Recently in eComm Amsterdam 2009 Category

Sean Park was one of the award winners back at the debut eComm Europe last October. He won the "Most Insightful Speaker" Award. The slides and video are on his blog. Below is a full transcript. Highlights are mine.

Sean: Good morning everyone. As Lee said, I'm a founding of Nauiokas Park. For my sins, I was a banker, a trader, for about 15 or 16 years. Maybe to my credit, I resigned from that industry at the end of 2006. I thought it was remediably broken. I've since started my new firm which is focused on principal investments strategic advisory in technology-enabled disruptive business models, financial services, and markets.

Why am I at eComm? I'm not really sure. I'm very pleased to have been invited. It's very exciting, but I don't know anything about telecoms, other than as a customer, both enterprise and consumer. But, I think there are a lot of similarities between the two businesses, and increasingly so, and that's because they're digital businesses.

I'm going to talk to you about platforms, markets, and bytes, the economic landscape of the sixth paradigm, or maybe I should have said the industrial landscape of the sixth paradigm. I'm going to try to answer these questions in 20 minutes. I'm going to be broad, not deep, so indulge me if I skate over a few points, and some of these I explore in my blog in more depth. I'm happy to discuss them afterwards in more depth.

In a world where everything can be expressed in 0's and 1's, the way we define our economy, the way that industries are structured, are they still relevant? If not, what new business models or structures are going to emerge, and maybe to focus on this and to give an example; what's the difference between a bank and a telecom company?

Before I get into that, I want to give a little bit of background in terms of a framework of what I'm thinking. What is the sixth paradigm? If you haven't read it, you should, Carlota Perez is a Venezuelan economist. She wrote a book called Technological Revolutions of Financial Capital, builds off of Schumpeter, talks about long economic cycles that, in her thesis, are driven by technological revolutions.

Since the first one of the modern era, which was the Industrial Revolution, she posits that there have been five. Each of these revolutions is accompanied by a set of best practices. The economy, the society, and the institutions need to adapt to this revolution they change. You get interesting affects in terms of how the economy diverges from the financial markets and a lot of this, again skating over it, has to do with the fact that technology tends to move exponentially or adoption of new technology moves exponentially whereas our social and cultural institutions move linearly. There is a divergence and it takes us time to get our heads around the way the world will work in this new paradigm. She calls it a "techno-economic paradigm".

Here are the five that she's identified: Industrial Revolution, Steam and Railways, Steel/Electricity, Mass Production, and the last one is the Age of Information and Telecommunications. My thesis is that we're coming to the end of that fifth paradigm and we're about to enter the sixth paradigm.

There are a lot of similarities, I think, between this one and the one at the end of the 19th Century, in terms of what we're seeing. Today, the financial crisis we lived through might be analogous to the oil crisis marking the end of the Age of Information and Telecommunications. I'm not going to go into that too deeply.

What will drive the sixth paradigm? Guessing, because as she points out you can only really tell in hindsight; it's very hard to identify these as they're happening, but I'm going to have the hubris of a banker to try to guess that maybe this is it; cloud computing - cloud computing may be a catch phrase, but ubiquitous computing storage might be the technology that drives the sixth paradigm, where you have "everything as a service".

She picks archetypal points - Intel's release of the first microprocessor in 1971 launched the Information Age. It's not that simple; it's a cluster of technologies, a cluster of people, but if you have to pick one for this, maybe it's Amazon Web Services 2006/2007 launching EC2 and S3.

Another factor driving the sixth paradigm is what I call "exchange ubiquity". I didn't really have a good catch phrase for this. Exchanges are now everywhere. Traditionally when we say exchange we think of financial exchanges. Betfair took the exchange model and applied it to another business very directly, which is the business of betting on sports. It goes beyond exchanges. Really, it's marketplaces and everything. iTunes is a marketplace. It's a marketplace that started for music, now videos, and tomorrow any digital goods - maybe. Facebook is also a marketplace. You've got the applications on top. Maybe it's a stretch, but things like Skype are marketplaces for voice communications.

Underlying marketplaces, and maybe this is where eComm - communications is at the heart of a digital economy. Alexis Richardson, who is the Principal behind RabbitMQ, which is an open-source messaging software, said "The difference between bank messaging and telecom messaging is disappearing." That's more and more true, every day.

The last one is maybe digitization. This one is fairly self evident but if you look at when I'm talking about digitization, it's transforming physical goods into digital goods for the purpose of trading and managing them. A great example is ISINs in the securities industry. Not so long ago, 30 years ago, the securities business was a physical business. You had certificates that were biked around the city of London, biked around, or driven around New York when you wanted to trade shares or bonds. Today obviously, it's a book entry. Every security is identified by its QSIP or ISIN.

VoIP, I'm not going to teach you guys anything. Obviously, voice is turning into a data business. Amazon, Jeff Bezos, his insight was with the ISBN database he could transform books into a digital good that could be sold and managed. There is obviously a physical supply chain, but it's right at the end of the business. The heart of the business is a digital business.

