P2P CEOs search for successful formula

The attraction of the P2P market is the ability to develop a concept that can achieve explosive growth by leveraging the inherent direct communication between users. Skype is just one example of the potential value that can be created by a wellexecuted P2P concept. In just four years, Skype has attracted 200 million registered users and created a multi-billion dollar asset. Within this whirlwind scene are several Israeli P2P companies that are attempting to achieve similar results. Their evolving path towards success is anything but straight.

Aim for a moving target

In an industry with an uncertain business model, a recurring management theme is to keep aiming at different targets until you find one that succeeds. In any other business domain, this approach might be considered erratic. In the evolving world of P2P, this may well be the most effective course.

OoVoo is a company that recently launched a video conferencing software application. In spite of Skype’s overwhelming dominance in the VoIP market and its support for video, ooVoo intends to become the leading P2P video conferencing player. Its value proposition is simple: provide the best single- and multi-point Internet-based video conferencing experience and features at no cost. Since the core functionality of ooVoo is free (even video messaging is free), Phillippe Schwartz, the CEO of ooVoo, is looking to generate revenue in upsell capabilities including landline and cell connectivity, video messaging to cell phones, visual effects, non-invasive advertising, and partnerships with social community portals such as dating sites. Schwartz readily acknowledges that at this stage he does not know which source will generate the most revenue. His goal is to establish a strong base of users using a platform that can be leveraged for any number of potential revenue sources. The key for Schwartz is having a flexible platform and an equally flexible mindset.

Another variation of this trend is expressed by Alexander Lazovsky, a young and impressive entrepreneur who is as creative as he is methodical. Lazovsky is a co-founder of Nareos, a company that currently offers the only universal P2P music and video file-sharing service for mobile phones, called PeerboxMobile. The current revenue model is primarily a combination of subscription fee-based access to virtually unlimited content as well as a-la-carte access – pay per download and/or stream. As the only P2P file sharing service for general mobile phone users (iTunes is currently limited to iPhones), Lazovsky is confident of his market position. However, it is neither the first nor will it be the final business model for Nareos.

Lazovsky is expecting others to eventually enter the P2P file sharing market for mobile phones with free, albeit illegal, access to music and video. He is already preparing for what he considers will be the inevitable switch to yet another business model: purely ad-funded access to unlimited content. Rather than having users pay for content, users will be legally allowed to freely share licensed content with revenue generated from non-invasive advertising. With countless cell phones in circulation, a propensity for cell phone users towards impulse purchases (as contrasted with Web users), and significantly higher CPM revenue for cell phones, Lazovsky plans to cash in on his next business model variation as well.

Nareos went through two different business models prior to settling on the current one, and Lazovsky already anticipates the need to switch to yet another business model in time. Schwartz of ooVoo anticipates having to test various mechanisms to generate revenue without knowing up front which one will be the major cash cow. In both cases the revenue target is moving, and the CEOs have found the need to create a flexible platform and an equally flexible approach to capturing revenue.

Tell me what you want to pay for

Motti Vaknin, CEO of BeInSync, has a straightforward approach to generating P2P revenue – let the users tell you what they will pay for. When Vaknin arrived in January 2007 to take the CEO position, BeInSync had a good product to enable users to synchronize files located on multiple computers. Originally targeted to consumer and mobile professionals who often have both a laptop and a desktop, the service was a convenient way to automatically maintain the current version of critical files on multiple machines.

At the time Vaknin joined, BeInSync offered the standard multi-user, multi-location discount license available from most software companies. However, when Vaknin began reading user requests, he found three unexpected results: 1) 80% of customers were corporate users; 2) Corporate administrators requested a mechanism for managing multiple users in a two-tier management system; and 3) Corporate customers were willing to pay more for such premium services than a typical home user. Realizing the opportunity, BeInSync is rapidly adjusting course and will soon be launching a multi-tier management system, off-site storage, and other features that will not only cater to business users, but will generate higher revenue per converted customer.

Not all P2P companies are able to leverage requests from users for paid services. However, ones that primarily offer a value-based service, rather than a free service with ad-based revenue, are in a better position to capitalize on user feedback.

Major media studios slow to embrace a changing world

Much of the global P2P business revolves around the sharing of media content, such as movies and music. A recent Cisco study noted that the majority of current consumer Internet traffic is video content, which will double every two years. A recurring theme found in surveying P2P companies is that in spite of the significant revenue loss from P2P piracy, and in spite of the opportunity in P2P shared ad revenue embedded in media content, major studios are slow to embrace change.

