Chapter 37

Peer to Peer

The pattern

The term ‘peer to peer’ originated in the computer industry, where it refers to two or more equivalent computers communicating. In business model terms, Peer to Peer normally refers to transactions between private individuals, such as lending personal items, offering specific services and products or sharing information and experiences (WHAT?). The organising outfit functions as a sort of intermediary, responsible for the safe and efficient handling of transactions (HOW?), ideally becoming a nexus for community relationships. As time goes by, this function can be monetised – for example, by charging transaction fees or indirectly generating revenue through advertising or donations (VALUE?).

A major advantage of Peer to Peer business models is that customers can make use of private products and services in much the same way as they would use commercial offerings (WHAT?). Additionally, customers value the social aspects of Peer to Peer networks (WHAT?). A company’s success in implementing this business model will hinge on whether it is able to establish a trusted image of the various offerings (HOW?). For while users appreciate the opportunity to purchase privately produced products and services, they also want the simplicity and ease of commercial transactions.

The origins

The Peer to Peer business model began to develop in the early 1990s. The creation of the Internet was a central driver for this model. The ‘collaborative consumption’ trend is also partially responsible for the development of Peer to Peer models. At the centre of this trend is a desire to revitalise the community spirit and communal use of resources. Online auction site eBay is one of the pioneers of the Peer to Peer model, giving people in over 30 countries an opportunity to auction off items they no longer need. Globally, eBay handles over 12 million auctions a day.

The innovators

A number of companies have followed in eBay’s footsteps in the past few years. Craigslist is a private Web communications company specialising in online classified advertisements for local goods and services, such as housing, jobs, gigs, personals, wanted, for sale, etc. The company revolutionised the market when it created an online Peer to Peer network, undercutting the monopoly previously held by print media. Through free listings, Craigslist developed a digital Peer to Peer network that processes over 60 million new classifieds and 50 billion page views per month. Craigslist uses this favourable market position to charge for certain listings, such as job postings or apartment offers, while the remaining listings remain free of charge.

Peer to Peer: timeline

The Berlin-based start-up friendsurance.com established yet another Peer to Peer model. The pattern has found application in the insurance industry by connecting social networking with a classic insurance concept. The basis of the concept consists of forming private insurance networks (e.g. four or five friends) over social networks. Taking car insurance, for instance, the individuals’ network comes up with a certain amount of money in case of damage (e.g. €20 per person) and the remaining amount is covered by a classic insurance back-up. In that way, friendsurance.com achieves a reduction in customer insurance rates of up to 50 per cent. Benefits accrue not only to customers: costs of distribution are eliminated, and customers solicit other customers. Moreover, the risk of moral hazard is reduced drastically.

Uber is a company that uses a smartphone application enabling on-demand Peer to Peer transportation services to users. It connects passengers and independent taxi drivers. The process is simple: registered users demand a taxi using the app; an Uber driver is then dispatched to the passenger’s location and transports the passenger to his destination. Taxi drivers use their own vehicles to provide the taxi service, while Uber receives around 20 per cent of the fare. The price itself is calculated by the Uber app, which ultimately depends on supply and demand. Uber has revolutionised the taxi industry, taking more than US $11 billion in 2018, only nine years after its foundation.

TIGER 21 (The Investment Group for Enhanced Returns in the 21st Century) is a Peer to Peer learning platform for high-net-worth investors, founded in New York City in 1999. The group addresses members with a minimum amount of US $10 million in assets: entrepreneurs, CEOs, investors, top executives, etc. The aim is to improve its members’ investment knowledge and explore issues of wealth preservation, estate planning and family dynamics. What is special about TIGER 21’s approach is that it organises monthly small group meetings where members can discuss topics related to wealth and discuss one another’s portfolios. These meetings are highly confidential and facilitated professionally. Members come up with business ideas and personal issues, or look at world events, all of which is evaluated and discussed collectively to spot opportunities and chances for each member’s wealth management. The real value evolves from the different perspectives the members bring into the debate. Meetings are topped off by guest talks from external experts. TIGER 21 charges US $30,000 a year for membership, which covers tuition for group meetings, expert speeches and access to the online community.

Airbnb offers users (‘hosts’) a platform to rent their living space, private rooms, apartments, castles, boats and other assets to a wide range of people within a Peer to Peer community. Logged on to its conveniently configured website, users of Airbnb can present their living space or property for short-term rent to a community of holiday makers and other people looking for affordable accommodation. A rating system has been introduced for both the accommodation facilities and guests, in order to prevent fraud and misrepresentations. Airbnb’s primary revenue is raised through service fees on bookings (between 3 and 10 per cent). Among others, a further source of revenue is guests’ credit card processing fees. Only ten years after its founding in 2008 by three friends, Brian Chesky, Joe Gebbia and Nathan Blecharczyk, Airbnb had made US $2.6 billion in revenues.

Based on Blockchain technology, several initiatives of Peer to Peer electricity trading have started to attack the centralised electricity market. With renewable energy has come the trend towards decentralised energy production and Prosumer(s) (produce and consume electricity, #60). DLT and Blockchain made it possible to further use and commercialise excess energy to a local Peer to Peer market via tokens. The Swiss company Quartierstrom, in Walenstadt, initiated a successful Peer to Peer platform to trade energy between 37 households in 2018.

When and how to apply Peer to Peer

Peer to Peer is most effective in online communities. The principal idea behind this pattern is to increase marginal utility. With every new user, the attractiveness of the network for other users rises. This creates a self-reinforcing cycle, whereby the ‘winner takes it all’ and it becomes increasingly difficult for new players to enter the market.