Courts, Not Investors, To Decide Fate Of File-share Cos.

In spite of the flavor-of-the-month status of file-sharing technologies offered by Napster and Scour, Internet analysts say the legal firestorm engulfing these companies has apparently caused the investment community to give them the cold shoulder until the courts decide if the software application is shielded by "safe harbor" provisions.

Charging that the copyright-infringement lawsuit brought by the Recording Industry Assn. of America (RIAA) and the Motion Picture Assn. of America (MPAA) has prevented it from enticing additional investors, Beverly Hills, Calif.-based Scour laid off 52 of its 64 employees Sept. 1.

Privately held Scour is in its third round of financing, and industry analysts say the lawsuit, as well as Napster's legal problems, most likely contributed to Scour's financing troubles. "If [MPAA president] Jack Valenti has a vendetta against Scour, that would scare the underwear off any venture capitalist," says Raymond James & Associates VP of digital media research Phil Leigh.

About a dozen staffers remain at the company, including its five founders and a handful of engineers to keep the Web site up and running.

Leigh suggests that MP3.com's copyright-infringement trial with Universal Music Group is also sending a message to potential investors who are considering technologies that are under fire in the courts. In that case, decided Sept. 6, a judge ruled that MP3.com had willfully committed copyright infringement in conjunction with the Internet company's My.MP3.com service (see story, page 5).

"If you look at MP3.com, [Seagram president/CEO] Edgar Bronfman has taken a very hard line," Leigh says. "And there might be a concern among financial backers that Bronfman may attempt to pierce the corporate veil"—i.e., seek additional damages from a company's investors.

"I was surprised by the [Scour] layoffs, but I can see why investors were unwilling to put money into it," he says.

Forrester Research media and entertainment analyst Eric Scheirer agrees that the flurry of litigation has chilled the investment community on file-sharing technologies. "Napster only got its $15 million because at that time the RIAA was suing everyone," he says, referring to Hummer Winblad Ventures Partners' $15 million investment in Napster in May. "But the climate is much more frightening, and it's much more difficult now."

Scheirer says that peer-to-peer file-sharing applications are creating a lot of "heat and smoke," but like many Internet ventures, there is no revenue source.