Before Skype was created, its founders and developers were already in a similar industry. They championed, at the time, the newly popular P2P networking systems and were able to create a service that was like nothing we had seen before. The sharing of data, legal and illegal, was easy and available to anyone with a computer and internet connection (Rao, et al., 2006). I will show in the next couple sections, how Skype was offered a bit of market luck to pair with its innovative IP technology.
4.1 A Decision to Pioneer
In Estonia, a very small country in Eastern Europe, Ahti Heinla, Priit Kasesalu, and Jaan Tallinn began programming the software that would be later known as Skype. However, this wasn’t their first venture together. They had already produced an immensely popular software program, called Kazaa that would eventually be the basis for Skype. The two founders of Skype, Niklas Zennstrom and Jaanus Friis, had a vision and when they launched Skype, they stated,
“We are launching Skype as the telecoms company of the future” (Stadler, 2006) . Since launching these two successful ventures, the founders and developers of Kazaa and Skype are looked at as public icons in Estonia. They did not embark on this journey to become rich and famous, but rather to help people connect in any way possible (Stadler, 2006).
4.2 Skype is born from Kazaa
As previously mentioned, Kazaa was designed by 2 of the programmers that went on to develop Skype, and one of the Skype founders, Niklas Zennstrom. Their company, Blue Moon Interactive was using a licensed form of file sharing protocol called Fasttrack. By implementing this proprietary protocol, Blue Moon was able to allow users to share virtually any kind of date file desired. Music was the most popular type of file on their system, and would eventually lead to numerous lawsuits and eventually the shutdown of Kazaa in 2012 (Ricketson & Ginsburg, 2006). Kazaa was extremely popular within the first few years of its implementation. Started in 2001, Kazaa reached over 389 million downloads by 2006 (Good & Kreckelberg, 2002). Since then, however, Kazaa has crashed. Almost right from the beginning, the music industry began issuing copyright infringement lawsuits to a number of similar applications. Napster, the most
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popular music sharing P2P application was their prime target, but Kazaa was hit with a number of lawsuits as well. Even though this made it difficult for Blue Moon Interactive to continue with Kazaa, they could continue developing and implementing the same P2P style applications into services that were legal.
4.3 Market Entry Timing
Many first mover studies have put a strong emphasis on the timing of entry that firms come to market. What most have found is that there is no perfect time that applies to all firms (Joshi, et al., 2009). There are simply too many environmental factors that can play a part as a variable and change the behavior of the market. In addition, technology advances at different paces for each industry. This makes it almost impossible to have a macro view on the timing of entry formula. The formula must therefore be subjective to each firm. We can, however, take two different environmental factors and see how they relate to each other and either reinforces first mover advantages or disadvantages. This can help explain how a firm can have a better chance at isolating the mechanisms for gaining advantages for being first to market, given certain external factors.
4.3.1 Pace of Market Evolution
Fernando Suarez and Gianvito Lanzolla have outlined a model in a paper which aims to explain what conditions are ideal for a company to choose early entry into a market (See Exhibit 1). They also acknowledged that this is a macro view of technology and market analysis; however it is useful in illustrating the two typical scenarios that usually occur. They use an S-curve to display the two core constructs in their analysis. These two constructs are technology evolution and market evolution. For each factor, the two scenarios are abrupt change and smooth change (See Exhibit 1).
Exhibit 1 outlines the two paces of market evolution based on number of resources over time. In scenario B you can see the abrupt change in market evolution where resources become readily available in a short amount of time, and inversely illustrated in scenario A, the market evolved smoother and less abrupt with resources becoming available slowly over time.
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and the 2 scenarios, abrupt and smooth, Suarez and Lanzolla display 4 quadrants (See Exhibit 2).
Each quadrant has a combination of the dynamics that are at play between the 2 factors.
In quadrant II and quadrant IV, the effects of first mover mechanisms are weak and therefore the advantages of being a first mover have the least likely chance of succeeding (See Exhibit 2). In quadrant III, the abrupt increase in market and technological evolution actually work against the mechanisms that allow first mover advantages (See Exhibit 2). Certain mechanisms are negatively affected and therefore rendered almost useless for first movers.
