BitTorrent Goes Legit

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BitTorrent execs are putting a lot behind the effort. Cohen has been holed up in the company's San Francisco offices perfecting the current version of the technology, while Navin hobnobs with the Hollywood crowd and spends weeks at a time in Asia securing hardware deals. It's a natural separation of duties for the 31-year-old Cohen, a technical savant who eschews big crowds and speaking gigs, and Navin, the 29-year old, slick, clean-cut former Goldman Sachs (GS) banker and mergers and acquisitions dealmaker for Yahoo.

The work is paying off. "It took some convincing and some work to establish that they were acting in good faith," says Dean Garfield, executive vice-president and chief strategy officer at the MPAA. Adds Blaisdell, "Eighteen months ago a meeting with a major movie studio would be a very contentious and defensive encounter. Now it's, 'How do we work together?' That's a pretty remarkable thing to do." Navin attributes the success to BitTorrent's approach to studios. It was less about defending illegal actions of users, more about "Here's our technology, what can it do for your business?"

There's a lot that it can do. BitTorrent's technology works by identifying multiple copies of the same file online and then taking bits and pieces of each one before reassembling them in the right order and delivering the completed package to its destination. It's more efficient than trying to move a single bandwidth-hogging file from place to place.

Converting Downloaders

It also doesn't hurt that BitTorrent's technology is so widely used. "When you look at popularity, you have to be able to compete side-by-side with illegal offerings," says Darcy Antonellis, executive vice-president for distribution and technology operations at Warner. The hope is that even a fraction of those illegal downloaders can be converted into paying customers. "Even if you look at a 10% conversion rate, that number isn't insignificant," Antonellis says.

Research from Parks Associates shows it could be even greater. In a poll late last year, 13% of Internet users currently downloading movies using peer-to-peer services said they would pay $20 per film to do it legally; 18% of those downloading TV shows would pay $5. At lower prices the numbers are even larger: 38% of people currently using peer-to-peer services would pay $5 for a movie; 47% would pay 50¢ for a TV show.

But while BitTorrent may have proven its good intentions, it's still not clear the plan translates to a legitimate business. Risks abound for the 30-person San Francisco company. Critics contend that BitTorrent is takeover fodder at best. Apple or Amazon (AMZN) could use pricing pressure to squeeze any profits BitTorrent could hope to make, the way Apple did with the music businesses by locking everyone into the standard price of 99¢ per song. On its own, BitTorrent could become a next-generation NetFlix (NFLX), soon to be replaced by others, especially since early versions of BitTorrent's technology were open-source, free to be downloaded over the Web.

Looking Ahead

The company counters, saying newer versions of the technology are closed and proprietary and that they have significant improvements when it comes to media in particular. It adds that it aims to branch out beyond media: BitTorrent wants to be the way to route large files over the Internet, whatever they contain. Already, software company Red Hat (RHAT) uses free versions of the technology to distribute the open-source operating system Linux to companies.

BitTorrent not only wants to become the next company to successfully merge consumer Internet and media, but also a technology company underpinning the wider use of downloading technology. Blaisdell compares it to DivX (DIVX), a company that makes software that compresses huge movie files into more manageable sizes. It went public in September and its stock has risen nearly 30%. Others have compared it to content delivery company Akamai (AKAM). In October, ThinkEquity Partners cited BitTorrent as that company's biggest potential threat two years from now.

But two years from now, what will this fast-changing market look like? BitTorrent is taking a big gamble by following the Apple iPod playbook. As is, it'll be at least a year before BitTorrent's hardware deals come to fruition, and its online store is already some nine months late. "In the next 18 to 24 months the gap between the computer and the television won't exist," says the MPAA's Garfield. "New services will come out that question whether you even need the computer as the mediator." If Navin and Cohen have their way, you'll also need BitTorrent.

Lacy is a reporter for BusinessWeek.com in Silicon Valley.