Net Gamer Centerspan Acquires Scour

With its acquisition of Scour, Internet gaming software developer CenterSpan Communications has suddenly become a player in the race to launch a peer-to-peer network acceptable to the major labels.

On Dec. 12 in Federal Bankruptcy Court in Los Angeles, CenterSpan paid $9 million in cash and stock for Scour's assets, outbidding rival Listen.com by $500,000. Last-minute bidder Liquid Audio dropped out in the first round.

"We are embarking on a rollout strategy," says CenterSpan chairman/CEO Frank Hausmann, referring to the company's C-Star file-sharing software, which it plans to launch in first-quarter 2001.

Hausmann says the C-Star technology will incorporate elements of Scour Exchange, the peer-to-peer software that caused the Motion Picture Assn. of America and the Recording Industry Assn. of America (RIAA) to sue Scour for copyright infringement. The software was removed from the site Nov. 16 under order of the bankruptcy court.

But the demise of Scour may accelerate settlement of the lawsuit. Lawyers representing the copyright holders in bankruptcy court said they are seeking an out-of-court settlement and are satisfied that CenterSpan will relaunch the Exchange service using only licensed product.

CenterSpan is not liable for damages in the lawsuit, according to provisions of the sale.

Hausmann says the company plans to license content from the major labels and studios to make C-Star the first industry-sanctioned peer-to-peer model. He adds that the company has made "fairly significant progress" but has yet to sign any content deals.

"What you have to do with the studios and labels is to convince them that you really have a secure and legal distribution channel," he says.

RIAA general counsel and senior VP Cary Sherman says the trade group is convinced CenterSpan will create a peer-to-peer technology acceptable to the recording industry.

"They have a clear intent of getting into a legitimate music business, and that was pleasant for us to hear," Sherman says. "So we're pleased with the outcome of the auction."

An unknown in the music industry, CenterSpan will be competing with Napster and Bertelsmann, which loaned Napster $50 million to develop similar technology. A spokeswoman for Bertelsmann's E-Commerce Group declined to comment.

CenterSpan outbid two well-known Internet music companies for Scour. A spokesman for Liquid Audio says its opening bid was $5.4 million in cash and 187,500 shares of stock. Listen.com's final offer was $5.5 million and more than 1 million shares of its privately held stock. Judge Kathleen March put the value of Listen.com's stock at $2.96 a share, despite efforts by the company to pump the value up to $14.77 a share.

"It got beyond the point of comfort," says Listen.com CEO Rob Reid, who participated in the bankruptcy auction. During the bidding, when it appeared that Listen.com would be victorious, Reid clapped his hands and broke into a big smile.

Reid says the company's peer-to-peer plans are now unclear. "A dozen companies have contacted us, but I don't know at this stage," he says. "We don't want to build our own technology and—who knows?—we may even work with CenterSpan."

Listen.com is backed by BMG Entertainment, EMI Recorded Music, Sony Music Entertainment, Universal Music Group, and Warner Music Group.

In addition to paying more than $4 million in debts, CenterSpan will pay Scour's primary investors—agent Michael Ovitz and supermarket magnate Ronald Burkle—with CenterSpan stock, which is traded on Nasdaq. In the sale, CenterSpan offered 333,333 shares of stock, in addition to the $5.5 million in cash. The sale is expected to close Tuesday (19).