The hidden costs of P2P
If peer-to-peer applications become ubiquitous, they could break the existing business models of many Internet service providers and force them to raise their prices, experts said.
Peer-to-peer computing, which lets networked computers act as both clients and servers, is the next great innovation on the Internet, according to some marketers. Napster is the best-known P2P application, but dozens of new companies are developing all kinds of P2P applications for consumers as well as business customers.
"The hype around P2P is valid," said Larry Cheng, an associate at venture capital firm Battery Ventures. "It's changing the nature of Internet computing."
But observers predicted the rise of P2P could also mean the rise of Internet service provider (ISP) access fees. Why? Because P2P programs have the potential to radically change the amount of bandwidth the average Internet user consumes.
The flat-rate pricing of most ISPs is based on the assumption that subscribers will only intermittently access the Web or e-mail. ISPs often "oversubscribe" their networks by a certain ratio - 40-to-1 is typical - which means they don't actually have the capacity to handle all of their users simultaneously.
So, if most computers on an ISP's network stay constantly connected running a P2P application like Napster - chewing up bandwidth by serving up files or otherwise communicating with other peers in the network -- the original ISP usage model will be shattered. And in that case, ISPs may have no recourse except to raise their access fees, experts said.
"The ISPs are in a tough situation," said Clay Shirky, a partner at The Acceleratorgroup, an investment firm. "All of their pricing models were based on everyone at the edge of the network tolerating second-class citizenship. They're totally unprepared for the idea that end users will distribute content to each other." Shirky's firm has invested in two P2P start-ups, Aimster and Uprizer.
ISPs have long had to deal with "bandwidth hogs." From a service provider's perspective, these are customers who cost money by using an unusually large amount of bandwidth to download large files from Web sites or newsgroups, or to view streaming media clips.
But P2P applications are different, experts said. They can turn any computer into an always-on bandwidth glutton because they run unattended, without any user intervention.
There's no shortage of P2P programs available that could potentially bog down ISP networks. In addition to Napster, start-ups such as Flycode and OpenCola are developing new P2P file sharing programs. Other file swapping programs, such as BearShare and LimeWire, are built around the open source Gnutella P2P protocol. Meanwhile, P2P companies such as Entropia, Popular Power and United Devices are building distributed computing services, which propose to use thousands of Internet-connected computers to process large computational problems.
None of these programs has become as popular as Napster - which claims to have 62 million registered users - but Napster has provided a stark glimpse into the ability of P2P apps to overwhelm networks. Universities were the first to feel severe pain from Napster, which was actively adopted by college students when it was released in 1999. Many institutions - and some private corporations - have banned the application from their networks, and others are taking steps to limit the amount of bandwidth Napster users consume.
For now, most service providers are monitoring the growth of P2P application usage on their networks. But ISP executives admitted that if their customers' bandwidth usage shifts substantially, they may have to increase their access fees.
"If there's a quantum leap in demand, then we'd have to modify and change our cost model a little bit," said Steve Dougherty, EarthLink's director of systems vendor management. He added, though, that EarthLink's aggregate bandwidth consumption historically has increased gradually from month to month. "The growth isn't going to suddenly double one morning," he said.
What's more, ISPs said, their bandwidth costs drop regularly. "We're seeing greater decreases in the cost of the bandwidth than we are seeing increases in individual bandwidth usage," said David Allred, vice president of broadband services at Telocity, a provider of residential Digital Subscriber Line (DSL) services.
Nevertheless, some ISPs have adopted restrictive policies regarding the use of P2P applications in order to cut down on bandwidth use. Cox Communications last year notified Cox@Home cable modem service subscribers that using Napster or other file sharing programs violated their terms of service agreements.
Analysts predicted that if bandwidth-intensive P2P applications become more popular, more ISPs will offer tiered pricing plans. Instead of raising rates across the board, ISPs "may add an additional tier of [service for] high-bandwidth users," said Rob Lancaster, an analyst at The Yankee Group.
Qwest Communications International already offers a $19.95-per-month plan for DSL service that requires a customer to log off every two hours for 10 minutes. The always-on version of the service is $29.95.
While P2P computing evangelists are fond of saying P2P takes advantage of otherwise "wasted" resources, such as bandwidth, the truth of the matter is that bandwidth isn't free.
"The bottom line is that somebody has to pay for it," said Preston Austin, president of Clotho Advanced Media, a small Web consulting firm.