peerflix.gifNot long after Billy McNair and Danny Robinson sold their Bay Area Internet company Spinway.com to Kmart’s Bluelight subsidiary in 2000, Robinson moved to Vancouver while McNair stayed put in the valley. But there was a problem. McNair wanted access to Robinson’s vast, but now-distant DVD collection.

That problem, McNair told us recently, is what eventually led to the creation of Peerflix, a young Menlo Park company that we profile in today’s Mercury News. It’s a valley start-up that is hoping to build a business around the idea of peer-to-peer DVD sharing.

As McNair explains it, the pair started with the idea of online video sharing.

“(Danny) built an infrastructure which enabled a technology platform for peer-to-peer exchanges of video content. Like Kazaa, but in the video sense.” McNair says. “The platform is there, and it works, but obviously as we look at it, it’s not legal today. So as we were looking at that, we thought, ‘interesting, but not legal.’ So what kind of applications, in this general area, can we build out of this. So that’s how Peerflix came to be. We kind of backed down the food chain and said, we could do this in the physical world, with tangible DVDs today. Perfectly legal. Still peer-to-peer. Still maximizing the benefits of peer-to-peer.

“We could build that customer channel, and then as things legally, technologically and everything else, evolve, we can get back to a situation where we have a large subscriber base and put this thing into a digital format, where people are trading online. So that was the original idea behind Peerflix.”

McNair and Robinson launched the service in the summer of 2004 with no fanfare.

“Our intention all along was to bootstrap the company, because we actually felt like there were a number of questions we needed to answer. We had this idea, but we didn’t know if there was a business model.”

They toyed with pricing models and eventually picked up small mentions in the New York Times, other publications and on blogs. Before long, the VCs came knocking.

The pair closed a round of funding for an undisclosed amount in November with BV Ventures and 3i. A larger Series B round will likely follow in the next few months.

Some will view Peerflix as a Netflix-Blockbuster competitor. McNair sees it more as a complementary service, with a different concept (trading, not renting) and pricing model (no monthly fees, pay-as-you-go).

Robinson and McNair may not stop with DVDs. “We built a trading platform that is extensible,’ McNair said. “It works for DVDs today. It can work for CDs tomorrow. It can work for games. It can work for audio books. It can work for a number of different things. So our long-term play is to take this trading platform and keep adding verticals to it.”

UPDATE: One area we didn’t delve into too deeply in our story is movie selection. Peerflix wouldn’t say exactly how many titles are available on its service. But as some bloggers have noted, the selection is limited and does not seem to feature many top films.

Peerflix suffers from the same chicken-and-egg problem as any service that relies on its users to provide content or the commodity. With Peerflix, the problem is simple. Until people start using the service in large numbers, the movie library (supplied by users) will be limited, which in turn will discourage people from signing up for the service. And so on and so on.

This is a classic conundrum for classified ad sites, which start with empty, unappealing Web pages (LiveDeal, Zixxo and even craigslist, to a degree, when it launches in a new city). In the case of Peerflix, the challenge is doubly hard because it needs users to seed the library with quality movie titles from their collections, not just the dreck from the bottom of the Wal-Mart discount bin. Peerflix realizes this. There are no fees to join, and the company has been trying to aid its own cause by shipping out free DVDs with its welcome kits — DVDs that users can then add to the collective movie library. Time will tell if it works.