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The September 9, 2002 Issue Provided by System Dynamics Inc.
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Napster's Dead--But P2P Progeny Live On

After a US Federal judge blocked its $9 million sale to Bertelsmann, Napster filed to liquidate its assets. But in a very real way, the idea of downloading and sharing music (and now video) files lives on in a much more threatening way. Napster was much easier to put out of business than what has replaced it: because Napster used a central server to locate the content to be swapped, there was a server that could be shut down and an owner to be put out of business.

"P2P" -- peer-to-peer networking -- has now arisen in its place. P2P is a type of de-centralized computing that allows computer users with the same networking program to connect with each other and directly access files from one another's hard drives. Unlike Napster, there is no central site and some of the most prevalent client software is open source, so stamping it out is virtually impossible. It's like the lump under the rug--you stomp it down in one spot and it pops up in another. Although P2P has multiple uses, including collaboration, communications and distributed computing, we'll focus here on the file sharing application which was popularized by Napster. Its primary application was people sharing music and much of the material being shared was copyrighted material.

What does this have to do with broadband? Everything! File sharing clients specifically target broadband content sources, so they are involved in the majority of transactions. This happens for several reasons. Broadband-connected PCs represent the file sources with the most bandwidth and therefore provide the fastest downloading, Since many broadband users leave their machines on and connected around the clock, their content is always available.

With their "always-on" connections, these broadband-connected machines can unknowingly become "supernodes". What that means is that their machines take on some of the functions that had been handled by Napster's central server: pushing search requests and acting as indexing servers, with hundreds of peers simultaneously connecting to the super-peer.

With residential broadband becoming more widely deployed all around the world, the type of files being exchanged has expanded from MP3 music files to include programs, games, movies and video files. Many of the movies have been "ripped" from DVDs and are of high quality; since the files are typically about 750MB, a broadband connection is all but required at each end for up- and down-loading.

What is different from Napster is that the company providing the P2P software has absolutely no control over the supernodes. Thus the copyright owners' effort to end file sharing becomes much more difficult.

So who are the many players in this drama and what are their needs?

  • Let's start with the end-users. What they want is simple: lots of music and video content, the ability to download it for home use and burn it for portability, easily obtained and without viruses - and preferably for free.
  • P2P software providers distribute P2P file-searching software in two forms - for free, with embedded advertising and what many users view as "spy" programs; and for a small fee without the ads and spyware. The most popular program, KaZaA, claims 100 million downloads. These companies say that all they are doing is facilitating what users want to do: trading files with each other. If some users trade copyrighted material, it's not their fault.
  • The copyright owners are represented by the RIAA (Recording Industry Assocation of America) and MPAA (Motion Picture Assocation of America). Their constituency is primarily the large studios and "Internet piracy" is a major part of their current agenda. What they want is to stamp out piracy, which they define as the illegal duplication and distribution of sound recordings and movies. Since the company providing the P2P software has absolutely no control over the supernodes, the RIAA's and MPAA's efforts to end file sharing are much more difficult than with Napster.
  • Next comes the artists who create the content, especially the audio content. Their position is harder to characterize, since it depends on whether opr not you're a mega-star. While the few mega-stars agree with the copyright owners, many other performers do not: since they earn their living from concerts rather than recordings, they would like some of their recorded material available for free downloading, but are often prevented from doing so by their contracts with the music labels. (Janis Ian has articulated this position at http://www.janisian.com/article-internet_debacle.html ).
  • Broadband service providers (BSPs) are being affected in two ways. First, they are having to handle large volumes of traffic for which they receive no additional revenue (since most have flat rate monthly service). Second, the nature of the broadband traffic they are handling is much different than they expected: rather than being highly asymmetric downstream (Web-browsing is mostly downloading) the traffic is much more symmetric, since it involves both downloading and uploading. The impact on cable operators is particularly high since cable upstream bandwidth is much scarcer than downstream.
  • Finally, there's a new breed of companies offering solutions to some of the stakeholders. Some such as Listen.com believe there's a legitimate customer need and a willingness to pay to fill it. Others, such as Expand Networks and Blue Falcon Networks, offer technology to mitigate the damage.

