Solon Partners

Joltid Ltd, a British Virgin Islands company founded in 2001 by Niklas Zennstrom and Janus Friis, the team that created Skype, Kazaa, and Joost, is threatening to shut down eBay’s Skype service. Skype’s approximately 450 million users generated $500 million in revenues in 2008, a figure expected to grow to $1 billion for 2011, according to the Wall Street Journal.

eBay bought Skype from Joltid Ltd in 2005 for $2.6 billion, but the deal did not include the complete assignment or transfer of the “Global Index P2P software,” merely a license for this core technology component.

Joltid Ltd. still holds a key patent on the content distribution platform technology that allows Skype to manage bandwidth efficiently. US Patent number: 7480658 filed on 14 July 2004 lists Joltid Ltd as the owner, and the Estonian programmers Ahti Heinla and Priit Kasesalu as the inventors of the technology.

eBay’s 10Q quarterly report filed with the SEC disclosed that in March 2009, Skype Technologies S.A. filed a claim in the English High Court of Justice (No. HC09C00756) against Joltid Ltd. due to its cancellation of the software license, and Joltid counterclaimed for copyright infringement and license repudiation.  The outcome of the dispute will be determined by the UK trial scheduled for June 2010.

Joltid has now canceled eBay’s license, and if effective, the cancellation could disable the whole service, as re-engineering the entire P2P architecture for half a billion users around the world within 10 months would be a mission to mars. eBay would have to rapidly develop, test and roll out world wide an alternate non-infringing technology, license an alternate technology, or abandon the service altogether. According to the 10Q eBay has chosen to try to develop an alternative technology.

This kind of an IP disaster is reminiscent of the Volkswagen deal to buy various Rolls Royce and Bentley factories and assets, but failing to buy the Rolls Royce trademark which was sold to BMW. For more embarrassing IP disasters look here.

The moral for entrepreneurs - make sure that you get qualified advice when negotiating and documenting technology deals to avoid such colossal PR, technology and financial disasters. The advice applies equally to those start-up founder/heroes that fancy themselves Renaissance-men capable of playing any role in any company, consultants that attempt to give occasional IP advice as an up-sell on their other services, and those CEOs thinking that their in-house lawyers should be able to handle it - I mean - how hard can it be?

eBay and Volkswagen found out the hard way.

yrjo internet, software licensing

Sweden is traditionally sees as a bastion of individual rights, but on 1 January 2009 it took a big step towards big-brother-like monitoring of international phone calls, e-mail and internet traffic.

All of the parties in the ruling government coalition were in favor of the sweeping data tracking measures included in the FRA Law. Interestingly enough every single Swedish political party’s youth organization has taken a position against the law. No wonder the Pirate party is quickly gaining followers from various youth groups with its anti-FRA stance as a centerpiece of their platform.

The FRA law allows supercomputers to scan all cross-border internet traffic in real time for trigger words and phrases. Once a trigger word, topic, name or phrase is identified, the communications will be reviewed in more detail and investigated further by Swedish electronic security service FRA (Försvarets radioanstalt). Electronic data monitoring has been introduced in Sweden like in other countries as part of anti-terrorist measures. Civil rights activists are concerned that this kind of monitoring may be used significantly broader than just for identifying terrorists, but also to find other potential violations such as software piracy, or to monitor any individual, group or religion’s activities for any reason.

Electronic Frontier Foundation (EFF) has been speaking out internationally against the growing proliferation of such measures. EFF this month filed a lawsuit entitled Jewel v. NSA over Obama administrations refusal to turn over oversight records related to social network surveillance.  EFF described the allegations on its website as follows:

Evidence in the case includes undisputed documents provided by former AT&T telecommunications technician Mark Klein showing AT&T has routed copies of Internet traffic to a secret room in San Francisco controlled by the NSA. That same evidence is central to Hepting v. AT&T, a class-action lawsuit filed by EFF in 2006 to stop the telecom giant’s participation in the illegal surveillance program.

