BitTorrent, the company founded to capitalize on the popular open-source file-sharing protocol of the same name, said Tuesday it received its first venture funding, marking the first recent positive news for the legally challenged peer-to-peer industry.

Doll Capital Management (DCM) invested $8.75 million in San Francisco-based BitTorrent. The company will most likely apply the money to its recent efforts to partner with the content owners its software had previously angered.

DCM’s David Chao and Tom Blaisdell will join BitTorrent’s board. Mr. Chao is also a member of Red Herring’s board.

BitTorrent, founded earlier this year, rides on the fame of Bram Cohen’s protocol, released in 2002, which makes downloads more efficient by having users upload portions of the file or “torrents” they’re downloading. But it’s a complicated fame—carrying weight with P2P users but drawing the ire of copyright holders, who have successfully shut down some of the “tracker” sites used to organize downloads.

Mr. Cohen and business partner Ashwin Navin think BitTorrent can seed a business, as Red Herring reported in February (see Harnessing BitTorrent’s Storm). The initial idea was to build a search engine for torrent files and profit from paid search results. Now BitTorrent wants to buddy up with the very same copyright holders it’s alienated in the past three years.

“What we spend a lot of time doing is putting together mechanisms so that people who want to launch viral solutions can have a turnkey solution,” said Mr. Navin in August. “We’re having great success with folks in the film and music and video game industry.”

Making Distribution Easier

His pitch is to help content owners use P2P techniques to facilitate distribution and save money on bandwidth. Details are unclear at this point, but that’s similar to what Kontiki, Red Swoosh, and Rawflow are doing. Kontiki recently had one of the first major scoresin this area with its trial runs distributing the BBC’s content to users in the United Kingdom.

"We believe BitTorrent's cooperative distribution technology will become the leading platform for the legal and secure distribution of large-file content for a wide range of commercial purposes around the globe," Mr. Chao said in a statement.

BitTorrent’s client software has more than 45 million users, the company reports. According to some measures, the protocol accounts for nearly half of worldwide Internet traffic.

Mr. Cohen has maintained that he opposes illegal file-sharing, but BitTorrent has enabled countless copyrighted files to be traded using the various software offerings that use his open-source code. He has avoided legal trouble due to the distributed nature of the file-sharing, his careful rhetoric, and now, his business practices.

CacheLogic, a firm that monitors worldwide P2P use, noted recently that the type of files being traded on BitTorrent networks increasingly were software, software updates, and game demos, rather than MP3s and compressed videos. The firm determined that BitTorrent, more than any other network, is now being used for the distribution of legitimate content.

Other P2P firms that generally distribute software for free and subsist on ad revenue were seriously challenged by the U.S. Supreme Decision in June that the business practices of Grokster and StreamCast Networks made them liable for promoting copyright infringement (see Grokster Loses).

The Recording Industry Association of America used the Grokster case as precedent when it sent cease-and-desist letters to seven P2P firms two weeks ago (see RIAA Goes After P2P Firms). At least one of the letters seems to have been effective, as the web site of a reported recipient, WinMX, is no longer functional.

In early September, an Australian judge ordered Sharman Networks, which operates Kazaa, to install filters in its application, and opened the door for record companies to seek damages (see Kazaa Loses Case Down Under).

Life Post-Grokster

Will these P2P firms be able to reform themselves to exist in light of the Grokster precedent?

In an attempt to avoid going out of business entirely, Grokster itself has reportedly been seeking acquisition by MashBoxX, one of a few startups founded to tweak P2P networks to make them more palatable to content owners (see third item in Tech Spin: Ruckus in the Home).

“Some of these companies have brand names that are quite well-known in the P2P community and have value the way Napster has value,” said Marc Morgenstern, vice president of Seattle-based Loudeye, which runs the back end of legitimate online media stores.

The P2P software itself only needs critical mass to operate. Once users download it, they cease contact with the company, Mr. Morgenstern pointed out. That means the survival of the companies, not file-sharing itself, is at stake. Overall users and file traffic on P2P networks are still rising.