Scour.com Wilts in Napster’s Wake

Scour, Inc. has laid off all but a fraction of its workforce, saying pending lawsuits have scared away investors lined up to fund the file-sharing network.

In all, 52 of Scour’s 70 employees have been laid off. Scour, which enables Internet users to search for and share music and video files, announced the layoffs in a statement released just before the long Labor Day holiday weekend in the United States.

Lawsuit Fallout

The move comes just over a month after the Motion Picture Association of America (MPAA), the Recording Industry Association of America (RIAA) and the National Music Publishers Association (NMPA) filed a copyright infringement suit against Scour, and just weeks after the Napster file sharing network lost a major battle in its own ongoing war against a similar lawsuit.

Executives at the Los Angeles-based Scour said while they believe the lawsuits are without merit because the music and video files are being shared by individuals, they acknowledge they are up against some formidable competition in the form of the music and movie industries.

“We’re the David and the music and video industries are the Goliath,” said Scour president and CEO Dan Rodrigues.

Investors Fearful

Rodrigues said that while investors do not necessarily believe the lawsuits will result in the shutdown of Scour’s file-searching and sharing networks, they are concerned about the distraction of the management team as the company is being built.

In recent weeks, much of the news out of the Scour camp in Los Angeles has been focused on the legal front, responding to its own legal challenge while closely monitoring the epic legal battles over Napster and MP3.com. The Napster case could go to court as early as next month, while the MP3 case is moving toward a conclusion, possibly sometime this week.

In early August, Scour announced that it had hired several well-known attorneys, including Harvard University professor Arthur Miller, to help it fight its lawsuit.

As a result of the swirling legal issues, unnamed investors who had planned to provide Scour with a second round of venture financing backed out late last week, the company said.

That move is understandable, according to John Martinson of the Edison Group, an early stage venture capital firm in New Jersey. “In a startup situation, a management team has to be able to focus on its core mission,” he said. “Everything else is a distraction and big distractions can be disastrous.”

Since VC firms have plenty of deals to choose from in even the smallest niche market, most will pass on firms with legal axes hanging over their heads, he added.

Ovitz-Backed

Like Napster, Scour grew up on a college campus, in this case the University of California, Los Angeles (UCLA). Though it began commercial operation in 1997, Scour moved into the public eye in 1999 when Michael Ovitz, a former Disney executive and Hollywood super-agent, bought about 25 percent of the company.

Scour said that while Ovitz retains that ownership share and controls two seats on the company’s board of directors, he does not hold one of those seats himself at this time. In fact, published reports indicate that Ovitz has been attempting to sell his share in the firm.

Peer-to-Peer in Spotlight

Despite the legal woes, many analysts insist that peer-to-peer technology, which allows direct file sharing between distant computer users, will become an increasingly important presence on the Internet in coming years.

Forrester Research analyst Josh Bernoff said that legal challenges against Napster and Scour are more likely to be seen in the long-term as bumps in the road rather than fatal blows to the rising tide of peer-to-peer technology.

“Peer-to-peer is here to stay no matter what,” Bernoff said.