The future of peer-to-peer computing, or P2P to its friends, came into sharp focus last week with the collapse of Scour.net, the controversial company which allows members to share the files on their computers via the internet.

The Beverly Hills-based company backed by former superagent and former Disney president Mike Ovitz became the latest victim of the dot.com crash after falling more than $100m into debt and facing legal action from both the Motion Picture Association of America and Recording Industry Association of America that sought to block its exchange services.

Unlike Napster, the poster-boy of the peer-to-peer music revolution with more than 30 million registered users, Scour presented a potentially larger threat to the entertainment and information industries: Napster lets users swap only music files. Scour allows them to exchange any type of digitised information, including movies and music.

Scour's collapse confirmed an industry-wide problem: the internet, and P2P file-swapping in particular, may be revolutionising the delivery of entertainment, but there are problems to be overcome, and quickly. Not only does wholesale P2P computing threaten the established system of creation, manufacture, marketing and distribution of copyrighted information, but it offers no workable revenue model in return.

P2P computing has effectively made the internet into a giant copy machine, allowing users and consumers to communicate and swap far more freely than businesses producing content ever expected and would like. One thing is abundantly clear: whatever happens to companies like Napster and Scour as copyright infringement cases work their way through US courts, peer-to-peer file swapping, whether of music, films, TV programs, books or any other creative, copyrighted media that can be digitised, is not going away.

Earlier this month in Washington DC, a publishing industry forum entitled Electronic Book 2000: Changing The Fundamentals Of Reading attracted more than 800 representatives from old-world publishing and dozens of entrepreneurs from start-up online publishers. What they heard from Dick Brass, vice president of technology development at Microsoft, was the prediction that 50% of all new books will be in electronic form within a decade.

But Brass went on to say that if e-books become as easy to copy and distribute as MP3 files, the whole tradition of fee-based content publishing could collapse. "The irony is that the more sophisticated the e-book industry becomes, the more tempting it will be for pirates. There is nothing less at risk than human progress and prosperity."

Overwrought perhaps, but other speakers at the meeting showed how sophisticated encryption supposed to protect from wholesale copying is sophisticated only until it is broken - which doesn't take very long. "This is so easy it doesn't even really feel like stealing," said Martin Eberhard, former NuvoMedia CEO, giving the encryption-cracking demonstration.

Many fear that the Napster generation is habituated to downloading copyrighted materials for free. Trade associations have found that trying to convince them that this is theft is a tough sell. "The anonymity of the internet gives consumers the feeling that there are no repercussions to piracy," says Frank Creighton, the RIAA director of anti-piracy.

If the vast number of P2P network users has revealed anything - apart from how much all the world loves a freebie - it is that the market for digitised entertainment content is huge. But that has only added to the burden of trying to control it and finding a way of making it pay. Forrester, the internet research firm, predicts that by 2005, more than $3bn in annual music business revenue will be lost. "Digital security will not stop theft of content, and neither will lawsuits," the report concludes.

Lawsuits have become the first line of defence of the entertainment business. But it is not certain that the law will clarify the complex copyright issues at stake, and, even if it can, whether this will make a difference. "No law can be successfully imposed on a huge population that does not morally support it and possesses easy means for its invisible evasion," wrote John Barlow of the Electronic Frontier Foundation.

The challenge of pure P2P computing - that is, sharing content without central control, organisation or intermediaries - is that no one owns it so no one, except perhaps its members, can make money from it. There are lots of unanswered questions about Napster and its counterparts. Could it become part of a pay ment mechanism similar to those adopted by business-to-business or business-to-consumer companies?

In court 10 days ago to stave off a preliminary injunction that would shut it down, Napster's lawyer David Boies invoked the argument used when VCRs were introduced. He argued that even if some Napster users are infringing copyright, the service as a whole has non-infringing uses and should not be shut down. Napster executives said they hoped the issue would be settled out of court and proposed to start charging consumers a minimal amount - $5 a-month that would mean $500m a-year for the record industry.

