(FORTUNE Magazine) – Of all the people in all the world you'd expect to find engaged in a debate, one of the unlikeliest duos would have to be rap star Dr.Dre and Intel Chairman Andy Grove. Yet here they are, speaking passionately--in the style of their respective milieus--about a little company with a big new technology. "I'm in business to make money, and Napster is fucking that up," inveighs Dr. Dre from Los Angeles. Grove marvels from Silicon Valley, "The whole Internet could be re-architected by Napster-like technology."

In case you've slept through this part of the revolution, Napster is a tiny startup based in San Mateo, Calif., that gave college students a new reason for avoiding their studies. Founded by 19-year-old Shawn Fanning and 20-year-old Sean Parker last September, Napster came out with a new type of software that lets people trade music files over the Internet with astonishing ease and at an unbeatable price--free.

Since then Napster has managed to turn the music industry inside out, igniting an ugly legal battle with the Recording Industry Association of America, which is fighting to keep people from getting hold of copies of songs without paying for them.

But Napster's import goes far beyond the balance of power in the music business. Napster represents a new idea, a different architecture for exchanging information. No one can say yet how important the idea will become or how it will change things. But people felt the same uncertainty seven years ago, when Marc Andreessen and some other University of Illinois students created an application called Mosaic--the browser that introduced the Web as an easy-to-use enclave within the Internet.

Will Napster trigger a similar revolution? Who knows? The point is that it might, and the fact that it might is forcing people in a lot of different industries to rethink their modus operandi. It could, for instance, change the way the Internet works, lessening its role as a repository of information and making it a conduit that lets any PC owner reach into any other wired hard drive in the world. Napster-like services could emerge as the next killer app, creating a hunger for greater bandwidth and ever more powerful PCs. The invasive nature of these services could force us to rethink our attitude toward privacy in a wired world too.

All of this is possible because of a technology called peer-to-peer file sharing, which is computer jargon for people trading files with each other. The first industry to shudder from the force of this new wind blowing is the music business. Before Napster, the only way to get music over the Net was to download the file from a Website. The song you wanted was stored there on a server, and thousands of people might be trying to access the same track at once. No wonder overtaxed servers would often conk out before you could download a single note.

With Napster, Website servers contain nothing more than simple directories of the digital music libraries on the hard drives of thousands of registered users. The digital files of the songs themselves remain on the users' hard drives. Say you want a copy of Nirvana's "Smells Like Teen Spirit." You log on to Napster and type in your request. Napster's software connects your hard drive to its central user directory, which sends you a list of active users who have Nirvana songs on their computer. Click on a handle name, and Napster opens a link between your PC and the hard drive of the user you've selected. Then--bam!--it zaps "Teen Spirit" your way. So while the music travels to you via the Internet, the files Napsterites trade aren't stored on the Web at all.

Napster was just Step 1 in removing content from the Web. Step 2 was eliminating the central directory. That is exactly the trick accomplished by Gnutella, a technology that has been spreading among Web cognoscenti like a brushfire. Gnutella makes Napster look old hat. Instead of using a central server to match up users, Gnutella's software connects your hard drive to as many other Gnutella users as it can find in a web of peer-to-peer connections, allowing each to download information from the hard drive of any other.

Here's how it works: The first time you want to log on to the Gnutella network, you download special software from a Gnutella Website (there are around 20). You next type in the Internet address of an established Gnutella user. (If you don't know one yourself, you can get a listing from the Website.) Your software then transmits an e-mail-like signal that will, in Gnutella-speak, "shout out" your location and announce your presence online. Once a link with the other PC is secure, your new PC friend will shout out your presence to all the other PCs that it has encountered during previous sessions.

After that, you're set. You'll never have to use the Web to find other users again. Each time you load your Gnutella software, it remembers its cronies and reconnects you with all the other hard drives online. Those connections introduce your hard drive to even more new users. If your original friend is offline, the signal just seeks the next in its web of acquaintances. "It's sort of like a closed society that you have to break into," explains Gene Kan, a 23-year-old who developed a popular version of Gnutella along with buddy Spencer Kimball, 26. "But once you do, the connections are endless."

Besides being completely beyond the control of any central entity, Gnutella lets users grab a far more varied range of content from the hard drives of other users than Napster does. Gnutella users can exchange any sort of digital information, from Word documents to MP3 music files to videos. If you want to find, say, a recipe for strawberry rhubarb pie, type in the phrase, and the Gnutella software launches a search of every connected computer, scanning for files bearing the magic words. It then displays on your screen a scrolling list of all related files. Clicking on any of them brings the file straight to your PC.

