Web 2.0 - After Dinner with Niklas Zennstrom

by Daniel H. Steinberg

After dinner on day one of the Web 2.0 Summit, program chair John Battelle invited Skype cofounder and CEO Niklas Zennstrom to discuss what the changes are to Skype now that it is part of eBay. Zennstrom says that in some ways Skype is run as an independent company, but there are some constraints and advantages of being a part of the bigger company. Zennstrom explains that Skype is not about phone calls but about conversations and sharing content. Battelle asks if Skype is a friend or not with telephone and cable companies.

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ANCCR: The opening night dinner at the Web 2.0 Summit 2006 featured a conversation with Niklas Zennstrom, CEO and co-founder of Skype. Here's a dinner conversation with Skype's Niklas Zennstrom.
John Battelle: Niklas, if you could come up? Niklas Zennstrom. Please join me in welcoming him.

Niklas Zennstrom: Thanks.
John: Have a seat.
Niklas: That was actually incorrect. We could have come as many times as we wanted. It was just a tactic that we didn't want to come.
John: It was a tactic. You were trying to avoid being acquired by a big US corporation.
Niklas: Exactly. We hoped that the European companies would acquire us, but they did not get the message.
John: Their loss, their loss. Let's just bring this up, then we can let anyone else who wants to bring this up during Q & A bring that up. What's the deal with the Kazaa settlement?
Niklas: The Kazaa settlement is settled, I think. It's taken a long time. When we started Kazaa in 2000 our idea allowed people to share videos, photos, and other stuff. We thought music, we shouldn't even go there because Napster was doing a good job on that. We thought maybe user generated content would be a great thing. Unfortunately we were just a bit too early. It took five or six years for the record companies and the movie studios to actually embrace the Internet. Sometimes it's not good to be too early. But now it's all settled. It's settled with the movie studios, director companies, and also now with the music publishers.
John: Did you get a call from Google, "Hey, Niklas, how did you deal with this? How much did you pay these guys? How much did you pay those guys?"
Niklas: I think Google will be just fine. What has happened is that it's a long delay. The business development people and the executives in the record companies have been embracing the Internet now for some time. Unfortunately, the message has not gone through down to the legal department. They're still out there billing each other and sending legal fees to each other. It's a bit disconnected. I think that the timing now is actually pretty good for starting video companies.
John: So we'll leave Kazaa. If you guys have other questions about Kazaa or the settlement you can bring them up during the Q & A. People forget that it's been 13 months since eBay purchased Skype for a lot of zeros. One year. I don't mean this in any negative way, but Skype was kind of last years YouTube. It was a service that just exploded. It didn't have some of the copyright issues that might have been. The telco's weren't so pleased. They weren't calling you congratulating you on your success, were they?
Niklas: Some of the telco's are friends with us and some of them are a bit more challenging in understanding what we're doing.
John: You have a background in -
Niklas: Yes, I'm an old telecom guy. It's quite funny. Everyone here in this room today are helping the telco's sell broadband connections. People who have broadband connection use it to send a packet to their neighbor. You want to access all these great services that are on the Internet, if that's eBay, Skype, Google, YouTube, or Flicker. Whatever it is. Without these services people would not buy broadband. So we're actually helping the telco's to sell broadband connections.
John: Right. How is it going one year in? Skype, this start up, you and your partner, all innovation driven, wild growth. You had a business plan that actually predicted the growth, which I think is somewhat unique. You join eBay. I'm a big fan of eBay. But, let me just say, of all the Internet companies that I spent time inside of, they are the most...
Niklas: Data driven.
John: Data driven, exactly. The most data driven. It's not a place where Power Point has been banned, let's put it that way.
Niklas: No, we actually had more Power Points in Skype before the acquisition. We have very little Power Points now.
John: all right, well let's go back to the original question. How has it changed Skype to be part of eBay?
Niklas: It has been great. One of the agreements we had with Meg and her team was that Skype should be a stand-alone company. We should take advantage of synergies when they are beneficial, but not just for the sake of it. We had this pull instead of push. You've seen it so many times when technology companies are acquiring small companies and one year after you don't see those companies anymore because they got completely dismantled. This happens like when Cisco, or Microsoft or some other company are acquiring companies. We said Skype needed to be a separate company so that you can still foster the growth and the innovation of the company but we should take advantage of synergies when we have them. We decided we can pull when we move into new offices. Rather than me figure out how many square meters we have, we just call on the eBay facilities team and they sort it out. Of course, we tell them how we want to design everything. Those things have been really good. The other thing that has also been very good is to get some executives who have been part of hyper growth, because it's been quite difficult. In Europe it's very difficult to hire executives who have been part of a very successful, fast growing Internet company. There's not that many of them there. That has been great just to get some of the executives who have been part of the early stages of eBay and the growth to come and help out with the company.
John: But now that you've had a year, what are you doing at Skype that you wouldn't have been doing had you not been a part of eBay?
Niklas: The biggest difference, to me, is that now we have to manage according to a quarterly budget.
