Monday, 11 November 2013

The peer-to-peer business model, Part I

“Peer-to-peer is a foundational business model of the internet economy”

It is more than a Napster.

Though reviled by the music industry, Napster (original) brought to light a significant business model, just that it was birthed in legal territory that was uncharted.  In time it would be seen as prescient.  It also made known to the masses the term peer-to-peer, file-sharing and gave rise to what is now called the sharing economy.

Peer-to-peer is about connecting peers, say a person, directly to another.   A peer-to-peer model is one that facilitates exchanges between peers; of products, services, knowledge, skills, money, etc.  This basic definition will be refined as we go along.  As a business model it is only now being realised.

This is a 6-part post:

Part I          What is the peer-to-peer business model?
Part II          How does it work?
Part III         Relating the p2p model to the internet business model
Part IV        Impact of p2p
Part V         How businesses can use p2p
Part VI        Issues and what’s next

Besides Napster

You know of eBay though most would simply think it as an auction site (and now eCommerce).  It is but its underlying operating principle is p2p.  Similarly, many have heard of Kickstarter, as a crowdfunding site.  It too is based on p2p as people fund ideas of other people.

Others, less well known in Asia are more obvious in their use of the peer-to-peer business model.  Lending Club, where a consumer lends to another, AirBnB that connects room letting owners directly to guests, Lyft does the same for ‘taxi’ services, lowering prices.  Bitcoin, an online currency doesn’t need intermediaries like banks.  It uses internet-connected PCs just like Napster but probably more contentious and again may prove prescient in time.  Some of these businesses are in fact controversial but only because the lawmakers (and entrenched interest) are still governed by industrial age regulations.  When they are re-booted to the information age we entered not too long ago, these innovative newbies will be the norms. 

Other examples are easier to digest.  Non-profit organizations like the American Cancer Society and the SETI Institute, which searches for alien life, also uses peer-to-peer to save money on research projects by accessing volunteers' computers and using their computing power.    

Interestingly, Zopa, a UK peer-to-peer lending site is widely reported as a model that most of the high street banks are now looking at on how they can leverage the idea.

Switching to mechanisms, ‘trending’, made popular by Google and its own PageRank together with Facebook’s ‘likes’ are peer-driven machinery as peers vote on what’s popular.  Peer ranking is now an important online tool for businesses.  Indeed PageRank is strategic to Google.  Another example is peer-production.  Its use is best exemplified by open source software, now starting to replace traditional software in corporations.  Open source software is developed by communities of independent programmers globally.

No question, more to come.

What is the peer-to-peer business model?

The concept of peer-to-peer became a jargon with the arrival of Napster (1999).  Through our internet-connected PC, we download music stored in another internet-connected PC somewhere in the world.  The two PCs ‘talk’ to one another directly as peers thus peer-to-peer, in contrast to the then prevalent model of computers talking indirectly to each other via a centralised server to get things done.  Usually p2p is described in this technical manner.

To be able to use Napster (of old) or today’s BitTorrent, a user must allow his PC to be used as part of a global storage for music by installing some software.  Thus the internet becomes a giant repository of music.  While file-sharing is used to describe p2p, this is incomplete.  It is the shared use of a PC’s resource including its file, computing power and internet connectivity.

I would now broaden the definition.  A p2p model is one that seeks to exchange resources between peers through the internet.  ‘Peers’ could be PCs, persons, even websites.  The resource can be a person’s internet-connected PC, his personal belongings, hard currency, social currency or his effort.  Transactions between peers are direct and a third party, a website, serves only to make the initial connection like the yellow pages.  What is exchanged can be a movie, temporary use of a car, a task, mostly for money.  They are usually spare resources but can also be products such as craft or one’s savings.

A peer-to-peer business model is one that seeks to leverage on peer exchanges.

One class of business is the peer-to-peer marketplace.  SnapGoods, Vayable, Google’s Helpouts and Friendsurance are examples.  They are also in what is called the sharing economy, named thus because they facilitate the sharing of personal resources.  Some have also called it the renting economy.    Fundamentally they are all p2p enterprises.  But they are really in the information business.  They use information to generate revenue selling data as a service.  They provide data, say, of people and the resources being made available for others and connect them together.  The sharing economy interestingly allows consumers’ assets to be disaggregated and consumed as services.  The result is that prices through p2p marketplaces are usually cheaper.

There is a huge difference between the traditional marketplace (middleman) and the p2p marketplace.  The latter does not hold inventory (obviously there are exceptions).  The former buys, holds stocks then sells them.  P2P marketplaces serve to connect peers, who themselves are buyers (or users) at one time and sellers (or providers) at other times, through the internet.  The sellers hold the stocks if any and in some cases, both buyers and sellers do so as is the case with Napster.

While p2p today is used mostly for digital businesses, companies can use it for business operations too, such as creating a platform to seed ‘chatter’.  One example is a car manufacturer setting up a marketplace for pre-used vehicles.  This can complement its own pre-sales unit since many would prefer to transact in the open market for better pricing.  Customers looking to buy a new car can place the older car there for re-sale keeping the customer within its ecosystem and providing a complete ownership-chain besides the marketplace fees.  The exchanges between potential buyers and the sellers (and fans of the brand) will provide insights, thus market intelligence.  It is only up to the creativity of the managers to come up with schemes to craft value.  Google is a classic example using peers of websites to rank websites for its PageRank algorithm.  This p2p insight begot what is now the world’s largest online company. 

How peer-to-peer became a business proposition started with the realization that consumers have spare resources that can be monetised and that by using specific characteristics of the internet, it can be viable.  We’ll look at the latter by first examining its roots in the next post.

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©Chen Thet Ngian, (2013).  Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Chen Thet Ngian and with appropriate and specific direction to the original content.