Remember Napster?

Napster will go down in history as one of the most disruptive “things” for businesses in the old economy. The music and video sharing and downloading site gave users across the globe the ability to “share” each others’ collections. The music industry bore the brunt of Napster there was a time when we thought that it will change it forever. Countless copycats and lawsuits later, things seem to have settled down a bit.

A couple of “legitimate” business models emerged in this space. Where legitimate means: music download is OK as long as you pay for it. The two most prevalent business models are – “pay by the sip” as in Apple’s iTunes or monthly subscription as in Real’s Rhapsody. Napster itself morphed into dopted the subscription model.

This music industry saga is far from over. It will take a few twists and turns before all is said and done. But there is a much more important story emerging thanks to Napster.

Well, forget Napster. Also forget what it did to the music industry. That was nothing compared to what is going to happen thanks to what Napster started. Or arguably, was the first one to tap into or prove. This phenomenon is not going to be restricted to an industry. It will fundamentally affect all industries – especially those that have a customer!

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Lesson No. 1: We are all connected

You see, the lesson from Napster is not that one can download music online or that millions of people want to do so. The lesson is that the internet – this information superhighway - has connected hundreds of millions of customers across the globe.

More importantly, this connection is two way.

Before the internet and, more accurately, even in its early days the connections technology provided were one way – using the broadcast model. Whether the signal went to the people – as in Television and Radio – or the people came to the signal - as in internet news sites – the broadcaster was the connecter. That is what made them valuable. They monetized this value through means such as advertising.

Now, people can respond back. More importantly, the power of the broadcaster – and the reason they made money – is being diminished as people get the ability to connect with each other without the need for a broadcaster.

Will the broadcaster disappear? Or will they go the way of the travel agent? Or will they morph into the Internet Service Provider (ISP) business model? Or will they go the way of the telephone company business model? Or will they focus on content creation not on distribution? Or will they get into the business of “telephone instruments” of our generation as in Apple’s iPod?

The possibilities are endless. Market forces will determine which business models emerge and who is successful. But the possibilities and opportunities of this two way connection between each and every human being on the planet are endless.

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Lesson No. 2: These connections mean new business models

Napster proved that there is a business model that can leverage these connections. Are there other applications of this new phenomenon known as “Person to Person” or P2P?

Let us take the banking industry. The good old banking model is a simple one. Some people have money to spare so they made savings deposits in a bank. They got a safe place to keep their money that also paid them – in the form of interest - for the privilege. What a concept!

Well, there is the other side of this equation. There are some people who wanted money they did not have. The bank is also a friend to these people in need. It gave them loans in return for a nominal payment – in the form of fees and interest.

If a bank got more interest from its borrowers than it gave to its savers it made money. This simple arbitrage is what keeps banks afloat.

That was then. Now, the brave new world of the internet is about to change that. Now, people are connected to each other so they can lend each other money – kind of the way it used to be before the advent of the banking system! If needed, two or more people can get together and lend a bigger amount.

But there is one problem. How will the lenders find out about the borrowers?

Actually, there is an even bigger problem. How does one trust perfect strangers in this transaction? After all, there is money involved!

Enter the new age broker. This is the online entity that will connect people i.e. provide the venue for the lenders to find borrowers. By brokering the transaction, it will also ensure that these transactions are trustworthy. They will of course charge a small fee for their effort. http://www.prosper.com/ is such an entity.

This new business model will provide unprecedented value for both lenders and borrowers. It will afford higher than market interest rates for lenders at the same time provide lower than market rates to borrowers.

How is that possible? By lowering the transaction cost. The traditional deal maker, i.e. the bank, made 5.25% on each transaction. Banks have savings interest rate of 0.75% and a loan rate of 6.00%. If the new deal maker, this online broker, charged 2% instead, we have 3.25% to give back to the lender and/or the borrower!

Will this model work? Will traditional banking models survive? Time will tell.

But the power of P2P is unmistakable. Eventually, people will be connected to each other the way telephones connect them today. The “phone number” will be replaced by the “internet number”.

Each and every business must take a look at their business model and see how P2P will affect them.

Sourabh Hajela is a management consultant and trainer with over 20 years of experience creating shareholder value for his Fortune 50 clients. His consulting practice is focused on IT strategy, alignment and ROI. For more information, please visit http://www.startsmarts.com/. Or feel free to contact Sourabh at Sourabh.Hajela@StartSmartS.com or post your questions at www.CioIndex.com/forums.


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Posted on 06/04/2009 by


Remember Napster? author sourabhhajela

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