Delivering the Digital Goods

Nifty BSE | NSE 31/05/12 Are Mutual Funds betting on Nifty?

Of course, pirated content has been available prior to p2p networks. The cassette recorder, for example, allowed individuals to generate unauthorized copies and to illegally share copyrighted content, lowering potential revenues to content providers. But cassettes and other forms of analog content replication were subject to quality degradation and required physical exchange, which confined sharing to relatively small social networks (family and friends). By eliminating these restrictions, peer-to-peer file sharing technology has increased the accessibility and attractiveness of unauthorized content replication. The threat of p2p is not different in nature, but of much larger scale as it does not require the exchange of a physical support. As a result, the impact of p2p networks needs be carefully considered when pricing legal downloads.

Our analysis reveals that, contrary to intuition, prices low enough to "kill" p2p are not optimal in large markets. The industry is better off setting higher prices and attracting those consumers ready to pay due to congestion. Coexistence with p2p, however, does result in lower prices than would otherwise be observed. We also find that legal attacks result in less sharing, harming p2p networks and helping sustain high prices. In any case, we do not expect p2p file sharing networks to disappear anytime soon. So far, they have proven resilient to technical and legal attacks due to their decentralized nature. The content industry must find ways to embrace the new technology and profit from it.

Q: What are the practical "takeaways" for managers in related areas?

A: At a broad level, in designing new business models, managers must carefully consider how robust a given design is to models of other industry participants with which they interact. Business models built with consideration only of how they work in isolation of those of other players will often exhibit poor performance. How well iTunes works as a channel for digital content distribution depends not only on the intrinsic operation of the model but also on how it interacts with p2p. Clearly, the extent to which two business models interact is not exogenously given but a result of choices made by the designers. Conversely, managers must also ponder how aggressive their business models are toward those of other players and ask whether or not complementarities are exploited. While this point might seem obvious, the academic and practitioner communities have so far offered little insight on how to think about interaction between business models. Our paper makes a first step towards a general theory.

At a more concrete level, given that p2p file sharing networks are likely to improve in performance as Internet infrastructure develops, the content industry must make tough choices regarding their revenue models. Moves towards monetizing products not subject to costless replication and distribution, such as live concerts and merchandising (for music) and product placements (for movies and network shows), will become essential for the financial health of media companies. This will involve setting up "creative" contracts with artists to share value created.

Our analysis also suggests that the "scarce" resource in digital goods distribution through p2p networks is not content, but bandwidth. This fact has been repeatedly documented by empirical studies on p2p networks. Studies on the Gnutella network, for example, have found that over half of its users do not contribute. As a consequence, we expect ISPs to have a more visible role in shaping industry structure going forward.

Finally, to compete effectively against p2p, online digital distribution must strive to become accessible and attractive to consumers. Online content providers are in a unique position to optimize and deliver new experiences to consumers that cannot be easily matched by decentralized, self-sustained peer-to-peer networks. ITunes provides a better customer experience than file sharing networks for similar content, and this allows record companies to charge positive prices and make a profit. While the potential industry-wide revenue implications of p2p are still uncertain, our analysis suggests that there is scope for profit-maximizing online distributors and content producers to compete effectively against unauthorized file sharing.

Q: What are you working on now?

A: Peer-to-peer file sharing remains a fascinating field for research that has not received much attention outside computer science. We believe that there are great opportunities for research here and we are doing some more work in this area. In particular, we are studying how different incentives schemes built into p2p networks such as BitTorrent and eMule affect the types of content that are likely to be found in these networks and the average life of that content. This will allows us to finesse our analysis of optimal pricing of profit maximizing firms that offer similar content on a client-server architecture.

Andres is working on a model of consumer search with recommendations, motivated by the proliferation of online recommender systems. The model can explain the impact of this technology on markets for experience goods, such as music, cinema, or books. This research relates to the recent debate on the Long Tail, and discusses the strategic implications for online retailers.

Together with Barry Nalebuff (Yale School of Management) and David Yoffie (HBS), Ramon is working on a model of competitive interaction between Microsoft, Intel, and AMD. The paper, titled "Competing Complements," introduces a mechanism by which firms may discipline the behavior of complementors at the value capture stage.