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Hotline sees network plan as its path to profit Add to ...

Walking through the front door at Hotline Communications Ltd. is like entering a spiritual retreat. A soothing waterfall cascades from ceiling-to-floor in the white-on-white lobby. Artificial bamboo criss-crosses frosted windows, and corduroy-covered sofas invite visitors to rest awhile.

The peaceful setting at Toronto-based Hotline has helped its two remaining young founders and their recently drafted executives contemplate the meaning of their business and reinvent their strategy. They've emerged from months of boardroom meetings reinvigorated by the prospects of their peer-to-peer (P2P) networking service, and the mantra they're now chanting is "monetize, monetize, monetize."

"The next step is to make money," says Jack Kay, Hotline's de facto sage and recently appointed chief executive officer. "The product has been developed."

P2P networking allows computer users to share all sorts of files, including music, movies and video games, over a network. The hottest P2P service, currently used by 20 million people to swap digital music, is Napster.

Its popularity has spawned many startups, which are trying to turn their P2P systems into a profitable business. But coming up with ways to get paid by running a free service that many people use to avoid paying for music or movies is challenging. There are also the obvious legal issues -- the outcome of the continuing lawsuit between Napster Inc. and the music industry over copyright infringement will ultimately determine just what P2P companies can and can't do.

One business model that P2P companies including Hotline are pursuing is the licensing of software to large Web sites that want to host on-line P2P communities.

Hotline makes client and server tools that allow users to build and run on-line communities where they can chat and share files with people who have similar interests. For example, there are currently Web-based communities devoted to the world of 3-D modelling, Bill Clinton and the Star Wars movies.

It has released eight versions of its software since it was formed in July, 1997. The company was started after Adam Hinkley, Jason Roks, Terry Gregory and David Bordin met on the Internet a year earlier -- using an early version of the Hotline software created by Mr. Hinkley -- and started chatting about ways to improve on-line communications.

In the beginning, the driving force behind the group was Mr. Roks, says Mr. Bordin, 30, who worked at BMO Nesbitt Burns Inc. in Toronto. They met Bachir Rabbat, then a co-owner of a local restaurant the two frequented. Mr. Rabbat became Hotline's angel investor, or as he jokingly refers to himself, "the first sucker."

Mr. Rabbat, now Hotline's operations manager, was an engineer by training and enlisted a former boss, Austin Page, who headed a unit at Toronto's Tridel Corp. Mr. Page, who is now Hotline's chairman, put the group in touch with John Caliendo, a former merchant banker and now Hotline's chief financial officer. Hotline raised about $8.5-million (U.S.) in three separate financings rounds.

In the past two years, Hotline has brought inmore seasoned executives, Mr. Kay and Mr. Caliendo, and parted with Mr. Hinkley and Mr. Roks, who didn't agree with the way the company was managed, Mr. Bordin says.

Hotline's business strategy has also morphed dramatically. It began as a software vendor selling client and server applications directly to individual users. But less than half of 1 per cent of its three million customers actually paid for the software, making it "the most pirated software on the Internet," Mr. Caliendo says.

The company adopted an advertising model, adding banner advertising. That took Hotline from revenue of $277,000 (Canadian) in fiscal 1999 to $3-million in fiscal 2000, Mr. Caliendo says, but the cost of acquiring ual users and selling advertising space was very high.

When Mr. Kay, 54, joined earlier this year, he forced everyone to re-examine the business and concluded that selling the software to companies who would offer it to their customers would be the best route. Hotline will pursue this strategy with the upcoming new version of its software.

Mr. Gregory, 21, oversees the company's development team, which aims to roll out the next version of the software in March.

Mr. Caliendo, 43, has been using his skills as a merchant banker to attempt to raise between $10- and $15-million (U.S.) from U.S. venture capitalists so that Hotline can hire sales and marketing teams in Silicon Valley, New York City and Boston. Their task will be to sell the new product to Internet portals, auction sites and other e-commerce companies, Mr. Kay says.

Hotline is banking on the belief that there will be growing demand for P2P features on Web portals as competing sites adopt such services to attract and maintain users in the near future.

"People will be able to establish their own communities on the Internet under their control, under whatever rules they decide," Mr. Kay says. (Internet users have been able to create on-line discussion groups through the less graphical portion of the Internet known as Usenet.)

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