Last month, Paltalk announced it completed a buyback of its shares from investor Softbank Capital Partners after having achieved years of profitability. The Paltalk platform was launched in 1998 and has more than 4 million unique users a month with nearly 100,000 people simultaneously chatting in rooms at any given time. The company combines voice and video into instant messaging, and has enabled user-created chat rooms, supporting as many as 5,000 people in one live video chat room. Following the announcement, we interviewed CEO Jason Katz about his company.

We asked Katz how a company that charges $14.95 a month or $60 a year can compete with free video chat available by using a Web cam and Internet service. He suggested that several factors contributed to Paltalk's success. First, the ability to support user groups with thousands of members has attracted users who can't find this feature on a peer-to-peer Web chat. He also noted that users can use the service for free if participating in groups of 10 or less, so the main attraction is all about bringing large groups together. "People can connect with people they know and people they don't know" Katz said, bringing together communities with common interests.

Another success factor has been the quality of audio and video his company offers. Using H.264 for compression, Paltalk gets excellent video quality at relatively low bit rates. (Katz said that a connection with 1Mbps upstream and downstream would typically offer a TV broadcast quality picture with 15 frames per second.)

When we asked about the mix of consumer vs. enterprise customers, Katz said that while most of his users were consumers, he has seen an uptake of enterprise users as well.

Our observations: whether enterprise or consumer, Paltalk's financial success proves that facilitating social networking with voice, text and video chat can be a profitable business model. As enterprises learn to better user the social network model to business advantage, they would do well to consider how Paltalk or a similar business process can help improve internal and external communications.

It might seem Jason Katz has gotten it all backward.

While so many startups are groveling for funding, the founder and CEO of Paltalk, an online social video conferencing startup based in New York, decided to use its cash to buy back a major chunk of the company from a venture capital backer. Specifically, Paltalk last month purchased a 20% stake from Softbank Capital Partners LP, which acquired the shares through a $6 million investment five years ago.

"We were accumulating a lot of money in the bank, but we're not a bank," Katz says. "We still have multimillions in cash, and now everyone owns a lot more of the company."

Paltalk's move seems particularly counterintuitive at a time when many startups are desperately seeking cash or struggling to conserve as much of their existing coffers as possible. VC industry experts are hard-pressed to cite a situation similar to Paltalk's.

"In every board meeting I sit in, cash is still king," says Brian Beard, a partner with Wilson Sonsini Goodrich & Rosati PC. "Most companies would probably love to do something like this but don't have the luxury."

But industry observers do view it as a part of an unprecedented shuffle in venture portfolios, sparked by a desperate hunt for liquidity and a sort of "investor fatigue" that leads to many recapitalizations. Secondary funds such as Industry Ventures LLC, which recently closed a $265 million fund aimed at buying VC portfolios and limited partner committments, are gathering up bundles of long-held startup stakes.

"We are seeing shifting of capitalization structures, existing funds selling portfolios, exiting people transferring to other people," says Morgan, Lewis & Bockius LLP partner John Park. "It's musical chairs."

Katz founded and bootstrapped Paltalk in 1998 and launched a primitive voice-over-Internet-protocol social chat site. Eventually, as technology advanced, the company added video to its chatrooms and built the capacity for hundreds of users to connect with one another. For groups of more than 10, Paltalk charges a subscription rate of $14.95 per month or $60 per year.

Before the Softbank investment, Paltalk received $3.9 million in two rounds from friends and family and a "smallish investment fund" that Katz declined to identify. But in 2004, he started looking for a backer that could bring not only money (the investment boosted Paltalk's coffers to $8 million from $2 million) but expertise, connections and reputation.

"I wanted money from a brand name VC," he says. "When a VC the quality of Softbank has looked at you, you are a real company."

With the help of Softbank partner Mike Perlis, Paltalk built a marketing operation and hired some Internet talent from AOL LLC. Very soon after the investment, the tiny company, now with 37 employees, became profitable and started piling up cash, Katz says.

The Softbank money became essentially superfluous, and, following a 2008 that Katz described as the startup's strongest year yet, the entrepreneur and the Paltalk board decided to try something out of the ordinary.

