ITune Downloads Vs. P2P Music Networks

Apple claims more than one billion songs have been purchased at $0.99 per download, from its iTunes music service.

In contrast, an estimated ten million users of Internet-based peer-to-peer (p2p) networks are logged on at any one time to swap music.

1. How does Apple compete with free music downloads on peer-to-peer networks?
2. Can the two approaches to distributing digital content complement each other?
3. What can the music industry, which aggressively fights p2p downloaders, learn from Apple's experience?

Changing Competitive Landscape

Competition and business models are changing rapidly due to drivers such as:

• globalization
• deregulation
• technological change - broadband Internet, digitalization of content

Business models are being led by searches for new forms of satisfying needs that reduce costs and/or raise value perceived by customers.

Two Business Models For Delivering Digital Media

Traditional client-server architecture [iTunes] - where content is stored in a single location and offered at prices to drive profit.

Peer-to-peer file sharing network - uses a multiple location p2p network architecture to store and distribute content, and does not seek profit maximization. Content is free

Interestingly, the study has shown that the two models used by p2p and iTunes can "potentially develop into a mutually beneficial symbiotic relationship".

iTunes is slowing the growth of p2p networks resulting in reduced congestion and more efficient file sharing. In turn, better functioning p2p networks result in more content exchange, affecting positively iPod sales.

Drivers Of Fee Paying Downloads

The choice between p2p and iTunes is driven by:

Legal considerations - a number of p2p users have been sued by record companies

Availability of content - older music such as that from Led Zeppelin, The Beatles, or Radiohead, is available on p2p networks but not iTunes.

Packaging of content - Digital rights management (DRM) technologies are being used to limit the playback of music purchased on iTunes, while music downloaded from p2p networks has no such restrictions.

Metadata [author, album, or genre] - is superior on iTunes. Digital encoding quality varies widely in p2p networks, albeit improving, and in some cases surpasses that of iTunes.

Process of obtaining content - ITunes provides a seamlessly integration of location, purchase, and consumption of content. Users of p2p networks, must navigate a complex environment and endure varying levels of congestion that hinder the quality of the process.

Comparative Strengths and Weaknesses

p2p

iTunes

Indirect Drivers

• Faster broadband - will make p2p more attractive
• P2P infrastructure improvement - downloads will become faster. Behavior of peers is independent of the state of broadband technology.
• Improvements in digital encoding
• Improvements in content resolution - transition to multi-channel audio and high definition video tend to decrease the efficiency of the p2p network
• More than 65 percent of all Internet traffic is content exchanged on p2p networks.
• Sharing Improves QoS - more connections means increased distribution and faster downloads.
• Default P2P - many p2p applications enable sharing by default. BitTorrent force users to share, but users can always decide how much to share and ultimately control their contribution to the network.
• Cost of Content - Higher priced content drives more p2p use.
• Rare content - not so good on p2p as fewer peers offering it.

How P2P Benefits From iTunes

p2p congestion will only reduce to acceptable levels when upload bandwidth is unlimited and legal risks disappear.

In the interim, iTunes provides an alternative to users suffering most from congestion in p2p networks.

Apple profits from the sale of iPods and related products. Most ipod content is from users' CD collections, other online stores, p2p file sharing networks, and sharing between friends. p2p networks drive iPod sales.

Optimal Pricing

Apple do not make a real profit from content downloads - Of the $0.99 charged by iTunes, the record companies receive about $.65 leaving Apple $.34 to cover the costs of running the service, infrastructure, encoding, dealing with credit card companies etc.

Record companies are lobbying for higher pricing for new or rare content - this will just drive more p2p.

The main buying price driver is not the level of the price, but paid versus free content.  Prices low enough to "kill" p2p are not optimal in large markets. Higher prices keep congestion lower and widens the gaps in quality of experience.

Replication Quality - peer-to-peer file sharing technology shows no degredation during content replication.

Future of Digital Media

Currently the "scarce" resource in digital goods distribution through p2p networks is not content, but bandwidth. p2p file sharing networks are thus likely to improve in performance as Internet infrastructure develops.

The content industry must move towards monetizing products not subject to costless replication and distribution, such as live concerts, merchandising, and product placements.

ISPs to have a more visible role in shaping industry structure going forward.

Online digital distribution must become accessible and attractive to consumers by delivering new experiences that cannot be easily matched by decentralized, self-sustained peer-to-peer networks.

Incentives schemes built into p2p networks such as BitTorrent and eMule will continue to affect the types of content to be found in these networks and the average life of that content.

Reference: "Peer-to-Peer File Sharing and the Market for Digital Information Goods". Ramon Casadesus-Masanell, a professor at Harvard Business School, and Andres Hervas-Drane, PhD.

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