Martin Varsavsky on How U.S. Tech Firms Differ from Their European Counterparts

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This is Kevin Werbach. I'm the organizer of the Supernova Conference, which is this year, June 20th through 22nd in San Francisco. Information@www.supernova2007.com this interview is part of a series of podcasts that we're doing with various Supernova speakers and other thought leaders. Today I'm speaking with Martin Varsovsky, who's the founder of Phone and several other companies. He's actually one of the most extraordinary technology entrepreneurs that I know on several levels, and he'll talk, I think, about some of the companies he started, but he's also an investor in technology companies throughout Europe and also someone who's done some tremendous work around using technology for social good and for philanthropy. And we're thrilled that he'll be speaking at Supernova this year. So, Martin, welcome. It's good to talk to you.

Yeah, same here. Nice to be with you.

So you're someone who is actually one of my entrepreneurial heroes, if you will, because you've disrupted the communications industry several times during your career, as well as other industries. Tell us a little bit about your background and how you wound up getting to the current company you're doing, which is Phone.

Yeah, well, I wish I could tell you was all part of some kind of master plan, but it really wasn't. I mean, I started the first telecoms company that I started. I started it because I was doing what turned out to be a failed real estate investment in which I because my first business, urban capital, we invested in lofts in New York city in the 80s, in the early 80s. I started that when I was in school. And then I decided to diversify at an Hawaii and bought a hotel in Boulder, Colorado, the Holiday Inn. That wasn't doing well at all. But the only part of the hotel that was making a killing was the switchboard, you know, the pbx. And we clearly were ripping off customers who stayed at the hotel, which wasn't that nice, but everyone was doing it and we were making a lot of money with that. And so I looked at the rates that we were paying and I saw that America had liberalized its international rates, and the international rates of America were very low compared to international rates of other countries. And that's when I had the idea, or invented callback, let's say, which was this cheaper way of making a phone call by switching calls through the United States. And I got some programmers in Omaha in 1990 to build a new kind of PBX that would switch calls by sending two outgoing calls from the United States that would link, let's say Italy with Japan. And that's how I got started. So it was completely by chance, but since then I've developed this. It's been, I guess, 17 years now that I've been in telecoms and the Internet and it's been one fight after the other to try to make the telecoms environment more friendly, less monopolistic and just better for the consumer. And so I started Viatel, which I it's a company that still operates in, out of the UK and I started that in 1990 and the company was worth around 1.2 billion when I sold my shares. And then I started Jaztel, which is today the second largest publicly traded telecom company in Spain. I also started yah.com which is the second largest Spanish website, type of generic website, and then also including DSL services and so on. So partly Internet, partly telecoms, which I sold to deutsche Telekom for 550 million euros. And I then had a failed venture in this industry called Einsteinnet, which was about web based computing, which is now very fashionable. But in 2000 it was, I would say, yet too soon to do that. And we lost 35 million euros on that venture. But we learned a lot about web based computing. And my latest venture is phone, as you said, which is the largest WI FI network in the world. And it's a WI FI network built by the people. So that's a summary of my activities in the industry, telecoms and Internet.

Okay, so explain what you mean by a network built by the people. This is one of the things that I think is really interesting about what you're doing. People think about communications as being infrastructure centralized and you're focused out at the user level on the social aspects of it.

Yeah, well we, you know, when I saw the work we were doing at my foundation in Argentina and Chile, and we were building a lot of educational content that was built by the people. Let's say we started this in 2000. There was an industry there which was the textbook industry, which was really ripping the Argentine students off with extremely high rates for textbooks, which most students couldn't afford. And we developed through the Internet a system that you can see actually in educ R which is like textbooks built by the teachers, you know, and that's how that was my first Web 2.0 type of activity. Before the Web 2.0 was actually known as the Web 2.0. It was like user generated content for the textbook industry. And I, I got into that mode and I thought, and then later I thought, well, couldn't we do a telecom operator built by the people? You know, how would a telecom operator built by the people look like? And that's how I had the idea of phone. Phon is based on WI fi routers that people buy@phon.com and these routers, which cost around $40, have the unique feature which split the WI fi signal into two. You get two SSIDs. So most of the bandwidth you keep for yourself, but you donate enough bandwidth. So when others come by your home, they see your signal. And because they also are donors, they are also we call phoneros, the people who donate, the nice people who join phone and donate part of their bandwidth. Everybody creates a public signal that's called phone that it's free for funerals and it costs $3 the first day and $2 every day thereafter for the people who are not donors. So we create an environment of free WI fi or affordable WI fi.

So what's the difference of a network that's built that way versus one that's deployed by an operator or an Internet service provider?

