Will P2P companies thrive or die?

Throughout the spring and summer, entrepreneurs and media pundits boasted that the technology--which allows people to search for and retrieve files from individual computers around the world--would transform the Internet and become a lucrative investment niche. A June article in Fortune magazine dubbed file sharing "the hot idea of the year," alerting investors to a trend that would "revolutionize infotech and reinvigorate the PC industry."

Chipmaking giant Intel jumped on the bandwagon last month when it said the new Pentium 4 will contain a new architecture called "NetBurst" designed to handle taxing tasks required by P2P technology.

"Peer-to-peer has been around for a long time, but it is now being recognized as the computing paradigm of the future," said Albert Yu, senior vice president of the Intel Architecture Group.

But a series of copyright infringement lawsuits against high-profile companies Napster and Scour have scared off venture capitalists and sapped enthusiasm from the fledgling sector. Detractors argue that pure-play P2P companies will never tap a significant revenue stream and that their business models are fundamentally screwy: The essence of file sharing, they argue, is contrary to file selling and profits.

Which camp is correct? Will P2P ignite a revolution or suffer the same ignominious fate of its business-to-consumer and business-to-business e-commerce brethren, whose stocks soared and then crashed when the hype died down?

Executives at P2P companies are bullish on the technology, insisting that they're on the cutting edge of what will drive the Internet in the future.

Because P2P technology is similar to the general architecture of the Internet, boosters say, P2P companies will not suffer the same fate of over-hyped B2C and B2B companies. In addition, P2P technology will likely seep into B2C and B2B e-commerce, fueling demand for companies that can provide P2P expertise and software to the uninitiated.

P2P executives are not alone in their enthusiasm: Marc Andreessen, chairman of Web infrastructure provider Loudcloud, likened file-sharing technology to the Netscape Mosaic browser that he helped create. The tool transformed the academic Web into an easy-to-use and powerful tool for consumers. Andreessen is an investor in and avid admirer of file-swapping software such as Gnutella.

P2P goes B2B
Greg Richardson, chief executive of San Mateo, Calif.-based Quiq, said P2P companies stand to reap a windfall as businesses increasingly transfer purchasing and procurement online. His P2P software company, which caters to technology and Fortune 1000 companies, announced last week that it had raised $15 million in its second round of venture funding.

"While P2P is a hot word right now, it's only the tip of the iceberg of how this is going to become valuable," Richardson said. "That phrase implies talking to only one person, rather than tapping into the collective knowledge of this industry."

Quiq allows companies and suppliers to communicate in virtual communities. Its software powers a portion of Web portal Ask Jeeves in which people answer other people's questions directly, without bogging down Ask Jeeves' human editors.

Quiq is one of many self-described P2P companies that actually work on the fringes of the somewhat out-of-favor B2B niche. Such companies allow groups of like-minded businesspeople to communicate in a closed circle of peers and participate in parts auctions, confirm quotes or send downloadable information.

For example, Provo, Utah-based NextPage enables file servers to talk to others within multinational corporations or industries. NextPage CEO Brad Pelo said international law firms and other businesses that need quick access to intellectual property are the company's prime targets.

"The technology is similar to Napster, except that within the enterprise you can have file servers talking to each other," Pelo said. "Think of a large law firm: It now has the ability from anyone's computer in the firm to access the content of dozens of offices around the world. Content no longer has to be centralized."

NextPage revenue comes from licensing fees for P2P-enabled servers that companies use, as well as from annual maintenance and support fees. The same technology could be used to speed paperwork and research during mergers and acquisitions, Pelo theorized.

Ahead of their time?
But not everyone is convinced that P2P will translate into returns on investment. Although businesses will certainly benefit from file-sharing technology in private networks, many experts are skeptical of pure-play P2P companies. They characterize Napster and Scour as companies on the "bleeding edge"--pioneers in the experimental niche whose business models may be ahead of their time.

Despite its phenomenal popularity, Napster and Napster-like companies will likely fail, said Steven Hoffman, senior vice president for business management at financial services hub Home Account--and not only because of their increasing legal burdens.

Pure P2P companies are adept at exploiting the power of file sharing, Hoffman said, but they offer no valuable services for which people are willing to pay.

"The good part about Napster and the Net in general is that there's a pluralistic, information-sets-you-free notion," Hoffman said. "The bad part is there's no way they can be compensated in the existing Napster model. Somebody, somewhere, has to put out money for something, otherwise there is no business model."

Napster could make money if it becomes a giant advertising and marketing vehicle for banner ads, Hoffman speculated. But that's a risky strategy that hasn't worked well for many content companies.

"iVillage didn't have the marketing or ad capabilities to keep the company going," Hoffman said. "One example does not make for a thesis, but there are certainly others. When you look at it in aggregate, the amount of money spent on ads is not terribly important...Marketing per se is insufficient to sustain a business model."

Others say that P2P companies can easily tweak their business models to offer valuable services, such as indexing and data crunching. For example, Napster could crunch numbers on the listening habits of its users, then sell it to record store franchises, music publications or others willing to pay for the data.

"Information doesn't want to be free," said Jonathan Hare, president and CEO of Berkeley, Calif.-based Consilient, an Internet infrastructure company. "Information wants to be freely accessible, but information itself isn't enough to do a transaction. You have to create usable data."

Profiting on computing cycles
Several experts said P2P technology can be vastly profitable if applied to the increasingly popular idea of shared computing cycles.

Roughly 90 percent of America's computer capacity is idle at some point during the day, especially when people turn off the machine and go home for the evening, said Danny Menasce, professor of computer science at George Mason University in Fairfax, Va. P2P technology could allow companies to tap into others' computing resources, provided people leave their computers turned on.

Companies that provide the software to enable this could make money on the software itself and possibly charge people to "rent" the computing capacity of others. Several universities are experimenting with this technology, including the University of Wisconsin at Madison's Condor project, which allows physicists to run high-energy physics simulations on computers located throughout the campus.

"If people were able to share cycles and bid in auctions for these cycles, that could be very profitable," Menasce said. "Many companies could then defer buying large supercomputers or mainframes if they could buy computing cycles on the Internet."

Despite the potential for profits, P2P companies are likely to suffer a cruel fate, said Philip Ferneau, professor at Dartmouth's Tuck School of Business and program director for the Foster Center for Private Equity. Many will get bought by larger companies that want to incorporate P2P technology in their e-commerce efforts, while others will wither as corporations usurp the technology.

The only investors in P2P should be those who can afford to defer profits, Ferneau said.

"This is one of those option plays," Ferneau said. "You see a big, emerging technology and a conversion of trends, and you know you've got to be in there if you're going to profit from the next generation. It's obviously a vital technology, but it's a long way from a payoff."