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In Praise of Freeloaders
Pages: 1, 2

Accentuate the positive

Economists call these kinds of valuable side effects "positive externalities." The canonical example of a positive externality is a shade tree. If you buy a tree large enough to shade your lawn, there is a good chance that for at least part of the day it will shade your neighbor's lawn as well. This free shade for your neighbor is a positive externality, a benefit to them that costs you nothing more than what you were willing to spend to shade your own lawn anyway.

Napster's single economic genius is to coordinate such effects. Other than the central database of songs and user addresses, every resource within the Napster network is a positive externality. Furthermore, Napster coordinates these externalities in a way that encourages altruism. The system is resistant to negative effects of freeloading, because as long as Napster users are able to find the songs they want, they will continue to participate in the system, even if the people who download songs from them are not the same people they download songs from.

As long as even a small portion of the users accept this bargain, the system will grow, bringing in more users, who bring in more songs. In such a system, trying to figure out who is freeloading and who is not isn't worth the effort of the self-interested user.

Real life is asymmetrical

Consider the positive externalities our self-interested user has created. While she sleeps, the Lynyrd Skynrd and N'Sync songs can fly off her hard drive at no additional cost over what she is willing to pay to have a fast computer and an always-on connection. When she is at her PC, there are a number of ways for her to reassert control of her local resources when she doesn't want to share them. She can cancel individual uploads unilaterally, disconnect from the Napster server or even shut Napster off completely. Even her advertised connection speed acts as a kind of brake on undesirable external use of resources.

Consider a second user on a 14.4 modem downloading a song from our user with her 1 Mb DSL. At first glance, this seems unfair, since our user seems to be providing more resources. This is, however, the most desirable situation for both users. The 14.4 user is getting files at the fastest rate he can, a speed that takes such a small fraction of our user's DSL bandwidth that she may not even notice it happening in the background.

Furthermore, reversing the situation to create "fairness" would be a disaster -- a transfer from 14.4 to DSL would saturate the 14.4 line and all but paralyze that user's Internet connection for a file transfer not in that user's self-interest, while giving the DSL user a less-than-optimum download speed. Asymmetric transfers, far from being unfair, are the ideal scenario -- as fast as possible on the downloads, and so slow when other users download from you that you don't even notice.

In any system where the necessary resources like disk space and bandwidth are priced at a flat rate, these economics will prevail. The question for Napster and other systems that rely on these economics is whether flat-rate pricing is likely to disappear.

Setting prices

The economic history of telecommunications has returned again and again to one particular question: flat-rate vs. unit pricing. Simple economic theory tells us that unit pricing -- a discrete price per hour online, per e-mail sent or file downloaded -- is the most efficient way to allocate resources. By allowing users to take only those resources they are willing to pay for, per-unit pricing distributes resources most efficiently. Some form of unit pricing is at the center of almost all attempts to prevent freeloading, even if the currency the units are priced in are notional units such as Mojo.

Flat-rate pricing, meanwhile, is too blunt an instrument to create such efficiencies. In flat-rate systems, light users pay a higher per-unit cost, thus subsidizing the heavy users. Additionally, the flat-rate price for resources has to be high enough to cover the cost of unexpected spikes in usage, meaning that the average user is guaranteed to pay more in a flat-rate system than in a per-unit system.

Flat-rate is therefore unfair to all users, whether by creating unfair costs for light and average users, or by unfairly subsidizing heavy users. Given the obvious gap in efficient allocation of resources between the two systems, we would expect to see unit pricing ascendant in all situations where the two methods of pricing are in competition. The opposite, of course, is the actual case.

Too cheap to meter

Despite the insistence of economic theoreticians, in the real world people all over the world have expressed an overwhelming preference for flat-rate pricing in their telecommunications systems. Prodigy and CompuServe were forced to abandon their per-e-mail prices in the face of competition from systems that allowed unlimited e-mail. AOL was forced to drop its per-hour charges in the face of competition from ISPs that offered unlimited Internet access for a single monthly charge. Today, the music industry is caught in a struggle between those who want to preserve per-song charges and those who understand the inevitability of subscription charges for digital music.

