Why were Janus Friis and Niklas Zennström successful with Kazaa and Skype?
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HD-afhandling
Forfatter: Ebbe Munk EM66645
Vejleder: Bent Martinsen
Why were Janus Friis and
Niklas Zennström successful with
Kazaa and Skype?
Handelshøjskolen i Århus
Aarhus School of Business
2006
Abstract
Friis and Zennström have a unique cooperation. They generate ideas and turn them into big
business.
They are classical entrepreneurs in Schumpeter's understanding. They create valuable
networks and are well prepared to be lucky in Alchian's understanding.
They founded Kazaa and learned a lot, but did not earn much.
When they founded Skype, they chose to use viral marketing only – a demanding principle,
as the distributed product must be viral in itself.
In both cases they have created their own market by letting their customers have the basic
service for free and then wait for the network to grow. In both cases they could later sell the
network without depriving the customers of their advantages.
With limited means they have created a business model that affect the whole world. They
created an enormous profit for themselves and disrupted the music, film, and telecom
industries.
kazaa_skype_ebbe_munk.doc 1 29-04-06
Table of Contents
1. Research Questions.................................................................................................................. 5
1.1 Delimitations........................................................................................................................... 5
1.2 Definitions............................................................................................................................... 5
2. Design of the Examination..................................................................................................... 6
2.1 Selection of the Case Study Method...................................................................................... 6
2.2 Considerations of Validity (1) ................................................................................................ 6
3. The Case of Kazaa..................................................................................................................... 7
3.1 Napster 1999........................................................................................................................... 7
3.1.a Information want to be free......................................................................................... 8
3.1.b The Entrepreneurs at Tele2........................................................................................ 8
3.1.c The Principles of Peer-To-Peer networks.................................................................. 10
3.2 Kazaa 2000............................................................................................................................ 10
3.2.a A Self-organizing Network with Supernodes........................................................... 11
3.2.b No Spending on Marketing........................................................................................ 11
3.3 Kazaa 2001............................................................................................................................ 12
3.3.a Copyright Problems and Legal Claims..................................................................... 12
3.4 Kazaa 2002............................................................................................................................ 13
3.4.a Kazaa Escapes the Legal Claims.............................................................................. 13
3.4.b Friis and Zennström Moves to a Taxpayer's Haven................................................ 14
3.4.c Guilty – Not Guilty..................................................................................................... 15
3.5 Kazaa 2003-2005................................................................................................................... 15
3.5.a The Fall of Kazaa....................................................................................................... 16
3.6 Developments in Kazaa's Environment............................................................................... 17
3.6.a There's No Such Thing as a Free Lunch................................................................... 17
3.6.b Bullguard Anti-Virus................................................................................................. 17
3.6.c Programs without Advertisements............................................................................ 17
3.6.d Altnet – a Spin-off with Licensed Content............................................................... 18
3.6.e Using Peer-to-Peer Services to find Local Hits........................................................ 18
4. The Case of Skype................................................................................................................... 19
4.1 Skype 2002............................................................................................................................ 19
4.1.a A Project Named Skyper............................................................................................ 19
4.1.b Venture Partners....................................................................................................... 20
4.2 Skype 2003............................................................................................................................ 21
4.2.a The IP Telephony Market.......................................................................................... 21
4.2.b Arrival of the Star Power...........................................................................................21
4.2.c News.com September 2003: Nine Reasons for Success............................................ 22
4.2.d Venture Partners (2).................................................................................................. 24
4.2.e News.com December 2003: The Force of Viral Products..........................................24
4.2.f The Properties of Viral Marketing............................................................................. 26
4.3 Skype 2004............................................................................................................................ 27
4.3.a Fortune February 2004: Heading for Six Billion Users........................................... 27
4.3.b Venture Partners (3).................................................................................................. 28
4.3.c News.com September 2004: Skype being the real deal............................................ 29
4.3.d Skype's Competitive Advantage................................................................................ 31
4.4 Skype 2005............................................................................................................................ 31
4.4.a Skype Services Banned in Norway and China......................................................... 32
4.4.b Skype's Customer Profile........................................................................................... 33
4.4.c Internet Telephone Mergers and Bids for Skype......................................................33
4.4.d "eBay to Acquire Skype"............................................................................................ 34
4.4.e Uneasy Conditions..................................................................................................... 36
4.4.f "Most Acquisitions Fail" ............................................................................................ 36
4.4.g Venture Partners (4).................................................................................................. 37
kazaa_skype_ebbe_munk.doc 2 29-04-06
4.4.h Press Coverage of Friis and Zennström................................................................... 38
4.4.i Being on the Edge of Craziness?................................................................................ 39
4.4.j Friis and Zennström's Co-operation.......................................................................... 40
4.5 Developments in Skype's Environment............................................................................... 42
4.5.a PGPfone, the First Peer-to-Peer Telephone?............................................................ 42
4.5.b Nimcat Peer-To-Peer Phone for Small Business...................................................... 42
4.5.c Development in Mobile IP Telephony....................................................................... 43
4.5.d Voice Spam to Be Expected....................................................................................... 43
4.5.e The Estonian Connections......................................................................................... 44
4.5.f Klaus Riskær Pedersen and Cybercity...................................................................... 44
5. Why were Friis and Zennström successful with Kazaa and Skype?...........................46
5.1 Cause and Effect................................................................................................................... 46
5.1.a Success is Profit and Survival................................................................................... 46
5.1.b Correlations of Cause and Effect...............................................................................47