John: So being a public company?
Niklas: Being a part of a public company is a big, big difference. It's much harder to make the right decisions for the company when you also need to do that with the constraint of the expectations of a quarterly budget. Before we had a budget, but it was just for giving a guidance of cash flow rather than we needed to meet our profit or, not so much profit maybe, but revenues.
John: So far profit hasn't been an issue at Skype?
Niklas: No, not an issue for us.
John: Not an issue yet. It's good not to have that constraint.
Niklas: We're getting there, though.
John: Actually the numbers look like 160 million in revenue this year, up from...
Niklas: Last year was about 60 million and it's going to be a little bit short of 200 million this year.
John: A little short of 200 million. That's good growth. You still have about four or five years to grow into that price, you understand.
Niklas: I'm sure there's a lot of very smart bankers out here today who can work on the multipliers. Actually what we did, we indexed back the revenues of Skype compared to PayPal and eBay from the years of inception, and we're completely outperforming both eBay and PayPal on revenue from year of inception. Actually quite few companies are growing as fast as we are growing in revenue.
John: Let me just ask you a question. Let's pull back for a second here. This is something that I actually didn't know. I probably should have. But when we spoke earlier, and you just mentioned, the original business plan of Kazaa was that you thought it would allow people to share, particularly videos and user-generated content and so on. But you were early. So, we just had a big event in the industry with YouTube. What do you make of that company?
Niklas: I think it's great. First of all, the timing of YouTube was phenomenal because if they would be one year earlier, they would probably get sued by all the media companies. Now the media companies are holding back. They were actually wanting to work out business models. Timing is everything. When we started Skype, the timing was also right for us. Timing is not necessarily good timing in terms of the founder sitting holding back, let's wait a few months and work on this. It's more kind of luck as well.
John: So Kazaa was early. Skype was dead on. What do you see Skype being in two, three, four years that it's not right now?
Niklas: When we started Skype, we wanted Skype to be the most popular communications company around the world. We come off a point far towards that, but we still have a long way to go. The two biggest challenges that we hope to be able to crack are getting Skype outside of the computer on mobile handheld devices. That's starting to happen now. We've spent a lot of work to make that happen. But it's still just being launched, there's more volume in that. The other thing is also to develop revenues outside of telecom. Today most of our revenues are coming from telecom revenues. Although the Skype calls are free, you're paying for making calls to other landlines and mobile phones. In maybe five years or something like that, those revenues are going to be diminishing because telephone calls are basically going to be completely free. What we're working on now is developing revenues around e-commerce and advertisement services. Those are the services that we want to develop more.
John: Talk a little bit more because Eric mentioned this when we spoke earlier. He said the same thing. Phone calls should be free and the reason is there is a business model that supports free phone calls and that's advertising. Tell us a little bit about your plan.
Niklas: Basically what we believe is that it's not so much making a phone call. Telephone calls you made a hundred years ago because of technology was very constrained of dialing someone. This actually is where we started with Skype. But it's all about conversation, enabling the world's conversations. A conversation is, of course, you talking to each other, you seeing each other, you express your feelings, you want to share your experience from the weekend when you went out for a car drive and you maybe were filming a video or taking pictures. Around those things is that you share content within the conversation. What's the first thing you say when you call someone? What's the weather? What did you do last week? If you can share content with each other in the conversation, that enriches the conversation. That gives you a carrier for different types of commercial content if that's advertisement sponsored or some of that content could be commercial content.
John: There's been a lot of conversation about how Skype is turning into a social network. And when you and I spoke earlier, you had an interesting kind of rift on the idea of Skype and social networking. Tell me whether or not Skype is going to take on MySpace and where that's going.
Niklas: We've always been discussing it internally. Should we become a social network? Should we work with the social networks? I think we've actually had conversations with most social networks that have been coming and going. We're working with a few social networks in Europe where they are enabling communications between the users with Skype. What we saw early on with some other social networks we had discussions with, they were quite afraid that the conversation would be handled outside their website. So they would lose -
John: They wanted to keep everything in their market.
Niklas: So that's been the challenge. And for us, when Skype was very much a utility to communicate with each other, it was about communicating one to one, or friends to friends, or colleagues to colleagues. We're not really wanting to become another social network. We would rather work with them so that you can share your content for YouTube, or MySpace, or Bebo, whatever you want. Any kind of web content you should be able to share with each other while you communicate in Skype. The other thing that we're actually doing now is that we're enabling people to do voice and chat communication, public communication. So if you have a blog for example, in the next version of Skype that's going to be released -
John: Wait, wait, so Skype 3.0?
Niklas: Yes.
John: When are you announcing that?
Niklas: Soon.
John: Not here?
Niklas: Not here.

