What’s the price for freedom?
Beyond doubt, some features of illegal P2P networks – such as taste-making and optimized delivery – are desirable for legal services (cf. Rosenblatt 2004). But considering the divergent interests of the entertainment industry, providers of P2P technologies and consumers, it seems hard to imagine how those features can be commercialized. In view of the copyrights concerned and the vastness of P2P networks, efficient tracking and billing of shared files is a complex issue. Yet, the idea that P2P sharing and commercial distribution of music continue to converge is supported by the results of the first INDICARE survey, which have recently been made available (Dufft et al. 2005). This article provides an overview of the eco-system of legal P2P and sharing models. In the course of this article, a P2P-network is understood to be a decentralized network that does not rely on a server-client infrastructure, circumventing third parties such as online stores. Sharing is the activity of making digital content available to peers.

The business of sharing
This article looks at existing and potential business models for sharing from two major angles: online vs. offline connectivity and distributional concepts that allow for sharing content. Before venturing on the details of sharing, an important distinction should be made concerning two prominent features of digital distribution. Its purpose can be primarily the sharing of content or the recommendation of music. While the industry embraces the latter, it is reluctant to provide ways to legally share copyrighted material.

Digital channels
Figure 1: Online vs. offline sharing

The most prominent distinction is online vs. offline sharing (see Figure 1). If customers wish to exchange data online, they may chose – first of all – the Internet to up- and download content. In this case, sources comprise online stores, links on websites and blogs – both commercial and private – or file sharing networks. A second option is streaming. In this case there is no permanent download. Rather, content can only be consumed once. Applications such as Apple’s iTunes make use of this technology. iTunes users located within a well-defined subnet (a division of a computer network) of up to five peers can browse and stream each other’s musical libraries. A third channel in the online domain is email and instant messaging (IM). Peers send each other single files or playlists that the recipient is free to sample for a definite number of times. After that, he is invited to purchase the desired tracks for a fee.

Sharing is possible offline by means of simply burning a track to CD or DVD and physically handing it over to a friend. Most online distributors allow for burning songs a number of times. After that, DRM restricts further burning. There are also business models built on physical DRM-free distribution. In that case, consumers are encouraged to copy promotional CDs and share them with peers (Reynolds 2005).

Legal P2P business models
Business models can be divided into those that build on "bulk" or "individual" sharing. Generally, a P2P network is a decentralized network that does not rely on a server-client infrastructure. Bulk sharing models make use of the most prominent features of file sharing networks such as Ares, FastTrack, Overnet or Gnutella: consumers can browse enormous libraries of digital content and conveniently share it with peers. On the other hand, consumers may want to package and share their music on a more personal basis. This usually happens via streaming but also by downloading and forwarding files (Gasser, McGuire, et al. 2005). In the case of business models for sharing, legal means the exchange of digital content without the violation of copyrights.
Figure 2: Business models from a sharing perspective

We can further differentiate bulk sharing between open networks and community networks, often referred to as "walled gardens" because of their exclusive nature. One of the most distinguished business models that make use of already existing open networks is Snocap. This back-end technology offers a licensing service that can be integrated into any P2P network service, e.g. KaZaA. Copyright owners can register their content in the company’s database. They can then specify pricing and DRM (Jones 2004, Dean 2005). Former Grokster president Wayne Rosso’s newly introduced Mashboxx service also uses Snocap to identify copyrighted tracks within networks like eDonkey and Gnutella (Adegoke 2004). Community networks such as UK’s Playlouder MSP (MSP stands for Music Service Provider) offer the end user a bundle consisting of broadband Internet access and a library of musical content that can freely be shared among peers subscribing to that service. They cannot share with outside peers, though (hence, walled garden).

Individual sharing business models
On the other hand, consumers may want to package and share their music in a more personal fashion. In contrast to bulk sharing, individual sharing models focus more on recommendations. In the legal sharing environment, users are free to individually share single tracks or compilations of their favourite music. One example is iTunes’ iMix feature. Anyone using iTunes can compile track-lists and share them via email or post them on the iTunes Music Store. Thus, friends and peers are invited to browse and sample previews of music recommended to them for free and eventually make a purchase. There are other schemes that make use of email and IM services to allow customers to share content. PassAlong Networks has partnered up with eBay and offers a library of about 200,000 songs available to forward via IM. Likewise, MSN Music Store allows using MSN Messenger to share music (Gasser, McGuire, et. al. 2005).

Yahoo!’s Music Unlimited service, that has just been launched in beta mode in the U.S., is also based on the legal sharing concept. In contrast to competing, more expensive offers, sharing with peers does not seem to be a mere accommodation. It rather stands at the core of the service. Sharing options are heavily integrated into Yahoo’s own messenger and desktop application. Subscribers may freely access, browse and stream each other’s library or send music files to other subscribers via the company’s own messenger (it is possible for the customers to opt out of the sharing features). The company obviously came to realize that one of the most important factors of commercial success is community building (Dean 2005).

There are also superdistribution models or promotional networks like Altnet’s PeerPoint Manager (PPM) that offer incentives to share specific content. These offers are primarily distributional or promotional tools. Participants collect points per file they share. They may then redeem those points for content or win prizes.

Finally, there is a grey area in between bulk and individual sharing. Applications such as Groupster allow peers to form individual sharing communities. Each member has to be authenticated within the network. Once done, members can freely share all the content they wish – including of course digital music. As individual communities are limited to 30 members and mp3 files can only be streamed, this is argued to fall under the fair use exemption (in the US copyright environment, that is). This clause allows copyrighted material to be shared with a private audience, such as close friends and family (Metz 2005).