Running for President, at that time Senator Obama announced that there was:

little doubt that the Bush Administration, with the cooperation of major telecommunications companies, has abused that authority and undermined the Constitution by intercepting the communications of innocent Americans without their knowledge or the required court orders.

Now, in response to EFF’s Freedom of Informational Act demand for disclosure, President Obama’s administration has cited immunity and a “state secrets” exemption in refusing to turn over the records.  EFF now seeks to have a federal judge to review the records in camera to determine if illegal surveillance of Americans has been carried out.

The program is reminiscent of the Department of Defense Total Information Awareness (TIA) program revealed by the New York Times in 2005.   That program was exploring data mining that included the mapping of communications and related social networks, but was shut down by Congress in 2003 over concerns of the legality of surveillance. Of course after the Patriot Act and the amendments to the Foreign Intelligence Surveillance Act, most of  such surveillance has been legalized in order to find and fight potential terrorist activities.

If the Judge forces the turn-over of documents we may soon find out the level of monitoring applied to  Facebook, MySpace, Twitter and other social network communications. Meanwhile, we continue to remind people of the often forgotten obvious fact - your online posts and pics are not private or confidential.

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I am posting an update to a social media valuation post from last week. There is a growing chorus questioning the high valuations and viability of business models of the social media start-ups.

More fuel was thrown on the fire this week with the announcement of the results of the latest round of fundraising at Ning.

Ning, a social networking start-up, raised $15 million at a $750 million valuation this week. The application allows anyone to launch their own personalized social networks (i.e. an entire network of Brüno aficionados, fans of the HBO show the Wire, or the Silvio Berlusconi support group).

Ning has a lot going for it: vip pedigree of founders - Andreessen and Gina Bianchini, approximately 200,000 active networks created to date, 30 million registered users, and it is revenue positive  from the placement of Google ads.

To beef up the revenue model, the company will be rolling out is own proprietary advertising scheme, $25 premium service network subscriptions as well as virtual gifts. This series- E round led by Light Speed Venture Partners showed significant valuation growth over last year’s $500 million D-round.

The latest successful fundraising round however does not change the fact that revenue will still trail far behind the valuation.  David Dines pointed out that even if 10% of the 200,000 active Ning networks subscribers pay up for the $25 “premium” monthly service upgrade, this would generate $6 M of revenue per year.

Using the advertising multiple for  big social network sites suggested by Raj Kapoor (Managing Director at Silicon Valley’s Mayfield Fund)  of $.20 month of on site advertising revenue per user would add from $6 million active users an additional $14M per year for an approximate total revenue of $20 M per year.

Even for optimists, this kind of revenue numbers stand out sharply in contrast to the $750M valuation.

yrjo economy, software

It has been over 6 months since the last time I purchased a CD.  Meanwhile this does not mean that there is no music in my life. I share  music with my friends, I listen to samples online and watch videos on You Tube. I also regularly purchase audiobooks on Audible.com clear proof that I am willing to pay for mp3 files. Nevertheless, despite repeated attempts - I have been foiled every time I have attempted to LEGALLY download music from iTunes in Estonia.

Despite large displays and ads for the iPhone in Estonia advertising how to “easily” download music and movies to the iPhone - there is no LEGAL way to do this. EMT (the only authorized seller of iPhone in Estonia) store representatives taught me how to ILLEGALLY sign up with a Finnish address and trick the system with a foreign credit card or gift card number in order to be able to pay for my music  (a lot of effort required to get them to take my money).

Meanwhile, Google has provided Chinese consumers with a great solution - free music.  Recognizing the reality that Chinese internet users were downloading free music illegally anyway, Google teamed up with the music industry to provide music files for free to everyone, and funding the service by advertising revenue from the site.

President of Google China - Kai-fu Lee said to the New York Times that “We hope this will move the landscape to a legal model.”  The Times reports that according to IFPI (representing 1400 record companies in 72 countries) 99 % of the online downloads of music in China are illegal.

