Well-scrubbed business plan not enough for Scour

Scour quickly tumbled from favor as it was sued in July by the motion picture and recording industries. Its troubles forced the company to lay off two-thirds of its staff last week.

The speed with which the company's carefully woven strategies unraveled stands as a cautionary tale for a growing number of ambitious Net companies looking to rewrite the rules of distribution for entertainment and other media products.

From AppleSoup to Lightshare, start-ups are springing up that hope to take a page from the Napster and Gnutella file-sharing revolution by giving power to individuals. But Scour's experience shows that this is a risky road, fraught with legal and political difficulties that make technological hurdles look like child's play.

"In the software and Internet world, there seems to be a universal assumption that the Internet changes everything, that existing rules don't apply," said Jim Penhune, director of media and entertainment strategies at The Yankee Group. "But it's hard to get around that if someone drags you into court."

Good Napster, bad Napster
Scour was started in 1997 as a search engine that crawled the Web for traces of multimedia files. There wasn't much in the way of viable audio and video online then, and there wasn't much in the way of competition in that niche.

By mid-1998, the company had attracted the attention of Hollywood power broker Michael Ovitz, who had begun to turn his gaze toward the Net. Insiders say that it was originally considered a potential piece, along with several other sites in the music and gaming niches, of what would eventually become Ovitz's CheckOut.com entertainment network.

That vision never came to be. But Ovitz and The Yucaipa Companies, an influential investment firm founded by supermarket magnate Ron Burkle, invested in June 1999 anyway, taking a minority but influential stake in the company.

The investment put rocket fuel under Scour's rising star. The company moved its headquarters to Beverly Hills and began doubling its efforts to make connections inside the movie studios.

But even then, the seeds of Scour's fall were being sown by a then-obscure start-up: Napster. Its founder, Shawn Fanning, had created technology that supercharged the ability to find multimedia files online. Instead of using a Web spider that created a database of short-lived links, Napster--now a household name in Net circles--searched individuals' computers to find files that were almost guaranteed to be accessible.

This new file-sharing model--much later dubbed "peer to peer"--was a clear step forward in the Internet technology arms race. Sources close to the company say it wasn't long before the Scour engineers decided they had to have a Napster of their own to keep up.

The company began work on the project at least as early as December 1999, insiders say. But by this time it was already clear that the copyright holders weren't taking Napster lightly. The record industry sued the technology start-up in early December, charging that it was facilitating online piracy.

At least partly at the behest of Ovitz's office, Scour moved quickly to ensure that it didn't fall into the same trap--even though it refused to back away from its own Napster-like software. The company and its investors brought in a team of high-powered lawyers to scrutinize the legal implications of the service, including David Nimmer, one of the country's leading copyright experts, insiders say.

Officially and unofficially, the lawyers said the Napster-like Scour Exchange service could be protected under the Digital Millennium Copyright Act (DMCA), according to sources. As long as the company didn't host files and acted quickly to respond to copyright holders' complaints of piracy, the company shouldn't face legal liability, it was believed.

Pushing the wrong buttons
But outside the arena of legal theory, Scour was treading on politically thin ground.

At the same time it was developing its Scour Exchange file-trading service, which allowed computer users to swap video and image files as well as music, other forces were pushing the movie industry into the same corner as the Recording Industry Association of America.

A series of underground hackers' innovations over the past few months made it easier to copy DVD movies and trade them online. Scour's technology inadvertently helped this along. The company struck an agreement with online storage company iDrive, allowing people to copy and store their files on that service. That proved a boon for movie traders, who needed a fast, stable connection to download and upload huge film files.

Again, lawyers quickly got involved--at least partly at the investors' behest. They said this could be trouble as it provided easy tools that facilitated movie piracy. In response, Scour set up a limit on the amount of data that could be transferred from the iDrive connections.

But all of this wound up being too little, too late. Scour had become popular as a way to find illegal films online. Even if the number of people trading films online was far smaller than the number of people trading music, the movie studios felt they needed a Napster suit of their own, industry insiders say. And Scour was the logical choice.

From that point, dominoes began falling. In mid-July, the RIAA and the Motion Picture Association of America launched their lawsuit against the company, just days after executives had held positive meetings with top executives at Sony Music Group, Warner Music Group and BMG Entertainment. No whiff of the pending suit had been mentioned in those meetings, people close to Scour said.

Even after all the legal precautions Scour had taken, the company was portrayed as a business built on piracy. The Internet's new potential doesn't overturn basics of copyright law, the movie and record industries contend.

"This lawsuit is about stealing," MPAA president Jack Valenti said at the time. "Technology may make stealing easier, but it doesn't make it right."

Scour executives took refuge in their previous belief that they were shielded by the DMCA. But the court ruling that threatened to shut down Napster after dismissing all of its legal defenses badly undermined that tack.

That Napster ruling led the other dominoes to fall. In a market where cash sources had already begun to dry up, Scour found that its best financial friends were falling by the wayside.

"Within a couple of days, you could feel the tide change," said Ray Santamaria, until recently vice president of business development and music initiatives at Scour. "All of a sudden, the labels were feeling more aggressive."

When the company's best lead on a next round of funding finally collapsed, executives had to lower the boom. Last week, they laid off 52 of the company's 70 employees, leaving just a skeleton crew to keep the Web site running.

The company itself declined to comment for this article, other than repeating its earlier comments about the layoffs and the lawsuit. "We remain hopeful that our dispute will come out the same way that the original David-and-Goliath battle did," Scour CEO Dan Rodrigues said in a statement.

People close to the company say it has enough money to last a little longer than early October, the date when an appeals court will decide Napster's near-term future. That ruling could be the death--or perhaps the unlikely salvation--of Scour, they say.

Learning lessons?
Analysts say that Scour's experience won't necessarily translate across the peer-to-peer world. Scour, like Napster, has focused on the entertainment industry and has stepped too far ahead of existing copyright laws.

Certainly there are many other companies working to fill the file-swapping gap. Even those that were recently burned strike a kind of hopeful defiance.

"It does not take an MBA to devise a number of profitable business models around file-exchange technology," former Scour executive Santamaria wrote in an email detailing his experience. "To the detriment of all involved, the willingness to build a cooperative business doesn't seem to outweigh the possibility of eliminating competitive, compelling experiences on the Internet."

Analysts note that new file-swapping companies may have futures if they can figure out a business model, a task that is still far from complete. But the companies have to avoid stepping on "old world" tripwires.

"What sets (the older companies) off is when the Net companies start to launch high-profile, IPO-bound businesses based on piracy," said The Yankee Group's Penhune. "They're saying, 'We can deal with the piracy we're used to, but don't go building a business on it.'"