To take this a step further, there is a disclosure; Zoopla is a company we've invested in. It's a U.K. property portal, but it's a very interesting one. It has a database of prices on all 27 million U.K. residential properties and an enormous amount of metadata around it, and using AI, increasing every day. You can imagine a future not too far away where every property has a Zoopla standard identification number, and you can trade that property, manage it, insure it, mortgage it based on that number. If that existed today, or 10 years ago, we wouldn't have had the extent of the problems we had in the securitization markets, which were driven by bad data.

How does this translate? I think there are two people that are worth thinking about when you're thinking about how this affects the new industrial or economic paradigm, Ronald Coase and his Theory of the Firm; basically transaction costs drive the optimal size of a firm in any industry. I would posit that transaction costs are changing and dropping massively, and that's got to have an effect on the way the companies are structured, and industries are structured. I'm not sure it has, yet, but it's inevitable.

The second person I think is worth reading and understanding is Herbert Simon, who is a psychologist of polymath, who really did a lot of research on complex, adaptive systems. Our economies are clearly complex, adaptive systems and his thesis was, or what he discovered was that complex, adaptive systems wherever you found them, in nature, in our economies, in mathematics, tended to be more evolutionarily fit if they had a property called "nearly-decomposable," a mathematical property that essentially, without putting up the back of all the mathematicians here, means that systems that are formed of components and subcomponents, modular. Again, this is something that intuitively, I think all of us know, especially in the computer or software industry. You build programs in nested objects and decompose the complexity of the system.

This leads us to a world of bytes, and to give you a quick example, I'll let you read this, but I just want to prove the point that almost anything is becoming a digital good, in the heart of the system. At the edges it might be physical, but in the heart of the system, it's a digital good.

Here, gas, the industrial company Shell, you think that's not a digital business? I think it is. Markets, any structures that allow any buyers and sellers to exchange any type of goods, services, or information. Again, abstract markets further out and you could start doing that in this digital world. Platforms are absolutely key in terms of business models and strategies, going forward. This is something that, again, is second nature to the computing industry, but I think in the digital world it's going to become more and more relevant for almost industry.

You've got a new stack for a modern economy. You've got physical platforms, digital platforms, and if you haven't read Invisible Engines, and you want to understand digital platforms and how they work and the economics of them, you have to read this book. On top of those digital platforms, you have APIs, which serve applications and services at the top of the stack.

The traditional industry of corporate structure was very much a vertical structure. If you look at Tyrannosaurus Telecom and Bank Brontosaurus, these are vertical entities. J.P. Morgan, British Telecom, KPN, they have everything from top to bottom and they're organized on the principles, I think, of the fourth paradigm, which was Sloan's Mass Production hierarchies and where transaction costs were very high. It's not that these business models are intrinsically wrong, they were very well adapted to the 20th Century. I think they're very ill adapted to the 21st Century, and I think some of the things we've seen happen over the last decade, first in the telecoms industry in the late '90s and the financial industry more recently, are manifestations of this misalignment of the structure of these industries against the fundamental economic structural underpinnings.

I think the new optimal industry corporate structure will be much more of a horizontal structure. You can have various different components in the stack within the same organization, I think, but the way of thinking about it needs to be much more horizontal. You have physical platforms again, and this is something I always laugh about; I'm not in telecoms but whenever I read articles about the latest, greatest new thing a big Telco's doing, it's to avoid becoming a dumb pipe.

What the hell is wrong with being a dumb pipe? Being a dump pipe can be a great business model. In fact, what's more important; the problem with the vertical stack is the capital structure is horrendous to align properly to an organization that is organized vertically. Dumb pipes, you finance them with debt; they're cash flow driven businesses. There are a lot of businesses in the world that would be considered dumb pipes. If you look at the satellite business, they don't sell services. They sell satellite access. These businesses are performing very well. You just need to align your objectives with your capital structure with the way that you're structured. You have real economies of scale here. This is a dimension where size does matter and you can use it to good effect.

Next up, the stack - the problem with these stack analogies is you have bottom, middle, and top. Everybody thinks that minds are tuned to think top is better. I'm agnostic. They're just different things in the stack. Digital platform, it's a substraight - you create a substraight for an ecosystem of services. Selling trust, I think, is one of the ultimate things you're doing. It's necessary that you have the technical capability to build something useful, but it's not sufficient to be successful. I think to be successful, you need to effectively sell trust that it will work and that people can rely on it. In doing so, you create markets.

Here again, you also have economies of scale, different economies of scale, but economies of scale nonetheless and probably more pointedly, this is where Metcalfe's Law of Networks, especially for multisided markets comes into effect. I love quote from ReadWriteWeb, "Well built developer platforms are the future of every industry," and I think they got that spot on.