John: I thought we had it all nailed down.
Niklas: No, it's coming out soon, really soon so stay tuned.
John: If it's Friday I'm really going to be pissed at you.

Niklas: What I will tell you is give you some sneak previews of what it's about.
John: Yes please.
Niklas: What we're doing is rather than just having one to one communication, you can have public communication. So you can post a link, for example, on a blog or wherever, a website, and you click on that and you get into a public chat room which you can moderate. You can also have Skype casts which we're having some tests versions previously. So you can hold a public conversation, a public audio conference, that you can moderate. You can imagine that you can have a mini-Web 2.0 seminar on Skype. That's a pretty cool way for people to host different conversations online.
John: Coming soon.
Niklas: Coming soon.
John: Coming soon. All right. Pulling back a bit to the media companies. If I can ask, as someone who's had extensive interactions with them, or perhaps none at all or only through your lawyers, what do you make of where they are right now as a group? I know that it changes individual to individual, but as opposed to where they might have been five years ago.
Niklas: Five years ago it was impossible to get a meeting with them. Today they are getting on the bus. Some of them are pushing the accelerator pedal, want to drive the bus, and some of them, even within the same company, are pushing the brake pedal. The trick is to be jerky right now. Some of them we're having great conversations and meetings with in the mobile and the media companies and they really want to develop new businesses. When you come to the next level, they have to clear all the rights even though they think they have all the rights. There are some TV contracts, for example, that they don't even know how to clear all the rights for whoever was doing the background singing. When they recorded this TV show ten years ago, they didn't have the rights for the Internet. Stuff like that. It's quite frustrating for some of them. They are certainly getting on the bus, but the bus is going quite slowly.
John: Got it. Let me ask you about another large industry which you have to deal with or, at least potentially may have to deal with, sooner rather than later, particularly in the United States. The telecommunication industry and the cable companies, are they friends?
Niklas: The same thing there.
John: I don't mean with each other either.

John: Are they friends with you? They must be awfully angry sitting there going, look at Niklas Zennstrom and eBay.
Niklas: Some of them are great friends.
John: Can you name them?
Niklas: Yes. Hutchison, for example.
John: Who?
Niklas: Hutchison Three.
John: I haven't heard of that.
Niklas: They're not in the US. They are in Europe.
John: I was admitting ignorance. I have never heard of those guys.
Niklas: The problem in the US is you don't have that many choices here.
John: Verizon, are they a pal?
Niklas: Level Three are great friends.
John: Level Three.
Niklas: Level Three are very good friends.
John: I don't get phone service from Level Three.

Niklas: No, because they are in the wholesale business.

