The Business Model of Peer to Peer (P2P) Networks

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The Business Model of Peer to Peer (P2P) Networks

By Sam Vaknin Author of "Malignant Self Love - Narcissism Revisited"

The recent decision of the Supreme Court of the USA (in June 2005) was hailed as a victory for the music and motion picture industries. Peer-to-peer (P2P) networks, such as Grokster, were held responsible for encouraging and making possible the violation of copyright by allowing users to download illicit music tracks and films off other users' computers.

Prior to this seminal ruling, publishers, distributors and some creators pursued individual downloaders in court, closed down Napster, an earlier file-sharing network with a central directory, and introduced digital right management bits of copy-inhibiting software into their products. They even invested in or collaborated with legal media download online services, such as Apple's iTunes.

Still, are content brokers - publishers, distributors, and record companies - a thing of the past?

In one word: disintermediation.

The gradual removal of layers of content brokering and intermediation - mainly in manufacturing marketing - is the continuation of a long term trend. Consider music for instance. Streaming audio on the internet ("soft radio"), or downloadable MP3 files may render the CD obsolete - but they were preceded by radio music broadcasts. But the novelty is that the Internet provides a venue for the marketing of niche products and reduces the barriers to entry previously imposed by the need to invest in costly "branding" campaigns and manufacturing and distribution activities.

This trend is also likely to restore the balance between artists and the commercial exploiters of their products. The very definition of "artist" will expand to encompass all creative people. One will seek to distinguish oneself, to "brand" oneself and to auction one's services, ideas, products, designs, experience, physique, or biography, etc. directly to end-users and consumers. This is a return to pre-industrial times when artisans ruled the economic scene. Work stability will suffer and work mobility will increase in a landscape of shifting allegiances, head hunting, remote collaboration, and similar labour market trends.

But distributors, publishers, and record companies are not going to vanish. They are going to metamorphose. This is because they fulfil a few functions and provide a few services whose importance is only enhanced by the "free for all" Internet culture.

Content intermediaries grade content and separate the qualitative from the ephemeral and the atrocious. The deluge of self-published and vanity published e-books, music tracks and art works has generated few masterpieces and a lot of trash. The absence of judicious filtering has unjustly given a bad name to whole segments of the industry (e.g., small, or web-based publishers). Consumers - inundated, disappointed and exhausted - will pay a premium for content rating services. Though driven by crass commercial considerations, most publishers and record companies do apply certain quality standards routinely and thus are positioned to provide these rating services reliably.

Content brokers are relationship managers. Consider distributors: they provide instant access to centralized, continuously updated, "addressbooks" of clients (stores, consumers, media, etc.). This reduces the time to market and increases efficiency. It alters revenue models very substantially. Content creators can thus concentrate on what they do best: content creation, and reduce their overhead by outsourcing the functions of distribution and relationships management. The existence of central "relationship ledgers" yields synergies which can be applied to all the clients of the distributor. The distributor provides a single address that content re-sellers converge on and feed off. Distributors, publishers and record companies also provide logistical support: warehousing, consolidated sales reporting and transaction auditing, and a single, periodic payment.

Yet, having said all that, content intermediaries still over-charge their clients (the content creators) for their services. This is especially true in an age of just-in-time inventory and digital distribution. Network effects mean that content brokers have to invest much less in marketing, branding and advertising once a product's first mover advantage is established. Economic laws of increasing, rather than diminishing, returns mean that every additional unit sold yields a HIGHER profit - rather than a declining one. The pie is getting bigger.

Hence, the meteoric increase in royalties publishers pay authors from sales of the electronic versions of their work (anywhere from Random House's 35% to 50% paid by smaller publishers). As this tectonic shift reverberates through the whole distribution chain, retail outlets are beginning to transact directly with content creators. The borders between the types of intermediaries are blurred.

Barnes and Noble (the American bookstores chain) has, in effect, become a publisher. Many publishers have virtual storefronts. Many authors sell directly to their readers, acting as publishers. The introduction of "book ATMs" - POD (Print On Demand) machines, which will print every conceivable title in minutes, on the spot, in "book kiosks" - will give rise to a host of new intermediaries. Intermediation is not gone. It is here to stay because it is sorely needed. But it is in a state of flux. Old maxims break down. New modes of operation emerge. Functions are amalgamated, outsourced, dispensed with, or created from scratch. It is an exciting scene, full with opportunities.

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AUTHOR BIO (must be included with the article)

Sam Vaknin ( samvak.tripod.com ) is the author of Malignant Self Love - Narcissism Revisited and After the Rain - How the West Lost the East. He served as a columnist for Central Europe Review, PopMatters, Bellaonline, and eBookWeb, a United Press International (UPI) Senior Business Correspondent, and the editor of mental health and Central East Europe categories in The Open Directory and Suite101.

Until recently, he served as the Economic Advisor to the Government of Macedonia.

Visit Sam's Web site at samvak.tripod.com