|www.ebbemunk.dkWhy were Janus Friis and Niklas Zennström successful with Kazaa and Skype?|
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:
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 MP3 [Note 3]. 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. [Note 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. [Note 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:
Napster 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. [Note 6]
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. [Note 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." [Note 9]
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. [Note 10]
Niklas Zennström was born in 1966 in Sweden. He has dual degrees in Business Administration and Engineering Physics (MSc, computer science) from Uppsala University. [Note 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. [Note 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." [Note 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. [Note 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" [Note 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: [Note 16]
"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." [Note 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" [Note 18]
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:
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. [Note 19]
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." [Note 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.
"We knew we'd come up with something," said Zennström. "Or at least we hoped we would." [Note 21]
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. [Note 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." [Note 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." [Note 24]
The development took about four months. [Note 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." [Note 26]
It 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,' " [Note 27]
Zennström funded the company with his savings. Kazaa was released without spending any money on marketing. Janus Friis:
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 ..." [Note 29]
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." [Note 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. [Note 31]
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. [Note 32]
What 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." [Note 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." [Note 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." [Note 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. [Note 36] RIAA brought the action against Kazaa in Holland. In November Kazaa was judged to stop illegal exchange of files. [Note 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. [Note 38]
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. [Note 39]
In January 2002 Kazaa BV sold the Kazaa network to Sharman Networks Ltd.:
"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. [Note 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. [Note 41]
The Australia-based Sharman Networks Ltd. moved formally to the Pacific island realm of Vanuatu. The registration was done by CEO Nikki Hemming. [Note 42] In legal matters Vanuatu is an interesting place:
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. [Note 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.
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. [Note 45] Kazaa BV later went bankrupt. The British Virgin Islands is yet another taxpayer's haven. [Note 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:
At 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.
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. [Note 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." [Note 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. [Note 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." [Note 50]
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. [Note 51]
In 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." [Note 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. [Note 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"
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. [Note 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. [Note 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. [Note 56] Actually, www.kazaa.com is sporting this banner on the opening page:
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. [Note 57]
Sure, this was cheap music, but could be costly in terms of time wasted.
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. " [Note 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.
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. [Note 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:
Around 2002 Friis and Zennström founded Altnet as a peer-to-peer service with licensed content. Altnet was delivered to all users in a bundle with Kazaa. The paid-for downloads are not from fellow Kazaa users' client computers, but from localized content servers paid for by the content providing companies.. [Note 61] Here are extracts of the marketese for possible content providers:
"Promote and sell your media to a worldwide audience of 70 million users. ... Altnet distributes licensed content into leading peer-to-peer applications and internet web sites, providing their users with access to Altnets library of Digital Rights Managed content and payment processing platform." [Note 62]
Altnet uses the Fasttrack technology. Altnet is owned by the Australia-based Brilliant Digital Ltd. The CEO is Kevin Bermeister, who once was working as a web designer for Friis and Zennström in Amsterdam. [Note 63] Like many other programs bundled with Kazaa, Altnet has been labeled spyware or adware. [Note 64]
BigChampagne Online Media Measurement offers marketing assistance to the American music industry. The company's offer is based on surveillance of the peer-to-peer downloads. Which songs are popular in which parts of the United States? Technically it is done by matching IP addresses with geographical zones. The music industry is using the results to choose the records to be played on the local radio networks.
The peculiar circumstance is that the music companies keep at a safe distance from the peer-to-peer network but are eager users of knowledge that can only be acquired through the use of the same peer-to-peer network. Here is some BigChampagne marketese:
BigChampagne sells information about popular songs, movies, television, games and software online. Our data products and services are employed by brands and their agencies, retailers, analysts, and entertainment industry professionals." [Note 65]