5.1.c Considerations of Cause and Effect for the Cases of Kazaa and Skype.................. 47
5.1.d Why Do We Hear About the Lucky Ones?................................................................ 48
5.2 Schumpeter on Entrepreneurs............................................................................................. 50
5.2.a Entrepreneurial Characteristics............................................................................... 52
5.2.b Friis and Zennström as Entrepreneurs.................................................................... 53
5.3 Internet Strategy.................................................................................................................. 54
5.3.a The Internet as a Brain............................................................................................. 54
5.3.b Digital Strategies and the Value of Networks......................................................... 55
5.3.c Go for the Metcalfe Curve – Give Your Product Away............................................. 55
5.3.d Downes and Mui on Railways and Telephones........................................................ 57
5.3.e The Lock-in Effect...................................................................................................... 57
5.3.f Friis, Zennström, and the Internet Strategy............................................................ 58
5.4 Preparing for the Lucky Strike............................................................................................ 58
5.4.a Sheer Chance and Conscious Adapting.................................................................... 59
5.4.b Good Luck and Bad Luck on the Internet................................................................ 59
5.4.c Survival and Risk....................................................................................................... 60
5.4.d Friis and Zennström Prepared for the Lucky Strike............................................... 61
5.5 Being on the Edge of Craziness?.......................................................................................... 61
5.6 A Digression into Biology..................................................................................................... 62
5.6.a Forks on the Road...................................................................................................... 63
5.6.b Changes in the World Description............................................................................ 63
5.6.c Friis, Zennström, and the Biological Development.................................................. 64
5.7 Opportunities and Strengths................................................................................................ 65
5.7.a Kazaa's Opportunities and Strengths ...................................................................... 65
5.7.b Skype's Opportunities and Strengths ...................................................................... 66
5.8 Answering Research Question 1.......................................................................................... 67
6. Will Friis and Zennström Continue to Have Success in Business Life?.................... 69
6.1 Have Pity for the Rich.......................................................................................................... 69
6.2 Schumpeter on the Social Role of the Entrepreneur.......................................................... 69
6.3 Are Predictions Possible?...................................................................................................... 70
6.3.a Future Business Possibilities.................................................................................... 70
6.3.b An Unqualified Guess................................................................................................ 71
6.4 Answering Research Question 2 ......................................................................................... 71
7. What are the Conditions for Other Entrepreneurs to be Equally Successful?........ 73
7.1 Who Wants to be a Billionaire?............................................................................................ 73
7.2 Answering Research Question 3.......................................................................................... 73
7.3 Considerations of Validity (2)............................................................................................... 74
8. Sources...................................................................................................................................... 75
8.1 Books...................................................................................................................................... 75
8.2 Newspaper articles................................................................................................................ 76
kazaa_skype_ebbe_munk.doc 3 29-04-06
8.3 Internet Sites......................................................................................................................... 76
9. Postscript.................................................................................................................................. 78
10. Appendixes............................................................................................................................. 79
10.1 Dansk resumé – Abstract in Danish.................................................................................. 79
10.1.a Problemstilling......................................................................................................... 79
10.1.b Analysemetode......................................................................................................... 79
10.1.c Svar på forskningsspørgsmålene............................................................................. 79
10.2 Schumpeter in German and English................................................................................. 82
10.3 Newspaper Citations in Original Languages.................................................................... 87
10.4 Newspaper Statistics.......................................................................................................... 92
10.5 Norbert Wiener's Cybernetics for the Internet................................................................. 92
10.6 Darrell Huff: How to Talk Back to a Statistic................................................................... 92
kazaa_skype_ebbe_munk.doc 4 29-04-06
1.Research Questions
Janus Friis and Niklas Zennström founded the Kazaa file sharing network and the Skype
Internet telephone service.
In 2000 Friis and Zennström created the Kazaa file sharing service as an efficient platform for
free exchange of files on the Internet. The users were offered free access, and Friis and
Zennström had a remarkable success as the program experienced 370 million downloads.
In 2003 the two entrepreneurs offered a new service to the Internet users free of charge, this
time the Skype telephone service. Within two years they experienced 160 million downloads
and an enormous commercial success with Skype. In 2005 they chose to sell the firm for 2.6
billion USD.1
Research questions: The cases of Kazaa and Skype are the basis for three questions:
1: Why were Friis and Zennström successful with Kazaa and Skype?
To answer this problem I must study the strengths and weaknesses of the entrepreneurs'
project and the surrounding environment
2: Will Friis and Zennström continue to have success in business life?
Can they continue to open new markets with new products?
3: What are the requirements for other entrepreneurs to be equally successful?
By now the possible need for peer-to-peer networks in file sharing and telephone businesses
has been discovered, and a swarm of copycats are waiting to pursue the business opportunities
arising in these trades. How should one create a similar success in another trade? I propose a
set of conditions for innovative business projects.2
My conclusions are found in the last sections of chapters 5, 6, and 7.
1.1 Delimitations
I have chosen only to use newspaper articles printed before 31 Dec 2005.
1.2 Definitions
• Success: An outcome that is favourable, desired, planned, or intended
• Peer-to-Peer: See section 3.1.c.
• Conscious adapting: Preparation to be lucky, see section 5.4.a.
• Viral marketing: See section 4.2.f
There are lists of abbreviations in the beginning of sections 3 and 4.
1
The number of downloads is from Jyllands-Posten 13 Sep 2005: "Telefoni: Ny dansk it-milliardær efter
Skype-salg" and Berlingske Tidende 29 Dec 2005: "Tilbage til fremtiden"
2
The term "swarm" is a used by Joseph Schumpeter, see section 5.
kazaa_skype_ebbe_munk.doc 5 29-04-06
2.Design of the Examination
2.1 Selection of the Case Study Method
I want to describe current entrepreneurship and have chosen to narrow my study to focus on
the two connected cases of Kazaa and Skype.
There is a general problem with case studies – one cannot generalize from a case study to the
world outside the case. I am aware of this problem when I propose answers to the research
questions 2 and 3, which precisely are attempts to generalize the findings in the case.
The study is based on secondary sources only and not on personal contacts with people directly
involved. The description of the cases is partly based on Danish newspaper reports 2000-2005,
partly on news found on the Internet. Further I use information from literature on economics
and organization.
