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Originally published Tuesday, October 18, 2005 at 12:00 AM

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DVDs

I'll trade you "Gladiator" for "L.A. Confidential"

Eighteen months ago, Billy McNair told his friend and business associate Dan Robinson that he was heading out to buy some "Baby Einstein"...

Los Angeles Times

Eighteen months ago, Billy McNair told his friend and business associate Dan Robinson that he was heading out to buy some "Baby Einstein" DVDs for his daughter. No need, Robinson replied. His daughter, a year older, had already moved on to "Dora the Explorer." Why not take hers instead?

"The proverbial light bulb went off," said McNair, 32. "Everyone has a common pain point — used DVDs lying around gathering dust. ... Sixty percent of all DVDs, we've been told, are viewed only once or twice. We realized this could be huge."

That was the genesis of Peerflix (www.peerflix.com), described by analysts as a cross between eBay, the online marketplace, and Netflix, a pioneer in online video rentals. Like the former, it's a clearinghouse for "ownership transfers," products sold from one person to another. Like the latter, it deals in DVDs, permitting people to trade those they no longer want for others they'd like to own.

The Menlo Park, Calif.-based company co-founded by McNair and Robinson recorded 10,000 trades in August. They project 35,000 to 40,000 trades a month in all 50 states and Canada by year's end.

"Consumers now have a third option — not just buy or rent but trade," said Robinson, 31, who runs the Vancouver, British Columbia, office.

Users sign onto Peerflix and begin by compiling two lists: their "haves" and their "wants." The company e-mails members when the desired DVD comes in — matching people with product. A person might send "Finding Nemo" to someone in Baltimore and receive "The Bourne Identity" from Pittsburgh. Each time they mail out a DVD, sellers earn "Peerbux" — internal currency they spend when ordering a disc. Each title is assigned a value — typically, three "Peerbux" for new releases, one or two for the rest. Rather than a monthly subscriber fee, DVD recipients pay Peerflix 99 cents per transaction.

Trading used DVDs isn't original, the founders concede, but the timing is right.

In 2000, WebSwap offered used DVDs on its barter-goods network, but the operation ultimately failed. (DVDs were not as well established, and inventory was limited.) Today, DVDs are a driving force in the movie world, with revenue more than double that of the box office.

Amazon Marketplace and eBay sell used DVDs online, but the consumer ends up paying more on those services after shipping and transaction fees or commissions are factored in. Blockbuster also sells used DVDs, they said, but the retail outlet has a far smaller collection and concentrates on mainstream titles.

Peerflix, at present, poses no threat to established entities such as Netflix or Amazon.com, said Don Rosenberg, publisher of Home Media Retailing.

Still, he says, the numbers are impressive for a low-overhead start-up with no inventory, and the potential is certainly there.

"There's a 'shrink-wrap phenomenon' when it comes to DVDs — people haven't taken them out of the wrapper," he said. "Time is of the essence and — unlike music, a passive medium — movies require a two-hour commitment."

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McNair and Robinson met in 1998 at Spinway, a private label Internet service provider founded by Robinson. Two years later, they sold the company to Kmart, which generated enough cash to get Peerflix off the ground. In November 2004, they received a cash infusion from venture capitalists 3i and BV Capital. Peerflix now has 15 staff members, part and full time, and another round of financing is in the works. The greatest challenges: perfecting the "matching" technology and managing the Peerbux currency.

Studios express concern about quality control, piracy and copyright infringement — issues Robinson and McNair said they've addressed. Peerbux are credited back to a customer's account if a disc doesn't play. And anyone receiving a DVD that looks irregular is obligated to return it so the pirated copy doesn't circulate. As for copyright infringement, they said, federal law allows anyone who buys a copyrighted work to give away, lend, rent or sell it.

"People associate us with ... online peer-to-peer networks that swap digital music or movies illegally," said Robinson. "But we uphold copyright laws. ... When someone shares a DVD with a friend on Napster, both end up with a copy. On Peerflix, the DVD is physically transferred from one person to another, so the quantity doesn't double."

The company could actually spur retail DVD sales, the founders suggest. "DVDs are an impulse purchase, and our company gives repeated value to the asset," McNair suggested. "People are more likely to buy at Target or Wal-Mart if they think DVDs have an afterlife."

Before long, Peerflix plans to expand into video games and CDs. Down the road, the company is aiming for "millions" of members, trading in "platforms" as varied as baseball cards and women's handbags.

"We know we're on to something big," McNair added. "How big is the question."

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