For years, the refusal of users to embrace per-unit pricing for telecommunications was regarded by economists as little more than a perversion, but recently several economic theorists, especially Nick Szabo and Andrew Odlyzko, have worked out why a rational user might prefer flat-rate pricing, and it revolves around the phrase "Too Cheap to Meter," or, put another way, "Not Worth Worrying About."

People like to control costs, but they like to control anxiety as well. Prodigy's per-e-mail charges and AOL's hourly rates gave users complete control of their costs, but it also created a scenario where the user was always wondering if the next e-mail or the next hour was worth the price. When offered systems with slightly higher prices but no anxiety, users embraced them so wholeheartedly that Prodigy and AOL were each forced to give in to user preference. Lowered anxiety turned out to be worth paying for.

Anxiety is a kind of mental transaction cost, the cost incurred by having to stop to think about doing something before you do it. Mental transaction costs are what users are minimizing when they demand flat-rate systems. They are willing to spend more money to save themselves from having to make hundreds of individual decisions about e-mail, connect time or files downloaded.

Like Andrew Odlyzko's notion of Paris Metro Pricing," where one price gets you into a particular class of service in the system without requiring you to differentiate between short and long trips, users prefer systems where they pay to get in, but are not asked to constantly price resources on a case-by-case basis afterward, which is why micropayment systems for end users have always failed. Micropayments overestimate the value users pay on resources and underestimate the value they place on predictable costs and peace of mind.

The taxman

In the face of this user preference for flat-rate systems, attempts to stem freeloading with market systems are actually reintroducing mental transaction costs, thus destroying the advantages of flat-rate systems. If our hypothetical user is running a distributed computing client like SETI@Home, it is pointless to force her to set a price on her otherwise unused CPU cycles. Any cycles she values she will use, and the program will remain in the background. So long as she has chosen what she wants her spare cycles used for, any cycles she wouldn't otherwise use for herself aren't worth worrying about anyway.

Mojo Nation would like to suggest that Mojo is a currency, but it is more like a tax, a markup on an existing resource. Our user chose to run SETI, and since it costs her nothing to donate her unused cycles, any mental transaction costs incurred in pricing the resources raises the cost of the cycles above zero for no reason. Like all tax systems, this creates what economists call "deadweight loss," the loss that comes from people simply avoiding transactions whose price is pushed too high by the tax itself. By asking its users to price something that they could give away free without incurring any loss, these systems discourage the benefits that come from coordinating positive externalities.

Lessons From Napster

Napster's ability to add more users per week than all other P2P file-sharing systems combined is based in part on the ease of use that comes from its ability to tolerate freeloading. By decentralizing the parts of the system that are already paid for (disk space, bandwidth) while centralizing the parts of the system that individuals would not provide for themselves working individually (databases of songs and users ids), Napster has created a system that is far easier to use than most of the purely decentralized file-sharing systems.

This does not mean that Napster is the perfect model for all P2P systems. It is specific to the domain of popular music, and attempts to broaden its appeal to general file-sharing have largely failed. Nor does it mean that there is not some volume of users at which Napster begins to suffer from freeloading; all we know so far is that it can easily handle numbers in the tens of millions.

What Napster does show us is that, given the right architecture, freeloading is not the automatically corrosive problem that people believe it to be, and that creating systems which rely on micropayments or other methods of ensuring evenness between production and consumption are not the ideal alternative.

P2P systems use replicable or replenishable resources at the edges of the Internet, resources that tend to be paid for in lump sums or at rates that are insensitive to usage. Therefore, P2P systems that allow users to share resources they would have paid for anyway, so long as they are either getting something in return or contributing to a project they approve of, will tend to have better growth characteristics than systems that attempt to shut off freeloading altogether. If Napster is any guide, the ability to tolerate, rather than deflect, freeloading will be key to driving the growth of P2P.

Clay Shirky writes about the Internet and teaches at NYU's Interactive Telecommunications Program. He publishes a mailing list on Networks, Economics, and Culture at shirky.com/nec.html.

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