Jesse Caulfield

Way back in 2003 I had this crazy idea of selling non-DRM music via the Internet. The fundamental premise was to convert a small percentage of peer-to-peer downloads to paying customers. I thought that if I could just convert 1% of peer-to-peer users to media buyers I’d make a fortune.

It turns out the basic architecture I invented is similar to that used for cable Video on Demand. About a month after writing my concept document, Apple launched iTunes. Oh well, great minds ….

Here is my original concept document, which evolved into a soon-to-be forgotten business plan. Maybe it’ll help another budding entrepreneur.

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An Alternative from Peer to Peer,
Safer Distribution of Electronic Content

Author: Jesse M. Caulfield
Key Bridge International, Inc.
Thursday, February 13, 2003

 

1 Key Words: peer to peer, client server, media delivery

2 Summary

The practice of peer to peer file sharing, originally made popular by Napster and presently characterized by Kazaa, Morpheus and Gnutella, presents both a unique threat and opportunity for the traditional businesses of media, on-line entertainment, and broadband consumer access.

Presently peer to peer file sharing is the near exclusive enabler for unlimited distribution of copyrighted music and video files over the Internet and represents a growing source of lost revenue for the music and video recording industries and network service providers. This problem is however inherently solvable.

Our business model seeks to create wealth by establishing a method and technique for the licensed distribution of electronic media. This includes music, video, software, etc. In so doing we will enable the recording to recover lost revenues from piracy by creating a new, revenue generating electronic distribution channel.

3 Survey of Peer to Peer

Peer to peer file sharing is a technique of revenue-free trading of electronic files, make possible by software running on consumer’s computers which acts as both a client and server for searching, downloading, indexing and sending of files, respectively.

3.1 Who uses it

Early adopters of peer to peer were typically young adults and teenagers, the prime demographic for consumers of music and video. Consumers used the service primarily to share music encoded in MP3 format. The typical user base has expanded over the past three years to also include many adults, professionals and international consumers. The bulk of p2p use remains the college, teen and young professional demographic. This is almost in parallel with the adopting demographic of e-commerce users.

3.2 Why they use it

Peer to peer is used today for access to a wide variety of media content including music, video and software including content from copied music CDs, DVDs, and recorded television and radio shows.

The most compelling and obvious attraction for p2p is free stuff, but the breadth and diversity of available content cannot be overlooked. Rare, unusual and out-of-print content can often be found with some searching. According to a 2002 survey by the IFPI, 19% of consumers would be willing to pay for music downloads if a viable source existed.

Inherent in its revenue free design, disadvantages of p2p are inherent in its decentralized architecture and entirely voluntary, read occasional, availability of content. Media quality also varies file by file, download speeds are inconsistent and there is no guarantee against uncorrupted files or viruses.

3.3 Who enables it

Popular peer to peer file sharing was invented by Napster, which separated in its software the signaling (registration and searching) from the file transfer. Napster established a central registration database for storage of meta-data plus location, and left the desktop software to negotiate and execute file transfer. Benefits of a central database led to a better user experience in that quality of content and download speeds could be reliably predicted. Napster is no longer in business and the central database is gone.

After the demise of Napster, an entirely distributed method for peer to peer file sharing was developed within the open-source community and serves as the basis of all p2p services today. The central registration database was eliminated and it function distributed into the consumer’s desktop software. A p2p node (which includes client and server components) now registers with a seed list of other nodes located on the Internet. Once registered, the software client may recursively search any other registered node for files to download and responds to any received inquiry with an indexed file list.

Leading peer to peer networks today are supported by software from Morpheus, Kazaa, eDonkey and Gnutella, all of whom generate no revenue from file sharing. There are a large and growing number of client and network software packages. Primary names are network specifications, with subordinated names denoting software clients. Those without subordinated clients are self-contained specifications and software packages.

• WinMX
• Newsgroups
• FastTrack
• • K++
  • KaZaA
  • Grokster
  • iMesh
• eDonkey
• • eMule
• IRC
• DirectConnect
• Blubster
• • Piolet
• Gnutella
• • Shareaza
  • Gnucleus
  • XoloX
  • LimeWire
  • BearShare
  • Morpheus
• Overnet
• FileNavigator
• SoulSeek
• URLBlaze
• OpenNap

3.4 How big is it

In 4Q02 there were estimated to be about three million users of p2p online at any given time worldwide. This is a user base almost 25% greater than Napster at its peak.