What's the state of play in this multi-sided game? Current P2P networks are very much in operation and continuing to grow. The Slyck web site has statistics for the various clients and number of users online (currently well over 3 million). Even more impressive, because of the file sizes represented, is the number of movies available for downloading: the Fasttrackmovies.com site provides Grokster, Kazaa and iMesh users with the "correct" movie file sizes so they can find the real movie they are seeking instead of a "spoofed" file (see below).

The RIAA's lawyers are busy suing the P2P networks and going after the file traders. In what appears to be a test case, the RIAA recently asked Verizon Communications for personal information about a subscriber whom they allege engaged in peer-to-peer file-sharing using KaZaA software. The case falls under the Digital Millennium Copyright Act of 1998 (DMCA), which expanded U.S. copyright law to protect against infringement in a digital medium. In addition, the RIAA has been busy engaging firms to fill file trading services with junk files or "spoofing"; the intent is to make it much more difficult and time consuming for users to download a real version of what they are looking for.

comScore data shows that P2P dominates broadband usage --> Click for larger pictureMeanwhile the impact on the broadband service providers is unmistakeable. comScore has been collecting data on Internet usage for some time, and we're delighted that they provided some recent data for this report. Their aggregate data on US home broadband users (May, 2002) show that

  • Aggregate outgoing home-based traffic is 84% of incoming. Contrary to the long-held assumption of high asymmetry, it's now nearly symmetric.
  • P2P represents 95% of the outgoing traffic. If outgoing P2P were not included, the traffic would indeed be highly asymmetric.

The attached graph shows this dramatically - P2P overwhelms all other protocols among US broadband users.

Broadband service providers are taking a multi-faceted approach to this problem. One part of their approach is to assume that there is a real consumer need and a willingness to pay something to fill the need -- particularly as the RIAA tries to make using P2P networks more difficult, time consuming and perhaps even risky. Broadband providers such as DIRECTV Broadband, Charter Communications and Time Warner Cable's Road Runner service have signed agreements with Listen.com to provide their customers legal access to music via Listen's Rhapsody digital music subscription service. The benefit for Rhapsody is clearly to get broader distribution of their service. The benefit for the broadband provider can be twofold: (1) getting some part of the subscription fee from Rhapsody (although we don't know the contractual details of their agreements) and (2) using significantly less bandwidth -- and no upstream bandwidth -- for Rhapsody users, because of Rhapsody's distribution technology. (Pressplay and MusicNet, digital music services owned and controlled by the recording industry, have not as yet announced any agreements with broadband service providers.)

A second part of the BSP approach involves "tiering" of broadband services. As covered in this month's article on tiering (see "Why The Move Toward Tiered Offers?" above), there is an increasing recognition by broadband providers that they will need to offer a variety of plans, which provide different bandwidth and perhaps volume options. We expect to see a proliferation of tiered offers over the coming year. These will put the price paid by the user in closer balance with the bandwidth resources they consume.

A third part of the BSP approach may be the use of technology to "mitigate the damages" from P2P traffic, like bandwidth consumption and increasing NAP fees from what Sandvine calls “protocol chatter” with other clients off-network. Expand Networks gave a recent paper on the potential application of its caching technology to reduce both downstream and upstream traffic in broadband networks. Blue Falcon Networks provides digital contect delivery systems that exploit P2P technology for the legitimate distribution of copyrighted material.

The big and as yet unanswered question is "How will the situation play out over the next few years?" We know certain things:

  • Online media is not going away--the genie is out of the bottle
  • Given the opportunity, some users will pay, while others will do what they can to continue getting it for free
  • Media owners will continue to try to create "friction" in P2P networks to discourage users from getting copyrighted content from others
  • The combination of new application offers and new BSP pricing plans may provide an alternative to P2P (or properly compensate the service operators and copyright holders), depending on how they are structured

To borrow from William O. Douglas (in a different context), we think that the solution that accomodates the various players and preserves their rights will be reached by "discarding old ideas that have outlived their usefulness and adapting others to current facts."

( www.bertelsmann.com ) ( www.kazaa.com ) ( www.riaa.org ) ( www.mpaa.org ) ( www.listen.com ) ( www.expandnetworks.com ) ( www.bluefalcon.com ) ( www.slyck.com ) ( www.fasttrackmovies.com ) ( www.verizon.com ) ( www.comscore.com ) ( www.directvinternet.com ) ( www.charter.com ) ( www.rr.com ) ( www.pressplay.com ) ( www.musicnet.com ) ( www.sandvine.com )