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Free as in ride

March 30, 2006

As more internet entrepreneurs construct their businesses out of the contributions of users, questions are being raised about compensation. If Flickr’s making money selling ads beside your photos, should you get a cut? If Google’s search engine gets smarter by spying on your clicks, does the company owe you a tiny slice of its riches? The short answer to such questions is: Dream on, pal.

But when a company’s service involves peer-to-peer networking, the question of compensation becomes something more than a cause for philosophical rumination. In the European edition of the Wall Street Journal yesterday, Bruno Giussani had an interesting op-ed that described how Skype routinely commandeers users’ computers and network bandwidth to run its popular phone service. This is, of course, how peer-to-peer works, and if it were just a matter of every user making a little contribution in return for free or cheap calls it wouldn’t be an issue. But, as Giussani explains, that’s not what happens. Skype turns the computers of a relatively small number of users (estimated to be about 20,000 at any given time) into “supernodes” that consume “computer power and bandwidth at an amazing rate.” He quotes a Computerworld article that found that supernodes could “saturate 100 Mbit/second connections.” (Paul Kedrosky, on his blog, recently described what happened when his computer apparently became a Skype supernode.)

It's a very nice set-up for Skype. By building its network on users' machines and pipes, it's able to "avoid massive investments and add new users at near-zero marginal cost,” Giussani writes. And in the past, its free-riding business model didn’t meet with much resistance. As a renegade operation – the Kazaa of telephony – Skype had an emotional connection with users that turned them into willing collaborators. But now that it's an arm of a multi-billion-dollar profit-making company, eBay, one wonders if users will continue to happily make charitable contributions of processing power and bandwidth. Already, corporations are banning Skype from their networks.

Giussani foresees potential challenges for Skype. First, “since most people pay for their bandwidth, some of them may ask Skype to share the cost.” Second, user complaints (and further network expansion) may force Skype “to start deploying its own supernodes.” That kind of capital investment, Giussani ominously concludes, “would completely transform its business model.” Free rides are great while they last, but they rarely last forever.

Comments

I'm really intrigued by this concept of "free".

In reality, it seems that we (as users) are simply making "micro contributions" that in aggregate subsidize the cost of the technology (and possibly provide some profits to the provider).

So, your question is in an interesting one: Given that in any community one person's micro-contributions may be of more "value" than someone else, when do the more "valuable" contributors decide to take a piece of the pie -- or go elsewhere.

Is there adverse selection at plan where the best micro-contributors stop contributing simply to subsidize others? Does this change the economics of the game for those providing "free" (subsidized technology)?

Interesting...

Posted by: Dharmesh Shah at March 30, 2006 10:55 AM

Thanks for the Skype tip. On my PC, it is dreadful for quality compared to Googletalk, but to each their own. I'm removing Skype right now.

Posted by: Michael Drips at March 30, 2006 01:51 PM

As soon as users start complaining about whitewashing their piece of the fence, it's not "Web 2.0" any more. On Web 2.0, application uses YOU! -- but it takes small enough chunks of work from you that you don't mind it.

Posted by: Don Marti at March 30, 2006 02:38 PM

Saturation of 100 mbps is a large exagerration. There are (independent) studies that show that the median bandwidth consumption of a supernode is 60 kbps. Skype is quite good at traversing NATs, so supernodes are used only for low-bandwidth operations such as login and discovery, and in the rare cases (less than 98%) where NAT traversal is not possible.

In any case, there are more than enough good candidates for supernodes - either users they are oblivious, or they don't care.

To avoid a computer from being used as a supernode, you don't have to "ban" Skype. You just have to make the machine not directly visible to the outside world by using a firewall. A typical Windows XP computer with a firewall running (by default) will never become a supernode.

Posted by: Ivan at March 30, 2006 04:02 PM

THE BIGGEST FREE RIDE IS HOW YOU GOT YOUR JOB...

60% of Americans state they got their job through some form of referral, and 75% of them say that it was a mere acquaintance (vs close friend) who hooked them up.

Head hunters generate about $8b in revenue (IDC-2005) to fill perhaps 1 million jobs, 60% of their success comes from free leads from you and me. Corporate America pays out at $5 to $10 billion in employee referral rewards to fill perhaps 20 m jobs. Referrals are #1 source of external hires. The employees earning these rewards often use an external referrer to find a candidate, but do not share their rewards.

GUESS WHAT? If you believe Gladwell's theory that only 4% of all people are true connectors (I call them Talent Scouts) than this small group is providing huge economic value mostly for free... with the increasing skills shortage the War for Talent will become the "War for the favor of the Talent Scouts" - and money will play a role, call it bounty, call it thank-you payment...this is one free ride that will not last?

Posted by: hans gieskes at March 31, 2006 03:38 PM

Yahoo! msgr with voice is ever so much better. Skype stuff is absolute garbage

Posted by: OG at March 31, 2006 07:37 PM

Surely you're implicitly accepting the deal when you use Skype.

By running Skype you're asserting that the free phone calls and messaging is worth the risk of becoming a super-node. And people will presumably create and switch to alternatives if they find that isn't a good deal for them.

Posted by: phil jones at April 1, 2006 12:43 AM

long ago, when i was just a user and so naive that thought that all sites are made to provide information... but now any site i open seems to me to be made to earn money) a kind of paranoia))))
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Posted by: clyopa at August 17, 2007 05:54 AM

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