Disrupter Man goes after TV this time

A great piece by my friend, Kevin Maney, at USA Today. Enjoy!

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SAN FRANCISCO — Few entrepreneurs have truly disrupted a single industry. Niklas Zennstrom has done it to two — and he has his sights on a third.

Zennstrom and business partner Janus Friis founded file-sharing service Kazaa, which by 2001 became the world's favorite way to steal copyrighted music. Entertainment companies all over the world lined up to sue. Next came Skype, the first globally popular free Internet calling service, which crumbled international telecom company business models. EBay bought Skype last October for $2.6 billion, and Zennstrom is Skype's CEO.

Now Zennstrom and Friis have a side endeavor. They've co-founded a secretive Internet TV venture called The Venice Project, which analysts say could threaten the viability of network television.

"There's never been a secret sauce" to his disruptive success, Zennstrom says with apparent modesty while flashing a grin. He creases his 6-foot-4 frame into a stuffed chair in his hotel room and looks more like a rumpled high-school chemistry teacher than a high-powered executive. "It's just that our timing has always been good."

In part, he's right. Zennstrom and Friis have never been first with a technology: They've followed with the right thing at the right time. Still, Zennstrom has established himself as a man the tech industry watches carefully. Hence the attention paid to The Venice Project, even though hundreds of video sites already crowd the Internet.

"Niklas and Janus … are two of the most extraordinary people I have ever met," says Tim Draper of venture capital firm Draper Fisher Jurvetson, which helped fund Skype. "I think they will succeed again and again."

Zennstrom, who hails from Sweden and lives and works in London, rarely gives interviews. This one is happening on his first trip to the USA in five years. He stayed out of the country to avoid being served in Kazaa lawsuits, which were recently settled.

He is just 40. His take from selling Skype to eBay is estimated at more than $400 million. Investors stand ready to back him. Zennstrom says he pledges himself to Skype and eBay for three to four years, but probably no longer.

"Don't expect to interview me in 20 years and I'm still CEO of Skype," he says.

In other words, Zennstrom could be starting companies for a long time to come — probably with Friis. Zennstrom is 10 years older and more of the leader. Friis is the hacker and tinkerer who gets the technology off the ground.

The biggest question about Zennstrom is whether he's good only at launching disruptive companies, not at building them into substantive businesses. Tech analysts say they still don't understand why eBay paid so much for Skype when similar free Internet calling services are offered by everyone from AOL to start-ups like Jajah.

136 million and growing

In an hour-long interview, Zennstrom does not seem to have an outsized ego — until he talks about his ambitions for Skype. When he started it in 2003, he told Fortune, "There is multibillion dollars in potential in Skype. We're not here to try to make some small business."

"It's the same plan," he says now. "We have 136 million users. There aren't many telephone companies that have more customers. We are still in growth mode. In terms of revenue per user, Verizon gets much more, but they also have much higher costs."

Zennstrom met Friis, a Dane, while working for Swedish telecom company Tele2. They left in 1999 to start an Internet company together to build a fast, easy-to-use technology called FastTrack. It was peer-to-peer (P2P) technology. It had no central data center, borrowing all the users' computers on the network to store and forward files.

It's a technical challenge, but if done well, P2P can be a cheap, fast way to move large amounts of data around the Net.

On top of FastTrack, Zennstrom and Friis built Kazaa, which surfaced just as the music industry shut down Napster in 2001. Millions of Napster users had become addicted to free music and switched to Kazaa because it was easy to use. Zennstrom and Friis became the Recording Industry Association of America's chief target.

After years of cat-and-mouse legal games, Zennstrom, Friis and Kazaa settled with the music industry in July for $100 million. They've rid themselves of Kazaa ownership, selling pieces in a series of legal maneuvers.

Kazaa set the stage for Skype. While considering what to do after Kazaa, Zennstrom says he and Friis thought about how "any digital content should be delivered over the Internet because it's so much more efficient." They then thought about the high cost of international phone calls, which are just another form of digital content.

"I remember us saying (around 2002) that Internet telephony should work by now," Zennstrom says. "We certainly didn't invent Internet telephony, but it wasn't very good and was too hard to use."

They realized that P2P could do for phone calls what it had done for music files. "We learned a lot by doing Kazaa," Zennstrom says. But they had to create a more sophisticated P2P, because calls must reach the right person and work with good quality in real time.

