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The Skype is Calling

Fresh from upending the music industry, the duo behind file-sharing phenom Kazaa turn their attention to telecommunications.

Do you Skype? If Janus Friis and Niklas Zennstrm have their way, soon millions of people around the world will not only understand that inquiry but answer in the affirmative. The Swedish duo, who became (in)famous as two of the original programmers behind the peer-to-peer file sharing program Kazaa, are currently at work preparing the world for the first official, non-beta release of their new baby: an application that uses peer-to-peer technology to allow users to make phone calls over the Internet for free. They call it Skype, a nonsensical word they chose for its simplicity and catchiness.

Though Skype is not even a finished product (the most recent release is beta version 0.94, released on October 30), it has already been downloaded more than 2.6 million times in just over two and a half months. For a little perspective, it took Kazaa-the most popular piece of downloaded software ever created-more than six months to reach that number of downloads. What’s more, Skype has achieved that download rate without any advertising.  “Skype can change the way people think about communications,” says Jeff Kagan, an independent telecommunications analyst. “Skype is the Napster of the phone system.”

Skype began with a walk in the park. In June 2002, Friis and Zennstrm found themselves in a park in Copenhagen, Denmark, contemplating what to do next. Kazaa had been sold to Sharman Networks. But “we weren’t going to retire,” says 27-year-old Friis. So he and his partner (who is 37) began to hunt for a new project. They were looking specifically for industries ripe for a disruptive technology. “We wondered what we could do now, what would be big. We wanted to do something that could reach millions of people,” says Friis in a telephone interview from Stockholm. “During our discussions,” he adds, “we determined that telephony was extremely well suited for a peer-to-peer disruption.” The key metrics? “It was centralized and expensive,” says Friis, referring to the fact that the telecommunications industry is controlled by large, profit-seeking companies. Skype bypasses those companies entirely.

Friis and Zennstrm researched and found that a technology for routing phone calls over data networks-called Voice Over Internet Protocol (VoIP)-was, after years of very limited use, finally taking hold. The surge in VoIP’s popularity stemmed chiefly from a rapid increase in the number of homes installing broadband, always-on Internet connections. The two programmers realized that the peer-to-peer infrastructure they used with Kazaa was well-suited to VoIP because it could scale cheaply (no central servers to purchase and maintain) and redundancies were built in: multiple users routed calls, so a conversation wouldn’t be interrupted if a user logged off when a call was being routed through his system. What’s more, because the routing would be done by users, Friis and Zennstrm wouldn’t have to purchase expensive infrastructure. They could therefore offer the basic service for free.

After downloading the 2.5-megabyte Skype program, Internet-connected users can make phone calls using a microphone headset and speakers (or a headset) to other users on the Skype network; instead of a standard phone headset, they use a microphone headset and speakers plugged into the computer. The interface is familiar to that of instant messaging program; users can see who on their “friends list” is online, and they can place calls by clicking on graphical icons. Through a broadband connection, the service quality is comparable to that of a conventional analog phone call. Gone are the problems that plagued VoIP’s earlier incarnations: static, tinny sound, delays, and dropped calls. Through a dial-up connection, however, sound quality suffers. ”

After 10 years of talking about how VoIP can disintermediate the traditional carriers, we’re actually seeing some tangible evidence that this phenomenon can become a reality,” says Tom Valovik, an analyst with the market research firm IDC.

Making phone calls to strangers isn’t much of a draw, so users typically act as recruiters, convincing friends and associates to download the software so they can communicate for free.  Rather than route the calls through a centralized server-the method used by other VoIP companies such as Vonage and 8x8-the calls are routed through other users’ computers, the same way Kazaa allows users to download files directly from other users’ computers. By dispensing with the cost of maintaining a centralized server, Skype can offer its core service for free. The company eventually plans to charge for services such as voice mail and call forwarding, but none of those services are currently available. 

With Skype’s creators’ controversial past (Kazaa remains the music industry’s public enemy number one) and the program’s rocket-like popularity, it’s tempting to envision the day when programs like Skype eclipse the major telephone companies. But don’t rush to sell your telco stocks (assuming you’ve held on to some); significant challenges remain before Skype becomes more than a nuisance to the AT&Ts of the world. “Skype will never threaten the traditional phone companies that have billions of revenue,” says Kagan. “But it is going to be a grass roots success story.”

One of the biggest challenges is that Skype can only be used with other Skype members, similar to how several years ago e-mail services allowed users to exchange messages only with other members of the same service. Until Skype’s popularity reaches a tipping point, this relegates Skype to secondary phone line status rather than primary. Second, Skype users can’t dial emergency services such as 911. Third, with phone company call rates dropping, offering service for free isn’t the draw it once was.

Friis says his company is “in discussions” with other VoIP players to introduce interoperability among their programs. He also maintains that the 911 issue is not a big technical problem and eventually will be addressed.

“Skype has the potential to be bigger than Kazaa,” Friis insists. “But the great thing is it doesn’t come with the legal issues around it.”

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