Business Breakdowns
· Matt Reustle, Sam Eden
[00:00:00] S0: Network effect beneficiary, and getting the free service out there can lead to that. [00:00:00] S1: Totally. That Project Honey Pot was the exact start of this. So all these customers could just redirect all of their traffic to Cloudflare and they would do the lookup. Now this is really hard to do. So Lee Holloway was able to build a technical solution on this. If we relate this back to our postal example, instead of splitting the network and all that, all you have to do now is just say, "My new mailing address is Cloudflare." No matter what the recipient is, no matter what the package type, Cloudflare will intercept it and decide what to do with it. What this allowed is because it's intercepting everything, if you want to add another service, whether it's a CDN or a DDoS protection, it doesn't matter. You can just really easily turn that on and off. You don't need that sales engineer that we mentioned before. Cloudflare is already in front of your traffic. You don't have to redirect anything. So that makes it simple. So this was the main breakthrough for Cloudflare. They could now serve that long tail of websites. And they were the first real product-led growth company for internet services. Anyone could sign up really quickly. They could serve all those weekend hobby projects, all the small websites, and start providing web protection services for them.
· Sam Eden, Matt Reustle
[00:00:00] S1: Totally. That Project Honey Pot was the exact start of this. So all these customers could just redirect all of their traffic to Cloudflare and they would do the lookup. Now this is really hard to do. So Lee Holloway was able to build a technical solution on this. If we relate this back to our postal example, instead of splitting the network and all that, all you have to do now is just say, "My new mailing address is Cloudflare." No matter what the recipient is, no matter what the package type, Cloudflare will intercept it and decide what to do with it. What this allowed is because it's intercepting everything, if you want to add another service, whether it's a CDN or a DDoS protection, it doesn't matter. You can just really easily turn that on and off. You don't need that sales engineer that we mentioned before. Cloudflare is already in front of your traffic. You don't have to redirect anything. So that makes it simple. So this was the main breakthrough for Cloudflare. They could now serve that long tail of websites. And they were the first real product-led growth company for internet services. Anyone could sign up really quickly. They could serve all those weekend hobby projects, all the small websites, and start providing web protection services for them. [00:00:00] S0: In terms of getting those users, were they just in front of the community of open source developers? Or was there anything that got the attention to where they got that initial user base going? Was there anything that stands out?
· Matt Reustle, Sam Eden
[00:00:00] S0: In terms of getting those users, were they just in front of the community of open source developers? Or was there anything that got the attention to where they got that initial user base going? Was there anything that stands out? [00:00:00] S1: A lot of their early customers – they served a lot of non-profits because they had a lot of traffic but couldn't pay much. So that was really big. And they actually served a lot of the hacker community because a lot of hackers get hacked as well. So hackers would sign up to Cloudflare to protect themselves. Those are some of the big starting customers that really proved that this service could work. Because if they could protect hackers, then they could protect a more basic website as well. [00:00:00] S0: That's very interesting. It also introduces they had to then be better than the hackers because in theory, the hackers would see what they're doing. The hacking community is one that is fascinating to me.
· Sam Eden
[00:00:00] S1: One thing that's important to understand, and this is why their business is so hard to replicate if anyone tried, is trying to understand why competitors just didn't do what they did. Why not just intercept all the traffic? The reasons would be revenue and costs. So with revenue, Cloudflare, it's a classic case of the innovator's dilemma. So these large enterprises that I mentioned before, they didn't want to offer this simple interception because that's not what the large enterprises wanted. So the short-term revenue wasn't there. So Cloudflare could build for this long tail on their own. And then cost is the other reason that competitors didn't do this. It's really technically difficult to build a system that scales to intercept all the traffic. And they made a decision early on to just use commodity hardware. They didn't want dedicated hardware to process this. They created the software-defined network, which was inspired by Google running on commodity hardware. So they could just scale their network with cheaper hardware. And today, that's still the case. Today, Cloudflare is still that single global network of commodity hardware with layers of very sophisticated software on top of that. And another really important thing is the peering relationships with the ISPs. So your ISP is who you pay each month for your internet bill. If we go back to that New York-Australia example we mentioned earlier, let's say you visit a small website in Australia. This small website, they can't afford those legacy services that only cater towards the enterprises. In this case, the ISP has to pay those transfer fees to get the traffic to and from Australia. And the ISPs provide a slow traffic experience. So it's lose-lose. Those enterprises aren't serving those customers. Now, because Cloudflare makes it easy – they have that product-led growth and that really generous freemium model, they can start providing those services for these small websites. Now one website isn't enough, but if you aggregate that whole long tail that they serve, Cloudflare has negotiating power with the ISP. They can say, "I see you're transferring a lot of bandwidth to this region. And I know that because I see all the traffic from my customers. So why don't I just put my server next to yours? We'll have a peering relationship.
· Sam Eden, Matt Reustle
That means you don't have to pay those transfer fees. I'll serve the content directly." And that ISP situation has gone from a lose-lose, kind of cost and slow internet – to a win-win because they don't have to pay those transfer fees and the internet just sped up. So Cloudflare can negotiate this relationship and often doesn't have to pay bandwidth fees. [00:00:00] S0: Is the ISP the loser in that case?
· Sam Eden
[00:00:00] S1: I would say it's a win-win situation because without Cloudflare, they have to pay the cost of connecting to other networks. So it's a cost for the ISP. If you think about your own internet experience – if your internet's slow, you don't blame the fact that the server is on the other side of the world or anything like that. You blame your internet service provider. By partnering with Cloudflare, they cut out those costs – because they just serve it from Cloudflare. And they can speed up their internet so their customers are happier. They partner with all these ISPs across the world. And one way that I like to visualize Cloudflare is they have this single global network that spans across the world. It's a single web, and that connects to all these sub-networks, all the ISPs. And today their single global network connects to over 13,000 different networks directly. And these sub-networks could be ISPs, they could be cloud providers, they could be corporate networks, but they connect them all together in this one connectivity layer. Now we're ready to piece this all together. I think this is the most important part of the Cloudflare business. So if you put this history together, it creates a reinforcing loop. So I'll try and help you visualize it that at the top of the cycle, we talked about their low bandwidth and low hardware costs. And they're easy-to-use products that enables this product-led growth motion, so they can serve that long tail of customers. What that enables is more traffic goes through their servers. So they collect more signals, they collect more data, and then they get better and better at blocking malicious actors. They get better at optimizing the network for speed and just providing better website services. And better services – which is halfway around the cycle now – that leads to more paying customers and more enterprise customers, which again brings in more traffic. And then as they get more traffic, they can negotiate even more with these ISPs to reduce their bandwidth fees further, create more peering relationships that brings their costs down further. And then they can reinvest that revenue and cost saving back into their global network, create more products, continually building out. And the cycle continues – they attract more of that long tail, collect more data, build out their network.