Still, when Zennstrom and Friis started Skype, they were considered pirates and outliers. "It was difficult to hire and raise money," Zennstrom says. But then Draper, who has always had a penchant for funding tech renegades, chipped in $8.5 million. "I recall first meeting Niklas in London," Draper says. "I had set up a meeting for half an hour, and I stayed for two."

Skype became the fastest-growing start-up in history. After 12 months, it was on pace to grow five times faster in numbers of users than eBay did in its first years. Seeing that, in 2005 eBay came calling.

Learning from eBay

"We didn't plan to sell," Zennstrom says. "We started a conversation with (eBay CEO) Meg Whitman because we thought we should work with eBay." He actually thought eBay wouldn't like Skype because a Skype voice connection could be a way for sellers and buyers to cut deals that eBay couldn't track.

Whitman saw something else: a fast-growing business that might also help eBay users talk to each other and close transactions more easily, especially those that involve big-ticket items like cars. "We always seek to remove friction from e-commerce," Whitman told USA TODAY soon after the Skype deal. "It leads to a better experience and an increase of velocity of trades."

She also liked Zennstrom and Friis. "They are impressive entrepreneurs who will be a great cultural fit with eBay," she said.

Zennstrom got thinking, too. He didn't want Skype to do an IPO in the dot-com bust years. Based in Europe, which is not known for Silicon Valley-style start-ups, Skype had trouble hiring executives who had been part of hyper-growth tech companies. And while Skype was growing like mad in Asia and Europe, it had trouble penetrating North America.

"We realized if we partnered with eBay, they could help us," Zennstrom says.

Whitman has been criticized for the deal by analysts and investors. She has not clearly shown how Skype helps the eBay site — though, on the flip side, it's clear that eBay's marketing muscle has helped Skype grow 122% in North America in 2006.

"In general, they're not doing a bad job in the VOIP (voice over Internet protocol) space," says Mirabel Lopez, vice president of research at Forrester Research. She pegs Skype revenue at $200 million in 2006, up from $60 million in 2005. "Since most people use it because it's free, the fact that they're making money at all is a good thing."

Zennstrom insists he's happy with the marriage. "You never know how the chemistry will be, but it's been really great," he says. "Meg did not impose on us to do everything the eBay way." He says he's learning a lot about management from Whitman and other eBay executives. Several attempts to talk to Friis were unsuccessful.

Fixing TV

The Venice Project is the brainchild of Zennstrom and Friis, but they aren't running it. Friis, though, spends significant time working on the new entity. EBay says this is fine and within the boundaries of the eBay-Skype merger.

The service is not yet live, and details are under wraps. It's difficult to say why The Venice Project will be much different from YouTube or AOL TV, except that it will — like Kazaa and Skype — be based on P2P technology. That could make The Venice Project cheaper and more flexible than other Internet video services, which centrally host videos on server farms.

Zennstrom describes it this way: "We're trying to do the full TV experience by taking the good things from television and putting them together with the Internet and video sharing." A blog on theveniceproject.com says, "We're fixing TV, removing artificial limits such as the number of channels that your cable or the airwaves can carry, and then bringing it into the Internet age, adding community features, interactivity, etc."

Significantly, The Venice Project will be a secure, rights-protected service that intends to work with content producers such as film studios and sit-com creators, not against them. This is Zennstrom learning from past mistakes.

And it will be ad supported. Zennstrom insists that The Venice Project will work in ways that are familiar to TV viewers — as simple to use as iTunes or an on-screen TV grid.

Interactive features

So The Venice Project is intended to be a pipeline directly between content producers and consumers, with relevant ads inserted on the fly — the way Google plops ads onto websites. Interactive features will let viewers rate content and form social groups around videos and programs.

If it takes off, The Venice Project could be Zennstrom's third disruptor, because it stands to knock cable TV services like Comcast and network TV affiliates out of their middleman positions. Of course, taking on such powerhouse industries is a tall order, and The Venice Project could get squashed before it makes a dent.

A few years from now, maybe Zennstrom will take charge of The Venice Project, or maybe he'll move on to a new target.

"Three to four years seems like a good time frame to make commitments," he says. "That's what I told Meg. I'm here and committed for some time. I want to build the business and contribute to eBay as well."

But after that, time to tee up the next disruptor.