Of course, people are far more likely to be launching searches for songs by Dr. Dre, so it is deliciously ironic that Gnutella was unleashed by what will soon be one of the largest music copyright owners in the world. Back in March, an employee of an AOL subsidiary called Nullsoft posted Gnutella on its Website. But AOL's new corporate partner, Time Warner, was suing Napster, Gnutella's prototype, for encouraging copyright infringement. AOL reportedly ordered Nullsoft to take the software down, and it did. But not fast enough. In the single afternoon the software was posted, roughly 10,000 technophiles downloaded it, and they passed it on to thousands of others. Today 30 versions of Gnutella are available, with countless numbers of users.

No wonder music moguls are profoundly freaked out. Record companies have tried to respond with a one-two punch: by filing lawsuits against any online company that promotes free exchange of music and by scrambling to launch similar services of their own to distribute their content online. But the industry has been slow and disorganized, unable to agree on a uniform approach. For instance, one way to distribute music securely is to protect each file with digital rights management (DRM) technology. DRM works a bit like a tollbooth--it makes sure you've paid before granting you access to your music and ensures that anyone you pass it on to pays a toll as well. The trouble is that several competing DRM technologies are floating about, including products from Microsoft, Xerox, IBM, and InterTrust, and the industry can't agree on one. It's a mess.

When record companies have ventured online, they have done so the old-fashioned way--by posting songs on a central Website. Not surprisingly, the user experience has been dismal and the pickings slim. All spring, record companies spun out press releases touting their progress in selling digital music. In April, Sony Music released 50 songs online, including singles by the Dixie Chicks and Lauryn Hill. BMG, Universal, EMI, and Warner all plan to follow suit. Yet in one recent experiment, it took ten minutes just to find the downloadable songs on Sony Music's site. (Hint: Go to the section called The Store.) Lauryn Hill's "Everything Is Everything" was offered for a "reduced" rate of $2.49. (The original price was $3.49. For one song? Please.) And the screen froze repeatedly during attempted downloads.

Napster is far easier to use. Letting people get music free eliminates billing issues, and ignoring the copyright question also helps to keep the technology simple. (If you're wondering, Napster hopes to make money by selling ads on its site and marketing T-shirts, tickets, and the like.) MP3.com CEO Michael Robertson says, "People were demanding a digital choice, and the record company didn't come up with one." No wonder Napster attracted ten million users in less than ten months.

The industry's legal gambit may bear greater fruit, at least against Napster. Back in January, the major record labels charged the company with violating copyright laws and sued to shut Napster down. Last month federal judge Marilyn Hall Patel rejected one of Napster's key arguments--that it was an ISP and hence not responsible for any illegal acts committed on its network. If the court continues in this direction, Napster could be out of business very soon.

But shuttering Napster won't save anyone's bacon. Tons of music already trade free via Gnutella, and since Gnutella is a technology, not a company, it can't be sued and it can't be closed down. Even if it could be, similar services are popping up. This stuff is irrepressible.

That's why the music industry's best bet could be to adapt a Napster-like service to distribute legitimate, secure music. Such a network could trade files shrink-wrapped in DRMs. Record companies could even give customers an incentive to pay by making the exchange of secure music files a for-profit venture. For instance, you might go to a file-swapping service and pay, say, 50 cents to download a song from a music retailer. Share that file with your buddy, and maybe she too will have to pay 50 cents (remember, the file would be DRM-protected). But 10% of that fee goes to you. The more legit music you share, the more you make. "I love that model," smirks Rob Reid, CEO of Listen.com, an online directory for music. "That's the Amway model."

Marketing chief Kevin Conroy of BMG admits to being intrigued by the idea of building a secure Napster-like service and says he is open to the idea of sitting down with Napster and talking about how to do so. Sony, EMI, and Universal wouldn't comment about talking to Napster. Warner Music says Napster has never contacted it. Still, it's not beyond the realm of possibility that Napster could get bought and stripped for parts by one of these supposed enemies before it gets shut down.

The extent to which peer-to-peer networks will change the music industry is unclear. But change is certain, and not just for record companies. Don't forget: The new peer-to-peer technology is really about trading information--all sorts of information. As such, the technology could end up changing how people use the Internet as profoundly as Mosaic did. Strangely enough, the post-Napster Internet could work much the way the pre-Mosaic one did, back when the Net was the province of academics, computer geeks, and the military. In those early days, Net users would launch arcane fetching programs that could go out and grab files from one another's databases. With Mosaic, which eventually became Netscape, the Net spawned the World Wide Web, which has worked like a giant bulletin board where anyone can post files with everything from stock tips to whips-and-leather porn for surfers to consult and download. Napster and Gnutella could mean that the Net will once again be a medium where information is mined directly from other people's computers--except this time it will be for the masses. As Andy Grove puts it, "It's sort of 'back to the future.'"

Only better. A peer-to-peer network can move faster than the Web because users search for data on countless numbers of hard drives simultaneously. The information can be much more timely, too, since it comes straight from a computer that might have been updated only a few seconds before you launched your search. And peer-to-peer services can even anticipate precisely where to find what you're looking for on the basis of your past pattern of requests, making for faster and more efficient searches and downloads. A London-based service called Freenet has smart software that can remember the exact pathway it followed to find that copy of the Tommy and Pamela Lee video you downloaded last week, so it will look there first the next time you shout out a tawdry request.

