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Free Internet Calling Threatens Phone Firms

Posted on: Wednesday, 8 June 2005, 00:00 CDT

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.

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.

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.

Zennstrom's strategy is to use new technology to fight entrenched companies that are too big to react quickly.

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."

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. He and Friis began talking about aiming their insight about efficient networks at another big industry: telecommunications.

Yahoo and Google, Zennstrom 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.

Source: Charleston Daily Mail

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