"I couldn't declare dividends or distribute any money because Softbank was there with a preference," he says. "So we approached them with a different idea."

Softbank's Perlis was amenable to the notion of selling its stake back to the company, Katz says, especially with the 5% annual dividend that was agreed upon as part of the investment. A request to interview Perlis received no reply.

"I was going to have to pay them one way or another," Katz says. "Liquidity is hard to come by, and Softbank got a good return."

An obvious conclusion one might draw from Paltalk's move would be that the startup is cleaning up its capital structure in preparation for a sale. Katz insists this isn't so, though he does argue that Paltalk would make an attractive takeover target.

"We convert users to a pay situation, so we are a monetization engine," Katz says, referring to the "freemium" business model where users are charged a subscription fee to upgrade from Paltalk's basic service. "If you layer this kind of thing on top of other services, it could make tons of money for lots of big companies."

Paltalk has struck a few acquisitions of its own, having acquired the assets of rivals HearMe.com and Firetalk in 2001. But for now, Katz says he aims to keep running his successful business and, in maintaining Paltalk's uniqueness among venture capital-backed startups, perhaps even returning cash to its remaining shareholders.

Back in the last downturn, in 2001, Jason Katz realized he was in trouble. His fledgling Web site, Paltalk, was trying to make money by giving away a free service and selling advertising. But suddenly advertising was drying up. So Katz--whose site operated chat rooms in which you could not only send text messages but also talk, the way you would on a phone--did something radical: he started charging people to use a premium version of his software, which offered some extra features. Guess what? Since 2004 he's been making a profit, and he's come to believe that, contrary to the conventional wisdom, people really are willing to pay for online services. "I think some companies are scared that they will cede users to the competition if they deign to ask someone to pay for a subscription to something--but that is obviously a mistake," Katz says.

If so, it's a mistake that a lot of bigger tech companies are making. Could these guys be leaving billions of dollars on the table? Facebook, for example, has 250 million members, making it one of the biggest sites on the Internet. Facebook takes in somewhere between $300 million and $500 million a year from advertising, but it has never made a dime of profit. Twitter, another hot Internet site, has 40 million members and doesn't even try to generate revenue, let alone profits. YouTube, the video site owned by Google, sells ads but runs at a loss.

Why not charge people to use these sites? If the service is so useful, surely people would pay. Nevertheless, the prevailing wisdom in Silicon Valley today is that everything on the Internet must be free. Enslaved by this dogma, tech companies keep bending themselves into pretzels trying to invent ways to "monetize their traffic," as they say in Valley-speak. Maybe they'll charge companies that monitor Facebook and Twitter to see what customers are saying about them. Maybe they'll steer people to shopping sites and take a slice of whatever those people buy. Maybe they'll get into the hardware business, developing smartphones or other devices that come preloaded with their application. Twitter might make money by charging celebrities and companies for "verified" accounts so that readers know they really are who they say they are.

Meanwhile, the most obvious answer hangs right out there in the open: charge a fee to use the serv-ice! I'm not even close to being an avid member of Facebook, but I do consider it useful--and I would gladly pay $5 per month for the service. The really passionate members are kids in their teens and 20s. They spend hours every day on Facebook, and would be lost without it. You think they won't pay five bucks a month? Even if half of Facebook's members were to leave rather than pay, you're still looking at a huge business.

So why don't more Web sites do it? The idea, apparently, is that charging money would limit growth and be shortsighted; that there's a bigger opportunity if membership remains free and everyone in the world can join. "Facebook is a free service, and we have no plans to change that," says Elliot Schrage, head of marketing at Facebook.

Katz, the guy who runs Paltalk, has a modest proposal: he suggests that Facebook should offer his video chat-room software as an optional feature, and charge a monthly fee to use it. "I think Facebook could make a zillion dollars putting my technology into their community," he says. (Katz would get a nice slice of that, too.) Alas, he says, he's tried to get a meeting with Facebook but has had no luck.

Katz didn't have this all planned out from the start. At first Paltalk was just a kind of fancy version of instant messaging--basically text plus voice. In 2001 Katz added video, and that's where he started generating money. For zero dollars, you can trade instant messages on Paltalk with up to 10 people and see their video- streams. But if you want to visit chat rooms and see video streams from hundreds of people, you must pay $14.95 per month, or $60 for a one-year subscription. In addition to the video chat rooms, Katz has created virtual conference rooms for corporate customers, mostly small businesses. For $90 to $1,000 per month (depending on the maximum number of users), you can have a room that's all yours, 24 hours a day.