Well, there's a lot of differences. Well, FON actually works with many telcos. It's very interesting because this is the first time that I built a company which has created or is creating so much value that the telecom operators work with us as well. Because paradoxically, phone makes broadband connections more useful because you pay at home and you roam the world for free. So the way we work with them with some telecom operators not yet in the States, but in Europe and Asia, for example, with cns, which is the largest cable TV company in Taiwan, or cnet which is a DSL operator also in Taiwan, or Excite Broadband, which is a DSL operator in Japan, or NEFT Telecom, which is a very large TSL operator in France. And there's many more. The way we work with them is they give you a broadband connection with a Fonera and so you pay at home, but then you can connect for free when you go buy the homes of all the other forneros who are, you know, we've created. There's over 100,000 foros growing at a rate of 10 to 20,000amonth. And when you catch their Signal, you don't pay. That's basically the idea. And if you'd like to make money, we have two kinds of the Linuses and the bills. The Linuses do this because they like to share and roam the world for free. But if you're a cafe owner, a business owner, and you don't really care about roaming the world for free because you want to make money, then at phone you are a bill for narrow and a bill which comes from Bill Gates. As you can imagine, bills want to make money, Linuses want to share. And bills are cafe owners who make 50% of all the revenues we make by selling access to the network.

So does the way people use the network, is it different in this kind of environment than it is with standard WI FI network or standard telecom network?

Well, I guess you're right if you're trying to point out that once all this is deployed, the experience of the person is similar to T Mobile. I mean, you basically find the hotspot, you put your username and password and you roam for free. If you're a Phonero, which is, I guess if you find the T Mobile hotspot and you pay T Mobile already a monthly fee, you put your username and password and you serve for, for, I'm sorry, not for free, you already paid T Mobile, but at that moment you don't pay extra. So it's. In that sense it's very similar. You see a WI FI screen and you put your username and password.

I guess the reason I'm asking is that I think that people tend to separate too much between people who focus on connectivity and just the pipes and people who focus on applications and things you do with connectivity. Certainly there's differences in different kinds of companies and so forth, but I think a lot of the interesting innovation that's happening is the connection between the two of them and looking at new possibilities when you've got new connectivity tools. So we're doing this conversation, appropriately enough, via Skype, which you could say is just using voip to do basic phone calling, but it allows all kinds of new services and usage scenarios. I think that you don't get on the traditional phone network. So do you agree with my contention that these are two separated and so what do we learn from bringing them together?

I agree. Well, we should clarify that Skype is the lead investor, one of the lead investors in Fon, the other one is Google and Janus and Nicholas from Skype are on my board. So we're very close to Skype. Right. So not only Are we talking over Skype? But FON is partly funded and partly, I guess, managed or at the board level from Skype. We have a very close relationship with Skype and to me, Skype, I have tremendous admiration for Skype because Skype is exactly what you said. It's the crossover of the culture of telecoms and the culture of the Internet. And so is phone at phone. Every Fonero has an opportunity to personalize their signup page with YouTube videos or Flickr pictures or any other picture. We have open APIs to many services. So for example, people get to know each other in a neighborhood through the WI fi signal of phone. Like they open up their laptop and they see a signal phone, they go in there, they sign up and then the sign up pages of phone all look different. And we also allow open free surfing to your blog. So for example, if somebody, a neighbor of yours is a blogger, all the neighbors can see his blog without paying or even without being for. Of course, if they are for, they can see anything on the Internet without paying. But we do a lot of things that are really a crossover between the traditional telco t mobile type of service where you connect to WI fi, which is what many for want to do. They want to connect to WI fi but others like the community aspect of phone and we were very inspired by Skype. Skype is free for anybody who's on Skype. And then if you want to call people who are not on Skype, you pay. The same thing with phone. It's free to anybody who's in phone. But if you want to use phone and you never donate it anywhere, you pay and that's our business model. So we're very inspired by Skype. And I agree with your comment that the future is more about crossovers than about straight dividing lines between telecoms and the Internet. Which is something by the way that in the States, when I hear this net neutrality debates, which you only hear in the States, by the way, you don't hear that in Asia or in Europe. You are surprised not coming from the States because. Because it's so clear to everyone else that the telecom industry and the Internet are so dependent on each other that it's hard to understand why they wouldn't get along.

No. And this was the next question I was going to ask you. So what are we missing in the States? Is it that in other countries the operators aren't contemplating these things or what?

I lived in the states for 18 years and I love the United States. So please don't take anyone Who's American? And here's my criticism, not take it badly, but here it goes. I think America invented liberalization and retreated from liberalization of the telecom sector. And America was an inspiration to the world in terms of liberalization. And then the unbundling of the local loop, which was so important for achieving liberalization in Asia and in Europe, was not followed through in America. And in America, what you have is basically a duopoly of fixed services in every market, which I think is pretty harmful to the American consumer. And so in America now you have expensive services, slow and expensive services compared to Europe and Asia. And that's just sad.