While the proposal comes close to the system that many believe will solve the copyright problem, it was quickly rejected by the RIAA. The recording industry does not want distribution controlled by anyone else. But to sustain the system as it is, the music industry will have to kill off the CD - something it is loath to do - to stop digitally perfect, unencrypted music getting out into the world in the first place.

So far, at least, it seems that consumers are unwilling to pay for content on the web and will probably not become willing to do so until the broadband future arrives, if then. For proof, the last two months have seen the almost complete collapse of web content providers. Webcasting pioneer Pseudo.com, the online music label Atomic Pop, and the Dreamworks funded Pop.com, have all closed while even web arms of established media companies like MTV have slashed jobs.

Even the New York Times, one of the world's premiere content providers, has scrapped plans to float its online division on Nasdaq. Dot.com has become a dirty word as advertisers and venture capitalists flee.

As the five big record companies - BMG, Time-Warner, Universal, Sony and EMI - rush to come up with a cohesive way of offering digital music on the web, many doubt there is a workable system. The two basic models being considered are downloading music on a one-off basis - the online reproduction of the current system - or a subscription model similar to Napster's offer - that would give consumers free access to new releases.

Until a system is developed that is more attractive than the cowboy P2P systems of Napster and Gnutella, it is hard to see how the record companies can succeed. They must beat Napster at its own game, which effectively means an end to copyright protection. "The fact is, the record companies have not figured out a way to make money from the internet," says one music executive.

How then will the music industries and others set for Napster-style bootlegging survive? One answer may to lie in corporate sponsorship. Some see the music industry and publishing industries becoming the marketing arms of big corporations. The two are already closely intertwined so "Radiohead bought to you by Coca-Cola" is no longer unimaginable.

A business along those lines has already been established. LicenseMusic.com has more than 200 content partners - including NBC and Playboy - seeking original music for projects range from high-end film productions to music in commercials to corporate training videos. With more than 1.4 million tracks from 5,000 musicians, entertainment and advertising ventures looking for content can find any kind of music they want.

Once a song has been chosen, the content buyer uses the transaction engine to calculate the price of the licence. Within 15 minutes, the song and licence have been downloaded. So far the site is doing about $50,000 in business per month, with the average licensing deal coming to between $300 and $2,000.

Many theorists like John Barlow are coming to recognise that peer-to-peer computing may not be the death of commercial opportunity, rather the start of a different system. As has been widely reported, US CD sales have risen by 20% since MP3 was widely adopted. And however hard Hollywood may be fighting DeCSS, the software used to decode DVDs, it also needs to remember that the VCR, which it fought for years, helped to increase revenue.

It was the same with computer software. After fighting duplication, the software industry learnt that the more a program is pirated, the more likely it is to become the standard. In other words, abundance breeds abundance. "The free proliferation of expression does not decrease its commercial value," argues Barlow. "Free access increases it, and should be encouraged... The war is on, all right, but to my mind it's over. The future will win; there will be no property in cyberspace."

In other words, peer-to-peer piracy may not turn out to be copyright black hole many fear but instead would lead to a wider distribution of products, streamlining distribution and enabling a broader, faster reach. And that, in the end, can only be an advantage.

"Consumers have spoken," said the Forrester report. "Regardless of whether the record companies consider Napster right or wrong, they must beat Napster at its own game." And that holds true for any industry vulnerable to the seemingly unstoppable explosion of P2P networking.

Web addresses

Gnutella
www.gnutella.wego.com

FreeNet
www.freenet.sourceforge.net

MyNapster
www.mynapster.com

OpenNap
www.opennap.sourceforge.net

Scour Exchange
www.scour.com

Aimster
www.aimster.com

Gnotella
www.gnotella.nerdherd.net

Gnumm
www.gnumm.wego.com

FileNavigator
www.filenavigator.com

Napigator
www.napigator.com

Riffshare
www.riffshare.com