Can This Stanford MBA’s Crypto Startup End Internet Outages?

There’s a surprising side to Katy Perry that many of her fans don’t know. It turns out that since 2017, the superstar singer/songwriter celebrated for her big hits like “Roar” and “Dark Horse” also has quietly pursued an interest in crypto assets like Bitcoin and Ethereum.

Then in June 2020, Perry signed a deal not with Coke or Pepsi, but with an unusual business partner—a Silicon Valley startup working to help prevent internet service disruptions with help from—of all things—its newly-minted crypto coins.

Online outages are increasingly becoming a chronic problem with global economic and social consequences. On June 8, an outage shut down much of the global internet for several hours. Sites and mobile apps disrupted included CNN, part of Amazon, The New York Times, Reddit, Twitch, The Guardian, and even the main website for Britain’s national government.

At the time, the press spun the story as a fluke occurrence unlikely to happen repeatedly. But only nine days later on June 17, another outage crashed the internet. This collapse mostly took down banks and airlines in the United States and the Asia-Pacific region. Delta, American, Southwest and United Airlines were among the carriers knocked offline in the United States. In Asia, the Hong Kong Stock Exchange stopped trading. Australia was especially hard-hit, where Commonwealth Bank and the Virgin Australia airline had to suspend operations for the next two days.

In both cases, the problems were traced to content delivery networks, or CDNs. The June 8 outage originated with a network operated by Fastly, a CDN headquartered in San Francisco; the June 17 outage stemmed from technical difficulties at Akamai, a similar network based in Boston. CDNs like these two are transparent to Internet users, so most of us don’t recognize their obscure brand names. But behind the scenes, their operations are essential for trouble-free connectivity.

Networks like these came into existence during the late 1990s. Their investors launched the networks in partnership with some of the biggest companies online at the time, like Apple and Microsoft. These launch customers wanted to accelerate network speed and throughput by relieving traffic congestion that bogs down key network nodes, resulting in websites that feel slow or poorly responsive.

One might think of these CDNs as “fast lane” bridges between a website’s server and a user. Setting up these bridges requires CDNs to position high-speed relay servers inside data centers close to congested cities and suburban areas.

A classic example would be a company like Apple that conducts a lot of business in Europe. Apple might locate a “mirror” server inside a data center in Amsterdam that’s connected to a high-speed backbone telecom network linked with the San Jose area, where Apple maintains headquarters. Such a network gives Apple’s European customers a web browsing experience on Apple.com that isn’t much slower or less responsive than if they lived in Cupertino.

Most of us never suspect that we’re interacting with a mirrored website until the CDN’s network crashes. But when outages occur like in the two cases above, the impact can be wide-ranging and catastrophic. That’s because networks like these typically host internet resources at scale for hundreds or even thousands of large corporate customers around the world.

The reasons these crashes have become more frequent aren’t only because of technical problems with CDN network equipment. In many affluent U.S. metro markets during the pandemic, some of these networks found themselves overloaded many months before the summer 2021 outages. That’s because of unexpected lockdown-driven demand for prime-time special event TV programming delivered not over cable or satellite TV systems, but through the internet by increasingly popular digital video providers like Netflix, Hulu, and especially Roku.

For example, during several live sports broadcasts, home customer demand for high-definition 4K and 1080p big-screen streaming video outpaced the slack capacity of the CDNs. Viewers in some U.S. markets experienced service interruptions or technical disruptions such as frozen or poor-quality video. One particularly widespread outage disrupted the CBS All Access streaming service’s Super Bowl broadcast in February 2021, affecting about 3.4 million subscribers.

CDNs have experienced challenges adapting to the unexpected surge in demand. Building expanded network capacity often can’t be accomplished overnight because it’s an expensive, labor-intensive process. And because until recently large-scale outages had been infrequent, executives at content delivery networks concluded that purchasing redundant backup systems for much of the equipment within their networks seemed uneconomical.

Crypto Products Customers Actually Want

A four-year-old San Jose startup that calls itself Theta Labs is testing a solution. Theta may be the first of a series of startups that incorporate blockchain and cryptocurrency technologies into products and services that people actually want.

Moreover, the graduate management education community might find it interesting to learn that the company’s CEO Mitch Liu happens to be a Stanford MBA only about a decade out of business school.

How does the Theta Labs solution work? Essentially, what the peer-to-peer file transfer protocol BitTorrent did for file sharing more than a decade ago, Theta Labs now plans to do for online broadcasting. Instead of using CDN server farms, Theta uses the computers and broadband connections belonging to their network’s end users. That way, the network can cache online video programming and relay it in nearly real-time to other Theta subscribers not far away.