Yeah, I'll agree with you on that. And as someone who was at the FCC when the liberalization process was started in the mid-90s, it is disappointing to see the way things have gone here. Although the question is then what comes from that? I mean, you're also, as I mentioned at the outset, investing in various Internet startups and certainly active in the Internet startup community in Europe. How do you see that environment today compared to the US and Asia and other parts of the world?

Well, let me answer that question first by giving you a list of, of the investments that I have so your listeners have an idea of what these companies are because some of them they heard about. So I not only invest in Europe, although I mostly invest in Europe, but to give you an example, I'm an investor in Technorati in the States. So that gives you a sense of a website that is well known in the States that I'm an investor in. Okay. But in Europe, I'm an investor in a lot of social websites that are doing extremely well. For example, I'm an investor in Singh, which is like the LinkedIn of Europe, but surprisingly it went public in Europe. I mean, there's an active and dynamic market for the Internet in Europe that people in the States are not so aware of. So sing, which is sing.coming, which used to be called OpenBC, is a very large social website for business people. Let's say I'm also an investor in smaller companies in Europe, for example, I'm an investor in a small startup called Money Tracking, which is like a web social accounting, as strange as it sounds. Like when groups want to account for expenses, startups or graduation trips, or think of any kind of group who's spending money, they go to Money Tracking to do this. So here's an example of, I think an original idea that it's of course in English and people in the States use it a lot. They don't even know that it's from Europe. Right. Because a lot of these websites, you don't even know where they're from. Right. But they're very effective. I'm also an investor in a much more. Another European website that has done extremely well, called Netvibes. I'm sure many of your listeners know it. It has over 7 million users in a year.

They were actually one of the companies at Supernova last year. One of our connected innovators we selected with tech run.

So absolutely fantastic. Fantastic. Well, Tariq is a good friend. He's also a member of my European advisory team. We frequently see each other. Many of the European tech entrepreneurs, we see each other frequently. Also with Nicolas and Janus, I'm also an investor in Juiced, which is the new venture of Nicolas and Janus, which is for delivering quality TV over the Internet, as opposed to YouTube type of fragments. Juce is about delivering the whole show with great quality. It's sort of the same thing as Skype, like a lot of emphasis on technology. Right. Skype is just the best quality of VoIP that there is and Gust aims at that, at being the best quality to deliver the TV. So I'm an investor in those. I also own 100% of a Firefox extension called GSpace. Getgspace.com is the URL. It's already used by around half a million people. And it's a Firefox extension that allows you to store all your documents, whether on a Mac or on a PC or on Linux or anything. You can send them over Firefox to Gmail. So it stores a PowerPoint presentation as Gmail, or your favorite song as Gmail, or any type of Excel or anything. It stores it as Gmail, which it's something that we're very interested at Phone. Because the next version of Phonera, which we're releasing by the end of the year, is going to be a Phonera that not only socially connects you, but also that manages your relationship with the Web 2.0 in the sense that it's going to be a Phonera that helps you upload and download. So you stick a pen drive with, let's say 200 megs of pictures from you want to send to Flickr. You stick them to the router and you go away. You don't need to do this from your laptop, which is something that slows you down and compromises your laptop many times and so on. And G space is a similar idea. So you can send it, for example, you can Send your files to GSpace. So it's all. The Internet is becoming more and more about uploading and downloading. Now that, and we love it, we love the new type of Internet, but we kind of hate being tied up with our laptops. And so that's what GSpace and the new phone era, which we're going to make work together, are about.

Okay, so sorry, let me interrupt you just as I want to do a couple more questions before we run out of time. But is there a difference that you can see between the startup culture or the activity in Europe versus other parts of the world?

Well, I would say yes and no. I'm also very familiar with Asia because Phony is becoming very big in Japan. Kore and I was just there for two weeks and this is kind of new to me because I was so happily surprised that I have Fontukof in Asia, but that made me go to Asia a lot. And I see the startup environment in Asia, in Europe and in America. My first answer would say that Europe and America resemble each other more than Asia. Okay. And the startup environment in Asia is a bit more local in the sense that when you start a company in Europe, anywhere in Europe, in Denmark, in Sweden, in Spain, you always do it with global ambitions because the Danish market is tiny, the Swedish market is tiny, the Spanish market is big, but not huge. Well, the Chinese, they don't launch anything with global ambitions because China is big enough. They launched, the Chinese launch things for the Chinese, the Koreans launched things for the Koreans, the Japanese launched things for the Japanese, and instead the Europeans launch things for the world. Like Juiced is meant for the whole world, Phone is meant for the whole world. Of course, all the stuff that's been done in Silicon Valley is meant for the whole world. So we have global ambitions and they have local ambitions. I would say that is a big distinction. Now, a minor distinction of Europe and America is that Europe is much more socially minded and less money minded. Of course, people like to make money in Europe, like everywhere else. But I would say that look at the open source movement. I mean, the open source movement exists in America, but it's very big in Europe. In Europe, people are happy to see their software being used. If you look at Jamendo, for example, another European company which is about music on the Internet, that is not piracy. It's people who just want their music to be heard, you know. And so you see Pandora, for example, is about famous musicians showcasing their music, hoping you buy it. Jamendo is about musicians. It's like open Source musicians. Right. So we have more of that. We have more open source in general, more people working on Linux and using Ubuntu and using just more larger open source movement. And people hate patents in Europe mostly they dislike patents, they dislike copyright, and they believe in an open and free environment for the Internet.

