The economics of peer-to-peer

Abstract

Peer-to-Peer networks boast three characteristics that make them unique. First, they are layered networks conceived and operating in a similar fashion to the Internet. Second, they are completely decentralized, making servers of individual computers at the Peer-to-Peer layer, and acting in the way an ISP acts at the Internet IP layer. Finally, Peer-to-Peer networks are made up of the resources that individual members make available when they use their Peer-to-Peer networks. 1 These networks, which were initially used by individuals to share and download content, including a significant amount of copyright material such as music, are now increasingly used for downloading games, videos, and software. 2 In this paper, we focus on the economics of Peer-to-Peer in terms of the impact that Peer-to-Peer innovation is having on the content sector, especially on copyrighted material, and on how the latter has in turn influenced Peer-to-Peer networks. Peer-to-Peer technology makes a server of endusers. In addition, while Peer-to-Peer network service providers may retain some control over their own networks, this control is effectively restricted to the Peer-to-Peer layer as a pure transport and file-sharing layer, and is independent of the content that is shared, at least in the post-Napster era. In this paper, we study Peer-to-Peer from the perspective of the "commons."3 Since Hardins study (1998) it is best to distinguish between "managed" and "unmanaged" commons. Currently, all Peer-to-Peer networks are "unmanaged" at file-sharing level, which means that the commercial links between individual members of existing Peer-to-Peer communities and the owners of the copyright material that is being shared have now completely disappeared. Furthermore, institutions that clarify the scope of fair use in everyday practice have not yet been created. At the same time, experimental economics suggests that this outcome does not automatically create a "tragedy of the commons."4 As the commercial success of new services such as iTunes shows, it is conceivable that many members of those new Peer-to-Peer commons may be willing to shift to commercial Peer-to-Peer networks that incorporate reasonable payments to artists, thus reflecting the expanded use of copyrighted material. The above is also suggested by the willingness of individual users to participate in voluntary programs such as SETI. However, these experimental results also suggest that the current practice may be becoming routine-like, i.e., that the window of opportunity for that kind of solution may shut in the near future, with consumers increasingly reluctant to diverge from the routines they are developing. The willingness of members of Peer-to-Peer communities to contribute with access and computer resources to the community is another commons Peer-to-Peer is creating. Todays Peer-to-Peer file sharing makes it simple for individuals and their downloaded Peer-to-Peer software to search for, share, and download files from other users on the same Peer-to-Peer system. While a few years have elapsed since court decisions in the USA essentially eliminated Peerto- Peer networks such as Napster and Aimster, many of the lessons that are relevant to a Peer-to-Peer economic analysis can still be traced back to those two cases. 5 In 2001, The Economist observed that, "[t]he most important lesson of Napster is that people are willing to open their computers to, and share files with, complete strangers as long as they see value in doing so. In the process, they have shown how really large computer networks can be created rapidly through the piecemeal contribution of millions of individual PCs, each of which functions as a server as well as client" (The Economist 2001).6 Over the years, the content sector has evolved into the industry we know today. It is, at present, a complex and, generally, highly concentrated sector that is characterized by a range of content types, the major elements of which are the video entertainment and music sectors as well as, increasingly, the gaming one. Through time, the sector has been characterized by the growing role of intermediation and the impact of technology on the ability to produce, access, copy and store content, as well as share and consume it. Technological innovation has revolutionized more than just the ability to access, transform, and consume content. It has redefined the very meaning of access, by copying and storing, sharing, and consuming. 7 Peer-to-Peer is a new enough activity the alternative object of which that can be associated with the sectors economic analysis needs to be clarified. With the gradual emergence of the Peer-to-Peer institutional setting, the economics of Peer-to-Peer are moving from the economic analysis of the transition process to the economic analysis of Peer-to-Peer as an established communication and processing architecture. At one end of the spectrum, we could consider the Peer-to-Peer sector in terms of conventional questions such as the demand for content and the role of free-riding. At the other end, economic analysis can help better understand the evolution of the institutional environment. It might help to understand the economic implications of competing frameworks within which Peer-to-Peer might operate. The kind of questions involved relate to subject matters such as the extent and meaning of copyrights ownership. The Napster court and Aimster cases as well as, more recently, the Ninth Circuit Courts Decision, are all elements of the trial and error process through which society is identifying the context within which Peer-to-Peer will largely be able to operate. What is the economics of Peer-to-Peer? Everything suggests that Peerto- Peers role is of growing significance for the content sector. There is no doubt that this is particularly true for video Peer-to-Peer. After all, this is the fastest growing segment of Peer-to-Peer, which is itself one of the fastest growing sectors in the digital economy. In addition, while the courts have been addressing Peer-to-Peer issues since the Napster Decision, the process is far from being complete: discussions on Peer-to-Peer economics in terms of a stable institutional setting are yet to take place. The specificity of Peer-to-Peer networks and their historical setting today raise questions about the applicability of many conventional economic tools. This has led us to select an analytical methodology that pays far more attention to the institutions that are developing with the growth of Peer-to-Peer, and to the economic forces that contribute to shape the same institutions. Conventional economic tools generally presume that stability and maturity are characteristics of the sectors that are under study. On the other hand, the process through which institutions take shape is a complex one involving not only economics but also a wide range of other factors. Nevertheless, it is important to evaluate the economic forces at play in this process, in order to understand the type of scenario that is likely to emerge and the changes it can bring about as new stakeholders compete to set up in the new environment. One of the main reasons why the understanding of the dynamics that shapes the transformation of the content sector into a mature Peer-to-Peer environment is so important, especially for those who believe in an optimal spontaneous order, is that the outcome is not predetermined as a unique "optimal" solution. In fact, our hope is that studies such as this one will help improve and streamline the process through which Peer-to-Peer could become established efficiently. Our analysis helps us focus on intermediation, the functionality that is most affected by Peer-to-Peer, in the emergence of stable and predictable Peer-to-Peer institutions. Indeed, through time, todays aggregators have built and now use intermediation to their advantage. Thus, aggregators have transformed their role from one of mere intermediation into one of ownership and brokerage. Such new functions have exacerbated the incumbency dimension of their position and, with it, the inherent tension that emerges between extracting more rents from existing assets, and developing new assets with new artists. © 2008 Springer-Verlag New York.