This technology embodies a disruptive threat to content delivery networks because it obviates much of the need for high-speed backbone networks and relay server farms.

What’s more, Theta also plans to introduce a highly disruptive business model that turns the traditional advertising-supported broadcast and basic cable TV model upside down. Believe it or not, Theta actually plans to compensate home computer users for the use of their computers and broadband connections as relay networks. In other words, the firm plans to reimburse home users for watching video content provided by Theta’s network—and pay them in crypto.

To that end, the company has already issued two exchange-traded crypto tokens. One of them acts as a currency through which viewers earn money for watching video over Theta’s streaming network. The other is a community token through which crypto miners can validate the integrity of Theta’s blockchain, much in the same way that Bitcoin miners perform a similar service.

Theta’s Deep Pockets

Among crypto startups, Theta seems to be in a unique position. That’s because the company appears to encounter no viable competition thus far. Moreover, financial backers include some very deep pockets from the technology and entertainment industries.

For example, the company already signed partnership deals with Samsung, Sony, and Google. Theta’s advisory board also boasts billionaire Steve Chen, the video software whiz who invented YouTube a few months after graduating from the University of Illinois. Chen’s stock in the company that bought YouTube in 2006—Google—is worth $1.93 billion as of November 2021.

Then in May 2021, Theta signed another partnership deal. This time their partner is Los Angeles-based Creative Artists Agency, one of the biggest sports and talent agencies in the world. CAA plans to operate one of the Theta network’s validator nodes while also functioning as a strategic advisor with close ties to the sports and entertainment industries.

In September, CAA inked a landmark deal to buy ICM Partners, the world’s fourth-largest literary and talent agency. The reason this acquisition is so significant for Theta goes well beyond extra financial support from the additional economies of scale and revenue that ICM will split with CAA. The real reason is that the shift to streaming has produced explosive demand for content “as media companies bulk up their film and TV content offerings for streaming services,” according to the Los Angeles Times.

The combined rosters of the consolidated firm will be better positioned to capitalize on this forthcoming talent buying spree. Launched as International Creative Management in 1975, ICM’s clients include actor Samuel L. Jackson, comedian Ellen DeGeneres and producer/director Spike Lee. And besides Perry, CAA represents actors Tom Hanks and Reese Witherspoon as well as music star Ariana Grande.

Controversy and Theta Labs

Crypto investors have started to notice. The price of the firm’s native Theta Fuel token (TFUEL) skyrocketed during June 2020, climbing 70 percent during a period when the coin market—dragged down by Bitcoin’s poor performance in the wake of its May crash—lost more than 10 percent.

In fact, Theta’s token which traded at six cents in mid-2020 a year later traded at six dollars. During the first six months of 2021 alone the price of Fuel had soared almost 1,700 percent. And immediately following the announcement of the CAA deal in June, the crypto token had amassed a market capitalization of $1.6 billion, according to data supplied by CoinGecko; by the time of this writing, the market cap had climbed yet another 6.2 percent, closing in on $1.7 billion.

Nevertheless, controversy swirls around Theta Labs. For one thing, it’s not yet evident that the Theta network has sufficient capacity and the kind of battle-tested performance track record needed to satisfy the expectations of potential content partners who currently rely on cable and satellite TV delivery.

Then there are the demanding expectations of the Roku and Hulu streaming service subscribers. If the Super Bowl experience is any indication, streaming media subscribers do not easily forgive network outages. During the first ten minutes of the interruptions experienced by CBS at kickoff time, almost 30,000 subscribers had already posted critical comments on websites like Downdetector.com and social media platforms like Facebook—which itself suffered a six-hour outage that also took down its Instagram and WhatsApp websites in October 2021.

To be sure, an evaluation account BSchools obtained from the firm in late July demonstrated adequate quality and service. Nevertheless, the content selection of YouTube-style subscriber-uploaded videos—and a single live cable channel feed from NASA-TV—may not sufficiently test the Theta network’s capacity to provide the variety and quality of content that’s up to the marketplace demands of likely partners and new customers.

Moreover, when the price of Fuel unexpectedly dropped during July and August, some commentators and analysts wondered whether the coin market could support the firm with enough momentum to carry Theta all the way through to an IPO. But then again, other observers didn’t seem too concerned, given that the firm’s promotional strategy now can rely on Hollywood connections from ICM as well as CAA—along with the star power of a spectacular showstopper like Katy Perry.

Douglas Mark owns no shares of Theta Token and has no conflicts of interest to disclose.