As the paper is mainly based on newspaper reports, there may be a problem with the sources
and the press bias. Newspapers like to tell exiting and entertaining stories. We have heard
about Friis and Zennström's success. The main bias is that the press cannot predict who will
have success. I will discuss this in details in section 5.5.
2.2 Considerations of Validity (1)
There are four considerations one should take into account before and after an empirical social
study:
1. Validity: Is this study actually examining what it claims to examine?
2. Reliability: Is the study carried out in a sufficiently exact way?
3. Representability: Is the data representative of the case?
4. Method and design: Are the chosen methods and combinations of data appropriate?
Here is a judgment before the actual study was carried out:
1. Validity: The problem is to combine the data with relevant theories so that the
research questions are answered in an exact way. The examination of research
questions 2 and 3 depend on the examination of research question 1.
2. Reliability: Does the newspaper articles contain the relevant information, and is the
information extracted properly? Research question 1 is closely connected to the
newspaper sources. In my arguments I hope not only to describe, but also to explain
why Friis and Zennström had success. This depends on a successful combination of
data and relevant theories. My proposed answers to research questions 2 and 3 will
mostly consist of extrapolations of my answer to question 1.
3. Representability: The study consists of two connected cases. This means that the
data must be representative for the cases, not for business life in general. The sources
in the case seem relevant, and the employed newspaper articles contain several points
of view. Especially in the computer section of the daily Politiken are a series of
interviews with Janus Friis' own words.
4. Method and design: The chosen method and design are promising.
kazaa_skype_ebbe_munk.doc 6 29-04-063.The Case of Kazaa
Abbreviations in this Section:
CD Compact Disc
CD-ROM Compact Disc Read-only Memory
CEO Chief Executive Officer
IPFI International Federation of the Phonographic Industry
ISP Internet Service Provider
MPAA Motion Picture Association of America
MP3 See note 4 below
P2P Peer-To-Peer, see section 3.1.c
RIAA The Recording Industry Association of America
VCR Video Cam Recorder
3.1 Napster 1999
Until 1990 the distribution of music was on analogue vinyl records. Consumers could copy the
records to tape, but the sound quality was inevitably reduced. Around 1990 the distribution
changed to digital CDs, which meant:
• The sound quality of the music was improved, and the record companies' distribution
was easier with this change
• The consumers got access to create perfect copies by CD-ROM copying etc. on their
newly bought computers. For the consumers as well, copying was easy and with
unchanged, high sound quality.
With the sudden growth of the Internet in the 1990's there were a possibility of sharing files
with other Internet users, especially for those connected through fixed, high-capacity lines.
Napster was created by the American student Shawn Fanning (born 1980) in the autumn of
1999. It was a tool for exchange of music via networks, especially the Internet. Napster
worked exclusively in the digital format MP33. By installing and running the program every
Napster user made his MP3 files available for all other Napster users through the Internet. In
this way Napster turned thousands of computers into one huge server.4 Rumours were that
Napster traffic was exploding on US University servers and suddenly amounted to 30-50 per
cent of the total traffic. In March 2000 any user could gain access to 300,000 titles, app. 1,000
GB.5
The Recording Industry Association of America, RIAA, naturally was against the computer
users' way of avoiding to pay for protected music. RIAA tried to close the service by
summoning Napster before the court during the spring of 2000. Several music companies
discussed ways of distributing music in copy-proof digital formats. The new technical
possibilities started a debate among musicians whether there was need for the record
companies anymore. However, there were severe problems by selling music through the
Internet:
• There was no easy way of cashing small payments
• There was no known digital format that protected against subsequent copying
3
MPEG Audio Layer 3, more commonly referred to as MP3, is a popular digital audio encoding and
lossy compression format invented and standardized in 1991 ... It was designed to greatly reduce the
amount of data required to represent audio, yet still sound like a faithful reproduction of the original
uncompressed audio to most listeners. (http://en.wikipedia.org/wiki/MP3)
4
Computerworld 5 Apr 2000: " Chuck D: Napster er godt for musikken"
5
Computerworld 23 Mar 2000: " Piratrevolution: Fri udveksling af musik, film og software"
kazaa_skype_ebbe_munk.doc 7 29-04-06Napster was dependent of a central server and accordingly easy to control, both by the owner
and by the music industry. In August 2000 Napster was fighting to survive, among other
arguments using a judgment from the 1980's concerning the legal use of VCRs. In the end,
Napster was forced to close its server.6
3.1.a Information want to be free7
But Napster had shown the way, and soon there were a whole swarm of peer-to-peer file
services on the Internet, and they avoided having a central server as Napster had it. The
Danish newspapers Ekstra Bladet and Computerworld mentioned:
AudioGalaxy, Kazaa, Rapigator, AudioGnome, Hotline, BearShare, CuteMX,
Freenet, File Rogue, Filetopia, Gnutella, iMesh, LimeWire, Mojo Nation,
Napigator, Riffshare, Song-Spy, Scour, Blocks, Circles File Sharing, Direct
Connect, eDonkey2000, FileAngel, FileFind, FileFury, GotchaPort, Gnutmeg,
Konspire, NetBrilliant, OnShare, OpenNap, Punch WebGroups, Yo!nk, Morpheus,
Grokster, Madster, Winmx, and Fasttrack.8
Copyright laws are national, but the Internet is international. What is prohibited in one
country may be accepted in another and even legal in a third country. The entrepreneurs soon
found out where to register a company and where to place the servers. Most of these file
sharing services were financed by advertisements, and that was possible because they
attracted a lot of visitors.
In 2001 it was even possible to download films before the date of release, here according to the
news for Planet of the Apes:
The larger broadband Internet connections and the availability of new
compression software results in a huge increase in the number of movies being
swapped online. ... Hemanshu Nigam ... said that movie swappers often begin
uploading movies on the very day a film opens by taking digital cameras into
theatres. "Planet of the Apes opened last weekend and it is now available online.