Some of these mechanisms include technology leadership becoming less isolated; catching up to late entrants becomes more difficult; patents are ineffective given the time it takes to be issued; decision making becomes less clear and therefore resources are not acquired in a preemptive manner; and switching costs are lower because late entrants can enter the market quicker. Under the circumstances of a fast paced or abrupt technology and market evolution, a first mover firm would not be able to utilize its proficiencies at the best of their ability and therefore have a weak or even disabling effect in obtaining first mover advantages.
In quadrant 1, we see both market growth and technology growth move at a similar, smooth pace (See Exhibit 2). In this scenario first movers have the best chance from gaining advantages from isolating their firm’s mechanisms. The idea of inertial advantage becomes more of a factor with slow market growth. This is because later entrants have trouble procuring the scarce resources. In this scenario, a first mover can expect a large market share because the market space for sharing with other firms is much lower (Suarez & Lanzolla, 2007).
Consumer behavior is different in this scenario as well in that customers are more likely to have a “wait and see” strategy when there is no clear industry leader (Suarez & Lanzolla, 2007). In regards to switching costs, customers in a slow market will have less variety to choose from and their brand loyalty will become stronger the longer there is an industry leader. In an industry where technological leadership is an important mechanism, a slow growth in technology will make it more difficult for competition to improve upon the leader’s technology. Even if they do
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succeed in doing this, the first mover will have an easier time catching up. After analyzing each quadrant, we can clearly see that quadrant 1 is the typical scenario for a first mover to utilize its proficiencies and obtain advantages (See Exhibit 2). Smooth market growth and smooth technological developments together construct the ideal conditions for first mover advantages to be realized (Suarez & Lanzolla).
4.4 Skype’s Entry Timing
When the team at Blue Moon Interactive were developing their P2P file sharing applications for both Kazaa and Skype internet usage was on a smooth yet steady growth pattern (See Exhibit 3). Throughout the world the internet infrastructure was becoming more and more accessible. The internet and its users are the main resources that are necessary for online file sharing and extremely important for Skype to function properly (Baset and Schulzrinne, 2004).
4.4.1 Market Growth
For a company whose core competencies are P2P file sharing and VoIP the internet is the marketplace where you will acquire your customers and ultimately establish your market share. The more users you can register to use your web services, the easier it is to perform your operations. For example, in eBay’s case, the more customers they have bidding on items the lower the prices will be, and with this will also come a larger stock of various items. In Facebook’s case, the application becomes more and more valuable with the increasing amount of users subscribed (See Exhibit 3).
Exhibit 3 is an example of the smooth market growth that I previously explained from Suarez and Lanzolla’s findings. This type of market growth is the best for first movers because resources will be distributed at a lower rate than if it was an abrupt growth curve. This graph also shows that only one quarter of the world’s population has internet access; however the trend is now beginning to rise exponentially. At some point in the future the rise will become even sharper and eventually level off like the typical S-curve. When this happens resources will become more easily acquired and late entrants have opportunities to enter the market.
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4.4.2 P2P Technology Growth
We can see that for a long time web access around the world has been on a smooth incline. How about the technology developments related to P2P file sharing and VoIP? If this would show similar growth to that of market growth (internet access), we could infer that this is a good opportunity for a first mover to gain significant advantages (Suarez & Lanzolla, 2007). The fact is that P2P technology has slowed over the recent history, however VoIP technology has continued to grow at a smooth pace similar to that of the market (See Exhibit 4). The reason for the growth of VoIP services been mainly because of the year over year increase in cellular capabilities with smart phones, and also because small business are finding it easier to integrate VoIP services into their communications. The proportional relationship between the technology development (P2P network) and market development (internet access), most notably the smooth growth, has allowed Skype to use its mechanisms to gain advantages and sustain them over the timelines expressed in Exhibits 3 and 4. In the next chapter we will identify what the important mechanisms are that Skype has used.
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