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Up to 40 percent of the bandwidth on the Internet is consumed by BitTorrent traffic, according to CacheLogic, a company that tracks bandwidth usage. But even by the San Francisco, Calif.-based startup’s own estimation, only about 3 percent of Internet users worldwide actively use its service.

BitTorrent is an open-source peer-to-peer protocol and software tool created by Chief Executive Officer Bram Cohen in 2001 for the efficient distribution of large files. But the technology was quickly embraced by millions who used the technology to illegally swap movies, music, software and other copyrighted materials.

Today, while many still use his invention for illegal file-sharing, the company itself — BitTorrent — has gone legitimate. In 2004, Cohen brought Ashwin Navin on board as president of the company, and together they have developed a strategy to transform the initial open-source BitTorrent technology into a money-making venture.

“The Internet is broken, and we’ve got the secret sauce to fix it,” Navin says.

That secret sauce is capitalizing on the 150 million people who have downloaded BitTorrent’s software client — and its 30 million active users — by offering thousands of films, TV shows and video games for purchase or rent. In the past year, the startup has inked licensing deals with 20th Century Fox, Paramount Pictures, Warner Bros. Home Entertainment Group, MTV Networks and three dozen other companies. The service, called the BitTorrent Entertainment Network, launched in late February on bittorrent.com.

“It took some time to build trust, but we spent a lot of time meeting with media companies and having constructive discussions on how BitTorrent could be a force of good and improve their margins,” says Navin, also chief operating officer and co-founder of BitTorrent. “It’s important for media companies to find the most efficient ways to deliver their movie creations as fast as possible on the greatest on-demand platform ever.”

BitTorrent is a unique file-sharing system that speeds the delivery of online content by allowing a computer user to download a large file from many users simultaneously, rather than the traditional method of downloading a massive file from one server.

For example, if 100 people have a copy of the same movie on a BitTorrent peer-to-peer network, a user can simultaneously download pieces of the movie from  other users’ hard drives. The components are seamlessly reassembled into one large file on the downloader’s computer hard drive. It’s faster than downloading a file from one server, which can get overburdened by download requests.

CacheLogic, a company that tracks bandwidth usage, estimated in 2006 that BitTorrent’s peer-to-peer technology makes up 40 percent of the world’s Internet traffic — and it’s not all for illegal file-sharing. Some Linux companies, for example, are using BitTorrent legitimately to distribute its operating systems, while gaming companies use it to distribute game patches and updates.

Growth Strategy

Navin, who previously worked at Yahoo!, focuses on the business side of the company, while Cohen handles technology development.

BitTorrent, which raised $20 million in a second round of venture capital funding in December, has a two-pronged business strategy. Besides competing against Apple’s iTunes, CinemaNow, MovieLink and other video-on-demand sites, BitTorrent hopes to sell its technology to other Web content providers, such as music labels or video game publishers that could use the peer-to-peer technology to more quickly and more cost-effectively deliver online content.

For its new commercial business, BitTorrent is positioning its content delivery technology as a cheaper alternative to purchasing more servers or resorting to Content Delivery Networks, such as Akamai Technologies, which speeds Web content delivery by hosting Web sites on servers throughout the world. “CDNs are charging a healthy premium, and they’re exploiting the inefficiencies of the Internet,” Navin says.

In contrast, BitTorrent’s peer-to-peer technology solves those inefficiencies. The more users there are who own or store a popular file on their computer hard drives, the faster the download speeds become. Movie downloads can take as little as 10 minutes, he says.

“The beauty of BitTorrent is you don’t need more servers, which is an expensive proposition. All you need are users,” he says. “With BitTorrent, when things get popular, the downloading experience is better and faster. That’s never existed in distribution before. Historically, if demand exceeded supply, there’s lost revenue and a consumer backlash. This flips that.”

The company has grown rapidly, with the number of employees growing from two dozen last year to about 55 today. BitTorrent is also investing heavily in technology as it readies itself for future growth. Last year the company bolstered its data center, from three racks to 28 racks, totaling hundreds of servers. The company has also beefed up its network infrastructure, storage and database management, Navin says.

He says, “Because we’re operating a content delivery service, we built a world-class data center. We have fail-over in place to make sure we are resilient and have high uptime.”

BitTorrent’s five information technology administrators built and manage the data center and support the company’s 25 to 30 engineers who are developing software on a mix of Linux, Macintosh and Windows-based computers. The company has been busy upgrading its current BitTorrent client. Later this year, BitTorrent will release new technology that will allow customers with broadband Internet access to start watching a movie a few seconds after starting the download.

It’s also working feverishly on its commercial software, called BitTorrent DNA Several companies are currently in trials with the technology.

The Company’s Future

Gartner analyst Mike McGuire likes BitTorrent’s technology and the experienced management team that the company has put together. He also believes BitTorrent DNA could become invaluable to media companies and other content publishers.

“I've always liked the protocol, and the way it can efficiently move large files around is impressive,” he says.

But in the consumer market, the company does face stiff competition and some challenges. First, the current BitTorrent client is merely functional and not seamless and easy to use, such as Apple’s iTunes’ client, McGuire says. Second, the company not only competes with other Web entities, but it also competes with more traditional entertainment outlets, such as cable TV, or buying and renting DVDs from the store, he says.

While it’s too soon to know whether BitTorrent will succeed, analysts say the startup has already accomplished much. “If they can get Time-Warner and all these other content players to play in their sandbox, that means they are already successful,” says Todd Chanko, an analyst with JupiterResearch.

Navin is pleased with the traffic BitTorrent.com is getting so far and has added free advertisement-supported music and other free content. He also sees huge potential for the commercial business, and believes other content providers and Internet Service Providers will deploy BitTorrent’s peer-to-peer technology as a more affordable, speedier and smarter way to deliver online content.

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