Every major theatrical release can be found online within days of its theatrical
opening."
20th Century Fox warned Internet Service Providers (ISPs) that it would take action against
them unless they shut down sites carrying bootleg copies of the movie. This was a rather
desperate threat, as the ISPs had no legal obligation to do so.
Stephen Townley, a London-based lawyer, told Reuters that the studio is likely to
have a tough time. "It's not so much about the adequacy of the law. It's a
pragmatic issue. It's about applying the law to a situation where you don't have
one single case of infringement, but millions."9
3.1.b The Entrepreneurs at Tele2
Tele2 is a Swedish telecom company operating in 23 countries throughout Europe. It provided
Internet connections in Sweden as early as 1991 and GSM mobile telephony from 1992. In
1993, Tele2 launched fixed telephony as a virtual operator. The international services started
in Denmark 1996, in Norway and the Netherlands 1997, and in Estonia, Germany,
Switzerland, and Luxembourg 1998.10
6
Berlingske Tidende 6 Aug 2001: "Filmens svar på Napster er svær at stoppe"
7
This aphorism seems coined by the biologist Stewart Brand www.well.com/user/sbb/
8
Ekstra Bladet 16 Feb 2001 and Computerworld 27 May, 10 Sep, 10 Sep, 22 Nov, 2 Dec and 4 Dec 2002,
and 15 Oct 2003
9
News for Planet of the Apes on 2 August 2001, www.imdb.com/title/tt0133152/news.
10
"Tele2 usually acts as a virtual operator, avoiding large investments in its own networks. ... We start
by building the brand and customer base within a product area. "Sources:
www.tele2.com/pages/Strategy.aspx?id=146 and www.tele2.com/pages/Text.aspx?id=85.
kazaa_skype_ebbe_munk.doc 8 29-04-06Niklas Zennström Janus Friis
Niklas Zennström was born in 1966 in Sweden. He has dual degrees in Business
Administration and Engineering Physics (MSc, computer science) from Uppsala University.11
He was hired as employee number 23 in Tele2. One of his early tasks was to go to Denmark to
build an Internet Service Provider (ISP) business in 1997.12
Janus Friis was born in 1976 in the suburbs of Copenhagen, Denmark. He has no formal
education. In 1996, at the age of 19, he began his career at the help desk at the new Danish
ISP called Cybercity. Janus Friis' employer was the tycoon Klaus Riskær Pedersen who in
2004 remembered:
"While working at Cybercity he spent all day surfing on the Internet searching for
crackpot ideas."13
Please note, that the employer is not accusing Friis for not doing his duty. Having Friis
"surfing all day for crackpot ideas" may have been a strategic advantage for Cybercity.
In 1997, Janus Friis applied for a job at Tele2 when Niklas Zennström advertised to form the
Danish start-up. Friis was called for an interview, and at the interview, Friis and Zennström
had a meeting of the minds about strategy. Janus Friis was hired as a part of a four-man
team. In 1998, Niklas Zennström moved to Luxembourg and Amsterdam where he was the
CEO in the Tele2 project called the everyday.com internet portal. Friis followed Zennström as
a Tele2 employee to both Luxembourg and Amsterdam.14
In February 2004, Daniel Roth from Fortune Magazine had the impression that the two
switched seamlessly between acting like business partners and like brothers, and that
"Zennstrom is the leader, doing most of the talking, especially when it comes to
business and strategy"15
In October 2004, Søren Krogsgaard from Berlingske Nyhedsmagasin described Janus Friis as
the visionary generator of ideas, while Niklas Zennström seemed to be the organizer bringing
the ideas into being:16
11
The photographs stem from Skype. Sources: www.skype.com/company/founders.html and
http://en.wikipedia.org/wiki/Niklas_Zennstr%C3%B6m
12
www.skype.com/company/founders.html and Fortune Magazine 9 Feb 2004: "Catch Us If You Can",
http://money.cnn.com/magazines/fortune/fortune_archive/2004/02/09/360106/index.htm
13
See section 4.5.b for a comment on Cybercity and the tycoon Klaus Riskær Pedersen. See citations in
original languages in section 10.1. Source: Berlingske Nyhedsmagasin 8 Oct 2004: "Skypes skæve
hjernehalvdel".
14
Politiken 28 Dec 2002: "Interview: Teknologi med to ansigter", Politiken 25 Oct 2003: "Jo vildere, jo
bedre", www.skype.com/company/founders.html, and Fortune Magazine 9 Feb 2004: "Catch Us If You
Can".
15
This agrees with other descriptions of Friis and Zennström's appearance and cooperation. Take in
regard that it is written four years after the start of Kazaa. Source: Fortune Magazine 9 Feb 2004:
"Catch Us If You Can",
http://money.cnn.com/magazines/fortune/fortune_archive/2004/02/09/360106/index.htm.
16
Politiken 14 Aug 2005: "Portræt: Janus Friis skabte KaZaA og Skype – fra telefonpasser til it-
milliardær?"
kazaa_skype_ebbe_munk.doc 9 29-04-06"The differences are clear to everyone. Friis is ten years younger than his Swedish
counterpart. He wears T-shirts and a rucksack while Zennström seems to prefer
pin-striped suit and an attaché case. ... Friis wants to develop ideas that can
generate popular movements. Zennström speak about ideas that will be big
business. They unite in the wish to create large projects."17
Janus Friis: "To me it is not important to turn our ideas into large commercial
successes. The important thing is that the ideas are accepted and used by a lot of
people"18
3.1.c The Principles of Peer-To-Peer networks
While crafting the ISP business and the everyday.com portal for Tele2, Zennström had grown
frustrated about having to buy enough bandwidth between the U.S. and Europe to enable
subscribers to watch movie trailers or listen to streaming music. Friis and Zennström
wondered if they could find a way to make money by storing the files locally – or to store them
on the subscribers' computers instead of the service provider's computers.