Digital platforms, with APIs allow people to build services and applications at the edge and this is where innovation should happen. This is where you need rapid adaptation. This is the Cambrian explosion. This is where any big company will structurally fail if they try to play in this edge.

I speak from experience. I tried to do this. My last employer, Dresner Klein, which is part of Alliance which is a huge financial conglomerate, I guess my "aha" moment was understanding it wasn't because any particular manager or group of management was dumb or didn't get it, or was wrong. Structurally, these big firms, actually the better run they are the harder it is for them to innovate at the edges because innovation is looked at as a virus and the corporate antibodies, the well-oiled machine does everything it can to stop that from happening.

Here you have dis-economies of scale. Dis-economies due to complexity, so bigger here is not better. It's worse. It's not even neutral. Low capital intensity - take an extreme example, the startup world, you're financing it with options through equity. You don't have debt finance. If you look at businesses where you have a mix of the two, and there are a lot of them in the financial business because you've got risk capital; Imagine the telecoms business, as well, risk capital at the bottom which is almost the equivalent of a physical platform, which might be debt financed or the expectations in terms of returns are limited but relatively certain. At the top you've got very deep, out of the money options, highly volatile, low capital intensity. You try to marry those in the same instrument, the same capital structure and nobody is happy.

Coming back to this example of Shell, in that example; who is the bank, who is the Telco, where is value created? It's not as obvious as it first seems. This is a friend of mine, Richard Water who works for IHS. He said, "Isn't it just all FX?" It's gas molecules, FX transaction to electrons, FX transaction to Sterling if the electricity is sold in the U.K., FX transaction to Dollars; back to Shell, paying for the gas. It's all a digital transaction and just modifying the same thing across the value chain.

Already, banks and telecoms are more similar than they look, and a lot of digital businesses are. If you look at the process stack of these two industries, and you could probably expand it, you've got enormous similarities. In the front office, again this is probably least intuitive, but if you're managing massive trading flows, they're digital now, the problems that you face are very similar to the problems that telecoms operators face in transacting and managing massive flows of data over their networks.

The other factor is customer account service: online payments, security, customer statements, customer support, and the trust around that. These are maybe more obvious, but again, it's the same thing.

If we're not there, or if that's not the right business model, then what is? I think the companies that will emerge over the next two decades in the sixth paradigm, that will become the giants of the sixth paradigm, are companies that are Messaging and Co., Trust Inc., Identity Ltd., where they're integrated along the horizontals. That will allow us to have an ecosystem of banking as a service.

Disclosure, this is a company we've invested in, FX Capital Group, RabbitFX. They offer FX physical brokerage, so if you need to buy Euros, if you live in the U.K., or vice versa, they offer one thing, one very small thing, very simply, very well, and they only exist because they have an enormous infrastructure e-platform, digital platform underneath them - the banking system, the payment system, the trading system that allows them to do that.

Another example is a fantastic example and really is a convergence of telecoms and banking. It's Frontline SMS, some of you might have heard of them. They just launched Frontline SMS Credit. They're focused on developing markets but they could operate anywhere, I think. This is a company I'm not involved in but I'd like to get involved in. They actually run as a not-for-profit, but they have built a platform that allows you to do messaging, building off of the global mobile network, via a computer, to do mass messaging and manage that. With the credit adaptation, their tagline is fantastic "It's a bank on a laptop" and that's what they'll be able to offer.

On the telecom side of the equation, voice is a service. We have that already, companies like Ribbit and others, so what I'm saying is not that companies won't be organized or have elements of all of this stack, but if they do have all of this, if it is a very large company, they need to be thinking about it in this way. Then perhaps, maybe get involved in some of the stack at the very top level, as a proof of concept or shop window, and also where it's obvious they have brand value.

Telecoms company and voice, banking and some of the payment services - they need to have open architectures and learn from the computer industry; where are the AWSs of banking, of telecoms? Where are these platforms? Why isn't J.P. Morgan opening up its platform and saying, "You guys innovate on top of it," instead of trying to do all of it in house? Where is the AppStore for finance?

You look at companies like Amazon, Apple, Facebook, Microsoft, all enormously successful, and much of their success if predicated on the fact that they build these platforms that allow other people to innovate and work on top of them.

My conclusion is that in our industries of finance and telecoms, we need to shake up the stack and we need to think of this new industrial landscape. We need to start thinking in a context of a sixth paradigm, not a fifth paradigm; 21st Century businesses, not 20th Century. Thank you.

Chair: That 20 minutes should be expanded into a book. It's quite clear that all the topics covered there each would be a chapter. I'd be really excited to see if a book gets made out of it. I think a book should be made out of it. I really enjoyed that. Questions from the audience? We have Jim here. You may need to stand up so we can see you.