Only about 5 percent of Paltalk's 4 million active members pony up. Apply that 5 percent conversion rate to Facebook's giant user base and you're looking at 12.5 million people paying $60 a year. That's $750 million. But even on his own, Katz has been able to build a nice little business. He has 38 employees and annual revenue that's in the "tens of millions," with 85 percent coming from subscriptions, he says.

Katz still runs ads, but ad rates have plunged so much that a business that was lousy in 2001 "now is even worse," he says. The funny thing is, if Katz hadn't dared to charge fees back in 2001, he wouldn't be in business today. That's something the big guys might want to keep in mind.

Lyons Is Newsweek's Technology Columnist And Author Of The Fake Steve Jobs Blog.

Here's a funding story you don't see often, recession or no: A startup buying back its shares from its venture capitalist, at a premium.

But that's the transaction that video chat firm Paltalk and Softbank have completed. Paltalk, which sold off 20% of its equity to Softbank for $6 million in 2004, has bought the shares back. No one has spelled out a purchase price, but I'm told the deal will be considered a "single" for Softbank -- it gets its capital back, plus a return -- which in this economy ought to be a homerun.

This is different than the "baby buybacks" we're seeing as the economy sputters, in which founders reclaim all or part of their companies at distressed prices after their investors give up -- think eBay (EBAY) and StumbleUpon (and perhaps Skype), or more recently, ManiaTV.

Paltalk can afford to buy its shares back because it's an Internet video company that actually makes money, which it does via a "freemium" model: Most users can hope on the service for free, but about 5 percent pay for some extra features, like virtual conference rooms. People familiar with the company tell me it should be on track to throw off $4 milllion in cash this year off of revenues of $20 million. It also has extra cash on hand these days as a result of a settlement it extracted from Microsoft (MSFT) in a patent lawsuit in March.

There are a whole lot of Web companies -- let alone Web video or Web chat companies -- that would like those financials. But Paltalk is a steady grower, not a rocketship, and while the company has supposedly gone down the road with potential acquirers in the past, it's unlikely to get acquired at a huge premium. So it makes sense for Softbank to take money off the table; I'm told Paltalk was their last open investment made from an Internet fund they raised way back in 1999. Paltalk CEO Jason Katz says he now owns 80% of his company.

Group messaging company Paltalk said on Thursday that it has reached a deal with Microsoft to settle a patent dispute.

As part of the deal, Microsoft has taken a license to Paltalk's patents and is paying an undisclosed amount of money, Paltalk said in a press release.

"After litigating with Microsoft for over two years to protect our intellectual property, it is gratifying to resolve this matter with Microsoft taking a license to Paltalk's patents," said Jason Katz, founder and CEO of Paltalk.

Paltalk filed its suit against Microsoft in September 2006, alleging that Halo 2 and Halo 3 running on Xbox Live violated Paltalk's patents. Paltalk said the case involved two patents that were originally filed in 1996 by MPath Interactive and acquired by Paltalk in 2001.

The case against Microsoft went to trial in March, Paltalk said, with a settlement reached on the fourth day of the case.

Microsoft declined to comment on the settlement. However, a source close to the company said the settlement was approved by the court last month.

Microsoft and Paltalk, which owns patents for video chat technology, settled in March a lawsuit in which Paltalk accused Microsoft of infringing on two patents. New York-based Paltalk alleged Microsoft illegally used the technology in its "Halo 2" and "Halo 3" Xbox games, among others.

The two companies settled for an undisclosed amount of money after the case went to trial, allowing Microsoft to continue using the technology, according to a Paltalk news release. Paltalk's technology allows Xbox players to talk to each other over an Internet connection.

Paltalk filed the suit in 2006. It announced the settlement Thursday.

"After litigating with Microsoft for over two years to protect our intellectual property, it is gratifying to resolve this matter with Microsoft taking a license to Paltalk's patents," Jason Katz, Paltalk founder and CEO, said in the release.

