Thanks to Lee Dryburgh and the Emerging Communications Conference 2009 Europe for the transcription
Chair: I think the room is filled up enough. On that note, I would like to say again a very warm thank you to the headline sponsor, Skype. Again, it allows us to be together in a nice venue, with great production, instead of a sort of low-ceiling hotel, sort of lobby place with nailed down carpets, which really doesn't do it for me. I would like to welcome Sten Tamkivi, all the way from Estonia, who is Skype's chief evangelist. A very warm welcome for the keynote of the headline sponsor.
Sten: Good afternoon. It's a pleasure to be here, and thanks Lee for pulling together eComm and I'm especially happy that this happens, not only in the U.S. where most of the things in this industry happens, but also in Europe. As you might know, Skype also comes from Europe and is one of the few success stories coming from here.
First of all, there is the usual thing that I do that I doubt if I should do here, but how many of you actually use Skype? Thank you. I love you too. I really wanted to see 100%, for the first time in my life. I usually get about 80%. Thanks for that.
What I wanted to talk to you about today is some of the basis of this talk is actually public knowledge. Skype has been around since 2003, only, so we're a six year-old company. Some might call us a startup still, but during that period, we have significantly gained market share of international calling minutes, all over the world. In 2005, maybe there was less than 3% than all calling minutes, internationally, going through Skype. Last year we crossed 8% and it's growing.
I want to give you some background around why this is happening and on which fronts it is happening, and what are some of the very specific issues that we see when we're addressing a truly global user base. Those minutes are generated by about 520 million users that live in 225 countries, all over the world. That's pretty much every single country and territory in the world, except for one, and you can guess which one doesn't have Internet.
Why are we growing? If you think of that, there have been VoIP applications before. There have been IM applications before. There have been hybrids of those before. There have been ones that are based on open standards. There have been other attempts based on proprietary approaches. Why Skype?
The rest of my half an hour we will split into two buckets. I will try to bring those buckets together again later. First, there is this notion of rich, intimate conversations you can have when you don't have the limits or barriers of cost. Earlier, I was looking at Twitter. One of the earlier presenters here was speculating on how much revenue Skype drives away from telecoms if we serve about 100 billion minutes a year. 
My answer to that is it's not about pulling those away from telecoms because most of those minutes probably would never have happened if we had to pay for them at the high rates. A very typical example is a video call, which is always longer than a voice call, because of the rich and immersive experience you have.
A good example of that is if you have ever tried to have a sensible voice conversation with a four-year old, over the phone. That usually lasts for three minutes, four minutes, and that is the attention span. You put the same kid on a video call with the grandparents, and all of a sudden you get an hour of playing together and drawing together, and all of these other things. Calls become longer and calls become more intimate.
At the same time, the growth of Skype, or the reason we can develop the product is that we make money from interconnecting to the PSTN network. All of our investments, after the first rounds of venture capital, there have been no cash injections into the company. We've been profitable for about 11 quarters now. We keep reinvesting the money we make from the PSTN to make that first rich bucket much better.
Let's talk about the video bit first. When we ask you users how they see Skype and the contact list of people they have on Skype, it's really interesting; the average contact list on Skype is a single digit number. The average Facebook contact list, for example, and they do an excellent job of recommending people you might know, and all of these other drivers that drive people on the contact list, it's tens if not hundreds of times bigger. Our users tell us that it's quite a harsh decision if I want to add this person to Skype because this means that I really want to talk to that person. The value of the members of that contact list is much higher, or they are much more intimate parties in a conversation that's about to happen.
Recently we've seen, and this is still a heavily growing number, which actually is a bit scary, about 1/3 of all call minutes - again, we're serving 100 billion of those a year, 1/3 of them carry a video signal. At peak times, when there is something special happening, like Christmas or New Year or Mother's Day in some part of the world, this goes well above 50%. It's huge. Video is out of the geek sector. Video reminds me of the early days of Skype. In the office, a few of the developers were placing bets on how many users Skype would have after launch. One of the core developers said this is never going to fly because people don't have headsets. Fortunately, he was wrong. Skype was valuable enough that people got headsets.
We've gone through the same transition from approximately 2005, where again we launched video and people didn't have decent cameras. They had trouble setting it up. Different cameras have different drivers under different operating systems and all these other hassles. Now, the video calling part, because of the huge value it provides to people, people have gotten over that. It has helped that Notebooks come with built-in video cameras and all of these other enabling factors. This is for the masses. It's not a technological subset of users or something like that, anymore.