Audience: I notice an emphasis, everyone wants to talk about the bits, and Negroponte used to think we have to talk about both bits and atoms. The atom side of what you just discussed, I've worked with hardware distribution models. Again, it's the same sort of thing. The distributor is running on top of a layer of financing to move goods from one person to the other. I'm really seeing and I'm getting into that area again. My question is; have you looked at these in terms of that sort of thing too, in terms of distributing hardware and hard goods?

Sean: I think the poster child there is probably again Amazon. Amazon couldn't exist or their business wouldn't exist without a very excellent logistics and distribution arm. Part of Bezos's genius was A) raising a billion and a half dollars from a convertable bond before the dot com bust happened and B) spending that money building the physical infrastructure he needed to properly run his business.

In this vision of the future, the point is not that the physical world will disappear, but the management thereof can become an abstraction, which liquefies it enormously. Both the management and a point you raised that I really didn't touch on, the financing, and one of the reasons I left banking was I became increasingly frustrated at the way that finance was delivered.

The way that banking and finance is delivered hasn't changed in 400 years, since Monte di Pietà in Italy in the Renaissance. It's the same thing, just bigger, faster, better. I'm sure that now with the tools that we have, it can be much more modular, flexible, adapted - this idea of abstracting from a pool of risk capital to the way it's engineered and placed.

The great example is a company we're invested in called WeatherBill that does weather insurance. The way we build the company is the underwriting is done by a weather fund in Bermuda. We've abstracted - all we do is price and originate the risk within WeatherBill. Again, the reasons the banks don't like that is that when you do that, there is an element of transparency and the more you do that, there is more and more transparency because the stack can only work if there is transparency. Banks love the fact that there is this big black box and there is opacity. They try to, and are often very successful in taking oligopolistic rents from that lack of transparency.

I think inevitably, the tide is moving that way and you'll get this abstraction of the economy into various different layers that's made possible because of this digital technology. Conceptually, you probably could have thought of this 200 years ago, but actually translating it into something that pragmatically works, at a cost that is not prohibitive is only something that's happened in the last few years, and it's continuing to happen.

Audience: Do you think that such platform companies should operate publicly toward the end customers, or should they hide between [00:24:42.06 ?] aggregating platform services vertically, and proposing niche services towards parts of the classical customers for big [00:24:53.10?]

Sean: I think it's the latter. I think it's a mix. For instance, take the example of either a telecom or a bank, and it was a point that I tried to make at the end; not that they should completely retreat from that edge, and I actually think that could be dangerous. You want to have, whether it's a shop window or certain areas where your brand or expertise really does add value at that part, and even the last thing and probably the most important over the long term is just to keep yourself honest, eat your own dog food, to have applications or services that are consuming your own platform. It's an early warning system of does it work or not.

I think the risk is, and humans work as pendulums, maybe the pendulum will shift too far the other way. When I speak to people, I probably emphasize more this idea of really separating those two businesses, because most of the people I speak to or most contexts is they're so deeply embedded. I'm trying to over exaggerate that separation.

The short answer is I think it's a mix, but the way that management thinks about it is absolutely important. It's not trivial, the fact that if they're looking at the business in that way, even if they're doing every element along the value chain, it's very important for the way that they're going to structure their offering.

Audience: Your proposition of "everything is a service" seems predicated on people neither wanting to own things or that providing them services is always the most efficient, when practically speaking you're going to have issues of network capacity, or availability for example. How do you blend the "everything is a service" vision with the more pragmatic desire or requirement of people to own physical devices, applications, and so on.

Sean: That's a good question. First of all, if Carlota Perez is right and then in terms of her thesis of how the economy evolves, and then if I'm right in terms of this is the start of maybe a new paradigm, I think what you just raised is a perfect example of the divergence in technology in our social and cultural intuitions and frameworks that we work in.

I think for the next few years, there is going to be an increasing disconnect between those two, and at some point, maybe 10 or 15 years from now, it might actually boil into something that's quite traumatic for the economy, as the technology pushes our economies into that direction of everything is a service, and our cultural prejudices mean that we're not adapted to live in that kind of a world. Forty years from now, those will realign.

I think the reason these cycles happen maybe this way is partly generational. The cycles have to do with human lifespans, to some extent, because people who grow up in a certain paradigm get comfortable with that. They actually reach positions of power very late in that paradigm, probably, and that's where you get this tension. But, the new generation coming through, so anyone who is born today or my children for instance, probably won't have the same context in terms of how they consume goods, services, and how they relate to the world around them.

I think naturally, that adaptation will happen only with time, and in the short term, you'll get the classic tensions between where the technology is pushing us and us digging in our heels, not wanting to go there.

Chair: Thank you very much.

Sean: Thank you.

Chair: I think the room is filled up enough. On that note, I would like to say again a very warm thank you to the headline sponsor, Skype. Again, it allows us to be together in a nice venue, with great production, instead of a sort of low-ceiling hotel, sort of lobby place with nailed down carpets, which really doesn't do it for me. I would like to welcome Sten: Tamkivi, all the way from Estonia, who is Skype's chief evangelist. A very warm welcome for the keynote of the headline sponsor.