Three companies surveyed interacted in some way with major movie studios. Although never deployed as such, the original concept for Nareos in 2004 was to use its platform to implement a P2P anti-piracy service. Since major studios lose an average of 10 percent of potential revenue to illegal P2P distribution, Nareos expected a warm reception and a healthy revenue stream by offering studios an alternative method to control P2P piracy. Nareos, however, was unsuccessful in building a viable business model either as a service to studios or as a legal upsell through the Internet. Its current business model, a P2P file sharing service for mobile phones, relies on the greater propensity of mobile phone users to pay for content.

Ehud Milo, founder and CEO of VeeZuu, is emphatic about one thing: avoid any business model that involves major studios. VeeZuu attempted to convince major studios to leverage his targeted P2P concept for sharing high-definition video content funded by ad revenue. The expectation was that users would pay a low monthly subscription fee and view a three minute ad per movie to be able to legally share highquality, high-definition movies in an exclusive P2P movie service. Revenue would be split between the studio and VeeZuu. After lengthy negotiations and failed attempts, Milo has a simple piece of advice for anyone attempting to engage major studios in a legal P2P file sharing proposition: "Drop It!" VeeZuu is in the process of developing other P2P business models.

Dr. Ori Cohen had a better experience with major studios when the company he co-founded, Skyrider, began selling anti-piracy technology to specifically prevent P2P piracy. With Skyrider technology a studio could release a protected version of its content to legal P2P services without the risk of the content being hacked and resubmitted to illegal P2P networks. Although the company reached profitability within a year, better opportunity was seen elsewhere.

In a severe detour from the original business plan, Cohen determined that he could leverage Skyrider technology to sniff P2P file search requests, identify queries, analyze their profile and deliver highly targeted ads. Skyrider has since abandoned its original business model, selling anti-P2P-piracy technology to studios, and recently launched a directed ad-based service targeted at P2P users. Although Cohen insists that his experience with the studios was positive, clearly the big money resides in tapping into the much larger and more lucrative general P2P file sharing market.

Although studios will eventually discover a balance between the need to protect their content while catering to a technologically savvy P2P market that can bypass them, most P2P companies are currently deploying business models that simply do not directly rely on the studios. However, the studios are starting to shift. As Lazovsky of Nareos points out, companies like QTRAX, SpiralFrog and Ruckus Network have already struck licensing deals with all four major labels along with other content owners allowing them the legal right to freely distribute content based on the shared ad-revenue model. This simply reinforces the notion that the P2P contentsharing business model that was valid yesterday will not necessarily be relevant tomorrow.

If you can’t join them, supply them

If there is one thing certain about the P2P market, it is that it will continue to experience explosive growth – and Oversi has stepped up to cater to the needs of that growth. With a wellseasoned team headed by Joav Avtalion, its Chairman and CEO, Oversi sells caching and content delivery infrastructure equipment designed especially for operators to substantially lower their cost of supporting P2P traffic.

Avtalion explained that an Israeli operator can pay up to $150/Mb/month for interconnect carrier charges between countries. Since P2P requests can randomly trigger a file transfer between any two devices in the world, operators must sustain the necessary interconnect bandwidth to support potentially heavy P2P requests. Oversi’s technology analyzes the P2P network requests and uses caching and other algorithms to substantially reduce the cost of sustaining the P2P traffic.

Contrary to expectation, when Oversi started selling its technology globally, it could not maintain a static business model. In some countries like the US where the interconnect bandwidth cost is exceptionally low and P2P traffic is mostly local (i.e. within the US), a business model that emphasizes better quality of service is used. Products are sold outright as a means of enhancing an operator’s service to gain a competitive edge. In countries such as Thailand, Taiwan, or Brazil, where interconnect charges are high and P2P traffic is primarily associated with outof- country connections, a cost-saving revenueshare business model approach is used.

Oversi’s case illustrates that even companies selling infrastructure equipment are finding it necessary to adjust their business models to the changing nuances of the P2P market.

Be smart, be cast, be flexible

A common theme among all the CEOs is that they need to be as nimble as the market to which they are catering. Firstly, the technology foundation must be capable of sustaining a variety of business opportunities. Secondly, the CEOs must be flexible and creative in seeking opportunity or adapting to business changes to implement an effective P2P business model. In what is a telling indicator of the current stage of the P2P industry, each of the CEOs surveyed recognize that they are just beginning to validate their new business models. Proof of their success will only be realized in the coming months and years.

This article first appeared in the Israel Venture Capital & Private Equity Journal (IVCJ). IVC Research Center publishes the Israel Venture Capital & Private Equity Journal, a quarterly review of trends and developments in the Israeli-related venture capital industry. IVCJ, distributed worldwide, is dedicated to provide wide-range coverage of Israel's venture capital industry. For more information please visit www.ivc-online.com