Moving onto the PSTN bit, or the International Long Distance, or ILD as some people call it and what's happening in that space. ILD, over the last five or six years has been pretty stably growing at about 4% a year. It looks like a decent number. Anybody who is trading stock, it looks on the lowish side, especially if you look at the prices of telecommunication endpoints, like phones going down and minute prices going down. If you look behind those numbers, that's actually what has happened. The growth is low because the volume is growing at a decent rate of 13% on average. 
What happens behind that is that both the retail and wholesale prices at which you can buy minutes when you have tens of millions of them to connect, then that sort of evens out the decent 13% growth in volume, and the size of the industry grows much slower.
There is a definite shift of those minutes going mobile, and going mobile in both directions - between mobile phones and also from mobile to land line and from land line to mobile. I'm sure that everybody knows that so I won't speak about that much longer, but there is something much more interesting which Lee kindly started introducing. These minutes are spread across many, many more calling corridors or country pairs than they used to. Just as a comparison point, there is one of the leading research providers on the market still maps out and monitors about two thousand top corridors. That is the old school telecom view of the world, that these are the corridors that matter.
When we look at the actual Skype usage, there are about 40 thousand calling corridors that are worth paying attention to. Just to give you an example of what a calling corridor could be, in the U.S. to Mexico is the most active international corridor there is in the world, and they serve about 500 million hours of calls a year. That gives us the number one ranking. That's quite a decent amount of calling minutes.
If you look at the top 30 calling corridors, again out of the 40 thousand or the 2 thousand that are currently researched in the world; those top 30 U.S. to Mexico and 29 others only sum up to the 37% of all calls happening. There is a 63% long tail that nobody has ever been able to address because the telecom industry had always been very focused on the local market, or some of them are regional and some may cover a continent quite well and focus the business and offerings there. Before companies like Skype, where we are not a telecom but we are a software provider that utilizes, as Michael put it so nicely this morning, the pipes that telecoms provide, with our software solutions and very flexible software solutions we are able to address this whole global space with pretty much the same offerings. It doesn't matter which country in the world you live in; you can still get access to Skype-to-Skype calling and SkypeOut calling to PSTN connections.
Another obvious statement, but let me go a bit behind that. When we survey our users, taking the intimate, rich, full conversation together and the basic needs of just talking to someone at an affordable rate, in the U.S. about half of our user base tell us that they are using Skype for making video calls. If you ask the same question in the users from China, and there are many other markets that I would say are far more emerging than China is as far as Internet penetration and the availability of decent computers and all of that. In China, you can cut that number into half. On the flip side, if you talk to those people, that has historically been a weird situation because Skype brand is so much connected to real time, live conversations, many people don't know we have a really cool, persistent chat system or the IM system. In the U.S., 5% of the users say they use Skype for IM, whereas in China you would see that number being 1/4 of the users. That starts to build up to a point where there are extremely high geographic differences in what people see as communication and what are the modes of communication those people are willing to go for, balancing their equipment, wishes, and needs for richness and so forth.
Taking that, you can make a much more interesting view on the long distance calling space than the previous mobile chart was. It's too obvious that people are using mobiles and don't want to use land lines. If you're running a global communication network, or a cloud of conversations, then one way you can look it is how are these conversations happening between the developed and emerging markets? On the bottom, on the X axis you can see the originators and then the destinations. You can split those in pairs.
What I did was to take the top 30 corridors, again for the sake of sensible data processing, not the whole 40 thousand, but split that out and it starts to build out something very interesting. Developed-to-emerging is the most important way of communication, or initiating communications among the highest volume corridors in the world. 
Of course, U.S. to Mexico is a great example of why that is. It's usually people moving from emerging markets to find a life in a more developed market, and then starting conversations back home.
Secondly, from developed-to-developed, again it's quite obvious. If you have a bunch of what we call developed countries, by GDP means or whatnot, in Europe, each of them call the U.S. enough times, and the U.S. calls a bunch of them back, then you get to 10 out of 30 top corridors. That's understandable.
Compare those developed market originated corridors to the ones originating from the emerging ones, and it's a really sad picture. It ties in with what I showed you with the IM interested users in Asia, for example, there are probably a number of good reasons why they don't find - for long distance conversations, what is blocking them of using real time, rich, audio-based, video-based calls to satisfy that need. If you try to generalize this, this is a very weird attempt on a graph; if you have the emerging markets on one side and the developed ones on the other, on the emerging market side, the poorer the country the less Internet penetrated the country. The less telecom penetrated the country. If you look at Africa, there are tons of people who will never have access to a cable in their life, and maybe if they're rich enough they will get access to a mobile phone, which has coverage in their village.
If you think back to the good old Maslow pyramid of human needs, if you have those needs of clean water, and children’s health and education and these needs unsatisfied, your price sensitivity is extremely high or the alternative cost of putting money behind communications or making communications happen. You have many more things to worry about and there needs to be something special about communication to even compete with the daily problems you're actually facing.