Sten: Good afternoon. It's a pleasure to be here, and thanks Lee for pulling together eComm and I'm especially happy that this happens, not only in the U.S. where most of the things in this industry happens, but also in Europe. As you might know, Skype also comes from Europe and is one of the few success stories coming from here.

First of all, there is the usual thing that I do that I doubt if I should do here, but how many of you actually use Skype? Thank you. I love you too. I really wanted to see 100%, for the first time in my life. I usually get about 80%. Thanks for that.

What I wanted to talk to you about today is some of the basis of this talk is actually public knowledge. Skype has been around since 2003, only, so we're a six year-old company. Some might call us a startup still, but during that period, we have significantly gained market share of international calling minutes, all over the world. In 2005, maybe there was less than 3% than all calling minutes, internationally, going through Skype. Last year we crossed 8% and it's growing.

I want to give you some background around why this is happening and on which fronts it is happening, and what are some of the very specific issues that we see when we're addressing a truly global user base. Those minutes are generated by about 520 million users that live in 225 countries, all over the world. That's pretty much every single country and territory in the world, except for one, and you can guess which one doesn't have Internet.

Why are we growing? If you think of that, there have been VoIP applications before. There have been IM applications before. There have been hybrids of those before. There have been ones that are based on open standards. There have been other attempts based on proprietary approaches. Why Skype?

The rest of my half an hour we will split into two buckets. I will try to bring those buckets together again later. First, there is this notion of rich, intimate conversations you can have when you don't have the limits or barriers of cost. Earlier, I was looking at Twitter. One of the earlier presenters here was speculating on how much revenue Skype drives away from telecoms if we serve about 100 billion minutes a year. My answer to that is it's not about pulling those away from telecoms because most of those minutes probably would never have happened if we had to pay for them at the high rates. A very typical example is a video call, which is always longer than a voice call, because of the rich and immersive experience you have.

A good example of that is if you have ever tried to have a sensible voice conversation with a four-year old, over the phone. That usually lasts for three minutes, four minutes, and that is the attention span. You put the same kid on a video call with the grandparents, and all of a sudden you get an hour of playing together and drawing together, and all of these other things. Calls become longer and calls become more intimate.

At the same time, the growth of Skype, or the reason we can develop the product is that we make money from interconnecting to the PSTN network. All of our investments, after the first rounds of venture capital, there have been no cash injections into the company. We've been profitable for about 11 quarters now. We keep reinvesting the money we make from the PSTN to make that first rich bucket much better.

Let's talk about the video bit first. When we ask you users how they see Skype and the contact list of people they have on Skype, it's really interesting; the average contact list on Skype is a single digit number. The average Facebook contact list, for example, and they do an excellent job of recommending people you might know, and all of these other drivers that drive people on the contact list, it's tens if not hundreds of times bigger. Our users tell us that it's quite a harsh decision if I want to add this person to Skype because this means that I really want to talk to that person. The value of the members of that contact list is much higher, or they are much more intimate parties in a conversation that's about to happen.

Recently we've seen, and this is still a heavily growing number, which actually is a bit scary, about 1/3 of all call minutes - again, we're serving 100 billion of those a year, 1/3 of them carry a video signal. At peak times, when there is something special happening, like Christmas or New Year or Mother's Day in some part of the world, this goes well above 50%. It's huge. Video is out of the geek sector. Video reminds me of the early days of Skype. In the office, a few of the developers were placing bets on how many users Skype would have after launch. One of the core developers said this is never going to fly because people don't have headsets. Fortunately, he was wrong. Skype was valuable enough that people got headsets.

We've gone through the same transition from approximately 2005, where again we launched video and people didn't have decent cameras. They had trouble setting it up. Different cameras have different drivers under different operating systems and all these other hassles. Now, the video calling part, because of the huge value it provides to people, people have gotten over that. It has helped that Notebooks come with built-in video cameras and all of these other enabling factors. This is for the masses. It's not a technological subset of users or something like that, anymore.

Moving onto the PSTN bit, or the International Long Distance, or ILD as some people call it and what's happening in that space. ILD, over the last five or six years has been pretty stably growing at about 4% a year. It looks like a decent number. Anybody who is trading stock, it looks on the lowish side, especially if you look at the prices of telecommunication endpoints, like phones going down and minute prices going down. If you look behind those numbers, that's actually what has happened. The growth is low because the volume is growing at a decent rate of 13% on average. What happens behind that is that both the retail and wholesale prices at which you can buy minutes when you have tens of millions of them to connect, then that sort of evens out the decent 13% growth in volume, and the size of the industry grows much slower.

