Peak Performance Pricing
Of all the columns I have written, none has netted as much contentious mail as
"Moving from Units to Eunuchs" (October 10, 2000, p114, and at Business2.com).
That column argued that Napster was the death knell for unit pricing of online music.
By allowing users to copy songs from one another with no per-unit costs, Napster
introduced the possibility of "all you can eat" pricing for music, in the same way
that America Online moved to "all you can eat" pricing for email.
Most of the mail I received disputed the idea that Napster had no per-unit costs.
That idea, said many readers, violates every bit of common sense about the economics
of resource allotment. If more resources are being used, the users must be paying
more for them somewhere, right?
Wrong. The notion that Napster must generate per-unit costs fails the most obvious
test: reality. Download Napster, download a few popular songs, and then let other
Napster users download those songs from you. Now scan your credit-card bills to see
where the extra costs for those 10 or 100 or 1,000 downloads come in.
You can perform this experiment month after month, and the per-unit costs will never
show up-you are not charged per byte for bandwidth. Even Napster's plan to charge a
subscription doesn't change this math, because the charge is for access to the system,
not for individual songs.
'Pay as you go'
Napster and other peer-to-peer file-sharing systems take advantage of the curious way
individual users pay for computers and bandwidth. While common sense suggests using a
"pay as you go" system, the average PC user actually pays for peak performance, not
overall resources, and it is peak pricing that produces the excess resources that let
Napster and its cousins piggyback for free.
Pay as you go is the way we pay for everything from groceries to gasoline. Use some,
pay some. Use more, pay more. At the center of the Internet, resources like bandwidth
are indeed paid for in this way. If you host a Web server that sees a sudden spike in
demand, your hosting company will simply deliver more bandwidth, and then charge you
more for it on next month's bill.
The average PC user, on the other hand, does not buy resources on a pay-as-you-go
basis. First of all, the average PC is not operating 24 hours a day. Furthermore,
individual users prize predictability in pricing. (This is why AOL was forced to drop
its per-hour pricing in favor of the now-standard flat rate.) Finally, what users pay
for when they buy a PC is not steady performance but peak performance. PC buyers don't
choose a faster chip because it will give them more total cycles; they choose a faster
chip because they want Microsoft Excel to run faster. Without even doing the math, users
understand that programs that don't use up all of the available millions of instructions
per second will be more responsive, while those that use all the CPU cycles (to perform
complicated rendering or calculations) will finish sooner.
Likewise, they choose faster DSL so that the line will be idle more often, not less.
Paying for peak performance sets a threshold between a user's impatience and the size
of their wallet, without exposing them to extra charges later.
A side effect of buying peak cycles and bandwidth is that resources that don't get used
have nevertheless been paid for. People who understand the economics of money but not
of time don't understand why peak pricing works. But anyone who has ever paid for a
faster chip to improve peak performance knows instinctively that paying for resources
upfront, no matter what you end up using, saves enough hassles to be worth the money.
The Napster trick
The genius of Napster was to find a way to piggyback on these already-paid-up resources
in order to create new copies of songs with no more per-unit cost than new pieces of
email, a trick now being tried in several other arenas. The SETI@home project creates
a virtual supercomputer out of otherwise unused CPU time, as do Popular Power,
DataSynapse, and United Devices.
The flagship application of openCola combines two of the most talked-about trends on
the Internet: peer-to-peer networking and expert communities that lets users share
knowledge instead of songs. It turns the unused resources at the edge of the network
into a collaborative platform on which other developers can build peer-to-peer
applications, as does Groove Networks.
As more users connect to the Internet every day and as both their personal computers
and their bandwidth gets faster, the amount of pre-paid but unused resources at the
edges of the network is growing to staggering proportions.
By cleverly using those resources in a way that allowed it to sidestep per-unit
pricing, Napster demonstrated the value of the world's Net-connected PCs. The race is
now on to capitalize on them in a more general fashion.