Whereas, in the emerging markets, the capacity or the capabilities of even handling any real time communications is almost zero. For the sake of simplicity, take the GDP as the basis of how to compare these countries. As a side remark, why I'm stressing it's for the sake of simplicity, there are some other real trends which are probably worth a session on their own, whereas in a very developed market, very developed user segments, when you go into testing new solutions much more eagerly, the actual reliability of communications can go down. Let's say there is an ex-Soviet country with a phone system installed in the '50s but basically works. On a day-to-day basis you might have a better connection to the outside world than the guys who are trying the latest version of LTE on a device that's not out of beta. That's a different story, so let's stick to GDP.
As you move more towards the developed markets, then you will see that people don't worry; the price sensitivity goes down enormously. If you live in the U.S. or in Europe, you will probably have a bunch of competing telcos who are offering you a TV Internet connection in a triple or quadruple package which has also zero cost calls to 30 or 50 countries in the world, so the last thing you worry about is how you are able to afford that, or you're not going to switch to some Internet application because of the price. The price sensitivity goes down and that's not the selling argument for those people at all, to come to emerging communication tools.
Whereas, because they have their needs on the lower end of the Maslow pyramid solved, they don't worry about food, water, and education; they have time to worry about other things like seeing their grandchildren that live on the other side of the country or on another continent, seeing their children who went to college on the other coast of the U.S. and so forth. Both the capabilities but also the drive or need for richness, intimacy, and they have the time to spare to keep in touch with their loved ones, and all of the soft things start come into play much more.
What happens here is that over time, theoretically taking the assumption that humankind will develop slowly but steadily towards some common level of development, which I don't know if you believe it or not, you can draw the line or move the line from right to left a bit, so there are more countries in the developed segment or less in the emerging but it's highly unlikely that it will ever hit 100% that everybody is zero price sensitive and 100% richness oriented, but that's how the market develops. It's not flipping from one end to the other or one end is not coming to replace the other.
With a company or an emerging communications provider, whether it be software or hardware, some new business model based on the existing software and hardware, or something else; as long as you pick one of those ends, what I'm saying is that in the foreseeable future, there will not be a high quality video conversations provider with a global footprint. There will not. People who will play in that segment will always be limited to the developed or well established communication markets or telecom markets which they can build upon.
On the other hand, establishing a next venture, and MVNO that's trying to do a price arbitrage, a new calling card system, or anything like that which is only focused on price with the same low or narrow-band audio quality, with a - what is the number - before, a call setup time with 8 seconds on both ends and all of these other things, the non-quality things will never be able to have a global footprint because people in the developed markets just won't care and it will help the number of people in the more emerging markets or expats from emerging markets in the old markets. It's still going to be a niche.
In order to truly cover the global communications needs of humanity, you have to do both. Basically coming back to the title of this presentation, there is the love and peace component and there is the good old analogy PSTN component that you need to serve in order to truly enable the world's communications as we wish, as we are doing at Skype. With that, I am running ahead of time so there is plenty of time for questions, if you have any.
Audience: What happens if you succeed and get 100% penetration? What do you make money on?
Sten: First and foremost, it's fortunately some while ahead. Skype has 520 million registered users and a subset of those are truly active users. There are about 1.2 billion PCs connected to the Internet. There is about 2 billion mobile phones that are equipped enough to run the a third-party voice application basically. All in all, there are 6 billion people in the world. Even though half a billion users look really big and we're happy to have achieved that in the first 6 years, at the same time it's still the very beginning of the curve. In turn, that means that we have a lot of time still to figure out sensible monetization models, if and what we need to do with the non-PSTN users, experiment with those, and we're in no rush to roll something out on a global basis and make Skype paid or anything like that.
Audience: Would you see an advantage or a disadvantage for Skype to switch from its proprietary protocol to an open standard like SIP?
Sten: We've been quite successful with a proprietary one, so any switch like that would need a very good reason. It's one of those where you don't fix what's not broken. I think what is more immediate for us is the question of how to interop with others, and something we launched this year into beta was Skype for SIP. The other related project is Skype for Asterisk; where it's about how do you connect to other end points who are not Skype nodes; which of the standards of protocols are the ones you pick to communicate with those. As you can see, we're doing SIP and Asterisk in parallel because that gives us new learnings of what works, what doesn't, where do open standards fall short.
