DVD-sharing startup Peerflix said Tuesday it received $8 million in a second round of funding to grow its operations and fuel its efforts to build tools for users to generate their own content.

Battery Ventures led the round, which was completed earlier this month, and also included first-round funders 3i Group and BV Capital.

Menlo Park, California-based Peerflix operates a peer-to-peer (P2P) network for sharing physical rather than digital goods. The company sprang from the market opportunity of swapping DVD collections that often sit on shelves unused. Some 60 percent of DVD owners only watch their movies an average of once or twice, according to a Peerflix survey.

The basic idea of Peerflix is this: Rather than renting or buying desired DVDs, Peerflix customers can trade movies in their collection with each other.

The company needs little of the infrastructure of online services like Netflix, DVD clubs, or brick-and-mortar stores, so it is cheaper. However, it’s also likely to be less dependable.

The Peerflix leadership hopes that its advantage will be a community of peers that builds up around the site.

“With Peerflix, we see a legal P2P community that provides mainstream movie fans with a new way to get movies without contracts or high monthly fees,” said Roger Lee, a general partner at Battery Ventures who will sit on the Peerflix board of directors.

Earning ‘Peerbux’

After registering with Peerflix, members list the videos they want to trade on the company’s site. Peerflix coordinates matching each DVD with another member who wants to see it. Each trade wins the donor a certain amount of “peerbux” based on the popularity of the movie or television show.

The transaction costs Peerflix very little—it pays only for network hosting and replacements for damaged DVDs. It thus avoids the expenses of warehouses, products, and stamps.

Meanwhile, users pay $0.99 per trade and are debited the appropriate number of peerbux. They can keep DVDs as long as they want, or start the cycle over again by trading a movie for something else.

The company even avoids the cost of special envelopes for mailing DVDs. It instructs senders to print out two sheets of paper with the recipient’s address, stick them back to back, put the DVD inside, and tape the package together. Peerflix is pursuing a patent on this low-tech “PeerMailer.”

“We feel very confident that our gross margins will be in excess of 60 percent,” said co-founder Billy McNair.

Building Online Community

The service, available in the United States and Canada, officially debuted in September. It has more than 50,000 registered users with a total inventory of more than 100,000 DVDs.

The Peerflix user interface resembles that of Netflix, the online DVD rental leader. Los Gatos, California-based Netflix allows users to build a queue of “DVDs I want.” It relies on 35 distribution centers to quickly send users their requested DVDs.

Peerflix’s browse and search functions are rudimentary. But they are aided by a community function that links friends’ collections.

Mr. McNair called the existing content on the Peerflix site “web 1.0,” in that it consists of movie descriptions licensed from an outside source. He said the company was moving toward “web 2.0” with “new features geared toward user-generated content and interaction—a community rather than a portal or destination or hub.” The features will include customer reviews and forums.

Other upcoming services include U.S. Postal Service tracking information, which should be available in early 2006.

Evading Negotiations

But all P2P networks are, by their nature, decentralized. Peerflix users send DVDs to each other without going through a central quality check. That could make the company vulnerable to damaged goods or possible copyright liability. Peerflix relies on its users to report scratched or copied DVDs and take them out of the system. Repeat offenders will be flagged and possibly banned.

The company also maintains that by facilitating exchanges of single items rather than unlimited digital copies, it can steer clear of copyright infringement questions.

In addition to its lack of infrastructure needs, Peerflix has also been able to sidestep special licenses for its DVDs. Sticky negotiations with movie studios have been a major hindrance to market leader Netflix. That company is doing significant damage to traditional rental shops but hasn’t been able to move into the fertile territory of movie downloads.

Netflix CEO Reed Hastings said last week that his company would delay a proposed download service indefinitely. While the technology is ready and waiting, he has said, film studios won’t budge on their hefty licensing prices.