They found the concept of distributed computing, also known as peer-to-peer (P2P). Since the
early days of the Internet, this technology allows people to access one another's computers and
tap the other computers for storage and computing capacity while online. The peer-to-peer
principle is solving a problem of mass distribution on the Internet:
• Normally, the more popular a certain file is, the less accessible. When thousands of
people try to download a file simultaneously, ordinary systems break down.
• But the peer-to-peer networks are quite opposite: The more popular, the more
accessible. The peer-to-peer technologies make the users able to exchange any kind of
files: Music, films, software, games, texts, and photos.
Further, there is no central control or possibility to stop the peer-to-peer traffic. File sharing
via peer-to-peer networks is impossible to stop without redesigning the whole Internet.19
3.2 Kazaa 2000
Friis and Zennström were in the middle of the dot-com boom where any company not yet in
the Internet business felt what Daniel Roth called the "how-can-I-invest obsession". Friis and
Zennström had plenty of ideas and experience in Internet business development. And why
help Tele2 growing when they could grow something themselves? Janus Friis told Politiken:
"But in 1999 or 2000 we decided to create a joint venture of our own. We quit our
jobs because we wanted to find out which kind of project."20
As for what they would make, well, they would figure that out later. The 34-year-old
Zennström lived with his wife in an Amsterdam apartment, and the 24-year-old Friis moved
into the guest room. They turned the kitchen into a temporary office. During the years in
Amsterdam, Janus Friis did not have a home of his own.
17
Berlingske Nyhedsmagasin 8 Oct 2004: "Skypes skæve hjernehalvdel", written by Søren Krogsgaard.
Take care, as the newspaper article is written three years later than the said event took place.
18
B.T 9 Oct 2005: "Portræt: Genert geni eller ungdomsforbryder". According to the reporter Søren
Krogsgaard, the quotation stem from an unpublished part of his interview in Berlingske
Nyhedsmagasin 8 Oct 2004: "Skypes skæve hjernehalvdel"
19
An example of another Internet feature that cannot be prevented without a major redesign is spam
mails. Sources: Politiken 28 Dec 2002: "Interview: Teknologi med to ansigter" and Fortune Magazine 9
Feb 2004: "Catch Us If You Can", as above
20
Politiken 25 Oct 2003: "Jo vildere, jo bedre" and Fortune Magazine 9 Feb 2004: "Catch Us If You
Can", as above.
kazaa_skype_ebbe_munk.doc 10 29-04-06"We knew we'd come up with something," said Zennström. "Or at least we hoped
we would." 21
3.2.a A Self-organizing Network with Supernodes
Napster's enormous appeal during 1999-2000 and legal problems during 2000 made soon Friis
and Zennström think of the peer-to-peer principle they had used at Tele2, and they decided to
use it for their new project.
Neither Friis nor Zennström are programmers. Kazaa's peer-to-peer engine is built by three
men in an Estonian garage called Bluemoon, headed by 32-year-old Jaan Tallinn. Friis and
Zennström met the Estonians when working in Tele2.22 Forbes Global tells:
"Tallinn met Kazaa founders Niklas Zennström and Janus Friis when he was
writing the software that pays for parking spaces via mobile telephone. All three
were working at the time for Sweden's Tele2, a breeding ground for many of the
region's entrepreneurs." ...
"These guys are the best software developers I have ever seen in my life," says
Niklas Zennström. "They're very skilful at problem-solving."23
Later, Janus Friis explained the technical principles: Computers logged on to FastTrack
negotiated among themselves to find the ones that were the fastest and had the best net
connections. The new program outsourced its server needs to its users:
We wanted to create a self-organizing network with 'supernodes'. Supernodes
create themselves spontaneously on the individual users' computers. Your
computer will automatically turn into a supernode if you have a powerful PC and
a fast Internet connection. In this way you serve the other users' searches and
improve the efficiency of the network."24
3.2.b No Spending on Marketing
The development took about four months.25 Friis and Zennström named their company
Fasttrack, and the Kazaa file sharing service started in September 2000. Prior to the take-off,
Janus Friis in August 2000 told the Danish newspaper Politiken:
"The overwhelming distribution of Napster indicates the need for file sharing tools
where users can exchange files. And of course we know that there are copyright
problems in such software"
"It is our goal to create an Internet-based community for various digital media
where artists can sell their works without using the traditional channels of
distribution and on the same time establish a far more direct connection to their
fans."
"We are trying to make our product more user-friendly than Napster, which
definitely is geeky. For example Kazaa has an advanced search facility."26
21
Fortune Magazine 9 Feb 2004: "Catch Us If You Can",
22
Politiken 24 Aug 2000: "Napsterklon: Kopier af kopimaskinen" and Computerworld 12 Sep 2005: "
Skype-stifter Danmarks nye it-milliardær"
23
Forbes Global 20 Dec 2004: "Estonia: "If It Works, You Can Break It"",
www.forbes.com/global/2004/1220/016_3.html
24
Politiken 28 Dec 2002: "Interview: Teknologi med to ansigter"
25
CNET News.com 11 Sep 2003: "Why VoIP is music to Kazaa's ear", http://news.com.com/2008-1082_3-
5074558.html. See the citation in section 4.2.b.