There is a definite shift of those minutes going mobile, and going mobile in both directions - between mobile phones and also from mobile to land line and from land line to mobile. I'm sure that everybody knows that so I won't speak about that much longer, but there is something much more interesting which Lee kindly started introducing. These minutes are spread across many, many more calling corridors or country pairs than they used to. Just as a comparison point, there is one of the leading research providers on the market still maps out and monitors about two thousand top corridors. That is the old school telecom view of the world, that these are the corridors that matter.

When we look at the actual Skype usage, there are about 40 thousand calling corridors that are worth paying attention to. Just to give you an example of what a calling corridor could be, in the U.S. to Mexico is the most active international corridor there is in the world, and they serve about 500 million hours of calls a year. That gives us the number one ranking. That's quite a decent amount of calling minutes.

If you look at the top 30 calling corridors, again out of the 40 thousand or the 2 thousand that are currently researched in the world; those top 30 U.S. to Mexico and 29 others only sum up to the 37% of all calls happening. There is a 63% long tail that nobody has ever been able to address because the telecom industry had always been very focused on the local market, or some of them are regional and some may cover a continent quite well and focus the business and offerings there. Before companies like Skype, where we are not a telecom but we are a software provider that utilizes, as Michael put it so nicely this morning, the pipes that telecoms provide, with our software solutions and very flexible software solutions we are able to address this whole global space with pretty much the same offerings. It doesn't matter which country in the world you live in; you can still get access to Skype-to-Skype calling and SkypeOut calling to PSTN connections.

Another obvious statement, but let me go a bit behind that. When we survey our users, taking the intimate, rich, full conversation together and the basic needs of just talking to someone at an affordable rate, in the U.S. about half of our user base tell us that they are using Skype for making video calls. If you ask the same question in the users from China, and there are many other markets that I would say are far more emerging than China is as far as Internet penetration and the availability of decent computers and all of that. In China, you can cut that number into half. On the flip side, if you talk to those people, that has historically been a weird situation because Skype brand is so much connected to real time, live conversations, many people don't know we have a really cool, persistent chat system or the IM system. In the U.S., 5% of the users say they use Skype for IM, whereas in China you would see that number being 1/4 of the users. That starts to build up to a point where there are extremely high geographic differences in what people see as communication and what are the modes of communication those people are willing to go for, balancing their equipment, wishes, and needs for richness and so forth.

Taking that, you can make a much more interesting view on the long distance calling space than the previous mobile chart was. It's too obvious that people are using mobiles and don't want to use land lines. If you're running a global communication network, or a cloud of conversations, then one way you can look it is how are these conversations happening between the developed and emerging markets? On the bottom, on the X axis you can see the originators and then the destinations. You can split those in pairs.

What I did was to take the top 30 corridors, again for the sake of sensible data processing, not the whole 40 thousand, but split that out and it starts to build out something very interesting. Developed-to-emerging is the most important way of communication, or initiating communications among the highest volume corridors in the world. Of course, U.S. to Mexico is a great example of why that is. It's usually people moving from emerging markets to find a life in a more developed market, and then starting conversations back home.

Secondly, from developed-to-developed, again it's quite obvious. If you have a bunch of what we call developed countries, by GDP means or whatnot, in Europe, each of them call the U.S. enough times, and the U.S. calls a bunch of them back, then you get to 10 out of 30 top corridors. That's understandable.

Compare those developed market originated corridors to the ones originating from the emerging ones, and it's a really sad picture. It ties in with what I showed you with the IM interested users in Asia, for example, there are probably a number of good reasons why they don't find - for long distance conversations, what is blocking them of using real time, rich, audio-based, video-based calls to satisfy that need. If you try to generalize this, this is a very weird attempt on a graph; if you have the emerging markets on one side and the developed ones on the other, on the emerging market side, the poorer the country the less Internet penetrated the country. The less telecom penetrated the country. If you look at Africa, there are tons of people who will never have access to a cable in their life, and maybe if they're rich enough they will get access to a mobile phone, which has coverage in their village.

If you think back to the good old Maslow pyramid of human needs, if you have those needs of clean water, and children's health and education and these needs unsatisfied, your price sensitivity is extremely high or the alternative cost of putting money behind communications or making communications happen. You have many more things to worry about and there needs to be something special about communication to even compete with the daily problems you're actually facing.

Whereas, in the emerging markets, the capacity or the capabilities of even handling any real time communications is almost zero. For the sake of simplicity, take the GDP as the basis of how to compare these countries. As a side remark, why I'm stressing it's for the sake of simplicity, there are some other real trends which are probably worth a session on their own, whereas in a very developed market, very developed user segments, when you go into testing new solutions much more eagerly, the actual reliability of communications can go down. Let's say there is an ex-Soviet country with a phone system installed in the '50s but basically works. On a day-to-day basis you might have a better connection to the outside world than the guys who are trying the latest version of LTE on a device that's not out of beta. That's a different story, so let's stick to GDP.

