When the founders of file-sharing Web site Pirate Bay were given a year's prison sentence in April for allowing users to illegally swap copyrighted content, many thought the swashbuckling Swedish-based Internet company was finished. Not so. On June 30, Sweden's Global Gaming Factory (GGF.ST), which runs cyber cafés and sells gaming software, announced it would buy Pirate Bay for $7.9 million—a hefty sum for a Web site that became the poster child for unlawful downloads on the Internet.
What does Hans Pandeya, Global Gaming Factory's chief executive, plan to do with his new acquisition? The answer is complicated and controversial. In an interview with BusinessWeek, Pandeya said he first intends to go legal by paying royalties for online content to media companies such as Warner Brothers (TWX), Sony BMG (SNE), and Vivendi Universal (VIV.PA). He didn't say how much he'll pay—and concedes he hasn't yet entered into discussions with any music and movie companies. Analysts estimate that up to 90% of downloads from Pirate Bay's 20 million users currently are illegal.
But Pandeya's ambitions for Pirate Bay 2.0 are much greater. He has hatched a novel scheme to bundle together the collective Internet bandwidth of Pirate Bay's users into a giant new peer-to-peer network. Then, he'll resell that broadband capacity on an ad hoc basis to Internet service providers—companies like Comcast (CMCSA) or AT&T (T)—that are in need of a quick injection of cheap bandwidth. Pirate Bay aims to split the revenue with its users, who will be financially compensated for sharing their connections. Pandeya declined to say how much users could pocket.
Cheaper Data Traffic
"The technology will use the community of file-sharers to cut costs of data traffic for ISPs by more than a half," says Pandeya. "Users will earn money by joining, which can be spent on Pirate Bay's other services [such as an expected online music store] or transferred to their bank accounts."
It's an intriguing notion, though not unprecedented. Other global peer-to-peer (P2P) networks have similarly used the collective computing and network capacity of participants—ranging from the Skype (EBAY) free Internet phone-calling service to massive research projects that distribute number-crunching work to millions of PCs.
Perhaps the best known among these is SETI@Home, based at the University of California at Berkeley, which has used P2P technology for more than a decade to speed the search for extraterrestrial intelligence. SETI participants allow access to their computers via the Net when they're not in use, creating a giant pool of processing power—a "virtual supercomputer"—that analyzes radio telescope data for signs of life from outer space. The technology also is being used by researchers to probe diseases such as Alzheimer's and Parkinson's.
Pirate Bay's plans aren't quite as philanthropic—and some analysts say pooling bandwidth for resale to ISPs won't be a slam dunk. Mark Mulligan, research director at consultancy Forrester Research (FORR), warns that Pirate Bay could face mass defections by its existing users, who might look elsewhere if the Web site swears off illegal content. That, in turn, could make it hard to build a peer-to-peer community large enough to generate excess bandwidth to sell to ISPs.
Banking On Lucrative Ads
"This doesn't appear financially viable," Mulligan cautions, noting that ISPs already are active in trading bandwidth among themselves and may not want to embrace an upstart with a shady past. What's more, many may balk at what amounts to buying back network capacity from their own customers.
Even the legality of Pirate Bay's new concept isn't entirely clear. Users who have paid for broadband from an ISP could profit by selling some of it back to Pirate Bay. That might violate the terms of service laid down by some providers, says Tony Ballard, a London partner at media law firm Harbottle & Lewis, although in principle, he says, "there's no obvious reason why network operators could object."
Aside from the peer-to-peer bandwidth strategy, Pirate Bay also hopes to make as much as €40 million ($56 million) per month from running ads on its legal content portal. Yet Forrester's Mulligan reckons the plan also embodies significant risk—and thinks the €40 million figure is "crazy."
Why? With 16.1 million unique visitors in May—the latest figures available from researcher comScore (SCOR)—the old Pirate Bay had enough scale to attract major advertisers. But blue chip companies like Wal-Mart (WMT) or Coca-Cola (KO) wouldn't go anywhere near a site associated with illegal downloads. Now, if Pirate Bay goes legit, those concerns should ease, but the site also risks losing millions of users and becoming less desirable for advertisers. "There's a fundamental flaw in [Pandeya's] belief in transforming it into an advertising business model," Mulligan concludes. Indeed, to date no illegal music downloading sites—including such pioneers as Napster and KaZaA—have successfully made the transition to a paid service.
Global Gaming Factory expects to complete its Pirate Bay acquisition by the end of August, so it has a couple of months to iron out the details. But Pandeya is convinced he has a great opportunity in hand. "Content is just one revenue source," he says. "Data transport, that's where the money is."