Delivering the Digital Goods

Nifty BSE | NSE 17/02/12 Are Mutual Funds betting on Nifty?

Sean Silverthorne

Apple boasts that more than one billion songs have been purchased from its iTunes music service. That sounds like a great number-until you consider that an estimated ten million users of Internet-based peer-to-peer (p2p) networks are logged on at any one time to swap music.

               

Ramon Casadesus-Masanell is an assistant professor in the Strategy unit at Harvard Business School.

How does Apple, which sells music titles for 99 cents each, compete with free music downloads on peer-to-peer networks? Do the two approaches to distributing digital content complement each other? What can the music industry, which aggressively fights p2p downloaders, learn from Apple's experience?

Those kinds of questions attracted the research attention of Ramon Casadesus-Masanell, a professor at Harvard Business School, and Andres Hervas-Drane, a PhD candidate in Economics at the Universitat Aut�noma de Barcelona and a Visiting Fellow at Harvard University. Their working paper, "Peer-to-Peer File Sharing and the Market for Digital Information Goods," is among the first efforts to study the interactions of two entirely new and radical business models operating in the same market.

Sean Silverthorne: What attracted you to research this area and what were some of the major insights you discovered?

Ramon Casadesus-Masanell and Andres Hervas-Drane: The nature of competition is changing rapidly. Drivers such as globalization, deregulation, and technological change are opening opportunities for the development of new, original business models. Competition is progressively moving away from imitation and the development of incremental tradeoffs towards radical moves to create new business models, new forms of satisfying needs that drastically reduce costs and/or raise value perceived by customers.

One important enabler of new business models is the Internet. This is especially true in industries where the product can be delivered directly online such as software, travel agencies, or media. Indeed, the digitalization of content paired with widespread adoption of broadband Internet is driving a major shift toward digital distribution. ITunes, set up as a traditional client-server architecture with content offered at positive prices, and peer-to-peer file sharing networks, which do not seek profit maximization, use p2p network architectures, and offer content for free, constitute two new business models for the distribution of digital goods.

While the study of business models in isolation is of great interest, we believe that the analysis of interactions between business models can highlight important hidden insights. In this paper, for example, we show that contrary to the popular view, p2p and iTunes can potentially develop into a mutually beneficial symbiotic relationship. The presence of iTunes has a negative impact on the size of p2p networks resulting in reduced congestion and more efficient file sharing. Better functioning p2p networks, in turn, result in more content exchange, affecting positively iPod sales and Apple's bottom line.

Q: Given that p2p delivers arguably the same music download as Apple's iTunes, and at no charge, why have millions of users chosen to pay a fee using Apple's service rather than download for free from p2p networks?

A: The choice between p2p and iTunes is not trivial. Both models differ on multiple dimensions beyond price, and neither is superior in all attributes. In a world with variance in individuals' needs and valuations, these dimensions are evaluated idiosyncratically, allowing both models to coexist. Legal considerations play an important role as a number of p2p users have been sued by record companies, but other aspects, such as the availability of content, are also relevant. Music from Led Zeppelin, The Beatles, or Radiohead, for example, has been available on p2p networks since Napster's time but is yet to make it to iTunes.

Record companies seem to be applying traditional "brick-and-mortar thinking" in their competition against p2p.

Other differences are related to the "packaging" of content. Digital rights management (DRM) technologies, for example, are used to limit the playback of music purchased on iTunes, while music downloaded from p2p networks has no such restrictions. Although record labels are increasingly experimenting with DRM-less music sales, p2p is superior in this respect. In contrast, metadata (data about data-the indexing data contained in media files such as artist or album name) is superior on iTunes. This allows music collections to be consistently organized by author, album, or genre, and provides a better navigation experience. Digital encoding quality varies widely in p2p networks, but it has continued to improve over the years and in many cases surpasses that of iTunes.

The process of obtaining content, an important part of the experience, also differs. ITunes provides a unified interface that seamlessly integrates the location, purchase, and consumption of content. Users of p2p networks, on the other hand, must navigate a complex environment and endure varying levels of congestion that hinder the quality of the process. ITunes certainly has the upper hand in this area.

The following table compares the strengths and weaknesses of each mode:
                                        
                 p2p

Strengths	Weaknesses
It's free	Under constant attack by industry players
Variety of content	Downloading time varies
No restrictions on content (no DRM)	Congestion problems
Constantly improving due to technological race	Sometimes content is unreliable (spoof files)
Decentralized-makes it hard	No anonymity

 

 

 

 

 

                             

                iTunes

Strengths	Weaknesses
Legal	Customers must pay for content (relatively expensive at $0.99)
Easy to use	Restrictions on content (DRM)
High reliability	Less variety of content
Metadata (i.e., information about the files)
Fast downloads
Works well with iPod

 

 

 

 

 

 

We built an economic model to improve our understanding of how both forms of digital distribution interact. While this methodology restricts somewhat the scope of the analysis, it allows careful examination of the phenomenon. Specifically, we restricted the comparative advantages of each as follows. Content from iTunes is legally sold at positive prices and downloads are immediate; downloads on p2p are illegal and can take many hours (or even days) to complete, but they are free. Other features such as DRM restrictions and differential metadata add little strategic insight.