As you move more towards the developed markets, then you will see that people don't worry; the price sensitivity goes down enormously. If you live in the U.S. or in Europe, you will probably have a bunch of competing telcos who are offering you a TV Internet connection in a triple or quadruple package which has also zero cost calls to 30 or 50 countries in the world, so the last thing you worry about is how you are able to afford that, or you're not going to switch to some Internet application because of the price. The price sensitivity goes down and that's not the selling argument for those people at all, to come to emerging communication tools.

Whereas, because they have their needs on the lower end of the Maslow pyramid solved, they don't worry about food, water, and education; they have time to worry about other things like seeing their grandchildren that live on the other side of the country or on another continent, seeing their children who went to college on the other coast of the U.S. and so forth. Both the capabilities but also the drive or need for richness, intimacy, and they have the time to spare to keep in touch with their loved ones, and all of the soft things start come into play much more.

What happens here is that over time, theoretically taking the assumption that humankind will develop slowly but steadily towards some common level of development, which I don't know if you believe it or not, you can draw the line or move the line from right to left a bit, so there are more countries in the developed segment or less in the emerging but it's highly unlikely that it will ever hit 100% that everybody is zero price sensitive and 100% richness oriented, but that's how the market develops. It's not flipping from one end to the other or one end is not coming to replace the other.

With a company or an emerging communications provider, whether it be software or hardware, some new business model based on the existing software and hardware, or something else; as long as you pick one of those ends, what I'm saying is that in the foreseeable future, there will not be a high quality video conversations provider with a global footprint. There will not. People who will play in that segment will always be limited to the developed or well established communication markets or telecom markets which they can build upon.

On the other hand, establishing a next venture, and MVNO that's trying to do a price arbitrage, a new calling card system, or anything like that which is only focused on price with the same low or narrow-band audio quality, with a - what is the number - before, a call setup time with 8 seconds on both ends and all of these other things, the non-quality things will never be able to have a global footprint because people in the developed markets just won't care and it will help the number of people in the more emerging markets or expats from emerging markets in the old markets. It's still going to be a niche.

In order to truly cover the global communications needs of humanity, you have to do both. Basically coming back to the title of this presentation, there is the love and peace component and there is the good old analogy PSTN component that you need to serve in order to truly enable the world's communications as we wish, as we are doing at Skype. With that, I am running ahead of time so there is plenty of time for questions, if you have any.

Audience: What happens if you succeed and get 100% penetration? What do you make money on?

Sten: First and foremost, it's fortunately some while ahead. Skype has 520 million registered users and a subset of those are truly active users. There are about 1.2 billion PCs connected to the Internet. There is about 2 billion mobile phones that are equipped enough to run the a third-party voice application basically. All in all, there are 6 billion people in the world. Even though half a billion users look really big and we're happy to have achieved that in the first 6 years, at the same time it's still the very beginning of the curve. In turn, that means that we have a lot of time still to figure out sensible monetization models, if and what we need to do with the non-PSTN users, experiment with those, and we're in no rush to roll something out on a global basis and make Skype paid or anything like that.

Audience: Would you see an advantage or a disadvantage for Skype to switch from its proprietary protocol to an open standard like SIP?

Sten: We've been quite successful with a proprietary one, so any switch like that would need a very good reason. It's one of those where you don't fix what's not broken. I think what is more immediate for us is the question of how to interop with others, and something we launched this year into beta was Skype for SIP. The other related project is Skype for Asterisk; where it's about how do you connect to other end points who are not Skype nodes; which of the standards of protocols are the ones you pick to communicate with those. As you can see, we're doing SIP and Asterisk in parallel because that gives us new learnings of what works, what doesn't, where do open standards fall short.

If you think back into late 2003 where those decisions around Skype's architecture was made, then I don't think we would be where we are if we had gone with open standards at that point. Some of those reasons have been mentioned today, as well. If you ask the users why they picked up Skype in the early days, they usually say Skype solved the problem of setting up the client. Me personally, the first time I tried to use a VoIP client in 1995, or 1996, and being a fairly technical person, I couldn't get through the proxies and ports and all this other mess I had to set up. Once I got the client running there was nobody to talk to. Those two problems, Skype solved, and a lot of that solved is our proprietary invention of how to solve it. That's explaining where the roots are. Today, we are looking more to how we open up to these open standards rather than replace what we have with something else.

Audience: To follow up on Adrian's question, there have been a lot of rants on the Web about the interoperability behind your P2P technology and the fact that Skype might be bought out by ventures and peer-to-peer technology would then be part of the [00:25:09.29 ?] software.

Chair: What was the question? I didn't understand it.

Audience: The question was would you go on open standards because of IP problems?

Sten: Of course, I can't comment on ongoing litigation, but right now we're just running our business as normal.

Chair: Let's not have blog-type questions. People can go on for a week commenting on blogs online in these topics anytime. Are there any other questions for Skype?