Microsoft had no comment on the case.

Manhattan Theater Club said that the actress Portia, of the plays "McReele" and "Our Lady of 121st Street," will take over the role of Mama Nadi in its production of "Ruined," the Lynn Nottage play which recently won the Pulitzer Prize for drama. It said Portia would begin performing the role on May 26, taking over from Saidah Arrika Ekulona, who is leaving to fulfill a previous commitment. ... The Williamstown Theater Festival's coming production of "True West," the Sam Shepard play about two estranged brothers, has lost one of the real brothers who was to star in it. The comedians Rob and Nate Corddry, alumni of "The Daily Show With Jon Stewart," were both cast in the production, but Rob Corddry has withdrawn because of a scheduling conflict, the festival said. He will be replaced by Bradley Cooper of "He's Just Not That Into You" and "Wedding Crashers." ... The Village Voice Obie Awards, which honor Off Broadway and Off Off Broadway theater, will be broadcast live on the Web site Paltalk.com. The awards ceremony, which begins at 8 p.m. on Monday and is to be hosted by Martha Plimpton and Daniel Breaker, can be seen online at paltalk.com/obies.

By: Neil Best

Sports media doesn't get more old-school than a weekly magazine that launched in 1886, a radio station whose frequency originated in 1922 and a TV network that debuted in 1939.

Within the last week, though, Sporting News, WFAN and NBC each has premiered or announced a new media initiative that 20 years ago would have been dismissed as science fiction.

Let's start with Sporting News, which has dropped the "The" from its name and is trying to reinvent itself after a decadeslong slide into relative obscurity.

"It was an iconic brand that had kind of lost its way," publisher Ed Baker understated yesterday.

One part of the plan was switching the print product to an every-other-week schedule, effective Sept. 1. It will focus on less time-sensitive material, featuring a quirky roster of writers that will include Yankees senior vice president Hank Steinbrenner.

What will Hank write about? "A very unique perspective on baseball, in keeping with the Steinbrenner tradition of telling it like is," Baker said, understating again.

The more daring news was the launch Wednesday of "Sporting News Today," which bills itself as the "first-ever national daily digital sports newspaper."

It's easier to sample than to explain (www.sportingnews today. com), but essentially it is a Web-based product that looks and acts like a newspaper, minus the paper and ink, plus complete late results. (There is no charge for the ad-supported "paper.")

For those who remember "The National," the sports daily that tried and failed to make a dent in 1990 and '91, it's like that, only digital. Kind of.

Sporting News swears it has the resources to break stories and produce compelling content. Perhaps so, but it will be a challenge against the likes of ESPN.com and local sites such as Newsday.com.

The real story is the format, which presents articles and graphics packaged by editors rather than hunted down by mouse-clicking readers, much like newspapers work. "It's a one-stop shop," Baker said.

The publisher said young readers seem to enjoy the format as much as older ones, but I suspect it will have special appeal to old-timers who grew up with the old Sporting News itself.

Its original claim to fame as the "Bible of Baseball" was its slavish devotion to boxscores.

And, lo, on Pages 12, 13 and 14 yesterday, there they all were, side-by-side, just like in a newspaper, with statistics and standings.

"We don't want to lose our history and heritage, back to when there were newsweeklies," Baker said. "But fans told us 'news' and 'weekly' is an oxymoron now."


WFAN has new video 'pal'

Also last week, WFAN began offering video of its morning and midday shows through the cameras of Paltalk.com, an Internet text, voice and video chatting service.

The video quality is akin to that seen in live shots of astronauts in space - circa last millennium - but for the first time, the station's listeners actually can see Boomer Esiason cringe at Craig Carton's jokes.

People can sign up to watch, and if they have a Webcam, they can be seen by and interact with the hosts. There is no charge unless you want to interact via video with other viewers.

President Joel Smernoff said Paltalk has 4 million users worldwide and has been a hit with fans of the "Opie and Anthony" show. But this is its first foray into sports radio.

"There is something very anonymous about watching streamed texts go by," Smernoff said. "When you can hear his voice, see him on camera, you really get the feel of who these people are."

