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BitTorrent's Grab at Respectability

By Heather Green BitTorrent, the maker of popular file-sharing software used to distribute movies, music, and games both legally and illegally, is going commercial. The company has raised $8.75 million in venture capital from Menlo Park (Calif.)-based Doll Capital Management and plans to create a marketplace for dispensing digital goods.

The idea? Gather movies, music, games, and software from Hollywood studios and indie producers alike and distribute them to consumers. BitTorrent would generate revenue either by selling ads within the content or charging a fee for the files.

That's a pretty dramatic turn for a technology that up to now has been so closely associated with illegal file sharing. BitTorrent was developed and released in 2002 by independent programmer Bram Cohen as a way to efficiently distribute the free Linux operating system that competes with Microsoft's (MSFT) software. But it was quickly commandeered by file sharers for illegal swapping of copyrighted movies and TV shows.

QUICK DOWNLOADS. The technology works by allowing files to be cut up into chunks so that they can be distributed by many file sharers, cutting down on the time it takes to transfer a file. The more people who share the files, the faster the process: A popular movie can take minutes instead of hours to download. BitTorrent works so well that it accounted for 30% of worldwide Internet traffic at the end of last year, according to traffic monitoring service CacheLogic.

Cohen always distanced himself from illegal use of his technology, though he did make money by accepting donations and selling T-shirts -- that is, until the past year. Ashwin Navin, a former Yahoo! (YHOO) employee and now BitTorrent's chief operating officer, met Cohen last year, and the two began discussing how to turn the publishing technology into a bigger business.

They set up headquarters in San Francisco and began looking for venture funding. They spoke to studios, record labels, and industry associations, including the Recording Industry Association of America and the Motion Picture Association of America. Now, with the VC money, BitTorrent plans to build out a marketplace aimed at attracting the huge audience of BitTorrent users, which the company estimates at around 45 million people. "We want to bring people the content that they want to watch," says Navin. "Some of that will come from Hollywood, some will be independently created."

Aspirations aside, BitTorrent's planned transition is fraught with risk. Its execs have to persuade movie executives, game makers, and record labels to distribute their works through the service. BitTorrent says it's in talks with major players, though it won't say which ones.

A big part of winning over holders of copyrighted work will be addressing concerns over illegal file sharing, much of which is done through so-called BitTorrent superhubs, independent sites that distribute both legal and illegal content. Navin says BitTorrent is working with the superhubs to reach licensing agreements on copyrighted works. BitTorrent will include any copyright protection technology that rights holders want to use.

GATHERING CROWD. Getting content providers to buy in will be key, analysts say. Any company that wants to compete with existing file-sharing networks will need to launch with a broad swath of offerings, says Mike McGuire, an analyst at researcher Gartner G2. "The next proof point is if we see all of the major content players lining up" when a service is launched, he says.

And some venture capitalists passed on investing in BitTorrent -- on concerns not only over copyrights but also over accelerating competition. While BitTorrent continues to grow, it was displaced this year as the most popular file-sharing technology by peer-to-peer software eDonkey.

What's more, some VCs say other means of distribution, including podcasting and so-called Really Simple Syndication, or RSS, are eating into BitTorrent's potential market. "I don't think the major media companies are ready to embrace P2P," says George Zachary, a partner at Charles River Ventures. "I could have invested and I didn't."

BitTorrent says it plans to adapt. It's adding RSS and podcasting to its marketplace. And it's wooing content holders with the efficiencies of using its distribution software to combat piracy. "We want to provide content services that will be the next generation of content distribution," says David Chao, Doll Capital's co-founder and managing general partner. And with file sharing continuing to soar, Hollywood might not be able to ignore BitTorrent's bid to go commercial.

Green is BusinessWeek's Internet editor in New York

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