File-Sharing Pioneer Turns to Free Internet Calling
By Jonathan Krim
Washington Post Staff Writer
Saturday, June 4, 2005; Page A01
TORONTO -- About 70 miles from the U.S. border that he will not cross, Niklas Zennstrom is pondering which gets him more excited: making life miserable for entrenched monopoly businesses or making money doing it.
The answer is both, and two of the world's largest industries haven't been the same since he went to work. Neither has the Internet.
In co-creating the file-sharing software Kazaa in 2000, Zennstrom helped fuel an online revolution that music labels and motion picture studios say threatens their existence. Sued by the entertainment industry even though he sold Kazaa in 2002, Zennstrom avoids the United States as his lawyers seek to remove him from the case.
Now, the 39-year-old Swede, whom few consumers have ever heard of, is aiming the same technology at something even bigger: telephone calls.
Skype Technologies SA, Zennstrom's newest venture, allows users of its software to talk to each other, via their computers, for free. That's free, as in no cost for either the software or the calls, anywhere in the world. And with none of the legal issues that surround sharing of music or videos online.
In just 18 months, Skype has become a global telephone firm with 40 million users, making it not just the fastest-growing telecommunications company in the world but one of the fastest-growing businesses of any kind.
By contrast, other voice-over-Internet providers, which charge a monthly fee and use different technology, have fewer than 3 million customers combined. Skype is acquiring as many new customers in a week as the best known voice-over-Internet company, Vonage Holdings Corp., has in total.
Zennstrom has done this by circumventing telephone wires and making the phone call just another computer task, the equivalent of sending an e-mail or conducting an Internet search. All that is required is a high-speed Internet connection, Skype's software, and a microphone or special handset for speaking.
"Skype is a huge threat to most incumbent phone companies," said Kevin Werbach, a law professor at the Wharton School and a telecommunications consultant. "The only reason they haven't trained their guns on it is they don't realize that yet."
Some in the industry argue that the cost of a basic phone call is on a path toward zero.
"In the next 10 years, I cannot imagine a telecommunications company that will be able to charge for telephone calls," said Howard Hartenbaum, a venture capitalist whose Silicon Valley firm is backing Skype.
But Skype has limits, and some experts argue that big, traditional players such as Verizon Communications Inc. and SBC Communications Inc. still have a number of advantages.
"Skype is a good company," said independent telecom analyst and commentator Jeff Kagan. "But Skype is never going to catch up to the major service providers," the large telephone and cable companies that increasingly are offering bundles of services, including local and long-distance calling, wireless, high-speed Internet access and digital television.
Zennstrom, who seems to relish being underestimated, is neither a stereotypical underground hacker nor a nerdy geek. Bespectacled and soft-spoken, he looks every bit the preppy, mid-level executive. He believes in capitalism and is motivated to disrupt markets that operate inefficiently.
"There's a duty," he said between appearances at a recent industry conference in Canada on Internet telephony. "You should not allow big monopolies to be inefficient. . . . If you buy services from a big monopoly that doesn't care about consumers and overcharges you, most people get really upset about that."
His strategy is to use new technology to fight entrenched companies that are too big to react quickly. "Not only is it great fun," he said, "it creates huge business opportunities."
Zennstrom's gift, say those who have followed his career, is his ability to pinpoint the industries most vulnerable to attack.
"Zennstrom is the regime changer," said Timothy Wu, a visiting technology law professor at the University of Chicago. "He makes happen what economists predict would happen" when technology overtakes existing business models.
The Big Efficiency idea underlying Skype and Kazaa struck Zennstrom and his longtime business partner, Janus Friis, when they worked together in the mid-1990s at Sweden's Tele2, the first independent phone company in Europe to take on state-sanctioned monopoly carriers.
Wouldn't it make sense, they reasoned, to allow computers to share information directly with each other rather than routing traffic through centralized networks and equipment?
Watching the music world get turned upside down by the Napster file-sharing service, which still relied on some centralized components, Zennstrom and Friis worked with some Estonian programmers to build a purer, more powerful computer-to-computer system known as "peer-to-peer."
Zennstrom said his goal was not to replace Napster, which was under legal siege and ultimately shut down for facilitating the pirating of copyrighted music.
Instead, he wanted the studios to use his more efficient system to legally put music into the hands of consumers via a payment method that would be negotiated.
Zennstrom said the music studios he visited in Los Angeles, which he declined to name, refused to consider it. A spokesman for the Recording Industry Association of America declined to comment on Zennstrom.
When legal troubles shut down Napster, enthusiasts turned to Kazaa as a way to keep swapping files that was harder for authorities to disrupt because it was so decentralized. By 2001, Kazaa and similar software proved so effective for moving large files (legal or otherwise) that the technology soon accounted for the majority of all Internet traffic.
Although Kazaa withstood early legal challenges, continued battles loomed. Zennstrom did not like the idea of a life spent negotiating music and movie rights agreements, so he sold Kazaa to Sharman Networks Ltd., a firm run by Australians and incorporated in the South Pacific island nation of Vanuatu. After taking some time off, he and Friis began talking about aiming their insight about efficient networks at another big industry: telecommunications.
Today, he just smiles at questions about how Skype will make money on a strategy of giving away basic calling for free.
Yahoo and Google, he notes, never charged for someone to conduct a search. Instead, the rapid adoption of search technology by so many people made the companies hugely valuable and opened the door to moneymaking, add-on services.
So the company offers Skype Out, which charges small toll fees for Skype users to call non-Skype users around the world, at rates below traditional long-distance rates. Already, the service has about 1.5 million users, though the company declines to reveal how much money it is bringing in.
The company also is letting users sign up and test-drive Skype In, which for a fee lets non-users call Skype users and provides voice mail.
Skype backers such as longtime venture capitalists William H. Draper III and his son, Timothy C. Draper, contend that the key to Skype's success is its ability to provide services at vastly lower cost than competitors.
With no networks, lines and poles to maintain, London-based Skype operates with 171 employees worldwide yet has nearly as many users as Verizon has residential phone customers. Verizon's land-line division employs 142,000 people.
Zennstrom is plotting pushing Skype into mobile phones, and he already has cut a deal with handset-maker Motorola Inc.
As long as the mobile phone can connect wirelessly with the home computer, as many now can, Skype users can walk around their homes and talk, rather than be chained to the computer desks.
About 30 percent of Skype's users are businesses, Zennstrom said, and the company is developing a pricing plan for large corporate customers.
As for the next big industry ripe for an attack? Zennstrom just smiles again.