Rather than competing with Internet technologies, peer-to-peer networks can breathe new life into them. Gene Kan and fellow Gnutellans have just come out with a beta version of InfraSearch, a peer-to-peer search engine. As with other search engines, surfers use InfraSearch by visiting a standard Website. The twist is that InfraSearch's back end is actually a private Gnutella network. So when you post a query, InfraSearch connects your PC to a web of participating hard drives until it finds what you're looking for. The result is something like Yahoo on steroids. In a test, I ran a Yahoo search for the latest news on Britney Spears, and the most recent story was from the previous week. InfraSearch found scoops on Britney that came out just a few hours before I pushed the button. Kan and friends are hoping that companies ranging from tiny e-commerce startups to IBM will use InfraSearch on their own Websites.

Peer-to-peer technology could change the way all sorts of institutions disseminate information. This past spring, Dr. Lincoln Stein of the Human Genome Project spoke to the folks at Napster about building a peer-to-peer service for exchanging data about genetics. "There's too much information [about genes] and too many ways to look at genes to put into a single database," explains Stein. "The information also changes so quickly. I'm very interested in any technology that allows people to post information instantly in a published index."

Here's how Stein sees it: Scientists would place their completed studies into a folder on their hard drive designated for the peer-to-peer network. If someone wanted to find out something about a given chromosome, he would simply type in, say, "Chromosome 3, Region P13," and a list of files containing relevant data would appear on his screen. Such a network might use some sort of DRM-like technology for signing and authenticating work so that researchers could avoid getting inundated with nonsense from nonscientists.

Peer-to-peer technology will also affect the balance of power between computer makers, Internet service providers, and the telcos that carry traffic across the Internet. By allowing a lot of information to flow from node to node via the Internet, peer-to-peer networks can hog a lot of bandwidth. That creates a problem. Several universities banned Napster this past winter because downloads of music files gobbled up so much space on their massive T1 connections to the Internet that students couldn't get their work done. For a similar reason Simon Khalaf, who develops file-sharing products for Novell, thinks local Internet service providers will crack down on peer-to-peer services. "Right now, people pay around $24 per month for bandwidth that's supposed to go to the Web," says Khalaf. "ISPs can't charge enough to support hard-drive-based services."

But peer-to-peer programs like Napster and Gnutella, as well as nonmusic programs yet to be invented, may be the killer apps that will finally drive people to want high-speed connections to the Internet. This would be good news for the Baby Bells and cable companies, which are trying to persuade consumers to spend $40 or $50 a month for services like DSL and cable modems. It would also justify the billions that phone companies have spent on beefing up the Internet backbone.

The technology could be a boon to hardware makers like Andy Grove too. On a peer-to-peer network, every PC becomes, in effect, a file server for every other PC. For these networks to work as they should, each PC must be robust and sophisticated. That could mean big bucks for computer hardware makers, as consumers and businesses continue to demand new PCs that are ever faster and more powerful. Grove says, "This could be used not just to share MP3 files but to share databases and documents at work."

The ease with which computer users can dip into the hard drives of other people takes the question of computer security to a new level of urgency. It's unnerving to think that your hard drive might be open to anyone who's interested in poking around it. Most Napsterites confess to feeling an eerie sense of violation the first time they hear their hard drives whirring spontaneously and realize that a stranger is rifling through their files. While services like Gnutella restrict access to files placed in a designated folder, few computers are immune to clever hackers, which could leave your financial records, resume, or private phone list up for grabs. Unauthorized deposits are conceivable, too, putting your hard drive at risk. Khalaf of Novell says, "I'd like to see the look on everyone's face when a virus like ILOVEYOU is spread through Napster."

Peer-to-peer software designers say they have taken measures to protect your hard drive. Claims Freenet founder Ian Clarke: "Freenet can only access what's put into the Freenet file." But neither Clarke nor Spencer Kimball, nor anyone else for that matter, exercises complete control of the software people use to tap into these networks. Someone could easily design and disseminate a version of Gnutella or Freenet that includes a built-in tunnel giving hackers access to your hard drive. Kimball warns, "I cannot guarantee there is no hole in Gnutella."

Indeed, security has always seemed a sidelight when it comes to peer-to-peer networking. Just look at Napster: It built its reputation by circumventing copyright laws. And shortly after Napster was launched, several different technogeeks figured out how it worked and published the protocol on various Websites. Clarke of Freenet argues that your computer's security has always been a figment of your imagination anyway. "When you run any piece of software, it's a bit like letting a stranger into your home and inviting them to stay while you're not there," he says. And you thought Big Brother would be Big Government. Who knew it was really the hard drive next door?

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