November 1, 2000 2:50 PM PST

Listen.com agrees to acquire file-swapping site Scour

Online music site Listen.com has reached an agreement to buy the assets of file-swapping company Scour, which filed for bankruptcy protection last month.

The total offer consists of up to $5 million and 527,918 shares of preferred Listen.com stock. The agreement is subject to the competitive bidding process required under the U.S. bankruptcy code, meaning that another company could outbid Listen.com.

Privately held Listen.com, which helps Web surfers locate and download legal MP3-encoded files, filed the so-called asset purchase Wednesday in U.S. Bankruptcy Court for the Central District of California in Los Angeles, where Scour filed for Chapter 11 bankruptcy protection. The agreement marks the latest chapter in the brief life of Scour, which just a few months ago was riding near the top of one of the fastest-growing movements in the Web's history.

By purchasing the assets without Scour's corporate shell, Listen.com would not take on financial liability for the pending lawsuit against the file-swapping company. Movie studios and record companies sued Scour in July, charging that the company was contributing to massive copyright infringement with its Scour Exchange software. Like Napster, that program allowed individuals to open up their hard drives and freely trade files.

Coming the day after Bertelsmann's surprise agreement with music-swapping king Napster, the deal accelerates the assimilation of the pirate peer-to-peer world with mainstream music companies. Together the two deals provide a framework on which much of the future's online music distribution could hang--if the file-swapping model can be made to work.

That's still an open question; even Listen.com chief executive Rob Reid on Wednesday called it a "big, big business puzzle." Legal questions that have resulted in crippling lawsuits filed against Napster and Scour still hang over the industry, and serious questions remain about how the technology can be adapted to the record industry's Byzantine structure of copyrights and royalty payments.

But whatever the future, the deal would rescue Scour from bankruptcy and legal limbo, while giving Listen.com a foothold in what promises to be a powerful new way of distributing data.

"We're making a bet here that peer-to-peer really does matter," Reid said. "But we think if we can get an excellent peer-to-peer system, without the legal baggage, we can create something huge."

Flirting with success
With the Listen.com deal, and the probable escape from past legal liability, Scour gets another shot at its original goal of creating a legitimate file-swapping service.

More so than any of the first generation of peer-to-peer companies, Scour actively courted Hollywood and mainstream media companies as partners. Hollywood power broker Michael Ovitz was one of the company's early investors, and under his influence attorneys went over the service with a fine-toothed comb looking for potential copyright liability.

Those attorneys gave it a clean bill of health, and it went on to become one of the most popular file-swapping services online. Unlike Napster, its Exchange software let people trade video, image and other files as well as MP3s.

For a few months, it appeared the company had stayed close enough to the law to avoid the legal troubles that were then besetting Napster. But in June, a coalition of movie studios and record companies ended the suspense, filing a suit identical in most respects to the one that still faces Napster.

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

That set the company into a business tailspin, even though its customer count was still high. Early in September the company laid off two-thirds of its staff, and it filed for bankruptcy protection in mid-October.

Since that time, the company has been putting out feelers to several potential suitors. Some of the most serious talks included a division of Sony, which is one of the plaintiffs suing Scour, sources close to the conversations said. Those discussions stopped well short of any deal, however.

The new Listen
With its purchase of Scour's assets, Listen.com hopes to skim the technological cream from the company without inheriting any of the legal fat that finally weighed down Scour's original vision.

Reid said the company will get Scour's technical team, the peer-to-peer technology and other search mechanisms on the service, and likely the Scour name and URL. Because of privacy concerns, it's not yet clear whether Listen.com will have access to Scour's usernames.

The original Scour Exchange program is already slated to shut down and will likely go offline within a period of "a few weeks or a few days," Reid said. That decision predated the Listen.com purchase.

The Recording Industry Association of America (RIAA) is waiting to see the death certificate before relinquishing any legal claims, however.

"I have been assured by Listen.com's management that prior to the acquisition of Scour.com the file exchange service and search engine service will be shut down," RIAA chief executive Hilary Rosen said in a statement. "Any resolution of the lawsuit will depend upon Scour and Listen.com following through on this commitment."

Listen.com isn't saying exactly what it will do with the new technology, The P2P myth but the company notes that it already has an extensive network of partners that are distributing MP3 files online. If the copyright and business relationships can be worked out, it would make sense to use the peer-to-peer technology to help create a distribution network for those partners, Reid said.

That goal brings the companies new focus potentially in line with the new vision painted, however vaguely, by Napster and Bertelsmann on Tuesday.

Each of the companies must figure out a way to use the peer-to-peer technology to distribute authorized files without stepping on any of the myriad land mines created by the possibility of piracy or other legal wrinkles.

"I think we have a lot in common," Reid said, adding that it was too early to tell whether his company and the Napster-Bertelsmann alliance would be allies or competitors. "Now we all have a strong vested interest in coming up with a model that can work."

 

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