Business: Trade, don't rent, your DVDs Business: Trade, don't rent, your DVDs (July 27, 2005)

That's the mantra of Peerflix, a business started by a Menlo Park entrepreneur

By Katie Bearman

Special to the Almanac

Billy McNair, co-founder of the new Internet-based DVD trading network "Peerflix," has had a knack for economics since his days at St. Joseph's elementary in Atherton.

"When I was in elementary school, I was obsessed with buying, selling, and trading baseball cards," says Mr. McNair, who grew up in Menlo Park and still lives there. "This taught me early lessons about bid and ask prices, spreads, values, and margins."

Mr. McNair applied these precociously acquired skills -- along with a bachelor's degree in political science from UCLA in 1995 and a combined law and business degree from Santa Clara University in 1998 -- toward launching Peerflix last summer with friend and colleague Danny Robinson.

The company is headquartered at 815 El Camino Real in Menlo Park, and has an office in Vancouver, British Columbia, where Mr. Robinson is based.

Unlike Netflix, which charges customers monthly fees to rent DVDs, Peerflix charges for each DVD traded.

Customers trade DVDs with one another, and the ownership of the disk transfers with each trade. Each time subscribers receive a DVD from a fellow member, they pay Peerflix 99 cents.

Currently, customers can choose from more than 40,000 DVDs, Mr. McNair says.
Peerflix takes root

Mr. McNair and Mr. Robinson devised the idea for the company after realizing how quickly their children grew out of DVDs, says Mr. McNair, who has three youngsters.

And growing out of DVDs is not limited to kids. Some people watch their DVDs repeatedly, but many end up sitting in a corner and accumulating dust, Mr. McNair remarks. He and Mr. Robinson resolved to put together a handy method for trading DVDs, and Peerflix was born.

"We felt that DVDs were a great opportunity because consumers have become familiar with the idea of getting DVDs by mail, in large part due to the online rental companies," Mr. McNair says. "People are also familiar with the concept of getting content and products directly from other people, thanks to sites like eBay, Amazon and Craigslist."
Growth spurt

Upon entering the company's 1,800 square-foot main office in Menlo Park, with movie posters tacked on the walls and about 10 young employees clicking away on computer keyboards, one could write off Peerflix as another ephemeral start-up.

But Peerflix has hit the ground running. The number of employees has grown from six to more than 15 since January, and the member base has more than tripled in the past 90 days, says Mr. McNair.

He wouldn't disclose the number of members, but Fortune magazine recently quoted him as saying there are more than 10,000 users.

"We are building a stand-alone business that can prosper for years to come as an independent entity," Mr. McNair says.

Two venture capital firms -- 3i, headquartered in London, and BV Capital, based in San Francisco and Hamburg, Germany -- have helped fund Peerflix, and have ownership stakes in the company, along with the two partners. Mr. McNair wouldn't disclose how much the VCs have invested.

Getting the word out is always a challenge for a small company, and Peerflix has been helped by major news media coverage, including articles in the New York Times and USA Today.

Peerflix is also running online advertisements such as search ads via Google and Overture, and offering a promotion that encourages subscribers to refer friends and family to the service.

The company looks to move beyond DVDs within nine months, says Mr. McNair.

While music CDs, video games and books are candidates, the Peerflix "platform," he says, "is extensible to enable our members to trade anything."
No big corporation

Mr. McNair says he enjoys working at Peerflix because of its consumer-friendly orientation.

"I like the fact that we're providing a convenient way for people to exchange DVDs, that we're empowering people, and that we're doing it in a cost-effective way."

He adds: "I've always been entrepreneurial. Trying to move up a big corporate ladder was never my goal."

Prior to starting Peerflix, Mr. McNair worked at law and consulting firms, founded Spinway.com -- a free Internet service provider -- with Mr. Robinson, and initiated GrayStar Group, a consulting and real estate firm, he says.

Mr. McNair is a busy guy, but when he has free time, he says, he loves hanging out with his kids, playing sports, and hiking in Tahoe.
Movie lovers' takes

Many Peerflix subscribers are Silicon Valley residents, he notes. "This means extremely fast DVD turnaround times for local members of Peerflix."

But Peerflix is not for everyone. Sherri Hansen, 20, of Salinas, says she can understand people's attraction to Peerflix, but she probably wouldn't sign up because she does not want to give away any of her movies or buy additional Peerbux online.

"When I buy a DVD, it's because I want to keep it forever," she remarks.

Still, members' responses to Peerflix have been positive, according to Mr. McNair, who says that one of the largest user populations is mothers ages 25 to 44, who are often too busy to deal with movie rental processes.

Susan Axelrod of Menlo Park says the service has been great because it saves her the time of going out to video stores -- important for a mother of two, who is always on the go.

"If I do buy a DVD, I have an avenue now if I end up wanting to get rid of it," she adds, and says she uses Peerflix not only for her children, but for herself and her husband, too.

"The service is really flexible. It's been great."

How Peerflix works

While online services such as Netflix own their collections of DVDs and send them to subscribers, Peerflix does not use a central distribution system.

Subscribers register DVD titles they own and are willing to trade, and request movies they are itching to view.

Mr. McNair explains how it works:

** When a subscriber asks for a DVD, Peerflix e-mails a subscriber who owns it; that subscriber sends the DVD (disk only) to the requester, and pays the 37 cent postage.

** To ensure that customers receive DVDs equal in value to those they send out, Peerflix rates DVDs on a one-to-three "Peerbux" scale based on the movie's timeliness and popularity. When subscribers send a movie, they receive one to three Peerbux, depending on that movie's rating; users must have Peerbux in their accounts to receive DVDs.

** The members pay Peerflix 99 cents for each DVD received, and, in addition, expend one to three Peerbux, depending on that movie's rating.

** If customers want to receive DVDs without giving away their own, they can buy Peerbux online.

For more information, check Peerflix.com.

E-mail a friend a link to this story.