Chris Carlin, who co-hosted the morning show when Carton was on vacation last week, said, "I think it's good; there's not only more interaction on a personal level, but [listeners] get a feel of what is going on in the studio. So we have to be a little more cautious."

PalTalk, a video-focused social network, and New York sports radio station WFAN on Monday announced that two of the station's popular programs will be video-simulcast on the Internet as the centerpiece of an online interaction among fans and program hosts.

The deal is part of a growing if belated embrace of the Internet by the radio industry which has seen many of its younger listeners abandon it for digital entertainment alternatives such as MP3 players and Internet radio. And advertisers have adjusted their budgets to accommodate that exodus.

But after decades as little more than an interested observer of the digital revolution exploding around it, the radio industry is finally repackaging its content for the Internet. The industry began by offering audio streams of radio programs via the Internet.

New York City-based PalTalk is going a bit further. It is combining video feeds of traditional media content such as radio shows with social networking tools, web style interactivity, and video-sharing among its users.

Ten-year-old PalTalk, which has taken $6 million from Softbank Capital Partners, hosts video chats for 4 million active users. The company recently began creating videos of radio shows around which it wrapped its video chat applications.

"We began with a simulcast of the Opie and Anthony radio show and it has been so popular that we have now established radio as an offshoot of our video chat business," said Joel Smernoff, president and COO of PalTalk.

PalTalk offers its basic service free of charge but generates revenue from paid premium services, which allow users to share video content with each other.

But not everyone agrees that video streams of radio shows will prove to be particularly enticing.
<!--[if !supportLineBreakNewLine]-->
<!--[endif]-->

"You are seeing the radio industry learn to leverage online video among other Internet technologies, but I am not sure that just putting cameras in the studio is the most compelling use of video," said Ray Mena co-president of Emmis Interactive. (see Emmis Takes Radio to Internet School)

Emmis Interactive, the online marketing division of radio conglomerate Emmis Communications, helps traditional media firms use the Internet as an extension of their businesses.

"I think online video should be approached in a more TV-esque way while still leveraging the brand and the niche that you own. You can expand into other more video-worthy areas," Mr. Mena said.

Radio is in the midst of its fifth consecutive year of flat or decreasing revenue.

The industry generated $17.9 billion in income in 2007, slightly lower than the $18.1 billion consecutively recorded in 2006, 2005, and 2004, according to BIA Financial Network. 

The research firm predicts radio revenues will be down as much as 3.1 percent in 2008, due in part to the faltering U.S. economy, but expects a rebound in 2009 when some of radio's Internet related experiments begin to take hold.

Oh, man, I was laughing so hard at the cleverness of this Web video.

What should occur to you eventually, of course, is that the "David Pogue" portion is generated automatically by the Web site, on the fly-and it therefore could be ANYONE'S name. Yours, your friend's, your significant other's.

To play this prank on someone you love (or not), go here and plug in the victim's name and email address. That's where you find out, by the way, that the whole thing is a viral marketing stunt for something called Paltalk.

I don't care-it's still brilliant.

He will also talk with Ian Eagle tomorrow at 4:30 ET on Paltalk's SportsScene show. Fans may join the chat online and ask Burress any questions.

Big Blue Interactive

Plax will be on PALTALK tomorrow

July 7, 2008

NY Giants Wide Receiver Plaxico Burress will be the featured guest on Paltalk's SportsScene.
Date: Tuesday, July 8
Time: 4:30pm EST
Room: Paltalk Studio A - SportsScene

So here's the latest and coolest internet prank you can play on your friends: Enter their name into this new fake news feature, send them an e-mail through the application and then tell all your friends about the resulting video.

This fun time-waster comes courtesy of Paltalk, a video and voice-enabled internet chat application company based in New York City.

"The reason we did the viral video is that politics is so hot right now, and we thought we could subtly promote the company and at the same time have some fun with it," said Joel Smernoff, Paltalk's president and COO.

The campaign was created by  the New York City branch of Vanksen, Culture Buzz, a global marketing  company  headquartered in Luxembourg.

"It was one of my sick ideas," jokes Thierry Daher, CEO of Vanksen, Culture Buzz New York. "I thought it would be nice if everyone could have a chance to be nominated to be a frontrunner."