Audience: We've just heard you refer to your various corridors, calling corridors between emerging and developed countries. I couldn't help noticing a lot of them seem to parallel some of the biggest remittance routes in the money transfer business, and some of the ones that have outrageously high transaction fees attached to them. Have you ever considered implementing a credit transfer or mobile money transfer like an extension for Skype? It seems intuitively almost obvious that given this has become such a big part of the business, that you'd be interested in that.

Sten: We've done experiments in that space, and most notably Skype has been since 2005, part of eBay and another company that is part of eBay is PayPal. We experimented with some product integrations with PayPal, like bringing PayPal send money to Skype between users and all of that. I think the main hassle, which again has been mentioned here today, is the individual regulations of individual countries are not ready for a pan-Internet fluid payment system. In the worst case scenario, and that's the business where PayPal is, that PayPal is becoming a bank in more, and more countries as far as legal status. We believe our mission is to enable the world's conversations, so we have not decided to take that step and start becoming a bank. We have enough hassle with many countries trying to regulate us as a telecom even though we're not. That's probably mainly a question of focus.

Chair: If you have questions, it's quicker if you stand up, so you're seen.

Audience: Just a question about are you planning to develop the social network capabilities of your platform? Are you planning to develop Skype into more of a social network platform itself?

Sten: What do you mean by social network, first?

Audience: I guess I kind of view Skype as a social application in that it allows you to connect with others and have presence, and that is an overlap with some other capabilities within social networks like Facebook and others. To what extent are you growing that capability set within your platform? Are you thinking about Skype as a social network itself?

Sten: Definitely, I think Skype is a social network because there are people, real people, there are social connections, and there are graphs you can analyze. I think what you're more referring to is exposing that all more in the clients and all of that. Yes, there are some things we have done and probably will do in the future. One thing that comes to mind is a few years ago is we did an integration with MySpace when MySpace was the number one social network. You didn't have to build your own profile on Skype but you could link to your MySpace profile and pick the new image from there and so forth. For the shared user base it had some value, but it was not something that was a game changer.

We are taking that carefully though, because of the intimacy slide that I showed. The nature of the usage pattern of people currently relying on Skype for their conversations is heavily, or the perceptional value they see is heavily different than the web-based social networking sites. If you mix them up too aggressively, like as a Skype employee and a heavy Skype user, I have 1,000 plus Skype contacts. That's a geekish thing to have currently. The clients are much more optimized for the segments of users who have a smaller number but more intimate relationships on Skype and they use those other sites for the whole thing. I'm sure you will see more experiments with different partners and opening of different APIs on both sides, and what not, happening.

Chair: We have time for one or two more quick questions.

Audience: I'm from Slovenia and I have a user question regarding you have peer-to-peer technology but it's not a pure peer-to-peer technology because it has a client server part. What happens to me, for example, I have a Wi-Fi community at home. When the Internet connection is broken because of a break in the fiber connection somewhere, I couldn't communicate with my community. Are you working on that area also, to be the pure peer-to-peer application?

Sten: I'm sorry; I don't think I got the question.

Chair: The question was Skype is a hybrid, it's a peer-to-peer, and it's centralized in terms of having a login directory. Do you ever plan to go fully decentralized?

Sten: I think we're looking at use cases, case by case. There are some things - for example, we keep your contact list on the server. When you install a new computer, log in, you get your contact list back. Some things like media streams only use peer-to-peer so we find that hybrid to be very flexible.

Chair: It's hard to see the audience; it's a little dark. If there are no more questions, please thank our headline sponsor, Skype and Sten:, for coming all the way. Thank you. We appreciate it.

Sten: Thanks Lee.

*** First Call for Speakers is now open ***

Due to the exceptional demand for both speaking at and sponsoring this year's event, we've decided to start the search for speakers and sponsors earlier. This will allow us to make a series of "calls" enabling the influx to be partitioned into rounds, giving a degree of preference to those who expressed interest during an earlier round.

Take this to be the first "alpha" round. Even though it's not reached the stage of a formal call, before expressing interest, please read over the last formal call.


Amsterdam, Fall 2009
Date TBD but initially we are considering the first two weeks of October. Venue TBD. Pre-register interest as follows:

• 2009_sponsors@eCommEurope.com (pre-register sponsor interest)
• 2009_submissions@eCommEurope.com (pre-register speaking interest)
• 2009_suggestions@eCommEurope.com (all suggestions welcome)

San Francisco, Spring 2010
March 2-4, San Francisco Airport Marriott. More details in two months. Pre-register interest as follows:

• 2010_sponsors@eCommConf.com (pre-register sponsor interest)
• 2010_submissions@eCommConf.com (pre-register speaking interest)
• 2010_suggestions@eCommConf.com (all suggestions welcome)

Potential sponsors please remember that ordering within a category is based on date of confirmation and that Platinum positions for eComm 2009 sold out two months in advance.

(Stay Connected: Weekly Update | Blog | Facebook Group | Twitter Channel)