John: Right, they love the fact that you eat up bandwidth. They're all for that, right?
Niklas: What we do is we terminate a lot of the calls with them, so we send them a lot of traffic. They sell traffic to us.
John: Are you concerned about Verizon, SBC, AT&T...?
Niklas: There is a concern that there are not so many choices for consumers. You don't have a very good competitive situation. If you go to Japan, Hong Kong, or Korea, and most places in Europe, the competition is much better. There are more choices for consumers. When you buy a broadband connection in Europe, you buy it for the four megabyte connection. You have a lot of different choices. There are price wars and it has used a lot of competition. You don't have the same competition here, which is an issue. Put it this way, obviously we are driving down prices for phone calls, which is good for consumers. It's good for businesses. Competition is generally a good thing. We are just another type of competition. What the phone companies need to do, and what they actually are doing with or without us, they are changing their business models. Ten years ago all of their revenues were from telephone line rentals and phone calls. It was very, very expensive to make phone calls. Today, because of competition and new technologies like what we are doing, prices have gone down. Revenues are now coming from broadband subscriptions and telephone calls. In ten years most revenues are going to come from broadband.
John: But doesn't that mean that the phone companies have to acknowledge that at the end of the day they are in the plumbing business? They are not in the sexy Skype, Google, super cool business.
Niklas: I think that there are mostly -
John: High margin, long tail...
Niklas: If you look around people in here in this room and what's happening, most innovative Internet services are not done by telco's. Most of them are done usually by small, innovative companies which are unfettered to history and can do whatever they want to do. That's where innovation is coming. But most of those companies are quite bad at keeping up time. Start up companies, Internet companies, are not that great at keeping a really reliable network and making sure everything is working like clockwork. That's what the telco's are doing well. I think the assets of Internet access always has value. On the Internet, the revenue per user is always quite low for any kind of Internet company, even Google, compared to how much Verizon is making per customer. With the assets they have they can always modify stuff. The challenge, of course, is what are the optics. They probably need to work on their optics a little bit but the cables are there. They have been there for quite some time. I think they will always be able to modify those.
John: Right. Last question then. If the folks with Mike's can put their hands up and let people know where you are so that we can get some questions lined up. This is my last question so if anyone has some questions... Where are they? I can't see. There's one over there and two over there. OK. One more question for you.
Niklas: OK.
John: Kazaa, Skype, Venice Project. The next thing that you're backing, and I know that you're still the CEO of Skype and running Skype, but you're backing a project called the Venice Project. Skype, in fact, is backing another project called FON. Tell us about both of them. Tell us about FON first and then tell us about the Venice Project.
Niklas: What FON is doing is great because it's allowing people to share their wi-fi access points. If you join the FON community, your access point becomes a public access point for everyone else who is a FON member. The objective here is to become the largest hotspot operator in the world. FON is on a good track to do that. You can buy a router for five dollars. You get another access point and then you become a part of the community. So it is basically a user-generated infrastructure. It's pretty cool.

The Venice Project is bringing the best things of TV and the best things of the Internet together. It's really taking television onto the Internet and raising the TV experience rather than the short form, low quality clips.
John: Let me understand this. FON is disrupting the access business by reselling it.
Niklas: Actually no, what we're doing is increasing the value of a broadband subscription. FON is working with several telco's -

John: Now wait a minute. Does Verizon agree with that?
Niklas: I don't know about them. I haven't spoken to them. There is actually a lot of good conversations with some of those carriers.
John: Next year we have to get the Verizon guys. I invited them. Any of you now Ivan Seidenberg, Ed Whitaker, there's an open invitation every year and so far they.
Niklas: You should get them and get Mark from FON at the same time. So what is does all these things, you can look at this glass. Is it half full or half empty? If you choose to look at the downside, or choose to look at the upside -
John: I put this here on purpose.
Niklas: Yes. Exactly.

Niklas: If you sell an ADSL line with a phone, not only do you get ADSL at home you also get access to tens of thousands of hotspots. It can actually increase the value. If you're a cable operator all of a sudden you want to provide a mobile broadband connection to your customers.
John: I've never seen Comcast really like the idea of sharing a Comcast connection. Matter of fact it was impossible for me to get DHCP working which is to get my router working. But anyway, I think FON is a great idea. I'm a little skeptical that it's going to work in the United States.
Niklas: We'll see. If you go to and look at a map of San Francisco, it's starting to be a lot of hot spots popping up.
John: Oh San Francisco. We have the speaker of the house now.
Niklas: You take any other city, by the way, you can take Tokyo, you can take Stockholm, or you can take San Diego, or wherever. It's happening organically everywhere.
John: That's great. Now just to complete the loop here, the Venice project strikes me, and I may be wrong about this, but it strikes me as an alternate distribution channel for programming. So it strikes me as not necessarily Brian Robert's favorite thing. He's the CEO of Comcast.
Niklas: Maybe, maybe not. It's a good thing if you are an Internet provider.

John: At least acknowledge that it might tick him off a tiny bit.
Niklas: It may be. So what.