26
Politiken 24 Aug 2000: "Napsterklon: Kopier af kopimaskinen" The interview mentions two more
founders: a Dutch and a Japanese citizen. I have not found any mentioning of these later.
kazaa_skype_ebbe_munk.doc 11 29-04-06It is an open question whether Friis and Zennström had made a business plan. Zennström
later told Daniel Roth of Fortune Magazine:
"What I learned when working with Tele2 is that sometimes when you come in
with a business plan, it's like, 'Why are you wasting your time writing that? Just
go out and do it,' "27
Zennström funded the company with his savings. Kazaa was released without spending any
money on marketing. Janus Friis:
"We uploaded the programs to a web server and entered links on
http://download.com and other shareware sites. Then we just sat down and
waited for something to happen"28
Later, the Fasttrack software was licensed to the services MusicCity, Morpheus, and Grokster
as well, and Janus Friis told Politiken a tale of a modest business plan:
"We did it because it was a challenge, and because we hoped that it could be some
kind of business opportunity later. There is a lot of luck in Kazaa's success, a kind
of snowball effect. Our starting point was that the program should be super-easy
to use ..." 29
3.3 Kazaa 2001
Janus Friis was not promising too much when he said "super-easy". One year later, the
newspaper Politiken compared Fasttrack with Gnutella. There were ten times more users
online at the Fasttrack network than at Gnutella. Fasttrack's search facilities included MP3
metadata, etc. Politiken's reporter Lars Dahlager compared:
"It is easy to see why Fasttrack has gained its popularity. It works, it is quick, and
it is easy to use, even for beginners and those scared by technology. Compared to
Napster, Fasttrack offers more than music. You can search separately for music
files, pictures, video files, and software. You can search for individual artists,
tunes, and albums. That was not possible in Napster. The system is ... able to split
the download between several computers to gain speed, and able to continue a
disconnected download." 30
During the summer of 2001 Kazaa registered a new user every second, a total of 3.5 million
users. It was the most downloaded program on the Internet. And during August 2001, the
Fasttrack programs was the most used file exchange with 970 million downloaded files, or 32
per cent of all files downloaded through Fasttrack, Audiogalaxy, iMesh, and Gnutella.31
3.3.a Copyright Problems and Legal Claims
The entrepreneurs were well aware that there were problems with the copyright. Janus Friis
showed good intentions in March 2001 in an interview with Ekstra Bladet:
"In reality Napster, Kazaa and others are the best that ever happened for the
distribution of music. If there is a wide range of music and it is easy to find, then
more people will listen to it. And the users don't mind paying as long as it is
reasonable amounts." According to Janus Friis, the technology has overtaken the
copyright rules.32
27
Fortune Magazine 9 Feb 2004: "Catch Us If You Can",
28
Politiken 28 Dec 2002: "Interview: Teknologi med to ansigter"
29
Computerworld 4 Oct 2001: " Musik- og filmindustri vil lukke flere byttetjenester", my emphasizing.
Morpheus moved to another platform during spring 2002 according to Computerworld 10 Sep 2002.
30
Politiken 16 Aug 2001: "Fildeling: Det nye Napster"
31
Politiken 13 Sep 2001: "Nyheder: Mere pirateri". The study was made by the firm Webnoize. The total
number of downloads were 3,050,000,000. The Fasttrack programs were Morpheus, Kazaa, and
Grokster
32
Ekstra Bladet 2 Mar 2001: "Musik: Dansker bag Napster-alternativ", my emphasizing
kazaa_skype_ebbe_munk.doc 12 29-04-06What is a reasonable amount? Nobody knows, but the price is certainly lower than the price
for an original CD. The technology has overtaken the copyright rules because the music is very
easily accessible in the digital formats.
In August 2001, at the age of 25, Janus Friis posed as the grand old man trying to calm down
the legal claims of the record companies. Yes, they have their legal claims, but there are
millions of users breaking the law, so we have a just cause. Let the politicians create new
rules, he told Politiken:
"The record companies will fight hard for their interests. It cannot be avoided for
the time being, because nobody knows how the future music market will turn out.
On the long term the market will stabilize, and the politicians will find a balance
between the needs of the users and the media companies."33
It is not criminal pirates that are the users. It is millions of common citizens. They
are consumers, and they are voters. That is the reason for this item to be a
political topic. You cannot turn a whole section of the population into criminals. If
one and a half million Danes use the file sharing services you cannot tell them
that they must not. You can regulate it, as you can regulate anything else."34
In September 2001 Friis and Zennström went to the United States to negotiate with the
Recording Industry Association of America (RIAA), but they decided to stay away from the
meeting after they found out that they had been chosen as the next legal target of the RIAA.
While waiting for the meeting they read an extensive, internal memo from the RIAA that
described how Kazaa and Fasttrack worked – and recommended that the RIAA sue Kazaa's
founders for copyright infringement.
"The claims are not as strong as those against Napster," explained the memo, "but
they are also not so remote as to be wishful."35
In October they visited the US again, this time backed by lawyers. They met representatives
from RIAA and the Motion Picture Association of America (MPAA), but the negotiations did
not succeed. The same month the two organizations sued MusicCity, Kazaa, Morpheus, and
Grokster.36 RIAA brought the action against Kazaa in Holland. In November Kazaa was
judged to stop illegal exchange of files.37
When Kazaa was launched, Friis and Zennström thought their service would become a hit in
Europe. They hoped that part of their work would be signing deals with European ISPs and
working with the Dutch copyright association to make a pay-for-share music service.38
3.4 Kazaa 2002
At this moment there seems to have been three companies involved in the ownership of Kazaa:
Indigo Investments BV and La Galiote owned Kazaa BV, which conducted both the Kazaa
network and the Fasttrack program development.39
3.4.a Kazaa Escapes the Legal Claims
In January 2002 Kazaa BV sold the Kazaa network to Sharman Networks Ltd.:
33
Politiken 16 Aug 2001: "Dansker bag nyt Napster"
34
Politiken 16 Aug 2001: "Fildeling: Det nye Napster"
35
Fortune Magazine 9 Feb 2004: "Catch Us If You Can"
36
Politiken 18 Oct 2001: "Piratkopiering: Dansker under anklage"
37
Computerworld 30 Nov 2001: " Kazaa dømt til lukning".
