P2P & the Economic Downturn: Hello, Browser Toolbars!

Commercial P2P, we hardly knew ye: The recent shake-up at BitTorrent Inc., which consisted of replacing its CEO, losing its president and firing half of its workforce, has fueled speculation that P2P as a B2C business model is dead. Paul Glazowski mused the other day that, “[T]he legit, utopian vision of paid-for P2P downloads is headed for a depression,” while the typically upbeat P2P news site Slyck.com contended that “things could get dicey” for BitTorrent and other, similar startups.
Actually, things already have, at least in terms of the number of people that have been laid off. BitTorrent went to 18 employees from 55 in just four months, and Vuze recently confirmed two rounds of cuts totaling 24 people. P2P advertising startup Skyrider closed shop completely in October, and file-sharing dinosaur Morpheus quietly faded away earlier this year. Still, there is hope on the horizon for P2P startups — if they’re willing to annoy their user base, that is.
During a downturn, it’s easy to blame every bad thing on the economy. Vuze told us two weeks ago that it had expected the economic environment was going to deteriorate when it started to lay off people in April. That sounds good, but of course it’s only half the story.
In Vuze’s case, the layoffs likely had just as much to do with the realization that selling downloads to P2P users simply doesn’t work. BitTorrent has apparently learned the same lesson, as it’s reportedly poised to shutter its unsuccessful download store. Yet Vuze remains committed to its content platform; the company now wants to monetize the distribution of free content through advertising deals. Ad-supported downloads, however, are an equally risky bet during a downturn. Media companies have been passing out pink slips like Halloween candy in recent weeks to prepare for lower ad rates.
The good news is that for for Vuze, BitTorrent and even Pando, advertising isn’t the only source of revenue. All three companies have started to bundle their clients with browser toolbars from companies like IAC’s (s iaci) Ask.com, a move that seems to be having a substantial effect on their bottom line already. Former BitTorrent President Ashwin Navin recently described BitTorrent’s toolbar deal as “lucrative,” and Vuze CEO Gilles BianRosa told me that his company’s toolbar revenue is “significant.”
But exactly how lucrative are these deals? Valleywag in September unearthed an offer for $2.50 per install of the Microsoft toolbar. Industry averages are said to be slightly lower, but those installations can still add some serious cash to a company’s bottom line. Take DivX, for example. The company is distributing the Yahoo toolbar with its free DivX player, and it recently revealed in a regulatory filing with the SEC that in the first nine months of this year, the deal generated more than $14 million — or 21 percent of its total revenue.
Of course, bundled software isn’t exactly a new phenomenon in the P2P space. File-sharing applications like Kazaa and Grokster regularly came with numerous toolbars, widgets and other adware applications. To be fair, today’s P2P startups generally use more respected affiliate partners whose toolbars are not functioning as adware, but simply try to direct users towards a certain search engine.
The companies also let users opt out of the toolbar installations, which wasn’t always the case with Grokster and other, older file-sharing apps. Still, P2P users abandoned Kazaa in large parts because of all the added software. The same could happen to Vuze, Pando and BitTorrent if desperation in the face of the downturn drives them to become too aggressive about affiliate apps that their users don’t really need or want.