Niklas: The reality -
John: That's what I was looking for!
Niklas: The reality is that for a network operator who is not providing television services, it's actually great to partner with these types of companies.
John: Right.
Niklas: The challenges for telco's is they want to provide all this value added services. But it's actually quite expensive to do it themselves. It's sometimes much better to partner with companies who can provide these services.
John: Right. Well said. Questions. Do we have questions lined up here? Lights are making it hard to see.
Rama Isola: Over here.
John: Great.
Rama: Hi, Niklas, great to hear your comments. My name is Rama Isola from Ice Cube Mobile. There's two things about you, from what I understand. One is, you go ahead and do whatever you want to do without listening to anybody. You have a laser-beam like focus, from what I understand. My question is, how did you end up deciding that selling to EBay was doing the right thing, rather than taking over the entire world and the entire telco infrastructure, which I believe you could have done?
John: Why did you sell to EBay?
Niklas: Its a great fit. [laughter] It's true, it is a great fit.
John: Don't forget they've had some wine.
Niklas: If you go back to what EBay is, the first Web 2.0 company is actually EBay. If you think about it, when Pierre started EBay it was all about network, people sharing, user-generated content. That's the first Web 2.0 company. EBay built out their API's. There are thousands of developers plugging into EBay. Sometimes you forget that. Deep down in the DNA of EBay is identical to Skype. It's all about sharing network effects. Sure, EBay is a much bigger company and we are a much smalle innovative company. But the reason why I'm saying it's a good fit, also, is what we are trying to do is to have a network effect of getting lots of users. We have 136 million plus users. Then we want to convert all of them to paying for services. It's pretty good to integrate with PayPal, which is the largest payment service in the world. That's a huge effect. Today, over 22% of all payments with Skype are done with PayPal.

The other effect is the other synergies, of course, with Skype and EBay marketplaces. Today we have Skype Me buttons in over hundreds of categories in over 20 countries of EBays. So there's actually a lot of synergy. The other great thing is, also, there was not services we had and EBay had and you just wanted to have organizational integration which is completely defocusing on the business. We didn't have any kind of organizational -
John: Structure?
Niklas: No, overhead or duplication. No duplications. We could just focus on the business and take advantage of everything. And now EBay has, what I think at least, three of the top brands on the Internet: the best brands for e-commerce, the best brands for payments and the best brands for communications.
John: Let me ask you a quick question before we go over here. It came up today. Jack Ma, and you heard him, said that there was a theory that Meg went to China, saw what Jack was doing, and then bought Skype. What do you make of that?
Niklas: Well, I think it's a theory.

Niklas: The only thing that is true is that the first time that I met Meg was actually in Beijing.
John: Ah, the conspiracy thickens.
Niklas: So maybe someone saw us there and then made a theory.

John: We have a question over here.
Man 1: Hi. I was wondering if you could comment on Vonage, and other players like that, and what effect they have on Skype, if any?
Niklas: I don't really follow what Vonage is doing. I think we are not a competitor to them. They are providing a plain old telephone service. The same kind of telephone service you can get from your local telephone company. They happen to use the Internet as a delivery mechanism. We are doing a completely different service. I wouldn't want to comment specifically on them.
John: Other questions over here?
Dimitry Shapiro: Hi, Dimitry Shapiro, CEO of Veoh Networks. With the recent acquisition of YouTube by Google, now creating what we now know as GooTube, and having access to virtually an infinite amount of very cost-effective bandwidth, how do you think that the P2P part of the Venice project really adds significant value in the world where you're dealing with a provider the size of Google, and their bandwidth capabilities, and existing relationships with media companies that they are creating, and the iconic power now of YouTube? How does Venice project compete in such a...
John: How does Venice project compete with YouTube?
Niklas: First of all, I don't think it's really the same type of service. The other thing is, when you start doing high quality video streaming en masse, it's not only costly it's also a quality issue to run from a server farm. P2P is not only cost efficient but also it builds a very reliable network. Skype, for example, we never had a single second of down time on the Skype P2P network. It's always been up. A P2P network is always more reliable. Secondly, I'm not sure of the existing relationship with the media companies that you refer to what they are that they have. I think P2P is very reliable and there is basically two different markets they are operating in.
John: I think it's going to be very interesting to watch a philosophy of peer to peer and a philosophy of massively scaled server farms compete in the next -
Niklas: First of all, it's not really just either or. You want to have a combination. You want to have business logic centralized because it's much easier to optimize. But, when they get into a lot of large data moving around, it's better to do it on the edges of the network.
John: Right. Well, I'm sorry that we have to wrap this up, but we have a progressive suite party upstairs to get to and I know that you guys want to continue your conversation. Please join me in thanking Niklas for coming tonight.
ANCCR: Niklas Zennstrom at the Web 2.0 Summit 2006.

Daniel H. Steinberg is the editor for the new series of Mac Developer titles for the Pragmatic Programmers. He writes feature articles for Apple's ADC web site and is a regular contributor to Mac Devcenter. He has presented at Apple's Worldwide Developer Conference, MacWorld, MacHack and other Mac developer conferences.