38
Fortune Magazine 9 Feb 2004: "Catch Us If You Can"
39
Berlingske Tidende 28 Sep 2005: "Skype-milliardærernes gemmeleg".
kazaa_skype_ebbe_munk.doc 13 29-04-06"Jan. 21, 2002 – Sharman Networks Limited, a privately held company, has
purchased certain assets of KaZaA BV, including the popular consumer site
KaZaA.com, distributor of KaZaA Media Desktop software. KaZaA BV is the
Netherlands-based software and products company that founded KaZaA.com. The
transaction was announced by Sharman CEO Nikki Hemming.
KaZaA Media Desktop is a full-featured peer-to-peer file sharing software that
allows users to search, download, organize and play media files. Included in
Sharman's purchase of assets are the license for the FastTrack P2P Stack, the
KaZaA.com Web site, name, and logos.40
According to rumours, Friis and Zennström sold Kazaa for approximately 600,000 US dollars
and granted Sharman Networks a loan to finance the sale.41
The Australia-based Sharman Networks Ltd. moved formally to the Pacific island realm of
Vanuatu. The registration was done by CEO Nikki Hemming.42 In legal matters Vanuatu is an
interesting place:
1. Vanuatu does not respect international copyright treaties
2. Vanuatu is known as a taxpayers' haven
3. On Vanuatu it is punishable if you bring out who is the owner of a company43
That Vanuatu have not acceded the international treaties on copyright makes it a very
interesting place for a company running Kazaa and taxpayers' havens seem to attract internet
companies. The third fact on the list has added fuel to rumours that Friis and Zennström
continued as formal owners of Kazaa.44 However, there seems not to be any reason for Friis
and Zennström to keep up the formal ownership of their old company. It was an obvious part
of the deal with the new owners that Kazaa would continue to pay Friis and Zennström for the
Fasttrack license. In this way Friis and Zennström had a determining influence on Kazaa, no
matter who were the formal owners.
3.4.b Friis and Zennström Moves to a Taxpayer's Haven
Friis and Zennström kept Fasttrack's software out of the deal with Sharman Networks.
Instead, they let Kazaa BV hand it over to a new firm called Blastoise Ltd, registered on
British Virgin Islands. Later Blastoise Ltd was renamed Joltid.45 Kazaa BV later went
bankrupt. The British Virgin Islands is yet another taxpayer's haven.46
In retrospective one could wonder why Friis and Zennström needed to make all these
arrangements. Of course it is always an advantage to pay less tax, but moving a firm to a far-
away taxpayers' haven is risky:
• It is costly to move the company affiliation. You need legal and auditing advice. That is
costly, especially if you want it in an unnoticed way.
• Hidden reserves tend to disappear. Suddenly you need to act quickly, but your business
is outside arm's length, or you are defrauded by your advisors, or the political climate
changes in your hideaway country.
• The risk is higher when the firm only employs virtual assets as rights to software,
brand names, a customer database, and Internet domains
40
www.dslreports.com/shownews/14353.
41
Berlingske Tidende 28 Sep 2005: "Skype-milliardærernes gemmeleg". The text mention five million
Danish kroner, which at that time was 600,000 US dollars (exchange rate 0.12)
42
Berlingske Tidende 27 Sep 2005: "Skype-stiftere under anklage"
43
Berlingske Tidende 28 Sep 2005: "Skype-milliardærernes gemmeleg"
44
See the unusual claim cited in section 4.4.c
45
Berlingske Tidende 27 Sep 2005: "Skype-stiftere under anklage"
46
Berlingske Tidende 28 Sep 2005: "Skype-milliardærernes gemmeleg"
kazaa_skype_ebbe_munk.doc 14 29-04-06At least, the frequent displacements reveal that Friis and Zennström must have earned some
kind of profit from the operation and sale of Kazaa and Fasttrack. You cannot hide from your
pursuers if you have no money.
One could also wonder whether all of this information is seen in its proper perspective, and
why it is brought to our knowledge. My sources are two newspaper articles from Berlingske
Tidende 27th and 28th of September 2005. They are based on very critical articles in the
Swedish weekly Veckans Affärer. I guess that at least part of the information is supplied by
Friis and Zennström's pursuers in the film and music industry.
3.4.c Guilty – Not Guilty
In April 2002 a Dutch court of appeal decided that not Kazaa, but the individual users were
responsible if Kazaa was used to break the copyright laws.47 Similarly, in April 2003 two US-
based file-swapping services were judged legal:
"Judge: File-swapping tools are legal: A federal judge in Los Angeles has handed
a stunning court victory to file-swapping services Streamcast Networks and
Grokster, dismissing much of the record industry and movie studios' lawsuit
against the two companies. ...
"Defendants distribute and support software, the users of which can and do choose
to employ it for both lawful and unlawful ends," Wilson wrote in his opinion,
released Friday. "Grokster and StreamCast are not significantly different from
companies that sell home video recorders or copy machines, both of which can be
and are used to infringe copyrights." 48
The ruling did not directly affect Kazaa because it was situated outside the United States.
Streamcast Networks were using Fasttrack software for Morpheus, but changed to another
system during spring 2002 after a dispute on the license fee.49
In December 2002 Janus Friis encouraged the music and film industries to look at the peer-to-
peer networks as a marketing channel.
"The music industry is making a huge mistake by demanding the same price for
the digital content on the Internet as for a CD. That is not logical, as there are no
costs for production, distribution, or stock for the digital content on the Internet
compared to the costs of the physical product in the factory and in the retail shops.
As I see it, the industry should market their products on the Internet – and make it
really cheap, really easy, and really safe for the users."