What’s the motivation to engage in P2P?
There are two major reasons for content providers to offer P2P features: reduction of distributional costs and recommendation of content. Distribution costs for musical content are only 20 cents for each dollar spent on traditional distribution, e.g. via CD (Palenchar 2005). Furthermore, for some companies P2P distribution might also be a way to cut down on costs for server and broadband capacity, as there is no need for a centralized infrastructure (heise online 2005). Opportunities to save on costs make P2P very attractive especially for independent labels that command slimmer marketing budgets than the majors.

Traditionally prone to mass marketing, sharing and recommendation schemes give major music labels the chance to get down to the personal level. EMI UK’s chairman and CEO Tony Wadsworth: "As a concept, any thinking person can see that customers turning other people on to music can be a good thing" (Anon. 2004). This holds true especially for legal sharing, which is less anonymous than P2P (please refer to Figure 2).

Another important advantage of P2P and sharing is long-tail distribution. This concept states that products that are in low demand can make a substantial market if only the distribution channel is large enough. Those items may eventually outsell current bestsellers and blockbusters. Given the global penetration of broadband networks, labels are now given the opportunity to sell content that would be too expensive to distribute using traditional channels and targeting smaller audiences (see Anderson 2004 for an introduction to that concept).

The commercialization of P2P sharing offers potential benefits for consumers and the industry alike. P2P sharing offers cheap distribution channels. There are innovative ways to distribute content that formerly was too expensive using traditional distribution. From the consumers´ perspective, P2P gives them the opportunity to conveniently share digital content at any time. Furthermore, it is a way to obtain recommendations from trusted personal sources as opposed to anonymous marketing messages. Finally, if the right-holders themselves seed their content into P2P networks, the number of intentionally corrupted files and spoofs will be reduced. This leads to an increase in content quality and attractiveness of commercial P2P sharing.

On the downside, consumers can only chose between various technologies, services, concepts and platforms that are mostly incompatible. Even if the consumer has worked through that thicket to decide on a service that suits his specific needs and consumption behaviours, he cannot get in touch with peers outside the particular network. Bundled offers or services tied to certain devices make sense only so far as they strengthen DRM but limit consumers’ flexibility.

Bottom line
The fact that digital rights need to be protected and artists to be paid is essential and unquestionable. With a convenient and efficient DRM system handled by back-end technology and business models that centre around consumers’ needs and preserving community spirit within the sharing network is a promising way to success.

  • Adegoke, Yinka (2004) : Record labels find a way to work with P2P. In : New Media Age, 11.11.2004, p. 12
  • Anonymous (2004): New filesharing set-up to reward legit users. In : Music Week, 14.06.2004, p. 6
  • Anonymous (2004): Legal P2P services gather steam. In : Music Week, 16.10.2004, p. 5
  • Anderson, Chris (2004): The long tail. In: Wired 12.10. Online available at: http://www.wired.com/wired/archive/12.10/tail.html
  • Dean, Katie (2004): Napster star changes his tune. In: Wired News, Dec. 03, http://www.wired.com/news/digiwood/0,1412,65893,00.html
  • Dean, Katie (2005): Music mis-match. Wired News, May 12, http://www.wired.com/news/digiwood/0,1412,67495,00.html?tw=wn_tophead_2
  • Dufft, Nicole et. al. (2005): Digital music usage and DRM – Result from a European consumer survey. Online available at: http://www.indicare.org/survey
  • Gasser, Urs, McGuire, Mike, et. al. (2005): Copyright and digital media in a post-Napster world. The Berkman Center for Internet & Society at Harvard Law School. Online available at http://cyber.law.harvard.edu/home/uploads/254/2003-05.pdf
  • heise online (2005): Bertelsmann-Tochter plant Distributionsplattform mit P2P-Technik, 22.03.2005. Online available at: http://www.heise.de/newsticker/meldung/57805
  • Metz, Cade (2005): P2P Goes private. In: PC Magazine, Vol. 24, Issue 2, pp. 96 – 102
  • OECD Committee For Information, Computer and Communications Policy (2005): Digital Broadband Content: Music. Online available at: http://www.oecd.org/document/46/0,2340,en_2649_201185_34994926_ 1_1_1_1,00.html
  • Palenchar, Joseph (2005): Prophets: music-industry judgement day near. In: TWICE – This Week in Consumer Electronics, Vol. 20, Issue 7, p. 14
  • Reynolds, Rob (2005): Spreading the word for free. In: Music Week, 09.04.2005, p. 20
  • Rosenblatt, Bill (2004): Learning from P2P: Evolution of business models for online content. INDICARE Monitor, Vol. 1, No 6/7. Online available at: http://www.indicare.org/tiki-read_article.php?articleId=61
  • Talbot, Martin (2005): Firms line up to launch file sharing offering. In: Music Week, 05.02.2005, p. 7

About the author: After having graduated from University of Mannheim (Business Administration), Philipp Bohn has joined Berlecon Research as Junior Analyst. He is a member of the INIDICARE-team. Contact: pb@berlecon.de

Status: first posted 23/06/05; included in INDICARE Monitor Vol. 2, No. 4, 24 June 2005; licensed under Creative Commons
URL: http://www.indicare.org/tiki-read_article.php?articleId=115