Wednesday, 13 November 2013

The peer-to-peer business model, Part II

“P2P has given rise to the consumer economy.  Rather than just consuming, the consumer now also produces”

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

In the beginning

My own recollection of peer-to-peer was during my early days designing computer communication systems in the 1980’s.  The excitement then was the invention of LANs (the networks now used in your office) that created an alternative to the then prevalent computing model of mainframe computers.  LANs work by allowing computers to interact among themselves as peers directly.  It is opposite to the mainframes which controlled everything through the centre.  It’s like walkie-talkie (direct) compared to mobile phones (through the telco).  This difference in approach, interestingly, is reflected in the counter culture that created the p2p model.  Recall that Napster was viewed by some as libertarian and liberation from the music honchos who controlled the music industry, through the centre.  This is mentioned because the emerging p2p model is challenging traditional businesses breaking down this old model.  AirBnB added a new category for travellers looking for cheaper accommodation (people’s spare rooms) and while not a direct challenge to hotels, it nevertheless reduces the market for hotel rooms.  Only six years old, they are now valued around USD 3 billion.

In fact the latest internet start-up wave today is p2p firms, the online marketplaces.  These entrepreneurs have brought p2p to mainstream businesses, disrupting them. 

No question, many traditional businesses will be transformed.

How does p2p work?

First, the p2p model uses information to achieve an objective.  With the marketplace, no stocks are involved (there are obviously exceptions).  Instead the peers (consumers) with spare resources other peers may want make the fact known and where to find them together with more information on the resource (physical assets, skill, a design, etc).  It is an information business.  Similarly Google’s PageRank method stores the links to content on websites, which are themselves peer ranked.

Second, p2p is a crowdsourced model.  The buyers, sellers, designers, users are from crowds of consumers.    In fact, in using p2p, firms use peer resources and peer production from these crowds to produce the deliverables, be they information about the goods or services to be sold, widget specifications or even influence.  This form of peer production has little of traditional costs and what is more, the ‘inventory’ is mostly self-organised but obviously into templates set up by the firm.  This use of crowdsourcing improves productivity, reduces manpower costs.

Third, it is the business for and between peers of consumers ie. consumer-to-consumer, of websites, etc..  And to be sure, it is different from the other C-to-C business, social media.  Facebook’s business model is based on social conversations while p2p is commerce, directly.  More specifically, the p2p business model is based on peer commerce that depends on peer resources, peer production then peer consumption.  Peers are even used in sales through peer ranking.

Fourthly, it relies on peers especially consumers with spare resources (this fact means there is wide input price elasticity and usually result in lower prices).  An unused car in an office car park can be monetised.  A passionate engineer may like to contribute his skills on worthwhile endeavours in his spare time like a hobby.  Napster uses the spare compute capability of peer PCs over the internet.

The internet is obviously the common link and enabler as it reduces friction to carry out these activities and scaling it to commercial quantities.   We’ll next take a closer look at this internet model by relating it to internet’s mechanisms.

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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.

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