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1st July 2004
From The Economist print edition
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With KaZaA, Niklas Zennstrom undermined the music industry. Now he has telecoms firms in his sights THERE is no shortage of aspiring iconoclasts in the technology industry. Start-ups are generally headed by brash, outspoken types who push their ideas with evangelical zeal, making big claims about how they will conquer the world, topple industry giants and overturn existing business practice. Not so Niklas Zennstrom, a 38-year-old Swedish entrepreneur. Measured and soft-spoken, and fond of historical analogies, he makes big claims but does so calmly, certain that history is on his side. This quiet man has a record that any iconoclast would envy. KaZaA, the firm he co-founded with Janus Friis, his Danish sidekick, struck fear into the heart of music-industry executives when it became synonymous with internet file-swapping after the shutdown of Napster. Now he and Mr Friis have taken the experience they gained from KaZaA (which is now in decline amid a sustained legal assault) and applied it in another field that is dominated by stodgy, dinosaur-like firms with prehistoric business models: telecoms. Skype, their latest creation, is an attempt to Napsterise the phone business. Whereas KaZaA offered internet users free music, Skype offers free phone calls. Better still, it is entirely legal—and might, some day, even be profitable. On the face of it, file-swapping and telephony have little in common. But both, it turns out, can be implemented using “peer-to-peer” technology, in which PCs connected to the internet via broadband connections organise themselves into a network. It is then possible to send data, whether media files or phone calls, from one PC to another efficiently. Many of the lessons that Mr Zennstrom and Mr Friis learned from building the file-sharing system behind KaZaA—in particular, the idea that some computers should act as “supernodes” to speed the transfer of data—could thus be applied to internet telephony through Skype. The supernodes, for instance, help to eliminate the delays and drop-outs that can plague internet telephony. Of course, transmitting sound in real time is far more challenging than delivering a music file or even, say, an episode of “The West Wing”, from one PC to another. But Skype does it, and does it surprisingly well. It is easy to set up and use, the sound quality is impressive, and the software also supports conference calling and instant messaging. Since its launch last August, the Skype software has been downloaded over 14m times, and now has over 6m regular users—and all without any advertising. That was another lesson learned from KaZaA, says Mr Zennstrom: “If you want to spread software to a large group of people, it must be simple, not need configuration, and give you instant gratification.” Skype runs on Windows-based PCs, some kinds of handheld computers and, as of last week, on Linux too. So far, Skype users have only been able to call other Skype users from their PCs. But the latest version of the software, which is now being tested, allows Skype users to call ordinary telephones too. While Skype-to-Skype calls remain free, users must pay to call ordinary phones: but rates are low, with most calls costing around 1 cent a minute. This puts Skype in direct competition with traditional phone companies, alongside a growing band of other small firms that offer low-cost telephony by routing calls partly over the internet. By bypassing the traditional phone network as much as possible, they can avoid the fees charged by traditional operators for carrying calls over their wires. But Mr Zennstrom thinks that merely linking traditional and internet-based phone systems is an inelegant halfway house. He is more radical, believing that all calls will migrate to the internet and be provided via software alone, with no need for any dedicated infrastructure. Telephony will be another free internet service, like e-mail and web browsing are today. (Skype plans to make money by charging for extras such as voice-mail, call waiting, multiple lines and calls to the few die-hards who stick with pre-internet phones.) If he is right, the traditional fixed-line voice business will shrivel and die, and telecoms incumbents will be reduced to selling broadband access, and little else. Mr Zennstrom has competed with telecoms giants before, having worked at Tele2, then a small Swedish operator, during the 1990s. He came to the conclusion that only a radically new approach to telephony would ever be able to challenge the incumbents, whose ownership of national telephone networks gives them a huge advantage over their competitors. Skype is the result. So how can the incumbents respond? Some are rushing to launch their own internet-telephony services, but most are trapped in the monopolist mindset. Mr Zennstrom recalls their attempts in the early 1990s to establish fee-based proprietary e-mail services, in effect clinging to the old idea of the telegram. Such services were wiped out by internet-based e-mail, which was free. The same, he believes, will now happen to telephony. Another lesson from history These are all convincing arguments. Mr Zennstrom clearly has long-term trends in his favour. But another historical analogy gives cause for concern. The fate of KaZaA suggests that Skype will do well, at least for a while. But it also casts a shadow over its future. KaZaA declined in popularity (from 90% of all file-swapping traffic to 20% over the past year, according to one estimate) because its users were being sued by the music industry, but also because it was a proprietary standard. Rival file-sharing networks, based on open standards, are now in the ascendant. The same criticism is being levelled at Skype, which is so far incompatible with a standard (called SIP) used by rival internet-telephony operators. As with KaZaA, it may be that Mr Zennstrom has correctly identified an important trend, but that the software he has written to exploit it will not ultimately prevail. If so, he and Mr Friis will have to find another industry that is ripe for disruption using peer-to-peer technology. If you are a chief executive in a stodgy, old-fashioned industry, watch out. |
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