Daher's idea was to "intelligently build the client into the story line," and to get the idea across that "if you want to talk politics this election season, there's no better place to do it than Paltalk."

To make it fun, and make people want to pass it on, the feature "puts the user at the center of the experience," he says. "It's all about you and plays on your ego."

The video clip uses Adobe Flash and is hooked up into a database, which enables the personalization seen in the video, Daher says.

By the way, if you're wondering who Russ Kick is, he's the guy behind The Memory Hole -- the web site that brought you the photographs of the flag-drapped coffins returning from Iraq that the Bush Administration took itself took, but kept secret and banned from being run in newspapers.

Texas Instruments says cell phone sales weakening: TI said that sales of chips for wireless handsets were "unseasonably weak," causing the bellwether company for the cell phone economy to lower its second-quarter earnings outlook. The Dallas-based chip maker said that it expects revenue to be $3.17 billion to $3.28 billion, compared with the previous estimate of $3.08 billion to $3.32 billion. It's interesting that TI is seeing the slowdown in advance of one of the biggest pieces of news to hit the market: the impending launch of the iPhone 3G on July 11.

Women are driving smartphone sales: In the past year, the number of women using smartphones has more than doubled to 10.4 million, according to Nielsen Mobile. Part of the reason is the popularity of the iPhone among women, who accounted for one in three iPhones sold in March. The trend is expected to continue as prices for smartphones fall and more consumers.

Internet service providers to block child porn: Three major Internet service providers -- Verizon, Sprint, and Time Warner Cable -- have agreed to block access to Internet bulletin boards and web sites that display child pornography. The deal is the first a number under negotiation with New York Attorney General Andrew Cuomo. Previously, the providers argued the task was too big to handle, given the size and decentralized nature of the Internet. The agreements apply nationwide and will cover service providers with more than 16 million Internet customers.

SanDisk agrees to buy MusicGremlin: The flash memory chip maker is buying MusicGremlin for an undisclosed price. MusicGremlin makes advanced digital content distribution technologies and is a pioneer in the MP3 player market, known for devices that can download music from an accompanying subscription service without the need for a computer. SanDisk said it will use the technology from MusicGremlin in its future Sansa audio-video products.

Paltalk brings together video chatters on the web: New York-based Paltalk has released a multi-person video chat service on the web. The Paltalk Express software is a Flash-based web service that lets as many as 5,000 people share the same video chat room, Techcrunch reports. In coming weeks, the company will release embeddable widgets that compete with other chat services such as Meebo. Paltalk's download client already has 4 million active users a month.

NetSpend founders launch $100 million investment fund: NetSpend's Roy and Bertrand Sosa are putting together the fund to invest in companies in the market for financial services for people without bank accounts or credit cards. The MPower Ventures LP fund also includes investor Jorge Vergara Madrigal, the founder of nutritional supplements company Grupo Omnilife SA. MPower has made investments in Sapphire Mobile Systems (now MPower Mobile Inc.) and Rev Worldwide.

NYTimes.com goes after small businesses: The New York Times and AdReady have launched Self-Service Advertising on the NYTimes.com web site. The online display advertising site enables small businesses to easily create and manage online ad campaigns on the New York Times web site. It allows advertisers with budgets of less than $10,000 per campaign to reach the large NYTimes.com audience.

NextG Networks shoots for IPO: The wireless infrastructure company hopes to raise $150 million with its IPO. Merrill Lynch, Lehman Brothers, RBC Capital Markets and UBS are the underwriters. Oak Investment Partners led a $35 million round for NextG in 2004 and another $50 million in January, 2008.

Merced Systems buys Practique Associates: Redwood City, Calif.,-based Merced Systems bought Practique in the United Kingdom for an undisclosed price. Terms of the deal were not disclosed. Practique creates tools for incentive compensation management, including the INCA web-based application that automates sales commission and bonus calculations.

Zoran buys Let It Wave SA: Zoran Corp. agreed to buy fabless chip maker Let It Wave SA for $27.6 million in cash. The deal is expected to close today. In June, Let It Wave raised 6 million euros from Iris Capital and T-Source. Paris-based Let It Wave makes components that reduce motion blur for LCD TVs, among other products for consumer electronics gear.