However, it turns out that  there is more than just moral obligations and desire to bring justice to Chinese online society behind Google’s decision. Google has been consistently loosing ground to Baidu, which has now over 60 % market share of  the Chinese search engine market.  The most significant driver of Baidu’s growth has been offering music search services and linking to sites that offer free downloads of music.

This kind of a dual system of treating European music downloaders as criminals and blocking music downloads from UK YouTube (subsidiary of Google), while creating a free searchable and downloadable database of music for Chinese users smacks strongly of hypocracy. Looking strictly at the situation - Google seems to be saying that in order for us to get the same opportunity - we need to start using alternative search engines and downloading more music illegally.

I for one, I am starting to do more searched on Mahalo.com - a very interesting and successful human powered (search results prepared by people) search engine started by Internet entrepreneur Jason Calcanis.

yrjo software iPhone, iTunes

I remember when HBO and Cinemax, the first pay Television channels, really started to take off in America in late 80s. My parents thought it an unnecessary expense, but once per year we got to watch HBO for free during the teaser campaign that showed us everything we were missing by being cheap.

When I got  to college I immediately ordered my very own pay channels for my dormroom  TV. However, after about 2 months I realized that I had already seen the vast majority of the movies on VHS or in theaters, and the stuff I wanted to see was never on, so I canceled the subscription.  Also I immediately found other uses for the $10-20 per monthly savings - like food and beer.

However, the next time I ordered HBO I did not cancel for over 5 years, until I literally had to  because I was moving back to Estonia.  The reason for such devotion and commitment is simple - Sopranos, Wire  and Rome. Three original series that were so interesting, so well acted, directed and made that it was worth paying for the subscription all year to catch those shows as they premiered.

Historical perspective

From US market introduction in late 1940s, it took  TV over 40 years to get people to pay $10 per month for content such as HBO and Cinemax. From US market introduction in 1920s, it took 81 years to get people to pay $12 per month for content such as XM and Sirius. Therefore, directly paying for content (not through) advertising is a rather new model. Moreover, it became successful only after the content offering truly became good enough to justify the expenditure.

Market reality

When I hear people pitching me with business ideas based on offering paid  web content, I ask myself two  simple questions - 1. would I read this for free -  if yes, 2. would I really pay for this on a month to month basis? Realistically 99% of the content is simply not innovative, interesting or useful enough to get out the credit card number and fill out the address for a subscription.

While Financial Times site, FT.com has 99,000 paying customers paying aproximately €13.95 per month, Barron’s has about 150,000 web subscribers, and that 50,000 people are willing to pay $6.95 per month for their New York Times Crosswords. But honestly, how does your writing quality and diversity compare to these sites?

You can only charge for content people really want

As a start-up, you almost certainly you cannot compete with NY Times, and Financial Times in volume of stories or even quality of the writing. This should put into perspective why it is so hard to get significant volumes of paying customers for your website.

However, resignation to the free model is the wrong answer in today’s long tail age.  If you are writing about a topic that is of considerable interest to your niche  you can make money by delivering specialized targeted content.  Consider the oil painting advice website that through ebook sales  and other revenue streams can make up to $100,000 per year, or the  parrot owner’s site that can make $400,000 per year.  The key is targeting your message to the relevant market and then providing them with content that they actually want.

Another words, again it is time to go to the cliche - focus on the customer. The entrepreneurs that really want to make money don’t just treat this as a mere slogan - they actually analyze who are their target customers and whether they are giving customers something they are willing to pay for.

p.s. A very insightful explanation for why FT has to charge for the content in the face of all the free information available on the internet can be found at the Seeking Alpha blog.

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Now not in China

Foreign Ministry spokesman Qin Gang, according to Reuters, stated that: “Many people have a false impression that the Chinese government fears the Internet. In fact it is just the opposite.”  Moreover, “China’s Internet is open enough, but also needs to be regulated by law in order to prevent the spread of harmful information and for national security.”

Then China shut down YouTube access.