The traffic consumed by p2p file sharing is estimated at 60 gigabits per second by the US Cable industry, representing between 50 to 60% of their total traffic loads. Similar ratios are believed to be present for European and Asian broadband access providers.

3.5 Impact on business

3.5.1 Recording Industry

In 1H02 worldwide music CD sales dropped by 9.2% in value and 11.2% in units sold.

• USA 6.8% drop
• Japan 14.2% drop
• Western Europe 7.5% drop
• Asia 15.6% drop
• Mexico 15% drop

The USA and Japan account for approximately 50% of the global music and video market, and the combination of CD piracy and on-line music sharing is claimed to cost the industry $4.2Billion in FY00. No figures are available for FY01 or FY02.

3.5.2 Network Service Providers

Beginning in FY00 and growing to its present levels today, p2p regularly accounts for more than half of broadband consumer network’s total capacity consumption. Because cable operators do not understand the nature and value of peering, all of this traffic incurs a direct Internet transit cost.

With a conservative average cost estimate for Internet transit of $75 per Mbps, the network costs alone to support p2p are substantial. As an example, Adelphia in 4Q02 measured between 6.5 to 8 Gbps of p2p traffic at any given time, accounting for 50 to 65% of its total consumption.

4 Survey of Client Server

Client – Server (CS) is a well established technique for the controlled distribution of electronic files. CS is made possible by a central, intelligent server communicating with widely distributed but generally less intelligent client software running on consumer’s computers. Each client software package registers with the central server in order to execute a transaction. The central server handles all aspects of user registration, payment and service delivery based upon requests and input from the client.

4.1 Who uses it

The World Wide Web is the best known and most ubiquitous example of client server. The Web browser is a generalized thin client, and every page viewed with a web browser is the result of a server request followed by electronic delivery of files: web pages, images, sound files, etc.

For the purposes of assured file distribution other CS software packages exist, including servers and client software for secure FTP (sFTP) and secure Copy (SCP), both of which provide assured delivery and success confirmation.

4.2 Why CS is better than Peer to Peer

Advantages of CS over p2p are primarily control. With both technologies one can uniquely identify users, but with CS one can control access to content and establish a revenue-based transaction scheme around its distribution. With CS, one can create rates and charges for a transaction.

Advantages for the consumer include improved user experience and a legally purchased product. Media quality is assured, download speeds are consistent and fast, and there is a guarantee against uncorrupted files or viruses.

4.3 Who enables it – critical components

A CS media distribution business relies on two critical components: a library of product and the means to distribute it. These are provided by third parties. We propose a carrot and stick approach to launching an electronic media service. As incentive, we will offer a viable, legal, high quality alternative from p2p. As disincentive against continued p2p piracy, we will engage network operators to disallow p2p communication across their networks.

4.3.1 Product

Access to content requires the active support of copyright owners: record companies, film makers, television studios and radio stations.

Almost 50% of all movie and 60% of all music music content is owned by the top three media companies. These are AOL Time Warner, SONY, and Vivendi Universal.

To create a viable alternative to today’s p2p networks, with similar diversity of selection, the active participation of media companies and access to their libraries of content is required.

4.3.2 Distribution

Very high speed network connectivity to the consumer is necessary to fulfill consumer orders for electronic media. This can be easily achieved with a wholesale connection to the Internet.

In addition to broadband access, protection from p2p competition is necessary. In exchange for a portion of revenues generated from electronic transactions, we will contract and partner with network service providers to actively prohibit and restrict p2p file sharing on their networks.

4.4 Impact on business

With three million active users and over 500 million music and video files available online at any given time, electronic music and video distribution is in great demand. Consumers are already trained to seek out, download, and use electronic music and video. What is not available today is a viable alternative to p2p. With the cooperation of network service providers, we intend to dampen p2p behavior among broadband consumers to an ember from its present conflagration.

According to the IFPI, 19% of users surveyed would pay to download electronic music. With a starting population of three million p2p users and a growing addressable US broadband base of 8 million, we believe the market for electronic file transactions is substantial.