"To a certain degree I understand the music industry. They are trying to protect
their business, but they had a peacefully sleep for too long. This is problems like
those they have fought earlier. They tried to ban the VCRs, but today the earn
most of their money on selling and hiring out of video films."50
3.5 Kazaa 2003-2005
In May 2003, the owner Sharman Networks said its Kazaa software was on track to set a
record and become the most-popular free program on the Web with more than 230 million
downloads.51
47
Computerworld 2 Apr 2002: "Hollandsk domstol frikender Kazaa"
48
http://news.com.com/2100-1027_3-998363.html
49
Berlingske Tidende 28 Sep 2005: "Skype-milliardærernes gemmeleg"
50
Politiken 28 Dec 2002: "Interview: Teknologi med to ansigter"
51
http://news.com.com/2100-1027_3-1009418.html
kazaa_skype_ebbe_munk.doc 15 29-04-06In December 2003 The Dutch Supreme Court ruled Kazaa legal:
"A Dutch supreme court today reaffirmed that it is lawful to make the file sharing
software Kazaa openly available. It is the first time that a Supreme Court or other
national high court is ruling on the legitimacy of P2P technologies such as Kazaa.
"This victory sets the precedent about the legality of peer-to-peer technology across
the European Union, and around the world," Kazaa attorney Christiaan
Alberdinck Thijm said in a statement. Niklas Zennström and Janus Friis, the
founders of Kazaa, call the ruling a "remarkable victory for the Internet and
consumers". ...
"The Dutch Supreme Court today did not rule on the issue of whether individual
file-sharers violate the copyrights of the music industry."52
The court cited international rulings including the 1984 U.S. Supreme Court ruling in the so-
called Betamax case. In Sony versus Universal, the U.S. Supreme Court said device makers –
in this case, VCR maker Sony – can't be held liable when people infringe copyright using
Sony's equipment.53 This was a recurrence to Janus Friis' statement from December 2002:
"They tried to ban the VCRs, but today the earn most of their money on selling
and hiring out of video films"
3.5.a The Fall of Kazaa
According to the Internet analysis firm CacheLogic, an impressing 60 per cent of the traffic on
the net by the end of 2004 was made up of peer-to-peer activity. But the traffic had moved
away from Kazaa. CacheLogic's analysis showed that Kazaa was reduced to about 10 per cent
of all peer-to-peer traffic.
"It just isn't as big a player as it once was, as BitTorrent and eDonkey are now far
more important to file sharers," said Professor Michael Geist, an e-commerce
expert at Ottawa University.54
In September 2005 Kazaa came in serious problems, as a Federal Court in Sydney ruled that
the file-swapping service breached copyright laws in Australia.55 I have not found any
explanation of why the Vanuatu-registered Sharman Networks could be prosecuted in
Australia or why it eventually moved the formal registration to Australian jurisdiction.
In November 2005, Kazaa was ordered to block 3,000 keywords. The court ordered Sharman
Networks to modify the Kazaa to block a list of artist and song names. The list was to be
supplied by the record companies. The court ordered Sharman to release the new version by 5
December.56 Actually, www.kazaa.com is sporting this banner on the opening page:
52
www.theregister.co.uk/2003/12/19/dutch_supreme_court_rules_kazaa/
53
www.pcworld.com/news/article/0,aid,113968,00.asp
54
news.bbc.co.uk/1/hi/technology/4214810.stm
55
www.cbsnews.com/stories/2005/09/05/tech/main815183.shtml citing AP.
56
http://management.silicon.com/government/0,39024677,39154560,00.htm
kazaa_skype_ebbe_munk.doc 16 29-04-063.6 Developments in Kazaa's Environment
3.6.a There's No Such Thing as a Free Lunch
When you have a very popular site, and it is free of charge, then your customers will pay in
other ways. The file sharing services made a living by selling advertisements, but there were
other possible costs: When installing Kazaa or any other program the users were risking virus,
backdoors, and spyware. In a letter to the Editor a reader stated in Politiken:
'There's no such thing as a free lunch.' When we do not want to pay with money it
means that we instead must pay with our attention, our time and our high
spirits.57
Sure, this was cheap music, but could be costly in terms of time wasted.
3.6.b Bullguard Anti-Virus
To protect the users from virus spread via the network, Kazaa started a partnership with the
Anti-Virus Software firm Bullguard. As Kazaa and Fasttrack, Bullguard is an international
firm. It is headquartered in Copenhagen, Denmark and has offices in Romania and the United
Kingdom.
Kazaa recommended Bullguard, and from May to November 2002 Bullguard's free trial
program was distributed in 4.5 million downloads (January 2006: 16 million downloads).
Bullguard uses the peer-to-peer technology to avoid unnecessary downloads:
"BullGuard P2P is free virus protection for all Kazaa Media Desktop users. It
scans downloads for viruses and is automatically updated each time Kazaa Media
Desktop is launched.
When BullGuard P2P updates, it collects a small key-file from the BullGuard
server to see if new updates are available.
The P2P network (other computers with Kazaa installed) is then searched for the
updates. In most cases, the updates are found and downloaded from other users of
Kazaa. If not, then the central BullGuard server is used. "58
One could say that Bullguard uses a kind of free lunch as the program does not strain its own
servers, but let the users share the updated virus definition files.
3.6.c Programs without Advertisements
Other entrepreneurs copied Kazaa's name and software and offered the Kazaa Lite, a peer-to-
peer program without advertisements, in December 2003. Sharman Networks reacted by
issuing a new version of the Kazaa program that could not share content with Kazaa Lite.59
There are several other offers that will make you contribute less or even nothing to the peer-
to-peer network, here examples from www.about.com:
• Limit the sharing of your files and save bandwidth: "Kazaa Media Desktop uses default
network settings that enable the computer to readily share files with other P2P users.
Follow these steps to control outbound file sharing and free up the network bandwidth it
consumes."
57
Politiken 23 Aug 2001: "Kommentar: Lad vær' at installer' dem"
58
Computerworld 8 Nov 2002: "Millionsucces for dansk sikkerhedssoftware" and
www.bullguard.com/press/release20030702.aspx
59
Computerworld 11 Dec 2003: "Kazaa spænder ben for Kazaa Lite"
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