Peer-to-peer, private and utility

Dec 10, 2009

This is going to be a slightly more speculative post than is usual. I’d like to explore three distinct models of delivery for services and goods. This is all pretty uninformed, as I don’t really know anything about economics bar what a nasty Google Reader habit will leave you with. With that caveat in place, here goes… <!–break–> It strikes me that many of the important goods we utilise as the building blocks of modern civilisation can, broadly, be managed in three different ways: as private concerns, as utilities, and as peer-to-peer goods. To sketch a rough example, electricity began with private power generation, progressed to utility provision by massive-scale entities (often state-owned or regulated) and may now be transitioning to small-scale and, in part, peer-to-peer generation using solar panels and wind farms (Nick Carr writes interestingly about this; I really must buy his book(s)). I am, of course, grossly over-simplifying, but I hope that I am catching some essential characteristic of the different approaches.

Money is another example. At times, money has been a private thing; access to it was limited largely to those who already had it. Money - as coins and notes - evolved as a representation of pre-existing private wealth. Over time, the system of goldsmiths issuing promissory notes in return for deposits of gold gave way to currency and fractional reserve banking, which eventually mutated into the utility model of mass banking we have today. Now, barely anyone deals with the local goldsmith or issues their own promissory notes and the stock of gold in the Bank of England or Fort Knox is a relatively small quantity of the wealth denominated in pounds or dollars. We interact with financial utilities, massive organisations that are intended, through their sheer size and scale, to deliver efficient supplies of capital to those who can make the best use of it. Of course, the rise of utility banking has not totally eclipsed what went before it, and this somewhat schizophrenic quality of banks remains part of the problem with them and explains why some want to split investment banking off from retail utility banking. Again, I have simplified here but I hope that I have captured some essential truth.

Computing power has actually undergone several transitions, but the major trend of recent years has been away from the idea of the private reserve of computing power - having your own servers and desktop PCs - to utility computing, where servers are provisioned dynamically from the cloud, and the computing power on the desktop is only really used to power the web browser. [email protected] provides a glimpse at what a future peer-to-peer computing network might look like, and the forward-looking vision of those who created the internet on peer-to-peer principles should smooth the way.

It’s important to note here that I do regard this as being a general trend of private to utility to peer-to-peer, but it doesn’t happen all at once and each subsequent stage will not completely displace the former. There are still plenty of, say, private electricity generators in operation, they’re just not a very big slice of the pie any more.

Might marketing data also follow a similar trajectory? Since time immemorial, vendors have held ‘marketing data’ about their customers simply by virtue of personal relationships. Shopowners would know the needs of their customers. In the 20th century, with the increasing ubiquity of large corporations, private data-gathering operations took hold. “Market research” was invented and the efficient management of information about customers and their observed needs became an important part of business. This process is still continuing, as the decrease in technology costs and the increase in opportunities to capture data about customer behaviour have led to the creation of vast private data repositories in our largest corporations. Many of the the most successful companies in business today claim that it is this deep understanding of customer needs that has driven their success.

Of course, there is a cost attached. To amass this data, store it, process it and analyse it is expensive. What’s more, the benefit of gathering data increases as you gather more of it. Data about two million people’s shopping habits is more than twice as valuable as data about one million people’s. Once you reach the scale of Tesco (whose ClubCard loyalty scheme gives them personalised shopping history for millions of people; £1 in every £8 spent in British shops is spent there) the data is of huge importance. The investment required in gathering that amount of data is so immense that it represents a barrier to entry far bigger than the cost of acquiring premises or setting up supply lines, and control of the data is vital to the defence of a strong commercial position.

Data, as it is held now, is a classic example of a private good. It is hoarded at great cost by the few who guard it jealously, with the cost of acquiring data of their own sufficing to hold down the competition. There are, however, alternatives. The most obvious is Google, which holds a similarly huge amount of information about individuals, but has no desire to sell products to them directly. Google is happy enough to allow other retailers to piggyback on their database via advertising. Google is, essentially, a utility provider of data about customer buying intentions. For retailers, it’s not as good as having your own data-mining operation, but it is dramatically cheaper. As a retailer, you only pay for what you use - on a per-click basis - and Google takes care of figuring out whether or not a person might want to buy your product. Google is not without competitors though: Facebook has a different kind of personal data about its users, and will also provide access to this data to others, for a price. For smaller businesses, this could be a boon as it erodes the advantage that mega-retailers have from their superior data. But, of course, the real winners are the utility data providers - Google and Facebook for now, though I suspect that credit card companies could get in on the act, and maybe even banks looking for a new business model could appear on the scene.

But what about peer-to-peer data? This is where VRM comes in. VRM offers the possibility that individuals will control their own personal data - their identity, their observable characteristics and attributes, and the data trail they leave from their interactions with others - and will be able to choose to share it with whomever they like. They can share it with other people, with small companies, large companies or nobody at all. In this sense, it represents something close to peer-to-peer exchange, in the sense that everyone 'creates’ their own data and nobody has privileged access to it.

If you’re interested in reading more of my thoughts on VRM, here are a few old posts of mine to get started with: This is my first post on VRM, when I was just figuring things out. VRM: Rent don’t buy explores some of the concepts I mentioned in this post and What’s a consumer? considers how a VRM world might change the relationship between 'consumers’ and vendors.

It would be interesting to consider other goods which have undergone similar shifts. The written word, perhaps - from narrow, private creation by the few, to mass consumption (the printing press) to mass creation (blogs, wikis etc.). Is this a pattern that is far more fundamental than I realise?