If you think back into late 2003 where those decisions around Skype's architecture was made, then I don't think we would be where we are if we had gone with open standards at that point. Some of those reasons have been mentioned today, as well. If you ask the users why they picked up Skype in the early days, they usually say Skype solved the problem of setting up the client. Me personally, the first time I tried to use a VoIP client in 1995, or 1996, and being a fairly technical person, I couldn't get through the proxies and ports and all this other mess I had to set up. Once I got the client running there was nobody to talk to. Those two problems, Skype solved, and a lot of that solved is our proprietary invention of how to solve it. That's explaining where the roots are. Today, we are looking more to how we open up to these open standards rather than replace what we have with something else.
Audience: To follow up on Adrian’s question, there have been a lot of rants on the Web about the interoperability behind your P2P technology and the fact that Skype might be bought out by ventures and peer-to-peer technology would then be part of the [00:25:09.29 ?] software.
Chair: What was the question? I didn't understand it.
Audience: The question was would you go on open standards because of IP problems?
Sten: Of course, I can't comment on ongoing litigation, but right now we're just running our business as normal.
Chair: Let's not have blog-type questions. People can go on for a week commenting on blogs online in these topics anytime. Are there any other questions for Skype?
Audience: We've just heard you refer to your various corridors, calling corridors between emerging and developed countries. I couldn't help noticing a lot of them seem to parallel some of the biggest remittance routes in the money transfer business, and some of the ones that have outrageously high transaction fees attached to them. Have you ever considered implementing a credit transfer or mobile money transfer like an extension for Skype? It seems intuitively almost obvious that given this has become such a big part of the business, that you'd be interested in that.
Sten: We've done experiments in that space, and most notably Skype has been since 2005, part of eBay and another company that is part of eBay is PayPal. We experimented with some product integrations with PayPal, like bringing PayPal send money to Skype between users and all of that. I think the main hassle, which again has been mentioned here today, is the individual regulations of individual countries are not ready for a pan-Internet fluid payment system. In the worst case scenario, and that's the business where PayPal is, that PayPal is becoming a bank in more, and more countries as far as legal status. We believe our mission is to enable the world's conversations, so we have not decided to take that step and start becoming a bank. We have enough hassle with many countries trying to regulate us as a telecom even though we're not. That's probably mainly a question of focus.
Chair: If you have questions, it's quicker if you stand up, so you're seen.
Audience: Just a question about are you planning to develop the social network capabilities of your platform? Are you planning to develop Skype into more of a social network platform itself?
Sten: What do you mean by social network, first?
Audience: I guess I kind of view Skype as a social application in that it allows you to connect with others and have presence, and that is an overlap with some other capabilities within social networks like Facebook and others. To what extent are you growing that capability set within your platform? Are you thinking about Skype as a social network itself?
Sten: Definitely, I think Skype is a social network because there are people, real people, there are social connections, and there are graphs you can analyze. I think what you're more referring to is exposing that all more in the clients and all of that. Yes, there are some things we have done and probably will do in the future. One thing that comes to mind is a few years ago is we did an integration with MySpace when MySpace was the number one social network. You didn't have to build your own profile on Skype but you could link to your MySpace profile and pick the new image from there and so forth. For the shared user base it had some value, but it was not something that was a game changer.
We are taking that carefully though, because of the intimacy slide that I showed. The nature of the usage pattern of people currently relying on Skype for their conversations is heavily, or the perceptional value they see is heavily different than the web-based social networking sites. If you mix them up too aggressively, like as a Skype employee and a heavy Skype user, I have 1,000 plus Skype contacts. That's a geekish thing to have currently. The clients are much more optimized for the segments of users who have a smaller number but more intimate relationships on Skype and they use those other sites for the whole thing. I'm sure you will see more experiments with different partners and opening of different APIs on both sides, and what not, happening.
Chair: We have time for one or two more quick questions.
Audience: I'm from Slovenia and I have a user question regarding you have peer-to-peer technology but it's not a pure peer-to-peer technology because it has a client server part. What happens to me, for example, I have a Wi-Fi community at home. When the Internet connection is broken because of a break in the fiber connection somewhere, I couldn't communicate with my community. Are you working on that area also, to be the pure peer-to-peer application?
Sten: I'm sorry; I don't think I got the question.
Chair: The question was Skype is a hybrid, it's a peer-to-peer, and it's centralized in terms of having a login directory. Do you ever plan to go fully decentralized?
Sten: I think we're looking at use cases, case by case. There are some things - for example, we keep your contact list on the server. When you install a new computer, log in, you get your contact list back. Some things like media streams only use peer-to-peer so we find that hybrid to be very flexible.
Chair: It's hard to see the audience; it's a little dark. If there are no more questions, please thank our headline sponsor, Skype and Sten, for coming all the way. Thank you. We appreciate it.
Sten: Thanks Lee.
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