I understand that aside from videos of a Humping Storm Trooper and a sleepwalking golden retriever there is a lot of other harmful information which may affect Chinese national security.

yrjo software YouTube

Printing money is hard work

When writing my March6 blog entry I wondered when we would the United States be added to the list of countries resorting to printing money to boost the economy.  That day has already come.

In the words of Goldman Sachs analyst Jan Hatzius, the Fed is going to the “kitchen sink” strategy of throwing everything it had to jolt the economy out of its downward spiral.

The Federal reserve is dropping a $1.15 trillion money bomb into the bond markets to boost lending. Yes this money will literally be eased out of the printing machine in major quantities (official term being “Quantitative Easing”). Ok maybe I am not using  exactly the proper description they teach in the MBA program.

Wickipedia defines QE as follows:

The term quantitative easing refers to the creation  of a pre-determined quantity of new money ‘out of thin air’ through open market operations by a central bank as the start of a process to increase the money supply. It can, more simply, be understood as an indirect method of printing money.

yrjo books, cleantech, economy, mobile apps, software, uncategorized, venture capital inflation

Skype

According to “sources” at the Counter Terror Expo in London,  the  cryptologic intelligence agency of the United States government  - National Security Agency (NSA) is ready to pay “billions” for technology that would allow listening in on Skype IM and phone call traffic. Apparently there are other clients lined up as well - German and UK clandestine services are also ready to pay big money.

Naturally this brought out the naysayers claiming that this message is just a diversionary tactic, attempting to assure the users of Skype that their calls are not already all being monitored “to get would be criminals to be more brazen.”

Estonia’s programmers should be capable of cracking Skype as they programmed significant portions of the system, but they should really rush to take the job as eBay (Skype’s parent company) may be tempted to recover some of its $1.4 billion it has already been forced to write off as a loss for the purchase of Skype.

I am joking of course — kind of…

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Author and designer Amy Jo Kim

Designing applications based on a game model can make them more effective and a much more fun experience for the users - which in turn should make your application more popular.

Just like I prefer working out while playing games versus hitting a weight bench for hours, I have to admit that I certainly prefer information presented to me in a format that incorporates fun rather than reading FAQ, Help or some other documentation.

Jeff Atwood in his post  World’s Largest MMORPG describes this approach to application programming and design as enabling applications that are “simultaneously complex and easily learnable.”

Jeff aptly references Amy Kim’s experience with “bridging the divide between game and web design.” She points out that lots of popular websites like YouTube, Flicker and others have picked up on this and are now using game elements in their UI - check out the opportunities for customizing and rating videos, keeping count of views, leaderboards and other game like attributes.

This may sound to some like a new trend, but in reality companies like Bank of America, Cisco, U.S. Army, Hilton Hotels, Alcoa, Volvo, Miller Brewing Company, Phillips Healthcare, Accentur, AOL and many others are already in the second generation of simulation and skills games to train their staff more effectively. The results have been very positive, with faster learning times and more engaged as well as better trained employees.

So developers, don’t be afraid to include some gamelike elements into your applications - you are making the users’ experience more effective and fun - even the serious companies are now doing it!

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My friend and gaming industry fan/expert Tom Bissell spent half a year in Tallinn writing a new book and recently found time to also publish a great article in The New Yorker magazine entitled “The Grammar of Fun“ regarding Epic Games’ best selling hit Gears of War2.  The article lets you take a peek behind the scenes of making blockbuster games. Epic’s Design Director Cliff Bleszinski offers some rare insights into the motivation behind some of the tone, mood and game-play elements.

Tom will soon have an article also appearing in GQ magazine regarding the gaming industry, there are also some rumors of a gaming themed book on the horizon.

I also strongly recommend reading Tom’s books Chasing the Sea: Lost Among the Ghosts of Empire in Central Asia (2003), God Lives in St Petersburg: And Other Stories (2005), The Father of All Things: A Marine, His Son, and the Legacy of Vietnam (2007).

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