And it's extraordinary to hear that. And I think you're right, it certainly jives with what I see out there. But looking from the perspective of the US and again remembering what things were like 10, 15 years ago when the Internet was first getting off the ground and we in the US used to have that perspective, that we were the ones in favor of openness and freedom. And it was these centralized corporatist societies in places like Europe that had a hard time getting used to it. So that's quite a shift.

Well, I think America sold the America of Clinton, let's say the America of the 90s sold a wonderful vision of the Internet to the rest of the world. The rest of the world embraced it. And then came the America of Bush, which of course you could say, well, Bush is not working every day of his life trying to meddle with the Internet. But the spirit of the Bush administration has somehow it's just not a positive spirit for the relationship of America and the world. And in general, the big distinction that I would say is that the rest of Europe, let's say, I was going to say the rest of the world, but really that's not the case because I just thought of the exception of China, which so much wants to be like the United States, but other than China, which is like, I want to be United States when I grow up, the rest of Asia is more socially minded. The Japanese are much more like the Europeans, The Koreans are more like the Europeans, the Taiwanese are more like the Europeans. They are more socially minded, less money minded, but of course they want to make a living. And if they can get rich, they won't say no, no, absolutely.

So one more question before we wrap up. Not, not specific to Europe this time. What advice do you give to entrepreneurs? People talk a lot now, especially in the web 2.0 context, about how cheap it is to start a company today. The platforms are all there, things are open, barriers are lower. But that doesn't necessarily make it easier to build a successful, growing, sustainable company because it's just as cheap for everyone else. What are the lessons that you've learned that are relevant to today for how to really build something that's going to be great and lasting?

Well, I built my own companies of which, let's say five Internet companies, of which four have done well and one failed. So I experienced failure and success. I'm glad that it was more success than failure, but both. And then I have my activities as an investor helping others. And I do. I teach entrepreneurship at the Instituto de Empresa, which is the leading business school in Spain. And I mentor, let's say, younger entrepreneurs because I'm 46 now and I've been doing this for many years and I many times see projects which are good. But the difficulty on the Internet today is that it's not about throwing money like in the Internet of 2000, trying and hoping that with commercials, advertising that things take off the Internet today. When you look at net vibes and how it's grown, or you look at Menehame, which is like a Spanish dig, which I am an investor in, and how successful it's been. I mean, menehame is an open source project and it's the third largest news website in Spain. It's really very similar to Diggs and it has two employees, okay. And it competes against publications that have hundreds of employees, which of course write the content. And that's not the case with many of, but still is the third largest news website. I think the key about these projects is that they have to strike a chord. They have to. The Internet is becoming more and more like the music business, where everybody sings a song, but some songs just make it. You know, some people just love this song. Now, the world of the Internet is a world of narrow casting, where so many things are narrow casted at the same time, but a few of them just catch on. Just people fall in love with them. People are really into them. And so you can only hope that people are going to listen to your song. The good news of the new Internet is you don't need to lose a fortune to find out that people don't listen to your song. It's like you said, it's inexpensive to try and you have to do it with your mind and you have to do it with your heart. If you ask me, how do I choose these investments, right? Because obviously I've been doing well with my investments. I've been backing the right people. Well, my first answer is, I test it. I invest in things I love to use. If I don't fall in love with this as a user, I don't invest. After I see that I really like the service, let's say the website, then I look at who's behind it. I interview the people, the entrepreneurs And I think, do these people have what it takes to handle success? Because not too many people do. And are these people in love with what they're doing? Are they committed? Are they going to stay with me? And after that, we'll see if we can work out a deal, a reasonable deal, reasonable valuation, or some way for me to get involved. So I've invested in, I've seen maybe hundreds of companies. I invested in maybe in 12. So I'm picky. I look carefully, but that's the way I choose companies to invest in.

So to use your metaphor, you'd like to teach the world to sing, right? Okay, thank you very much, Martin. Again, Martin Warsovsky, who will be speaking at supernova this year. Supernova 2007, June 20th, 22nd in San Francisco, www.supernova2007.com.

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