As we reported yesterday, Peerflix is to close its core DVD sharing/ swapping business April 23. Since then we’ve heard reports from users who are having problems cashing out their Peeflix accounts. Here’s what one reader received:

The Peersafe Protection Program will also be terminating effective April 23, 2008 meaning that you will no longer be able to make any Peersafe claims starting April 23, 2008. So, if you have DVDs that you have been holding on to but were planning to send at some point, now?s the time! If your Trade Cash account balance is greater than $10 and you would like to cash out your remaining Trade Cash balance, you must do so before April 30, 2008. To request a cash out of your Trade Cash, please log in to Peerflix.com and click My Account in the upper right corner, then click the My Cash tab and then click on the Request Cashout button and follow the indicated steps. As of April 30, 2008 you will no longer be able to request any Trade Cash payments from Peerflix and your Trade Cash will immediately expire and be forfeited. All cash out requests remain subject to the terms and conditions set forth in the Peerflix Service Policies and will be charged a $10 processing fee.

Closing a service and charging users $10 to cash out is a little rough, but not only that they’ll have to wait as well. After following the process, they received this message:

Please note that requested amount is not removed from your cash account until the request processed. Cashout requests are processed and paid approximately 45 days after the end of the month in which you made the request. You will receive a confirmation notice when your request is processed and your payment is on the way. If you do not have the necessary funds in your account at the time payment is made, you will receive the remaining balance, but under no circumstances will we issue disbursement for less than $10.

45 days from the end of the month would place the transaction due date as mid May, 3-4 weeks after Peerflix is due to cease trading. As the reader commented, it “doesn’t sound good.”

For a company wishing to continue (in another form) as an ad network, leaving your existing customers empty handed isn’t going to create a lot of goodwill going forward. Peerflix burnt through $10 million in funding received over two rounds from 3i Group, Battery Ventures and BV Capital.

Peerflix has announced it will close its previous core DVD trading platform April 23.

In an email to members (via Stowe Boyd)

Dear Peerflix Member,

Effective April 23, 2008 Peerflix is discontinuing the Marketplace and DVD buy/sell/trade portions of Peerflix.com. While the Peerflix.com web site will be available beyond April 23, 2008, you will no longer be able to buy, sell, send or receive DVDs on Peerflix as of that date. While we have made considerable investments in our marketplace platform over the past four years, unfortunately the escalating costs of operating the marketplace do not make that business viable at this juncture. As we move out of the DVD marketplace business, we are focusing our energy and resources on building the Peerflix Media Network which is now the web’s fastest growing vertical movie network.

Erick wrote in November that Peerflix didn’t know what it wanted to be; after four months it would appear that it wants to be a BlogAds or niche FM for movie sites and nothing more.

Peerflix has taken $10 million over two rounds that included 3i Group, Battery Ventures and BV Capital.

Poor Peerflix. It can’t quite seem to figure out what business it wants to be in. The DVD trading site, which already tried to rethink its business last December, has decided that maybe an online swap meet for DVDs isn’t such a great idea after all. Now it wants to become an ad network for movie-related sites. Oh, and it also bought a blog today, TheMovieBlog, for an undisclosed amount.

Peerflix will continue to operate its DVD-trading business, which pretty much runs itself on autopilot, says CEO Billy McNair. But today it is launching the Peerflix Media Network, which will be an ad network targeted at movie lovers. Peerflix ads will run across more than 40 partner sites, including Peerflix, TheMovieBlog, Pajiba.com, ComicBookMovie.com, BadMovies.org, ScreenRant.com, and AnimeMojo.com. All together, this collection of niche movie sites attracts about one million visitors a month. TheMovieBlog represents the biggest chunk of that, with visitors fluctuating between 300,000 and 650,000 per month, and Peerflix attracts about 100,000 visitors a month. The rest come from the other sites.

McNair clearly sees a bigger opportunity in advertising than in e-commerce. He explains the reasoning behind his shift in strategy:

We have a very loyal audience, but it is unclear to me today whether the trading side becomes part of the arsenal of the average consumer to acquire content, or whether it remains a niche play. We could extend the trading platform or extend the movie experience. We felt the smarter play was to extend the movie experience.

Swapping DVDs always seemed like more hassle than it was worth to me. But Peerflix has been able to gather 300,000 registered users, with about 10 to 20 percent of those active in any given month, according to McNair. The problem is that there is not much growth there.

McNair says he was able to finance the blog acquisition and the new ad network from operations, and that he has not yet burned through the $10 million in capital he’s raised so far from Battery Ventures, 3i, and BV Capital. (The last round was in October, 2005). And he does not rule out more blog acquisitions.

But he may find that swapping DVDs is easier than swapping business models.

After a year long beta period and another year of operation, Peerflix is ditching its barter model of swapping DVDs. Until today, users swapped DVDs in the Peerflix marketplace, and the company took a $.99 transaction fee for the exchange. Any DVD was as good as any other, and the result was that people only put the stuff they really didn’t want on the site, hoping to swap it for a new release. The price for any DVD was effectively the same. You just had to find a sucker to take yours off of you.

In January 2006 Peerflix announced 100,000 trades. In a press release today that number had grown to just 250,000, suggesting that the company has recognized just $250,000 in revenue over the last two years.

This Model Didn’t Work

Money exists, of course, because a barter economy doesn’t work very well. Peerflix won awards at tech conferences for their model, but users didn’t take to it with nearly as much enthusiasm. Peerflix was on a long, gentle slide into obscurity, slowing burning their venture dollars.

Hey, Let’s Use Money

Good companies change strategic direction when the writing is on the wall. Peerflix just did that, creating a virtual currency on the site and putting a price on every DVD. If you send a DVD to someone, they pay you a set price based on an algorithm created by Peerflix. When you receive a DVD, you pay the sender the set price. There is no negotiation, and Peerflix takes a $0.99 transaction fee. You have to have money in your account in order to get a DVD, so you either have to send out DVD first, or add to your account with a credit card. I put $20 in my account to test the system, but couldn’t find a DVD I wanted. Perhaps the new system needs more time to ferment. Users can cash out of the Peerflix currency at any time.

Swapping One Problem For Another

Market economies work (see eBay), but Peerflix didn’t adopt a market system. They ditched a barter economy for a command and control system, where Peerflix uses a proprietary algorithm to determine the value of a DVD. That won’t work – eBay will always have a more efficient system for quickly equalizing supply and demand. Peerflix will constantly be tinkering with their pricing algorithm, while eBay lets its users do all the work.

This is easy criticism to give, but in reality Peerflix couldn’t adopt a market pricing system. If they had, there would be little to distinguish them from eBay to keep users going there. Their solution – adopting an inferior model – does give them the differentiation they need. But in the long run my bet is that they continue to burn those VC dollars.

Speaking of swapping sites, anyone hear any news about Swaptree? They went into private beta in June and I haven’t heard a word out of them since then.