MP3 is the de-facto standard for digital music compression. Since 1999 over 10 million MP3 compatible players have been sold worldwide. This includes car stereos, DVD players, portable radios, and personal jukeboxes. Every Windows, Macintosh and Linux computer sold today supports the MP3 audio standard (among others).

Video codecs are spread among four dominant flavors, depending upon application. These are separated between DVD, Video CDROM, Macintosh and Microsoft Windows platforms. Microsoft’s AVI format is widely supported and serves as a foundation for conversion to other codecs. MPEG2 is the DVD video standard and is universally supported in DVD players and on computers. MPEG1 is the VideoCD standard and is also universally supported on DVD players and computers. MPEG4, or DivX, is a newer standard and only supported on computers.

For relative quality, MPEG2 is the highest quality, but also requires the largest amount of storage. For example, a 1.5 hour movie will present a varying file size depending upon the video codec:

• MPEG2 (DVD) 7,000 Mbyte
• MPEG1 (VCD) 1,400 Mbyte
• AVI 1,400 Mbyte
• DivX 0,750 Mbyte

If even 1% of today’s p2p traffic can be converted to revenue, potential sales volumes could be:

• 4 songs per second
• 3 movies per minute

5 Approaches for a Workable System

There are two primary methods for delivering broadband content to consumers: a web-based portal and a dedicated software client. Each has its relative advantages and disadvantages.

5.1 Web Based Portal

When compared with consumer client software, web portals, which are intelligent web sites, are cheaper and faster to develop, cheaper and easier to maintain, are more flexible in that they can be more easily modified, and offer an easier centralized infrastructure to manage.

A negative aspect of web portals is that they are much less ‘sticky’ than desktop software, are difficult and expensive to promote and require constant reminders to consumers of the services they provide. With an e-commerce web portal, one is competing for mind share with other Internet sites like Amazon, Ebay and Yahoo, and betting its success on consumer’s ability to remembering a URL.

Perhaps most critically, a web portal is hard pressed to offer the critical features of assured file delivery, enhanced searching and media file management available today with free peer-to-peer client software.

5.2 Client Server Application

Client software is more expensive to develop and maintain than a single, centralized web portal, and individual builds must be produced for each computer platform supported (Windows, Macintosh, Linux) With desktop software comes desktop support, which will also add to operations and maintenance costs.

However, desktop software is inherently ‘sticky’, with immediate consumer availability of our application on the desktop. With a desktop client more control is gained over the file transaction process and features unavailable with a web portal can be implemented; a music jukebox as an example. Most importantly, client software can assure registration and file delivery for billing purposes.

One approach not in the marketplace today is a combination of dedicated web portal and desktop client. This approach leverages the strengths and advantages of both.

6 Costs to Deliver

To deliver a working system, two interdependent systems must be developed: a web portal and a client desktop application.

The web portal must provide four specific functions:

• User registration and tracking
• File index and search response
• File transfer management and transaction recording
• Payment processing

The client software must be both user friendly and support three minimum functions:

• User registration
• Content search and presentation of results
• File transfer management

Fortunately, many software components exist in the VoIP and Web Serving/e-commerce community to fulfill these functions. Both the client software and server stack can be created with existing tools and software components to create a sophisticated and user friendly system.

Development requirements to deliver an operational system can be delivered within 6 months would include:

• A team of 6 to 8 capable programmers
• • Estimated budget: $ xxx
• Approximately one dozen Intel-based computers running Linux or Solaris to act as servers for development and staging.
• • Estimated budget: $ xxx
• Approximately five computers running various target operating systems (Windows, Linux, Macintosh) to develop and test client software.
• • Estimated budget: $ xxx
• Development software for Windows and Macintosh
• • Estimated budget: $ xxx

Using an open source operating system for the server, Linux, Solaris or BSD, the costs for development software are minimized. Prior to deploying services into production, licenses for databases will be required.

• • Estimated budget: $ xxx (incurred upon public start)
• Temporary office space for one dozen people for six months
• • Estimated budget: $ xxx
• Internet access for 6 months
• • Estimated budget: $ xxx
• Totals $ xxx

7 Salient Selling Points

• Quality of content (audio fidelity, video quality)
• Breadth and depth of content library (wide selection equal to or better then p2p)
• Legal ownership of content (You own the Audio/Video files)
• Quality of delivery (Fast servers)
• Remove threat from p2p via revenue share
• New, previously unavailable revenue source for network operators