer-to-peer companies will never see the public market unless they offer real value," said Chris Kwak, an Internet analyst at Bear Stearns in New York. The companies would have to provide fast, reliable software "but we just haven't seen very compelling offerings," Kwak said.
In addition to questions about their business models, analysts wonder whether file-sharing firms can offer users enough security and meet the threat of the increasing speed and ability of the Internet.
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Peer-to-peer is a way of networking and collaborating - it's not a market in itself.
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Chris Kwak
Bear Stearns Internet analyst |
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In so-called peer-to-peer file-sharing, people pass files to one another over their computers without the need for a central computer, or server. Companies such as LimeWire LLC and StreamCast Networks say they intend to make a legitimate business from the technology.
"We're about deploying a piece of software that connects people," said Steve Griffin, CEO of Nashville, Tenn.-based StreamCast, which runs the MusicCity.com site where users can download its Morpheus file-sharing software. "Our software is so much more than music or media."
Morpheus, launched last May and built on FastTrack code, has had 30 million-plus downloads, Griffin says, but he adds it's difficult to track the number of people actually using the service. Rival LimeWire, which uses FastTrack competitor Gnutella software, says it has 300,000 users a day.
While FastTrack is licensed by Streamcast, Gnutella is so-called open-source software, meaning it is free to download, and any developer who adds to it must share the new software code with others for free.
The strategy of marketing otherwise "free" software worked for companies like Red Hat (RHAT: up $0.68 to $7.88, Research, Estimates) and VA Software Corp. (LNUX: up $0.16 to $2.06, Research, Estimates), which attracted much attention on Wall Street a few years back by packaging, selling and servicing the Linux computer operating system.
But now these companies - whose initial public stock offerings were hot affairs during the tech boom of the late '90s - are struggling. And some observers say that file-sharing companies face similar challenges.
"We never set out to be a Napster replacement," said Greg Bildson, chief financial officer for New York City-based LimeWire, which launched its version of Gnutella two years ago, giving home computers server-type capabilities.
Last year Napster, a company that allowed free online music-sharing through a central server, was effectively shut down after a federal judge found the company in violation of copyright laws. The Recording Industry Association of America brought a suit against the company for enabling its customers to copy the music of its members without paying royalties.
So far, file-sharing companies using a peer-to-peer system, in which MP3 music files or other files are housed on a user's computer rather than a central server, have not been found to violate copyright law. The RIAA recently did file suit against StreamCast's MusicCity.com, and other sites, alleging copyright infringement.
Griffin maintains that the company doesn't support or encourage users to transfer illegal files using the technology, adding it has so many legal uses it would hurt innovation if courts ruled against it.
Why they think they can
While LimeWire's Bildson acknowledges that most people use the technology to download free music, he said the company had seen interest in adapting the source code for academic and corporate environments. But nothing solid was in the works, he added.
Peter Sommer, director of education at Columbia University's Center for New Media Teaching and Learning, said this type of network can help teachers collaborate at universities and in primary and secondary schools, but would require a major change in people's thinking.
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From very early on I thought these systems would have great educational applications. I think there are possibilities, but I can't tell you if it would be profitable
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Peter Sommer
Columbia University head of new media |
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"From very early on I thought these systems would have great educational applications," Sommer said. "I think there are possibilities, but I can't tell you if it would be profitable. I'm not sure they could survive in terms of a business model."
Bildson said LimeWire, wholly owned by technology incubator Lime Group, has thought about going public, but must demonstrate success in long-term use for a variety of purposes, and not just for downloading MP3 music, to gain favor with venture capitalists and other potential investors.
LimeWire is owned by founder Mark Gordon, who put about $1.5 million into the start-up and has pulled in another $250,000 from individual investors so far in exchange for a small equity stake, according to Bildson.
Why some think they can't
Some academics say they don't see the benefit of peer-to-peer networks for an environment where much care is taken to file and manage information in a central location.
Peter Leonard, a colleague of Sommer's at Columbia, said Web-based information system Yahoo! Groups, formerly eGroups, would be more beneficial in the course management area because the system holds the information on a central server, accessible at all times.
And like many dot.coms, most free file-sharing applications try to pull in dollars from site advertising or by distributing other software - a risky venture, many analysts say.
"They are obviously pirate services," said Robert Martin, an analyst at Washington, D.C.-based Friedman, Billings, Ramsey. "Sure they might be able to survive as small businesses, but it's hard to get advertisers to advertise on a pirate site. It's a hugely fragmented market."
StreamCast, funded by Vancouver, Wash.-based Timberline Venture Partners, currently relies on ad revenues but hopes to start making money from the sale of music or other goods on its MusicCity.com site. In addition, it may charge for access to an advertising-free version the site.
LimeWire plans to launch a new system called LimeWirePRO that is free of banner ads and bundled software, which users can buy for $6. In addition, the company is trying to target its marketing based on user searches - working with a concert promoter to deliver tickets to someone interested in a specific artist's live shows, for example.
While Bildson said there's room for growth and innovation in the market, analysts claim the technology hasn't found a footing yet - and that the window of opportunity is rapidly closing.
Check software stocks here
Kwak at Bear Stearns said that, as with other technologies, it's a question of providing a product or service users can't get elsewhere that will be key to survival. "I think that peer-to-peer is a way of networking and collaborating - it's not a market in itself," he said.
He said closely held Groove Networks, based in Beverly, Mass., comes the nearest to using the peer-to-peer scheme in an interesting new way. Groove's so-called "shared spaces" - interactive workspaces - are open only to invited members who can collaborate online. The system is similar to Microsoft (MSFT: up $0.85 to $60.65, Research, Estimates) Net Meeting, but does not work from a central server.
Bill Kallman, a managing partner at Timberline, a unit of Draper Fisher Jurvetson, said the venture capital firm has invested millions in StreamCast since its initiation to the file-sharing technology in 1999.
"I think this type of technology is going to be pervasive on the Internet," Kallman said. "It's general-purpose communications networking software."
But, analysts and experts say, the battle has yet to be won. The consensus among industry watchers is that file-sharing technology has a long way to go before it can become a financial success.
"The actual service as a software product has value," Friedman, Billings' Martin said. It might last "if it's robust and commercially ready. I just haven't found one that doesn't crash at least once a day." 
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