Copyright Enforecement: Legal Risks of Investing in Peer to Peer Technology

Technology and business model are two very different things. While BitTorrent’s technology is valuable and can be used to many purposes, its current business model sits closer to the liability-generating side of the spectrum than to the opportunities we as venture capitalists (VC) see as calculated risks with high-return potential. The current model Bittorrent was operating under provides a ‘platform’ for users to trade copyrighted content, and this is a very risky business to enter.

We would not invest in the business as-is, but would be willing to reconsider if the founders decide to shift their technology to Business-to-Business (B2B) to help insulate the company from the down-side of legal liability. We note that BitTorrent heaviest users have already been sued by the Motion Picture Association of America (MPAA). These users contributed to the industry’s estimated $860M in losses in that year alone. At a run-rate of nearly a $1B loss per year, it creates incentives for the music and movie industry to respond aggressively. A majority of the current user base for BitTorrent use the system for illegal practices and it is very hard to shift this type of behavior, which erodes the value of this system. This would present a red flag to us, as we would be investing in and entering a space which is under heavy fire and scrutiny by legal authorities. As VCs, reputational damages are series since we rely so heavily on reputation in the marketplace, and a bad investment could be extremely damaging for portfolios and business as a whole.

However, we see some very strong potential for the B2B applications of BitTorrent in major industries, particularly the media (music and entertainment) industries and the gaming industry with the advent of online downloadable content and increased internet connection speeds. The original intent of BitTorrent was not to pirate original or copyrighted DVDs/CDs, but to facilitate a faster and more efficient transfer of large data packets over the internet. There is immense potential in the method of streaming multiple data packets over networks, and the system can be monetized to capitalize on the 40 million plus users of BitTorrent. Using this efficient data transfer method, companies could host their videos on BitTorrent and have the multiple files held by multiple business users lead to efficiency gains in downloads. The system of BitTorrent would also result in less capital costs for companies that sign-up, as they would not need to buy servers to accommodate the huge amounts of data sent to thousands of other users. Companies would save from using the BitTorrent system and limit the expense associated with hosting downloadable files. In particular, Hollywood studios, and in the future software and game developers like Microsoft, could be potentially large clients since BitTorrent provides a platform to make online downloads a lucrative and effective business. However, given the stigma associated with BitTorrent and similar websites as sites for pirates to illegally benefit from this efficient system, we need to create contingencies upon which the investment would depend. The system mainly revolves around respecting copyrighted material of any sort and the legal strategy set-up would protect the investor from copyright litigations faced by Napster investors Hummer Winblad and Bertelsmann.

An investment would require the deletion of copyrighted songs from BitTorrent’s master index or marketplace, as well as measures to ensure that direct, contributory, and vicarious copyright infringements are avoided. To prevent full liability on any software distributed through BitTorrent, the investors should relegate all operational control over BitTorrent to the founders and their software developers and restate that the goal of the investment was to fund the revolutionary system BitTorrent operated by. The VC focuses on controlling nothing more than the financial aspects of the company--in this way exonerating themselves from any lawsuits claiming they acted inappropriately. This could rather easily be done, contractually, given this would be a private company with extremely malleable contractual provisions. Ultimately, we believe the technology created by the entrepreneurs, which utilizes ‘multiple seeding’ from different computers, is the real gem worth pursuing. If applied in the correct context, this could be a real ‘game-changer’ in online file sharing. However, if Bittorrent kept its present business model, we believe it would ultimately have its value destroyed by lawsuits brought forth by the powerful, deep-pocketed players in the Media industry as a whole.

The measures BitTorrent and VC takes to protect themselves from copyright liability can also lie in its ability to differentiate customers and monetize its technology. Being able to differentiate between users and content types would be important if it tries to monetize business clients. If the company can differentiate, it would also be able to detect copyright infringement and be liable for it. The B2B business model applied to BitTorrent is quite useful, since the overall volume of B2B transactions is high. We see a strong potential market in small and medium businesses and in multiple software developers that frequently engage in file sharing. Using BitTorrent as a client for these companies could lessen the costs of file sharing and communication, while raising efficiency. The sharing technology can even be commercialized or specifically developed for the business’ core competencies.